The British referendum has come and gone, and global equity markets are acting like nothing meaningful has happened. I suppose that's fine, and the volatility will come about eventually; but the recent rally has made me even more skeptical than I was 2 months ago. The next key event will be hearing what multinationals have to say during earnings season. There is a host of global headwinds, upon which too much ink (digital and otherwise) has already been spilled. Throw in there last week's massive bond default from Puerto Rico's. Margins and earnings peaked in the US over a year ago. So what can we do? Well, I am continuing to research individual companies, keeping the pulse of the companies that are in our portfolio, and waiting as patiently as I can for better opportunities to present themselves. Last week for instance, we thought we found an opportunity when we began buying shares of Lazard Ltd. (NYSE:LAZ). Time will tell how this investment works out, and while the company is not likely to be a long term holding we see good value in it.
What continues to astound me, is the prices that bonds and "bond proxy" stocks (think telecoms, consumer staples, etc.) have been bid up. These are astounding, and I believe them to ultimately be unsustainable but the trend will likely continue until it can't continue any longer. Not only don't we want to buy stocks within this group, but the current prices are making us think long and hard about selling more of our holdings and maybe eventually some of our long-term holdings. So far we've just been selling our trades and the few lesser quality companies we bought a few years ago, as we continue to transition into a portfolio of the long-term holdings we want to own. Let's hope it doesn't come to that. Nothing would make us happier than for equities to meaningfully reprice and allow us to get back to building the portfolio we intended, but at present we are forced to wait for better opportunities.
Last week we sent out an email to our subscribers, indicating we were selling our shares of The Kraft Heinz Company (NASDAQ:KHC). We have had a position in Kraft Heinz, and its predecessor Kraft Foods, since 2008. Calling it a remarkably profitable investment would be an understatement. The shares originally paid an annual 5% dividend, which grew over time. Along the way, Mondelēz International (NASDAQ:MDLZ) was spun out to shareholders, and then more recently the company was combined with Heinz. A great deal of value was unlocked for shareholders along the way, but the multiple expansion that has accompanied the current low interest rate environment has really pushed up returns. I wrote an article for Seeking Alpha discussing our reasoning to sell, but suffice it to say the decision was basically a valuation call. When I look at Kraft Heinz, I see an accomplished management team that is saddled with a ton of debt. Their goal is to cut their way to prosperity, and I think the goal is ambitious, but I am skeptical that the earnings growth analysts are expecting will be realized.
Coca-Cola (NYSE:KO) is one of our long-term holdings, and has been a very profitable investment for us. It is currently the largest single position in our portfolio, but I can give you no rational justification for the company's shares to be trading at a P/E over 27. Especially, given headwinds of low global growth and a strong US dollar. Consensus analyst earnings estimates for 2016 are $1.97, $2.08 for 2017 and $2.28 for 2018. Accompanying these earnings estimates is the expectation that revenue will decline each of the three years. I know Coke's management team has been pushing a cost reduction plan, but these estimates seem unlikely, and we all know what happens to the share prices of companies that disappoint Wall Street. Coke is a low growth, mature, cash cow of a business, with outstanding return on equity metrics. The company currently pays a 3% dividend, which is great in this low interest rate world. The payout ratio on that dividend is over 80%, making me question the size of future dividend raises. We haven't established a price at which we would be interested in selling our Coke shares, but I would suspect we are within a couple dollars of a reasonable sell price.
While General Electric's (NYSE:GE) cyclical nature precludes it from our long-term holdings, we have held and profited from the company for a long time. General Electric faces many of the same global and currency headwinds as Coke, but without the benefit of being a consumer staple company. GE's management has been transforming the company for the last few years, and I applaud their efforts. They have sold or spun out non-core assets and returned the company to its industrial roots, by reducing the financing/lending divisions. These are all great, but the company is in highly cyclical industries at a time when global growth is slowing. Further complicating matters, the strong US dollar will work against this multinational's earnings. With the asset sales and spinoffs, I am sure GE's accountants will find a way to engineer another quarterly earnings beat, but I am not optimistic about this company's earnings for the next 3 or 4 years. Analyst consensus is for essentially 15% earnings growth each of the next two years. I don't see it, especially with a strong US dollar and the fact that we are overdue for a recession. While I wouldn't be surprised to see the stock pop in the short term, especially if management announces a special dividend following the US government's assessment that the company is no longer crucial to the financial sector, we will likely be looking to sell this investment in the near term.
Whoa! It looks like we have been, and will be, selling many of our investments. We will reinvest a portion of the money into other companies, likely along the lines we outlined back in May, but we will also continue to hold cash and look for better opportunities. I would much rather hold a company like Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A), with Buffett/Munger at the wheel, tons of cash and a P/E of 14, than we would hold consumer staples and industrial companies we see as very overvalued. (Yes, Berkshire has industrial divisions but it has many other divisions as well.) On a substantial pullback, we will also put some money to work in a vehicle like Vanguard Total Stock Market ETF (NYSEARCA:VTI). Oh well, investing is a marathon and not a sprint. We will seize opportunities as they present themselves, just like we did at the start of 2016. Waiting is the hard part.
What have you been selling? Where are you looking to deploy cash?
Disclosure: Long KO and GE. 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. The information above is provided by Yahoo Finance, GuruFocus.com and Morningstar.com.