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Retirement: Buying More Stocks For The Future-Proof Portfolio For Young Investors

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Includes: ACGPF, ACNFF, ADM, ADP, AMNF, AOS, AWR, BASFY, BRK.B, DEO, DIS, DNNGY, ED, ETN, GILD, GLW, HASI, HENKY, INFY, JNJ, KNYJF, MDT, MMM, NGG, NVO, O, RHHBY, SGAPY, TCEHY, TSM, UL, UNP, VTR, VWDRY, WPC
by: Giesbers Investment Strategy
Giesbers Investment Strategy
Long-term horizon, dividend investing, foreign companies, growth at reasonable price
Summary

Markets have had a great run in 2019, which makes it difficult to find attractively-priced stocks.

This is especially the case in low volatility quality stocks, in which I am particularly interested for my portfolio.

In this article, I present a couple of stocks which could still be interesting options in this challenging environment.

I will also make a choice where to invest €3,000 for my Future-Proof Portfolio For Young Investors.

I am looking for attractive stocks to purchase for my model portfolio, the future-proof portfolio for young investors. Every half year I aim to invest a total of €3,000 euro in stocks for this portfolio. In this article I will examine the possibilities for investment and make a decision where to invest.

You can find my previous article where I discuss the 2019 results of the Future-Proof Portfolio for Young Investors here.

Criteria for investment

The criteria for selecting stocks for the Future-Proof Portfolio For Young Investors are a bit loose and flexible; it is more a philosophy than strict rules. Roughly I am using these criteria to find investments:

  • The investment has to have a good future potential. I know this is a very vague criterion, but I often use the following thought experiment to determine whether a company could be a candidate to invest in: try to imagine whether the company could be thriving in 30+ years time. If I'm not sure about this, I will try to avoid these companies/sectors. Examples of sectors which I find hard to imagine that they will still be profitable in a couple of decades time are fossil fuels and tobacco. Also, I find it very hard to predict in which direction the financial and the insurance sectors will go in this time period, with many disruptive developments happening the last couple of years (blockchain, negative interest rates, fintech industry). As such, I try to avoid these sectors in my portfolio.
  • The company needs to pay out part of their profits as a (preferably growing) dividend. Needless to say, part of this criterion is that the company has to make a profit in the first place. Also, I prefer that this dividend is nicely covered and not directly or indirectly funded by taking on more debt. I am not strict on this rule, if I find a very solid and promising company which does not pay a dividend, I might still decide to invest in it. An example of this is Tencent, which is included in my portfolio but pays a negligible dividend. Berkshire Hathaway (BRK.B) is also a solid company of which I would not mind them not paying any dividend, although I would not invest in them because of their high exposure to the financial and the insurance sector.

Source: Getty images

  • The company needs to have manageable debt. Even in this negative interest rate environment where companies are paying less and less for their debt, I need to be sure that a stock in which I invest will not be crushed by its debt in the future. It is impossible to know how long the low interest rate will continue, and it is important for the continuity of a company to have a manageable debt. Actually, in this environment it is even more important to focus your investments on companies which are not drowning in debt: right now, in a benevolent economic environment and with low interest rates, it is relatively easy to service large debts, even for struggling companies. If the economy turns sour or interest rates go up again, heavily indebted companies might have a big problem.
  • The company needs to be a solid name in their sector. This does not mean that its market capitalization needs to be high; it just means that they should be good at what they are doing. A niche company like Armanino Foods of Distinction (OTCPK:AMNF), which is included in the portfolio, is a very valid investment.

I am not using any strict quantitative criteria on purpose, since I want to remain flexible with selecting stocks to invest in. Next to the four criteria listed above, I do not want to invest in stocks that are overvalued, no matter how good the company is. A company like American States Water (AWR), for instance, is a great company but likely a very bad investment at this moment because of their historically high stock price. Since many markets are at or approaching their all-time highs again, selecting a good company, which is also affordable can be a difficult process.

In the next part I will present a list of possible investments that I think are not too overvalued at the moment. I will first list a couple of stocks that are already included in my portfolio, and later on I will present a couple of new investment options.

Adding to existing positions

  • Armanino Foods of Distinction (OTCPK:AMNF): This tiny Italian food company has been one of the outperformers in my portfolio, and since I started my portfolio with only a relatively small position in Armanino it might be a good idea to increase my exposure. The downside of this is that the company is not cheap at the moment and only yields 2.7%, which is on the low side for Armanino. I don't expect them to become cheap again soon, but this dividend yield might be a bit low.
  • Archer Daniels Midland (ADM): This food processor has had a so-so year in an industry which is impacted by the trade war. Weather conditions and adverse developments in the ethanol market have also contributed to the lackluster performance of the stock. But, this uncertainty has led to the situation that the stock is not expensive at the moment. The company is a dividend aristocrat yielding 3.35% at the moment, which certainly makes it worth considering.
  • 3M (MMM): The relatively cyclical nature of 3M and a couple of liability issues contributed to the fact that the company has been the worst performer in my portfolio in 2019. Also a dividend aristocrat, yielding 3.36%, it is worth a look.
  • Gilead Sciences (GILD): Ever since Gilead Sciences experienced 'peak HCV', the stock has been underperforming. Though they started paying a dividend which they have grown aggressively and bought back many shares, their stock price has suffered during the last couple of years. Their HIV business is successful, but not safe from competition. The company pays a sustainable 3.8% dividend, but the future remains uncertain.
  • Corning (GLW): Corning has many things going for them: good growth, a relatively cheap stock and a beautiful recent history of dividend increases. But their stock has underperformed this year, which means it could be a good moment to increase exposure to this company.

New investments

  • Henkel (OTCPK:HENKY): European consumer goods giant Henkel, about which I wrote an article a couple of months ago, has underperformed in the last year due to a disappointing guidance and a decrease in their earnings per share. Growth prospects are low but not too bad for this type of business. Their moat of the company is not to be underestimated. Also, their debt is very low and I expect them to increase their dividend with a modest percentage during the coming years. This is a classic low volatility stock which is still affordable.
  • AO Smith (AOS): The stock of this dividend aristocrat has been hit hard by the trade war between the US and China. 34% of its sales come from China, which is a significant percentage. This is certainly a risk, but with their stock trading about a third lower compared with their peak in January 2018, they look relatively cheap.

Where to invest €3,000?

As we are nearing new all-time highs again in most markets, I would like to be a bit on the safe side with regard to my investment. I will thus exclude Armanino (not cheap enough) and Gilead (probably the most risky option).

For the same reason, I would prefer to split the investment between a couple of different positions, so that even if one turns sour, I still have the other two. Among Archer Daniels Midland, 3M, Corning, Henkel and AO Smith I do not see a clear winner; I would say they all seem to be decent buys at the moment. But investing in 5 different stocks would mean that I only invest €600 per stock, and my trading costs will be relatively high. This is why I decided to increase my existing positions in Archer Daniels Midland, 3M and Corning with €1,000 each, and not open a new position in the Future-Proof Portfolio For Young Investors now. But for my new purchases of upcoming winter, AO Smith and Henkel are on the top of my watch list!

On Friday the 21th of September, the following purchases were made:

  • 26 shares of Archer Daniels Midland for a price of $41.10 per share
  • 7 shares of 3M for $167.30 per share
  • 38 shares of Corning for $27.80 per share

Together these three purchases add up to €2,992.92. With trading costs added the total costs are just below €3,000.

The future-proof portfolio for young investors now looks like this:

Name Ticker Shares Value Weight 2019 gain/loss (including dividend)
Consumer
Unilever UL 43 2.313,40 3,36% 15,18%
Disney DIS 22 2.640,65 3,84% 27,22%
Archer Daniels Midland ADM 83 3.080,55 4,48% 3,69%
Diageo DEO 69 2.516,08 3,66% 18,38%
Accell OTCPK:ACGPF 42 924,00 1,34% 19,43%
Armanino Foods of Distinction OTCPK:AMNF 488 1.629,65 2,37% 38,03%
Amsterdam Commodities OTC:ACNFF 92 1.828,96 2,66% 13,72%
Industrial
3M MMM 17 2.572,57 3,74% -4,59%
BASF OTCQX:BASFY 37 2.363,93 3,44% 7,82%
Union Pacific UNP 18 2.717,69 3,95% 26,64%
Kone OTCPK:KNYJF 44 2.266,00 3,29% 28,07%
Eaton ETN 44 3.336,79 4,85% 25,93%
Vestas Wind Systems OTCPK:VWDRY 35 2.585,50 3,76% 13,85%
Healthcare
Medtronic MDT 29 2.925,84 4,25% 28,99%
Roche OTCQX:RHHBY 10 2.610,23 3,79% 25,13%
Gilead Sciences GILD 15 904,10 1,31% 12,58%
Johnson & Johnson JNJ 17 2.030,94 2,95% 8,43%
Novo Nordisk NVO 43 2.064,48 3,00% 22,62%
Utilities
Consolidated Edison ED 31 2.599,32 3,78% 27,83%
National Grid NGG 109 1.050,41 1,53% 19,86%
Ørsted OTCPK:DNNGY 21 1.749,85 2,54% 45,49%
Technology
Corning GLW 110 2.771,01 4,03% -2,04%
TSMC TSM 54 2.149,75 3,12% 26,62%
Infosys INFY 134 1.380,15 2,01% 26,22%
Automatic Data Processing ADP 20 2.891,16 4,20% 28,29%
Tencent OTCPK:TCEHY 45 1.746,54 2,54% 13,34%
Telecom
Singtel OTCPK:SGAPY 994 2.077,06 3,02% 17,68%
REITs
Realty Income O 46 3.167,88 4,60% 28,23%
Ventas VTR 44 2.883,21 4,19% 32,41%
W.P. Carey WPC 19 1.554,17 2,26% 48,50%
Hannon Armstrong HASI 56 1.473,20 2,14% 63,95%
Total 68.805,06

I will keep you updated about the future performance of my model portfolio and new purchases which I will do again during next winter.

Disclosure: I am/we are long ALL STOCKS IN MY PORTFOLIO. 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.