Building A Bulletproof 2020 Portfolio: Part V
Happy New Year!
I’m a day later than I had hoped to be in publishing the final part, but I wanted to do a fairly in-depth look at my portfolio and make sure I was absolutely comfortable with the investments. In doing so, I decided to create a new page in the Navigation Menu on my website dedicated to my 2020 Canadian Equity Portfolio so that readers can have easy access to it year-round. Just click on the link to check it out, and feel free to download the Excel version as well!
As such, this article will be more like a Coles Notes version of the page above. To start, the portfolio I have developed has four key features:
It’s recession protected: a vast majority of stocks in my portfolio have trading history back to 2008, the year of the Great Recession, and many performed well during that period.
Return on Equity Focused: every one of my investments has a positive trailing twelve months return on equity
True Diversification: unlike broad-based ETF’s and the mutual funds which track the major Canadian indices, my portfolio is truly diversified across sectors. Financials and Energy are part of it, but do not dominate it.
Free Cash Flow Per Share: if a company isn’t generating positive free cash flow per share, its weight will be limited no matter how strong its historical risk and return metrics are.
As mentioned in the previous parts to Building a Bulletproof 2020 Portfolio, it’s important to lengthen the time period you are using for your analysis. Unlike funds you may be interested in investing in, my analytical period extended to 2008 to purposely include negative returns during the Great Recession. The IIROC’s ten-year standard would only include periods from 2010 onwards, giving investors a false picture about how risky a product is.
Core Stocks
The top ten stocks in my portfolio make up 58% of its total weight. They include Canadian Apartment Properties REIT, Metro, Boyd Group Income Fund, Alimentation Couche-Tard, Morneau Shepell, Fortis, Constellation Software, Empire Company, Premium Brand Holdings, and Franco-Nevada Gold.
I encourage you to read the full description of these stocks I have included in the link here.
Mid-Tier Stocks
The eleven mid-tier stocks I’ve chosen range between 2% and 4% each for a total weight of about 30% of my portfolio. The securities I’m choosing are Alaris Royalty, Pembina Pipeline, Kinaxis, Fairfax Financial Holdings, CGI, Parex Resources, Magna International, Air Canada, Open Text, Semafo, and Element Fleet Management.
Low-Tier Stocks
The remainder of my portfolio has nine stocks with weights ranging from 0.75% to 1.75%. These stocks have performed relatively well historically, but unfortunately many of them were not trading in 2008. It’s a mixture of cyclical and non-cyclical stocks and are somewhat speculative in nature, but most of them still feature positive free cash flow metrics and solid sales growth (both one-year and five-year).
Names include Winpak, Aritzia, Summit Industrial Income REIT, Whitecap Resources, National Bank of Canada, InterRent REIT, Intact Financial, Exchange Income, and WSP Global.
Summary
You’ll notice I purposely have not invested in the big banks and some other high market cap Energy stocks. Big banks are highly correlated with the market and as such, do not offer many diversification benefits. I prefer to choose stocks with low correlations and make portfolio picks rather than stock picks. As for Energy stocks, my research shows that these stocks just are poor investments in the long run. Sure, oil prices may recover in the New Year but if they don’t, I do not want my portfolio being tied down by companies who are so reliant on outside forces determining the commodity prices.
Thanks for reading, and I wish you all the best in 2020. Happy New Year!