Recent transactions and mid week money

I’ve been making a few minor tweaks to my portfolio recently. With the markets at the levels they currently are, I haven’t been really tempted to go in and make many net additions to my portfolio. That doesn’t mean that there haven’t been a few areas where I’ve looked to add funds. 

 

Recent Sale activity:

Apple

I exited my entire position in Apple. This was probably the tech position that I had the least amount of conviction in. Apple’s growth profile is flattening out in my view. It will likely experience some margin compression as it rolls out “mini’s” and “cheaper versions” of all it’s flagship products. It will still continue to be a very profitable business, and have some good growth, but the nature of consumer electronics is that it’s a very fickle business.

I would have been happy to hold Apple for a longer period of time, but given my move to significantly ramp up my exposure to large cap US holdings in my 401k, I’ll be getting healthy does of Apple as part of that mix.

I sold all my 10 Apple shares for $521, realizing $5200 in proceeds and a nice gain of about $1k, plus about $100-$200 of dividends thrown in for good measure. Like most stocks, Apple enjoyed a nice ride up over the last year, certainly from where I bought at $410.

BP

I slightly trimmed my rather large BP holding. I sold 115 shares at 45.70, realizing about $5k in proceeds. I still really like BP. I continue to believe that it remains undervalued. The significant discount from the legal overhang will pass in time.

But I was very exposed to the stock, probably too much so. It was the single largest position that I owned in my US portfolio. I took advantage of a 15% rise to sell off a small portion of my holding. I still have about $12k invested in the company. My single stock exposure was just a little too great here.

Colgate

I had a small holding in Colgate, approximately $4k.  Again, I really like the Colgate business. It’s a nice stable consumer staple. I really like the steady predictable demand from the company. But it’s run up….a lot. I acquired some Colgate just earlier this year at around $55. It’s shot up close to 20% since then. The elevated valuation, plus the fact that I’ll also be indirectly acquiring more of it as I ramp up my 401k investment prompted me to exit this stock.

Purchases

Health Care Services Group (HCSG)

This is a new purchase for me. HCSG is an intriguing company. it provides laundry, maintenance services, housing keeping to hospitals and nursing homes, rehabilitation facilities and aged care facilities. I love businesses like these that have long term locked in contracts and ride a secular trend (in this case, the increasing “greying” of the baby boomer population in the US).

This is a large market segment that is experiencing good growth. Health Care Services Group has been growing at a good clip, with revenues exceeding 10%, and return on equity exceeding 20%. The dividend yield on offer is 2.5%. Best of all, it has no debt. I’ve wanted to bulk up my exposure to dividends in the healthcare space. This provides a nice avenue to do so. I purchased 150 shares at $25

United Guardian

I added to my position in United Guardian, in which I already have a reasonable stake. I was able to acquire another 55 shares at $25/share. I continue to like this stock. UG reported an increase of 14% in yoy EPS growth in it’s most recent quarter.

The more significant thing was Renacidin, United Guardian’s moneymaker pharma product came back in market after some supply disruption. The introduction of this product back into the market augers well for the future profitability for the company and for continuing dividend increases.

Resmed

I acquired another 40 shares of Resmed stock at $50 share. Resmed missed quarterly earnings estimates last quarter and got spanked by the market. It dipped about 14% on the miss. Frankly, I viewed the earnings miss and stock reaction as an opportunity to load up. My outlook remains that this is a high growth business paying a modest dividend that will rapidly grow over time.

Female Health Company

I acquired another 100 shares of FHCO at $9.30 . I continue to like the Female Health Company from an investment perspective. It has a unique product, protected by IP in a rapidly growing market. Best of all, it’s another hidden gem.

Yandex

Lastly, I bought some stock in Yandex, a Russian internet services business. You can think of Yandex as Google’s equivalent in Russia. Google operates in Russia, however Yandex is the market leader in search, with close to 62% market share. The key to Yandex’s success in my opinion is the language localization it provides which results in more targeted searches.

Yandex will leverage the shift in print to online ad spend that is occurring globally, as well as the increasing spending power of Russian’s as the Russian economy grows.  I think Yandex will selectively expand globally over time. I bought 130 shares in Yandex @$35. Yandex isn’t a dividend payer, but I’ve decided to be a bit more open to high growth companies that aren’t currently paying dividends.

More on that later.

It’s been way too long since I did a Mid Week Money, and there’s been a lot of great stuff in that time.

Dividend Growth Investor had a great article on his retirement strategy for tax free income. This was a part of a 4 part series. I share many of the views expressed, particularly the need to explicitly focus on tax expense in an investment strategy. That’s part of the reason I’ve determined that maxing out our 401k could get us an extra $500k

Dividend Mantra wrote about why he enjoys when a stock he owns falls in price. I can’t say I’ve ever really enjoyed when this happens, particularly in 2009 when I bought heavily on margin and bled for days. I do understand his reasoning though.

Dividend Ladder had some interesting picks in China for dividends. I’m always interested to discover some interesting and exotic dividend picks that provide some exposure that i don’t have. China Mobile is one I put down for further research.

W2R updated his 2013 passive income goals. I like having dividend goals and investment goals myself. It helps give me something to aim for.

Passive Income Pursuit asked for help in identifying some good candidates for dividends!. I share his sentiment. It’s tough to find really compelling picks that one doesn’t already own…. and even there valuations are sometimes stretched.

Dividend Growth Stock Investing introduced his Dividend Academy. I look forward to finding out more when it’s open for business.

My Money Design had an interesting post on whether the search for early retirement could be ruinous. In my view, progress towards financial independence is helping me find my optimal balance in terms of energy spent at work. I’m still working hard, but the foot is gradually coming off the gas… :)

 

Comments

  1. Interesting moves, FI. I have had FHCO on my list of companies that I need to research more but havent got around to do it. Your post and move just bumped it up to the top of my list of things to do.

    Thanks for sharing

    • Integrator says:

      R2R,

      I’m cautiously optimistic on FHCO. It has a long way to run to prove itself out. The 1st inning of 8 right now. At $260M and change, the upside for this stock is all blue sky. These are the type of opportunities I try to seek out to add a little upside to my portfolio. It’s potentially a multibillion dollar market if the company executes well. My own sense is that they’ll be take over before they reach that sort of potential, but I like what I see so far. Having a strong core of very stable stocks allows me the freedom to place selective positions in companies like these.

  2. Thanks for the mention Integrator!

    Good to see you mixing up the investments some, and I am on the same page with you on some of those smaller DG stocks. Big potential for growth, both in value and dividends. Not surprised by your moves out of some of the equity positions you have. Take some gains when you can, and put them to work elsewhere.

    • Integrator says:

      W2R,

      I haven’t sought out gains that actively in the past. I have fairly low turnover in my portfolio generally. But I’m increasing my exposure to some of the larger companies that I’ve just sold down in my 401k index fund. I’m thinking of repositioning my taxable account to positions that have more scope for growth and dividend increases. No wholesale changes to what’s currently in there, this is more forward outlook. In my large cap 401k fund, it’ll just be business as usual.

  3. FI Fighter says:

    Don’t blame you for losing faith in Apple lately. For the last few years, each product refresh hasn’t really introduced anything new or groundbreaking. It’s kind of just a more refined version of last year’s model. I would also worry about the margins thinning out, especially as tablets and smartphones continue to become commoditized.

    • Integrator says:

      FI Fighter,

      I don’t think I’ve lost faith in Apple as much as recognizing that with now maxing out our 401k’s, we are going to be progressively holding more and more stock in Apple (albeit in smaller increments) over the next few years as our 401k contributions increase. That plus the fact that it was the position that I had the least amount of conviction in when I entered prompted me to sell. Apple should still continue to churn out reasonable profits going forward. I don’t see major near term threats to dividend growth for the stock. The long term position is less clear.

  4. FI,

    Interesting group of stocks you picked up. I hear you about Apple, there is so much exposure in just about any retirement stock fund, or even index fund. I still own some, but I don’t see it as a forever holding. But they do still generate so much cash. A lot of healthcare stocks, certainly a growth sector

    -RBD.

    • Integrator says:

      RBD,

      I’m trying to add more healthcare exposure to my portfolio. They greying of the baby boomers and their medical needs is a trend that will keep stocks growing and dividends flowing for the forseeable future. The key has been to avoid those co’s that may be tainted by recent health care changes. The insurers and pharma co’s are ones that I’ve been keen to tiptoe around. In my view, the underlying trends for HCSG, Resmed and FHCO are all positive, something that should sustain their businesses for years.

  5. moneycone says:

    Absolutely agree on FHCO! I rarely see coverage of this stock, so when I saw this I knew I had to comment! I recently started accumulating this stock and I see good potential.

    On AAPL, I bought this stock and started accumulating before the iPhones or the iPads! I still have a considerable position, but I did sell a few.

    On BP, looks like it is slowly starting to pick up. It has a ridiculously low PE and a decent dividend. Unless BP screws up again, it should be decent bet.

    I’m surprised why you sold CL. Rock solid company – one of the few ‘buy-and-forget’ stocks in my opinion! I would add more if the price goes down. Too expensive at the moment though.

    • Integrator says:

      moneycone, I still like BP. The legal issues will blow away and they aren’t likely to leave lasting impacts on the company. Of course one can never be sure with the legal system and punitive damages, but the odds are good that BP will emerge just fine, if Exxon Valdez is any kind of benchmark. I still have a $13.5 k position in the company, so I really just trimmed around the edges.

      CL- I love the business, but gee, the stocks a little pricey for the growth it’s been delivering. 5 year average EPS growth of <10%, revenue growth of about 6%. Honestly, I probably would have held on if I could have seen myself increasing the position, but at these levels, that’s not something I planned to do anytime soon. Of course, if it happens to fall 30% from here, I’ll happily load up :)

  6. AAPL is easily my least conviction. I’m pretty much just waiting to see if Carl can get them to do a big buyback or not.
    CL. I owned them in the past and they just got too expensive. I sold them for a nice gain. I’m surprised at their valuation. Can’t blame you at all for wanting to sell here.

    • Integrator says:

      Apple buyback may juice up the stock some. They need to do something with all the excess cash. I don’t see a dramatic business catalyst for the company any time soon. It will continue with steady revenue growth and profit, with likely declining margins. That’s a reasonable story, not necessarily a compelling one.

  7. Integrator,

    Thanks for including me!

    Very interesting purchases there. I like the looks of some of them. HCSG is particularly compelling based on the business model, but the valuation is a bit rich for me here.

    Can’t blame you on the sales. CL seems to know no bounds!

    Best wishes.

    • Integrator says:

      DM,

      I hear you on the HCSG valuation. For smaller companies with rapid growth, I tend to look past current yr PE ratio’s. Stock earnings tend to be so rapid that these companies are priced on 2-3 yr out expectations. If the underlying trends are positive I tend to be a little more flexible with valuation, more so that with established businesses such as a Colgate for example. HSCG is riding a trend toward health care outsourcing, which will only increase more and more over the years as demand in hospitals and nursing homes forces them to outsource non core operations. With revenue growth >10% and EPS growth >20%, I suspect the stock will “grow into” it’s pricey valuation.

  8. Jason says:

    I see everyone is tiptoeing about your purchases so I thought I’d give some constructive criticism. Never…ever sell a cash flowing asset that’s been around for decades! you only need to look as far as Buffett who has mentioned the mistakes hes made in his lifetime selling the wrong asset when he should have held. You have a nice sized dividend income that you could have easily used to purchase these riskier companies if you wanted to invest in them… But it’s my opinion you will regret selling BP and CL 15-20 years from now. That’s like cutting down the tree that provides abundant fruits:-). Hope you don’t mind my candidness.

    Thought the following case study could be an eye opener…

    http://www.joshuakennon.com/a-20-year-history-of-colgate-palmolive-stock/

    Jason

    • Integrator says:

      Jason,

      Thanks for the comment. I actually really value contrary opinions here. It helps me think through counter investment thesis to my own, which makes the decision making more robust. Let me lay out the thinking a bit further behind each of the moves.

      I view the partial BP sale as more trimming around the edges. I still have a very significant exposure to the stock (just under $14k at current market value). Single stock exposure was pretty significant compared to my overall US portfolio, greater than 10% of total portfolio. I get nervous when I have positions that large, particularly when they are mired in some legal wrangling that could go in any direction. i’m confident the business will emerge stronger and relatively unscathed. But US tort law, with consumer friendly juries can be a strange beast and plaintiff lawyers all want their pound of flesh. I took the recent price rise as an opportunity to take a little off the table.

      The Colgate stock sale was not so easy to justify. I agree with your assessment of the business. It’s very high quality. These are the businesses you want to hold forever. It’s also close to the most expensive it’s been in about 10 years. That’s not to say it won’t move higher, but I really didn’t see myself adding to it at these levels, and my holding size was too small in my opinion. It’s a mature business, lacking current growth drivers that I’d just be picking up at an expensive price if I were to add. That said, if the price was to return to more reasonable levels, with PE resembling historical levels, I’ll definitely reenter. I guess like Buffett, I’ve also had some negative experiences selling too early. Mastercard was my bugbear. I bought at the IPO for $45 and substantially exited at $170-250. I though I’d done well, but I had sold way too soon. I reasoned that the holding was a small one, as is the case here. The difference was that Mastercard was still a business with significant growth drivers and favorable trends. I don’t see the same with Colgate at the moment.

      Of course, a discount to fair value pricing would likely get me back in the stock, even though I’d have some small indirect exposure via my 401k.

  9. Jason says:

    You certainly have very valid justifications for your decisions. The constant debate with oneself is primarily the reason why investing is such an art, and often time opportunity costs go unnoticed unless documented and tracked.

    BP is one of my largest holdings as well, and I have been accumulating it since the dividend was cut after the oil spill to take advantage of the opportunity. Certainly the litigation surrounding BP is a huge risk and the reason BP is so undervalued relative to earnings. Which brings up an interesting phenomena that has been documented in Jeremy Siegel’s book “The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New” i’d like to share. Interestingly, it was characterized using Phillip Morris and IBM. I’m going off memory here and don’t have the book in front of me but basically, in his case study of the better long term investment between the two the PM investors did overwhelmingly better than the IBM investors even though earnings growth, revenue growth, profit margins, etc. for IBM have always been higher, faster, etc. than PM. He goes on to explain that because of the constant litigation battles for PM the stock was always at a better valuation than IBM so investors are constantly over paying. With dividends reinvested, more shares were being accumulated with PM than IBM and over long periods of time this pounds the high growth company….assuming survival of company and increasing dividends. I built a model in excel that highlights divs being reinvested or not and separates the stock growth from the dividend growth and I observed this to be correct…after 20 years or so the compounding becomes absurd. It’s not an exact model, because I can’t replicate the daily changes in stock price, but useful data can be observed with averages. Here’s an example of a scenario. Scenario 1: stock price averages 10% growth and div increase averages 12% growth for 20 years. Scenario 2: stock price averages 5% growth and div increase averages for 12% growth for 20 years as well. 100k invested in both scenarios with 3.5% entry yields $3,624.12 in divs reinvested qtrly after the first year.

    After the 20 years:
    Scenario 1 has a total valuation of $1,544,072.77 which equates to an annualized return of 14.67%. Scenario 1 annual dividend in year 20 was $81,452.06 and cumulatively totaled $532,732.96 in divs for a total annualized income return of 16.84%.

    Scenario 2 has a total valuation of $1,044,476.71 which equates to an annualized return of 12.45%. Scenario 2 annual dividend in year 20 was $150,640.77 and cumulatively totaled $771,646.27 in divs for a total annualized income return of 20.49%.

    BP is reminding me of this case. When comparing BP with its peers, they all make loads of money, but notice the market cap discrepancy I’ll post it like this (earnings/market cap): XOM ~33B/414B, CVX ~ 23.5B/237B, RDS~ 23.2B/218B, BP~23.4B/149B. Essentially, BP makes similar earnings to CVX and RDS but the market cap is substantially lower. I know this is only one piece of valuation, but this is extremely noticeable.

    Anyways, I enjoy your site and analysis. Heres to BP recovering and getting back to peer valuations:-) Or should we hope for consistent depressed share price for accelerated dividend income;-)

    Cheers,
    Jason

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