In my most recent Special Report: When to sell: What to sell on my JubakAM.Com subscription site I recommended that any current rebalancing build up some cash. To implement that cash-building strategy, when you sell to rebalance a portfolio for 2020, buy fewer stocks than you sell so that the result is more cash on the sidelines. For example, in the rebalancing of my long-term 50 Stocks portfolio I’ve sold enough stocks so that this portfolio dropped to 38 stocks instead of the 50 in the headline. Today, Tuesday, January 21, I’ll be making my initial buys for 2020 to complete the rebalancing of this portfolio. But I expect to buy just four stocks, which would leave me with 42 stocks instead of 50. That will leave the portfolio 16% in cash. I’ll leave the cash position there for a moment so I can judge earnings results–and maybe pick up a bit of extra short-term gains on selling a stock or two in the portfolio on an earnings surprise. But I think my goal, given my reading of the risk and reward of the macro background, would be about 20% cash. The point of raising cash here is two-fold. First, cash acts to damp downside volatility in the portfolio in case of a market slide. (It also damps upside volatility in case of a market advance, which is why I’m not going 80% or 100% cash now. The fundamentals in the near term would call that an over-reaction.) Second, I’d like to have “some” cash on hand in case there is a downward move big enough to create a buying opportunity. I’d hate not to have any powder dry in case of a move to the downside.
To recap in this rebalancing I sold: Pioneer Natural Resources (PXD), Fluor (FLR), Chesapeake Energy (CHK), Enbridge (ENB), Infosys (INFY), General Electric (GE), Facebook (FB) and Essilor Luxottica (ESLOY.) With sells during the year and stocks that have dropped out of this portfolio because of acquisitions (Monsanto and General Cable, for instance), this rebalancing selling resulted in a 50 Stocks Portfolio with just 38 members.
My buys to this portfolio are
Veeva (VEEV) is the leading provider of software to the life sciences sector with an 80% market share in this sector (based on seat count.) Its Veeva Commercial Cloud enables vertically integrated customer relationship management (CRM) that supports real-time collaboration and regulatory oversight. Its Veeva Vault is horizontally integrated content and data management software. From the point of view of this portfolio and its search for five-year (or longer) competitive advantage, I’d stress the stickiness of Veeva’s sales. Once a customer has signed on to use Veeva for such functions as managing clinical trials, regulatory compliance, and tracking manufacturing quality, the high cost of switching to a new vendor in time and uncertainty minimizes customer turnover. Veeva has 800 customers in 130 countries including 19 of the top 20 life sciences companies. The company sports a dollar retention trend of near 100% (and 80% of revenue comes from subscriptions.) Morningstar forecasts five- and 10-year revenue compound annual growth rates of 28% and 20%, respectively. And that non-GAAP operating income will climb to 38% of sales in 2021, up from 35% in fiscal 2019.
Charles Schwab (SCHW) shows that it’s better being a disruptor than being disrupted. With Schwab leading the charge in the discount brokerage segment to $0 commissions, the company has emphasized that vacuuming up assets is THE game right now. The company ended 2019 with $4 trillion in client assets and looks to have accelerated the speed with which it gathers client assets. It took only three years from the company to go from $3 trillion in client assets to $4 trillion. In the fourth quarter, Schwab added $77 billion in net new client assets. After the merger with TD Ameritrade, the combined companies will have about 40% of the Registered Investment Advisor market by assets. I’m adding this stock to the 50 Stocks Portfolio because over the next five years I see the big getting bigger in the financial services sector. It also gives the portfolio a bit more exposure to the currently unweighted financial sector.
West Pharmaceutical Services (WST) specializes in selling small stuff–lots of it in lots of different configurations–for the pharmaceutical, biotechnology, and generic drug industries. West Pharmaceutical develops, manufactures, and distributes elastomer-based supplies for the containment and administration of injectable drugs, including basic equipment such as syringes, stoppers, and plungers, along with somewhat more complicated devices including auto-injectors and other self-injection platforms. Proprietary products made up 76% of sales in 2018 with contract-manufactured products making up the other 24%. About 44% of revenue comes from the United States with the other 56% coming from international markets. Now it might seem unlikely that a company could wrest a five-year or longer competitive advantage from making syringes, plungers, vials, and rubber components. But West Pharmaceutical’s customers operate in the highly regulated drug industry where changing the manufacturer of a relatively low cost injectable system component requires regulatory approval. (Any component that comes in direct contact with the drug agent must be written into each new drug application sent to the U.S. Food & Drug Administration and remains on file for the life of the product.) Which creates huge switching costs for West Pharmaceutical’s customers over a component that on average sells for 4 cents. With this stock you’re getting exposure to growth in both the drug industry as a whole and to the faster growth in the injectables segment.
Palo Alto Networks (PANW) gets its potential 5-year edge not from its cybersecurity technology–I can’t predict what the cutting edge of cybersecurity technology will be in five years with any degree of confidence–but from the company’s progress in its approach to software. Palo Alto Networks has made substantial progress in making three key transitions that will determine which software companies thrive and which do not over the next decade or so. All software companies face these transitions–they’re not unique to cybersecurity software. First, there’s the transition to software as a subscription service from software as a product. At the end of 2018 subscriptions accounted for 61% of revenue and carried a 73% gross margin. That’s about four percentage points better than the gross margin on security products. Second, there’s the move toward automation in software to provide quicker responses in cloud-based services through the use of artificial intelligence pattern recognition. And third, there’s the shift to providing security for hybrid systems where the threats could come from any device attached to the network rather than just from an attack on a customer’s central, on-site servers. Palo Alto Networks has been a member of my Jubak Picks Portfolio since June 27, 2019. The shares are up 18.71% in that period through there close on January 21.
