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 ~130 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.
Given I'm bullish on the stock market, it should come as no surprise that I made August's purchases at the first possible moment. With hindsight, I could have gotten better prices if I'd waited a couple more days. Regardless, I'm fairly pleased with the value that was on offer this month. Energy, along with banks, were the main focus for August. There's also a few less predictable picks to take note of as well:
Counting the dividend reinvestment in State Street (STT), there were just 12 purchases this month; it was definitely one for focusing on the most compelling values rather than choosing a more broad basket of picks.
We'll get through the bank picks quickly since I've already said a lot on the subject recently. I bought more TFS Financial (TFSL) for the reasons I've described at length in many previous editions of my monthly portfolio purchase reports.
I keep buying First Of Long Island (FLIC) since the rent control laws scare has blown over, but FLIC's stock hasn't recovered nearly as quickly as New York Community Bancorp's (NYSE:NYCB) stock (yet). Given that FLIC is a much more growth-oriented bank with a higher beta to the market, FLIC should be rallying more sharply than NYCB as fears recede, instead FLIC has barely moved. And zooming back to the Financial Crisis, FLIC was one of the strongest-performing of the NYC metro area banks; it's a great franchise for long-term owners as well. Ultimately, the stock should head back to $30 where it peaked out at the top of the Trump financials rally, offering another 30% upside for short-term trades as well:
Additionally, Wells Fargo (WFC) with its 4% dividend and 10% share buyback now has my attention. At just 10x earnings with a 14% shareholder return, it's easy to see promising returns on WFC's stock going forward.
Energy: Time To Buy (The Majors) Aggressively
Unfortunately, many people seem to be under the impression that to buy energy, you have to buy unprofitable small E&P plays and hope the price of oil and natural gas spike higher. The truth is, most of these speculative companies are going to go bust. The aggressive "deep value" favorites like Antero (AR), Range (RRC), Southwestern (SWN), etc., are absolutely wiping people out:
Resist the temptation to try to catch those sorts of falling knives. Unless energy prices improve sharply - and soon - there's a good chance those sorts of stocks are going to zero.
Why does that matter to us? Because these are the years that end up eventually printing money for the oil majors. That's because as the low-quality end of the industry goes bust, everything has to consolidate.
There's simply way too much overhead in E&P that you can't support with $60 oil and $2 natural gas. A lot of redundant management teams, office space, accounting and compliance teams, etc., need to go away before the industry becomes rational again.
The easiest way to do that is for the small money-burning producers to sell out to the majors or go bankrupt and auction off their assets to viable companies. For decades, companies like Exxon Mobil (XOM) have bought up more resources for cheap when the energy cycle has pointed downward. As the old adage goes, why explore for oil and gas in remote locales when you can buy proven resources for cheap on Wall Street?
Out of the IMF's new positions this month, Canadian Natural Resources (CNQ), demonstrated precisely how this plays out. During downturns, the rich get richer buying great assets from the struggling firms for pennies. Want an example?
Canadian Natural managed to buy out Devon's (NYSE:DVN) sizable oil sands position for roughly half the price that U.S. investment banks had estimated that it was worth! Half-price - so what's that look like on an EBITDA basis? Josh Young has the math:
"Devon (DVN) announced the sale of its Canadian oil sands assets for $3.8 billion Canadian dollars - about $2.8 billion USD. Canadian Natural is the buyer.
With over 100,000 barrels of oil per day of production, the deal was done at less than $30,000 per boepd and at an estimated 3x ebitda. There is a bit of variation on production estimates and cash flow estimates in research analyst notes, but most think CNQ got a great deal [...]
CNQ is continuing its long track record of accretive acquisitions. The company has created enormous value over decades through astutely buying assets at a discount."
As Young noted, Canadian Natural has absolutely crushed Devon's stock over the past 20 years - over time, the rich get richer:
For self-proclaimed value investors, this is supposedly the time to be searching through the energy wreckage to buy bombed out stocks that could triple if energy prices turn quickly enough. And hey, good luck, sometimes it works.
But for long-term investors that want good returns with far less risk, buy the energy majors here - I'd argue there is quite a bit of value as well. In the case of CNQ specifically, one of my favorite Seeking Alpha authors and Twitter voices, Keubiko, makes the case for value compellingly:
That's right - the company is selling at less than 9x free cash flow with more than 50 years of resources. And, as he notes, once you build an oil sands project, ongoing CAPEX is rather modest opposed to other types of production such as fracking:
Also, as a reminder, we're talking about getting a 10%+ free cash flow even with NYMEX crude at $60 and Western Canadian crude selling at a huge discount to that. At some point in the future, Canadian pricing will recover once transportation issues are worked out. And, sooner or later, oil prices should spike again for whatever reason. When you're printing money at $38 a barrel with 50 years of asset base left and can buy even more resources at 3x EBITDA, what's not to like?
If that weren't enough, CNQ's stock also pays a more than 4% dividend yield and has a 19% 10-year dividend CAGR:
Source: Seeking Alpha
What else did the IMF pick up in energy this month? Canadian pipeline giant Enbridge (ENB) dropped 10% over the past three weeks, putting it back to near the IMF pre-existing position's cost basis. At a 6.4% dividend yield, I was happy to pick up more with this discount.
Also, I added to the Exxon position. I buy Exxon almost every month nowadays - you simply don't get many chances to buy this company at a 4.5% dividend yield. So enjoy while it's still on offer:
Even in the late 90s, when oil hit $10, Exxon was still only yielding in the low 2s. The company is now planning for aggressive growth and has an effort in place to double earnings and free cash flow over the next five years. Again, as majors with great balance sheets, you get to be aggressive and reap rich rewards for it as the aggressive wildcatters go bust.
The Other Purchases This Month
Banks and energy were the two main focuses this month; here's everything else I purchased. In consumer staples, I keep adding to Kraft Heinz (KHC) as it's simply way too cheap compared to other struggling packaged food companies. Either valuations slump across the sector, or KHC's stock has to go up. With everyone chasing dividend yields again, I wouldn't hold my breath waiting for the rest of the sector to slump.
Similarly, in Molson Coors (TAP), the company delivered on its massive promised dividend hike. The stock advanced slightly but then sold back off on its earnings report. The North American beer market continues to be weak (the whole market, including craft). This is a headwind for Molson Coors, but as long as the company isn't performing badly compared to rivals like Anheuser-Busch (NYSE:BUD), I'm not particularly concerned. Management wouldn't have just hiked the dividend that aggressively if it were legitimately worried about the next few years. Beer stocks usually trade at a sizable premium to the stock market; instead TAP is at 11x earnings and a 4%+ dividend while the stock market hits all-time highs. Easy decision to buy more.
I'll have more to say about the airports soon, but for the time being, I must say I'm warming up to Grupo Aeroportuario del Centro Norte (OMAB) as opposed to its rivals. Despite the Mexican economy being sluggish - which should hurt OMAB most of the three operators - it's instead delivering the strongest traffic growth numbers. If this is what happens when the Mexican economy is soft, what happens the next time Mexican GDP surges? I had been thinking there would be another Mexico panic sell-off that would allow the IMF to load up on more OMAB stock down around $40 - I'm not sure anymore. I want to own more of this for the long haul, and I'm willing to pay a fair (as opposed to cheap) price to get it.
Finally, we have the two most tech/growth names I've bought in a little while, Roper Technologies (ROP) and Tyler Technologies (TYL). I bought a little Roper earlier this year and wanted to make it a decent-sized position, but it immediately rocketed higher. Shares have paused for the last few months, however, so I revisited it, and despite the aggressive valuation, it's hard to see how long-term investors still don't make great returns over the next decade.
In Tyler, we have a software provider for local governments. Local government software is a more than $10 billion market with more than 500,000 individual systems in place around the country. Tyler has solutions to address a large portion of the overall market.
It's a highly desirable business niche because governments rarely change their technology systems; in many cases, Tyler is replacing stuff that's been in place since the 1980s or early 1990s. Once you're in, you get recurring revenue for decades. And governments tend to not be especially price sensitive either. This gives Tyler a lot of upsides of most SaaS companies such as huge profit margins, strong top-line revenue growth, etc., with much less downside when the next inevitable recession hits.
Tyler has merely matched the S&P in recent years and hasn't made new highs yet unlike most of the SaaS stocks lately, so there's a relative valuation case. While the stock has been a fantastic compounder, it hasn't done that much since 2015. It's not hard to see it blasting off another hundred points higher once it breaks out above its all-time highs here:
On an outright basis, no one is going to say 39x forward earnings is especially cheap, but for something that has grown earnings at 26%/year compounded over the last five years, it's not terrible. A good number of these SaaS stocks lose money on a net income basis, after all. And 9x Price/Sales is well within the pack for cloud software, despite Tyler's above-average revenue stickiness.
This is an Ian's Insider Corner report published August 1st for our service's subscribers. If you enjoyed this, consider our service to enjoy access to all my reports 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.
Additional disclosure: I am also short AR stock.