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Three Bears and "Just Right" Diversification

The Blue Harbinger 15 outperformed the S&P 500 by nearly 2.0% last week.  The strategy is not over-diversified (so it has room to outperform an index), but it’s still diversified enough to not get whipsawed by the Fed’s increasingly likely December interest rate hike.  To those of you concentrated in certain sectors, such as high dividend utilities, the chickens are coming home to roost.

 
 

One of the core beliefs of our Blue Harbinger 15 strategy is diversification.  It sounds simple, but it is so important to own a variety of stocks across market sectors and styles.  We recently wrote about the importance of diversity in our Blue Harbinger holdings here.

Investors that invest in only a certain style (such as tech stocks) are not adequately diversified, and they run the risk of losing a lot of money if the market moves against them (as we saw when the tech bubble burst in the early 2000’s).  Today, many investors have concentrated their investments in high dividend stocks because they like the yield.  The problem with this strategy, is that every time the Federal Reserve gets more “hawkish” (meaning they might raise rates), high dividend stocks come down.  And considering we may see a series of interest rate hikes over the next few years (we have not had interest rate hikes since before the financial crisis of 2008-2009), dividend stocks may significantly under-perform the market.

Paylocity: Our cloud-based payroll processing company, Paylocity, gained 29% this week, as the company announced earnings that exceeded expectations.  This is a company that is spending heavily to generate growth, and that growth is being achieved, and then some.  We love the company because the business it generates is “sticky” (i.e. it’s hard for customers to leave), and eventually Paylocity will not need to spend heavily on growth at which time it will become essentially a cash cow.  We believe this stock still has significantly more upside.  You can view our Paylocity thesis and research report here.

Facebook gained over 5% this week on a positive earnings announcement.  In a nutshell, the company continues to demonstrate very impressive growth in mobile advertising revenues.  Also, Facebook continues to spend heavily on research and develop (we think this is a good thing).  You can read of most recent Facebook updates here, and you can view our full Facebook thesis and research report here.

Walt Disney: The market had a mixed reaction to Disney’s earnings announcement this week, but the stock still managed to gain 1.72% while the S&P 500 gained only 0.96%.  From our standpoint, the good news was that they are not losing as many ESPN subscribers as the market had feared due to people cutting the cord on cable TV.  You can read our most recent Disney updates here.  And you can view our Disney thesis and research report here.

Also important to note, these three stocks (Paylocity, Facebook and Disney) operate largely in different market sectors, and they add diversification to our portfolio.  And similar to the story of Goldilocks and the Three Bears, it’s possible to have too much or too little of something (for Goldilocks, she tried multiple bowls of porridge, chairs and beds, before finding the one of each that was "just right").  In investing, it’s important to not have too much or too little diversification.  Too little diversification and you’re exposed to too much risk.  Too much diversification and you’re a boring index fund (which is not necessarily a bad thing if you keep your fees down).  At Blue Harbinger, we believe our Blue Harbinger 15 portfolio has achieved the “just right” amount of diversification and has the performance to show it.
 

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