Real estate mogul and host of NBC’s “The Apprentice” Donald Trump was on CNBC this week to announce that he’d been in the market buying stocks, something he claims he rarely ever does since he’s a real estate guy not a stocks guy. His motivation was the lack of yield he was receiving at the bank. So which stocks did Mr. Trump buy? I’ll take a look at them below, beginning with what I see as his best picks and finish with his worst.
Procter & Gamble (PG)
Given the troubling developments of the past couple weeks, Procter & Gamble, the world’s largest manufacturer of consumer staples, seems as good a place to hide as any. While top and bottom line growth have been relatively flat recently (analysts expect a speedier 9% annual growth going forward), the company sells at a discount to its historic P/E and offers some potential for growth in emerging markets. P&G has increased its dividend every year for 54 years and at 3.4%, it certainly trounces the yield on a money market or bank savings account.
Johnson and Johnson (JNJ)
Another best of breed, multi-national company, healthcare juggernaut Johnson and Johnson operates three divisions: pharmaceutical, medical devices and consumer. The diverse operations help insulate the company from patent losses on its branded medications making it a safer bet than pure-play drugmakers like Pfizer or Merck. A 3.6% dividend which the company has increased every year for 48 years satisfies Trump’s quest for yield. Better top line growth over at Abbott Labs would likely have led me there instead, but it’s hard to quibble here.
I guess it’s apropos that someone who considers himself the world’s biggest celebrity would choose the biggest businesses he can find. From the world’s largest consumer goods and healthcare companies to the world’s largest chipmaker, Trump doesn’t seem too concerned about diversifying across market caps. With its 4% yield and a valuation that grows more attractive by the day, Intel offers growth and value in one package. My concern here is the potential for the market to take this cyclical stock much lower if the global economy is peaking as I believe it is. Fortunately for The Donald he’s split his picks between cyclical and non-cyclical names which hedges out some of this risk.
I’m sure Trump feels a certain comfort with the brand since Caterpillar’s machines have been critical to moving the earth on any number of his building projects but this doesn’t make it a sound investment. Personally I’m not too fond of the business and recently published an article on the company’s fundamentals. Here again is a cyclical that lost over 50% of its market cap in the last downturn. If he’s willing to accept that kind of risk for a 2% yield than Trump’s a braver man than I. Must be the hair.
I'm lumping Trump's final two picks together, tied for last place. I understand they're different companies with Citigroup operating in 160 countries and decidely more global than Bank of America, but I have the same problem with both. How do you value them? Ever since the Financial Accounting Standards Board changed the rules to allow banks to legally hide bad debts, the best investment case that can be made for Citi and Bank of America is, “how much lower can they possibly go?” This isn’t a very adult approach to investing.
Many smart men have been humbled recently trying to call the bottom in these names. Morningstar’s mutual fund manager of the decade Bruce Berkowitz has wrecked returns at his Fairholme Fund by feasting on AIG and Bank of America. Billionaire golden boy John Paulson bought the banks and is now expecting redemptions at his Advantage Plus hedge fund which is reportedly down 31% this year alone. I’m guessing there are some (including Trump) who feel it’s their patriotic duty to support these franchises but to what end?
Sorry Trump but …You’re Fired!
Trump’s first four picks can be justified but he really blows it with the banks. Not only is it impossible to determine a reliable book value for Bank of America and Citigroup but they don’t fit Trump’s stated goal of earning him a better yield than cash. At a brisk penny a quarter, investors are better off wading into the fountain down at the mall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.