Sluice Box: My 2018 Strategy

In a recent conversation with a friend of mine, the topic of cryptocurrency arose as he has started accepting Bitcoin in his business.  Though more enamored over the possibilities of wealth through hoarding and/or trading, he began to look under the hood to figure out why I had a greater fondness for Blockchain over any cryptocurrency.  His insight surprised me: “You’re like the sluice box salesman in the California Gold Rush.”

I choose to think of myself as a shortstop hitting singles rather than a home run hitter going for the fence, but his analogy was apt.  I prefer to get a slice of many transactions as opposed to getting the big one.  I play the percentages.   He was able to visualize I place a greater value on the tools (mining), transport (exchanges) and utility (ancillary applications) rather than the commodity itself.  Meaning, I’d rather sell the Levi’s than look for (and mine) the gold vein.

It appears the revisions to the tax plan being discussed will be slightly less draconian than previously announced resulting in a little lead time for portfolio adjustments.  My guess (pure speculation) is the first half of 2018 will be relatively good but a little choppy.  The last half I suspect we’ll be seeing a weaker dollar, a little uptick in inflation and minimal tangible results from the administration’s policies.  Anyway, an emphasis on appreciation over dividends in a rising tax environment may result in tax deferral possibilities.  This belief is the basis for next years’ strategy as subsequently outlined.

  1. Continuation of the primary portfolio strategy in regards to moving closer to the defined target allocations.  One example of this was my first December purchase, KMB which is an Anchor holding of mine.
  2. With the tax bill still in an uncertain status, load the maximum allowable contribution to the IRA.  These funds have been allocated and will be moved by month end.  A small Canadian holding in my taxable account has been identified as my new IRA purchase which will probably be made in January (pre ex-div).  A by-product of this will be a temporary overweight status in this issue.  Since I don’t like redundant holdings across accounts, my smaller taxable holding will be sold post ex-div.  This should shield more income from taxation (under current tax).
  3. Implemented (December 14th) my side strategy for 2018 titled Sluice Box which is a reference to the Gold Rush days.  This represents about 1% of the portfolio and was created (and bought) in my Motif account (shameless plug).  The emphasis is on Bitcoin, Blockchain, Growth and my first Swiss stocks with a couple of beaten down issues thrown in.

My 2018 strategy research began in earnest when I encountered Fortune magazines’ November 1st article, In Search Of ‘Vital’ Companies.  Of the fifty companies listed, my selection process drilled into the dividend payers – albeit at low yields.  Then on November 7th, Investor Place published The 10 Best Growth Stocks You Can Buy Now I chose to ignore The Dividend Guy’s August 23rd launch of Dividend Growth Rocks as I tend to shy away from paid sites particularly when operated by one person with multiple pseudonyms.  Besides, only one of his selections (Nordson – NDSN) was either not owned already or replicated in the other analyses.

Once the data was combined, I removed issues already owned and ones I had no inclination to buy.  Basically I had to be convinced of the opportunity and that the price (subjective argument) remained reasonable.

The following table presents my 2018 picks and the primary reason.  All but one are dividend payers and I front-loaded my purchase to 2017 to ensure receipt of CME’s special dividend (ex-div Dec 28).

SLUICE BOX (Motif: 2018 Growth)
Yield
NVIDIA Corporation (1,2) NVDA 7.30% 0.32% Bitcoin chipset
CME Group Inc CME 7.30% 1.76% Bitcoin Futures
Cboe Global Markets Inc CBOE 6.70% 0.86% Bitcoin Futures
Intercontinental Ex. (1) ICE 6.80% 1.14% Coinbase investor
Nasdaq Inc NDAQ 6.70% 1.96% Blockchain
Microsoft Corp. (2) MSFT 6.80% 1.98% Blockchain (Azure, Ethereum)
JPMorgan Chase & Co. (2) JPM 6.80% 2.68% Blockchain (hyper ledger)
Veritex Holdings Inc VBTX 5.90% 0.00% emerging growth co. (JOBS Act)
Ottawa Bancorp, Inc. OTTW 6.10% 1.10% 2-step conversion (growth)
Newell Brands Inc NWL 6.50% 3.02% Brands
Energizer Holdings Inc ENR 6.50% 2.44% Brands
Cognizant Technology (1) CTSH 6.50% 0.84% Future 50
Intuit Inc. (1) INTU 6.70% 1.00% Future 50
Novartis AG (ADR) NVS 6.70% 3.21% possible Alcon spin
ABB Ltd (ADR) ABB 6.70% 2.91% purchased a GE segment

Notes:

  1. Future 50 (also currently own: MA, V)
  2. Investor Place 11 (also currently own: V, SQ)
  3. Other Bitcoin/Blockchain indirect investments include: GS, IBM, WU, AMTD

At the very least it will be interesting to observe the Crypto phenomenon in more of a supporting role.  I also need to acknowledge Dividend Diplomats whose research on NWL was enlightening.

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Recent Buy – VLO

Right out of the gates with the new month, I added to my Valero position.  It wasn’t an average down scenario, but rather a reaction to geopolitical events.  Since May the stock has been on an upward trend.  At month end it dropped to $66.69 – which I missed, but  wound up adding on August 1st at $69.64 which locks in a yield of 4.02% on my new shares.  By adding prior to the record date, they are also eligible for the September dividend.

The news cycle last week was on the Venezuela election – or notably any US reaction (sanctions) to it.  The reason for my hesitation in purchasing was to understand the impact of possible oil import sanctions on Gulf Coast refineries.  It turns out only one of Valero’s refineries has significant exposure to oil from Venezuela, basically on par with Phillips 66 (PSX).  Subsequently – contrary to Trump’s earlier pronouncements – the actual response has been relatively muted thus far.  Perhaps the administration recognizes potential impacts to the economy (refinery jobs in Trumpland or higher gas prices nationally) with a more bombastic approach.  The day following my purchase, VLO announced an agreement to export refined fuels to Mexico through iEnova (SRE subsidiary) with an option to attain 50% stake in storage facilities in Vera Cruz, Mexico City and Puebla.

Last week The Dividend Guy also published an an analysis on Seeking Alpha that reinforced my conclusions – albeit via differing metrics.  Although in concurrence with his findings, I would add that Valero also spawned Nustar Energy (NS – 2006) in addition to his mention of CST (now ANCTF) and Valero Partners (VLP).

Therein lies my rationale for my first August purchase.

Recent Buy – KSU

ksu

Usually I don’t announce my incremental purchases, preferring instead to report in bulk as part of my monthly recap.  There are occasions when an exception is warranted so I figured I’d share my thought process with this week’s post – and the subsequent events.

Kansas City Southern is the smallest of the Class I railroads in the US and operates in Mexico through a wholly owned subsidiary.  Since the election, it has been beaten down as Mexico is reviewing its’ concession, concerns over NAFTA trade and a weakened peso (impacting earnings).

While reviewing my holdings last weekend, I noticed:

  1. The price appeared to have hit bottom and began moving higher
  2. The current price was significantly lower than my $115.07 cost basis
  3. The ex-dividend date was around the corner (Jun 12th)
  4. The Mexican peso has risen over 5% (now 6%) against the USD since October

Figuring there was minimal downside left, on Monday (June 5th) I bought enough (at $95.87) to average down my cost basis to $98.69 – though it’s still less than 1% of my portfolio.

Where it gets interesting is:

  • June 6th – US and Mexico reach agreement on sugar trade – KSU closes at $96.57
  • June 7th – US appears to seek resolution in lumber spat with Canada ($97.46 close)
  • June 8th – Guy Adami (CNBC’s Fast Money) announces position ($98.86 close)
  • June 9th – Pete Najarian (Fast Money) announces position ($99.59 close)

I certainly did not expect this level of activity but sure am glad I chose to average down when I did.  Also not sure what option activity got Fast Money’s attention but suspect we’ll see a little pullback as we go ex-dividend.  Still, 3.7% price improvement in a week and now I’m no longer underwater plus the dividend (small though it may be) – have to say it was a good week!

Now to attempt an encore …

Recent Buy – PWCDF

pwcdf

Yesterday my limit order executed purchasing shares of Power Corporation of Canada for my IRA at $22.98.  I placed these shares in my IRA as the US tax treaty with Canada coupled with Power Corp.’s Direct Registry status will result in $0 tax withholding on the dividend garnering a 4.36% annual return.

Power Corp. (PWCDF, POW.TO) operates primarily as four publicly traded entities with Power Financial (POFNF), Great-West Lifeco (GWO.TO) and IGM Financial (IGM.TO) the others each of which Power Corp. has retained 60-65% ownership.  Additionally, Power Corp. owns Power Energy and Square Victoria Communications Group.

What really got my attention were the underlying assets within the subsidiaries.  Great-West has multiple insurance companies plus Putnam Investments.  IGM owns Mackenzie Financial.  Power Financial through a joint venture has stakes in LafargeHolcim (cement), Pernod Ricard (liquor), Adidas (sports apparel, Total (petroleum) and more.  LaFargeHolcim with its’ US assets is particularly well suited to share in potential infrastructure investment (walls,bridges,etc.)

I also added to my Janus Capital (JNS) position after receiving – and voting in favor of their merger with Henderson Group.  The new company will be named Janus Henderson Group plc, traded on the NYSE under the symbol (pending) JHG, with London headquarters and a quarterly dividend payment scheme.  I wound up averaging down this position with the expectation of a stronger, post-Brexit, UK currency.

Recent Buy – AKO.B

ako

Keeping with my Coca-Cola bottler strategy, yesterday I added a new holding to my portfolio.  Embotelladora Andina S.A. is based in Chile with territory covering Brazil, Argentina, Paraguay in addition to Chile.  Their product line includes Coca-Cola products in addition to bottling and distributing outside brands including Amstel, Dos Equis (XX), Heineken and others.  They have an integrated operation, meaning they manufacture the bottles, cases and caps used in their bottling operation.

Andina has two share classes, the A shares carry greater voting power while the B shares pay a higher dividend.  As I don’t expect to accumulate enough shares to impact the board, I chose the higher dividend.  The shares are traded on the NYSE as an ADR administered by Bank of New York Mellon (BK), another of my holdings.  The ADR ratio is 6 shares of Andina-B (Chilean exchange) to 1 AKO.B (NYSE).

A dividend is paid almost quarterly (Feb, Jun, Sep, Nov) but is variable as the cycle is Provisorio/Adicional.  The company’s goal is to pay approximately 35% of earnings to shareholders.  The TTM for the ADR is $.70 which translates into a current yield of 2.88% at my $24.25 purchase price.  The forward (12 month) yield would be about 3.1% depending on actual declarations and the future exchange rate.

A also added to my TD holdings making it a full satellite position (1.5% of portfolio dividends) due to weakness (can you say Wells Fargo?).