My Post-Brexit Shopping Spree: Day One

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Includes: EXPE, GERN, GILD, GOOG, GOOGL, MSFT, REGN
by: Nicholas Ward

Summary

I'm currently sitting on a large pile of cash. I've began to use this post Brexit weakness to increase my equity exposure.

On Monday I added to existing positions in MSFT, GOOGL, GILD, and GERN. I also initiated positions in EXPE and REGN.

Moving forward I expect we'll see further volatility and downside pressure, so I'll be sure to continue to update readers on this shopping spree.

As I said in my previous article where I highlighted potential investments that would do well in a post Brexit world, I am sitting on a large amount of cash right now. Since 2013 I've been slowly moving funds that were being managed by my financial adviser into the portfolio that I manage myself. I'm not a professional in the financial industry, nor do I have any sort of official financial education. I come from the school of hard knocks when it comes to investing, reading books, articles, and transcripts, learning lessons as a do-it-yourselfer for several years now. Because of this I didn't want to take the dive into self directed management all at once, thinking the most responsible thing to do with my family's portfolio was to make a slow transition, eliminating the risk that my lack of experience might imply. Well, after 3 years of relative out-performance when it comes to the returns of my adviser and the broader market, I decided to go ahead and move all of the funds into my self directed account, hoping to continue with my past success. So, last Tuesday I sold a large portion of my portfolio, liquidating all of the mutual funds that were left in my adviser's portion of the overall portfolio. This move greatly bolstered the 11% cash position that I was already sitting on, pushing that needle up to 65%.

Now, as a long-term investor, I'm not of the opinion that it is in my best interest to be holding such a large cash position. I had been raising cash over the last year or so in my personally managed portfolio due to perceived over valuation and macro market risk. However, 65% is much too high a percentage of my portfolio earning less than 1% interest per year. I liquidated when I did, knowing that the Brexit issue could potentially be a large one. Honestly, I didn't think the U.K. would vote to leave, but I knew that if this wasn't the issue that sparked large scale volatility, another would likely follow, especially with the way that the U.S. election seasons is shaping up for this fall and winter. In the past I've always tried to take advantage of the market's emotional over reactions when they occur. Buffett is a major influence on mine and his quote, "be fearful when others are greedy, and greedy when others are fearful," rings loudly in my ears when I see these seemingly irrational sell-offs. I don't believe this is a Lehman type of circumstance, though admittedly, Britain, and potentially the EU could be in for a mild recession due to Brexit related complications. But, like I said, I don't think this political event will be the end of the world for world markets (especially those in the US) by any means. I feel comfortable using the weakness created by the Brexit uproar to put cash to work for the long-term.

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The first and largest purchase I made on Monday was in Microsoft (NASDAQ:MSFT). This is a wonderfully defensive tech company that fits the DGI bill perfectly. I already held MSFT shares and was happy to fill out my position from where I previously bought back in March of 2015 for $41.61. At the time, this price meant that shares had crossed the 3% dividend yield threshold, which was my target for initiating a position. An article detailing my rationale behind that purchase can be found here.

Since then, CEO Satya Nadella, has become a superstar of sorts after giving this stock a boost after years of lackluster performance with his focus on innovation rather than the legacy software businesses. MSFT's highly successful transition to the cloud and the growth that this segment of the company has posted over recent quarters has caused the stock to surge since I last bought shares. I have bought MSFT shares via selected dividend re-investment during the last 15 months, but I feared that I wouldn't have a great opportunity to buy the other half of what would be a full position in the stock without drastically averaging up. Now, so long as fundamentals are improving alongside stock price, I don't mind increasing my cost basis; a rational market should push prices up, satisfying fundamental ratio premiums on pace with growth. But, when looking at income plays within my portfolio, I pay attention not only to fundamental metrics, but dividend yield as well. MSFT's share price appreciation had caused the stock's yield to dip significantly below the 3% threshold that I had targeted for the stock originally and look for in large cap DGI names. Well, due to the 7% that the Brexit sell-off has knocked off MSFT's market cap, shares once again neared that 3% target and I decided to add to my position at $48.55, or a 2.97% yield. Also, I should mention, that while it's never a good idea to count your chickens before they hatch, MSFT has increased its annual dividend payout for 14 consecutive years, having most recently boosted its payout by 12.2% last November, and I expect the company to announce another strong double digit increase for this upcoming November payment as well. If my assumptions are correct and the company increases the payment, to let's say, $0.40/share, then my yield on cost on this purchase will be bumped up nicely to 3.30%. This means I only have to wait one quarter to exceed my 3% yield threshold goals.

Another purchase I made today with dividend growth in mind was Gilead Sciences (NASDAQ:GILD). I've held shares of GILD for a couple of years now, initiating my position at $67 in April of 2014. Since then I've happily watched as this company became a dominant player in the HCV space, initiated a dividend payment, and began what I hope will be a long streak of annual dividend increases. Although GILD maintains a market leading position in the HIV/AIDS space as well, the stock seems to trade solely on HCV numbers, which is why the premium that the market has put on shares relative to its fundamental metrics is so small. Although I don't agree with this premium, nor the fact that the market seems to disregard GILD's overall product and upcoming pipeline portfolio, I've learned that sometimes it doesn't matter much what I think and fighting the market sentiment is a losing battle. Because of this, earlier in the year when it was announced that Merck (NYSE:MRK) had won a law suit against Gilead regarding patent issues with the company's breakthrough HCV treatments I sold half of my GILD stake for a nice profit at $90.25. I was worried about lost revenues and market share and didn't like the sound of an ongoing royalty paid on profits of one of the company's most successful drugs. Long-term, I like this company, which is why I didn't liquidate my entire stake, but at the time it made sense to me to reduce my exposure and risk to the lawsuit fall out. I put those funds to work immediately in Abbvie (NYSE:ABBV), which turned out to be a good decision with regard to relative performance. Since then, it was announced that the initial Merck victory was reversed due to false testimony and although you might have thought this news would have changed the stock's negative trajectory, it didn't, and I've been able to essentially repurchase those shares that I sold at $90 for much lower prices: $82.68 on May 20th and $78.18 today. At these sub $80 prices, shares are trading at less the 7x ttm earnings and the stock yields 2.40%. Although there is much debate as to where future EPS numbers will come in for this company, the current payout ratio is an anemic 15.9% and I expect future increases in the high single-low double digits moving forward.

Now, unfortunately for you DGI fans, the rest of the purchases I made on Monday weren't really focused on yield. I have a large shopping list of traditional DGI companies that I will continue to monitor as this Brexit sell-off progresses; however, right now I'm still not all that excited about the valuations that I see in those names, which has lead me to focus more on growth (which is something I wanted to do anyway, as a means of long-term diversification for my portfolio).

Expedia (NASDAQ:EXPE) is a company I've had my eye on for some time now. I actually traded in and out on this name several times earlier in the year in my Roth when it appeared to be in a narrow range between 103 and 107. These were very short-term trades and although they were profitable for me, I've been looking to add long-term exposure to this company at a slightly better valuation. I was actually working on a focus ticker article on EXPE over the weekend while doing my due diligence knowing that shares were nearing my target purchase price. Because of that, I will not talk too much here about my rationale behind this purchase; that article will be submitted shortly and go over my bullish stance on this company in more detail. However, in the meantime, what I will say, is that all gains that the stock made after the stellar first quarter report have been more than wiped out over the last couple of days. The stock now trades for $98/share, putting its forward p/e ratio at just 15.4x. This company has made a habit of posting strong double digit growth on both the top and bottom lines. Although the stock's yield is low (0.98%), it has more than tripled its dividend quarterly dividend since 2010. This company has revolutionized the ways in which we book travel and while Brexit will likely create currency headwinds for a small portion of its business, I believe over the long-term EXPE will continue to post excellent growth as expands its market share in the travel booking business.

Another growth oriented company that I've had my eye on for a while and finally decided to initiate a stake in was Regeneron (NASDAQ:REGN). REGN hit a new 52 week low of $329.09 on Monday, trading more than 45% off its highs of $605.92 set last August. I was able to buy shares for my Roth near the lows, at $331.10. The valuation here isn't cheap, at 35x 2016 earnings expectations, but growth prospects are large and if this company is able to recreate even a smidgen of its performance over the last 10 years or so over the next decade, I will be happy camper with this sitting in my Roth. REGN is unique amongst bio-techs. Not only does the company have an established series of drugs currently generating massive cash flows, but it also has a strong, diversified pipeline as well with several new potential blockbusters expected to be approved in the coming years. Many companies in the space seem to have one or the other, but not both. The valuation is a bit speculative, but at least I have cash flows to fall back onto as an investor, with free cash/share growing steadily from negative $1.07 in 2010 to $6.89 over the trailing 12 months. I don't think this company is established enough to initiate a shareholder dividend quite yet, though I do think it had the ability to make a splash or two in the M&A market should an attractive opportunity arise with so many of its peers' prices depressed greatly. The company has zero long-term debt as well, showing responsible management practices. Speaking of low debt loads and M&A, Sanofi (NYSE:SNY) maintains a large ownership position in the company. That leads me to believe there's a floor somewhere under this stock during this bio-tech slump - because if things get even more nasty in the sector moving forward, REGN may be a take out candidate itself. This would add growth to the larger company's balance sheet that it is already comfortable with and understands so well due to the many partnerships these two companies have embarked on over the years.

The smallest purchase that I made on Monday was in another, even more speculative, bio-tech name: Geron (NASDAQ:GERN). This is a micro-cap company that I discovered via the very active community that follows the stock here on SA. This is by far the most speculative position I hold in my portfolio, representing massive growth potential within my Roth. From what I've learned this company has tremendous potential via its partnership with Janssen, a pharmaceutical company of Johnson and Johnson (NYSE:JNJ), focused on the potentially revolutionary oncology drug Imetelstat. This drug is still undergoing early stage trials, though it has bullish investors extremely excited, particularly due to the apparently successful results in Dr. Tefferi's pilot study with the Mayo Clinic. Some believe Imetelstat could go further than simply treating blood cancer, but rather becoming the basis for an overarching oncology platform. Admittedly, this one is a bit of a moon shot. It doesn't appear that the company as much going for it outside of Imetelstat. However, if this drug continues to perform it has the financial backing of JNJ, and if Imetelstat is able to meet GERN bulls' expectations in the future, this company will be worth much, much more than the $2.43/share that I paid for it today. This is my 4th purchase of GERN shares, averaging down each time. Right now my cost average for GERN is $2.94 and although I don't plan on getting this speculative position grow too much larger, I've allocated funds to add a couple of times should shares continue to slide alongside the rest of the sector.

And finally, shifting gears here, we'll shift from a microcap to one of the largest market caps out there: Alphabet (NASDAQ:GOOGL). As I've transitioned away from solely dividend growth stocks over the last 6 months or so I've been building a core position in shares of this massive company. I know that when many see the GOOGL ticket they immediately think overpriced growth due to its status as a "F.A.N.G." stock. However, I believe that GOOGL represents one of the best value plays in the market right now due to its relatively low fundamental multiples, massive cash flows, and strong double digit earnings growth prospects. At the company's current share price of $681, GOOGL offers investors a forward p/e of 18.6x 2016 earnings expectations and 16.3x 2017 estimates. GOOGL has produced strong double digit growth on the top line over the past 5 years, with bottom line growth coming in in the high single digits annually. This is a free cash flow generating machine, with over $25 ttm free cash flow/share. We all know Alphabet for its Google search platform, which maintains massive market share, generates billions of advertisement dollars, and serves as one of, if not the largest, data collection systems in the world. But, what really allows this company to shine in my book is the fact that it isn't even really monetizing several of its major assets, namely: YouTube. I think this platform has major potential moving forward, making this company a potential power player in the content world as we continue to move away from traditional delivery of video content towards digital. I think a well placed acquisition or two would quickly turn Alphabet into a rival of Disney (NYSE:DIS) or Comcast (NASDAQ:CMCSA) in this space. I'd love to see this company take out a beaten down Netflix (NASDAQ:NFLX), solidifying itself as the leader in digital content moving forward. Alphabet also has other exciting growth opportunities ahead of its with its "other bets" segment, including things like autonomous vehicle software, which I imagine will be implemented alongside its android operating system as we turn cars from simple means of transportations to large scale moving digital entertainment devices, and Google Fiber, which is something I'm envious of, having to settle for sub par internet speeds at home. As you can see, I'm a bull here. Sure, this company faces issues of shrinking margins, higher ad spend, and increased competition in the search space. However, no company is perfect and I feel very confident that the dollars I invest in GOOGL shares at today's prices in the $700 range will be significantly higher 5 or 10 years down the road.

So, there you have it. These were the purchases I made on day one of my Brexit shopping spree. These purchases represented roughly 3.5% of my cash position at the start of the day, meaning I have plenty of dry powder left to spend should prices continue to fall. I will continue to update readers/followers as I put this cash to work. I don't have a time table for hitting my target equity allocation of roughly 80%. I will try to remain patient and rational, letting value come to me as I continue to build a well diversified, long-term buy and hold, portfolio. However, I will say this: I'm currently interested in adding to my core positions in Disney and Apple (NASDAQ:AAPL) as these two wonderful companies get cheaper and cheaper, and tomorrow, I'll be watching Nike's (NYSE:NKE) earnings report after the bell closely, with a mind to potentially add shares to my NKE position should they sell off on the results. Best wishes all, be well in these volatile times!

Disclosure: I am/we are long DIS, NKE, GERN, GILD, AAPL, JNJ, GOOGL, REGN, MSFT, ABBV, CMCSA.

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.