The Ultimate Stock-Picker's Portfolio Makes a Move

Performance Update
As you can see in the table below, we've further extended our lead over the S&P 500 SPX, now outpacing the index by more than 500 basis points since inception on Sept. 7, 2006--a very pleasing result indeed. While I am encouraged by the portfolio's overall performance, I don't believe the portfolio will have this type of outperformance over every reporting period. That said, I still think that these strong initial results continue to indicate that my approach has merit, and that over time--think three- to five-year periods--the model portfolio has the potential to do very well.

Ultimate Stock-Picker's Portfolio Performance Update
	Shares	Net Cost ($)	Dividends ($)	Market Val ($)	Tot Raw Ret (%)	Star Rating**
Tyco	95	3,895.82	--	4,877.30	25.19
Tyco Elec	95	2,918.37	--	3,749.65	28.48
Covidien	95	3,169.97	--	4,180.00	31.86
Wal-Mart	219	9,986.21	133.15	10,763.85	9.12
Dell	459	9,987.02	--	13,228.38	32.46
Berkshire	3	9,615.95	--	11,034.00	14.75
Time Warner	595	9,985.15	98.18	12,411.70	25.28
Expedia	599	9,992.29	--	17,754.36	77.68
American Exp	174	9,965.75	52.20	10,932.42	10.22
Anheuser	211	9,999.58	186.74	10,723.02	9.10
J&J	157	9,976.17	182.91	9,958.51	1.66
Sprint Nextel	602	9,994.11	45.15	13,063.40	31.16
Pulte	346	9,981.21	55.36	8,065.26	-18.64
Market Value*		109,467.60		130,741.85
Cash Balance				5,182.11
Portfolio Value*		110,000.00		135,923.96	23.57
S&P 500 Raw Return					17.66
Outperformance					5.91
* Portfolio Inception on 09-07-06 ** As of 07-13-07

Over the last few months, the main sources of this performance surge have been continued strong results from the investments in  Expedia ,  Dell ,  Sprint Nextel , as well as Tyco, which recently split into three parts--more on this later. The detractors continue to be primarily  Pulte Homes  and  Johnson & Johnson . I will note, though, that each of these two laggards continues to be rated 5 stars by Morningstar, and I remain optimistic that over time their valuations will begin to eventually improve.

Tyco
As for Tyco, the conglomerate recently split into three parts:  Tyco International ,  Tyco Electronics , and  Covidien . Covidien is basically composed of the former Tyco's health-care businesses, whereas Tyco Electronics houses the former conglomerate's electrical components business. The remainder of Tyco's businesses--such as its Fire Protection Services and its Safety products businesses--reside in Tyco International. I previously told you that I intended to sell either the less moat worthy of Tyco's businesses, or those that were rated 3 stars (fairly valued) by Morningstar. Although our analysts believe that each of these businesses possess a narrow economic moat, there were some differences in their respective valuations that have allowed me to free up some additional liquidity for the model portfolio.

Based on my colleague Alex Morozov's  most recent fair value on Covidien, I've decided to stick with this 5-star name for now, as I also believe that its separation from Tyco will eventually unlock value for owners. Alex recently wrote about Covidien: "No longer a part of a large conglomerate, Covidien now has the ability and financial resources to rectify this situation. Management's plans to substantially ramp up development spending came as no surprise to us. We believe the company's desire to accelerate growth across its business units, particularly medical devices, has potential. Covidien still controls a sizable share of the market in surgical and energy-based devices, and should benefit from growing demand for minimally invasive surgeries, a need that many of its products address. Furthermore, the firm's fine-tuned acquisition strategy, which focuses on technologies that fill the voids in its offerings, rather than expand into unrelated fields, has already resulted in a slew of promising products that complement and enhance Covidien's existing line." (For more on Covidien, see Pat Dorsey's recent video report.)

My colleague Rick Hanna has a similar view of Tyco Electronics, which, based on his  most recent fair value estimate, is presently rated 4 stars by Morningstar. In his most recent Analyst Report, Rick wrote, "We do not believe Tyco Electronics was being managed optimally to exploit its competitive advantages before its spinout. The firm is one of the largest providers of electronic components (representing more than 70% of its sales), including connectors, relays, and touch-screen displays. Network solutions (including fiber optics and cabling) and wireless systems (including mobile radio systems) round out the revenue base. Although competitors like  Molex  and  Amphenol  have been expanding capacity through aggressive acquisition strategies, Tyco Electronics has not invested as much in its manufacturing capacity or global customer base. As a result, its sales and operating profit growth significantly underperformed these competitors' over the past two years. However, we expect the company to increase its investment, both internally and through opportunistic acquisitions, now that it is independent." Thus, in addition to sticking with Covidien, I've also decided to hang on to Tyco Electronics.

As for Tyco International, although my colleague Eric Landry believes its collection of businesses do have some competitive strengths, he also doesn't think their prospects look exceedingly bright right now, and as such, the shares presently have a 3-star rating. As a result, on Monday, July 16, I jettisoned the shares of Tyco International to free up some liquidity for a new starter position in the model portfolio.

Click here for Recent Transactions and the Updated Portfolio >>