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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 10-30 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 past month's purchases on September 30th. Given the huge recovery in value stocks and drop in growth names that occurred recently, I waited until the end of the month to see how things would shake out. As it is, I pruned nine old holdings from the portfolio in August and September, taking advantage of the recent recovery in many beaten-up stocks to get better prices. These stocks have now been removed from the portfolio:
- Global Net Lease (GNL)
- Infracap MLP Trust (AMZA)
- Piper Jaffray (PJC)
- BCB Bancorp (BCBP)
- Waddell & Reed (WDR)
- Tanger Factory Outlets (SKT)
- Urstadt Biddle (UBA)
- BT Group (BT)
- Brinker International (EAT)
There was a variety of reasons why I sold these positions. BT Group, for example, decided to delist its US ADRs and it wasn't entirely clear what would become of the pink sheet listing after awhile. Better safe than sorry in terms of getting stuck with an illiquid and potentially untradable position. I sold several REITs such as Global Net Lease (see my reasons here) and Tanger due to underwhelming fundamental performance which has increased the odds of future dividend cuts. Others were companies in declining industries like Waddell & Reed, or which face strong headwinds - such as Brinker's reliance on mall/shopping traffic to driving dine-in customers.
As such, I've split the monthly purchases articles into two portions. Today, we have my more conventional picks, and then in part two, I'll discuss the Argentina basket of stocks along with the more growth-focused picks.
As always, to start off, we have the dividends. For the dividends received in the month of August, I channeled those back into Altria (MO). Given how I culled the portfolio of quite a few high income stocks this month, it is nice to get some of that yield replaced via Altria and its greater than 8% dividend.
Long story short, I believe the scare around vaping is greatly overblown and largely due to people consuming unregulated THC cartridges rather than products from Juul and other licensed distributors. Once the panic ends, you'll end up with a much more regulated market that helps the entrenched leaders like Juul while stifling competition. Even if I'm wrong, however, it's not hard to make a case that MO stock is worth at least $40/share purely off its cigarette business and Anheuser-Busch (BUD) stake, even if you value Juul and Cronos (OTC:CRON) at zero.
The buys this month have a pretty sharp divide between high income stocks like Altria, and a basket of high growth stocks that pay no dividend at all. We'll get to the growth stocks tomorrow, but first, energy - another hated sector paying big dividends at the moment.
Q3 ended with a big sell-off in energy stocks as the risk premium around the recent events in Saudi Arabia faded quickly. September's rally in natural gas quickly gave way as well. As a result, funds dumped their energy holdings ahead of the end of the quarter, and perhaps to front-run upcoming tax loss selling as well. Fund flows can create a self-perpetuating momentum trade for awhile; when folks know other people are about to rush for the exits, they want to get out first. You can profit off that from shorting weak companies like Antero Resources (AR) ahead of forced selling. That can be a most profitable trade.
For long-term investors, however, don't overlook the opportunity to stock up on the high-quality energy names as many market participants feel compelled to sell. I'm working on a lengthy feature on ExxonMobil (XOM) and the future of the oil industry - I won't make those arguments here today. In brief, though, we simply aren't going to develop enough oil to meet future demand with prices down here.
Domestic U.S. shale in particular rapidly appears to be turning into a bust - cost estimates were way too low and we've drilled through much of the best rock already. With sky-high depletion rates, producing oil from shale is a treadmill, and the cost to keep maintaining shale production will surge in coming years. I don't see a huge shortage of oil anytime soon, but there should a definite uptrend toward $100/barrel over the next five years.
This, in turn, will have a healthy effect on a large chunk of the energy industry. Schlumberger (SLB), for example, retains a fantastic A+ credit rating and enviable worldwide scale in oil services. The stock pays a fat dividend of almost 6% (though they may cut this if prices remain low for longer). Despite continuing to make decent profits during this trough period, SLB stock has fallen far below 2016 levels when oil fell below $30/barrel:
In fact, SLB stock has now taken out the Financial Crisis lows and is back to where it traded in 2000 when gasoline cost a buck a gallon in much of the country. If Schlumberger had a perilous balance sheet, this might make sense. But for a company still making profits with a fantastic fiscal situation, this sort of pricing makes no sense. Schlumberger will go back to $100+ during the next oil boom. People buying today with the ability to hold the stock for the next decade should get exceptionally good results.
Oil services will fare well when energy picks up. As far as specific producers go, you should also focus on the oil sands companies. Unlike shale, these producers aren't running on a treadmill; once you get a sands operation going, it tends to produce at a steady rate for decades. The upfront CAPEX and regulatory hurdles to get one of these projects open is immense, but once it is running, you get decades of predictable low-risk cash flow. Enter Suncor (SU) and Canadian Natural (CNQ) which are both heavily involved in the Alberta oil sands.
Take Suncor for example:
Source: Suncor investor relations
Even at $55 oil, the company would bring in C$9 billion in cash flow versus C$5.2 billion needed for maintenance CAPEX and its dividend. At a modest $61 per barrel, the company can cover its CAPEX and dividend twice over. Throw in any sort of oil recovery and things get even more interesting.
Speaking of the dividend, Suncor has raised its by 65% since 2014, despite the plunge in oil prices. It has also bought back a large chunk of stock. Remember, all this is going on with oil prices in a slump. When oil heads back up toward $100, people will be clamoring to own oil sands stocks like Suncor and Canadian Natural. Better to load up now. And even with Suncor paying a modest dividend in comparison to its current cash flow, the dividend yield comes out to more than 4% at the moment. Oil sands companies make profits at prices that most other new sources - like shale - don't work at all. And when oil prices turn upward, these oil sands plays will mint money.
Turning overseas, for the first time in awhile, I added to my position in BP (BP). Years ago, BP and the other European oils traded at a big discount to the U.S. players like Exxon. That's subsequently changed as the European names rallied a bit while Exxon has traded down fractionally:
As such, in previous months, I've loaded up on Exxon while foregoing the European oil names. That said, the foreign oil giants are now hitting their lowest levels since 2017, so I'm starting to get interested again. With BP in particular, they hiked their dividend last year, showing that the Deepwater Horizon hangover has ended and that the company has entered a more prosperous era.
Banks And Other Value Names
Aside from energy, financials continue to be my favorite hunting ground for companies paying solid dividends. In a market so starved for yield, for example, I find it remarkable that Wells Fargo (WFC) is paying a 4% dividend with likely double-digit annual hikes going forward. It's rare that the market offers up such as compelling opportunity in a well-known low risk situation as this.
I also keep adding to my positions in Goldman Sachs (GS) and TFS Financial (TFSL). As long as the former trades at tangible book value, I remain a buyer. And the latter is the cheapest regional bank stock I'm aware of in America; the 6% dividend yield is certainly a perk as well. TFSL stock is the largest holding in the IMF portfolio by a substantial margin, and there's no sign of that changing as long as it remains available for purchase here at $18 or better.
Price still does matter with banks. Take New York Community Bancorp (NYCB) for example. It's one of the largest holdings in the IMF as well, and I've pounded that table for it here in the past. But with shares up nearly 50% since the 2018 lows, there's no reason to keep adding to the position. A stock like NYCB serves primarily for dividend income, and logically you're getting less for your money buying at $13 now than in the past. I'm willing to buy more, but the price has to be right.
If you want more exposure to the NYC metro area, though, there are other options. First of Long Island (FLIC) has become my go-to option for the area's banks now, and has become a top 20 holding in the IMF in its own right. First of Long Island got dragged into the same rent control scare that weighed on NYCB stock, however, shares haven't bounced back to the same extent, at least not yet:
FLIC has historically been a fantastic performer, and since it wasn't subject to asset caps like NYCB, has compounded book value at a great clip in recent years. Throw in a 3% dividend yield, and First of Long Island is a fantastic growth and income play in one of the country's best markets.
Switching coasts, we also have PacWest Bancorp (PACW). The bank has long carved out a niche with lending to smaller businesses along with specialty products aimed at financing things such as venture capital. The combination of recession fears and the implosion of tech unicorn stocks has left investors fleeing PACW stock, despite its ongoing excellent operational results. I'm not sure I'll hold this one forever, but I like the odds of it catching back up to the market as short-term fears fade - in the meantime, enjoy the 6.8% dividend.
Before we move on, I should note FedEx (FDX). I discussed this one in a recent Weekend Digest, concluding that the stock looks deeply discounted assuming they finally get their European operations fixed and start generating more cash flow again. I don't know whether they will be able to fix things or not. But fair value appears to be $240+ in a scenario where FedEx is facing short-term problems rather than persistent structural declines. And at least some of the things weighing on FDX stock now - like the trade war - should resolve within a few quarters. I could definitely be wrong on this one, but the odds favor the bulls at this price.
Stay tuned. Tomorrow I'll be back with Part 2 of September's purchases, and later this week, I'll have the Q3 2019 portfolio performance review and analysis.
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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.