With the twin debacles of Microsoft’s (MSFT) initial release of the Surface tablet and DreamWorks Animation’s (DWA) disappointing “Rise of the Guardians” debut this holiday season, I shudder at the thought of reading the financial press, let alone the blogs.
I feel like a Vegas odds maker who picked the Jets and the Eagles for the Super Bowl this year. Still, I remain bullish on these two names and have no plans to reduce the All-Cap Value fund’s holdings in either. In my view, both companies retain extremely strong and under appreciated competitive positions. I have written about DreamWorks in this forum on a couple of occasions. Please visit my personal blog if you are interested in my detailed analysis of Microsoft.
In November, the All-Cap Value fund sold its positions in Ebay (EBAY), the Howard Hughes Corporation (HHC), and Becton Dickinson (BDX). While I view EBAY to be rock solid as an online retailer and payments processor, I now question whether the company will become a big enough winner in mobile and offline payment processing to justify its current valuation.
In addition to my assessment of the likely evolution of the payments business, slow quarterly revenue growth and a headcount reduction at PayPal made me nervous about this large-cap name. The Howard Hughes Corporation has been in the model nearly since inception, but I feel that this hard to value real estate developer is no longer cheap enough to offer a margin of safety.
There is a strong probability that I will close out the remainder of this position in December. I sold our small position in Becton Dickinson because I determined that the potential upside in a small position in this large-cap stalwart is not high enough to justify the time required to follow and understand the business.
We closed out November with approximately one-third of the portfolio in cash. This is more the result of a failure to find new investments that satisfy the fund’s criteria in recent weeks than it is of any attempt to time the market based on the “fiscal cliff” or other upcoming events.
While I generally don’t base investment decisions on my “big picture” outlook, Covestor has asked its managers to take a stab at offering a few prognostications on the economy and the markets for 2013. For what its worth, I expect a recession next year resulting mostly from a slowdown in business investment due to uncertainty about policy in the U.S. and the decline in demand from abroad.
In my view, the biggest risk to the economy in 2013 that isn’t getting much press currently is war with Iran. I doubt that anything short of regime change will stop Iran from obtaining a nuclear weapon, and President Obama has made it clear on several occasions that he will not let that happen. For that reason, I think that S&P 500 Energy Index is most likely to surprise investors on the upside in 2013.
The investments discussed are held in client accounts as of December 1. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.