IMF March Buys: The 12 Stocks Added To My Fund
- 11 buys and 1 dividend reinvestment for March.
- Thanks to a major market rotation, tech stocks are finally worth buying again.
- To that end, we have three new tech picks this month, along with a new position in a winery IPO.
- Looking for a helping hand in the market? Members of Ian's Insider Corner get exclusive ideas and guidance to navigate any climate. 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 this month's purchases on March 25. There was a lot of volatility this past month, but the market overall never corrected. As such, there wasn't any particularly compelling moment to go on a shopping spree, however I did take advantage of the drop in tech stocks. Here's what I bought in March:
For the dividend reinvestment this month, that all went into Reynolds (REYN). I'd been splitting it between Reynolds and Hormel (HRL) recently, but Hormel has bounced off its lows, so Reynolds gets the nod thanks to relative valuation. While the market is sleeping on the name, I reiterate my call for REYN stock to hit $40 this year.
Old Favorites Make A Return
We have additions this month to a few "classic" IMF stocks that had been off the buy-list for a while.
For one, I added shares of Centro Norte Airports (OMAB) for the first time since the height of the pandemic last summer. OMAB stock has fallen back from $61 (where it had recovered all its Covid-19 losses) to $50 in recent days with the slowdown in European vaccinations.
Does that matter to the bull case for OMAB stock? No, not really. But when the stock had doubled in a matter of months, any sort of excuse could justify a round of profit-taking.
Long story short, the reopening and travel stocks ran up a long way really quickly. A swift correction like this is nothing to fret. As it is, it's looking like OMAB will be back to mostly normal operations over the next year and the dividend will be reinstated:
OMAB's dividend is back, now set around 3.7%/year on the current share price.
This should be a $65-$70 stock when things are "normal" and the current $50 is a healthy discount to that figure.
Subsequent to my March purchase, rumors surfaced that someone would be acquiring OMAB for $54/share. However, the company said it didn't have knowledge of that information. Instead, it appears the rumor confused a potential tender offer for a takeover bid. Additionally, from my reading of OMAB's 20-F, it appears that the company can't be taken over as it has to hold 51% ownership of its properties as part of its concession agreement with the Mexican government.
Changing gears, we also have First American Financial (FAF) in the buy-list again. In all honestly, I was going to keep adding to its smaller title insurance peer Investors Title (ITIC) but there was an $8 bid/ask spread on ITIC stock when I was putting in the orders and I didn't feel like paying that much slippage. So I bought First American instead. Both companies are riding the same housing trends and I'm bullish on each. The only hitch with FAF is the government investigation around its data breach from a while ago, but I don't expect that to be a major issue long-term.
Additionally, Brown-Forman (BF.A) is back as well. I've held the line at $65 being the top price I'm willing to pay for BF stock for a while now. It's been pretty rare to get the opportunity to buy more. Recently, though, shares have settled at $64.
Between tariff troubles and the drop in on-premise consumption (Jack Daniel's has a large share of consumption at bars versus at home), BF stock has come back in. It's still going to screen expensive to most people. But BF stock generally sells at one of the following: "expensive," "very expensive," or "priced for perfection." If you want to own it, you have to pay up.
At the moment, the premium is less than usual - in fact shares are slightly below pre-pandemic levels:
Turning to another blue chip, health care has been underperforming. In fact, of the (very few) S&P 500 stocks that are flat or down over the past year, nearly all the worst offenders are in pharma or biotech.
This brings us to Johnson & Johnson (JNJ). The stock hasn't done that poorly, but it's not up much either. That's even despite a seemingly successful Covid-19 vaccine and a quick recovery in its medical devices business.
The stock is going for 17x current and 15x forward earnings. Not bad for a Dividend Aristocrat with an impeccable balance sheet and arguably the most diversified business within the health care industry. JNJ stock will never make you rich overnight, but your odds of losing money owning it are also minimal. It's a great one for the "steady blue chips that are way better than cash" pile.
Continuing Recent Buys
After revisiting those old favorites, we return to stocks I've been actively buying recently and continue to find attractive.
Consolidated Edison (ED) falls in a similar style bucket to J&J. One of the most dependable utility stocks, ED is another Dividend Aristocrat that is a solid value now, albeit without a whole lot of growth. But in a world with persistently low interest rates, greater than 4% starting yields with small annual increases are appealing.
Lockheed Martin (LMT) has started to rally. It's not quite as compelling as last month. But it's still cheap down here- I believe the stock should be quoted with a price at a minimum in the $400s. It's one of the best defense companies out there and the space and satellites angle gives you a nice bullish touch that you won't get at most of LMT's peers.
Yes, you can find even cheaper defense stocks than Lockheed Martin. But when you can pay 13x earnings for the blue chip with high single digits growth and an unimpeachable moat, is it worth straying to riskier waters? This one seems like one of the most obvious solid upside, minimal downside investments out there today.
I also continue to add to First of Long Island (FLIC). The regional banks, as a sector, have doubled since last fall. Some have run even more. My portfolio's position in Altabank (ALTA) fka People's Utah is up a cool 154% since the entry point last spring. That's not a misprint; 154% in under a year on a bank stock.
Against that performance - or even the more sedate regional banking ETF - FLIC stock has been a laggard:
There's no good reason for such drastic underperformance. (And yes, it says something about how hot banks are now that being up 40% in a year is a disappointment).
FLIC is a great franchise. It's one which remained profitable in the 2008 financial crisis and then saw the stock go up 4x in the ensuing decade afterward. In other words, it's conservative enough to roll through lean years without difficulty, but it still grows assets and earnings at a near double-digit CAGR regardless.
First of Long Island has slumped on the death of New York theme and concerns around multi-family housing in particular. I've discussed both these in the past in the context of New York Community Bancorp (NYCB). Funny thing is this is trading similarly to NYCB even though FLIC is a way faster growth machine.
As such, FLIC's valuation remains depressed:
I believe First of Long Island is worth at least 1.5x book, as you'd normally pay for a bank with a track record of double-digit growth and good returns on equity "ROE". That gets you at least 30% upside from here, and potentially more depending on how quickly book value rises with the economy recovering. And the stock could certainly head back toward 2x book if interest rate movements remain favorable, which would result in the stock heading to $34/share from the current $20 level.
In the meantime, there's a 3.8% dividend yield, and the stock sells for just 11x earnings.
In August 2020, there were dozens of great banks trading at that valuation level. Now, there's very few - First of Long Island is arguably the last of the cheap reasonably-sized regional banks. I continue buying.
New Portfolio Positions
We have four new positions for the IMF this month. First up is The Duckhorn Portfolio (NAPA), which IPOed in March. I recently did a full write-up in Ian's Insider Corner. The quick summary is that this is by far the best publicly-traded North American wine company out there in terms of business quality. The EBITDA margins blow everyone else out of the water.
NAPA stock doesn't look cheap (though thankfully it did pull back a little since the initial IPO pop) but don't underestimate the growth here. The company has grown revenues several-fold over the past decade without denting their profit margins at all. Give this thing's scale and access to cheap capital and it could build quite a luxury wine empire over the next decade. There's a good chance this thing gets cheaper once the IPO buzz is gone so don't go crazy buying here just yet. However, I'm happy to take a starter position here and average in if it drifts lower.
Saving the most intriguing for last, we have the new tech positions. I've got a full write-up on C3.ai (AI) that I'll publish at some point, so I won't spoil that one here yet.
Let's get to the other two, Unity Software (U) and Berkeley Lights (BLI), now.
Unity is a major video game engine. That is to say, game developers can design their games and applications within Unity's universe, and then pay licensing fees if/when their games hit certain revenue thresholds. Unity is made to run for almost anything - you can design games and apps for mobile, PC, virtual reality, consoles, and more. Unity also has a cool ad-serving system to display promotional content in mobile games and gets a cut of the revenues from that. Advertising is actually one of Unity's largest lines of business.
Unity's core features are in a way closer to Adobe (ADBE) or Autodesk (ADSK) than a game developer in that it's a place to work with 3D content and then give it code around lighting, physics, character interactions and more that is then put into an actual game or other application.
To that end, the company has more recently started to sell Unity into other markets such as automotive design. In due time, there's a good chance some version of Unity will be used for all sorts of demanding graphical applications across numerous industries.
A screenshot from Valheim. | Iron Gate Studios.
Valheim is the most popular new PC game of 2021 and one of the fastest ever to hit 5 million copies sold on Steam. Valheim was built on Unity, and impressively runs more than half a dozen different open-world environments (oceans, mountains, tundra, etc.) in a massive procedurally-generated world while using just 1GB of disk space.
Another credit to Unity - Valheim has a development team of only five people. Unity is such a complete engine that it makes it possible for tiny game studios to compete with EA (EA), Activision (ATVI), etc., and release industry-leading games on a shoestring budget.
My theory is that Unity draws less investor interest than either Nintendo (OTCPK:NTDOY) or Roblox (RBLX) since it falls outside of the right investment manager demographics. Nintendo appeals to middle-aged investors that have nostalgia for an earlier era of video games. Nintendo has some of the best intellectual property of any gaming company and thus it hits those buttons perfectly. Unfortunately Nintendo has a poor management team that makes frequent strategic blunders and also seemingly doesn't care too much about its outside shareholders.
Meanwhile, that generation's children are now enjoying Roblox. That's great - kids will always need toys. However, I'm skeptical of the long-term growth potential for a niche experience like that. Is it really a $40bn market cap business?
Roblox probably can't really compete with adult-targeted content to a mass market. Its user base skews very young, and I'm skeptical (though could be wrong obviously) that churn will be high as folks age out of the demographic.
With Unity, by contrast, you have a game engine that goes into a ton of products aimed at a much broader base of users. That said, the people probably playing the most Unity games - 18-to-35 year-olds - are not the investors with the most assets under management. I doubt that many prominent hedge fund managers know that Valheim, for example, exists yet, even though it's all the rage in my demographic.
When you have a great game engine that can easily be purposed for building top-notch stuff that runs well anywhere from virtual reality to mobile, you're going to have a huge developer community grow up around it. Design the OS for games and you've got a huge revenue stream. You get ancillary revenues as well, from things such as the assets store, where developers can buy models of objects to put into their games and applications.
Unity has already taken the lion's share of the market in mobile gaming; it estimates that 71% of the top grossing mobile games in Q4 '20 used Unity (and then it gets to sell a bunch of ads on those).
Unity also has more than 60% market share across all platforms in augmented reality and virtual reality. Getting large chunks of the market in newly-emerging consumer product categories tends to be a recipe for huge successes.
Additionally, Unity has recently started to branch out into media and industrial applications. Think things such as automotive design, online real estate and architecture businesses, and film production. Needless to say, this expands Unity's market dramatically as it moves beyond just video games. The company also envisions becoming the operating system for retailers as they build full 3D scale models and digital showrooms of products rather than just using boring static 2D images.
Unity stock is still expensive on any traditional valuation metric, even after dropping nearly 50%. However, I'm not greedy. This is one of the most fascinating and promising tech companies out there, and if you don't start nibbling at a 50% decline, then when would you?
Rounding out the fallen pure growth stocks, we have Berkeley Lights (BLI), which is down nearly 60% in three months.
The company has built various systems to allow biologists to run tests on cells in a matter of hours for things that used to take weeks. For example, its main platform was successfully used to isolate Covid-19 antibodies in one day and deliver a working test candidate in 18 days. Those Berkeley-identified antibodies ended up going into an AstraZeneca (AZN) therapeutic that is now in Phase III trials as a therapeutic for Covid.
That successful demonstration understandably built up considerable interest in the platform. Not only is Berkeley Lights' platform orders of magnitude faster than traditional cellular assays, it also requires far less lab space, easing a major pain point for universities and non-profits.
Berkeley Lights sells a very high-priced niche set of products. Revenues are still small and not growing especially quickly (think 30% range annually). However, you don't often get the chance to buy into the next generation of biotech equipment - and particularly not at a 60% decline from recent prices.
I'm biased here since my wife is a graduate degree-holding biologist but this is a company I've wanted to own since I heard it was coming public. And now, it's at a 60% off sale. Will it go to 70% or 80% down? Sure, it's possible. It was really expensive a few months ago. However, there's good reason to think that Berkeley Lights will be an order of magnitude larger enterprise in five to ten years, however, and I'm willing to overpay now even if the valuation isn't there yet.
This IMF portfolio has very few "moonshot" stocks in it since tech has been frothy for years now. I'm willing to take a few shots - even at high valuations - in a 50% correction. Not all of them will hit, I'm sure, but get even one of these right, and it pays for all of them in spades.
For readers that complain that I own too many banks and consumer staples stocks, that's because it's been what the market has been offering at good prices in recent years. Now, however, bank stocks have soared so I'll buy fewer of those. And if tech continues to decline, I'll get more capital allocated there in the coming months. Sector rotations offer a great opportunity to diversify your portfolio at good prices, rather than just buying a mix of all sectors at once regardless of valuation.
This is an Ian's Insider Corner report published March 25th 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 worked for Kerrisdale, a New York activist hedge fund, for three years, before moving to Latin America to pursue entrepreneurial opportunities there. His Ian's Insider Corner service provides live chat, model portfolios, full access and updates to his "IMF" portfolio, along with a weekly newsletter which expands on these topics.
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.
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