I am a conservative investor who seeks out the highest return with the least amount of risk. I tend to favor large established companies with proven track records. I find that companies with an established track record are more predictable. By being consistent, it allows an investor to more accurately model future gains. I also find that companies who have consistently raised their dividend and are buying back a large amount of their shares tend to outperform over the long run. I recently wrote about my portfolio which can be seen here. The article below will detail the transactions undertaken in the third quarter.
For the third quarter there were two additions and one deletion from the portfolio. The reasoning behind the moves will be discussed in length. The additions were BP (BP) and Starz (STRZA) and the deletion was Motorola Solutions (MSI). I was also able to take advantage of market volatility to sell covered calls on positions held thus generating some additional income.
BP Total Return Price data by YCharts
BP was added due to its compelling risk reward ratio. I wrote an article fully detailing the reasons for my purchase. It should be published at the same time as this article so feel free to review it. I anticipate an investor in BP will be able to compound at a rate of over 10% for the rest of the decade. The current dividend yield is over 5% which will be reinvested into additional shares. By being patient and allowing all future dividends to reinvest, an investor is more than halfway towards the goal of 10% a year compounded. BP generates a healthy and growing cash flow as demand for energy continues unabated. The shares are being penalized due to the Macondo accident which is in the second of three phases of litigation. I anticipate once the litigation is concluded the shares will trade in line to its peers such as Exxon Mobil (XOM) and Chevron (CVX) generating a healthy capital gain.
STRZA Total Return Price data by YCharts
STRZA is a media company with assets that include its pay television channels and content distribution. STRZA was spun off earlier this year from Liberty Media (LMCA) making it the only pure play pay television provider. I view content as the key going forward as Netflix (NFLX) is making the need to pay for channels such as HBO and Showtime obsolete. To combat the decline, the pay TV providers are creating their own original content. In STRZA case this included titles such as Spartacus, Magic City and the White Queen. STRZA has a minor share repurchase plan in effect and according to its latest 10-Q filed in August the company has repurchased roughly 1.6 million shares. The repurchases help offset the dilution that would occur if all of the employee options and restricted shares were exercised. STRZA is not my typical play and this is a bet on their content becoming more valuable in the future. I view this as a worthwhile venture and have added it to my portfolio. Warren Buffet also happens to hold a stake in STRZA in his portfolio. It was more than likely added by one of his minions, but the fact remains Berkshire Hathaway (BRK.A) has a stake. For an excellent write up about STRZA by in my opinion one of the best writers on Seeking Alpha please click here.
MSI Total Return Price data by YCharts
Motorola Solutions was sold to free up the capital to purchase BP. MSI has disappointed me since its recent earnings miss. The company announced that the CFO was dismissed more than likely due to missing its earnings estimates over the past few quarters. This adds an element of uncertainty to the equation. I also wasn't pleased to hear John Chambers from Cisco Systems (CSCO) offer very cautious comments concerning the spending environment for IT over the next two quarters. MSI is very dependent on government contracts for the vast majority of its revenue. With what looks like at minimum bitter squabbling emanating from Washington for the rest of the year, I felt it was time to depart. I am pleased to see the shares regain the ground lost after another earnings disappointment; I used the opportunity to exit the position at a small profit.
I use a covered call strategy to generate some income during periods where I feel the market will consolidate. The above mentioned condition was exactly what was presented to us in the August/September time frame. Calls were successfully sold on Wells Fargo (WFC), DIRECTV (DTV), United Healthcare (UNH), Schlumberger (SLB), Oracle (ORCL), Kroger (KR) IBM (IBM) and Wisdom Tree Hedge Japan Equity Hedged ETF (DXJ). I was able to generate income and not lose any of these positions. I currently have calls outstanding on Macy's (M) which I anticipate will expire worthless generating an equivalent of an extra dividend payment. I don't anticipate writing additional calls against my positions as we enter into earnings season.
Thank you for reading and I look forward to your comments. I will be composing a fourth quarter update in late December detailing the actions taken for the fourth quarter. I am cautiously optimistic that we will end the year higher than we are today.