Four years into the Messed-Up Expectations portfolio and, as I reviewed here, I'm doing all right. I've twice met my goal of generating 15% annually on rolling three-year periods, and I'm on pace to do it again. Assuming, that is, that the hit the portfolio took in September and October doesn't become the new normal.
I don't think it will, though. In fact, I'm going to take advantage of the drop in share prices of some portfolio picks to add to my positions.
Barriers for life
Trinity Industries (NYSE:TRN) -- maker of railcars (especially tanker cars for petroleum by rail, a big part of my original thesis) -- was hit with bad news over the last couple of months that hurt its share price. First, oil and railroad industry groups asked for more time to adopt new proposed safety rules that would require upgrading their fleet of tanker cars, arguing that the proposed two-year replacement timeline is too short (they want six). The request is understandable, but I still believe the writing is on the wall here, and that the regulations will be adopted and enforced sooner rather than later. Fires from accidents like what happened two summers ago in Lac-Megantic, Quebec, are not what is needed or desired.
Second, in October, Trinity lost a lawsuit (brought by a competitor) on the safety of the company's ET-Plus highway guardrail end caps. Several states have since prevented contractors from using the end caps. Separately, the company itself stopped shipments of the end caps, and the Federal Highway Administration is overseeing new tests. Trinity did not expect to lose the lawsuit, so it had not set aside any reserves. Now it will have to do so (that is, it will have to post a bond when it appeals the jury's verdict, which might show up as a hit to earnings), and it has lost a revenue stream as states aren't buying those end caps until this situation is resolved.
Any hit to earnings should be a one-time event. The loss of revenue is not significant, as the $33 million the end caps brought in through the first three quarters was just 1% of the company's total revenue. In other words, even accounting for a potential legal payment (if it loses the appeals), this is a tiny part of Trinity, and its primary business remains railcar manufacturing.
I'm taking advantage of these two situations to expand the portfolio's position.
Mobileye (NYSE:MBLY) last week issued its second earnings report as a public company (for the third quarter of 2014). While it beat expectations for revenue, it only matched the forecast for adjusted earnings per share. The share price dropped a bit after the report came out, but the share price had been falling before then, too. Currently, the portfolio's position is down by about 10%.
I actually liked the earnings report. Free cash flow came in quite strong (and at a higher growth rate than was priced into shares when I first purchased them for the MUE portfolio), new auto manufacturers using Mobileye were announced (including Tesla Motors), sales of units were up quite handily, and the move to autonomous driving seems to be in gear. (Sorry.)
I'm willing to give it a few quarters to sort itself out as a public company as long as revenue and free cash flow keep climbing. I would like to see it rely less on stock-based compensation, as that is diluting shareholders.
One interesting thing I noted from the conference call were comments that being a public company is helping sales. For instance, management said Eli Lilly became a recent customer, and implied that being public helped land the sale.
With the drop in price, I'm bringing this up to a full position.
Copper and gold... and oil
The share price for Freeport McMoRan Copper & Gold (NYSE:FCX) is just about the lowest it has been over the past several years. That's probably due to a couple of things: lower realized copper and gold prices recently and lower volume of (and price received for) oil equivalents sold, both compared to last year. But it's more likely that the decline in oil prices since the summer's high is contributing significantly to Freeport's fallen share price.
With its purchase of Plains Exploration and McMoRan Exploration in 2013, the company has become exposed to the fluctuations of oil prices. Currently, oil's price is down and companies involved in extracting it are not Wall Street darlings. I'm taking advantage of this to bring my stake back up to the investment level I want.
Come discuss these decisions and the rest of the holdings in the MUE portfolio at its dedicated discussion board.