IMF January And February Buys: The 11 Stocks Added To My Fund

Summary

• 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:

Data by YCharts

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:

Data by YCharts

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:

Data by YCharts

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.

Data by YCharts

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.

Everything Else

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.

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.

Comments

[eaglebear]

@Ian Bezek
I am loving the recovery of Wash. That tip led me to CTBI which is doing swell for me (div champion and regional bank) I recently found PB in a screen. Have you looked at them. At fair value and near dividend champ with 21 years of raises. % year average 11% div raise. If I may ask AMT looks good here with more growth ahead. Any thoughts on these two? Also bought heavily into TD and BNS in the recession. Both up very nicely for me. Canadian banks only large banks that interest me but the US regionals seem to have some real gems!.

[Ian Bezek]

@eaglebear I own CTBI in the IMF portfolio as well. No opinion on AMT. And I prefer U.S. banks to Canada for the moment as the interest rate/economic outlook is more favorable. There will be a time to rotate some back into Canada though.

[eaglebear]

@Ian Bezek
Have you taken a look at PB in the past?

[darnoc111]

@Ian Bezek I think you are making a mistake in thinking that inflation is not coming. As long as we see commodity prices increasing, especially oil, along with interest rates and wages, I do not see how we escape inflation. And once people begin to expect price rises inflation will feed upon itself since people will try to buy before prices rise more thus creating a dog chasing it's tail effect. I still remember how fast inflation took off after the oil price shocks in the 70's and how rapidly interest rates rose compared to how long it has taken interest rates to fall. When I go shopping I am seeing prices fluctuate and moving higher. Another thing that is pushing inflation is due to disruptions in manufacturing from covid. Listening to CPB's CC yesterday they said that they had added 20% more people to keep up with demand but even that did not help as much as they hoped. This was because of covid's effect of workers showing up. I am sure that they are not isolated and that all manufacturing has been affected which will have the effect of driving up costs and prices. Any bond like investment will be affected and adjust to expectations of increasing yields and prices, as bonds are. Maybe you can protect yourself with buying puts on stocks you buy, but that will probably cost more than you will make on the dividends. For now I am not selling the utilities that I hold, but if I see inflation getting out of control I will probably sell them and wait in cash. I also see things like Bitcoin as basically Ponzi scheme type investments since they have limited amounts of coins and when all are invested in them and some begin to sell the price could fall like a rock. Though with reddit investing they could hold Bitcoin up a little longer until those holding the bag realize that they were burning money. Best of luck, and I still think your analysis is still one of the better ones.

[Ian Bezek]

@darnoc111 Crude went back up to $75 in 2018 and did next to nothing for inflation. Even with Trump in office which was supposed to be inflationary, nothing happened. There's a huge supply of oil from frackers available with a few month lag whenever the price goes up now so it's hard to get sustained inflation from there.

Similarly, many of the commodities that have spiked such as lumber or copper are due to Covid shortages which will be transitory. There's no shortage of trees, for example, just need a little bit to reallocate labor to up supply.

Conditions are extremely different from the 70s now:

Baby bust instead of baby boom.
Increasing peace in the Middle East.
Far more automation/pressure on labor
Unions are essentially dead now (they used to help cause the wage/price spiral)
Near-record income inequality keeps money from going to middle and lower class.

This stuff could change, but for now, USA still seems to be heading destination Japan from a macroeconomic perspective. Japan has been printing and borrowing up a storm for 30 years now and their inflation rate reliably stays at 0%.

[darnoc111]

@Ian Bezek Trump used the strategic reserve of oil to push down oil price, and this so far has not happened. And Trump encouraged drillers to drill with his policies of cutting regulations, which we are now seeing being reversed. Also OPEC and US drillers have hopefully learned not to oversupply oil as we are seeing recently when OPEC met recently. Further with the push for higher minimum wages all wages will rise as they are adjusted to this higher amount. As for income inequality that will get worse as taxes rise and out of control federal spending devalues the dollar. Devaluing the dollar will make imports more expensive and force more robots to be used, like we are seeing in grocery stores with self checkouts. But this means higher skilled workers will be needed and higher wages than the minimum and higher costs pushed through to the consumer. I also think that commodities prices have been held down due to limited growth in markets around the world. That will change as our government throws money heavily into the economy and we see shortages grow especially in the green energy areas. And without a way to cheaply store electricity intermittent power will force the purchase of batteries for backup driving more demand for raw materials pushing up prices for all along the value chain. I have been reading that some think that the opposite of inflation could happen, deflation. But I doubt that for now since so much money is being borrowed and spent. We live in interesting times. For now I am seeing higher prices in grocery, housing, fuel, and as promised soon in taxes. Interest rates for 10 year treasuries bottomed last year at .5% and are now over 1.5% and growing. Higher interest rates are in themselves inflationary as was in the 70's. If it was only one thing forcing prices higher I could understand and agree that inflation will not happen. But you have higher commodities, energy, interest rates, wages, housing, and runaway federal spending devaluing the dollar. I do not think you can compare to several years ago to now because lower costs are embedded in current prices and as costs rise so will prices and inflation. Thanks for your thoughts, but I still think inflation is here and growing, only time will tell for sure.

[darnoc111]

@Ian Bezek Here is an article that I think is relevant -- "Companies are boosting wages to bring workers back in COVID-19 recovery"
finance.yahoo.com/...

[Token White Guy]

Been adding to LMT for a for months now in the $335-$338 range. I do think LMT will be north of $400 in the near future, so it's a good opportunity to accumulate in an otherwise frothy market.

[Alex Pitti]

I dont understand the growth potential of REYN

[Ian Bezek]

@Alex Pitti 14x earnings to start with 3-5% growth going forward. Nothing thrilling, but beats KO at say 25x earnings and no organic growth.

[Alex Pitti]

@Ian Bezek well yeah, but what about Nestle?

[Ian Bezek]

@Alex Pitti Nestle is at 22x earnings with -2% revenue growth if Seeking Alpha's numbers are correct (could be wrong, I haven't checked in their base currency).

[Greenhorn Investor]

Thanks @Ian Bezek

I'm also long LMT and RTX. I don't see the demand side of the equation diminishing so these companies will be there to provide the supply.

[Finding Your Retirement]

@Greenhorn Investor i actually see demand increasing. Trump might have funded the military but in general it wasn't really being used. they bought stuff and it sat there. Biden, however, proved that he's willing to use the military by bombing syria within his first 50 days in office. By the end of his four years I would be surprised if we had any missiles left in the air force.

Like I told people when Biden got elected. Biden voted for every single war in his entire 47 years of politics. You really think old dogs learn new tricks? long all war stocks.

[janedoeseeker]

@Finding Your Retirement I agree. I've been buying defense stocks ever since I thought there might be a chance he could be elected. It's not group thinking, for sure, but as you say, it's based on his history. I think we will also see military build-up vis-a-vis China, and I'm trying to plan how to shop for that.

[Greenhorn Investor]

@Finding Your Retirement @janedoeseeker
I do think there's a decent chance military activity increases. My 'demand side won't materially decrease' is my floor.

[woodland]

Very nice update on your portfolio and I can say I wish I would have started what you are doing 25 years earlier. Keep up the good work and thanks for the update.

[fhbecker]

Ian,
Hope you get a chuckle from this, when Fidelity asked me if I wanted to attend a
"Socially Responsible Investing Forum to hear leaders in the financial services industry, share their perspectives on socially responsible investing"

I replied;
Probably not the best event for me, as I think ESG really stands for Every Salesman's Gimmick or Every Salesman's Goal.

ESG appears to me to be a clever way to convince someone that something might do more for them than is possible. I.E. buy this and "help mankind or the planet" or that something is worth more than a realistic appraisal of its value.

There are those that consider Tesla to have a very high ESG score, but when you consider Tesla's governance, Mr. Musk's contempt for the SEC, or the electricity's fuel source (25-50% coal), one has to ask how is that possible? Ahhh the ESG rules!

Those rules do not consider the companies life cycle product impact and the system is quite game-able. Those that write the ESG rules carefully craft them. For example, over half of Asia's electric grid is powered by coal and they are building more coal power plants as fast as possible. They make most to the stuff we import, yet Amazon has declared that it will be "net zero carbon across Amazon by 2040." However most of the stuff on their web site in made in Asian factories mostly powered by coal.

So if something, mostly made using electricity generated by coal, is delivered by an electric vehicle, 20-25% powered by coal, they get a high ESG score? Ok....they will be buying the electricity from renewable sources, the net effect of that, is a shell game, as the to high carbon electricity just get sold to someone else.

[Ian Bezek]

@fhbecker Excellent post! I love your acronym for ESG. That's a great point on Asian manufacturing -- I hadn't thought of it that way before. And you're right, Tesla has to fail any reasonable standard of governance.

[horowitzcpa]

Well done Ian! I don’t think you’re giving yourself enough credit here. Here are four examples: CBOE, OVBC, FAF, TFSL. All up nicely over the past few months - all paying healthy dividends.

[Ian Bezek]

@horowitzcpa Thanks that's very kind. I think FAF should be up more. Slightly disappointed with it so far, to be honest. TFSL and CBOE looking great though.

[Panzerman]

Great update Ian!
Question for you. I hold WASH and am up 58%
I hold WFC and it's up 35%
My idea is to sell WASH and or WFC and move to FLIC? Would that be a prudent idea?

[Ian Bezek]

@Panzerman I still own all three. WASH is arguably the best of those as a long-term franchise. I still believe WFC will recover and get to $60 at some point... not as much upside from here as $22 a few months ago though. FLIC is the one I'm currently buying.

[Panzerman]

@Ian Bezek Thank you IAN :)

[garygm]

I had hoped for an update on Renn.

[Ian Bezek]

@garygm Given that it's outcome rests on a lawsuit and is a special situation, it's not appropriate for a buy and hold portfolio such as this one.

[gfmn2000]

Thanks for the update on your plan. You will get there.
I share your feelings about ESG investing. Some of their logic makes no sense. After all what is more ethical and socially responsible than avoiding war and protecting your people! Without a strong US defense there would only be more devastation across the globe. I have investments in GD, LMT, RTX, and recently started new positions in NOC and LHX. These companies are vital for us to maintain our freedoms including the rights of the ESG crowd to have their stupid ideas.

[RoseNose]

These updates are my favorites as you offer such a nice over view of the market and sectors in general. I agree with adding to LMT and have been doing so as well. REYN looks new to me and very interesting...thanks for the idea.
Long NYCB recently as well, and enjoying owning pipelines too! Happy with ENB.
Best to you always Ian
... and Happy Investing :)) Rose

[Ian Bezek]

@RoseNose Thanks for checking in and glad you liked the ideas.

[newfruit]

Been a while since I caught one of these... thanks for the update!

"'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."

I am with this logic. While I am happy to see people trying to drive business in a greener direction I believe the pandemic has distorted people's perception of reality.

[Ian Bezek]

@newfruit Spot on.

[Wm Hagerty]

Thank you, always a good one.

[Arimnestos]

For me, any investment in the defense sector would only occur in a "correction" scenario where I can get in to LMT or NOC dirt cheap. Good to see your still buying REYN and HRL as I only recently established positions in those names. Considering adding to REYN. I'm long WASH and just averaged up a bit so that covers my regional banking need for now.

[Ian Bezek]

@Arimnestos WASH is one of the absolute best in the regionals, can't argue with that pick at all.

[SimonBeauvais]

Glad to read a new IMF pf update. Thanks Ian!

[Signup22]

Appreciate the update, a lot to learn from your investing style

[Whiterabbit66]

I also added LMT recently. May add some more VPU on any pullback.

[NextGenInvest]

Thanks Ian! I always enjoy reading your articles.

[knoxmarlow]

Good stuff. Thanks for posting the trades and color.