I am publicly posting our annual investor letter detailing some of our operation mindset, holdings and performing for the year 2015. Until now, only our clients held this information and a few that requested it when the announcement of the letter was made earlier in 2016.
This year is no different, our 2016 letter will be sent automatically to our clients only. The letter will not be posted online until after 2017. If you would like to receive it as well, please contact us directly here.
SONOMAN INVESTMENTS LLC
1198 Venetian Way, Miami Beach, Florida 33139
Phone: (305) 934-9069
FIRST ANNUAL LETTER TO SONOMAN INVESTMENTS’ CLIENTS
Market Performance During 2015
During 2015, many investments were affected by the downfall of oil prices. In addition, many blue-chip securities surpassed pre-recession levels. We are continuously looking for new investments in companies with sound financials and competitive advantage. Do not misconstrue this for an aggressive buy-in every time we bump into such businesses. If the selling price is not adequate, we will wait on the sidelines until the market level drops to a point we believe to be an undervalue level with a defined margin of safety.
The past year was not kind to newcomers of the stock market. Multiple fluctuations of indexes and stocks caused days of panic-selling across multiple business sectors and indexes such as the S&P500 and the Dow Jones Industrial Average.
Activities During 2015
Our portfolio is heavily invested in stocks. We believe this will overall outperform the market throughout time. Occasionally, we will look for investments in sales, mergers, tenders or offers made publicly. These investments might take longer to realize, but could help our performance in a down market. At the moment, we have no position on such investments, but we are on the lookout.
We made new investments in companies that are somehow related to the oil industry such as National Oilwell (NOV). In addition to this, we also increased our position in General Electric (GE). Most companies in this sector have seen their market price drop significantly. It is extremely difficult to buy at the bottom of a down market; hence, we save our time and energy in seeking the best acquisitions. Our investments were made solidly on valuation of the company. We will try and secure more of these investments if they keep dropping in value; it is actually an advantage for us since we can acquire an additional amount of shares at a lower price.
Companies we let go: We released our positions with Fluor Co, Precision Castparts Co, Gannett and Tegna Inc. The last two are the product of a spinoff from one of the divisions of Gannett, meaning, they took out one of the business segments of Gannett and made it into a unique public company called Tegna, Inc.
A little story about one of these companies: we started buying Precision Castparts Co (PCP is the stock symbol) by March 2015 at $212. They are a worldwide manufacturer of complex metal components and related products, and leading manufacturers of forged components for the aerospace and power generation markets. Many of their sales are to companies such as GE (owned by us). They possess a great business structure, and, like many parts and accessories, natural wear and tear requires maintenance. In the US alone, planes log in 23 million flight hours in approximately 5,000 public airports. PCP went to trade as low as $187, this represented a decrease from our original purchase price of 12% within three months, but we kept buying more. During August 2015, a public announcement was made stating Warren Buffett’s Berkshire Hathaway was going to acquire PCP for $230 a share. Thank goodness we didn’t sell at $187, right?!
Our portfolio ranges within many industries such as consumer staples, discretionary, retail/wholesale, basic materials, industrial products, multi-sector conglomerates, computer/technology, finance, business services, construction, and oil & related.
This brings us to our next subject.
Results for 2015
In 2015, accounts under the portfolio did slightly poorer than the general market. The S&P500 traded at the beginning of the year at $2058.9 and closed off $2043.94. This represents a loss of -$14.96 or -0.73%. These numbers are excluding dividends. If we consider dividends, the yearly return for the S&P500 was 1.38%.
The compiled table below only reflects the performance of accounts active for that entire calendar year:
|Accounts Operating Entire Year||Accounts Gain||S&P500 Gains|
|2016||21 (Not a Full year)||4.48%||3.20%|
The above table shows the family is growing. There have been no accounts that have had a consistently superior or inferior record compared to our group average, but there has been some variance each year despite my efforts to keep all partnerships invested in the same securities and in about the same proportions.
|Accounts operating throughout the year no matter when they were introduced||Accounts Gain||S&P500 Gains|
|2016||21 (not a full year)||4.20%||3.13%|
Although two years is entirely too short of a period from which to make interpretations, what evidence there is points toward confirming the intention that our results should be relatively better in moderately declining or static markets (when stock prices are depressed due to bad sentiment on the market).
|Overall Compounded Gain||Accounts Gain||S&P500 Gains|
|2014-16||(2016 Not a full year)||3.69%||3.72%|
The basic question that will arise is the fluctuation on performance between accounts. Some performance will be relatively better, in some cases, due to when the funds were received or when the account was open. Nevertheless, all accounts are invested in the same portfolio at approximately equivalent weights.
Even though the performance of the accounts did not represent a positive number, we increased our position in many of our holdings and invested in companies that significantly dropped in price. We will not be like other companies that are tempted to predict a bold new direction and performance percentage. We will resist that urge and stay on course. Our basket of growth is far from complete. During 2015, our portfolio perhaps would have looked different during events such as the drastic drop in oil prices, the laggard performance of retail companies, and the exposure some banks have to loans from oil related companies. Events like this create opportunities to buy. Many of these investments will keep dropping in price; hence, our performance on the short-term might be affected if we don’t buy at bottom markets (it is not our goal to time this).
Today, our largest position in a single company represents between 10-15% of the entire portfolio. We try not to exceed 25%, but it is not a rule. During any purchase of a security, our main interest will be to have the security do nothing or to further decline in price rather than increase. This might sound contradictive to the purpose of investing, but what would you rather have? One stock of Coca-Cola going from $40 to $60 (50% return or $20) or an increased position (amount of shares owned) at $40 or less and gradually see our investment grow (let’s say 7% annually)
We have made great progress, perhaps not in investment returns, but in the accumulation of shares within a company. This is a great metric; we try and buy more pieces of the pie, below are your company holdings and your respective share count up to June 2016:
|AXP||AMERICAN EXPRESS CO|
|BAC||BANK OF AMERICA CORPORATION|
|BBBY||BED BATH & BEYOND INC|
|BRK.B||BERKSHIRE HATHAWAY INC DEL CL B NEW|
|DIS||DISNEY WALT CO DISNEY|
|GE||GENERAL ELEC CO|
|IBM||INTERNATIONAL BUSINESS MACHS|
|JPM||J P MORGAN CHASE & CO|
|KO||COCA COLA CO|
|NOV||NATIONAL OILWELL VARCO INC|
|USG||U S G CORP NEW|
|WBA||WALGREENS BOOTS ALLIANCE INC NEW|
|WFC||WELLS FARGO & CO NEW|
|WM||WASTE MGMT INC DEL|
|WMT||WAL MART STORES INC|
In a formal and easy manner, these are some of the points which we think are relevant to take into consideration when looking at your account. Via our blog (blog.sonomaninvestments.com), newsletter, or any other form of communication, we have and continue to convey our investing philosophy.
If you come across any questions, we invite you to please contact us!
Alex Lopez O’Bryan
Managing Member and Chief Executive Officer