For the next couple days, I am finishing up my Twelve Posts of Christmas, sung to the classic English holiday song introduced back in 1780. I am using the holiday season as inspiration to try out new ideas or reassess old ones.
We covered the first six days last Wednesday and Friday, so let's move into the back half of the season.
In this Seventh Post of Christmas, my true love sent to me: Seven Swans-a-Swimming
The fund using the symbol SWANX is the Schwab Core Equity Fund, a large-cap index fund with $2.4 billion in assets and a 0.8% yield. Morningstar classifies the fund as large-cap value, a mismatch to the name since core funds normally intend to be a mix of growth and value. In any case, it doesn't matter because I am not advocating this particular fund, rather I am using it as a launching pad to discuss the asset allocation between large-cap and small-cap, which is on my mind lately.
Large-caps massively outperformed small-caps this year, as measured by comparing the S&P 500 to the Russell 2000, raising the question of whether there is a fundamental shift in the return prospects for large-caps vs. small caps going into 2015. In other words, does it take money to make money? Do only already-large and profitable firms have the ability to attract investor attention?
Before we panic too much, this year appears to be very much an anomaly. Over the past 5-, 10- and 15-year periods, small-caps have handily outperformed large-caps and there is no reason to believe any sort of permanent change has occurred. Small-caps still have several advantages: faster revenue and earnings growth, the law of small numbers (room to get larger) and the general position of being in tomorrow's industries, not yesterday's. Despite this year's drubbing, I still favor small caps for your long term asset allocation.
In this Eighth Post of Christmas, my true love sent to me: Eight Maids-a-Milking
If we are talking milk, we eventually are talking cows (no soy in my Iowa-raised household, thank you very much). More broadly, we are talking one of the hottest sectors in our economy the past few years: agriculture. This oldest of professions is still going strong, because it solves the most fundamental problem facing human beings: sustenance. The sector is still the subject of high science in the form of ag-biotech, high tech in the form of GPS-driven precision farming and the growth and upward margin pressure resulting from the entry of billions of people into the middle class.
There are any number of ways to profit from the sector, from specific names (such as Cal-Maine (CALM), which I highlighted last Wednesday) to owning Iowa farm land. Another simple and liquid way is to own the iShares Global Agricultural Commodity ETF (COW). The ETF is traded north of the border in Toronto, but its exposures still place you in the center of the 150-year old agriculture revolution.
In this Ninth Post of Christmas, my true love sent to me: Nine Ladies Dancing
Christmas is a time for good, of course, but the naughty boys and girls are occasionally discovered frequenting a Rick's Cabaret, the only publicly-traded gentlemen's club chain. Now renamed RCI Hospitality (RICK), it struggles to gain the respect of investors despite a strong record of revenue growth and high margins. (It doesn't help to brag about your "legendary due diligence" trips, although that could be persuasive to some.) Revenue has grown to $129 million in FY 2014 from $95 million in FY 2012, and gross margin is a healthy 84% -- although most expense is in SG&A, which is 57% of revenue. Net income was $11.2 million in the latest fiscal year vs. $7.5 million two years ago, putting the valuation at less than 10x trailing income.
The stock has gone nowhere the past few years as the multiple compressed, but RICK seems to be a solid -- but not spectacular -- grower with good margins and a seemingly recession-resistant business. For small-cap punters, there should be a spot for RICK in the sin allocation alongside the booze and tobacco names.
At the time of publication, Dvorchak had no positions in any of the securities mentioned.