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 took advantage of the escalating Chinese tariffs situation to make this month's IMF purchases last Wednesday, May 8th. All orders were executed on the open of that day's trading session.
Given that there were no portfolio divestitures last month, I allocated the usual $1,000 of capital across 13 stocks plus a dividend reinvestment. Despite the China-related jitters, few high quality stocks are making 52-week lows at the moment, making it relatively unattractive to start positions in new holdings. Thus I added to existing holdings that have fallen a bit with the recent selling.
Usually there is a central overarching theme or two that binds many of the month's purchases together. This month, with stocks near all-time highs and no particular sector in the doghouse, it was harder to find a main narrative to focus on. May 2019's IMF purchases are one of the more diverse selections of stocks we've seen added to the portfolio to date.
That said, if there was one primary factor driving purchases this month, it would be the flare up in U.S.-Chinese trade tensions. The concerns about a potential economic slowdown that would hit trade-focused outfits in particular affect several IMF holdings.
For example, I added to the position in A.O. Smith Corporation (AOS), which is a leader in hot water heaters and boilers internationally. The company derives the majority of its revenue from the U.S., where it has more than 50% market share. However, it also has established a strong market presence in both China and India. Investors are eying those Chinese sales warily, leading AOS stock to drop 20% over the last year as earnings may slip as the trade war continues.
AOS stock took center stage subsequently to my purchase on May 8th, as not one but two short selling firms took fire at the company's Chinese operations. Shares dropped as much as 10% before modestly recovering in Thursday afternoon trading:
I published a full report for Ian's Insider Corner subscribers with my reaction and investment takeaways from the bearish reports on A.O. Smith. I will say publicly that I am not especially concerned and in fact I purchased more AOS stock on Thursday.
Fedex (FDX) is another great outfit that is temporarily struggling with trade-related concerns. Shares have dropped 10% since mid-April and 25% over the past year. That leaves the stock trading for less than 11x forward earnings. Not everything is going right for Fedex, particularly with its European operations. Still, the stock is down from $270 early last year to $180 in what is still a strong American economy. The stock could certainly drop more if I'm wrong and there's an imminent recession. But it's already down a lot and management has a strong record of value creation over the years. This is an enticing dip to buy.
The reversal in global sentiment related to China has crushed the rally in oil. Crude has slumped nearly 10% in recent weeks. That has sent oil stocks lower. I'm taking advantage of the situation to add to another Dividend Aristocrat this month, Exxon Mobil (XOM). XOM stock is back to being near 10-year lows in its share price, even as oil is far higher than it was trading for much of 2015-17. You've almost never had the chance to buy XOM stock at a 4.5% dividend yield. Unless you think oil is heading for terminal decline much faster than most analysts model, it's hard to see an investment in Exxon not producing reasonable to strong results in coming years.
Even more surprisingly, Schlumberger (SLB) is trading well below where it did in 2016 when oil bottomed. I may sound like a broken record on this, but you buy the leader when an industry is struggling, and then wait for the cycle to turn. Oil services will come back, and Schlumberger will be even stronger as many of its peers have gone bust and industry supply has shrunk. Despite the hard times, Schlumberger remains solidly profitable and is paying a 5% dividend, making it easy to wait for demand to pick back up in its industry.
DowDupont (DWDP) is another victim of global trade concerns, with the stock spilling from $40 to just $31 in recent weeks. The spin-off of the agricultural assets, Corteva is coming up shortly, so that should finally give us more clarity around the numbers and assets for the three firms that emerged out of DowDupont's demerger process. In any case, shares are trading below where they were throughout the merger/spin-offs stage, so unless all the deal architects were severely off-base, there should be substantial value at these levels.
Finally, related to oil and global growth, the Colombian Peso has slid a few percent so far in 2019. That has little to do with conditions in Colombia, but rather the uncertainty around China/emerging markets and the strong U.S. Dollar in general. This has knocked shares of financial conglomerate Grupo Aval (AVAL) well off recent highs, despite a much-appreciated 25% dividend hike earlier this year. The dividend had been frozen for several years, but improving conditions in Colombia have allowed the company to break the freeze with an emphatic dividend increase. This month's add to the position comes right around the IMF's cost basis, allowing me to stock up further on the portfolio's largest monthly dividend paying position.
The only other Latin American stock this month is Coca-Cola Femsa (KOF). This leading Mexican Coke bottler also controls territories in several countries of South America, including Venezuela. While the recent uprising there didn't manage to topple Nicolas Maduro, conditions remain unsettled, and a regime change could occur at any point. When a more market-friendly government takes over, it will be great news for Coca-Cola Femsa, which has essentially stopped earnings profits from its 30 million customer market in Venezuela due to the dismal economy there. KOF stock traded as high as $160 in 2013 when Venezuela's economy was still functioning and Latin America as a whole had better sentiment. There's no guarantee we'll ever get back there, but the current $64 share price is rather low given its past trading history and profit potential.
Back in the U.S., I've been buying a lot of Dividend Aristocrats lately, and that includes Walgreens Boot Alliance (WBA). Health care stocks have slumped as political concerns mount ahead of the 2020 election. Of the pharmacy plays, I prefer Walgreens as it has much less exposure to other parts of the health care supply chain; pharmacy should be least impacted by potentially harsher political regulations. There are real long-term concerns about Walgreens' business - non-drug retail, for example, could be a melting ice cube. Though at close to 8x forward earnings, a lot has to go wrong for shareholders to lose money from this price - its lowest since 2013.
In U.S. banking, I added to four positions this month. First up is an addition to a more growth-oriented South Carolina bank, First Community (FCCO). The stock remains right on its 52-week lows, unlike much of the sector. The bank has grown total assets from $862 million to almost $1.1 billion just since 2015, as it is adding new branches and expanding into new markets. Shares rallied 150% between late 2014 and 2018; additionally it was a 5-bagger since 2011. But it has now given back much of those gains as interest rate concerns have set in. I'm always happy to throw in a little more growth in my community banking stock basket, and the 2.5% dividend yield is high enough to add some income to the mix as well.
Goldman Sachs (GS) remains way too cheap on a Price/Tangible Book Value basis. Unless you see an imminent recession coming, the stock is sharply undervalued here. Chemical Financial (CHFC) is still under-appreciated ahead of its merger with TCF Financial (TCF) which will make it one of the Midwest's 10 biggest banks. This is likely trading under 10x earnings once the merger synergies kick in, while paying a more than 3% dividend.
Meanwhile TFS Financial (TFSL) remains the cheapest banking stock I'm aware of by a huge margin for reasons I've elaborated on at length previously. The stock popped more than 5% recently on earnings and nearly took out 52-week highs before the market correction reeled it back in a bit. One of these days, TFSL stock will take off out of its long-running trading range. I intend to have as large a position as possible before then. It's already the #1 holding in the IMF by both position size and annual income.
Wrapping up for the month, there were two additions to food stocks. The first of these is Ingredion (INGR). I started a small position in INGR stock last year, but shares bounced, stopping me from building it anymore. Until now. With Ingredion now taking another leg lower, the food products firm is looking interesting with its 2.5% dividend yield that has continuous increase since 2010 and a 9% dividend growth rate over the past five years. Throw in a strong share buyback - now at attractive prices - and INGR stock should be able to generate significant value for shareholders here, as it has done in the past:
Last up is Hormel Foods (HRL), where I reinvested April's dividends. I waited patiently for HRL stock to drop back to $40 after it touched as high as $46 recently. Even as Hormel is my favorite food stock and preferred Dividend Aristocrat, price still does matter. At $39, compared to $46, you're essentially getting an extra two years of earnings and dividend growth (at the company's usual 10% annual rate) by buying now as opposed to the earlier valuation. With earnings coming up, shares may not stay down here for long.
Also keep in mind that African Swine Flu could be a big positive for Hormel. Tyson(TSN) recently commented that ASF could be one of the biggest opportunities for protein producers in years. Hormel is well positioned for this, and its shares could start rallying sharply, as Tyson stock has done this year.
Hormel is currently suffering from trade war concerns relating to pork exports, but like everything, that will pass with time, leaving behind a fairly to slightly undervalued Dividend Aristocrat whose shares have recently dropped 15%.
I publish all IMF portfolio purchases and other transactions in real-time for Ian's Insider Corner members, along with reports on stocks in the news such as AOS this week. 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.