On Friday, I sent out an e-mail to our e-mail subscribers, like we always do whenever we are about to have a transaction in our portfolio. I don't usually address our portfolio transactions on the blog, but I thought I should clear something up. Some readers have been questioning why we recently sold out of certain stock positions, specifically General Mills (NYSE:GIS) and Procter & Gamble (NYSE:PG).
These sales have been several months in the making honestly. Over the past two months, I have written a couple of posts about changes to our Portfolio Allocation and the ETFs that will make up the core of our future portfolio. Part of the focus of our portfolio has been to generate income from the dividend growth in our portfolio, but the other part of our focus is to grow our portfolios' value by investing in undervalued business… that will prosper over the long term. Part of that concept means that we do need to take profits when the value of some of our assets become overvalued. A while back we sold out of our utility company investments, for instance. At that time (and currently), we felt that the valuations and growth prospects that the market was assuming did not justify our continued investment. Something similar has occurred over the past several months, in regards to consumer staples companies. While I consider General Mills a good company, it's a mature business and its model is dependent on consumers continuing to pay a premium for the company's name brand products and agricultural commodities remaining low. Therefore, I don't believe it has the characteristics of a company we should own over the next 30 years. Profits over the past couple of years have been goosed by unusually low agricultural input costs, low transportation costs, and good consumer demand. Will these trends continue? I don't know, but given the company's current metrics, I am happy to book our profits.
The other part of why we took our profits, is I am not particularly optimistic about the global economy. That outlook, which may or may not be justified, and our desire to shift our core holdings over to passive index investments… encouraged us that some of our capital was better in cash for the time being. While I never expect to time our portfolio's transition from mostly individual stocks… to mostly passive index investments… perfectly, it makes sense to me to do some selling while those assets are at elevated levels. For the past few years, dividend growth investments have been very popular with investors…largely as a result of the current (artificially) low interest rate environment. Therefore, some consumer staples and utility companies are trading at price to earnings ratios approaching 30. That wouldn't concern me at all if the underlying businesses were growing at a rapid pace, but instead, many are only growing (revenues and profits) at 2%-6% annually. At some point, the companies will likely need to grow faster, or the share prices will need to come down. The exception being if we are entering a sustained period of mild deflation, but that situation comes with its own problems.
I have been called everything from a contrarian to a "nut" on this blog, but I have found most readers receptive to our ideas. I don't know that I am really a contrarian and I don't strive to invest the opposite of how most people invest. I just try to think independently, and follow the path that's best for me and my family. So our portfolio is largely in cash and we're happy to remain that way for the near term. I think we will have dramatically better investment opportunities within the next year. If I can leave you with a concept, without going on about all the virtues of cash, it's that in the current economic environment Cash is Not Trash!
In round numbers, our sale of General Mills freed up $11,500 in capital. We had owned the shares for about 2 years and enjoyed capital appreciation of 20.5%, as well as 2 years' worth of dividend income. The cash has been added to our growing "war chest". We will reinvest this capital in the global equity markets as soon as we see a great long-term opportunity, but we also invest a small portion of our portfolio in deep value investments. Time will tell what our next investment will be, but for now, I am happy to hold plenty of cash and wait for the proverbial "fat pitch".
Do you ever book profits, or are you strictly a "buy and hold" investor?
Disclosure: I do not currently own shares in GIS or PG. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional.