Q1'16 Update For The R.I.P. Portfolio: Down But Not Out

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Includes: AIG, BAC, DOW, GE, KEY, PFE
by: WG Investment Research

Summary

Added to the DOW and KEY positions.

BAC and AIG are the top two under-performers, but GE has significantly outperformed the market so far in 2016.

For the first quarter of 2016, the portfolio finished in the red (down 4%) but I plan to stay the course (i.e. heavily invested in financials).

The Retire In Peace portfolio, or the R.I.P. portfolio for short, was first introduced to the SA community in December 2015. In the first article, I explained that monthly updates were going to be provided due to the fact that these holdings are the companies that I write about here on SA. However, I now plan to provide quarterly updates due to the lack of viewers.

This portfolio is being shared to allow my followers to track the performance of the stocks that I write about in addition to allowing everyone to see what adjustments are made on a quarterly basis. At the end of the day, I hope that allowing the SA community to see the quarterly adjustments made to the portfolio (specifically the purchases and sales) will lead to constructive discussion about the companies that are considered my "core holdings." I learn on a daily basis from others on SA so these updates will also be a benefit to me.

This is a real portfolio with real money, and it is being built with retirement in mind so I have 30+ years to make adjustments. As such, the monthly/quarterly volatility is not a concern.

Lastly, this is not my family's main retirement portfolio, but it is a portfolio that will greatly contribute to a stress free and relaxing retirement.

Full Disclosure: The core holdings (please see linked article for a listing of the core holdings along with the short-term and long-term catalysts that have been identified for each holding) are not necessarily the shares that I plan to hold for the next 30 years, but instead the shares that I would like to hold for that period of time. I will closely monitor these holdings and will trim, add to, or eliminate positions if the company's story drastically changes.

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Below you will find the portfolio and its performance, the March 2016 activity, as well as my thoughts on each sale and purchase that occurred in the month.

Price at Beg Value at Activity Monthly Monthly Current Unrealized Portfolio Yield Current Annual
Company Stock # of shares 3/31/2016 3/1/2016 Purchases (Sales) Unrealized G/L Realized G/L Value Gain (Loss) Weighting On Cost Yield Income
General Electric (NYSE:GE) 378.087 $31.79 $11,017 - 1,002 - $12,019 $3,102 22% 3.9% 2.9% $348
AT&T (NYSE:T) 154.72 39.17 5,717 - 343 - 6,060 1,208 11% 6.1% 4.9% 297
Franklin Income (MUTF:FKINX) 2269.66 2.11 4,562 - 227 - 4,789 (45) 9% 5.6% 5.7% 272
Walt Disney (NYSE:DIS) 26.65 99.31 2,545 - 101 - 2,646 715 5% 2.0% 1.4% 38
Bank of America (NYSE:BAC) 519.09 13.52 6,475 - 543 - 7,018 (1,269) 13% 1.3% 1.5% 104
Bank of America Warrants BACWSA 505.00 3.89 1,944 - 20 - 1,964 (931) 4% 0.0% 0.0% -
Citigroup (NYSE:C) 48.15 41.75 1,871 - 140 - 2,010 (414) 4% 0.4% 0.5% 10
KeyCorp KEY 102.35 11.04 653 460 17 - 1,130 (126) 2% 2.4% 2.7% 31
Dow Chemical (NYSE:DOW) 30.00 50.86 681 815 30 - 1,526 54 3% 3.8% 3.6% 55
Synchrony Financial (NYSE:SYF) 77.00 28.66 2,075 - 132 - 2,207 454 4% 0.0% 0.0% -
Kroger (NYSE:KR) 22.06 38.25 878 - (34) - 844 (73) 2% 1.0% 1.1% 9
Johnson & Johnson (NYSE:JNJ) 23.32 108.20 2,438 - 85 - 2,523 380 5% 3.3% 2.8% 70
Pfizer (NYSE:PFE) 86.51 29.64 2,546 - 18 - 2,564 (26) 5% 4.0% 4.0% 104
American International Group (NYSE:AIG) 51.40 54.05 2,565 - 213 - 2,778 (160) 5% 2.2% 2.4% 66
AIG warrants AIGWS 60.00 18.68 977 - 144 - 1,121 (320) 2% 0.0% 0.0% -
Metlife (NYSE:MET) 49.00 43.94 1,938 - 215 - 2,153 217 4% 3.8% 3.4% 74
Xinyuan Real Estate (NYSE:XIN) 194.06 4.43 749 - 111 - 860 126 2% 5.3% 4.5% 39
Previous Holdings -- -- -- -- - -- - -- -- -- -- -- --
- $49,632 $1,275 $3,306 - $54,213 $2,893 100% 3.0% 2.8% $1,516
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Industry/Portfolio Companies Value Portfolio Weighting
Industrials - GE, $12,019.39 22%
Healthcare - JNJ, PFE 5,087.17 9%
Financials - BAC*, C, KEY 12,122.78 22%
Insurance - AIG*, MET 6,051.83 11%
Telecom Services - T 6,060.19 11%
Real Estate - XIN 859.68 2%
Media - DIS 2,646.48 5%
Basic Materials - DOW 1,525.80 3%
Credit Services - SYF** 2,206.82 4%
Consumer Defensive - KR 843.80 2%
Conservative Allocation Fund 4,788.98 9%
*AIG and BAC warrants included in value and weighting
**Play on consumers --read articles on profile for more info
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March 2016 Activity

Sales
Company Amount Shares Price per share Realized G/L
N/A
$-
Purchases
Company Amount Invested Shares Price per share
Dow Chemical $815.15 16 $50.95
KeyCorp (NYSE:KEY) 459.95 40 11.50
$1,275.10
Dividends
Company Dividend amount Reinvested?
FKINX $22.59 Yes
PFE 15.60 Yes
KR 2.32 Yes
JNJ 17.38 Yes
KEY 4.64 Yes
BAC 25.86 Yes
AIG 16.35 Yes
XIN 6.98 Yes
$111.72
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Sales - No sales were made during the month.

Purchases -

(1) DOW - This is still a small position in the portfolio, but I plan to continue to add DOW shares if the stock stays around the $50. My initial purchase was made after the mega-merger with DuPont (NYSE:DD) was announced, because I believe that a tremendous amount of shareholder value will be unlocked if merger is approved.

The merger is the reason why I initially started a position, but there are other factors that make DOW an attractive long-term investment at today's price. DOW shares are attractively valued (~14x 2016E earnings) and the company is currently paying an above-average dividend (3.60%). I plan to write more about DOW in the coming months, so stay tuned.

(2) KEY - This regional bank has underperformed the market by a wide margin in 2016, but the future looks extremely bright for this growing bank. The bank sells at ~10x 2016E earnings and the upcoming catalyst is the proposed purchase of First Niagara (NASDAQ:FNFG) for $4.1b. The KEY and FNFG shareholders recently approved the purchase/sale, so the last hurdle will be receiving the final regulator approval for the deal (the banks anticipated for the deal to close in second half of 2016).

I plan to build a sizable position in KEY over the next few months so I hope that the stock price stays at the current level (~$11).

Portfolio Performance for March 2016, first quarter of 2016, and since the portfolio was first introduced to SA (December 4, 2015)

This period YTD Since Introduction
Beginning Balance $49,632 $53,191 $46,042
Contributions $1,275 $3,757 $5,458
Realized Gain (Loss) $- $(177) $(180)
Unrealized Gain (Loss) $3,306 $(2,558) $2,893
Ending Balance $54,213 $54,213 $54,213
Income Received $112 $337 $448
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The first quarter of 2016 was not kind to the R.I.P. portfolio, as the value declined by ~$2k. Being overweight financials took a toll on the performance of the portfolio, and the two holdings that were the biggest contributors to the poor performance were BAC and AIG. I, however, have no plans to reduce my stake in either of these companies.

For BAC, the bank's stock price has been under pressure due to the broader market selloff, and more specifically, the poor performance of the financial sector. For example, the SPDR Select Sector Fund - Financial (NYSEARCA:XLF) is down ~6% YTD. I do not anticipate for BAC's stock price to recover in the near-term, but the tide will eventually turn (let me stress eventually). As I explained in a recent article, I consider BAC a long-term investment and a stock that will greatly outperform the market in the next two-to-three years.

For AIG, there is a lot to like about this company's long-term prospects but the stock price has been under pressure so far in 2016 due to two main factors. First, the global insurer has struggled to report improving operating metrics and specifically the company's return-on-equity has been well-below the industry average for the past year (and heading in the wrong direction). Second, the negative outlook for the interest rate environment is not a good thing for this insurance company. As such, the stock price is down double digits in 2016.

The main catalysts that will likely propel the stock price higher in late 2016/early 2017 are the shareholder-friendly decisions that management and the board continue to make. AIG's quarterly dividend of $0.32 is ~156% higher than the company's quarterly dividend at the same time in the previous year. Moreover, AIG has repurchased $10.7b worth of shares in 2015 and has committed to returning $25b to shareholders over the next two years. Going forward, I expect for the dividend to continue to trend up and for the share count to be significantly lower as the year progresses.

The first quarter was not all bad, as the largest holding, GE, has continued to grow in value. GE has outperformed both the market and the company's peers -- Honeywell (NYSE:HON), United Technologies (NYSE:UTX), and 3M (NYSE:MMM) -- over the last year.

GE shares are currently fairly valued on an earnings perspective, but there are several catalysts in place that will contribute to GE shares outperforming the market through 2018. To keep things short, I highly value my GE shares and I have no plans to reduce my overweight position anytime soon. Please read the last three GE articles posted on my profile for my recent thoughts on the conglomerate.

Noteworthy Monthly News

(1) PFE - March 2016 was an uneventful month for Pfizer, but that dramatically changed in early April 2016. The proposed $160b merger with Allergan (NYSE:AGN) was dropped on April 6, 2016, after the government revealed rules that could negatively impact tax inversion deals. Shares of PFE are up almost double digits since the two companies announced that the merger plans would be dropped, and I believe that Pfizer is still a long-term value play even without the benefits of the Allergan merger.

In February 2016, Pfizer reported better-than-expected Q4 2015 earnings and in my opinion there are other catalysts in place that will create shareholder value in the years ahead. Furthermore, Pfizer is still attractively valued when compared to peers --Johnson and Johnson and Merck (NYSE:MRK).

I plan to add to my PFE position if the stock price drops back to the $30 range.

Thoughts

I look forward to reading (and responding to) everyone's thoughts on this portfolio, as I believe that sometimes the best investment advice is constructive criticism. I try to contribute ~$1,000/month to this portfolio, but sometimes it is a little more or a little less. I will attempt to provide quarterly updates but I may miss some quarters.

Please let me know if you would like for me to incorporate any additional analysis within these updates. Lastly, I will still write about these companies on a regular basis so stay tuned.

If you found this article to be informative and would like to hear more about this company or any other company that I analyze, please consider hitting the "Follow" button above.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, T, FKINX, DIS, BAC, C, KEY, SYF, KR, JNJ, AIG, XIN, DOW, PFE.

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.