Adventures In Value Investing

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Includes: BA, GILD, IBM, SPY, TROW
by: Thomas Pangia

Summary

The longer I’m an investor, the more I learn about value investing.

My way of value investing might be kind of crazy.

I repeatedly buy stocks that are going down in hopes that they go back up eventually.

I’ve seen it work well, when I don’t mess it up.

"Insanity: doing the same thing over and over again and expecting different results." Albert Einstein

Source

A Spark of Insanity

I consider myself a dividend-oriented value investor. Not quite a dividend-growth investor, since my dividend concern is sustainability before growth. As Kinder Morgan investors will attest, a sustainable dividend (in my mind, well-covered by earnings or free cash flow, bolstered by a low debt load) is far better than a dividend placing growth above all else. A dividend cut that doesn't happen brings no downside. Also, a dividend that won't be cut can potentially be increased. Still I don't buy a dividend because it can grow, but rather because it is unlikely to shrink. As for value, I love bargains. A company trading at close to 1-3 year P/E lows, with a nice dividend, lets me buy at a low price and collect a dividend while I wait for the price to recover. I'm far from the first to invest on perceived value and margin of safety, as Benjamin Graham and Warren Buffett have succeeded very well with their pioneering iterations of value and dividend investing. The worst thing that can happen as long as the fundamentals of the target company are unchanged, is that the price keeps going down, the company keeps paying dividends, and I keep getting better prices as I build my position. I call this a win-win, since this allows me to build my dividend income over my long time-horizon. It's seemingly a little "insane" though, since I keep buying stocks that are declining in price, while waiting for an eventual price increase that may or may not happen. These stocks aren't fancy, but they're enduring brands with high earnings that I like in my portfolio.

I'm "Insane" About Boeing

The Boeing Company (NYSE:BA) has had some nice opportunities for me to experiment with over the past couple years. I first bought BA in November of 2014 at $129. Some declines later, I went for seconds in December at $124. I let that position sit for a while until earlier this year, when I bought some more in February at $118. Wouldn't you know, reports of a review of BA's program accounting methods of its 747 and 787 programs by the SEC caused the price to plummet right after I bought. So of course, with my practiced "insanity," I bought again after the investigation was announced at $105.

BA Stock Price 3-Year History

Source: finbox.io

With earnings on an upward trajectory, I was content to keep buying BA as the price declined.

Source: Chart and projections made from finbox.io

After all that work, my position is up nearly 4%, which edges out the S&P 500's (NYSEARCA:SPY) gain of 3%, although it's still better than BA's loss of 3%. Not spectacular, but shows gains from averaging down into a discounted position. Plus with a dividend increase from $3.64 annually to $4.36, I don't mind BA's price stagnating while I keep building my position.

I'm Even More Crazy About IBM

International Business Machines (NYSE:IBM) has been lambasted while revenue has fallen and buybacks have been maintained. However, because the dividend was (and is) secured at a roughly 40% payout, I was content to keep buying while the price was under $140/share. I first bought last July, at $165/share. At a 3.2% forward yield and a P/E of roughly 13, I thought I was getting a terrific bargain. As Wall Street teaches though, terrific bargains can always get even better if prices keep falling. And luckily for me, IBM's price kept falling. I bought more in November, at $137/share, with a yield of 3.8% and P/E of around 10. And as prices stagnated, bought again in December at $138. And wouldn't you know, as the market panicked in the new year, IBM kept falling. I got to buy again at $125, at a yield of 4.2% and a P/E of 9.5. Now IBM trades at $155.66/share, with an increased dividend to boot, bringing the forward yield back down to 3.6%.

IBM Stock Price 3-Year History

Source: finbox.io

Because of averaging down, the position is up 12% from when I bought, even though IBM is down 4% and the S&P 500 is up less than 1%. Dollar cost averaging into this undervalued company, combined with a bit of patience, showed me what others before me have seen: value investing can bring a nice return. Even in spite of my purchases at higher prices, consistent purchases at lower prices helped drive the gains. I'm happy to hold IBM now, and wait for the price to dip before I buy more, while collecting dividends and reinvest them.

Where Next?

I've seen value investing work by bringing in decent returns, capable of matching and even beating average market returns. Although my past targets have increased in price beyond what I want to pay for them now, there are a couple other candidates that I'm looking forward to averaging into. Gilead Sciences (NASDAQ:GILD) and its P/E of 7 and dividend yield of 2.5% is a fun candidate. Negative news and declining revenue have driven the share price down farther than appears warranted. I'll happily add as the price drops, patent infringement threats and all. Not only is GILD a potential bonanza for me to average down, but T. Rowe Price Group Inc (NASDAQ:TROW) is another candidate that I like. A 3.1% dividend yield and a 51% payout ratio for a company with no debt on a downward price trend this year, are some characteristics that I like.

TROW Chart

TROW data by YCharts

I look forward to picking up more GILD and TROW as their prices decline, and practicing what I've learned about averaging down. The price declines tell me I'm exhibiting some "insanity," but the strong fundamentals I see in these companies tells me that in time it could lead to prosperity.

Author's Note

I am on the lookout for high yet sustainable dividends or value opportunities with a significant margin of safety. If you're looking for the same, please hit the "Follow" button by my name at the top of the article, and hopefully you'll get some good ideas for value and income stocks.

Disclosure: I am/we are long IBM, BA, TROW, GILD.

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: The author relies on external links for some information that may have appeared on this perspective. These external links, although believed to be accurate, have not been verified independently. Therefore the author is unable to guarantee their accuracy.

I am neither a certified investment advisor nor a certified tax professional, and do not claim to be either. The data presented here is for informational purposes only and is not meant to serve as a buy or sell recommendation. Investors and potential investors should do their own research and make their own decisions. In the event that an investor or potential investor does not feel qualified to make such a buy or sell decision on their own, they should consult a certified advisor that they trust or feel comfortable with. Investing may involve losses, including potential loss of principal.
The author relies on external links for some information that may have appeared on this perspective. These external links, although believed to be accurate, have not been verified independently. Therefore the author is unable to guarantee their accuracy.