Portfolio: Q3 2020 Review

by The Compound Investor

Regular readers will recall the introduction of The Micro Portfolio and The Coffee Can Portfolio earlier in the year. Now that the third quarter of 2020 is done and dusted, it is time for their first reviews. I figured it would be easier to bundle both into a single post rather than have two separate ones. Anyway, it was a good three months for stocks in general as we tentatively begin the economic recovery from the COVID-19 shutdowns. The S&P 500 gained 8.5% in the third quarter, with that figure rising to circa 9% inclusive of dividend cash.

The Micro Portfolio started life with exactly one-hundred dollars of initial invested capital back in June. You may recall that amount was spread equally across the five starting positions. The idea was to add the same amount each month, thereby slowly building positions in some of the best companies on the planet. That regular purchase plan brought us up to a total invested capital of exactly $400 by the end of September. We also had our first cash distributions hit the account, with total dividend income coming in at $1.26 last quarter. Okay, it’s not exactly a king’s ransom, but we have to begin somewhere.

In terms of overall performance, Exxon had a truly miserable three months. The price of oil largely held steady in the $40 per barrel area, but energy sector stock prices continued their downhill march. Exxon, for instance, lost almost 25% of its value between the ends of June and September. The Texas-based giant was also booted from the Dow Jones Industrial Average just to rub salt into the wounds.

As far as the portfolio is concerned, this obviously weighed heavily. The $80 invested in the firm to date sported a market value of $63.20 at the end of 3Q20. That, in turn, helped to drag down the rest of the portfolio’s constituents. The total market value of the Micro Portfolio‘s holdings came in at $393.22 at period end.

The Coffee Can Portfolio

Next up is the Coffee Can Portfolio. You may recall this one started life during the quarter with invested capital of circa $8,115 split across three mega-cap dogs: AT&T, Exxon Mobil and Anheuser-Busch InBev. The travails of Exxon and the energy patch also weighed on performance here quite significantly. The addition of another 15 shares of the oil giant for an all-in cost of $555.54 was also the sole transaction last quarter. The other two names had pretty quiet quarters, which also didn’t help matters.

Overall, the market value of the Coffee Can Portfolio stood at $7,834.65 at the end of the quarter. It generated a further $44.37 in net dividend cash in the period courtesy of Exxon. All-in-all, not a particularly great start, but that is the nature of the value space right now. Even if Exxon were to slash its dividend in half, the stock would still offer us a yield on cost of around 4%. AT&T continues to offer a well-covered dividend that currently yields in excess of 7%.

Eventually, corporate profits will begin to recover from the economic impact of the pandemic. A quick look at analysts’ FY22 earnings estimates implies the share of constituents’ net profit attributable to the Coffee Can Portfolio will be worth around $720 by then. I have that equivalent to a forward earnings yield of around 9.2%. If – and it is a big if – Exxon weathers the storm with its dividend intact, then the annual income stream might be worth $430 by then. Hopefully that will provide a base for better quarters ahead given interest rates look set to remain depressed.


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