A Newbie Active Investor Discusses His Portfolio

by: Oneota Investor

This is my first article on Seeking Alpha. I wanted to discuss my portfolio and get some intelligent feedback from fellow Seeking Alpha bloggers about my stock picks. In this article I will discuss my motives for each of the positions I hold. The expressed opinions are candid, anecdotal, and nonprofessional. I would say that in most areas of investment and speculation I am a novice in terms of technical knowledge, but I believe my temperament to risk is appropriate to be an equities investor. Please keep in mind that I have a buy and hold mentality and that I do not buy stocks unless I am willing to hold on to them for 10 years. Please also keep in mind that while I have owned stocks since I was 14, I haven't started really watching the market until last year. I switched my account to an Interactive Brokers account in February of 2012 to give myself better control over my purchases.

AAPL: I never thought I would buy this stock. I did not like the hype that surrounded it, but I noticed that a lot of hedge funds had bought the stock. Further, the hedge funds that did buy it were the value types of funds such as Greenlight Capital (interestingly enough). I put the stock in my watch list and figured that my opportunity had passed. I really liked AAPL and GOOG's ability (or future ability) to monetize media to customers' devices. These 2 companies appear to be the Coke (NYSE:KO) and Pepsi (NYSE:PEP) of digital media conduits. Of these two companies, I like what GOOG is doing better in terms of outright technology, but I like AAPL's more shareholder friendly dividend, lack of split share structure, and price. AAPL also does a great job of squeezing out every possible profit from its products and services. I believe that this is why Steve Jobs loved Tim Cook so much. AAPL went to $600 for reasons I can't really explain. As someone with a long-term focus, $430ish seems too good to be true. I bought my first share at $600 and have averaged down since the record earnings report yielded a $100 per share drop.

AIG: I read a lot of stuff about Warren Buffett and one of his successful investments was Geico. Insurance companies do well when interest rates rise. Sometime between now and 10 years from now I predict that interest rates will rise substantially. I considered Allstate (NYSE:ALL) when I was purchasing AIG, but all of the financial metrics pointed me to AIG, even though I really like ALL. Well, AIG has/had extreme exposure to bad securities some of which I looked into and decided I can't figure out heads or tails of what accountants are talking about. I purchased the shares after 4 quarters of calm and progress with the company. I really like the opportunity of this company and every month that passes makes this a more attractive company. If Berkowitz can handle 40% or so of his portfolio in AIG, I can handle less than 10% in mine. I will say that I wish Benmosche could stay as CEO for a lot longer.

BAC: Notice a theme yet? I really am a sucker for bad publicity. Bank of America at less than $5 per share - a price to book value of approximately 0.25, what's going on? Obviously, Ken Lewis screwed up when he bought Countrywide, but the US taxpayers were/are backing the downside risk of this giant. At the sub $5 prices the Fed stress tests had shown that the banks (including BAC) were better capitalized than prior to Lehman's collapse. Litigious risk is an issue to liquidity, but that will take time to figure out and like AIG, time is on BAC's side. Despite his supposed lack of charisma, CEO Brian Moynihan seems to be doing a lot of positive things for the company. When I initiated BAC at $5-plus, I could have almost as easily bought C, or JPM. Everything seemed too cheap to believe. Buffett got himself a deal, I had a chance to buy cheaper than him, GREAT.

BBL: Currency wars are a risk to the value of the American dollar. At least that is what I read somewhere. I want a company that has less exposure to that risk (Australia and Canada?) and whose profits can be tied to commodities - prices which in theory should move up with inflation. Ahh, the perfect marriage indeed. I also believe that there will be better days in the global economy - even if it's 6, 7, or eight years away. If the global economy fixes itself tomorrow, even better. You mean to tell me that miners are selling at cheap prices relative to 2007 when no one really cared about the Fed's expanding balance sheet and the G20 members didn't focus on their exports through the use of monetary policy? BBL is tied to virtually every commodity that makes the civilized world work and has an expertise in getting the commodities to market - an ETF geared on commodities. BBL has a nice steadily increasing dividend. I will take some more of this opportunity - even if it takes four or five years to fully appreciate.

BP: What can I say, I really like fixer uppers…In terms of the Key Statistics found at Yahoo Finance, BP appeared to have the best value of any of the big oil companies. My other upstream consideration at the time was TOT and I considered PSX as a downstream option. CVX and XOM also appeared cheap, but did not have the value metrics that appeared at first glance on Yahoo. From what I could tell at the time of purchase, I thought the market was scorning BP too much for the negligence that occurred 2 years prior. Additionally, I really liked BP's full spectrum of upstream and downstream abilities, a diversification measure. Now I believe that I probably should have purchased either one or both TOT and PSX ahead of BP - aka, I was wrong.

Going forward, I initiated my position into BP at just over $36, therefore mark-to-market I have profited from the position. My position on selling shares is that I will not do it, unless the market is pricing the company way more than I believe the company is worth, there is a similar competitor that is twice as good at half the cost, if I distrust management, if the reason I invested in the company was faulty logic, or if I can take a loss for tax purposes. BP meets NONE of these reasons and I like the company going forward for several reasons: 1) The litigation with the U.S. looks even more manageable every time I read headlines. 2) The CEO Robert Dudley appears to be a top notch manager. He is an engineer instead of a lifelong businessman and that makes me feel better as far as the future safety of the rigs and operations. I believe I read once that in the TNK-BP debacle that there was an ill-planned, uncarried out assassination attempt on him, yet he didn't back down in getting a good price for BP's stake in the venture. 3) The Macondo oil spill was devastating to everyone, but in the face of adversity BP is also shaking up the company to better focus its efforts. That tells me that they are not in damage control any longer, but are gearing up for the next four to five years. They are being proactive instead of reactive, the benefits of which can be outsized returns for shareholders. The projects BP intends to develop in the next 3 to 5 years appear to have an outstanding upside. If no outsized returns occur, 4) I get an apparently stable 5% quarterly dividend on a company that is trading at 0.35 price-to-sales and 1.1 price-to-book.

CAT: My durable goods pick. My initiated order for CAT was $80. The order hasn't filled yet and I am not going to reach down and try and get it at a higher price. I don't feel that strongly about this pick. However, I put money into my portfolio every month and have purchased some CAT since. I don't know what durable goods company I liked best: JOY, DE, CMI, or CAT or even BA for that matter. I have worked in construction and the operators always liked the CAT equipment. Their dealer network is supposedly one of the best. I think it would be easier for CAT to get into/expand in the agricultural sector far easier than DE would get into the specialty mining equipment. I don't really know. CAT has a better dividend than JOY. Like I said, I really like the company and at $80 I feel I can afford paying for my lack surety on this pick.

CIG: Cemig, a Brazilian utilities company, is yet another hairy pick. My brother first mentioned this company as a high dividend pick. I then noticed this company when I looked at the mutual fund my 401k was invested in. I thought it was a tobacco company at first, but when I found out it was a Brazilian utility company, I figured why not go and look at the company's website. Nothing really stood out except that the dividend was high, higher than any American utilities with a balance sheet that I could stomach. This was interesting, a high yield company with a balance sheet that appears to me to be superior to comparable American companies in a high-growth economy. Brazil has an economy that is relatively energy independent and more consumption driven rather than export driven. The company went straight to my watchlist.

I ignored the fact that it went on a tear from something like $13/ share to $24. Then, in the fall, I saw the price sink like Guido being pushed off a bridge wearing concrete boots. I saw the price at something like $16 and wondered, what's going on? Then it got to $12ish, I committed to buying it after the news. The news was that Ms. Dilma decided to set prices on the utilities, prices significantly lower than previously charged. That makes sense for the price decline, but a lot of selling occurred because a growing company has price controls that it conceded to without much fight.

The reason for this is that the energy produced by CIG and other nearby Brazilian utilities is hydroelectric. Being a mostly hydroelectric company allows for more predictable costs, and revenue with a growing demographic (and a growing kW h per capita) should continue to grow. The World Cup and the Olympics could also be a boon to infrastructure build out, thereby further increasing revenue streams. Utility companies in the US have to work with regulators on prices too and yet they can be good investments. Buying a utility company that I was considering at around $16 for less than $12 even with the hair seems to me to be a good deal.

CSCO: This is one of the first stocks that I ever owned. I acquired the first of the shares back in 1995. I just let the shares sit until my recent shift to managing my own account. I did not care about anything other than making sure that CSCO was solvent. I am glad I decided to keep the shares, even from 2001 to 2012. CSCO is a good company and John Chambers is as frank about the macro goings on in technology/IT as I have heard. CSCO's price looks to be gaining momentum on the backbone of good fundamentals. Good for me.

CTIX.OB: Rather than donate to a cancer charity, I can spend $50 and get some equity into a biopharmaceutical company that is working to cure cancer. Most people I talk to don't believe that profit seeking and charity can coexist; as a capitalist, that is Ridiculous. To be honest, I am trying to line my pockets. As far as CTIX is concerned, watch out. Everything appears WAY too good to be true. If it's not, then I might make $50 turn into $500.

DFS: My first credit card was a Discover Card back in 1999. I loved how they have ALWAYS been friendly and I can talk to an agent right away. Fast forward to 2012 and I purchased into a credit card company (which is generally a good investment when interest rates are on the rise) whose P/E was mid single digits and whose basic banking services were growing the company substantially. Additionally, V and MA had P/E multiples that if DFS achieved, a 500% return could be had. My dealings with DFS are so positive that I think that - all else being equal - DFS should be a premium to AXP, MA, or V. I really like buying into companies that I like.

DRI: This is my newest position. I really like going out to eat at Olive Garden. It isn't as fancy as Macaroni Grill or some other high-end restaurants, but I can get some good food, good atmosphere, good wine and bonus points from the wife all without spending $150 for dinner. If on the cheap, I can spend $10 for a reasonable meal. This is not to say I like Olive Garden because the place is as cheap as the stock. I like it because, like Longhorn and Red Lobster, management has set up restaurant chains that I know exactly what I am getting - excellent food and atmosphere without frills. As for the company, they have been buying back shares since about 2003, accelerated purchases in 2008/2009 and have been borrowing money at roughly the same interest rate as their common stock dividend to supplement the operating cash. I am no stock expert, but this seems to make a lot of financial sense. To me, this isn't just being friendly to shareholders; it is a commitment to shareholders.

GPOR: Like I said, there looks to be lots of "deals" in the oil and gas industry. In June/July 2012, I ran a stock screener and found GPOR. The PEG ratio was great and it was trading at a 52-week low. The following weekend my wife was out of town and I spent the weekend reading up on the company. I tried figuring out why the company went from $30 per share to $18. I still don't know, but I believe it had to do with GPOR management financing some of their Alberta Oil Sands projects with cash. So much so that it wiped out much of their cash reserves. Additionally, the price of oil went down and I believe that people got scared. I still don't know what really happened, but I was pretty sure by the 8 or 9 annual reports that I browsed that this was a temporary issue. Management are debt-o-phobes.

I purchased shares the following Monday. The pick made me feel smarter than I am, the projects that management has laid out on their presentation slides are pretty fantastic and the company has a good mix of oil, NGLs and dry gas. That being said, the stock is no longer cheap. Management has decided to finance additional Utica acreage with stock to the tune of roughly 25% dilution. Additionally, natural gas prices don't appear to be going up any time soon. There's a supply glut and global warming, and…GPOR's biggest revenue drivers in 2013 and beyond will be natural gas. If you are looking for a home run in natural gas, I would look hard into UPL. I'm not selling GPOR, but I am holding out for more info. The other thing that has struck me is that Jim Palm is a big cheerleader. I base this on the last couple transcripts I read where there were lots of gushy things to talk about, including a doubling of revenues for fiscal 2013. I wonder what we will hear when times are tough.

HBC: Another bank. Am I deworsifying? To an extent, absolutely. Shouldn't I just buy a mutual fund or ETF? Well maybe, but that is no fun and misses the point. My reasoning for buying is that I had just purchased BAC and AIG, and I wanted some of my capital to represent cash. I don't know of a megabank that holds more cash as a percentage of assets. More importantly to me, I like to have my portfolio generating cash, more cash than the Dow. At the time I initiated my purchases, HBC was paying a 4+% dividend. I spent some time looking at different world cities in Wikipedia where you can find major banks within the city. It seemed European banks had far more exposure to the world and emerging markets than the American banks, a trend that was in the best interest of the banks' sovereign countries to maintain. Again, C would have been a good choice here, but it lacked the dividend. BCS, Deutshe Bank, UBS all met what I was looking for on the top end growth, but the bottom line is that I did not feel as safe with them as HBC. Long-term, I want a conservatively managed bank that cuts out the misbehavior that has been in the headlines on this company lately. I want a bank that derives its revenues from all over the world and is highly selective in its locations worldwide.

HCN: A high-yield play on one of easiest trends to see coming - the aging of the developed world. As best I can tell, HCN has one of the most respected management teams in real estate. The company also appears to be the most vertically (or is it horizontally?) integrated health care REITs in the business - it even works on the facility and urban planning. With its recent purchase of Sunrise the company now has a global scale. These are the reasons I chose HCN over HCP and VTR - which I also strongly considered and believe may be better value in terms of price-to-FFO.

IBKR: I get a company whose product and service are outstanding, whose balance sheet is rock solid, pays a dividend, pays a special dividend in case the U.S. government wants to dip into your pocket, trades at close to price-to-book, buys back shares at less than book value, whose best business comes during times of stress (a market hedge), and who is increasing its customer base substantially year after year. 'Nuff said.

IBM: I inherited a small position of this stuff through marriage. That being said, I love the company and have been adding to our position aggressively. I believe Sam Palmisano's leadership and vision will be missed but Ms. Rometty is a highly capable executive with plenty of background to lead the company for several years. IBM has a fantastic ability to develop managers within the firm. People who used to work at IBM say that she is a consummate professional with good business skills. Mr. Moffat would have been a good CEO, but he shot himself in the foot. As I understand it, IBM had no less than 10 people that could have filled the CEO position competently. Good managers and top notch technology R&D make for a great company. Oh yeah and Buffett's on board too.

IMUC: That cancer shtick I wrote about CTIX applies here as well. Except, I think that this is a good company. IMUC is an infant biopharmaceutical company specializing in immunotherapy. If you don't know what that means and I haven't lost your interest go look up the company website. We know that initial results for ICT-107 were great. The phase II study appears to be confirming a lot of the positives from phase I. Unfortunately, phase 1 had an initial sample of only 16 or 20 patients. Anyway the company has no debt, low cash burn, an unconfirmed treatment for GBM in the works and a schedule of other cancers that their brand of immunotherapy may be able to treat. In relation to NWBO, ICT-107 is a less invasive treatment for patients that qualify. Note that this company could go from hero to zero, so my position is small (i.e. less than 1% of portfolio.).

MCP: To date, my worst pick. The good on this pick is that it is trading at a price-to-book of about 0.6. The bad is that the book value is about to be reduced substantially by a goodwill impairment. Perhaps worse, MCP needed to raise cash in a recent stock and debt offering to cover its bills for 2013. I do believe that this stock could go down further, I am waiting on delayed news from new CEO Constantine Karayannopoulos for better insight. Basically, I bought this stock because TMR's Jack Lifton has a high opinion of Mr. Karayannopoulos, there has been a lot of insider stock purchases, MCP has processing facilities in both the east and the west, and the stock is/was(?) cheap. I do think the Chinese connections that Neo Materials developed and will keep under the Molycorp name are an ace-in-the- hole. We will find out more this week.

MRK: Another one of my passive picks from high school. MRK hasn't done much for me in terms of performance, but it is a good company. I think one of the Kahn brothers owns significant shares in this company. One thing that doesn't seem to get mentioned in anything I read is that MRK does generate a lot of revenue on products such as its Dr. Scholls foot products and other name brands. I also like GSK or AZN as big pharm value plays.

OTC:NWBO: On Seeking Alpha, Larry Smith described exactly why this company is a great company. I cannot articulate any better than this article. The DCVax-L product sounds amazing. I am long this company equivalent to my IMUC stake. Between IMUC, CTIX, and NWBO, I believe there will be a better treatment for GBM. If only one company "wins," I "win." If there are multiple "winners," I "win." If there are no "winners," the companies are financed well enough to move on to their next project. One thing that is very important on all of these companies is that all of them have the ability to treat more than one disease. My spin on NWBO is that Linda Powers has a story that feels very American. It makes me feel good about speculating in NWBO.

NYMT: The mREIT. With mREITs it is hard for me to differentiate between good and bad. It pays 15% and the paper it purchases tends to have variable rates meaning that it may be better hedged against rising rates. I also like that management doesn't focus on only 1 type of security (such as Agency-only) giving themselves options. I don't like that NIM has gone way down. The recent dividend history for NYMT has been very good the last 3+ years and the stock price has remained flat. This is an important fact because mREITs are required to distribute 90% of profits to shareholders.

O: I read that the management was top notch. A monthly dividend is nicer than quarterly. Steadily increasing dividends is even better. I bought this early last year and I have enjoyed the stock and dividend appreciation. I also like the ARCT acquisition. How is that for great research?

PEP: My first purchase ever. It has done well for me. The stock appears to be ready to rally after Ms. Nooyi has finally decided that traditional business concerns matter. For the past couple years PEP has been so socially conscious that I believe it has come at the cost of the shareholder. That is not to say that these were wasted efforts, but that profits have suffered. Looking forward, PEP has recently set up several distribution channels in emerging markets and has snacks and beverages in a broad range of healthier genres. I believe that these will drive growth in the medium and long term.

SAN: I really believe people are throwing the baby out with the bathwater on this one. I like dividends and this stock has one of the best. In terms of traditional banking this bank has one of the best footprints in all of Europe, a region that could start to regrow in a couple years. The bank made a wise decision and limited its exposure to the housing crisis that has ensued in Spain. The balance sheet looks great to me relative to BCS and some others. The real kicker is that even if Europe can't pull itself up in a timely matter, a large portion of the equity and revenue this bank generates is in Latin America, one of the fastest growing emerging markets. Additionally, this company has put shareholders first in all of its considerations.

SPWR: I got lucky on this one. I read an article by Motley Fool's Travis Hoium that happened to be right after a Forbes article talking about the solar industry's costs going down and efficiencies going up. SPWR had technology much better than competitors, could produce seamless panels (an architectural benefit), provided extended warranty - a sign of quality craftsmanship, and had the backing of TOT's equity purchase which drove down debt costs when things got hairy. Further, if companies were going broke SPWR would gain in market share. An asymmetrical opportunity if I have ever seen one. In July or August, I speculated with a small amount and so far have been very pleased. After the last earnings report, I will be looking to add to my position as management has achieved what it has set for itself and weathered a very difficult environment.

STX: Another company that is questionable. There appears to be lots of tech companies that have great value metrics including INTC, QCOM, and WDC. Of these STX had the "best" metrics. STX has an excellent CEO in Stephen Luczo. Mr. Luczo is generating increasing profits and is looking to where the puck is going to be. STX is partnering with Dens Bits and Virident, two highly respected firms within the data storage business, to address the SSD question facing the company. STX has been on my radar thanks to its fantastic valuation and recent growth metrics, but I did not purchase the company until I could wrap my head around how they could address SSD. The Dens Bits partnership really allowed me to pull the trigger on this company. I do think that many people are throwing HDD out prematurely - it is a great source of cash right now. That cash can be invested in SSD development. The growth of the internet and cloud storage are high growth areas and STX provides the most economical hardware (HDD) and expertise. Combine good products, management with a solid background, and a stock at a good price and better than average returns become more likely.

VOD: This is another pick from my early days. I have liked this company ever since I first owned a cell phone. Even though its price performance over the last 10 years has sucked, I am holding on. The company has a fantastic balance sheet relative to its other European peers, Telefonica or France Telecom, has investments all over the world, including some of the juiciest emerging markets, and generally follows shareholder friendly policies with generous dividends and buybacks. The brouhaha over whether VZ will buy them out is immaterial to the fact that this is a good company fundamentally and a relatively safe place to park funds in an European company. This makes a really good stock if India and VOD would make up and get along.

WMT: I used to work at WMT in high school. They allowed employees to purchase the stock at a 10% discount. Too bad I was buying stock in an overvalued company. However, I can only say this now that I have hindsight. The silver lining is that I was buying into a great company and that time has finally made my early purchases worthwhile. Going forward with WMT, what is not to like? They may no longer set the world on fire, but they can continue to generate great profits. Let's not forget that the last recession showed WMT's great position as an equity hedge. Recently, I believe I read that WMT intends to reduce capital expenditures in the near future. I read this as bullish for further buybacks or increased dividends.

Disclosure: I am long AAPL, BAC, BBL, BP, CAT, CIG, CSCO, DFS, DRI, GPOR, HBC, HCN, IBKR, IBM, IMUC, MCP, MRK, OTC:NWBO, NYMT, O, PEP, SAN, SPWR, STX, VOD, WMT. 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.

Additional disclosure: I am long CTIX.