The upward trend continued this month with catalysts being the tax plan and holiday sales. My guess remains that the first half of 2018 will be good for corporations (i.e., dividends and buybacks) with a shift in focus later with deficits and mid-term elections playing a leading role. I remain convinced the yearlong weakness in the US Dollar will continue and expect to allocate more cash into foreign equities during the first half 2018. I will review this plan as my personal tax implications become clearer. For the month, the S&P index increased by .98% while my portfolio increased by 3.29% largely fueled by Financials (again). For the year the S&P increased by a stellar 16.26% while I came in at +20.58%! The S&P return with all dividends reinvested adds about 2.41% which my hybrid approach still beat.
It’s getting to be that time of the year and since I don’t think the grandkid reads this thing, I figured I’d share one of the presents she’ll be getting. Just to review, each year since she came to live with us she has received shares in a company as a gift. This gift has been purchased in a company DRIP, established as a Custodial Account of which I’m the custodian. Generally, the company is one in which she can relate, i.e., Trix was her favorite cereal as a kid hence the General Mills stock.
This week I finally decided to do a little housekeeping on the portfolio section of the site, getting rid of the XIRR column – which is probably meaningful only to me, and adding price (updated with roughly 20 minute delay), prior dividend, dividend frequency, ex-div date (which may or may not be retained) and cost basis. The Div Wt column is updated when a dividend is credited and reflects the YTD weighting which is most accurate at the end of each quarter. Basically I’m trying to reduce manual intervention.
As Texas begins their recovery process from Harvey, Irma slams into Florida and Jose is lurking just behind. One has to wonder as to the luck of Maersk (AMKBY) who diverted the Ohio from Houston (Harvey) to Freeport (Irma). I’m also keeping an eye on Antigua and Barbuda where I’ve frequently vacationed and enjoyed their hospitality on my honeymoon years ago. Impacted issues may include Disney (DIS) and Comcast (CMCSA) as well as the entire Florida tourism and orange businesses.
The End of the Year
As I was updating the site, I realized that two issues have already paid their final 2017 dividends. Delving a little deeper shows all of my holdings are past the ex-dividend date for a September dividend leaving but one quarterly payment remaining. This is only a reminder that time is running out on impacting 2017. Generally I enter October with an eye on the strategy for the upcoming year as most of my moves will have a minimal impact on the current year.
More Dollar Weakness?
Deutsche Bank argues that more weakness is in store for the US dollar as a result of current monetary policy and a failure of the market to price in further 2017 rate hikes. They may be onto something as hurricanes and a lack of rational policy agendas from Washington can also be added to the mix. Now this could be good for exports but lousy for the typical consumer.
Hope your week was uneventful.
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:
- 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
- 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.
- 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.
- 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:
|First of Long Island/FLIC||C-(3%)||0.85%|
|Bank of the Ozarks/OZRK||C-(3%)||0.67%|
|NOTE: Not all payment schedules coincide completely|
|PNC Financial Services/PNC||C-(3%)||0.30%|
|Legacy Texas Financial/LTXB||C-(3%)||1.48%|
|NOTE: Not all payment schedules coincide completely|
|Flushing Financial Corp/FFIC||S-(1.5%)||0.99%|
|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.
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.
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.
|Comcast/CMCSA||1.57%||C,A,E,O – Philadelphia Flyers|
|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|
|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|
|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.
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.