- The next round of IMF buys are here.
- Highlights include my case for the energy sector, and a defense of New York Community Bancorp.
- I made these purchases two weeks ago, so significantly better prices are available on most of these names today.
- This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner. Get started today »
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.
For various reasons, I didn't end up making any purchases for the portfolio in January of 2020. As a result, I rolled that money over and combined it with February's capital. I'm also recycling cash from a couple of recent portfolio sales - most notably my sale of former top five holding Bancolombia (CIB) - giving the portfolio almost $4,000 to spend across the following 16 stocks. I made the following purchases for the portfolio on February 18th:
In dividend reinvestment funds, this month, I channeled them into Altria (MO). Do remember that I keep all dividend-funded stocks separate from stocks I've paid for with my own capital. In this way, I can track how much of the portfolio has been purchased via dividends rather than my earned capital over the years (currently, dividends have paid for 8% of the portfolio's overall holdings). Hormel Foods (HRL) is the portfolio's primary dividend holding, given that it has been cheap for nearly the entirety of the past three years, making it an easy decision on my part to buy more every month with the dividends that roll into the IMF.
However, with Hormel hitting new all-time highs last month, I decided to move away from buying more of it for the time being. The portfolio's dividend-funded positions are currently, leaving me to elect between them (or a new position) for my dividend reinvestment:
- State Street
- British American Tobacco
- Global Water Resources
- Campbell's Soup
Of these, Altria is the one with the worst stock price performance, as people remain concerned about the vaping/Juul issues. Like with alcohol, I'm skeptical that there's a big problem here as this is another vice, after all. People are going to use nicotine one way or another, and Altria will get its cut.
New York Community Bancorp (NYCB) offers a well-covered 6.3% dividend yield from its low-risk New York metro-area multi-family lending business. And the bank announced an excellent quarter a few weeks ago though the stock largely went sideways and is now trending down again with the market.
For years, the bank has been dogged by critics who complained about the bank's falling profit margins, lack of growth, and a stale business model. That's all changed for the better in recent months. For one, the government eased federal banking regulations, allowing NYCB to grow beyond the old $50 billion asset cap. This, for the first time since the financial crisis, will let New York Community Bancorp expand its balance sheet normally again.
On top of that, New York Community Bancorp has a sort of counter-cyclical loan book that didn't benefit from higher interest rates immediately. Now, however, while other banks are seeing their margins plummet with Fed rate cuts, NYCB's margins and EPS have just kicked into solidly positive territory.
Even after delivering a fantastic quarter, critics have moved on to complaining about the bank's exposure to New York City multi-family housing. Local government there changed rent control laws, and this has had a negative effect on prices.
No matter though, NYCB lends against less than 60% of the value of these properties so even a significant dip in housing prices won't cause the bank losses. NYCB was one of the safest banks in the country in 2008. It experienced minimal lending losses even then. It's time to take advantage of the market's inappropriate reaction to NYCB's excellent earnings.
I fully co-sign Seeking Alpha author Healthy Wealth Coach's recent NYCB article - and recommend it for further reading. They concluded, writing:
I don't know where else you will find an ultra-conservative 6%+ yielding stock with double-digit earnings growth and multiple catalysts to sustain that growth in this market. I don't know when this investment will work out, I just know that it will work out, and I know I'll be paid well while I wait for it to work out.
I agree fully, and frankly it frustrates me how badly this company and management team get treated by some investors and analysts. The bank's management has done so much right over the past 25 years and yet everyone wants to fault them for one deal that didn't work out four years ago. That "failed" deal in and of itself only came about because the bank was stuck up against an arbitrary and ill-conceived regulatory asset cap.
It's truly ridiculous the sort of criticism that the bank gets for how it handled that situation, and now people are ignoring the bank's progress. Earnings are up, loan growth is robust (and I'm a fan of the loan buyback to supercharge growth here), and the specialty finance business is taking off. And, unlike most banks, NYCB is positioned quite well for this rate environment, and is now enjoying a rising Net Interest Margin.
Yet the critics want to complain about rent control, even though it simply isn't going to cause the bank any meaningful loan losses. In fact, it's probably a long-term positive in that so many other more aggressive lenders are pulling out of the market, leaving better deals for the extremely conservative folks at NYCB. Berkshire (BRK.B) has done so well in insurance over the decades, you may recall, because they only write premiums when it is significantly profitable to do so. If rates get too competitive, they stop underwriting. Having a political-driven scare in the multi-family housing market should perform similar wonders for NYCB's loan underwriting profit margins.
I'm not sure what more NYCB can do to please the market at this point. Apparently, it seems that rising earnings, improving net interest margins in a generally dismal environment for regional banks, and solid loan growth aren't enough. Tough crowd. I'll get by with the 6.3% dividend in the meantime, however.
The next bank this month is Wells Fargo (WFC). Like with New York Community Bancorp, it's a highly-controversial bank. However, unlike NYCB, Wells has fully earned the criticism that it has received.
That said, as I've argued previously, its bad deeds are in the past, and with high-caliber new management in place, it's time to turn the page. Yes, the lingering effects of those scandals remain. However, given Wells Fargo's almost outlandishly-large share buyback, it hardly matters. If Wells gets its costs under control within, say, two years, and we get a normal efficiency rate in the high 50s, then we have $6+ of EPS and a $72 stock on a 12x PE ratio.
If they take quite a few years to iron out the excess costs, then they can keep sopping up massive quantities of stock at the unusually low valuation of present (particularly given the latest plunge in the market this past week). Then when efficiencies kick in, the increased net income will be spring-loaded onto a far smaller share count, resulting in explosive upside. The outcome will be favorable for Wells Fargo shareholders either way.
Wells has cost problems for now, but the reasons are understandable, and the new CEO is highly competent and capable of fixing them. This is a much better problem than having a revenue/business model issue - there's a clear road map to fixing cost issues. The market is pricing in far too much uncertainty and shares are significantly undervalued.
And finally in banks, we have Washington Trust (WASH), which is At Its Cheapest Since 2016. Washington Trust was an original top holding of the IMF portfolio back in 2016, but has slid back to barely being a top 40 position size now due to so much additional capital that has flowed into the portfolio over the years. That's a shame, as this is a top-notch bank, and I'm glad it's on sale again at a reasonable price.
As energy stock prices continue to drop, I keep getting more and more calls to discuss the sector. Alternative energy is having a moment, and naturally folks are concluding that if it is winning, something else must be losing. The price of Tesla (TSLA) and a few alternative energy stocks like Ballard Power (BLDP) have gone way up recently. That, in turn, has led the green energy folks to declare victory, while prominent pundits like Jim Cramer are declaring that fossil fuels are dead and that the sector is the "new tobacco".
That's all fine and well - you need extreme sentiment to get capitulation and compelling entry points. But what's actually changed with green energy lately? The models such as what you find from the International Energy Agency using the world's stated energy policies still have oil demand going up until 2030 and then plateauing for at least the next 10 years. And natural gas demand will continue to surge as well, as it's the cheapest and cleanest fossil fuel. Yet the market is starting to price these stocks as if they're the next mall REITs.
How do you get imminent apocalypse for energy companies if their main products will see rising demand for the next 10-20 years and then a leveling off after that?
I listened to a recent Bloomberg Odd Lots podcast to hear what the other side is saying. It had a green energy newsletter writer on who claimed that things are rapidly changing and that the internal combustion engine is on its last legs.
Listen closer, though, and he trumpets the thus-far 5% market share of EV adoption in China as the thing that will cement the end of the internal combustion engine. 5% market share in a command economy selling glorified electric golf carts is hardly a revolution, if you ask me. And even he had to admit that Chinese sales are losing steam now as subsidies have been reduced - meanwhile, he also confessed that the U.S. market has been a "disappointment" and that little is going on beyond Tesla as of yet.
Take note: That podcast episode was entitled "Why The Transition To Green Energy Is Happening A Lot Faster Than People Think" and yet I saw the actual evidence provided there as sparse.
The big story was - and remains - that the world needs a fantastic amount of energy and that a scant amount - well under 10% - comes from modern renewables now for electricity generation. Oil, of course, remains the predominant transportation fuel. But if electric vehicles simply burn coal and natural gas from grid power, what's the rush to switch?
Looking at electricity generation chart globally, wind is hardly on the chart and solar (purple) is too small to even fit its name on there:
Old-school hydro is still, by far, the biggest source of renewable energy for electricity generation. That's hardly what you'd expect listening to the green energy revolution boosters. Sure, solar and wind are slowly coming, but we're talking decades there. And the world still burns way too much coal - including, embarrassingly, in "green" countries like Germany. That coal use has to go way down before any rational economist/business leader would start turning off oil and gas. As the New York Times recently reported:
Germany announced [in January] that it would spend $44.5 billion to quit coal — but not for another 18 years, by 2038.
The move shows how expensive it is to stop burning the world’s dirtiest fossil fuel, despite a broad consensus that keeping coal in the ground is vital to averting a climate crisis, and how politically complicated it is [...]
Germany doesn’t have shale gas, as the United States does, which has led to the rapid decline of coal use in America, despite President Trump’s support for coal. Germany also faces intense opposition to nuclear power. After the Fukushima disaster in 2011, that opposition prompted the government to start shutting down the country’s nuclear plants, a transition that should be complete by 2022.
At the article hints, if you want to kick the coal habit, gas and nuclear are the only two large-scale alternatives at this point. Germany has already pushed off much of its renewables build to the late 2020s, the article reported. Economics still win out over empty rhetoric at the end of the day. Meanwhile, India and China continue to build more coal capacity. If we're still heavily relying on coal, it's silly to talk of the death of oil or gas in the near-term.
Simply put, it's nonsensical much of the current rhetoric we're hearing from the green energy folks. If you want modern developed life to continue as is, and for emerging markets not to be thrown into abject poverty, we'll need to continue using as much if not more oil and natural gas than we do now for 20+ years (probably more unless we get a turbocharged nuclear program).
And, because of all the misleading rhetoric, many oil and gas companies are now under-investing in the future. Investors are punishing any firms that continue to make long-term plans in oil and gas.
Companies like Exxon (XOM), with fantastic balance sheets, are getting slandered by talking heads left and right for having the gall to invest in new oil fields.
Think about it. How is a company going to have strong free cash flow at this point? Either have the lowest costs around (hello Canadian oil sands producers) or cut investment to the bone. Exxon isn't cutting dramatically because they've been in business a century. This isn't their first downturn and management knows to invest through the cycle.
I've lost track of how many articles I've read lately that claim Exxon is about to cut its dividend or is heading for massive trouble because it is overspending its cash flow. Well yeah, they're overspending. How else are they going to bring massive new fields in Guyana and elsewhere online, ensuring we have affordable energy over the next 10 or 20 years? Is Exxon only supposed to put new capital into energy projects when prices are sky-high and future returns are low? Exxon got to be the king of oil precisely because it kept its cool during previous oil panics.
Exxon is investing heavily now, when the sector has been left for dead, and my family will be reaping a large and quickly-growing dividend stream for decades as a result. This is a generational opportunity to lock in unusually large dividends from some of the world's most reliable, profitable and shareholder-friendly companies out there.
How am I playing it this month in particular? I'm obviously buying more Exxon. As always, when an industry is in the dumps, you obtain a great deal of safety in buying the largest company with a great balance sheet. That's Exxon, full stop. A couple years of lower cash flow is a speck in the company's history. By the time the critics give the all-clear, the opportunity to lock in a golden 6%+ yield will be long gone.
Canadian Natural (CNQ) and Suncor (SU) are two other extremely-safe picks. Thanks to their profoundly low cost of production, they make money at oil prices that makes even folks like Exxon - to say nothing of independent E&Ps - squirm. Canadian Natural and Suncor are dealing with a hostile pricing and regulatory environment in Canada at the moment and yet they're throwing off double-digit free cash flow yields, buying back stock, and offering big dividend increases.
It's astounding how attractive both of these stocks are right now. That said, perhaps they could get even cheaper. Currently, the media is picking on Exxon in particular, and U.S. oil in general. Also, the election is another risk factor. Thus the Canadian shares have outperformed by quite a bit recently (CNQ was still up until a couple days ago for example). With any improvement in sentiment, however, they'll move a lot higher:
I also added to the position in BP (BP) and started a new position in Royal Dutch Shell (RDS.B). I don't have too much to say about either of these in particular. Simply, the dividend yields (8%+) are astounding for this market, and will have a most salutary effect on the overall portfolio's blended dividend yield.
Yields are approaching - if not already surpassing - what was on offer 2016 when oil hit $27/barrel.
Rotating From Colombia To Chile
I recently laid out the case for taking profits on Bancolombia (CIB). That stock was (until two weeks ago) at 5-year highs despite a downward trending political situation in Colombia and persistent low oil prices. Economic growth in Colombia is fine, but not back to robust levels. And the currency sits on the verge of all-time lows. If Colombia couldn't hit escape velocity to the upside when the stars were aligned in 2018, it's easy to take profits at higher prices now while fundamentals are starting to slip.
That sale put a lot of cash back into the portfolio, I sold half the position booking a 36% gain, and it dropped from the #5 to #16 largest holding in the IMF portfolio as a result. What's a more proper use of that cash than rotating from LatAm's best-performing market to one of its worst dogs of late, Chile?
I'll let a chart of the two countries' leading banks, Bancolombia, and Banco de Chile (BCH), make my case:
Long-term, I'm bullish on both countries, and both banks represent top-tier franchises within their respective countries. By swapping one for the other, you're getting much more for your money. Put another way, a couple years ago, both banks yielded around 3.5%. Now Bancolombia is down to a less than 3% yield thanks to price appreciation while Banco de Chile is yielding more than 5%.
As for Chile, nothing of note has changed politically since my December article making the case for that country's ETF (ECH) though corona virus could hit the country's exports to Asia. Regardless, I'm adding to that position again. Chile (and LatAm in general) is trending lower again on demand fears related to China and the corona virus. That's a perfectly rational reaction, but the prices down here are too compelling to pass up.
Bring Me Some Beverages
Sticking with Chile, I added to the two listed beverage stocks out of that country again this month as well. Embotteladora Andina (AKO.B) for that country's Coca-Cola (KO) bottling operations along with Compañia Cervecerias Unidas (CCU) for its beer, wine, and soft drinks business.
These are some of the lowest-risk businesses within an economy, so they'll do fine regardless of how long it takes for sentiment to turn in Chile. And with CCU, there's some upside to the weaker Chilean currency with their robust wine export business. Revenues from countries like the U.S. are more valuable as the Peso devalues.
I also bought CCU's arch-rival, Brazilian brewer Ambev (ABEV). See my recent At 10-Year Lows, Ambev Is A Buy for the whole reasoning as to why. In any case, for the beer industry, CCU is #1 and Ambev #2 in Chile, while Ambev is #1 and CCU #2 in Argentina and a bunch of smaller South American countries. Buy both, and you get the vast majority of the revenue pie for the Southern Cone's beer business along with Ambev's dominant position in Brazil.
I also picked up more beer and spirits this month. Diageo (DEO) stock has dropped back sharply off its highs in large part due to corona virus concerns, and it's fallen way off the pace against peer Brown Forman (BF.A) (BF.B). While Brown-Forman was until recently too expensive to buy, Diageo is coming up on its lowest valuation in awhile. 20x earnings has historically been a fantastic buy point for Diageo since 2013 and unless you are really bearish on the world, it probably bounces strongly there again:
Finally, there's more Molson Coors (TAP) for the portfolio. The stock initially popped on the latest earnings report but has since dropped back to its seeming equilibrium price in the low $50s. Management has long frustrated me with its underwhelming performance, but at least the last quarter was a step in the right direction. I stand by my long-running take: either the people in charge fix things, or activists will shake it up. Stable beer companies (revenues are now growing again, after all) don't trade at 11x earnings for long.
If nothing else, Molson Coors' is finally differentiating itself against chief rival Anheuser-Busch (BUD). I know it's frustrating owning TAP stock lately, but things could be a lot worse...
This is an Ian's Insider Corner report published February 19th for our service's subscribers. If you enjoyed this, consider our service to enjoy access to similar initiation reports for all the new stocks that we buy. Membership also includes an active chat room, weekly updates, and my responses to your questions.
This article was written by
Ian Bezek is a former hedge fund analyst at Kerrisdale Capital. He has spent the decade living in Latin America, doing the boots-on-the ground research for investors interested in markets such as Mexico, Colombia, and Chile. He also specializes in high-quality compounders and growth stocks at reasonable prices in the US and other developed markets.
Ian leads the investing group Ian's Insider Corner. Features of the group include: the Weekend Digest which covers everything from new ideas to updates on current holdings and macro analysis, trade alerts, an active chat room, and direct access to Ian. Learn More.
Analyst’s 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.
Also long Brown-Forman, Bancolombia, and Berkshire shares.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.