- 9 buys for January/February, plus 2 dividend reinvestments.
- New positions for the IMF in Lockheed Martin and Alsea.
- How going against the ESG investing crowd will lead to favorable results in the 2020s.
- These are the first buys with the portfolio now being held at Interactive Brokers.
- This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner. Learn More »
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 10-20 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, which 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 the IMF buys for January and February. The portfolio's old brokerage custodian, Folio, shut down its operations in January. Perhaps that was just in time given the total chaos that was about to kick off over at rival Robinhood. Anyways, the portfolio was transferred over to Interactive Brokers (IBKR) in mid-January.
Interactive has been my primary brokerage since 2012 if I recall correctly. However, I had no idea that they supported fractional share trading, and it took me a while to set up (it doesn't seem to work in their dedicated web trader, for example). Anyways, I got it figured out, but not in time to hit the January buying window.
So, for February, I combined January's $1,000 of my capital and received dividends from December along with the normal $1,000 + dividends for this month. Here are the buys:
Source: Interactive Brokers / my screenshot
I divided the $2,000 equally across the positions, with one exception. This resulted in $200 ($199 plus the $1 commission) going into each stock. As you can see, for Alsea (ALSEA-Mexi) (OTCPK:ALSSF), the Mexican security, Interactive Brokers charges a 60 Mexican Peso ($3) commission, so I bought a double position to justify the higher fee.
As always, I keep dividend-funded stocks in a separate bucket from those purchased with my initial earned capital. In this way, I can track what portion of the portfolio has come from reinvested dividends rather than my own purchasing power. At current rates, the portfolio should be more than 10% composed of dividend-funded stocks by the end of this year. The compounding snowball is picking up steam.
For the month, those dividend purchases were Hormel Foods (HRL) as it's the highest-quality minimal risk blue chip selling at a good price that I'm aware of. And the other half of the dividend money went into Reynolds (REYN) as it's outright cheap, just put out solid earnings, and still refuses to go up. I'm convinced this stock trades at a 4-handle this year, and it's still on sale for under $30 now? Sign me up.
New Positions: Alsea and Lockheed Martin
I've already talked up the defense contractors lately. They're like the tobacco companies in that they're similarly hated by just about everyone. No ESG fund is going to touch them, and a lot of folks feel icky about the subject in general. However, unlike, say, Philip Morris (PM), there's little chance of regulators doing anything to the defense names. There is bipartisan support for the military-industrial complex. And because they provide jobs in all 50 states, they're hard to touch from an employment front as well.
Why Lockheed-Martin (LMT) specifically? Here are a few quick facts. It finished 2020 with record revenues, EPS that grew more than 20%, and it managed to keep nearly all its factories open despite the pandemic. How's the stock price looking in a raging bull market? Not exactly new all-time highs:
I know all the risks around Biden taking over from Trump and these stocks being absolutely toxic in our new ESG-dominated world.
On the other hand, earnings are up from $12 to $24 per share since 2016, and analysts see that jumping to $28 for fiscal year 2022. How low can the P/E ratio truly go into a company growing EPS at a 10%+ annual rate? Plus, you also get a greater than 3% starting dividend yield with solid growth. Lockheed-Martin is an easy choice here.
Switching gears, I offered the full story on Mexico's Domino's and Starbucks operator Alsea earlier this week. I see shares returning to the 40 MXN price range this year as it catches up to other Covid-19 restaurant recovery plays. A 40 MXN price would only put it on par with where the likes of Applebee's (DIN), Chili's (EAT), and Red Robin (RRGB) already are today.
And, of course, you'd probably rather own Domino's and Starbucks in a fast-growing emerging market than those staid American brands in a shrinking market for those sorts of concepts. Longer-term, I see Alsea returning to its 2018 highs, which is nearly a triple from here.
Now that the portfolio is held at Interactive Brokers, it can purchase international stocks on their home exchanges.
For the sake of the IMF, I purchased the stock in Mexico, as the bid/ask spread was .05 MXN Pesos when I made the buy. That's a small fraction of a U.S. penny spread whereas the U.S. pink sheets-listed version of Alsea is quite illiquid. The only downside is paying a slightly higher commission ($3 versus $1 in the U.S.) but I'm happy to have the far superior liquidity from owning the stock in its home market. Also, there should be no issues with random fees, potentially missed dividend payments, changing/disappearing listings or the other sorts of stuff that can happen with long-term ownership of unsponsored pink sheet listings.
That said, if you want to ALSSF, that should be fine; I just prefer owning the far more popular ticker of the two. For the portfolio, I bought 331 ALSEA shares at 24.38 MXN. That, plus the commission, is 8,130 Mexican Pesos. That was $400 right on the nose at the then-prevailing 20.3 exchange rate.
More ESG-Hated Stocks
I'm convinced one of the bigger trends of the 2020s will be fading the environmental, social, and governance "ESG" investing crowd. ESG ETFs are bringing in more and more money, particularly from younger investors, to try to promote the idea of "ethical investing" and making an impact with your money.
I've long held that trying to influence companies with your investment dollars is a silly idea. If you want to make a difference, make good investments and then fund projects and charities that make a direct impact with your profits. But that's a rant for another day.
In any case, as long as an increasingly large portion of the market can't buy tobacco, defense, energy, etc., those stocks will be undervalued. In one way, this is bad for the investments. In our increasingly passive-money driven world, stocks only go up if they are in the right ETFs. A Lockheed-Martin, for example, is not going to be in too many of the right ETFs.
That said, when you buy a stock at 12x earnings, it grows earnings a lot every year, and it pays you a well above-average dividend, you don't really need the stock price to go up immediately. The passage of time makes you a lot of money. The dividend covers your initial waiting period, and as the company earns more and more cash, it can start buying back gobs of stock at an attractive valuation.
The tobacco companies were already using their outsized earnings to throw off massive dividends and capital returns for the past 20 years. We know the model works. Now, I think we'll increasingly see other hated sectors like energy and defense turn into new tobacco companies. I'm fine holding a company at 12x earnings that stays at 12x earnings for years to come as long as it pays a good and rising dividend and eventually buys back stock or does something useful with the mountains of cash it is building up.
Don't mistake any of these stocks for likely sources of large near-term capital gains. As long as the ETFs underweight these stocks and investors just want to buy ETFs, there's no reason for these stocks to skyrocket. At some point ETFs will hit a crisis - or ESG in particular - and out-of-favor shares will suddenly explode to the upside. For now though, I'm just happy to buy quality at dirt cheap prices (compared to the S&P 500 in any case).
So, in addition to LMT stock as discussed above, we have another defense contractor. The IMF has a small long-standing position in Raytheon (RTX) from before the merger/spin-offs. I haven't added to it in ages, as I wanted to see how earnings started to come in post-spin before making any moves. However, it appears the new Raytheon is looking successful, and I like the value proposition here. Analysts see RTX stock at 14x forward earnings and just 11x the next year's earnings as cost savings are hammered out and conditions normalize post-pandemic. In this market, 11x earnings for an industrial with high-single digits top-line growth is a steal.
Switching to another ESG-hated stock, we have TC Energy (TRP), one of Canada's large pipelines. Unlike the U.S. pipelines, the Canadian operators never over-levered, and thus have remained stable even in the midst of unprecedented volatility both politically and in the energy markets. This is how I like my high-yielding blue chips, nice and steady:
Over the past decade, the stock has only traded in a range of $30 to $56, which is pretty amazing given all the wild stuff that's happened. You may say, but Ian, the price hasn't gone up. Sure, but natural gas also crashed from $10 to $3 and oil from $100 to as low as negative $40 during that same period. Most small oil companies went bust and even major integrated firms are down as much as 50%. A pipelines company that rides through that with a slightly up stock price and a 5.5% dividend that's as healthy as ever is a gem indeed.
And now, with political heat rising, it's worth asking if anyone is ever going to build another pipeline in North America again.
That sounds hyperbolic, but think about it. The current media consensus is that oil and gas are on the way out and that everything will be electric with magic batteries any day now. The stock market seems to agree; you could start a random electric vehicle SPAC and it might have a larger market cap than Exxon (XOM) within a year the way things have been going lately.
No one is going to want to invest any capital in current energy infrastructure. If anything snags should come up with green technologies and we happen to actually need more oil and gas transportation, the pipeline owners have a scarce resource in high demand. I'm a firm believer that there will be at least one more massive oil and gas bull market before humanity stops using those resources. Being the owner of one of the continent's best-run midstream networks isn't a bad place to be.
Two Financial Stocks
Last year, these IMF write-ups always had a ton of bank stock picks. I know, sometimes it was a slog to read about four different regional banks you've never heard of before. Fortunately (or unfortunately depending on your reading preferences) this is no longer a problem. The regional banking sector shot up 60% from November 2020-onward, making most of last year's banking picks much too expensive to bother buying more of in 2021.
However, there are still a few laggards here and there. For today, let's talk about First of Long Island (FLIC). It's one of the several low-risk New York City regional banks that I love. Unlike its more (in?) famous neighbor New York Community Bancorp (NYCB), FLIC's stock hasn't really done anything yet:
Since the pre-pandemic peak, the sector ETF is up 21%, NYCB has advanced 7%, yet FLIC is still down double digits. I suspect this is due to ETF flows as much as anything, NYCB is part of some meaningful ETFs, whereas FLIC is too small to appear in many of the significant indexes.
That said, FLIC has the same low-risk culture as NYCB (albeit with a more diversified business model). Unlike NYCB, FLIC has actually grown dramatically in recent years, and the stock was up fourfold at one point out of the Financial Crisis before the recent swoon. At 11x earnings and a greater than 4% dividend yield for a bank with virtually no credit risk, FLIC is an easy one to throw in your bucket to profit off the horribly misguided "Death of New York" narrative.
On a much different note, we have Investors Title (ITIC), the small North Carolina title insurer. This thing flew up from $100 to $190 at one point last year, but is now back to a more reasonable level.
The housing market is still booming, and title insurers have a golden opportunity to make windfall profits. Many housing stocks have already soared way beyond their pre-pandemic levels yet this one is still flat.
I also added to the stake in Roper (ROP). I know there's been some concern about this position as a major rival announced a significant change to its business model. However, I'm not too worried about it for reasons I explained recently.
Finally, I keep adding to the two recently-established utilities positions: Consolidated Edison (ED) and Northwest Natural (NWN). I have nothing specific to say on either this month, as I've discussed both at length recently.
I'll just reiterate that you want to buy yield when other people are selling their yield stocks. From 2016 to 2019, everyone was always asking me what yield stocks to buy as yield stocks only went up. It was tough to recommend anything because valuations kept getting crazier. Now that the yield stocks are way underperforming, everyone is asking me how to protect against inflation. However, you make money going the opposite direction of the market.
In other words, I'm happy to grab utility stocks down 30% because of a small move in treasury bonds. This is a wild overreaction to a small blip in terms of macroeconomic developments.
Are the utility stocks outright cheap here? No, not really. But they're at a fair price for arguably the first time since 2010. If you ever wanted to own them, now is the time. The price may get better, but it may not either. If interest rates start going back down again, you know these things will be back to all-time highs in the blink of an eye.
This is an Ian's Insider Corner report published in February 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.
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