Saturday, September 17, 2016

The Long Haul Weekly Review 9/17/16

“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” - Peter Lynch

Couldn't agree more Peter.  For most people they don't bother looking at the actual financial performance of a company.  Most people are infatuated with the talking heads on CNBC or Bloomberg about the hottest and latest technology.  Don't get me wrong it can sound intoxicating and make you feel like the riches are right around the corner.  You have to resist the instinct to buy what's hot, and buy what's boring instead. 

This week I made a few buys,
all in the tobacco sector.  Not the the most exciting industry around.  Controversial? Absolutely. I'll detail the buys in a minute.  

This was another volatile week in the markets.  All told when it was said and done the S&P 500 actually gained 0.5%.  The Nasdaq was much stronger as it tacked on 2.3% for the week.  Much of that is attributed to Apple's(AAPL) massive gain this week as it added more market cap than nearly 400 hundred other S&P 500 constituents have. In other words these 400 companies don't even have $50 billion in market cap to their names on an individual basis*. That's really impressive. 

The markets are heavily awaiting next weeks Fed and BOJ meetings.  Add in the US elections less than 2 months away and it was a perfect time for traders to come back from vacation and take profits all month.  Add in some home stretch re-positioning by other funds and you can see why the markets are moving like a gorilla.  

Meanwhile a lot of rate sensitive sectors are moving as investors position themselves for a rate hike. Financials(XLF) have started to outperform Utilities(XLU) and Real Estate(IYR). The outperformance isn't massive, but it's still there.

Visit StockCharts.com to see more great charts. 

 Meanwhile this week we received a lot of economic data. The employment picture is still unchanged as we continue to log record lows for initial claims for unemployment. This week came in at 260k.  

However Retail Sales(-0.3%), Industrial Production(-0.4%), Capacity Utilization(-0.4%), and CPI(0.2%) are painting a mixed picture ahead of a Fed meeting.  Considering the Fed's rhetoric was strong for a rate hike it got many people thinking September is THE MONTH.  In reality it looks like December is what market participants are eventually settling on.  This is the absolute last month the Fed has if they don't want to be "political".  I can see it happening next week, and if not then December is a real big possibility.  I've thought for sometime that rates needed to be raised, but I don't run the Fed. 

People are getting all crazy about this hike as if it will be a death blow to the economy.  Rates will still be below 1%!!! C'mon people let's get real.If you think that's bad then try dealing with negative rates seen in Europe and Japan.  

 Portfolio Buys

I added UVV, MO, and RAI this week.  While the tobacco sector is rate sensitive due to heavy financing by the companies, I think worries here are over blown. Don't get me wrong higher rates down the road will increase financing costs. So I took a look at the debt profiles of each company. Here are some highlights.

UVV has long term debt maturing in 2019 and 2021 in $150m and $220m tranches. The effective rates on these loans are 2.94% and 3.48%. 

RAI has considerably more debt($13bil) of which 31% is maturing by 2020.  The current effective interest rate on all of it's debt is approximately 4.6-4.9%. 
 
For Altria's $12.8bil in long term debt $6.3 bil is maturing by 2020. Most of that is high interest(9%+).  In 2013 the company was able to issue 30 year bonds at 5.375%. Their current effective interest rate on all debt is 5.5%.

Even with a bump in rates I do not expect their financing costs to increase substantially. I'm expecting them to take advantage of lower rates for longer time maturities. Absolutely there is more risk involved to add shares with the prognosis for higher financing costs. The thing is I still don't see the industry losing it's profitability because of this.  In 10 years I see vaping taking on a larger role in company profits too. 

Short term the downward pressure stinks. But remember I'm thinking years out here.  Even with the decline in cigaratte use I'm confident they'll still make money.  You can see my buy prices by checking out the portfolio spreadsheet. Look at the "Cumulative Price" column. 

The rest of the portfolio has been quiet for the most part. It's been a rough week as some of our names have taken it on the chin. Notably McCormick(MKC) which has been a stalwart for us.  It's fallen nearly 7% in the last two weeks.  The shares are starting to look tempting for another add and I'll keep my eye on them. 

I think the drop in MKC shares underpins the rotation we are seeing in the market . Tech and High Beta names have been taking less of the selling pressure lately compared to the high quality names in the market. I will note it's been increasingly difficult with my desire to make adds. Stocks are getting more expensive, and after this round of additions(if anymore) I'll have to take a good long look at how I feel about adding after this. 

Visit StockCharts.com to see more great charts.  

That's all I have for this week.  I'm still working on some changes to the blog. Hopefully I'll have the portfolio page up and running soon so you won't have to check out the spreadsheet separately. Bring the popcorn for next week as I'm sure it will be a fun one in the markets. 

*Using 2015 market cap data according to Siblis Research

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