"Mr. Market" can be a wild and crazy guy.
In his 1949 book, The Intelligent Investor, Ben Graham introduced "Mr. Market," an imaginary business partner who personifies the stock market and helps explain the market's fluctuations. It's a way of describing the market's tendency to be overly optimistic at times and at other times overly pessimistic. Sometimes these "mood" swings can be explained by macro economic or political/social events and sometimes by events particular to one company or sector. Sometimes, there seems to be no particular catalyst for market swings.
This week, as I did business with the imaginary Mr. Market, at times I thought I was dealing with a "wild and crazy guy."
With apologies to Ben Graham and to the "Festrunk Brothers" (Steve Martin and Dan Ackroyd), sometimes when the market acts in ways that seem crazy, it helps to have a sense of humor.
A quick review of the week
On Friday, February 5, the Dow Jones Industrial Average closed down 211 points to 16204 and the Standard & Poor's 500 Index closed down 35 points to 1880.
On Friday, February 12, the DJIA closed at 15973, up 313 points for the day but down 231 points for the week. The S&P 500 Index closed at 1864, up 35 points for the day but down 16 points for the week.
Here's a table of the week's daily highs and lows for the Dow Jones Industrial Average and the Standard & Poor's 500 Index rounded down to the nearest whole point, provided by the Wall Street Journal.
|Date||DJIA Low||DJIA High||S&P 500 Low||S&P 500 High|
The DJIA range was 15503-16201, or 698 points. The S&P 500 range was 1810-1881, or 71 points. Within these ranges, the week "felt" like the broad market has a downward bias, with occasional strong rallies. Yet, there were many individual stocks that were responding to company-specific news and going in their own direction apart from the broad market. At times, it was like watching a "tilt-a-whirl" ride at the fair, where a car goes in one general direction with the other cars, but each car spins on its own, independent axis.
A market week with many moving parts
Amid all the moving parts in this week's market, I saw opportunities to improve the quality of the portfolio and to move it closer to the desired design. Quality is in the eye of the beholder, of course, and others may see my trades in a different light. By "quality," I'm referring to the portfolio's overall credit quality. Sometimes trades "fall into place" and this was one of those weeks.
The year began with several stocks on my "watch list" for possible inclusion in the portfolio. Here are the January 4, 2016, prices, and my target buy prices on that date, along with the S&P credit rating, and the number of years the company has been on David Fish's "CCC" list.
|Automatic Data Proc||ADP||82.07||2.12||2.6%||78.52||3.55||AA||41|
|NW Nat Gas||NWN||49.90||1.87||3.7%||42.50||7.40||A+||60|
I made an initial purchase of shares of Parker Hannifin (NYSE:PH) on January 15 at $88.09. It was 2.0% of the portfolio.
The watch list was revised several times during the following weeks.
Here's the watch list as of February 1, 2016:
|Automatic Data Proc||ADP||82.97||2.12||2.6%||64.32||18.65||AA||41|
|NW Nat Gas||NWN||52.19||1.87||3.6%||42.51||9.68||A+||60|
Integrating the Watch List into the portfolio
On Thursday, February 4, I dropped the watch list as a separate section on my spreadsheet, and added five lines to the portfolio in anticipation of expanding the portfolio to 35 holdings. In those rows I added Exxon (NYSE:XOM), Apple (NASDAQ:AAPL), General Electric (NYSE:GE) and Northwest Natural Gas (NYSE:NWN), and Qualcomm (NASDAQ:QCOM).
On February 4, I put in a limit order to buy initial shares of Qualcomm at $43.51. The order filled on Monday, February 8 at $43.51. At that time, QCOM was 1.4% of the portfolio. Another purchase of QCOM was made on February 10 at $43.12 and a final purchase was made on February 11 at $43.13. After these purchases, QCOM was 3.4% of the portfolio. I wrote about the background of this QCOM purchase in a February 8 article.
Mark Hibben provided a helpful QCOM update on February 12.
So, on Monday, February 8, there were still four rows with "0" in the "shares" column, reserved for XOM, AAPL, GE and NWN.
On Wednesday, February 10, Cisco Systems (NASDAQ:CSCO) reported strong earnings and announced an increase in the dividend from 21 cents per quarter to 26 cents. I dropped XOM from the group and inserted CSCO in its place.
For several weeks, I had been looking closely at Apple, Qualcomm and Cisco. With CSCO's dividend announcement on Wednesday evening, I decided I would add it to the portfolio if the price didn't jump too much in the wake of the announcement. Shares were purchased on February 11 at $24.50, and CSCO now represents 4.1% of the portfolio. At the new annual dividend of $1.04, the yield at purchase was 4.2%. Here's a brief February 11 CSCO article by Brian Nichols and a February 11 article by Nigel Kelly about CSCO's cash position.
The technology sector
With this week's purchase of Qualcomm and Cisco, I removed Apple from consideration, even though I was tempted when it dipped to slightly below $93 this week. Currently, the technology sector represents 18.0% of the portfolio. This is extraordinarily high for me.
Added cash and trimmed some positions
On February 11, some stocks were up and some were down. I added the first cash to the brokerage account in 2016 to take advantage of what appeared to be some attractive opportunities, and I trimmed several positions to bring them more in line with my targets. I sold a few shares of Union Pacific (NYSE:UNP) at $75.97, Genuine Parts (NYSE:GPC) at $85.18, Johnson & Johnson (NYSE:JNJ) at $100.24, 3M (NYSE:MMM) at $151.34, and PepsiCo (NYSE:PEP) at $96.77.
The industrial sector
Going into the week, the industrial sector was 21.8% of the portfolio. In the prior week, Cummins (NYSE:CMI) spiked up to over $100 on the news of a big share buyback. CMI had become my largest position at 5.5% of the portfolio, and I've been waiting for an opportunity to reduce this percentage, although I'm in no hurry to sell CMI since it yields 4.0%. Last week, I placed a limit order to sell some of the position at around $101. The stock brushed up against that level before falling back, but the order has not filled.
Bought General Electric
I made an initial purchase of GE shares for the portfolio. I like the transformation away from financial services. The dividend is frozen for 2016 as part of their restructuring, but I believe the resulting company will be profitable and dividend-friendly. I've had GE on my watch list from time to time. The company has a decent yield and it has an AA+ credit rating from Standard & Poor's. I bought shares of GE on February 11 at $27.52. The yield at purchase price was 3.3%. GE now comprises 4.2% of the portfolio. Currently, the industrials sector comprises 23.3% of the portfolio, an all-time high for me. Here's a nice January 29 review of GE by William Stamm.
Sold Parker Hannifin
To make room for GE, I sold the recently-purchased shares of PH on February 11 at $95.43. This is a great company but as I looked at other opportunities in the sector, I decided to sell this small position rather than trying to build it at this time. Here are two recent excellent articles about PH, one by Stephen Simpson and one by Simply Safe Dividends.
Added some Archer-Daniels-Midland (NYSE:ADM)
On February 11, I bought a few more shares of ADM at $32.07, bringing ADM from 2.0% to 2.5% of the portfolio. The yield at the purchase price was 3.7%.
Tilt-a-Whirl in REIT Land
Nowhere was swirling company-specific action more pronounced this week than among the REITs.
Sold HCP Inc (NYSE:HCP)
Like other holders of HCP Inc, I have tried to formulate a plan to deal with HCP shares. On November 25, 2015, I sold some shares at $35.27, reducing exposure from 5.2% of the portfolio to 3.8%.
After HCP Inc reported earnings on February 9, I spent considerable time thinking what would be the best course of action. I decided that HCP's Manor Care problem would be a more difficult workout than I expected and that a dividend cut is now a clear possibility. The general downdraft of the market provided some good opportunities to buy shares of some companies that have been on my watch list from time to time. I decided to liquidate the position and redeploy the proceeds elsewhere. My cost basis was $39.46 and I sold the shares at $26.20.
Held WP Carey (NYSE:WPC)
During the week, I considered selling WPC after the surprise announcement of CEO Trevor Bond's departure. When the price fell to a yield of 7.5%+, I considered doubling my position (from 1.7% to 3.5% of the portfolio). After a little reading, I decided to maintain the present allocation. It appears that the Board may be less enthusiastic than Mr. Bond was about the proposed "pivot" to possibly break-up the company by separating their international REIT operations from their US REIT operations, as well as the possible spinoff of their investment management business and their new business development venture. I have reaffirmed my position that I will hold WPC until the dust settles. If a REIT entity emerges that raises their credit rating from BBB to BBB+, I will consider continuing to hold shares. On February 12, Brad Thomas offered a helpful summary of the present situation at WPC.
Sold National Retail Properties
My most recent purchase of NNN was on September 4, 2015 at $34.17, at which time it was 4.0% of the portfolio and the yield was 5.1%. In the ensuing months, NNN saw a nice appreciation in price and I trimmed the position, most recently on January 8 at $39.59, February 4 at $44.51, closing the position on February 12 at $45.575 (at a yield of 3.8%). The S&P credit rating for NNN is BBB+. I agree with the February 11 value assessment about NNN by Colorado Wealth Management.
Sold Realty Income
On September 4, 2015, Realty Income was 6.0% of my portfolio. The price was $43.38 and the yield was 5.3%. The price increased over the next few months and I began to gradually trim the position, most recently on January 8 at $51.70, on January 27 at $55.24, on February 10 at $56.89, closing the position on February 12 at $60.64 (at a yield of 3.9%). The S&P credit rating for O is BBB+. Once again, Colorado Wealth Management provided a helpful article about the strong price appreciation at Realty Income.
Bought Pfizer (NYSE:PFE)
I used the proceeds from the sale of NNN and O to establish a position in Pfizer at $29.04. The annual dividend is $1.20, so the yield at the purchase price was 4.1% (higher than both NNN and O). The S&P credit rating for PFE is AA-. Alexander Valtsev offered a cautious view of PFE in his January 14 article. Several other SA articles about PFE have appeared recently, including a December 15 article focusing on Pfizer's free cash flow by Dividend Drive.
Recapping a Wild and Crazy Week
The week began with 31 holdings in the portfolio. These new companies were added to the portfolio:
- General Electric
These positions were closed:
- Parker Hannifin
- HCP Inc
- National Retail Properties
- Realty Income.
So, the week ended with 31 holdings and I'm still reserving a spot for NWN, which at this point is the only stock on my watch list. I'm waiting on an entry point around 4.0% yield. The current yield is 3.6%.
Here is an update of the portfolio, with prices as of February 12, 2016, the annual dividend, and the current yield. The percentage of the portfolio represented by each holding is given, along with the percentage of portfolio income provided by each holding. The cost basis for each security is listed as well as my current target buy price. The S&P credit rating for each company that is rated (from FAST Graphs). GPC is not rated by S&P, but is rated A+ by Value Line. "CCC" represents the number of years of consecutive dividend/distribution income, as provided by David Fish.
|Procter & Gamble||PG||80.99||2.65||3.3||5.2||4.1||76.43||72.65||AA-||59|
|Int Bus M||IBM||121.04||5.20||4.3||4.4||4.5||141.96||115.56||AA-||20|
|General Electric||GE||28.26||.92||3.3||4.2||3.3||27.52|| |
|Enterprise Prod Partn||EPD||20.60||1.56||7.6||2.7||4.9||25.66||19.75||BBB+||19|
|Archer Daniel M||ADM||32.45||1.20||3.7||2.5||2.3||32.57||30.00||A||40|
|Main Street Cap||MAIN||27.68||2.16||7.8||2.2||4.2||29.02||25.41||BBB||5|
The portfolio's current yield is 4.2%. So far, the portfolio is up 1.79% for calendar year 2016.
Here is the current sector breakdown, with the first column giving the approximate value of the economy as represented by the S&P 500 on 12/31/15, according to MarketCapitalizations.com:
|S&P||Sectors & Portfolio Companies||Value||Income|
|20.68||Technology (MSFT IBM CSCO QCOM TXN)||22.2||19.7|
|REITs (WPC STAG HASI)||4.4||8.4|
|15.20||Healthcare (JNJ MRK PFE)||10.2||8.2|
|10.11||Consumer Staples (PG WMT PEP ADM)||15.3||11.6|
|9.96||Industrials (MMM GE CMI DOV EMR UNP)||23.3||19.2|
|6.53||Energy (EPD EVA PEGI)||4.9||10.1|
|2.98||Utilities (CNP SO WEC)||9.8||11.3|
My current target allocations for the portfolio are:
- 5.0% each: JNJ, PG, MMM, MRK and MSFT;
- 4.2% each: WMT, IBM, GE, PFE, CSCO;
- 3.4% each: NWN*, GJPC, QCOM, TXN, CMI;
- 2.6% each: DOV, EMR, PEP, ADM, UNP;
- 1.8% each: NUE CNP, SO, WEC, T; and
- 1.2% each: EPD, WPC, MAIN, STAG, HASI, EVA, PEGI.
*NWN is not yet included in the portfolio. My goal is to eventually have five holdings in the 1.2% category rather than seven.
This article is part of the journal of my effort to design a retirement income portfolio. I have tried to recapture my thought process and decision process during a rapidly changing market scenario this week. I've given more of a "play-by-play" account in this article because I gain new insights when I review what I did and why I did it. I hope you will find this helpful.
This article is not intended as a recommendation to buy or sell any security. I particularly want readers to know that I consider Parker Hannifin, National Retail Properties and Realty Income to be excellent enterprises, and I hope HPC Inc is able to weather the Manor Care storm.
I offer this as part of Seeking Alpha's ongoing community conversation about stocks to study and how to design a portfolio. Please do your own due diligence.
Disclosure: I am/we are long JNJ, PG, MMM, MRK, MSFT, WMT, IBM, GE, PFE, CSCO, GPC, QCOM, TXN, CMI, DOV, EMR, PEP, ADM, UNP, NUE, CNP, SO, WEC, T, EPD, WPC, MAIN, STAG, HASI, EVA, PEGI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.