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 waited patiently for much of April, hoping for some sort of modest correction to use for its purchases. However, there would be no correction until May. So, as it was, I conceded that prices were unlikely to improve and made my purchases for the month on April 17th. For April, a bunch of banks remained on sale, and my favorite food stock re-entered the strike zone, so there were places to put money to work.
In banks, TFS Financial (TFSL) is the IMF's largest position and largest source of yield. It currently makes up 4.5% of the IMF overall, so it's not an especially concentrated position for the fund's top holding, however. And as long as it keeps paying a 6% dividend and sells at half of book value, I'll keep adding to regardless.
Speaking of sizable dividends, Colombian banking conglomerate Grupo Aval(AVAL), thanks to improving portfolio performance and an uptick in the Colombian economy, has ended its dividend freeze. The firm just put through a 25% dividend hike, bumping this monthly payer's yield back up to almost 5%.
Turning back to the U.S. banks, Pittsburgh's CB Financial Services (CBFV) is also yielding more than 4% after its recent decline from the mid-$30s to $23. It lingers just a couple percent off its 52-week lows. It trades at just 0.9x book value, and around 10x forward earnings. The company is still digesting a recent merger, but once that those cost savings are fully realized, the numbers here should turn nicely higher. Buy a basket of these 4% yielding 10x P/E sorts of community banks at or under book value, and things should turn out nicely.
Slightly to the east of CB within Pennsylvania, we have Orrstown Financial (ORRF). That bank has been slower to react to the rally in banking shares as it is in the process of merging with another bank. Earnings will be a bit messy for 2019 as a result, but things should pick up in 2020 as cost savings emerge. I see 30% upside once that happens.
Next up, we have an assortment of odds and ends. These are companies that have seen their share prices fall and thus I had been considering adding to these positions. However, with the deep discounts in the market from November through about February, my priorities were focused elsewhere. With the great companies at value prices pond running a little thin, however, my attention is turning back toward companies where I can lower my cost basis.
Perhaps Kraft Heinz (KHC) is the best example of this. The company plunged in value this year after taking a massive writedown on its brands and cutting its dividend. As I said at the time, there was no rush to buy, as these sorts of situations rarely lead to rapid bounces. Indeed, the stock has flatlined in the low $30s:
However, we're now far enough removed from the plunge that we can start thinking about the company with a fresh perspective. If you were to look at it for the first time today, knowing nothing of its past, Buffett and 3G's involvement, the dividend cut and any of that. Just looking at it as a new outfit, what would you see?
You'd see 11x forward earnings, a 5% dividend yield, a hefty but manageable debtload, and a collection of respected and valuable, if somewhat worn, set of brands. You'd also see some of the highest profit margins in the industry. Kraft Heinz' management may have its faults, but don't accuse them of wasting money - they run a tight ship. Analysts forecast flattish earnings and EBITDA in 2020, and then a slight rise in 2021. With the company generating more than $3/share in earnings, it's not hard to see the $30 share price (10x earnings) being solid support.
Is anyone who bought KHC stock at $60 going to be made whole on their investment anytime soon? Probably not. Can you make a reasonable return on investment buying here today? I think so. This is far from my favorite stock in the universe, but with the market up so much year-to-date, KHC stands out for having not rallied at all following its huge decline. Given that fact, it's easy to make a value case. The 5% dividend alone produces a decent base return on investment, and the stock could easily move back to $40 once earnings start moving up a bit and the stock heads back to 12-13x forward rather than 11x as it is now. From this opening price, it's a low bar to make money on KHC stock.
Molson Coors (TAP) is in even better shape than Kraft Heinz, but it is also tainted by the connection to 3G. That is to say that just as 3G overlevered Kraft leading to a dividend cut, the same thing happened at brewing rival Anheuser-Busch(BUD). As a result, investors have put the whole sector in the doghouse and are looking askance at Molson Coors as it similarly took on debt to make a transformational acquisition. Unlike BUD, however, Molson Coors didn't/doesn't have an excessive dividend yield, and it is now rapidly paying down its long-term debt to more manageable levels.
Beer and liquor companies are supposed to trade at a sizable premium to the S&P 500 as a whole, given that they are recession resistant, have incredibly steady profits, and are fantastically efficient with capital. TAP stock, however, continues to trade for less than 12x earnings. I don't know when the market will get its act together and revalue Molson Coors, but it will happen sooner or later. I'm happy to keep chipping my cost basis lower.
Switching gears, I also lowered the cost basis for the fund's position in Catchmark Timber (CTT). After a huge run in timber prices last year, prices have collapsed, taking the wind out of the industry. Throw in short seller concerns about Catchmark last year, and the stock tanked. CTT stock has recovered a fair bit this year with the more general rally in REITs and stabilization in lumber prices, but it's still down a solid 25% from last year's heights:
I'm happy to collect the 5.5% dividend yield and add a little more hard assets to the IMF, as the fund doesn't have much exposure to commodities/natural resources.
As I've discussed recently, I like Coca-Cola Femsa (KOF) - Mexico's largest Coca-Cola bottler - as an underfollowed way to play the potential economic recovery in Venezuela. The government there may fall at any point, as the opposition has declared itself in charge and obtained recognition from many states around the world. The timeline on the government switching there is unclear, but when it happens, it will be a huge thing for KOF. They own the bottling rights for Venezuela, a market of more than 30 million people that used to be quite profitable but has been rendered inert due to hyperinflation.
KOF stock traded as high as $165 in 2013 at the height of the last wave of enthusiasm for Latin American stocks. It'd take a major upswing in profits and sentiment to get back there anytime soon. But at $65, KOF stock is more than reasonably priced, pays a sizable dividend, and is a defensive way to play rising consumer incomes in Mexico and South America with a powerful call option on Venezuela recovering. In Mexico, I also added to the Grupo Aeroportuario del Sureste (ASR) position as it is still lagging the other Mexican airports.
The other adds in this bucket are more mundane. If you're bullish on the U.S. economy, you're going to make money buying Goldman Sachs (GS) under book value. Don't overthink it. Similarly, ExxonMobil (XOM) over a 4% dividend yield is a solid entry point. It won't be the star performer in anyone's portfolio, but it gets the blocking and tackling job done for income investors wanting a little energy inflation hedge.
I continue adding to CBOE Holdings (CBOE) as well. Generally, if you can buy fast-growing financial firms under 20x earnings, things should go reasonably well. I particularly like stock exchanges. You have huge network effects, modest capital expenditures, and effectively get to function as a toll booth on the economy. It's up only modestly from the December lows, making it an attractive option given the S&P's recent run.
I've discussed Walgreens Boots Alliance at length in this recent Ian's Insider Corner article, so refer back there for my detailed look. I will note, however, that WBA stock has been relatively stable while Bernie Sanders fears have absolutely pummeled insurers, hospitals, and biotech stocks. So far, WBA stock appears to be working as a safer haven within healthcare in regards to political concerns, as I had anticipated.
Finally, for the first time in 2019, I reinvested the IMF's dividends back into my favorite food stock, Hormel (HRL). It's a bit tough for me to maintain price discipline buying HRL, as this is my favorite stock in one of my favorite sectors. I'm quite convinced it is going to $50 over the next 12-18 months, and its a core never sell holding over the long haul. That said, price still matters. We're at 21x forward earnings. That's a reasonable valuation for a stock which should deliver double-digit EPS and dividend growth over the next decade.
If the stock's fair value is 20x earnings - a reasonable number - you need $2 of EPS to justify a $40 share price, and $2.25 to justify a $45 price. With the stock's recent decline of almost 15% since last November, we're now effectively getting more than a year's worth of additional earnings growth included in our purchase today compared to where it recently traded.
The stock is probably never going back to the low $30s again, but even these more modest corrections can offer reasonable points to add to a core holding. As a reminder, here's what Hormel did during the great financial crisis:
People often ask how I sleep well at night having nearly 100% of my portfolio in stocks. It's because not all stocks have the same risk exposure. If you load up on names like this, your portfolio will hold up much better in a bear market. Sure, you may miss some gains in the tail end of bull markets, but - at least to me - I'd rather limit drawdowns than maximize every last dollar of potential upside. That's why you see me eagerly buying something like Hormel again at fair value (but not a discount to it) today. Quality doesn't come cheap.
Ian's Insider Corner features extensive initiation reports on new stocks we buy, along with real-time updates to the IMF and other investments and trades. 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.