SMLR - Coffee Can Portfolio 1 Month Update

2023-04-18 17:26:02 ET

Summary

• After one month, the coffee can small cap portfolio has 14 stocks up and 12 stocks down.
• The biggest gainer over one month was JAKKS Pacific with a 45.8% gain.
• The biggest drag was Co-Diagnostics with a 43.66% decrease.

The coffee can portfolio

Below are the 1 month results of the 15 Year buy and hold "coffee can" portfolio from a recent article of mine posted in March 2023. The portfolio is based on principles from both the book 100 Baggers and Joel Greenblatt's Magic Formula. The premises that the 100 Bagger book laid out as to where the commonalities of stocks that returned 100 to 1 were found had the following qualities:

They follow the acronym SQGLP:

• S-Size is small.
• Q-Quality is high for both business and management.
• G-Growth in earnings is high.
• L-Longevity in both Q and G.
• P-Price is favorable for good returns.

I combined these qualities with Joel Greenblatt's Magic Formula screener that hunts for stocks both good, as predicated by their' ROIC score, and cheap as determined by their earnings yield. The two percentages are added together to score the stock market from high to low. I believe the metrics in the formula satisfy the:

• Q-Quality is high for both business and management.
• G-Growth in earnings is high.
• P-Price is favorable for good returns.

As for:

• L-Longevity in both Q and G.

That is more of a roll of the dice, but the scoring system should help fish out stocks that will provide a higher probability of that longevity in the small cap category. Finally, size was easy as I just screened the top 50 stocks and crossed off all stocks that exceeded $1 Billion in market cap.

1 month results

Below are the 1 month price change percentages for each stock in the original portfolio. Please note all data is from April 14th 2023 after the market close:

The top 3 gainers

JAKKS Pacific

JAKKS Pacific ( JAKK ), has been a popular small-cap play on Seeking Alpha for some time. This last month happened to be the month it finally ripped to the upside. The Nintendo ( NTDOY ) affiliated toy manufacturer has a Magic Formula score of 73.46. They are up 45.8% in one month.

Semler Scientific, Inc.

This small-cap biotech is known for its QuantaFlo product that helps quickly measure blood flow when analyzing a patient's cardiovascular condition. Semler ( SMLR ) has a magic formula score of 41.38. They are up 22.13% in one month.

ProPhase Labs, Inc.

ProPhase ( PRPH ) engages in OTC supplement production, aimed at "male vitality" as well as other segments. The company has a Magic Formula score of 83. Seeking Alpha's Quant system has also upgraded this to a buy. They are up 19.01% in one month.

The bottom 3 losers

Co-Diagnostics, Inc.

Co-Diagnostics ( CODX ), was the top drag on this list. The nucleic acid reagent biotech may be seeing some downside after the demand for Covid-19 testing has dropped significantly. They produce tests for a variety of other maladies, but the Covid-19 affiliation will begin to hurt all companies with the label attached. The company has a Magic Formula score of 244. Indicating they may be coming off the absolute top of their cycle. They are down -43.66% over one month.

Selecta Biosciences, Inc.

Selecta Biosciences ( SELB ), is pre-clinical biotech producing a variety of nanoparticle drugs to prevent human disease. The company has a Magic Formula score of 69.7. They are down 17.01% over one month.

Polished.com Inc.

Polished.com Inc. ( POL ), is a small-cap Brooklyn-based appliance and home furnishing e-commerce platform. The company has a Magic Formula score of 32.58 and is down -16.62% over one month.

More up than down

So far I'm seeing a few more stocks on the upside versus down, with a relatively flat performance over one month. One year will be a good indicator of how the strategy racks up to the market. The beta of the stocks individually is wild. As a collective, it's pretty tame. I own the whole list in small amounts, and as the original article states, the goal is to hold for at least 15 years.

Buy and hold parable

On each monthly update, I hope to provide one useful buy-and-hold parable from a book in my library. I aim to have no more than 5% turnover per year in my portfolio. Holding as long as possible just makes too much sense from a compounding and tax perspective. This month, let's take a look at the story of an everyday IRS worker that didn't start investing until her early 50s. She started with $5,000 and ended up with $22 million. This story is paraphrased from James Glassman's The Secret Code of The Superior Investor .

The young lawyer detailed in the book, Anne Scheiber, retired from the Internal Revenue Service in 1944. She had a graduate degree but was consistently denied promotions, she never made more than an inflation-adjusted $35,000 a year. At retirement, she scraped together $5,000 in savings and put the funds all into stocks.

Over the first six years, stocks doubled, and, in 1950, she bought 1,000 shares of Schering-Plough Corp., a drug company, with her profits. She had a position of about $10,000 in the company at that time. When she passed in 1995, those shares became, through splits, 128,000 shares, worth $7.5 million. She also used dividends and some profits to buy other blue chips during her holding period, one of which was Coca-Cola ( KO ), which increased in value from $28,000 to $720,000 during the last 15 years of her life, excluding dividends. She also had investments in Loews ( L ) that ended up worth $2.2 million, PepsiCo ( PEP ) worth $1.6 million, Bristol Myers Squibb worth $900,000, and Allied Signal, purchased by Honeywell ( HON ), which was worth $1 million. By the end, she had parlayed her buy-and-hold strategies into a portfolio worth $22 million.

She startled Yeshiva University by donating it all to them, avoiding estate taxes. Her broker, William Fay of Merrill Lynch said this of her strategy after her passing:

"She believed in these companies. She just stayed with them. She didn't care if the market was up or down." All of her stocks went through rough patches, Schering even halved during the 70s, but Scheiber didn't sell.

She got her revenge on the IRS by seldom selling and not having to pay much if any capital gains taxes. She moved a portion of the funds into bonds in her 80s, which amounted to $8.1 million. Together, she was receiving over $800,000 a year in interest and dividends by the end of her life. She lived to the ripe old age of 101, 50 years of compounding, coming from very humble conditions.

Conclusion

I shoot for a low to no turnover strategy, avoiding taxes and letting my portfolio compound. 100 Baggers and books like it, have many examples of why buy and hold is superior to all other forms of investing. I look forward to building on the small-cap portion of my portfolio and intend to buy a new buy-and-hold list each year using the same logic laid out in this article. If next year the same stocks screen out, I'll add to those. If there are new entrants, I'll buy those instead. All the while holding and compounding the portfolio. Even if stocks on the current list wallow, they are in my set-it-and-forget-it coffee can. The money is locked up for the long run.

For further details see: