January 26, 2022

My private SmallTrades Portfolio is a Roth Account in which I no longer make annual contributions and cash withdrawals. Calendar year 2021 marked the 14th year of active portfolio management.  Figure 1 shows the latest portions of year-end market value as 81% index-ETF, 18% U.S. stocks, and 1% money market. 

Fig 1.

Annual returns

My investment goal is to earn an annual rate of return above that of the benchmark Standard & Poors 500 Stock Index.  Unfortunately, the Portfolio usually underperforms the Benchmark.  

Fig 2.

Figure 2 presents the history of annual returns for the Portfolio (blue bars), portfolio holdings (yellow & red bars) and Benchmark (black bars).  In year 14, the Portfolio earned a 27% rate of return compared to the Benchmark’s 29% rate of return, thus underperforming the Standard & Poors 500 Index by a margin of 2%. The history of annual returns reveals devastating losses of market value in the first 6 years followed by encouraging gains in the last 8 years.  Speculation and hurried trading, augmented by the 2008 Recession in year 1, created multi-year losses.  After year 6, reduced speculation and slower trading produced multi-year gains.

14-year growth

Devastating losses of Portfolio value in the first 6 years precluded any chance of matching the cumulative growth of the Benchmark over 14 years.

Fig. 3.

Figure 3 displays the cumulative growth of annual returns as a chain of “unit” market values.  The unit market values of the portfolio (blue dots) are ratios of year-end market value to the initial market value at time 0.  After 14 years, the Portfolio’s compound annual growth rate reached 4% compared to the Benchmark’s 11%.

8-year growth 

To evaluate the cumulative growth of annual returns in the last 8 years, I reset the unit value to $1.00 at the end of year 6 and recalculated the succeeding unit values now displayed in figure 4.  

Fig. 4.

Less speculation coupled with longer holding periods enabled Stocks (red dots) to outperform the Benchmark (black dots) through year 10 and generally outperform the Portfolio (blue dots).  The Portfolio (blue dots) matched the performance of its ETF (yellow dots).  


Measurements of annual return and cumulative growth show that the SmallTrades Portfolio continues to underperform its Benchmark by a wide margin of 7% cumulative growth over 14 years.  The last 8 years produced encouraging results based on improvements in portfolio management.  To continue improving, but not wishing to leverage my investments, my choices are to invest in a growth index ETF and/or re-allocate assets to a higher portion of growth stocks in the portfolio.    

Copyright © 2021 Douglas R. Knight

Issue, the current market’s Volatility

August 22, 2011

Fig. 3 Market volatility in relation to VIX

“Volatility” is a measure of price-stability.  The CBOE’s Volatility Index (“VIX”) serves as a yardstick for volatility of the U.S. equity market in which high values indicate unstable, gyrating stock prices.   The chart shows this year’s changes in the S&P 500 Index for large-cap stocks and the Russell 2000 Index for small-cap stocks relative to the VIX.  Compared to the first day this year, both stock market indices increased when the VIX was below 20 and decreased when the VIX was above 30.  The bond market moved the opposite way.  The current volatility is above 30 on the VIX scale due to the following influences on investor sentiment:

  • slowing growth of the U.S. Economy
  • general mistrust of the economic policies of the U.S. Government
  • potential defaults on the soverign debts of Greece, Portugal, Spain, Ireland, and Italy
  • high-frequency trading in large volumes

In my opinion, today’s financial markets will remain volatile and there could be further decline in stock prices before the economy improves.  I don’t know how far the markets will decline or how long the volatility will persist.

What are the retail investor’s choices?

  1. Speculate in a variety of ways such as day-trading and use of leverage (‘leverage’ means borrowing capital to buy assets).  These are risky actions.
  2. Do nothing except continue to hold all investments and reinvest the returns.  Expect the stock market to return 8% over a few decades.
  3. Seek ‘safe havens’ of low-risk investments (CDs, money markets, investment-grade bonds, etc.).  Investors seek safe havens for reasons that span from panic to planned rebalancing.
  4. Seek bargains in the down-market.  Active investors have choices of penny stocks (below $5/share), favorite securities, and securities with high intrinsic value.  United Technologies is one of  the companies in my previously posted company profiles that has high intrinsic value.

Do you have comments about Volatility?

Copyright © 2011 Douglas R Knight

Company profile, iRobot (IRBT: nasdaq)

August 19, 2011

Business.  iRobot Corp. designs and builds servant robots for household, industrial, and military applications.  Its two business segments are:

  • automated robots, which perform indoor & outdoor cleaning operations for households and generate 55% of revenues. 
  • remote presence robots, which are primarily ground and maritime unmanned vehicles designed to gather intelligence and perform dangerous tasks.

CEO/Chairman Colin Angle (age 46) is a co-founder with previous robotics experience at NASA.  Other co founders have remained with the company since it was founded in 1990.

Business operations.  The company performs its core operations of design, development, and marketing.  The manufacturing and administrative operations are outsourced to 3 Chinese firms (domestic robots) and U.S./Indian firms (commercial robots).  Profits are earned from sales (88% of revenues) and contract research (12% of revenues).  Product distribution channels are online sales, government contracts, and retail stores.  Product price range is $200-$800 for automated robots and $20,000-$195,000 for remote presence robots.

Service Robotics/Personal Robotics Industry.  Service robots are used in non-manufacturing activities.  Personal robots are a subset of service robots which are sold as consumer products.  The service robotics industry was projected to grow from $5 B in 2005 to $17 B in 2010 and $52 B in 2025.   An independent report projected global growth of service robotics from $1 B in 2005 to $8 B in 2010 and $16 B in 2025.  The research challenges are improved performance and product development (design, safety, and cost).  The U.S. lags behind Japan and Korea in product development.

Market position.  The company’s competitive disadvantages are 1) big competing firms and 2) global market dominance by Korean and Japanese robotics firms.  The company’s patents and trademarks provide a competitive advantage.

Primary risk.  iRobot’s primary risks are an unstructured market in the U.S., patent infringement, and dependence on significant revenues from government contracts.

Growth strategy.  The company’s goals are to strengthen current market positions and open new markets.  One new market will be “product maintenance and support”.  The firm’s combined investment in future technologies averaged14% of total revenues over the past 3 years.

Stock valuation.  The common stock (IRBT: nasdaq) is a growth-opportunity stock with a market capitalization of $0.7 B and 67% institutional ownership.  The P/E declined from 88 in 2009 to 27 in 2011 as a reflection of growth in earnings.  Beta is 1.1.  Shareholders are rewarded by share buybacks and growth of assets.  No dividends are paid to shareholders.

Copyright © 2011, Douglas R Knight

Company profile, 3D Systems Corp. (DDD: nyse)

August 17, 2011

Company overview3D Systems Inc. (3D) is a holding company that designs, makes, sells, and services 3-D printing, manufacturing, and prototyping systems within 2 business segments:

  • Technology platforms for manufacture and sale of 3-D printing systems
  • Rapid Manufacturing Solutions for manufacture and sale of finished parts to customers.

The customers are businesses/professionals/government agencies in N.A., Europe, and Asia.

Corporate history.  Founded in 1986 with the patent of stereo-lithography by founder Chuck Hull, 3D became the first company to produce rapid prototyping machines using stereo-lithography.  Although the company owned 367 patents by 2003, emerging competitors and lawsuits caused 3D’s profits to plummet.  A new CEO was appointed in 2004 to refocus the business.  3D’s net deficits subsequently decreased until 2010 when the firm began earning a net profit.  Growing sales and stock issuance accounted for 3D’s recovery and accumulation of $37 million in cash. 

Product pathway (Operations).  Technology platforms: 3D’s printers are manufactured by several foreign companies based on customer orders.  Proprietary software is embedded in the equipment and the technology platforms are sold to businesses globally.  After-market services support the platforms.  Rapid manufacturing: The rapid manufacturing solutions business designs and makes precision parts for customers.  No single customer accounts for more than 10% of revenues.

Strategy for growth.  The plan for growth includes acquisitions of businesses aimed at penetrating new markets and expanding the current line of products (e.g., healthcare services).

Risks.  3D’s business operations are vulnerable to the following forces and events:

1)  Interrupted supply of materials

2) Loss of market share upon expiration of patents and commoditization of 3D printing

3) Competing technologies within the rapid prototyping industry

4) Strong bargaining power of customers

Competition.  3D’s main competitor in the 3-D printing industry is Stratsys Corp., who has a partnership with HP.  Other 3-D printing competitors are Z Corp, Solidscape (private firm), Sony, EOS GmbH, Arcam,  Objet Geometries, and Optomec (private firm).

Position within the industry.  3D’s competitive advantages are its patents (353 approved and 152 pending) and an offering of diversified products.

Rapid Prototyping Industry (additive manufacturing, desktop manufacturing). Rapid Prototyping is a series of automated processes that fabricate three-dimensional objects for the purpose of testing their form, fit, and function. The fabrication process is a layer-based additive manufacturing method. Business segments of the Rapid Prototyping industry are: 1) concept modeling, 2)rapid prototyping, and 3) rapid manufacturing.  Competing technologies offer alternative solutions as displayed in the following table:

selective laser sintering (SLS) Thermoplastics, metals powders
direct metal laser sintering (DMLS) Almost any alloy metal
fused deposition modeling (FDM) Thermoplastics, eutectic metals.
stereolithography (SLA) photopolymer
laminated object manufacturing (LOM) Paper
electron beam melting (EBM) Titanium alloys
3-D printing (3DP) Various materials

3-D (three dimensional) printers are cheaper and faster than other rapid prototyping machines (see below).  In 3-D printing, computer-aided design software or digital media are used to program a 3-D printer to build an object for a prototype or final product.  The construction process involves additive-part production without tooling. The typical 3-D printer business segments are 1) hardware, 2) consumables, and 3) add-on services.  The advantages of 3-D printing are comparatively low-cost machinery, reduced labor, rapid production, and rapid customization.  3-D printing may not be as accurate as other types of rapid prototyping methods.  The industry is fragmented by many private companies and several public companies.

Stock valuation.  3D’s common stock (DDD: nyse) has a market capitalization of $0.7 billion and 52% institutional ownership.  The beta is 1.65.  The company is focused on growth of assets rather than on payments of dividends or repurchasing stock.

Copyright © 2011, Douglas R Knight

Company profile, Union Pacific Corporation (UNP: nyse)

August 15, 2011

Business overviewUnion Pacific Corporation’s customers are manufacturers who hire bulk shipments of agricultural, automotive, chemical, energy, industrial, and intermodal freight from coast-to-coast and border-to-border of the U.S.A.

Business operations.  Profits depend on attracting customers with efficient service at competitive prices.  Profits decline when economic downturns reduce customer demand for shipping, the cost of locomotive fuel rises, or work is stopped by unions/disasters.  Profits depend on factors that include efficient freight operations, locomotive fuel efficiency, and high customer satisfaction.  The highest costs of operation are fuel and employee entitlements (48,000 full-time employees who are highly unionized).  Suppliyes of train equipment are constrained by the availability of locomotives and tracks.

Strategy for growth.  The company grows operations by adding double-, triple-, and quadruple- tracks to its busy corridors; also by upgrading and increasing its terminal capacity.

Industry/market.  Railroads ship ~40% of all surface freight in the U.S. (largest portion of total surface freight) and freight rates (revenue per ton-mile) have decreased by ~50% since 1981.  The leading railroad revenue companies in North America (Burlington, Canadian National, Chesapeake, Union Pacific) primarily finance their assets with debt and maintain debt/equity ratios of 1.5-3.1.  They uniformly invest in capital expenditures for upkeep and consistently earn profits, of which 25% are paid out as dividends.

Competitive advantage.  Railways provide the safest form of ground transportation within the freight industry.  Union Pacific is a class 1 railroad that operates 32 thousand route miles (26K owned, 6K leased) of railways.  It is tied with Burlington R.R. for being the largest earners of revenue from shipping rail freight within the U.S.A.  Highway trucks offer competition in all commodity segments except energy, are able to ship time-sensitive freight, but unable to ship bulk quantity.  River barges are competitors for grain and bulk commodities.

Risks.  The risks to earning profits are high fuel costs, bad economic conditions (may reduce demand for freight transportation), interruption of operations (weather, technology failure, strikes), changes in regulations (environmental regulations, government regulations), an interrupted supply of equipment, and accidents (personal injury, hazardous material spills).

Stock valuation.  Stock ticker UNP:nyse represents a large-growth stock that offers consistent dividends and corporate earnings.  I estimate the investment potential is a 10% return based on consistent earnings and dividends (2% yield).  Standard & Poor’s credit rating is BBB+.

2011 Outlook.  The 4th quarter is likely to be the busiest time of the year for railroad freight and high fuel costs will make railroads more competitive than trucks.  These predictions could be offset by the sluggish economy.

Company profile, United Technologies (UTX: nyse)

August 13, 2011

BusinessUnited Technologies is a globally operated, manufacturing-conglomerate company that sells commercial products (refrigeration, elevators, safety systems) and aerospace equipment (jet engines, helicopters, aircraft systems) to governments, manufacturers, and businesses.

Business plan.  Profits are earned from contract sales of high-end machinery and aftermarket services.  The business is primarily capitalized by debt which is backed by a large store of equity.

Market postion. United Technologies has large market-shares of the elevator, air conditioning, helicopter, and jet engine industries.  Its competitive advantages are the high barriers to entry (e.g., jet engine manufacturing, high-rise elevator manufacturing) by new competitors and the strong brand names of subsidiary businesses (Otis, Carrier, Pratt & Whitney, Sikorsky, Hamilton Sundstrand).

Competitive advantagePratt & Whitney’s competitors are Rolls Royce and General Electric, both of which compete on the basis of improved performance in fuel efficiency and noise reduction. Carrier’s competitors are Johnson Controls, Trane, and Lennox.   Otis’s competitors are Kone corp, Schindler Holding Inc, ThyssenKrup AG, and 1,000 smaller companies.

Investment potential.  The stock (UTX: nyse) has a large market capitalization value and its institutional ownership is 82%.  Standard & Poor’s credit rating is A.  The dividend yield is about 2.5% and I estimate a potential annual return of 11%.

Risk management.  Profits could fall as a result of global economic downturns, loss of government contracts, interruption of the supply chain, and product malfunction.

Company profile, Thermo Fisher Scientific (TMO:nyse)

August 11, 2011

Business. ThermoFisher makes and sells analytical instruments, laboratory supplies, and laboratory services to the biotech-pharma, healthcare, process control, and basic science industries.  Revenues are earned through wholesale distribution of products and direct sales to laboratories.

Market position.  ThermoFisher  is the leading provider of analytical instruments and laboratory supplies.   The firm’s competitive advantages are its breadth of products and brand names (Thermo Scientific, Fisher Scientific) .

Upside potential.  TMO:nyse is a large-cap growth stock with 91% institutional ownership.  Investment returns are earned from stock price appreciation, not from payouts of dividends.  Recent valuation ratios were P/E 15 and EPS $3.38.  Standard and Poor’s credit rating is A (investment grade).

Downside potential.  Major risks to ThermoFisher’s business are the 1) slow development of new products, 2) maturing markets for scientific supplies, and 3) dependence on customers’ capital spending.

Helpful links and references.  ThermoFisher’s Corporate web site, competitors (ref 1), and  market position (ref 1,2).

  1. Lab equipment/consumables index sales decline. (company overview), Instrument Business Outlook, ISSN: 1061-2203; volume 18, issue 1, 15 April 2009.
  2. Bathija, Sagar. Thermo Fisher Scientific, The M. J. Neely School of Business Education Investment Fund, July 4, 2009.

Company profile, NVE Corporation (NVEC:nasdaq)

August 10, 2011

Business.  NVE Corpproduces computer microchips that are made with leading-edge technology (spintronics) to efficiently acquire, store, and send digital information.  The customers are a few large companies involved with medical devices, national security, and the electronics industry.

Business plan.  NVE Corp. earns licensing fees and sells microchips to distributors or end-users at a high net margin (40%), which allows the company to control its sales prices.

Market position.  “Spintronics semiconductors” is the name of an emerging manufacturing industry that relies on nanotechnology.  NVE Corp. competes by owning intellectual property that excludes unlicensed competitors.

Upside potential.  NVE Corp. is a candidate for growth or acquisition based on its intellectual property and business success.

Downside potential.  Major risks to business success are the loss of a large customer and competing technology.

Stock valuation.  NVE stock (NVEC:nasdaq) is a small-cap growth stock with 58% institutional ownership.  NVEC does not pay dividends.  Loss of corporate earnings would likely devalue the stock.

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