It's time for the half-year checkup on the Winning Value Portfolio that I unveiled at the beginning of this year. After the first quarter of 2012, when the portfolio was up 20%, compared with 12% for the S&P 500, I remarked, "I give full credit for the portfolio's outperformance to the 12% market advance ... however, the portfolio's 8% besting ... was a result of undervalued securities springing back nicely."
In the second quarter, the market was not as friendly, but I believe that that is when a portfolio is truly put to the test. A rising tide lifts all boats, but when the tide goes out and stocks are put to the test, that's when an investor earns his stripes.
In earlier updates, I also noted that positions in names such as Dollar General (DG) and Advance Auto Parts (AAP) would be able to sustain the portfolio during down periods, as these companies often do well in weaker economies. That certainly proved the case with Dollar General. In the case of Advance Auto Parts, some weak forecasts from names in the industry, such as O'Reilly Automotive (ORLY), sent shares down significantly. I am not concerned whatsoever, and in fact I would welcome a further decline in prices, because auto parts retailing is an excellent business.
Sterling Construction (STRL) has remained a drag on the portfolio for two reasons: a bad quarter and uncertainty over the next federal transportation bill. Congress recently passed HR 4348, a bill that would expand federal highway transportation spending until fiscal 2014. The measure authorizes about $100 billion over the next two years. It's not the perfect solution, but net-net, it's a positive for pure infrastructure names such as Sterling.
While this is only a six-month performance, outperforming the S&P 500 by 500 basis points is very solid start, considering the see-saw market in the first half. Mutual fund legend John Bogle once estimated that 85% of active money managers can't beat the market by 300 basis points.
To be sure, the S&P return was slightly higher than 8% when you account for dividends, but half of the value portfolio pays dividends as well, so overall it's a fair comparison. More so, I would characterize all the securities in the winning portfolio as still undervalued with varying degrees of appreciation left. Odds are quite good that by year-end, this portfolio will outpace the S&P on both a relative-return and absolute-return basis.
