Squirrel!!!

Dug (the dog), from the movie Up, 2009

Which is essentially a metaphor for being easily distracted. Which may be the answer to Buy, Hold Long’s comment on last week’s post. The more complete answer would be the final 10% is more complex than anticipated and other than one outlier (so far), the corrections to my cost basis has generally been within a couple of dollars – mostly lower. So yes, I recognize the need – and have the desire for – accurate reporting, but complex algorithms take a brain toll and to rest I hunt (figuratively) squirrels!

A thought can be like squirrels and one of my recent squirrels was compliments of Buy, Hold Long’s post (congrats on the good month, by the way) where he comments on his recent purchase, APN Asian REIT. His statement, “Take a look here to see how its going” is like telling me ‘hey, how about this rabbit (in this case, squirrel) hole‘. Simply irresistible.

Not a bad choice, in my view, but the fees, structure and liquidity raise a few questions mitigated by the historical performance and geographic diversification. As essentially a REIT of REITs (kind of like a reverse engineered Banker’s Bank), my adversity to fees (even reasonable ones) got me questioning why not a company with diverse real estate holdings (like Hong Kong’s Swire Pacific (SWRAY) with property in Hong Kong, mainland China and the US? Only then did I realize it was a moot point (squirrel) as APN Asia is not registered for sale outside of Australia and New Zealand.

Another type to consider is the rabid squirrel with one of the symptoms being unprovoked aggression or unexplained fearlessness. One of my ongoing diversions concerns the banks caught up in the ongoing investigations surrounding our illustrious president and his surrounding minions. While I have yet to identify a sound investing thesis, the list continues to grow. From a former board seat (Ivanka, SBNY), suspicious activity reports (FRC, RY), subpoenas (DB, COF) and questionable loans to Cohen and/or Manafort (CFG, STL, BANC). Perhaps most rabid being the private Illinois bank that allegedly loaned Manafort a sizable sum that representing about a quarter of their loan portfolio. I’m still waiting for the Fed’s answer to that one.

Then there’s the rabble-rousing one best illustrated by the Ray Stevens classic, Mississippi Squirrel Revival. From the ‘amen pew’ we hear from the Green New Dealers. While generally in agreement with their goals, I’m troubled by parts of their messaging. One area that has my sporadic attention is the topic of corporate welfare. I’ve been working on a file of subsidies granted since Trump took office. While far from complete, the initial findings are that the majority of subsidies are SBA loans for small businesses, which have roughly a 17.5% default rate. Next up are loans for hurricane recovery (as most of these are managed by the SBA, they are in the “corporate welfare” classification). Surprisingly, Federal research grants for alternative fuel sources (battery, solar) were granted by the Energy Department. The larger problem I envision is the fact that these subsidies are provided to large and small companies, foreign and domestic. Charities and religious organizations get a piece of the action as well. Inquiring minds are begging for an answer as to how this will be voiced through the upcoming election cycle. Although not directly an investing theory, my attempt is to identify foreign companies that have proven adept at being subsidized by the American taxpayer. It is another area that heeds Dug’s Squirrel! siren call.

Some of these ideas will bear investing fruit, most probably won’t. The larger question will probably be whether these types of subsidies are permitted under WTO regulations. But the research is enlightening and provides a welcome relief to the tediousness of spreadsheet formulas!

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Shifting Sentiments

Generally I put together a watch list quarterly based first on overall portfolio goals.  As an example, the first quarter typically is used to readjust weightings where they’ve gone a little awry – particularly in my anchor and core positions.  This next quarter has historically been goosing returns as its’ priority.  Meaning, adding to out of favor positions (depending on the reason) which carry the highest current yield.  You could say it’s a personalized Dogs Of The Dow approach.  As always, market valuations have the final vote on my actions.

In preparing the list for next quarter, I’m finding more compelling reasons to avoid sectors as opposed to buying:

  • Example 1 – The first legislative test facing the Trump team is today’s vote on health care.  Even putting campaign rhetoric aside which placed a spotlight on the likes of CVS, the actual bill aims directly at Medicaid and indirectly at Medicare recipients.  Assuming the bill passes in its current form (unlikely), estimates are roughly 20 million people will become uninsured.  The indirect impact to health care REITs could blindside some investors.  Using CCP for one, some providers to which they lease could face reimbursement issues.   Simultaneously, the DOJ is pursuing a case alleging Medicare fraud against AET, CI, CNC and HUM.  Then there’s fraud in diagnostics resulting in one bankruptcy.  I think I’ll let the dust settle in this segment before treading any deeper.
  • Example 2 – My expansion into Hong Kong encountered some headwinds.  Swire announced a dividend which was effectively a cut (still figuring the magnitude, but about 38%) primarily on the heels of their 45% ownership stake in Cathay Pacific (CPCAY).  At least the poor fuel hedge (that my analysis missed) expires next year.  And, no, my efforts to increase my diversification outside the US are still intact.  If only the Yen would weaken …

Perhaps a correction is on the horizon as UBS suggests. perhaps not.  But the one certainty is there is plenty of uncertainty – especially with earnings season set to begin again.  I guess I need to finish my taxes to see what the budget for purchases looks like.

My 2017 Strategy (Coca-Cola)

Usually during the third quarter of each year I analyze my portfolio’s performance, do a little tweaking and cast about for an underlying strategy for the new year.  2016 was especially difficult due to a couple of mergers wreaking havoc on my portfolio structure as well as the uncertainty caused by the election.  The easy fix is to add to my anchor, core and satellite holdings at reasonable price points to get them to their target weightings.  This is illustrated by my recent purchases of KMB, CLX and SBUX with more to come.  The more difficult issue was identifying potential value plays for an ancillary portion of the portfolio.

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Jan 2017 Update

January saw DOW 20,000 being attained before dropping under once again.  The post inauguration euphoria  beat a hasty retreat in the wake of record protests, a wave of executive orders and a record number of lawsuits filed against a president in his first eleven days.  In finance terms, this uncertainty translated into concerns about the the ability or  time required to effect change through the legislative process – in particular tax reform.  This month The S&P gained 1.79%.  while my portfolio recorded a gain of 3.51% largely due to the final significant merger completing.  After a great 2016, I’m making some changes in my 2017 strategy that will (hopefully) accelerate performance in 2018.  Meanwhile I’ll be content with a slight win versus the S&P this year.

Headlines impacting my portfolio:

  • 1/5 – WMT ends V ban in Canada
  • 1/9 – SBUX discontinues Evenings concept
  • 1/10 – NWBI divests MD assets to SHBI
  • 1/13 – LSBG/BHB merger completes
  • 1/17 – ADP acquires Marcus Buckingham Co.
  • 1/20 – IRM acquires Kane Office Archives LLC through BK court
  • 1/23 – AMC acquires Nordic Cinema
  • 1/24 – Executive order moving Keystone (TRP) forward signed
  • 1/25 – DOW 20,000
  • 1/25 – BLK moves 1T$ from STT to JPM
  • 1/26 – JNJ to acquire ALIOY then spin R&D unit to ALIOY shareowners
  • 1/30 – GDOT buys UniRush (RushCard)
  • 1/31 – BX prices INVH IPO

Blog Updates:

posts under consideration for Feb are Methods to my Madness Pt 3 update, Anti-Trump strategy, My Coca-Cola strategy and The Commonality Between Trump and Me

Portfolio Updates:

  • Added to CLX
  • New position – CCLAY
  • New position – BHB (LSBG merger)
  • New position – SWRAY

Dividends:

  • January delivered an increase of 15.46% over January 2016.  This requires normalization due to PEP and WRE paying in January rather than December, KO paying in December rather than January and BUSE paying in February.  On a normalized basis, this represents a Y/Y increase of 3.1% which is attributable to dividend increases (Y/Y).  This means my October purchases from merger proceeds were successful in maintaining my Jan,Apr,Jul,Oct income stream.
  • January had a 3.0% increase over the prior quarter.
  • Declared dividend increases averaged 7.44% with 19.65% of my portfolio delivering at least one raise (1 cut – YUM).
  • Dividends received were 9.2% of total 2016 dividends and if the current run rate is maintained would exceed this total around October 15th.

Spinoffs:

The MET spin (Brighthouse Financial – BHF) remains pending.

Mergers:

Agrium/POT, JNS/HGG.L remain pending

Recent Buy – SWRAY

swray

In keeping with my current strategy of utilizing a strong US dollar to my benefit, today Swire Pacific was added to my portfolio.  Swire Pacific is 49% owned by privately held, London based  John Swire & Son with the remaining 51% traded on the Hong Kong exchange under the ticker 0019 (a second class trades as 0087).  The ADR corresponding to 0019 trades in the US as SWRAY.  They are also one of Coca-Cola’s (KO) anchor bottlers under the 21st Century Beverage Partnership Model of KO’s that is expected to complete in 2017 with territory covering Hong Kong, the Chinese mainland, Taiwan and the western United States.

But Swire is much more than a Coca-Cola bottler.  Last year they celebrated their 200th anniversary and are a conglomerate in a style similar to Warren Buffet.  They own 45% of Cathay Pacific, have significant real estate holdings and refrigerated warehouse operations among their holdings.  The Coca-Cola Bottler’s Association did a great article on their success.

Swire Pacific pays a dividend twice per year on an interim/final schedule.    At today’s purchase price ($10.338), the dividend yield translates to roughly 4.77%.  There is a risk of currency fluctuation as dividends are declared in HK$.

As an aside, I wonder how this company fits into Pres. Trump’s world view as a Chinese (HK) company that employs several thousand US workers – many on production lines?