Seeking Alpha

Our Family Investments: May Purchases

Includes: JNJ, MMM
by: ScottU

After a busy last two years, our family is in a position to be able to invest into a couple companies each month.

Currently, the Family Investments cover five portfolios: My wife and I, my grandmother, and one for each of our three kids.

Each month, I will track any purchases or sales in these portfolios, starting with the two made in May.

After a very busy couple years, our family finds itself in a position to continue building our investment portfolios. Back in December, I highlighted a couple purchases we made in my end-of-the-year review. Going forward, we plan on adding to a couple positions a month through five different portfolios. For May, there were purchases made in two portfolios. On occasion, there may be sales. When this occurs, I will highlight those as well. If we notice anything interesting of note on our current holdings, we will add thoughts on them as well. This should give readers a good idea on what our thoughts are on different investment available for investors from ages 13 to 104.

Our Portfolio

Our portfolio currently consists of 25 companies and was reviewed at the end of December. In the comment section of that article, I mentioned that we sold our shares in Coca-Cola (KO) and Umpqua Holdings (UMPQ) during the first quarter of this year. Both of these companies are still held by other members of the family, and in both cases, I would consider buying the shares back if there were compelling reasons to do so. One thing to note is that this is a taxable account, and as such, we do try to limit transactions that cause a taxable event to occur as much as possible.

We do not keep position size limitations within this portfolio. Eventually, we see the total number of positions growing to close to 50, but with the current set-up, an average position size is four percent of the portfolio. Currently, our largest position is Microsoft (MSFT), which makes up just over 23% of the entire portfolio, while our smallest position, General Electric (GE), is just less than .5%. Two other companies, Apple (AAPL) and McDonald's (MCD), have position sizes more than double an average size. Of the three that are more than two average position sizes, only Microsoft was purchased at more than an average sized lot at the time of purchase, and it was only a 1.5 position sized purchase. The remaining difference is made up in the gains on the stocks themselves.

Our Purchase

On May 30th, we executed the purchase of shares of Johnson & Johnson (JNJ) at a price of $132.22. This is a company that we have been slowly building a position in over the last few years and brings its position weighting up to 1.6% of the portfolio. This purchase increases our average price per share paid to $122.85. For quality companies, we have no problem averaging up over time. For years, I have been an investor who looks to take what I believe are opportunities to add to stocks when market weakness is not warranted. On May 29th, I saw this news note on Seeking Alpha and noted the 6% drop in price that had occurred. My wife is a lawyer, so when there's stock news that is driven by legal concerns, I tend to get her opinion first. Her opinion is that this is a lawsuit that is going nowhere, at least not to a company like Johnson & Johnson. The other two defendants settling doesn't help the State's case against the remaining defendant; it probably does the opposite. Furthermore, the amounts talked about by the Oklahoma Attorney General and the amounts the other two defendants settled for have such a gross difference between them that in the case of a loss by Johnson & Johnson, the final settlement payment would be far less than the total discussed by the State. Without the share price drop on this news, we most likely put these funds to use in a different company; however, the quality offered on the dip was too great to pass up.

Grandma's Portfolio

For those who have read my work in the past, I often write about a portfolio that I helped my grandmother put together at the end of 2013. As a refresher, when she purchased the original companies, there was a thought that she may need a portion of the income created by the shares to cover living expenses as she grew older (she was just turning 99 at the time), but that any remaining funds would be reinvested. Today she's 104, still going strong and has yet to need to use any of the funds the portfolio has created in any way. The reinvested funds have gone on to purchase Apple (AAPL), Starbucks (SBUX), Costco (COST), McCormick (MKC) and Dominion (D). Her only rules for the portfolio were that I had to be able to explain to her what each company did and that she didn't want me to sell anything unless the market forced us to sell. This has happened once in nearly six years, when Avista (AVA) announced it was being acquired in an all-cash transaction with Hydro One (OTC:HRNNF). That merger fell through, but in thinking it was coming, we sold the Avista shares and used the funds to purchase shares in Amazon (AMZN).

At the beginning of May, this portfolio had 31 companies in it, of which 30 pay a dividend. Eventually, I would like this portfolio to have 40 companies in it, giving us an average position size of 2.5% of the portfolio. Going forward, with the rest of the companies to be added, I will be building the positions in smaller increments and not purchasing them all at once. This is the model that was followed to add reinvested funds into the companies purchased above, and one that will allow us to make purchases fairly regularly while the rest of the portfolio is built out. This will allow us to add to existing positions in a controlled manner after that.

Grandma's Purchase

On May 30th, my grandmother purchased shares of 3M (NYSE:MMM) at $160.39. For the last couple years, Seeking Alpha Contributor RoseNose and I have gone back and forth on fair value for 3M. My opinion was always that the company's fair value was close to the $185 range even when it was selling for over $225 a share. I told her in many comment streams that if the share price fell closer to that $185 range, I would be looking to add shares for either my wife and I or grandma. First-quarter earnings and the revised guidance kept me from buying when shares hit the $185 mark. In running through the numbers again, I came up with a fair value estimate of $170. As the shares closed in on $160, I decided that she would have enough margin for safety there that I could buy a full position and the risks that were there previously would mostly be priced in. Forward guidance has the company growing profits again in both 2020 and 2021, albeit not in the same growth rates that we have seen in the last five years.

With the purchase, MMM becomes the 15th largest position in the portfolio, which makes sense given it was purchased to be an average sized position. The yield on the shares purchased was 3.59%. Because the yield for the company is a big higher than the average yield on the portfolio, the company creates 3.918% of the income for the portfolio. Since purchase, shares have increased by 3.88% and are sitting very close to what I consider fair value. We bought this as a beaten-down company that we plan on holding for a long time. The goals of the portfolio help frame what we chose to add here, if those goals don't align with that, I don't believe there's a huge margin of safety to purchase additional shares here. If the company's growth turnaround does occur in the next couple years and you're happy collecting the dividend and waiting, I don't see the downside that I've seen in the past.

June Plans

In June, we will be getting the accounts set up for the kids and letting them help make initial selections. The kids are the same ones I've written about previously, and they have some very interesting ideas about how they would like to invest funds. While my wife and I will certainly help them with the selections that they choose, they will have a good amount of input into how these accounts grow in the next decade. In our portfolio, we may also make another purchase, but I think it's far more likely that we allow cash to accumulate. In grandma's portfolio, if something becomes available that is of interest to us, she may look to buy a starter position. She has enough cash in the account available to make 2/3s of another full position purchase and accumulate enough cash to add another full position a year. I have half the last eight companies picked out for her, the other four are still to be determined, so suggestions are always appreciated.

Disclosure: I am/we are long ALL STOCKS MENTIONED. 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.