Why We Own W.W. Grainger And Abbott Labs

This past year was one of measured progress that included strong corporate profits, low US economic growth, marginal improvement in employment, and an uptick in housing starts coupled with less price declines. Financial stress was also present from the Euro-Zone on the brink of collaborative collapse, U.S. debt ceiling crisis, and one of the worst displays in a long, long time of ineffective government.

The equity market swung wildly but ended up in just about the same place it started the year. The Suncoast Equity model (SEM) fared a bit better posting a positive return of 4.3% net of fees versus the S&P 500 of +2.1%, and SEM outperformed most of its peers as represented by the Lipper Core/Growth reporting returns of 0% and -3%, respectively.

Looking forward we see many reasons to stay the course. We continue to emphasize the best opportunities will be in high quality businesses with a global reach and strong balance sheets. Company valuations are attractive based on both an absolute basis and relative to bonds, especially against high quality corporates and Treasuries.

Earnings growth projections for our portfolio in 2012 are in the low double digits, down slightly from the mid teens growth we suspect 2011 will post. But these are still at healthy levels and higher than the mid-single digit profit growth for the companies as a whole in the Standard & Poor's 500. Anemic portfolio appreciation in 2011, combined with strong earnings growth in 2011 and 2012, may support rising portfolio price appreciation in the year ahead.

We have always felt that our favorable long-term investment results benefit from selection among higher quality businesses, as well as from our intense emphasis on safety. High quality businesses boast business statistics, such as above average return on capital and excess free cash flow. A rather large percentage of publicly traded businesses don't make the cut and this narrows our focus to approximately 250 companies.

Safety has been a critical factor and will always be as long as we are managing client assets. In today's world of extreme volatility and a lot of leverage, some companies' financials may implode, and we don't want to be invested anywhere near these situations. A company with substantial cash or little to no debt is not going to go bankrupt. So the SEM Disciplined Investment System (SEM-DIS) requires companies to have strong balance sheets.

Within our portfolio it may appear as if we favor some industries, such as consumer goods, but our choices are entirely bottom-up. It just so happens that a disproportionate number of consumer-based companies are very good choices because they boast global brands, recurring sales, good growth prospects and lower risk; the attributes of an attractive business.