The GARP & Dividend IRA: Evolution Of A Portfolio

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Includes: AGX, AMNF, AOS, APOG, CCF, COLM, EXPD, LCII, LRCX, MA, MKSI, MLR, PAYX, TPL, TSM, V
by: Steven Miller
Summary

The “Strong Growth Portfolio” I introduced last year has a new name to better reflect its nature: “The GARP & Dividend IRA."

I added fourteen new stocks to the portfolio in 2017.

All but two stocks in the portfolio have produced exceptional total returns, and are set to double in less than five years.

A quick review of the updated screen for the portfolio is also given.

Last April, I introduced the “Sound Growth Portfolio,” a portfolio based on the experience gained from managing my own IRA for many years. It was and is a portfolio consisting of real funds in an actual IRA. However, it is not simply a growth portfolio. It also incorporated elements of value investing, and had a very strong preference for companies that pay dividends. The new name “GARP & Dividend” better reflects both the nature of the portfolio and much of my investing style. GARP is an acronym for “Growth At a Reasonable Price,” an investing strategy that balances growth and value investing.

An Updated Screen for the Portfolio

A hallmark of GARP investing is use of the PEG Ratio, a metric introduced by legendary investor Peter Lynch. It compares the P/E Ratio of a company against its growth rate. A ratio of 1.0 or lower is generally desirable, though I once read that a PEG in the range between 0.8 and 1.8 is good. I use the PEG to rank stocks in my watch lists instead of other metrics I have used in the past.

I continue to look for positive Net Current Asset Value (NCAV). A positive NCAV means that a company can pay its total liabilities out if its current assets (cash, receivables, and inventory). That being so, debt is entirely manageable, if it exists at all, and is not a concern. A company with positive NCAV has plenty of funds for acquisitions, dividend payments, and stock buybacks.

Companies with positive NCAV are often value traps. The PEG Ratio is one good way to avoid such companies. In addition, I look for the EPS to increase in at least three of the most recent four years.

David Fish’s CCC List has hundreds of companies that have increased dividend payments for five years or more. Nearly all of my holdings are on the list. The three exceptions have either initiated dividend payments in the past year or increased dividend payments for two years. As a result, this portfolio can be categorized as a dividend growth investor (DGI) portfolio as well as a GARP portfolio.

More recently, I have chosen to buy companies that have a Glassdoor rating of 3.0 or better. Satisfied employees will likely be productive ones, and unsatisfied employees may indicate trouble brewing. Besides that, I feel something of an obligation to check that employees are treated right, even if the fraction of the company I own is quite minute. Fortunately, the vast majority of the companies on my watch list have a Glassdoor rating better than 3.0. Companies I once had on the list that failed to make the cut include: dividend king Tootsie Roll (TR); DGI favorite Healthcare Services Group (HCSG); and retailer Williams-Sonoma (WSM).

In short, I look for growing companies with a strong balance sheet, growing dividends, and reasonably satisfied employees.

Stocks Held

Following are the sixteen holdings in the portfolio, as of the end of 2017. This will provide a benchmark to compare against in the future. Total Return from stock purchase to the end of 2017 is given for all but the most recent purchases. The stocks are listed in order of largest percentage of the portfolio holdings to the smallest.

Keep in mind that this is an IRA, so the quantities of stocks bought are likely smaller than might be expected. I suspect the quantities bought reflect a fair number of IRAs held by Seeking Alpha investors.

I also give each stock a Doubler’s Ratio, or Total Return Ratio. The Ratio answers the question: Is the stock’s Total Return on track to double in five years? A ratio greater than 1.0 means it is doubling at a faster rate than five years, and less than 1.0 means that it will take longer than five years to double. The ratio can go negative for stock prices that sink lower than purchase prices.

Texas Pacific Land Trust (TPL)

The Trust is one the hottest stocks on the market. It is unique and virtually impossible to evaluate by conventional means. The core business is real estate, but it is not a REIT. Its only real asset is land, much of it dry, arid, and not very habitable. The Trust has been selling off that land since 1888, yet it remains the largest landowner in Texas. Its income is primarily in the form of oil and gas royalties. It has spent its cash primarily on buying and retiring shares in addition to paying a tiny dividend.

The Trust has been very good to investors who have invested in it. The stock could be had for $30 as recently as 2010, but then Apache Corporation (APA) announced a new gas and oil discovery in September of 2016. The Trust’s stock price went from under $200 to more than $300 in less than two months. At the end of 2017 it stood at $446.63, and as of this writing is at $559.94.

Initial Purchase

Shares Bought

5

Open Date

April 3, 2017

Cost/Share

281.39

2017 End Price

446.43

Total Return, end of 2017

59% in 270 days.

Doubler’s Ratio, end of 2017

3.97

Second Purchase

Shares Bought

5

Open Date

April 13, 2017

Cost/Share

291.89

2017 End Price

446.43

Total Return, end of 2017

53% in 260 days.

Doubler’s Ratio, end of 2017

3.72

Third Purchase

Shares Bought

5

Open Date

Oct 31, 2017

Cost/Share

429.23

2017 End Price

446.43

Total Return, end of 2017

4% in 59 days

Doubler’s Ratio, end of 2017

1.25

Miller Industries (MLR)

Miller manufactures tow trucks. It holds a virtual monopoly in the industry, and it is the only pure play in the industry. The company has a robust balance sheet and is nearing completion of updates to its factories. The price is more volatile than I like, but it has been trending upward for years.

First Purchase

Shares Bought

75

Open Date

July 25th, 2015

Cost/Share

18.53

2017 End Price

25.80

Total Return, end of 2017

49% in 2 years, 157 days.

Doubler’s Ratio, end of 2017

1.00

Second Purchase

Shares Bought

75

Date Bought

March 1st, 2016

Open Date

19.33

2017 End Price

25.80

Total Return, end of 2017

41% in 1 year, 303 days.

Doubler’s Ratio, end of 2017

1.11

Mastercard (MA)

Mastercard hardly needs an introduction. The company is the second-largest payments processor, and has benefited from the move away from cash transactions. It has doubled for me already, and at one point it represented 18% of my invested funds. But when the company warned of a possible $1 billion fine in Europe, I decided the time had come to diversify somewhat. I sold half of my Mastercard holdings and invested them in Visa (NYSE:V).

Shares Bought

20

Open Date

June 30th, 2014

Cost/Share

74.27

2017 End Price

153.36

Total Return, end of 2017

110% in 3 years, 182 days.

Doubler’s Ratio, end of 2017

1.57

Visa

Like Mastercard, Visa hardly needs an introduction. It is also a payments processor, benefiting from the move away from cash transactions. It bought Visa Europe in June of 2017.

I initially bypassed Visa because it did not have a positive NCAV. However, with a Current Ratio and a Quick Ratio of 1.90 (as of this writing), the company is arguably quite solid. While the stock returned only 2% in the last month and a half of 2017, it has done much better in 2018.

Shares Bought

25

Open Date

November 15th, 2017

Cost/Share

112.23

2017 End Price

114.02

Total Return, end of 2017

2% in 44 days.

Doubler’s Ratio, end of 2017

0.73

Armanino Foods of Distinction (OTCPK:AMNF)

The company manufactures frozen Italian food for food service, retail, and industrial markets. It does have sales internationally, but its primary market is in the United States. It has recently updated its factory. While the stock trades OTC, the company voluntarily delisted to save money.

I invested in the company primarily as a place to park my money until another investment came along, but the stock price surged shortly after I bought it. The price has retreated somewhat from its highs, but I am content to hold for the time being.

First Purchase

Shares Bought

400

Open Date

November 18th, 2017

Cost/Share

2.36

2017 End Price

2.56

Total Return, end of 2017

8% in 72 days.

Doubler’s Ratio, end of 2017

2.15

Second Purchase

Shares Bought

100

Open Date

November 18th, 2017

Cost/Share

2.47

2017 End Price

2.56

Total Return, end of 2017

4% in 72 days.

Doubler’s Ratio, end of 2017

0.92

Third Purchase

Shares Bought

500

Open Date

December 11th, 2017

Cost/Share

2.29

2017 End Price

2.56

Total Return, end of 2017

12% in 18 days

Doubler’s Ratio, end of 2017

11.96

LCI Industries (LCII)

LCI is an OEM of RVs, buses, trailers, pontoon boats, trains, manufactured homes and modular housing. Its customers are some of the best-known RV names in the industry, including Thor (NYSE:THO), Forest River, and Winnebago (NYSE:WGO). I liked the prospects of the company so much that I wrote an article about it last August. By the end of 2017 it had become one of my best performing stocks, though the price has been coming down in late January. The company does not appear on David Fish’s CCC list, but it has initiated dividend payments.

Shares Bought

15

Date Bought

August 25th, 2017

Cost/Share

94.46

2017 End Price

130.00

Total Return, end of 2017

38% in 126 days.

Doubler’s Ratio, end of 2017

5.54

Argan (AGX)

Argan operates primarily through a subsidiary, Gemma Power Systems, LLC. It constructs, maintains, and provides services to power generation markets. Due to worries over its backlog, the stock price plummeted shortly after I bought it, and remains the biggest problem in an otherwise strong portfolio. Should the backlog improve, the share price will likely shoot up. It does not appear on the CCC list, but has increased dividends the last two years.

First Purchase

Shares Bought

20

Open Date

November 7th, 2017

Cost/Share

68.60

2017 End Price

45.00

Total Return, end of 2017

-34% in 52 days.

Doubler’s Ratio, end of 2017

-12.08

Second Purchase

Shares Bought

20

Open Date

November 17th, 2017

Cost/Share

60.97

2017 End Price

45.00

Total Return, end of 2017

-26% in 39 days.

Doubler’s Ratio, end of 2017

-12.26

Paychex (PAYX)

Paychex is a payroll outsourcing company, second in size to Automatic Data Processing (ADP). Paychex provides human resource, insurance and outsourcing benefits to small and medium-sized companies.

The company has a higher PEG Ratio than I like, but I bought the stock on a dip and intended to sell it later as a momentum trade. The price went up far beyond expectations and I am content to continue holding it for the time being.

Shares Bought

25

Date Bought

May 5th, 2017

Cost/Share

57.44

2017 End Price

68.08

Total Return, end of 2017

20% in 238 days.

Doubler’s Ratio, end of 2017

1.55

Expeditors International of Washington (EXPD)

Expeditors International is a third-party logistics provider. It contracts with airlines and steamship carriers, and derives its revenue from air freight, ocean freight, and customs brokerage. It is another stock that I expected to hold for only a short time, but it has performed beyond expectations, and I am content to hold it.

Shares Bought

25

Date Bought

May 16th, 2017

Cost/Share

53.61

2017 End Price

64.69

Total Return, end of 2017

22% in 227 days.

Doubler’s Ratio, end of 2017

1.79

Chase Corp. (CCF)

Chase is an industrial and construction materials provider, including tapes, laminates, sealants, and coatings. It derives its growth primarily through acquisitions in a fragmented industry. The company recently acquired Stewart Superabsorbents on January 4th, 2018.

Shares Bought

15

Date Bought

July 27th, 2017

Cost/Share

106.66

2017 End Price

120.50

Total Return, end of 2017

14% in 155 days.

Doubler’s Ratio, end of 2017

1.62

A. O. Smith (AOS)

My only regret with A. O. Smith is that I have not found another good entry point to buy more shares. The company manufactures water heaters and boilers in North America and China. It also manufactures air purification products in China. The company joined the S&P 500 on July 26th, 2017.

Shares Bought

25

Date Bought

August 1st, 2017

Cost/Share

54.03

2017 End Price

61.28

Total Return, end of 2017

14% in 150 days.

Doubler’s Ratio, end of 2017

1.67

Other Holdings

Other stocks I bought during the last two months of 2017 were:

  • Columbia Sportswear (COLM): 20 shares bought on November 7th at $62.35. Columbia is one of the best performers in the portfolio to date.
  • Taiwan Semiconductor (TSM): 30 shares bought on November 30th, at $39.65, another strong performer since purchase.
  • Apogee (APOG): 25 shares bought on October 27th, at $47.37. It is the only other construction company in the portfolio besides Argan.
  • MKS Instruments (MKSI): 10 shares on December 7th, at $95.20.
  • Lam Research (LRCX): 5 shares on December 7th, at $189.33.

Summary

The refined portfolio balances growth and value for DGI stocks, and looks for companies with reasonable employee satisfaction. I had a relatively large amount of cash to deploy in 2017, and I bought shares in fourteen companies I did not own before. Except for the two construction companies, total return was outstanding for all the stocks in the portfolio and they are on track to double in five years or less.

Disclosure: I am/we are long TPL, MLR, MA, V, AMNF, LCII, AGX, PAYX, CCF, AOS, COLM, TSM, APOG, MKSI, LRCX.

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: Stock prices were obtained from BigCharts.com. Total Return was calculated from my broker's statements. The Doubler's Ratios were calculated from stock prices and Total Return figures.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.