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 on July 9th, taking advantage of a tiny dip in the market. As it was, analysts downgraded several stocks I was interested in buying this month, creating more favorable prices for a few of this month's purchases despite the overall market rally of late. Here were my purchases for the month:
There were no portfolio transactions last month, so I had the usual $1,000/month to invest, along with more than $200 in dividends to reinvest as June is a big income month for the portfolio. I used those dividends to start a nice-sized position in State Street (STT) for the IMF. Here's my Top Idea pitch for State Street from last week. Since then, the company beat earnings, leading to a solid pop in the stock. State Street was far from the only bank purchase this month, and it was one of two new holdings for the portfolio.
This abundance of discounted banking shares means that, for once, I didn't add to the New York Community Bank (NYCB) position. NYCB stock has reclaimed the $10 level. Below $10 is the level where NYCB steps up its dividend buyback - I see much less rush to keep adding to the position above that threshold. Additionally, it's worth noting that NYCB is one of the few big banks that would earn more money as interest rates go down. With my view being that interest rates are set to bounce back up in coming months, there are more attractive bank stocks to buy today. What would those be?
The following sentiment probably won't be popular, but I stand by it: It's time to forgive Wells Fargo (WFC). Yes, I know all about their scandals with excessive accounts and fees. I personally moved my banking business from there to a rival bank a few years back in part due to customer service concerns. Wells Fargo acted in a predatory manner, and they deserve the fines and ill repute that resulted.
But at some point, you have to move on. Wells Fargo has replaced top management and overhauled its sales practices to avoid a repeat of its past ills. Yet, whenever you read an article about Wells Fargo, most comments are still stuck in the scandal days of the company, rather than focusing on the huge opportunity for the bank's stock now.
What's that opportunity? With Wells Fargo's build-up of excess capital, they can now return a gigantic amount of money to shareholders, both via dividend and share buyback. Between the 4% dividend and the massive share buyback, Wells Fargo is offering a 15% shareholder return this year. WFC stock has gone sideways for the better part of six years now. This while rivals such as JP Morgan(JPM) and Citigroup (C) have hammered out strong gains.
I get why WFC stock hasn't worked in the past, but it's now creating a huge catch-up opportunity. With Wells Fargo stock so cheap and its massive buyback authorization, the company can now grow earnings double-digits even with flat net income simply by sopping up its undervalued stock. How long do you think the market will let WFC stock continue to sit under $50 while it retires 10% of its float and drives earnings up double digits?
It's particularly amazing that Wells Fargo stock has gone nowhere in recent years because the bank – like most financials – benefited hugely from the corporate tax cut, raising their profits dramatically on a sustainable basis. Throw in tax cut gains, the benefits of a strong economy, and a massive share buyback, and Wells Fargo's earnings are on an enviable trajectory.
The stock price will soon catch up. The fact that we get a fat dividend yield as well – in a time when investors are chasing yield again – makes the situation even better.
In the category of large banks, I continue to add to my position in Goldman Sachs (GS) as well. The company's recently-announced 47% dividend hike is the cherry on top of an already wonderful situation that I described at length here. I expect shares to trade toward 1.5x tangible book value before this economic cycle ends – that would put the stock up to at least $300 versus its $210 price today.
Moving out of the huge bank category, while I passed over NYCB stock this month, I'm still adding to the TFS Financial (TFSL) position. Every month now, the stock seems to have climbed another 20 or 30 cents from my previous purchase. Shares are no longer offering the nearly 7% yield on cost that we could originally buy them for. Still, with the recently announced 10% dividend hike, the stock is yielding 6% here at $18, making it more compelling than most other options. Fair value continues to be at least $25.
And while skipping New York Community Bancorp, I didn't totally ignore the New York City metro banks. I added again to the position in First of Long Island (FLIC). FLIC is under the same cloud of short-term pessimism as NYCB. That's thanks to New York's revised rent control laws, as First of Long Island has a substantial multifamily-apartment lending business. Unlike New York Community, First of Long Island has grown at a decent clip in recent years, and has shown solid book value increases. FLIC stock yields more than 3% for the time being, while also offering the possibility of 50% upside if it merely returns to where it traded in 2017.
PacWest Bancorp (PACW) is also highly attractive given the current macroeconomic environment. PacWest makes some less standard types of loans, from which it earns a far higher net interest margin than usual for regional banks. As such, PacWest is more levered to the economic cycle – when people worry about recessions, they tend to dump banks with less standard loan books. If my economic outlook is right – economic acceleration in coming months and yields edging back up - PacWest is perfectly situated.
PACW stock was trading around $60 before the recession scare hit late last year. It's still lingering under $40 now, and yielding more than 6% for good measure. It also just beat on earnings this past week, but the stock hasn't moved yet. I'm not sure if I'll want to hold PACW stock through the next recession. Before then, however, there's a high chance of the stock revisiting $60 or more and paying fat dividends along the way.
Overall, the banks are down significantly over the past year - in many cases down well into the double digits. That's while the S&P 500 is up almost 10%. The catch-up trade here is going to be highly profitable once the market figures out there is no recession coming over the next few quarters:
Turning to energy, I continue to add to Exxon Mobil (XOM), as I have been every month recently. As long as XOM stock yields 4.25% or more, I'll likely be buying it on a monthly basis.
The last time Exxon yielded this much, we were still in the first term of the Bill Clinton administration and the oil market had been moribund for a decade. Conditions aren't that bad (remember that gas prices went under $1/gallon during the late 1990s) for Exxon now, yet the stock is similarly discounted.
I did stop buying Schlumberger (SLB) for the time being, however, as it has reached top 20 position size status in the IMF, and that's a large enough stake for now, given how weak industry dynamics are for the firm at this time. As a top 20 holding, the position is big enough to make a difference once the cycle turns – but I see no reason to make it an even bigger conviction holding just yet. Exxon, with its heavily diversified business, is the safest – if far from the flashiest – way to allocate to oil while the energy stocks remain in their slump.
Over in industrials, I managed to add to a few positions this month. Industrials have been a sore spot for the portfolio since its inception in 2016. That's because the economy has generally been strong and thus industrials have traded at high valuations. What positions I did buy tended to shoot up almost immediately, like Caterpillar (CAT) and United Technologies (UTX). CAT stock went up so much, in fact, that it got the rare boot from this portfolio for gross overvaluation. Meanwhile, something like UTX stock is up more than 50% from the portfolio's cost basis making further investment less palatable.
That said, the complicated DowDuPont merger and then breakup has arguably left several of the firms coming out of that situation looking cheap. I particularly like Corteva (CTVA). Ag sciences firms like Monsanto and Syngenta have historically been home run investments. And the combination of Dow and DuPont's science and marketing teams should make Corteva a winner in its field. As far as synergies from the whole merger/breakup process, Corteva appears to have come out the best.
I also added to the position in DuPont (DD) this month. I don't see the stock as especially cheap here, but we could easily get 20% upside or so over the next year back to around $90. That's much better than most industrial alternatives, which appear to be fully valued or overvalued.
I also added to the IMF's position in Illinois Tool Works (ITW). The stock is only about 10% above the IMF's cost basis, which isn't too bad, compared to most other industrial stocks. Illinois Tool Works is a widely-diversified outfit and a Dividend Aristocrat selling at a reasonable though not especially compelling price. Regardless, the portfolio is underweight the sector, and I wouldn't be surprised if ITW stock gets caught up in the chase for yield sooner or later. If I want to make the position bigger while it still yields a decent 2.7%, the time is now.
In a rare opportunity to lower my cost basis in a stock given the overall market level, I added again to the position in FedEx (FDX). I continue to expect shares to rebound at least 25% from current levels once fears about the global trade war die down.
In consumer staples, I only added to two positions this month. That's a shockingly low number for me – longtime readers know I love the staples. But with so many of them at 52-week if not all-time highs, there just isn't that much that is compelling. I love something like McCormick (MKC), but I have no need to chase it after it's already up 35% over the past year. This is why you load up on sectors when they are out of favor – staples were cheap in 2017 when everyone was worried about rising rates. Now with rates falling, you have to pay 30-50% more to get into most staples stocks. Not good for long-term investors. Now, by contrast, banks are the unloved sector to stock up on.
All that said, two staples stocks remain beaten down. One of these is Molson Coors (TAP), which should spring back to life since it just announced a 39% dividend hike this past week. The other is Kraft Heinz (KHC) which remains extremely cheap compared to other middling consumer staples firms. On an EV/EBITDA basis, KHC stock is something like 30-40% undervalued even compared to lackluster firms like General Mills (GIS) or Campbell Soup (CPB) let alone the sector's star performers. Kraft is deservedly in the doghouse for past bad decisions, but at some point, the stigma will fade and value investors will pile into the stock.
This is an Ian's Insider Corner report published July 9th for the service's subscribers. Join today to avoid missing any of my trades and new investment ideas. Membership also includes an active chat room, weekly newsletters, and my responses to your questions.
Disclosure: I am/we are long all the songs 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.