Monday, January 25, 2016

Putting Emerson Electric in the Portfolio

I decided to add shares of Emerson Electric(EMR) on January 22nd. For those of you that have never heard of this company they have been around quite awhile(125 years). The company sells a wide variety of services and products. Many of their services help other companies save money via their engineering and automation expertise. Most regular people would probably recognize their RIDGID power tools and ClosetMaid brands. One item to note is the company is spinning off its Network Power division expected to be completed by September 2016.

EMR has had a rough 10 years as the stock has gone up and down, but if you bought in 2006 you'd be roughly in the same spot. Although you would have collected about $15.11/share in dividends during that time. Emerson is known as a Dividend Aristocrat and a Dividend King for having increased its dividend for the last 25 and 50 years in a row. Not an easy feat and one few companies have managed. Although it's last payout bump was quite meager as it was bumped from $1.88 to $1.90 for 2016.  This highlights the challenges the company has faced. Even with a modest bump the 10 year growth rate(2006-2016) still comes in at 7.41%. From 2005-2015 the growth rate was 8.35%. The company has also been aggressively buying up stock the last few years spending over $5.25 billion dollars. It remains to be seen if this was a good use of company cash considering the stock price has not appreciated much. Also the company is scheduled to purchase another 70 million shares this year, or about 10.75% of the current shares outstanding.

Revenue has been stagnant for awhile as it's oscillated between 20-24 billion for most the last 10 years.  However management was able to deliver ROA of 9.57%, ROE of 29.88% , and ROTC of 22.8% the last year despite many challenges. The company also increased operating margins the last 3 years from 13.8% to 14.7%. Additionally the net income profit percentage has increased from 8.1% to 12.15% during the same time.

The balance sheet is pretty good also with a current ratio of 1.29, total A/L of 1.58, and subtracting goodwill and intangibles shows 0.99. I also like how the long term debt has stayed relatively flat the last 3 years and currently sits at $4.2 billion, which should be manageable for the company.

The stock currently yields almost 4.5% and is trading near a 52 week low. Based on 2016 guidance we can expect a 7.5% earning yield at today's prices. Plus the large dividend which we can expect at the very least to stay steady should provide some comfort.  I expect the next year to be tough and management has already conveyed that message in its guidance. I think a lot of the bad news is baked in, and unless the global economy really unravels this should be a safe pick. Especially since they help other companies figure out ways to run their energy and mechanical systems more efficiently which will be essential for others to weather the downturn themselves.  I do expect the company to outperform the next 10 years.


Added Philip Morris

I decided to add more Philip Morris to the portfolio. I want the added dividend protection during this time. Despite the company being largely affected by a strong USD, I'm willing to sacrifice some of that for the dividend during an uncertain time. I still want to add to MO and RAI, and eventually I will. I think PM will eventually get a grip on its currency issues a bit more, but that will take time. With the yield around 4.7% as of today I think it provides enough income and defensive protection to warrant an add.

Friday, January 22, 2016

Year End Review

I finished calculating the portfolio returns as we closed out the end of the year. While the portfolio barely had a full quarter under its belt the results were cool to see. Just a reminder I decided to start this with positions I already had in my personal portfolio, and then decided to use the prices of the securities on the date I began the blog to track performance of the individual stocks. It was the only way I could think of that would be fair since there are stocks I'd owned for a few years already in varying proportions. Especially since the point is to buy and hold stocks that are here for the long haul it's more important to track the individual picks, and the performance overall as the years go on. Either way lets get to some of the results which you can view in the Google Doc spreadsheet.

I have quite a few calculations in the spreadsheet detailing the returns from the first addition price, cumulative price, weighted return price, and gains with dividends. I think they all bring some value and will be beneficial to see over time. For me personally the figure that represents the most value is the "Cumulative % Gain w/Dividends" column. The reason being is as time goes on and I make additional purchases it will average out the prices from when I started everything.  As more purchases are made and I buy assets at better prices the performance should be better as I normally like to buy when prices have fallen. In reality I wouldn't have bought all the stocks on October 7th. Although my COST buy was clearly at a recent top, sigh. Everything is what I decided to do though so I'll have to live with it.  

Either way the portfolio returned a negative -.01% from October 7 until year end. If I excluded the SAM purchase the overall portfolio would be slightly up at .03%. The SPY meanwhile had a pretty good stretch gaining 2.84% with dividends. So overall the picks lagged during this time period. The weighted portfolio return was a negative -2.5%. I badly lagged the market in that respect by more than 5%.  I'm hoping 2016 brings betters results obviously.  Hopefully all the info available in the spreadsheet turns out to be useful for plenty of people.

Some things I noticed was how certain stocks have been hammered more than others during this time period. CMI and WAB were down the most at 18% & 16%. Expected considering industrials' in the transport sector have been reeling from commodity price fallout. Also WWAV and HAIN were losers suggesting the healthy trend isn't strong for portfolio results right now. I'm a big believer in both long term as they build their brands. Yet it hurts to see the results. One very surprising loser was CTSH. The company has been growing very well the last year and even raised guidance again. I'm expecting a lot more from them in 2016.

The tobacco stocks did well as all ended the year up in a positive position except BTI. Currently I see PM and VGR as the most attractive, but I'm not sure if I'll make anymore adds. FB and PYPL were the top two performers during this time up 13% & 11%. I wonder if PYPL could be a takeover target, and FB is richly valued in my opinion so I'm not planning to add unless there is a pullback. HCP is another stock that ended the year strong. It was beaten down to $33 and yielded 6.8%. I thought long and hard about adding, but ultimately decided not to.  In hindsight it appears to be a mistake so I'm interested to see how it performs this year.

2016 will be an exciting year as I'll have one full calendar year to gauge the results. Especially considering I made a couple adds toward the end. Additionally it will give us the time to collect all the dividends which the portfolio missed quite a few of since many of the companies had paid a dividend in late September and early October. That should help boost the results.

Also for the most part I'll continue to buy the stocks of companies that I use their products and services. To me that is a very overlooked part of investing. If I like buying things from the companies then I bet others do to, which should translate into better results.  Plus it makes me feel good buying Silk Almond Milk or a 6 pack of Guinness.

That's all for now. Thanks for reading and good luck to us all in 2016.

Thursday, January 21, 2016

Adding Global Payments Inc(GPN)

On January 20th Global Payments Inc has been added to the portfolio.  They operate in the electronic payment transaction field. In essence the company is like a toll road for electronic transactions where they handle the processing for a variety of customers and transactions. Here is an excerpt from the 2015 annual report which is a good read.

"Our comprehensive offerings include terminal sales and deployment, authorization processing, settlement and funding processing, customer support and help desk functions, chargeback resolution, industry compliance, Payment Card Industry (“PCI”) security, consolidated billing and statements and on-line reporting."

In a nutshell the company is like a toll road for financial transactions. Warren Buffet has spoke many times of the inherent value companies like this have. It's one of the reasons why he owns AXP, MA, and V. I've been wanting to add for awhile and I think the pullback from $75 represents a decent enough entry point.

Additionally the company has been growing rather well lately and hasn't been shy of completing an acquisition to access new strategic markets. The acquisition of Heartland didn't come at a value price, but it takes out a competitor allowing them more leverage in the negotiating process with customers in the future. The market didn't like the acquisition but I think it's a plus long term. I still expect financial transactions gain a bigger foothold. People currently 25-34 years old have shown an increasing propensity to use electronic payments over cash. I think the trend will only grow with each successive generation.

The company has increased it's revenues from $784 million in 2005 to $2.77 billion in 2015 from a combination of acquisitions and organic growth. The company has increased its net income profit percentage the last three years from 9% to 10%. I think management will be able to hit 10.5% this year. Additionally operating margins have increased from 15% to 16.4% from 2013-2015.

The balance sheet is decent but not spectacular with a current ratio of 1.15, 1.18(Assets/Liabilities), and .68(subtracting goodwill & intangibles from assets/liabilities). Additionally the company guided Fiscal 2016 EPS between 2.88-2.96.  At the low end that gives us a stock yield of about 5% if the stock traded at $57. Not much when compared to some other names in the portfolio right now. But I think the kind of stability the company will offer the next few years will prove to be worth it(Oh I hope I'm right).

The dividend isn't much and is not raised consistently. When I adjusted for stock splits I came to a 10 year growth rate of 14% which is still pretty good. Basically when the company does raise the divided it does so by a good amount. If anyone has a different number please send me the data so I can review and adjust if necessary. I calculated the TTM payout ratio as 5.7% and 6.7% when I back out capex.  The company could easily raise the payout ratio to say 10% without compromising any financial soundness. Especially if they curtailed the stock buyback program which has basically been funded with the issuance of cheap debt.

That is all for now. Keep checking back for more updates as the market volatility could afford us another bargain before we know it.

Tuesday, January 19, 2016

IBM Earnings & MKC Downgrade

IBM had another quarter of declining revenue. The stock is down in after hours and now close to yielding 4%. I think the turnaround will be tumultuous given the economic landscape. Also CTSH is moving into their territory ever more slightly this year. Hopefully it does not hurt profit margins for either company. Either way I still like both, and at this price IBM is looking real attractive to those who want to start a position with a long term time frame. One could do a lot worse in this environment.

Here is the CEO's statement from IBM's earnings release.

"We continue to make significant progress in our transformation to higher value. In 2015, our strategic imperatives of cloud, analytics, mobile, social and security grew 26 percent to $29 billion and now represent 35 percent of our total revenue," said Ginni Rometty, IBM chairman, president and chief executive officer. "We strengthened our existing portfolio while investing aggressively in new opportunities like Watson Health, Watson Internet of Things and hybrid cloud. As we transform to a cognitive solutions and cloud platform company, we are well positioned to continue delivering greater value to our clients and returning capital to our shareholders."

Also JP Morgan downgraded MKC today. I'm going to watch this one as the analyst said the company was overvalued based on its historical valuation and recent EPS growth. While that might be somewhat true I think the company offers one of the few places to hide right now. Look at how steady the stock price has been since August. It's traded in a 10 point range. I'd bet a lot of people would be willing to have that kind of stability the last few months. The company is well run and in my opinion not in any danger whatsoever. I'll take this analysts near term view as an opportunity to put the stock on watch for another add. I'd love to get shares below $75.  I said it before and I'll say it again. I'd buy this whole company if I had the means to.

Thursday, January 14, 2016

Market volatility and BUD

The market is definitely acting volatile and retesting support from Aug/Sept 2015. We are at an interesting point in the market right now. We can easily see a big drop right now despite today's massive bounce. I was oddly thinking yesterday we could hit near 1875, although I never once thought it was going to be that day. Either way today's bounce is encouraging and I'm willing to nibble on stocks I want to buy.

So today I purchased more BUD. That's about all the alcohol stocks I need right now as I added to SAM and DEO last week.

Also I saw CHD was downgraded by Goldman Sachs the other day. I would love to buy this stock at a cheaper price. I had been eyeing it for a long time and finally broke down in early December. I wish I would have been more patient and I would have scooped up shares this week instead to start the position. I'm going to keep a closer eye on it the next few weeks and see where it goes. Also CHD competitor PG looks to be a good value here too. The stock seems to be holding up well. The same goes for tobacco stocks. They are still on the list of  potential adds to make in what continues to be a volatile January.

I almost pulled the trigger on another stock(GPN), but just couldn't do it today. Hopefully it doesn't run away from me. Either way I'm still positive the market will give me another chance considering the way this year has started.

That's all for now.

Friday, January 8, 2016

Portfolio Update

I added shares of SAM and DEO to the portfolio today.

I'm finding both to be of good value, although SAM still can be considered overpriced. I'd rather be a little early on SAM than late as I think the company is fantastic, and in 10 years I'm confident the price will be much higher. This will be my last add of SAM for awhile. I'm attributing most of the downfall today to an analyst downgrade. There was always some part of me that felt analysts put out that kind of news to help themselves or someone else buy shares at a lower cost. Either way I've never done any research into it but I wouldn't be surprised if plenty of them get their calls wrong.

DEO is still looking like a great pick in today's market. With the dividend and steady business I believe one could do a lot worse with other stocks. There is a small part of me that says wait for a price under $100, but I think anything under $115 is still a good value for the company.

On a side note the S&P 500 is off to its worst start ever according to the media today. Definitely makes buy and hold investors frustrated in the near term. For a trader this kind of volatility is fantastic.  I think 2016 is going to be a year of big ups and downs, and just maybe we end up 5% for the year.  Either way I have a lot of big expectations for some of the names in the portfolio and I think in these unsure times they will hold up better overall. For example I've been impressed with MKC the last few months. Stock has been pretty solid despite all the volatility. I wish I could buy the entire company.

That's all for now and have a great weekend!

Tuesday, January 5, 2016

A Craft Buy

I decided to purchase shares of Boston Beer Company better known for its Samuel Adams brand. The company also sells Angry Orchard Cider and Twisted Tea. When the company was founded in the 80's craft beer was an under served market. The company continues to innovate in craft beers with its Alchemy and Science Subsidiary which creates different craft beer & ciders, and operates small craft breweries located throughout the USA.

The challenges are not small for the company. It faces substantial competition from the big brewers as they expand offerings and acquire other small craft brewers. The company even noted in its 2014 annual report that the number of craft brewers has expanded from 420 in 2006 to an estimated 4,500 in 2013.  I think the company fully recognized this trend and that is why its Alchemy and Science subsidiary will prove to be a valuable asset in the coming years. I personally visit the occasional craft brewery and I am usually pleased with the results. However Sam Adams products have always been one of my favorites, and it's Angry Orchard brand I think has plenty of potential.

Here is why. As a naturally gluten free product cider appeals to consumers trying to avoid gluten in their diet, and as the new social drink of choice for those actually intolerant(although its estimated to be way less than 1% of the total population). Yet an overlooked aspect is that plenty of women have been moving to cider from beer. I see it in my social circles as women cite their lack of taste for beer, and it appears more socially acceptable for a women to be out with a bottle of cider than a beer in hand.  I remember going to an inaugural cider tasting event in 2013. There were about 40 vendors present. In 2014 there were almost 60. For 2015 there were almost 90 and the location had to be moved to accommodate the huge influx of vendors and attendees. I'll be excited to see what this year brings. Now these are just my personal experiences, but the trend is up for sure. There is a lot of potential in the cider category still untapped in the USA and the Angry Orchard brand is a market leader.

Boston Beer has seen some really great revenue growth the last few years too. It has experienced 5 year revenue growth of 16% that includes a 55% jump from 2012-2014. The company has an operating margin that has stayed stable around 16% the past 3 years and a net income percentage above 10% which I also love. Additionally the company has only 4% of sales overseas as reported in its 2014 annual report. My guess is the number is a bit higher for 2015, but this is actually a plus as the company does not lose from currency translations.  Additionally the company benefits from buying many of its raw materials from Europe with contracts negotiated in Euros or Sterling. I expect the dollar to stay stronger allowing the company to buy raw materials at a cheaper price over time as contracts get renegotiated. That's a hidden plus from the way the company operates and I do not think it is being reflected in the price.

The balance sheet is great with very little debt. The current ratio stands at 2.05, and when I subtract goodwill from assets I get an Assets/Liability ratio of 3.50 which is solid. Shows me that company is conservatively run, and instead of financing expansions with debt the company is choosing to use its cash as it sees a high rate of return on investments.

That is evident by an ROI of 20%, ROE of 22%, and ROA of 16%. All very respective numbers.  On top of this the company has been buying back shares the last couple years. While I'm not glad to see the cash used to buy shares at a price way higher than it is now I know my future share of earnings will be more substantial.

The stock is a bit pricey with a P/E of around 26 and yield of total stock yield of 3.64% at today's prices. Yet the stock has fallen all the way from $320 to around $200 for a 37.5% correction. This might not necessarily be the low for the stock, but I think it represents enough of a fall for me to add. If the stock falls a bit further to maybe 185-190 I'll make one more add. Cheers.

The stock was added on 12/29/15 at the closing price of 204.25