Glad I Held These 2 Stocks, But What's Next?

Includes: CVX, MCD, PG, SAM
by: Mark Morelli


It was a good move holding on to McDonald's and Chevron.

It was a good move letting go of IBM.

Can I go 5 for 5 with Boston Beer and Procter & Gamble?

Last year, I wrote an article, "Know When To Fold (And When To Hold)", which discussed the various trigger points for selling a stock. I highlighted two, McDonald's (NYSE:MCD) and Chevron Corp. (NYSE:CVX), in my portfolio that I had decided to hold on to and another, International Business Machines (NYSE:IBM), that I had sold.

Six months later I revisited my thinking (it was a rainy day here in New England and I put the yard work on hold for a day). Although hindsight is always 20/20 as they say, it looks like I made the right move. Both of my holds are up 11% to 12%. The stock I decided to sell is lower by 9% with a poor outlook.

The nascent turnaround for burger joint McDonald's has intensified. The company indicated that the all-day breakfast has been a big hit and the streamlining of the menu and operational improvements are taking effect. Management reported better-than-expected results at its recent earnings call. Icing on the cake was a dividend boost in late 2015, which keeps its streak of 41 straight annual increases going.

Chevron's management is still implementing a major cost-cutting program and recently announced the sale of more assets. A 50% increase in crude oil prices didn't hurt either. However, a continuing negative is that the dividend has been the same for eight quarters and income-orientated investors might get a little antsy if the payout doesn't go higher soon. I'll keep Chevron on the watch list.

Now it's time to move on to another two stocks to keep a wary eye on. Boston Beer Company (NYSE:SAM) and Procter & Gamble (NYSE:PG) are now under the microscope for further scrutiny.

Is this SAM for you?

The craft brew king Boston Beer just reported results for the March quarter. And investors didn't approve. Shares dropped by nearly double digits on the news. It seems that intense competition in the industry, every day two new craft breweries open their doors, are driving revenue, depletions, and earnings lower. Earnings per share fell by half in the quarter as compared to the previous year in spite of the fact the company retired 70M shares.

The question remains: can Boston Beer get its mojo back? Founder and Chairman Jim Koch stated that the company has gone through this situation before, most notably back in the 1990s, and through a combination of several new offerings and operational improvements, he is confident it can again.

I'm still up significantly on my original investment and don't want to generate capital gains, so for now I will hold on to my shares and give Jim Koch and CEO Martin Roper a chance to work through myriad issues affecting the company. It will take a lot more potential downside for me to sell.

Getting a jump on things

It seems consumer products giant Procter & Gamble is getting a jump on the next decade. Not surprisingly, the company just announced a miniscule 1% dividend increase as it continues to battle its way through sagging revenue and earnings growth. Management is reorganizing and jettisoning several of its major brands. The plan is to grow by shrinking.

The disappointing dividend increase, probably instituted only to keep Procter & Gamble on the Dividend Aristocrat list for the 35th consecutive year, is in line with a recent report from Goldman Sachs which projects that growth at large companies will slow from the mid single digits and migrate below 1% over the next ten years, a level not seen since the 1940s when Harry Truman was in the White House and the U.S. was just starting an economic and baby boom. Note that most big companies did not routinely start boosting dividends until the 1950s and beyond, so according to Goldman Sachs, we could be entering uncharted waters here - uncertainty is never a good thing in the investing world.

Still, the company has a lot going for it, and in spite of the issues, it hasn't been a bad performer in my own portfolio. Including dividends, I'm averaging a gain of 7% per year over the last five plus years, most of the time with many analysts and SA readers badmouthing the stock, which currently yields a hefty 3.3%. The company has a manageable debt level, about 50% of shareholder equity, and consistent free cash flow - $10.9B last year - to help fund the dividend and any buybacks. P&G has retired about 50M shares over the last five years.

In spite of the problems, and the puny dividend increase, I'll hold on to my shares for now and give management time to correct the problems and return the company to a respectful growth trajectory.


It's always a good idea to occasionally revisit past investment decisions, such as my insistence to hold on to shares of "troubled" companies such as McDonald's and Chevron but sell IBM, and to add new stocks, in my case, Boston Beer and Procter & Gamble, to the watch list

Disclosure: I am/we are long MCD, CVX, SAM, PG.

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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