Hello to my fellow Seeking Alpha investors. I hope the holidays were joyous for all; now it's time to get back to work. I see many Seeking Alpha articles presenting stock selections for the new year; may I present some stocks to consider as we begin 2018.
You are not going to find the sexy names or hot stocks in my 2018 portfolio. You are not likely to outperform a bull market with this portfolio. You are not going to have much to talk about at parties with this portfolio. But you will likely lose little sleep with this portfolio.
Let's begin by examining a few generalities central to my investment thesis.
- The US stock market is up tremendously as we are getting close to a 9-year bull run. Essentially, the stock market has tripled since the last recession. This suggests to me that now is probably not the optimal time to back up the truck and load up on stocks.
- The stock market to GDP ratio is extremely rich on an historic basis. In the year 2000, the ratio peaked at 151% as the dot com bubble popped and the market crashed. In 2009, the ratio fell to 59% as the market then took off and led us to the highs of today where the ratio stands at 133%. To put it into perspective, in the 1970s and 1980s, the ratio stood between 30% and 80%. This indicator is often attributed to Warren Buffett, as it is one of his favorite metrics for reliably gauging the overall stock market. Let me repeat, this metric is extremely rich on an historic basis.
- The home price to income ratio is also rich. On an historic basis, the ratio is almost 30% above the historic average.
- Many a wise market sage is ratcheting up their cash position. Including Warren Buffett, who has Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) at over 37% in cash.
For those who have not invested through a few business cycles, my portfolio might seem odd, dull or staid. Perhaps so, but I do not suffer from any fear of missing out. In July 2008, I sold every stock I held. Two months later, the market crashed. Fortunately, I was out and 100% cash. Although my exit timing was near perfection, I must admit I was quite late on reentry. It was not until mid 2010 that I got back in the game.
A few months prior to the 2008 crash, the legendary Sam Zell sold his real estate empire. When I caught wind that the great Sam Zell had sold out, that was enough to convince me that cash is indeed the place to be. Before I heard of Zell selling out in 2008, I was ready to bail on stocks anyway, but that was a strong confirmation that my Spidey senses were intact, and cash was indeed the place to be.
Today, I see the same rich valuations as I did in 2008. So why am I not 100% in cash here in 2018? I do not see a catalyst for a crash. Back in 2008, there was a clear catalyst for a crash... clear to anyone who bothered to look. It was debt, and hyped credit ratings. The collateral debt bubble, along with the valuations, bull run, and hyped home prices. Not to mention the banks over-levered and dependent on home prices staying high (still somewhat true today).
Please let me repeat, I do not see a catalyst for a crash. I would not be surprised if the bull run ends in 2018, but I think it would be a little premature to go 100% cash at this juncture. I also think that being 100% invested in 2018 is too aggressive. In 2018, I stand around 60% invested in stocks and 40% in cash.
With this in mind, I present you with my buy list, accompanied by the current price on January 15, 2018:
China Mobile (CHL) $50 5 units
Campbell Soup (CPB) $45 1 unit
Equity Residential (EQR) $60.50 5 units
General Electric (GE) $18.50 1 unit
GlaxoSmithKline (GSK) $37.50 1 unit
Welltower Inc. (HCN) $59 3 units
Kimco Realty (KIM) $16.50 3 units
Omega Healthcare (OHI) $26.50 3 units
Tanger Outlet Centers (SKT) $25 2 units
Molson Coors (TAP) $82 3 units
Public Storage (PSA) $193 2 units
Vodafone Group Plc (VOD) $32 2 unit
Ventas Inc. (VTR) $55 5 units
China Mobile is a state-owned telco with $107 billion in revenue. The valuations, dividend sustainability, and dividend payout ratio are all exceptional. The trend in China demographics are tremendous as the middle class grows. The drag is that CHL is state-owned. Basically, it is not as shareholder-friendly as one would like, but there are so many other positives, that I cannot ignore the opportunity at a 2-year low in share price.
Campbell Soup has its headwinds but I cannot ignore major brands at multi-year lows. I will dip the toe at a 2 1/2-year low.
Equity Residential is a residential REIT. I view residential real estate with an easy smile. Pick up EQR at $60 and layer in if it falls hard. Currently, just above 2 year lows.
General Electric. Beaten down, unloved and relatively cheap. Like Campbell Soup, I love to pick up major brands at multi-year lows. GE is near a 5-year low, so I will dip my toe. By the way, I am not eager to buy every major brand just because it has fallen to multi-year lows. Sears (SHLD) for example.... I cannot recommend.
GlaxoSmithKline is big pharma near a 5-year low. I am not savvy in the pharma space, but I have utilized a simple strategy to buy the big pharma stocks whenever they hit multi-year lows... just a small long-term position. This has worked out more often than not. Stick to the top dozen or so by market cap and wait patiently.
Welltower Inc., is a healthcare REIT in the hospital and medical office sector. Welltower is considered by many to be among the cream of the crop in this space. Under $60, you are buying close to a 2-year low. Many a REIT expert was trumpeting this stock at much higher prices. A solid buy and hold.
Kimco Realty is a shopping center REIT near a 5-year low. The retail sector has been hammered over the last couple of years. For years, I had been warning many to avoid the space and wait for much lower prices. Well I cannot wait any longer with Kimco... hold your nose and buy under $17. Again... many a REIT expert was trumpeting this stock at much higher prices.
Omega Healthcare is a nursing home REIT with a fat 9% dividend. All the experts seemed to love Omega in the $30s, and now that it is near a 4-year low around $25, there are a plethora of skeptics? I relish negative sentiment. Certainly, there is merit to the negative take, the nursing operators are under pricing pressure, and are levered and not the most rock solid of clients, political pressures abound. Still, I cannot fathom the demise of the nursing home industry. Near 4-year lows, I will take a fair position in OHI for the long hold.
Public Storage is near a 2-year low. Buy at prices under $195. Start small and layer in if it falls hard from here.
Tanger Outlet Centers is a retail outlet REIT near a 6-year low. I am not ecstatic about owning retail real estate, but every time I go to the Citadel outlet center here in LA, the place is mobbed. I go to the Taubman Centers (NYSE:TCO), Macerich (NYSE:MAC), or Simon Property Group (NYSE:SPG) malls and they are empty and uninviting. I still suggest avoiding the mall space until prices are much lower. I do however suggest considering a fair position in SKT under $26.
Molson/Coors is the well known Molson and Coors brands as well as a myriad of craft beers too. TAP is currently near a 52-week low, and at attractive valuations. As I build a portfolio with a potential economic downturn in mind, consumer staples like soup, beer and cigarettes are the space I would like to be. Soup and beer seem to be on sale, while smokes are still holding their price. Buy TAP anytime it nears $80.
Vodafone Group is an EU telco with expansion into India and Africa. For the last few years, Vodafone has been on a Capex tear, spending billions to build out the telco biz in India and Africa. VOD already has a strong foothold in Europe and has now partnered in India. If you look at a 1-year chart, the price may not seem like rock bottom, but if you look at a 10-year chart, you can see that VOD has been beaten down as the capital expenses skyrocketed, while the returns had been delayed. I believe the tipping point for VOD may be in 2018. A small position seems reasonable.
Ventas Inc. is my favorite Healthcare REIT. At $55, I would not talk anyone out of taking a very large position in VTR. My strategy is to take an average position at $55 and layer in at lower prices. Once again... many a REIT expert was trumpeting this stock at much higher prices. VTR is considered the darling of the space, and you are getting in at a 2-year low.
As you can see, the buy list is chock full of real estate investment trusts. I am concentrated in this sector for I suspect the dividends will hold up better than most in a down market. Same for most of the stocks on the 2018 buy list. I also suspect that revenues will hold up better for most of these stocks should the economic cycle turn south.
This 2018 portfolio is not diversified. It is fair to say that it is concentrated. This is not by design, but by the dearth of opportunity that this richly valued market offers.
Many of the other stocks and sectors I would like to own are simply priced too high. Altria (NYSE:MO), Coca-Cola (NYSE:KO), the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Exxon Mobil (NYSE:XOM), 3M (NYSE:MMM), Johnson & Johnson (NYSE:JNJ), etc. These are all fine companies that may well hold up better than most in a down market... but alas, they are all near all-time highs. They may all go even higher, they are all fine companies, I just cannot step up and buy at these prices.
Have some dry powder.
If one is fully invested and the market crashes, that investor is more likely to panic and sell at the bottom. If one has lots of cash on the sidelines, that investor is more likely to hold, and also look to buy stocks on the cheap.
If someone wants to stay fully invested and not market time, I can understand and respect that. But the key is that they must also have the backbone to hold those stocks when the market panics and crashes. That is the important part of the buy and hold equation. A part of the equation that many an investor misses as they crack under the pressure of a major market correction. I too have been guilty. It is an emotional roller coaster we ride when the markets move in extreme gyrations.
There are a myriad of investing approaches and styles. My style is essentially one of patience and risk management. There are many different paths to success in life. Just because a man is not on my path, that does not mean that he is lost.
In the long run, it is best to have a plan, ignore the noise, and try to keep the emotions at a minimum. Everything is situational, so stay aware and be flexible. May your path lead you to success.
One last thing. Seeking Alpha is a great resource chock full of data and interesting takes. This article is just one man's take. I may have it wrong. On the other hand, I may have it right... right for some but not necessarily for everyone. Please do your own due diligence and view this article as simply food for thought.
Best to all in 2018… good health, green earth, and a green portfolio.
Disclosure: I am/we are long CHL, EQR, GE, GSK, HCN, KIM, OHI, SKT, TAP, UBA, VTR.
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.