2017 Mid Year Correction

Each year I establish a basic plan to govern my investing activity based on sectors, segments or locales able to deliver a little alpha to my portfolio.  The past couple of years had a focus on the Financial industry with the outcome being rewarded with mergers (small banks) and outsized dividend increases (money center banks).  I also began increasing my Canadian allocation in 2015 from 2.5% of my dividends to the current 8.6%.  Since the election, I was accelerating the increase in my other foreign holdings to the current 13.6% on two theories, 1) gridlock in Congress would persist as the Republican majority would be too narrow to push through sweeping changes, and 2) this inaction would result in a weaker dollar.  It appears I was correct on both counts as the US dollar is now at an eight month low.

With my alpha agendas now too pricey (at least for slam dunk results), a re-prioritization is in order. With the Fed Chairs’ testimony this week indicating that GDP growth of 3% would be difficult, the Trump agenda which projects a higher growth rate is likely in peril – even ignoring the self-inflicted wounds.  Without an improvement in the GDP, deficit hawks will be circling.  It is likely the last half of the year will present some opportunities, but my view these will be predicated on external events.  My eyes will remain open to the USD exchange rate – on strength I may buy foreign issues.

My portfolio allocation between holdings labeled Anchor, Core and Satellite have been imbalanced for a year or two primarily due to merger activity and the acceleration of adding foreign issues.  Now that the major mergers have completed, the last this past January, and other alternatives are slim, I figure it’s time to get back to basics.

My going forward strategy can be summarized as follows:

  1. Non-US equities when secured at a favorable exchange rate
    a)I have 2 Japanese, 2 Swiss, 1 UK and 1 Swedish company on my watch list in the event an attractive price presents itself
  2. Assess corporate actions (spins, splits, mergers) for opportunities
    a) Generally I’m agnostic to splits except when the result would be a weird fractional.  I can easily manage tenths or hundredths of shares.  Smaller sizes are troublesome so I avoid when possible.
    b) Spins (and mergers) are assessed to prevent (if possible) weird fractionals.  For instance, I added to my MET position earlier this month as their spin will be at a ratio of 11:1 which would have otherwise delivered a weird fractional.
  3. Assess portfolio for average down and other opportunities
    a) An example of this was last months’ purchase of KSU.  To this end, I recently updated my Dividends (Div Dates) Google sheet to flag when the current price is lower than my cost basis.
    b) An example of “Other Opportunities” would be BCBP which is resident in my Penalty Box due to dilution.  The dilution (secondary) might be explained (now) with their announced acquisition of the troubled IA Bancorp.  If the regulators provide their seal of approval, it may be time to remove BCBP from Penalty status and perhaps add to this 3.5% yielder.
  4. Add to holdings that are below target weighting
    a) This is where I expect most of my second half activity to reside.

Of my 26 stocks labeled Anchor, Core or Satellite; 5 can be considered at their target weight (within .5% of the target) and 4 I consider to be overweight.  The remaining 17 will receive most of my attention.  As most of these rarely go on sale, I’ll likely ignore price and place a higher priority on yield and events – at least until I’ve exceeded last years’ total dividends.

The following table highlights this portion of my portfolio:

JAN/APR/JUL/OCT

COMPANY TYPE PORT DIV%
Kimberley-Clark/KMB A-(6%) 4.01%
First of Long Island/FLIC C-(3%) 0.85%
Sysco/SYY C-(3%) 1.81%
Bank of the Ozarks/OZRK C-(3%) 0.67%
PepsiCo/PEP S-(1.5%) 1.51%
First Midwest/FMBI S-(1.5%) 0.3%
Comcast/CMCSA S-(1.5%) 8.32%
Toronto-Dominion/TD S-(1.5%) 1.58%
NOTE: Not all payment schedules coincide completely

FEB/MAY/AUG/NOV

COMPANY TYPE PORT DIV%
Clorox/CLX A-(6%) 3.68%
PNC Financial Services/PNC C-(3%) 0.30%
Legacy Texas Financial/LTXB C-(3%) 1.48%
Starbucks/SBUX C-(3%) 1.07%
Blackstone/BX S-(1.5%) 2.58%
Apple/AAPL S-(1.5%) 1.26%
Lakeland Bancorp/LBAI S-(1.5%) 1.04%
Webster Financial/WBS S-(1.5%) 0.82%
NOTE: Not all payment schedules coincide completely

MAR/JUN/SEP/DEC

COMPANY TYPE PORT DIV%
WEC Energy/WEC A-(6%) 5.61%
3M/MMM C-(3%) 0.76%
Home Depot/HD C-(3%) 7.32%
Blackrock/BLK C-(3%) .22%
ADP/ADP C-(3%) 1.60%
Southside Bancshares/SBSI S-(1.5%) 0.96%
Chevron/CVX S-(1.5%) 9.52%
Norfolk Southern/NSC S-(1.5%) 1.99%
Flushing Financial Corp/FFIC S-(1.5%) 0.99%
Wesbanco/WSBC S-(1.5%) 1.14%
NOTE: Not all payment schedules coincide completely

I will provide the caveat that this plan is subject to not only the whims of  the market but of my own as well.  In addition, this plan may be changed if/when a better idea comes along.

Some Cracks Begin To Form?

Naysayers of this market (of which I include myself to a degree) have been voicing a concern regarding market valuations.  When reviewing my February results I noticed the average size of  dividend increases was lagging last years’ pace (12.3% in 2016 vs. 7.96% YTD 2017).  One could say it’s too early to make an assessment and that could be true.  But it could also be said that companies are being cautious due to uncertainty in regulations, taxes, inflation and economic growth.  If this were a one-off issue, that would be one thing.  On the other hand I’m starting to see some parallels to times when bubbles existed.

Exhibit #1 – SNAP

When was the last time an IPO was launched successfully with an increased price, profitability uncertain, a twelve month lockup for outside investors and founder retention of roughly 88% of the voting rights?  If so inclined, the safest play is through Comcast (CMCSA)’s roughly 5% ownership of Class A shares.  Can we say dot-com revisited?

Exhibit 2 – Target

Target (TGT – #19) whiffed on earnings and guidance last week.  On one of Lanny’s posts, my comment How many were blindsided by TGT’s report yesterday, how many updated their forward estimates and how many incorporated the fact (illustrated by mgmt) that a turn around was (minimally) two years out and would incur additional costs in store conversions and IT expense?  raised the question Did you, by any chance, seize the opportunity, by the way, at TGT? Or waiting for some dust to settle?. 

The short answer is no and not likely near term.  All retailers are struggling against Amazon (AMZN).  I have exposure to Wal-mart (WMT) through a trust I manage.  WMT is about a year ahead of TGT via their Jet acquisition but still significantly lag AMZN.  The good news is TGT now recognizes a problem.  My question surrounds their execution (and time required).  Yet several bloggers bought this dip.  They may be correct but this one currently carries more risk than reward in my book.

Exhibit 3 – Caterpillar

It’s always disconcerting to have Federal agents raiding corporate offices.  To have it broadcast live on television raises the stakes.  Caterpillar (CAT – #32) experienced this treatment last week.  Not overly surprising as CAT has been embroiled in a dispute with the IRS regarding alleged shifting of profits offshore to a Swiss subsidiary.  What I found interesting was that FDIC regulators participated … which perhaps raises a new question of money laundering?

Exhibit 4 – Costco

Sliding back to the retail space, we have another DGI darling illustrating how customer loyalty should be rewarded.  Costco (COST- #156) reported Y/Y revenue growth due only to new stores and membership fees.  Their response?  Let’s boost revenue growth by raising membership fees further!  Talk about a counter-intuitive response.

These are but a few reasons I believe this market warrants an abundance of caution.

Long: CMCSA, WMT (trust).  Ranking based on DGI popularity list.

The ‘Ole Ball Game

Take Me Out to the Ball Game

Jack Norworth – 1908

As a result of the Canadian Radio-Television and Telecommunications Commission decision to classify broadband as “a basic telecommunications service for all Canadians” I figured an update was in order for Part 3 of Methods to My Madness  post of last year.  Previously I had postulated that the Carriers were a viable segment in order to capitalize on Cord Cutting.   This segment over the past year proven to be more a commodity with streaming essentially the same regardless of carrier.  With limited pricing power, I now feel  this segment is more likely an indirect beneficiary rather than a driving force of Cord Cutting and am dropping this segment as a viable candidate going forward.

The other two segments, Creators and Providers, in my initial thesis remain intact.  In fact, AT&T’s (T) overtures with Time Warner (TWX) enhance the argument.  Casting about for a replacement segment, I ran across Mr Free At 33‘s post on “Experiencism”.  Although I can quibble with his choice of wording (I think the word he was looking for is Experientialism), the heart of his message is sound being a cautionary tale on falling under the spell of excess.

While I doubt many have the will, means or gumption to head to Thailand on a whim, many are seeking  “Experiencism” locally or with family and friends – and there lies my replacement!   I’ve written before on my interest in business interrelationships.  Localized Experientialism melds nicely into this strategy.  A family visit to the circus or an outing to a sports event are just a couple of examples.

Assume you experience a Flyers game in Philadelphia.  The Wells Fargo Center and Flyers are owned by Comcast (CMCSA), Spectracor (also CMCSA) manages it, Aramark (ARMK) has the food service contract and Comcast SportsNet (CMCSA yet again) the broadcast rights.  So the primary lines of business are the Content Owners/Creators (Teams/Studios), Aggregators and the Experience.  In sports, this model is pretty much followed across all leagues with only the companies involved changing.  In this definition, The Experience includes the cleaners, concessionaires and venue managers.

Many of these companies and teams are privately held with associated interrelationships managed or owned by an entity controlled by the owner .  Others, while public, pay a minimal – if any – dividend.  But there are a few that do pay a healthy – and growing – dividend.  Generally, to invest in this manner requires patience and a willingness to await a change in control of the team while being satisfied with bragging rights of ownership.  In fact, I have to agree with Christopher Lackey in his assessment: “The sports properties, which include the suddenly not laughable Toronto Maple Leafs and Toronto Blue Jays, are doing well and increasing in value, but investing on this basis alone is not sound because if the teams achieve success they require significant reinvestment to sustain it.

During the past year, Comcast (CMCSA) became sole owner of the Philadelphia Flyers and Liberty Media created a tracking stock (BATRA) based on the financials of the Atlanta Braves, new ballpark and nearby real estate.  I also uncovered two additional teams that have – at least in part – public ownership, the Chicago Cubs (TRNC which I believe retained ownership with the Tribune changes) and Seattle Mariners (NTDOY).

With content being the driving force in landing eyeballs – which in turn lands revenue, providers and the groups providing the eperience are the more direct beneficiaries.  Point in fact is Dustin Blitchok‘s article, “Which Streaming Providers Are Winning The Content War?”  This was also confirmed in series of interviews by AT&T employees aired on CNBC last week.  The following table presents my current take on this strategy which, as always, is subject to change.

OWNERS/CREATORS

COMPANY YIELD SEGMENT
Disney/DIS 1.41% C,E
Comcast/CMCSA 1.57% C,A,E,O – Philadelphia Flyers
Time Warner/TWX 1.67% C,A
Fox/FOXA 1.19% C,A
BCE/BCE 4.96% O,A,E,C – Toronto Maple Leafs, Toronto Raptors, Montreal Canadians
Rogers Comm./RCI 3.42% O,E,A – Toronto Maple Leafs, Toronto Raptors, Toronto Blue Jays
Madison Sq Gdn/MSG n/a O/E – New York Knicks, New York Rangers
Netflix/NFLX n/a C,A
Amazon/AMZN n/a C,A
Liberty Media/BATRA n/a O/E – Atlanta Braves
Nintendo/NTDOY 0.42% O – Seattle Mariners
Tribune Co./TRNC (susp) O – Chicago Cubs
NOTE: Nintendo also includes the Pokémon GO experience

AGGREGATORS

COMPANY YIELD SEGMENT
AMC Networks/AMCX n/a A
Discovery Communications/DISCA n/a A
Cox/(pvt) n/a A
MSG Network/MSGN n/a A
Charter/CHTR n/a A

THE EXPERIENCE

COMPANY YIELD SEGMENT
Aramark/ARMK 1.16% E
ABM/ABM 1.69% E
Compass Group/CMPGY 2.05% E
Sodexo/SDXAY 2.31% E
SMG/* n/a E
NOTE: SMG was an ACAS portfolio company as of June 3, 2014. ARCC does not include in their portfolio a/o 3 Jan 2017 merger. Both Bloomberg and Wikipedia classifies them as a private company.
NOTES: C-Creator, O – Owner, A – Aggregator, E – Experience.
Yields as of 14 Feb 2017.

Prepping for ’17

In my inbox I found a message inspired (?) by my last post.  In a nutshell, it was a request for further insight into my October purchases.  I have to admit that, on the surface, the appearance is that I was throwing stuff against the wall to see what would stick.  I would like to think I’m slightly more calculating.  To set the scenario, I had an oversized cash position due to a merger, the markets had started their pre-election downward drift and the FBI just breathed new life into Candidate Trump’s aspirations.

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April 2016 Update

April was generally favorable for the markets.  Earnings reports presented few surprises although the trend of beating analysts’ expectations while presenting lower year over year results continued.  Financials were modestly positive while old technology seemed to disappoint.  Until month end, the market was drifting higher.  Then Apple’s and Starbucks reports were weak, the BOJ failed to raise rates and Carl Icahn announced he sold his Apple position over China fears.  So the month ended basically flat managing a gain of .27% – at least it was positive.

My portfolio value managed a 2.66% gain with the weaknesses (KMB, SBUX and AAPL) being offset by M&A activity (Comcast (CMCSA) acquiring Dreamworks (DWA) and First Cloverleaf (FCLF) being acquired).

Blog Updates

  • I changed my portfolio reporting to measure % of dividends provided instead of market value.
  • Updated the Blog Directory

Portfolio Updates

  • Sold Monarch Financial (due to upcoming merger).
  • With the proceeds, initiated positions in SRCE, BKSC, CVLY and AROW
  • Moved CVX from DRIP to brokerage resulting in a fractional share sale
  • Added to LTXB prior to their earnings release.
  • Added to SBUX after earnings.
  • Added to AAPL after earnings(and the Icahn announcement)
  • Added to XRX – I anticipate a reverse split prior to – or in conjunction with – the spinoff.  So trying to position myself more favorably in this event.

Dividends

  • April delivered an increase of 38.7% over April 2015.  This was due primarily my first dividends from NJR and SJI coupled with dividend increases.
  • April was also up slightly from last quarter by 4.4%
  • Announced dividend increases currently average 10.05% with 48.6% of my portfolio having at least one raise so far this year. .

Portfolio Weightings

When I researched my holdings and dividends for my quarterly review, I noticed something that required further analysis.  I put it aside while completing my taxes, but resolved to readdress it.  The issue is portfolio balance – or more specifically – being out of balance.  I noticed over the past few months that portions of my portfolio were sliding farther from their assigned allocations.  I currently rank my holdings by value (price * # shares).  I then weight by category.  The companies I’ve identified as Anchor positions would comprise a maximum 18% of the total value.  Frankly, none of these positions has yet attained the 6% threshold since I only added this category last year.  WEC (5.4%), CLX (4.6%) and KMB (3.8%) hold these slots and I haven’t been adding to them this year outside of dividend reinvestment due to valuation.  So my ‘heavy hitters’ aren’t out of balance.

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Methods To My Madness Pt 3

My final post to this series is probably the least defined and most speculative post I’ve composed.  Many have attempted before and I’m sure many will follow, but the topic Cord Cutting and how to profit from it is filled with politics, regulation, evolutionary technology, disruptive practices and good old fashioned corporate greed coming together to create a minefield to negotiate for those seeking answers.

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