The Revised Coffee-Can Portfolio: What’s in Store for 2014?

by Will Ashworth | January 29, 2014 9:11 am

A year has past since I last revisited the alternate version of the Coffee-Can portfolio[1] I created in April 2012. It’s based on Bob Kirby’s original concept[2] of putting a bunch of stock certificates in a coffee can and leaving them there. The ultimate in passive active investment management, it was revised by Morningstar in 2005.

arrows[3]My version simply replaced three of the stocks Morningstar had chosen with three of my own. I’lll take a look back on its performance in 2013. In addition, I’ll pick three stocks I think will outperform in 2014.

Coffee-Can Portfolio: The Good 

The portfolio achieved a total return of 23.2%, with nine of 10 stocks delivering positive returns. Eight of the nine had double-digit gains, with the best performance coming from John Malone’s Liberty Interactive (LINTA[4]) which was up 49.1% in 2013. LINTA focuses on e-commerce businesses such as QVC, Evite and many others.

My three replacement stocks, Franklin Resources (BEN[5]), U.S. Bancorp (USB[6]) and Liberty Interactive, whose share prices barely budged in 2012, averaged a gain of 39.2% in 2013. With the exception of Strayer Education (STRA[7]), all these stocks have achieved a total return of at least 20% since the portfolio’s inception back in April 2012.

Coffee-Can Portfolio: The Bad

Probably the most disappointing result in 2013 was underperforming SPY by nine percentage points. I predicted at the beginning of last year that the portfolio would beat the ETF by 300 basis points. That clearly didn’t happen.

This past year seemed as if you could throw a dart at a board and you’d come out smelling like roses. Not so for the coffee-can portfolio. Six stocks couldn’t keep pace with the large-cap ETF including Diageo (DEO[8]) whose 2013 return was 20 percentage points less than it achieved in 2012. Of course, the passive nature of this portfolio lends itself to the type of year it’s just had — it wasn’t constructed for short-term results.

Also disappointing is the fact that my three replacements underperformed the old ones that I removed: Federated Investors (FII[9]), Fifth Third Bank (FITB[10]) and IAC/InterActive (IACI[11]) by almost seven percentage points. Lastly, Strayer Education has become a chronic problem that’s weighing on the portfolio’s overall performance.

Other for-profit educators like ITT Educational Services (ESI[12]) and Capella Education (CPLA[13]) did extremely well in 2013. Hopefully, it’s Strayer’s turn to rebound in 2014 because it was down 39% this past year and 59% since April 2012. 

Revised Coffee-Can Portfolio: 2013 Performance
Iron Mountain IRM 1.3%
Diageo DEO 16.3%
Novartis NVS 31.8%
CarMax KMX 25.3%
Berkshire Hathaway BRK.B 32.2%
Colgate-Palmolive CL 27.6%
U.S. Bancorp USB 29.6%
Liberty Interactive LINTA 49.1%
Franklin Resources BEN 38.9%
Strayer Education STRA -38.6%
Average Total Return 23.2%

Here are my three picks from the coffee-can portfolio that I think will do well in 2014:

Diageo (DEO)

I was hopeful that Diageo was going to be a part of the Beam (BEAM[14]) acquisition given that it doesn’t have a large presence when it comes to Tequila or Bourbon. I guess it didn’t want to pay 20 times EBITDA as Suntory Holdings has agreed to do, and who could blame DEO? It’s still the world’s biggest spirits company, after all.

Besides, since the new year DEO has already announced two premium tequila acquisitions, and more are on the way to complement its existing Don Julio brand. I also wouldn’t be surprised if it added to its bourbon and Irish whiskey categories through small, bolt-on acquisitions.

Even though it’s down 3.5% year-to-date through January 24, I still think DEO stock will achieve a 20% return in 2014.

Berkshire Hathaway (BRK.B)

I picked both Berkshire and Diageo to perform last year, and while Buffett’s return was much more palatable than Diageo’s, both still underperformed the SPY.

Questions regarding Buffett losing his touch seem to have subsided thanks to index-beating results from both his hired guns, Todd Coombs and Ted Weschler, who have outperformed the S&P 500 each year since joining Buffett.

While Berkshire has less cash today than in 2012 ($42 billion), it still has enormous buying power should Buffett want to bag the elephant of a deal he often muses about. Whether a public or private company, look for it to be closely controlled, quite likely a family business.

I’d like to think the families that control Brown-Forman (BF.B[15]) would sell to Berkshire, but given McLane Company’s investments in liquor distribution I doubt the deal is doable. If it were up to me I’d sell McLane, buy Brown-Forman and use some of the proceeds to make strategic, add-on investments.

Is any deal north of $20 billion going to happen in 2014? I doubt it. But even without a massive deal I’m confident Berkshire will have another solid year.

Strayer Education (STRA)

STRA stock hasn’t traded this low since March 2001. While it’s not the cheapest of the education stocks based on enterprise value as a multiple of EBITDA, its current valuation by almost all financial metrics is significantly lower than its historical average, not to mention cheaper than the S&P 500.

Strayer is in the midst of a cost-cutting initiative that will see a 20% reduction in the number of employees delivering $50 million in annual operating cost savings. Strayer is still free-cash-flow positive despite the drastic drop in enrollment.

Anything it can do to make its business more efficient is going to effect STRA stock in a good way. For this reason, I believe 2014 is the year it gains back some of its losses.

Coffee-Can Portfolio: Bottom Line

Once again, I see the revised coffee-can portfolio outperforming the SPY by 300 basis points in 2014. We’ll check on it in April to see how it’s doing.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

  1. Coffee-Can portfolio:
  2. original concept:
  3. [Image]:
  4. LINTA:
  5. BEN:
  6. USB:
  7. STRA:
  8. DEO:
  9. FII:
  10. FITB:
  11. IACI:
  12. ESI:
  13. CPLA:
  14. BEAM:
  15. BF.B:

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