The R.I.P. Portfolio's Jan.'16 Update: Still 'Banking' On Bank Of America

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Includes: BAC, DIS, PFE, SYF, XIN
by: WG Investment Research

Summary

The performance of the R.I.P. portfolio was greatly impacted by the broader market sell-off.

A PFE position was initiated in the month with plans to significantly add to the position later in 2016.

I am still "banking" on BAC, as additional A warrants were purchased at an attractive price.

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.

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 monthly basis. At the end of the day, I hope that allowing the SA community to see the monthly 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 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.

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

Price at Beg Value at Activity Realized Unrealized Current Portfolio Yield Current Annual
Company Stock # of shares 1/31/16 1/1/16 Purchases (Sales) Gain (Loss) Gain (loss) Value Weighting On Cost Yield Income
General Electric GE 378.087 $29.10 $11,680.63 - - (678) $11,002.33 22% 3.9% 3.2% $348
AT&T T 152.69 36.06 5,253.89 - - 252 5,505.82 11% 6.0% 5.3% 293
Franklin Income FKINX 2247.07 2.02 4,696.97 - - (158) 4,539.08 9% 5.6% 5.9% 270
Walt Disney DIS 26.46 95.82 4,041.38 (1,144) (137) (225) 2,535.40 5% 1.9% 1.5% 38
Bank of America BAC 517.21 14.14 8,704.59 - - (1,391) 7,313.31 15% 1.2% 1.4% 103
Bank of America Warrants BACWSA 505.00 4.25 1,763.46 908 - (525) 2,146.25 4% 0.0% 0.0% -
Citigroup C 48.09 42.58 2,488.61 - - (441) 2,047.63 4% 0.4% 0.5% 10
KeyCorp KEY 61.92 11.16 816.78 - (3) (123) 691.07 1% 2.3% 2.7% 19
Synchrony Financial SYF 77.00 28.42 2,341.57 - - (153) 2,188.34 4% 0.0% 0.0% -
Kroger KR 22.00 38.81 920.26 - - (66) 853.82 2% 1.0% 1.1% 9
Johnson & Johnson JNJ 23.17 104.44 2,379.94 - - 40 2,419.79 5% 3.2% 2.9% 70
Pfizer PFE 52.00 30.49 - 1,591 - (6) 1,585.48 3% 3.9% 3.9% 62
American International Group AIG 87.09 56.48 5,396.92 - - (478) 4,918.80 10% 2.0% 2.0% 98
AIG warrants AIGWS 60.00 18.75 1,437.00 - - (312) 1,125.00 2% 0.0% 0.0% -
Xinyuan Real Estate XIN 191.99 3.64 708.44 - - (10) 698.84 1% 5.2% 5.5% 38
BP p.l.c BP 18.00 32.37 562.68 - - 20 582.66 1% 7.2% 7.4% 43
$53,193.11 $1,354.07 (140) (4,254) $50,153.62 100% 2.9% 2.8% $1,400

January 2016 Activity

Sales
Company) Amount Shares Price per share Realized G/L
Walt Disney $1,144.44 12 95.37 (137)
Purchases
Company Amount Invested Shares Price per share
Bank of America A Warrants (BACWS) $907.52 202 $4.49
Pfizer $1,590.99 52 $30.60
$2,498.51
Dividends
Company Dividend amount Reinvested?
FKINX $22.37 Yes
DIS $18.79 Yes
GE $85.94 Yes
$127.10

*Contributions for the month were $1,368

Sales -

1. DIS - This company is still considered a core holding for the R.I.P. portfolio, but I felt that it was necessary to reduce my DIS stake in order to get defensive given the broader market sell-off (I purchased shares of PFE with the proceeds). There are some concerns, with the ESPN subscriber losses being the biggest, but DIS is still the king of content and this will allow for the company to create shareholder value for the foreseeable future. On the other hand, DIS is priced at a rich premium compared to its competitors and in my opinion the near-term market pressures will likely pull the stock price lower. As such, I will look to add to my DIS position at opportune times (~$90/share) in the months ahead.

Purchases -

1. BAC A Warrants - The R.I.P. portfolio is overweight this large financial institution, but I have no plans to reduce my stake until shares trade close to book value.

Recently, BAC reported fourth-quarter and full-year 2015 results, and beat analyst EPS estimates. The bank reported Q4 2015 EPS of $0.28 (compared to the consensus estimate of $0.26) and finished the year with earnings of $1.31/share. How significant of an achievement was the full-year 2015 earnings figure? Very, as Bank of America increased earnings by over 200% YoY.

(Q4 2015 Earnings Presentation)

In 2014, Bank of America was plagued with what seemed like an endless number of legal fines and settlements. The bank, however, was able to finally turn the page by reporting impressive earnings results with no material legal expenses for each quarter of 2015.

BAC shares are down ~1% since reporting the Q4 2015 earnings results, which brings the YTD performance to ~(14)%. BAC's stock price and its fundamentals are heading in opposite directions, and to be quite honest, it is hard to predict when this will end. But, BAC is trading at an unbelievable valuation (~.9x tangible book value) and the bank has greatly improved its earnings results, so the tide will indeed turn at some point. I might have been premature in predicting that BAC would trade at book value in 2016, but I still believe that investors with a long-term perspective will be richly rewarded for picking up shares under $16.

Furthermore, a prominent financial analyst that has bashed BAC management and its board for years recently changed his tune (see below for further detail). BAC shares are greatly undervalued (compared to itself and its peers) and the bank has great long-term prospects in place.

2. PFE - The purchase, and sale of DIS shares, was made in an attempt to get more defensive. I have been following PFE for awhile now, and this month seemed like the right time to start a small position in this ~$190b market cap healthcare company. To start, PFE has a nice dividend yield (~4%) and the company has a great long-term outlook for its business. In addition, the anticipated Allergan (NYSE:AGN) merger (if finalized) will create a tremendous amount of shareholder value.

PFE is scheduled to release fourth-quarter 2015 results on Tuesday, February, 2, 2016, and analyst are estimating for $13.6b in revenue and EPS of $0.52. The PFE position is small right now, but I plan to significantly add to the position throughout 2016.

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

This period Since Introduction
Beginning Balance $53,191 $46,042
Contributions $1,368 $3,069
Realized Gain (Loss) $(137) $(140)
Unrealized Gain (Loss) $(4,268) $1,183
Ending Balance $50,154 $50,154

Being overweight financials took a toll on the portfolio's performance in January 2016. The S&P 500 finished the month down ~4% and the portfolio was down double that figure, with BAC being the biggest contributor.

AIG shares are down big to start the new year but I have no plans to reduce my stake, as I believe that management will eventually be able to unlock value. Mr. Carl Icahn is calling for drastic changes to AIG's operating structure, but management is standing firm on their belief that the company is better as is. No one knows who will prevail in the "management vs. activist" fight, but at the end of the day, in my opinion, shareholders will be the beneficiaries. See additional information on AIG below.

Noteworthy Monthly News

1. BAC - Permabear financial analyst Mr. Mike Mayo recently upgraded shares of BAC to an outperform rating (from a sell) with a price target of $16/share. Mr. Mayo gave three factors that will lead to BAC shares appreciating in value: [i] improvements in the efficiency ratio --BAC currently has the worst ratio among other large U.S. banks, [ii] shareholder pressure on management to create value, and [iii] sum-of-the-parts analysis shows that BAC is deeply undervalued.

Mr. Mayo is right in that this bank is currently undervalued, and I believe that the risk is to the upside for BAC shares. The 2016 Comprehensive Capital Analysis and Review ("CCAR") process is the near-term catalyst that could propel BAC's stock price higher (see this article for my thoughts on BAC's potential 2016 capital return plan).

2. AIG - Ding, ding, ding --it's a fight! Management of AIG and Mr. Carl Icahn are battling over what type of changes need to be made in order to create shareholder value for this large insurance company that has reported deteriorating operating metrics, and more specifically, a well below average return-on-equity. Mr. Icahn is calling for a three-way split of AIG in an attempt to avoid the Systemically Important Financial Institution ("SIFI") designation, but management decided to take a different approach. AIG announced that the company would return at least $25b to shareholders over the next two years, and will sell shares of its United Guaranty unit instead of making significant operational changes.

In my opinion, this fight is a win-win situation for long-term shareholders. Stay tuned.

3. XIN - On January 14, 2016, Xinyuan Real Estate Co. announced that the company acquired land in Manhattan, NY for $57.5m, which marks the second time that this Chinese company has made a large real estate investment in the U.S.. The company has started the preliminary sales process for its Oosten project, which is estimated to materially impact 2016/2017 revenues and earnings in a positive way.

XIN currently pays a $0.20 annual dividend and the company is attractively valued (trades at an ~4 P/E ratio), so there is a lot to like about the long-term prospects of this company. However, there are significant risks with investing in Chinese companies so investors need to do their own due diligence when evaluating whether XIN is worthy of your investment dollars.

The company is scheduled to release earnings in late-February 2016, so any material updates on the Oosten project will likely move the stock price. Currently, I have a small position but I may be adding to it in the next few months.

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 monthly updates but I may miss some months.

Please let me know if you would like for me to incorporate any additional analysis within these monthly 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, BP, 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.

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