Stock Story Time (Part 2)

by: John Rhodes

Quick Recap

In Stock Story Time (Part 1), I briefly explained that investing is very emotional and that we all seem to carry around simple stock stories in our minds.

On a personal level, although I spend huge amounts of time doing my research and due diligence, I find that I often have very short summaries of each stock rolling around in my skull.

Simple Disclaimer

As I mentioned in my previous article, what you see below is the story I carry for each stock I own. It is not a proper reflection of the work I've done to select these businesses.

Therefore, please use the materials provided to better reflect on your own stories. Or, perhaps use my short stories as a reason to begin your own research.

Review: Stocks Covered in Part 1

In my previous article, I covered the following 9 stocks:

To be perfectly clear, these are all stocks that I currently hold in my portfolio. So, this isn't just blather to me. The stories I carry in my mind are important and impact my decisions to a degree, no matter how hard I try to be perfectly rational.

I summarized the previous article by pointing out that I like to buy stocks based on value first and growth second. Yes, I know they are connected at the hip. Also, I am a dividend growth investor but I'm not a slave to yield. And lastly, I get a lot of ideas from smart folks like Warren Buffett, Charlie Munger, Todd Combs, Lou Simpson, Seth Klarman and many others. Note my attraction to "value" investors.

Stock Story Time

Deere & Company (NYSE:DE) -- I started buying Deere in Q3 2013 because it showed up as a relatively small investment of Berkshire Hathaway. I realized that Todd Combs or Ted Weschler probably bought this. This phrase goes through my head at least once per week: People Gotta Eat. Population is increasing and we all need fuel. Also, the John Deere brand is crazy strong, just ask my father-in-law. DE is also trading at lows but operating profits are strong, with a fair dividend (2.2%) that's growing. In fact, it's a Dividend Contender. I don't plan on ever selling this one and I'll be adding on dips.

Digital Realty Trust, Inc. (NYSE:DLR) -- This data center REIT caught my attention because it's been crushed over the last 6-7 months. When the market hates a stock, or industry, I pay attention. It's a REIT and many investors are freaking out about tapering and interest rates. Also, growth is slowing a bit in 2014 and there's a threat from Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) because of the cloud (although I think that threat is overblown). So here's what matters in my brain: The dividend is high but secure, there's been very heavy insider buying, it's a Dividend Challenger, DLR is a market leader, it was near its 52-week lows when I bought at $45 and management is more transparent than ever. DLR also does custom builds for customers and they are firing up some cool stuff with OPEN IX. Sounds like a bunch of spaghetti against the wall, I know. Bottom line is that the company got punished way below fair value but its earnings are growing and that supports the strong and growing dividend.

DeVry Education Group Inc. (DV) -- DeVry is an old, for profit education company with a relatively strong brand. Management is competent, margins are generally high but under pressure. DeVry is a Dividend Challenger with a low yield of about 1% right now. I've got a lot of experience with the education market and I thought I understood how it all worked, including the $1 trillion in student debt. But, I bought well before the bottom although I'm back above my cost of $32.23 by about 10%. It's pretty cool that DV has low capex and low hard costs, which helps maintain higher margins. I have a love/hate relationship with the entire industry in terms of their marketing and all the regulations and red tape. I bought this stock without fully understanding my ignorance and hubris about how the industry really works. I recognize this now and I'll likely reduce (but not eliminate) my holding in early 2014, thankful that overall market gains have also smoothed over potential losses.

IAMGOLD Corporation (NYSE:IAG) -- This is a silly little position that acts as a simple gold hedge. I like management. I like that they quickly started a $100M cost reduction program before getting completely kicked in the teeth by the gold market correction. I also use IAG as a tool to help me keep my eye on gold, and silver. When I bought IAG, it still had a dividend of 4-5% but then it was cut completely. I'm going to see how IAG does over the next 3-6 months as I lick my wounds from a 20% loss in 2013. And, in fact, this was my ONLY loss in 2013. I appreciate seeing the blood red loss on the screen. It's a painful reminder. It's a useful remind. (And yes, I know there are better hedges.)

International Business Machines Corporation (NYSE:IBM) -- I love Big Blue for so many reasons. Warren Buffett. Incredible innovation. Great prices for me to buy all year (average cost of $178). Relentless stock buybacks. Strong owner earnings. 18 years of growing dividends. Excellent strategic plan. Moat of boiling oil. Super strong brand. I'm honestly not sure where to stop. And yes, I know that there are plenty of reasons to write off IBM, or hate them, or ignore them. But, in short, I believe that 2013 was one of best opportunities to ever buy IBM and that's it's still on sale. I don't plan on ever selling IBM unless they totally, completely, and absolutely screw up.

Intel Corporation (NASDAQ:INTC) -- This is a bit controversial, but like IBM, I do not think that Intel is really a tech company. Instead, INTC is much more of an old school but world-class manufacturing company. INTC's operations are highly efficient, their brand is powerful, their margins are high although pressured and they produce a quality product. I'm not thrilled about their mobile market screw ups but they are fixing that now. The PC market is finally starting to show some stability and INTC's server products are first class and high margin. I loaded up on INTC just under $22 then sold about 25% of my position at well over $25, and I'm holding the rest. Although INTC's yield is high, they didn't raise their dividend in 5-6 quarters. They appear to be pushing cash into CapEx and aggressive marketing. My gut says HOLD on right now but don't expect much to happen with the price or dividend in 2014. Their transition is still happening. Unfortunately, the real magic is likely to happen in 2015 and 2016 but holding on with my 4% yield is fine.

Joy Global Inc. (NYSE:JOY) -- When researching Caterpillar Inc. (NYSE:CAT) and Deere, I found Joy Global and I learned to love coal. While everyone seems to be focused on renewable energy and the natural gas revolution, I'm looked at stuff like this: World Coal Consumption To Surpass Oil By 2020 Due To Rising Demand In China And India and Coal Consumption Statistics. Like Superman, can you say Up, Up, And Away! JOY appears to be a better coal-oriented operation than just about anyone, plus they have a wonderful after-market business. The spare parts and service business is high margin and it smoothes over earnings. I bought at just under $49 so I'm sitting on a 20% gain right now. Unless there's a profound breakthrough in energy, I'll be jumping for JOY for a long time. Secret Tip: If you have FASTgraphs, take a look at JOY because your eyes will pop...

Kinder Morgan, Inc. (NYSE:KMI) -- Kinder Morgan has a complex and hard to understand business structure. Richard Kinder reminds me of John Malone; that's a good thing. In any case, the complexity keeps people away and that means greater pockets of opportunity on price and yield. On the other hand, KMI's business is rather easy to understand: They transport gas and oil through pipes and collect a toll. Yippee! Kinder has seen heavy insider buying. Right now, P/FFO is just 8.5, which I feel is a steal based on everything I've seen and read. If you look at Kinder Morgan Management, LLC (NYSE:KMR) and Kinder Morgan Energy Partners L.P. (NYSE:KMP) you'll start to see how Kinder has been punished, much like DLR, which I profiled above. I'm holding KMI at a price of about $35 and I will very likely continue to invest more in 2014. My favorite thing about Kinder Morgan is that they are shareholder friendly, almost to a fault. I love what I see on all of their presentation slides: Companies Run By Shareholders, For Shareholders. That just warms my heart, especially because of their proven capital allocation skills. I'm happy to ride the energy boom in 2014, and beyond.


In this article, I covered 8 more stocks in my portfolio. Here are two things I noticed this time.

First, I like to see strong, long-term, "human" trends supporting the growth of a business. For DE it's about population growth and the need to eat. For JOY and KMI it's about the need for energy as the economy grows. For more tech-oriented companies like INTC and IBM, and also DLR, it's about delivering a digital and technical backbone for humans.

Second, I believe in abundance and a positive future. I know that seems weird when I'm talking about "ugly" businesses involved in transporting gas or digging up coal or gold. But, I'm more of an optimist than a pessimist. Like William Gibson, I believe the future is already here, it's just not very evenly distributed. And, what's not quite here yet is just around the corner. Companies like IBM and INTC help create fantastic technology but they are old and boring compared to small startups or social media properties like Twitter, LinkedIn and Facebook.

In Part 3 of this series, I'll walk through the rest of my portfolio. Thanks for your comments and questions.

Disclosure: I am long DE, DLR, DV, IAG, IBM, INTC, JOY, KMI. 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.