Ian's Million Fund "IMF" is a real-money portfolio that I've written about monthly since January 2016 here at Seeking Alpha. The portfolio is a largely buy-and-hold group of ~120 stocks. Each month, I buy 10-25 of the most compelling stocks available at then-current prices, deploying $1,000 of my capital plus accumulated dividends. If things go according to plan, this portfolio, began when I was 27, will hit one million dollars in equity in 2041 at age 52. I intend it to serve as a model for other younger investors.
I made this month's purchases Monday morning at the open. With last Friday's 2% pullback and an additional dip to start this week, it gave the portfolio the opportunity to add to positions at slightly better prices than had been offered most of the month. Additionally, banking stocks in particular have gotten hammered, offering nice values across the sector.
In fact, for the month, there were three major categories of purchases. There were 1. bank stocks, 2. energy stocks, and 3. positions that I've started buying recently and want to make bigger. In all, I added to 18 positions this month and refrained from starting any new positions in the portfolio. The purchases were much bigger than normal this month, as proceeds from sold positions (Kimco (NYSE:KIM), Union Pacific (NYSE:UNP), Coca-Cola Consolidated (NASDAQ:COKE)) were recycled back into the portfolio.
First things first, I reinvested February's dividends into Global Water Resources(GWRS). Unfortunately, the price rose to almost $10 this month compared to the $9 price the IMF started its position at last month. Still I'm willing to add under $10. This is a long-term growth story that could play out for decades, and the growing monthly dividend makes holding for the duration an easier process.
Here's a chart of all the bank stocks added to the IMF this month, from last August on through to today. As you can see, it's a mixed bag how badly they've gotten hit, but the selling has been widespread:
For comparison's sake, the S&P 500 is flat over the same stretch. Only one of those six banks has beaten the market, and only one other one is down single digits - the rest are down big since this past summer.
My favorite bank stock, TFS Financial (TFSL) has dipped back from $17 to $16 this month as the banking sector gets shellacked. Still, it's notably one of the very few bank stocks that has topped the S&P in recent months. It's done remarkably well recently, given its sector.
Still, since the market seems disinterested in figuring out TFS's Mutual Holding Company "MHC" structure and the stock remains in obscurity, I'm happy to keep snapping up this bank at half of book value and with a 6.3% dividend. Don't forget that we got a 39% dividend hike this year and the payout ratio remains fairly low. Expect another solid dividend hike next year, as management has shifted from share buybacks to dividends to try to boost the share price. In any case, shareholders are set to reap a fortune here in coming years.
Next up, CB Financial Services (CBFV) has fallen back to the IMF's cost basis, and is now trading under book value and with a more than 4% dividend yield. It's also selling at 10x forward earnings. I'm also bullish on the bank's local Pittsburgh economy, as the city has revitalized in recent years and is turning into an under-appreciated burgeoning tech hub.
Other than TFS Financial, First of Long Island (FLIC) has held up best of the banks the IMF bought this month. First of Long Island has grown more quickly than most of the NYC metro area banks in recent years, while managing to maintain strong credit underwriting. As such, I'm happy to keep buying, even while its share price isn't as beaten up as many of the other regional banks.
Also in the northeast, we have the ultra-stodgy People's United Financial (PBCT). I wrote this bank up in December as an example of where to find a safe relatively high yield (4.5% dividend yield) from a bank that took close to no loan losses even in 2008. The bank also recently became a Dividend Aristocrat. While its annual dividend hikes are minimal, when your starting yield is that high, you are still getting paid nicely to hold its shares. The share price isn't likely to scream higher, given management's aversion to risk, but if you're worried about a recession over the next couple of years, this is exactly the sort of bank you want to own.
Switching gears, Goldman Sachs (GS), despite all the headlines, worries, and Malaysia scandals is actually in the middle of the pack as far as banking performance goes in recent months. Still, with its 20% decline over the past couple of quarters, it is now trading at just 0.9x book value and 7.8x earnings. This is a rather silly price unless you think a heavy economic downturn is coming. With a 13% Return on Equity and 10% discount to book value, it's not hard to see 15% annual total returns coming from GS stock in coming years from this starting price.
Finally, we have Chemical Financial (CHFC), which is down more than 30% since last summer. A few months ago, Chemical announced a surprising merger of equals with TCF Financial (TCF). After this deal closes, the combined entity will become one of the Midwest's 10 largest banks. As a standalone company, Chemical is under 10x earnings, book value, and paying a 3.5% dividend yield. We'll have to see how the combined company does in terms of cutting costs, but there's the potential for huge returns - particularly after the 30% decline recently - once the merged bank is up and running.
With Canadian midstream giant Enbridge (ENB), we have an interesting situation setting up. Canada is set to have its next elections this October. The current Prime Minister, Justin Trudeau, is quite unpopular. The conservative opposition, led by Andrew Scheer, isn't especially well-liked at the moment either, setting up what should be a contentious election. PredictIt's market odds currently has 60/40 odds of Trudeau keeping his job and Scheer defeating him. That's not far from a coin flip.
Scheer has campaigned on an explicitly pro-pipeline platform and heaps blame on Trudeau and the central government for delaying the growth of Canada's energy infrastructure. This lack of infrastructure has led to Canadian crude selling for a massive discount to world prices, as there isn't sufficient capacity to get that crude to market. Scheer makes it clear who he feels is to blame:
"The reason we don't have this energy infrastructure today, the reason why we're bleeding in Western Canada because of this price differential, and the reason why we continue to have to import foreign oil in eastern Canada is directly related to Justin Trudeau's policies".
Enbridge already looks reasonably priced and offers a more than 6% yield as it is. Throw in the potential for a favorable change in government regulation/policy going forward and ENB stock could surprise a lot of folks.
Exxon Mobil (XOM) doesn't have as clear a catalyst as Enbridge, but in this case, the yield makes the story pretty clear. Exxon hasn't yielded this much in nearly 25 years, excluding that brief blip up to 4.5% in December:
The balance sheet remains excellent for this Dividend Aristocrat, and you'll rarely get a better starting yield out of the company. XOM stock has done essentially nothing for the past decade. That could be setting up a huge move after many years of consolidation once energy stocks finally start rallying again.
Finally, I added to the position in Schlumberger (SLB) because when a sector is in the dumps, you buy the industry leader as a defensive strategy. While Schlumberger's peers struggle and many go bust, it can consolidate its position and come out stronger once demand for its services returns. Again, there's a nice almost 5% dividend yield here as well. SLB stock continues to trade well below where it did in 2016 - when oil hit $27 - even though the price of oil is more than double that now. This discrepancy won't last forever.
Adding To Recent New Positions
While I started no new additional positions in the IMF this month, I continued to add to recent new positions. With Broadridge (BR), I laid out the case in an Editor's Pick article earlier this month. Long story short, I see 25% upside over the next year and this is also a fantastic long-term buy and hold Fintech growth story.
In FedEx (FDX), we have a fantastic wide-moat company down 27% over the past year and off 35% from its 52-week high. That leaves shares at just 10x forward earnings. I've done a good deal of reading on the differences between FedEx and UPS (UPS) and it seems FedEx has better corporate culture. On top of that, UPS has some pension liability concerns. As for Amazon, I don't see them as a serious threat to FedEx in the intermediate future - the stock's fall as of late has more to do with the potential for a global economic slowdown. Regardless, business will go on, and shares are already way into bear market territory.
For another bit of perspective, consider the difference between FedEx - a stock I'm buying, and Union Pacific (UNP), a stock I recently sold. These can't both be simultaneously right, can they?
CBOE (CBOE) is another fairly new holding I'm excited to add to. The stock has done nothing so far in 2019, getting left behind by the market as a whole:
CBOE may still be in the penalty box for last year's calamitous VIX products meltdown. However, VIX-related product revenues are not nearly as big a share of CBOE's pie as many people seem to think. Other initiatives, such as Bitcoin futures, failed to take off as people had hoped. Still, stock exchanges are a fantastic business model, and CBOE is now under 20x forward earnings.
Other Assorted Purchases
The only emerging markets stock this month is Grupo Aeroportuario del Pacifico (PAC). In writing the recent airport operators outlook article for Ian's Insider Corner members, it stood out to me again how great a business PAC is running. With the chance to add to my position only slightly above cost basis, I was happy to take the opportunity. In general, however, the portfolio's Latin American stocks are having a good 2019 so far, so I don't feel a compelling need to add to these positions into strength.
I keep adding to the position in DowDuPont (DWDP) now that the share price has plunged back to the IMF's initial cost basis after all of the financial maneuvering that had previously given shares a jolt. The market is clearly in wait and see mode to see how all the new spinoffs work out. At this price, however, it won't take much for shareholders to get solid results.
A year ago, Molson Coors (TAP) was in the doghouse. Everyone wanted to know why you'd buy TAP stock when Anheuser-Busch (BUD) was bigger, yielded more, and was said to have better management. Fast forward, and TAP stock has largely held its ground, despite difficult conditions in the consumer staples industry. BUD, on the other hand, went flat. Now Molson Coors is likely to raise its dividend, while its arch-rival slashed theirs.
TAP stock hasn't rallied yet, but with the balance sheet getting healthier, the craft threat losing steam, and with the stock trading at an enticing 11x earnings, there is a lot to like here. Alcohol stocks deserve to trade at a premium to the market, given their recession-resistant nature and massive cash flow generation. TAP stock won't stay at 11x earnings forever.
In our latest reminder never to buy cyclical companies when things are looking good, I present Polaris Industries (PII). I first bought this stock for the IMF in 2016 following both a general demand slowdown and a difficult winter which curtailed snowmobile demand in particular. PII stock exploded higher - but with global economic slowdown concerns back, PII stock has fully round-tripped from the original entry:
Over the past 20 years, PII stock is up 967% (not counting dividends) - it's been a fantastic wealth generator. That said, wait for times like now - when people are fretting about the economy - to add to positions. Even in huge long-term cyclical winners, you'll get sizable drawdowns from time to time.
Finally, there's Gilead (GILD), a stock which has gone from market hatred to ambivalence in recent quarters. Earnings have just about stabilized as the decline in HCV sales is tapering off. The company continues to dominate both HCV and HIV, and Yescarta sales will be ramping up in coming years, helping replace falling revenues from elsewhere.
As earnings were declining, I warned investors about the risk of a low P/E ratio when the E is quickly falling. With earnings now near stable, however, Gilead is throwing off tons of cash. I like the odds that management will figure out some way to turn all that cash into new blockbuster products in the future. In the meantime, the company is paying a strong dividend.
This is an Ian's Insider Corner portfolio update first published March 25th. We track the portfolio, offer detailed theses for new positions and timely buy and sell notifications. Membership also includes an active chat room, weekly updates, and my responses to your questions.
Disclosure: I am/we are long ALL THE STOCKS IN THE TABLE. 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.