Stock Selections for 2019

This year we will have two lists of stock selections.  The first list will be a small list of new selections for 2019, split between US and foreign companies.

The second list will have stocks that are from existing portfolios to choose from, splits between US and foreign companies, if the individual portfolio doesn’t already have these stocks (we want diversification until you get to 15 or so stocks).

New Selections for 2019 – US:

  1. OTKA (OKTA) – OKTA is a software provider of access and authentication solutions for businesses.  OKTA pays no dividends.  It has been on a great run and is used by many major corporations.  It recently went down about 25% from all time highs which is a better price point to purchase.  A new competitor, PING, recently went public and saw its valuation go up, as well (OKTA’s market cap is about 10x bigger)
  2. Abbvie (ABBV) – Abbvie is a pharmaceutical company with a high dividend of almost 6% whose stock price went down almost by half after a recent merger, although it recently recovered some of the loss.  This also may be a good price point to purchase the stock.
  3. Starbucks (SBUX) – Starbucks is an iconic US brand.  The stock pays a modest dividend of 1.6%.  They are focused on profitable growth.

New Selections for 2019 – Non US

  1. BHP (BHP) – BHP is an Australian natural resources (mining / commodities) giant with a high 5.2% dividend.  They are diversified and well run (some competitors like VALE have had significant challenges recently)
  2.  Accenture (ACN) – Accenture is a world wide consulting and outsourcing company headquartered in the Bahamas with a modest 1.5% dividend.  About half their revenues are from North America.  They are well run and a leader in the consulting space

Stocks in US Portfolio to Consider (if not owned already):

  • American Electric Power (AEP) – Utility with 2.8% dividend
  • CME Group (CME) – futures exchange with combined dividends and special dividends more than 3% annually
  • Facebook (FB) – software company with excellent stock performance even after all the publicity.  Paying a few billion for Instagram may be one of the best purchases ever
  • Gold ETF (IAU) – gold does not pay a dividend but the price of gold has recently started rising with risk and high levels of debt behind major countries
  • Coca Cola (KO) – Coke pays a 2.9% dividend and is well run and focused on profits
  • Mastercard (MA) – Mastercard benefits from the rise in mobile payments and move away from checks and cash, and pays a very small 0.5% dividend
  • Procter & Gamble (PG) – Procter and Gamble owns and manages many brands and has a solid 2.5% dividend
  • PayPal (PYPL) – PayPal has done well since its split from EBAY (pays no dividend)

Non US Stocks in Portfolio to Consider (if not owned already):

  • Alibaba (BABA) – Chinese ecommerce giant (no dividend)
  • Taiwan Semiconductor (TSM) – Taiwanese chip builder with high 3.6% dividend
  • Unilever (UL) – European company that owns and manages brands with a good 3% dividend

Stock Selections per Portfolio:

  • Portfolio One – to discuss (significant amounts in cash)
  • Portfolio Two – ETF’s and cash, to discuss (40% cash now)
  • Portfolio Three – will move away from stocks and into ETF’s.  Will discuss between VTI (US), VEU (Non US), HEFA (Non US hedged), cash, and IAU (Gold)
  • Portfolio Four M – 3 stocks
  • Portfolio Five D – 4 stocks
  • Portfolio Six – 3 stocks
  • Portfolio Seven G – 2 stocks
  • Portfolio Eight K – 2 stocks

Stock Selections – February 2014

Due to recent stop orders being triggered it is time to select additional stocks for all but one of the six portfolios.  My goal is to select stocks and purchase them so that we can update the portfolio information in line with the need to file taxes by April 15, 2014 (although many of the portfolios don’t need to file because the beneficiaries don’t meet minimum income requirements between these funds and other earnings).

As the individual portfolios get larger, we want to keep the number of individual stocks manageable, so these portfolios will generally have larger purchases of a single stock than multiple stocks at smaller quantities.  The goal is to keep the number of stocks in each portfolio between 10 – 15 stocks, so smaller portfolios will buy in smaller quantities until they hit the 10 number, and the larger portfolios will buy larger positions when they hit the 15 number.

Stock Purchases by Portfolio: 

Portfolio 1

– 3 stocks at $2000 / each

Portfolio 2

– 1 stock at $1700

Portfolio 3

– 2 stocks at $1100 / each

Portfolio 4

– No purchases required

Portfolio 5

– 2 stocks at $700 / each

Portfolio 6

– 1 at $800

 Portfolio Selections for February 2014

US Companies

KO – Coca-Cola – $37, 52 week range ($37-$43), 3% yield, $164B market cap, $37B debt.  Coca-Cola is the worlds’ most iconic beverage brand.  They had some recent issues and their stock fell and this could be a buying opportunity for a well-run company with a good dividend.

APC – Anadarko Petroleum Corporation – $82, 52 week range ($73 – $98), 1% yield, $41B market cap, $14B debt.  Anadarko is a leader in US oil and gas development and there are continuing opportunities with the rising price of natural gas and US oil.

AVA – Avista Energy – $30, 52 week range ($25 – $30), 4% yield, $1.8B market cap, $1.5B debt  Avista is a well run utility in the Pacific northwest.

TWTR – Twitter – $56, 52 week range ($39 – $74), no dividend, $30B market cap, almost no debt.  Twitter is one of the main players in the modern internet.

GRPN – Groupon – $8, 52 week range ($4 – $12), no dividend, $5B market cap, no debt.  Groupon is attempting a comeback from recent issues and has come up substantially from market lows.

CVC – Cablevision – $16, 52 week range ($13 – $20), 4% dividend, $4B market cap, $10B debt.  Cablevision is run by the wily Dolan family and may be part of industry consolidation.

Non-US Companies

BHP – BHP Billiton – $70, 52 week range ($56 – $76), 3% dividend, $188B market cap, $38B debt.  BHP is a well run global commodity company based out of Australia.

TAC – TransAlta Corp – $12, 52 week range ($12 – $16), 4% yield, $3B market cap, $4.5B debt.  TransAlta is a Canadian energy company that recently cut their dividend and plans to spin off some market segments but provides energy to the growing Alberta market so this may be a buying opportunity.

BIDU – Baidu – $172, 52 week range ($82 – $185), no dividend, $60B market cap, $3B debt.  Baidu is an iconic Chinese internet company.  Their price is near the top of the range.

Portfolio Two Updated August 2012

Portfolio Two is the second longest lived-portfolio, at about 8 years old. A link to the updated statement is here or you can find it in the link list on the right side of the page. The current value is $13,780. Investment by the trustee has been $8000 and the beneficiary $4000, for a total of $12,000. The gain so far is $1780 or 14.8%, about 3.1% / year since inception.

Current Portfolio

We are reviewing the stocks in Portfolio Two as part of the preparation for purchasing stocks for 2012. Wynn is a casino company in the US that has interests in Macau (which dwarfs Las Vegas) and has been involved in lawsuits with their Japanese partner, resulting in a lost of 32% when adjusted for dividends. We need to consider whether this stock can come back or if we no longer believe it will recover in the near or medium term. Urban Outfitters (URBN) faced a large loss when they missed earnings but have made up about 1/2 that loss since then. Wal-Mart and Diageo (ADR) have been good performers recently.

Stocks Sold Previously

Most of the sales were right with 20/20 hindsight (not present in real life) – we booked big gains on BHP and CHL and the stocks have yet to hit those highs.

The Role of Bonds in a Portfolio and Foreign Bonds

A while back I was talking with a friend of mine in the money management industry. I asked him if any of his high net worth clients bought non-US bonds in their accounts (the securities are held in the name of the client, but the advisor helps with selections) and he said one of them picked up a big position in Australian bonds. How did he do? I asked. The answer:

His bond positions increased significantly in value

Why is this? And what was the client trying to accomplish?

The client was likely looking for an increase in the value of the Australian currency against the US dollar, and buying bonds as a proxy for this bet. Bonds have the advantage of paying off interest as well as providing diversification from the US dollar, but in the case of this Australian debt, the percentage of the return that came from the increase of the Australian dollar vs. the US dollar provided most of the gain. The Australian dollar was as low as 63 cents per USD in late 2008 / early 2009 and is now at over $1.03 per USD as of mid 2012. That is a 95% gain! Any interest income or changes in creditworthiness (short of seismic market events like the Greek default) don’t move the return like this.

His client wasn’t the only one. At about that same time I talked to another professional who also said that the commodity producing countries were going to have stronger currencies relative to the US dollar, and was making his equity picks accordingly. If you bought an Australian ADR on an Australian exchange in 2008/9, in US dollar terms it would also be up an additional 95% (give or take some) in US currency when compared on a similar apples to apples basis, before taking into account the performance of the underlying stocks. Google Finance offers a simple graphing tool to see the performance of various currencies against one another over multiple time periods – the US dollar vs. Australian dollar is here.

Let’s look at BHP (Broken Hill Proprietary), the massive mining conglomerate out of Australia. On the ASX (Australian stock exchange) you can see that the price was about $25 in late 2008-9 when the Australian currency was at its nadir and the price today on the ASX is around $32, a gain of about 28%. However, the price of BHP as an ADR listed on the US stock exchange (which is exactly the same instrument, denominated in US dollars) was drastically different – it went from around $35 to $65, a gain of 86%. The difference in the change of the currency contributed to over 2/3 of the total gain during this period.

A different example is Bankocolumbia. Here is a graph of the Columbian Peso (COP) vs. the USD per Google Finance for the year to date through mid 2012. The Columbian peso is up almost 10% vs. the US dollar during this time. The ADR for Bancolombia S.A. (CIB) is up about 9% during the year (listed in the US on the NYSE). Bankocolumbia listed on the Columbian exchange (and obviously denominated in Columbian dollars) can be found on Reuters (Google apparently doesn’t include the Columbian exchange in its price history) and the price has been roughly flat during the year to date ended June 2012 at a price of around 27,000 CP.

Based on these examples if you know 1) the performance of the stock on its “home” exchange 2) the performance of the currency vs. the US dollar 3) the performance of its ADR on a US exchange, you can see the portion of the return that is “currency based” and the portion of the return that is “stock based”.

While sophisticated investors have known about the impact of currency changes on portfolios for decades, given the relatively rapid (in years, not decades) shifts in relative currencies that is occurring today, it is important that smaller investors start to understand the impact of these currency changes on their investments.

The most important part of the view is what you DON’T see on your (relatively worthless) brokerage statement – the “absolute” return of your dollar denominated assets relative to what they would be if they were denominated in other currencies. By this (theoretical) example, if you held assets in US dollars, and you could have had those same assets held in Japanese Yen over the same period, you lost 35% of your value over the last 5 years due to the decline of the US dollar vs. the Japanese yen. Until a turnaround in 2012, the US dollar had been declining against virtually every other major currency in the world, and reducing returns in the US in absolute terms, as a result, whether we noted it or not in our statements.

Thus the conclusion (this is obvious, sorry) is that the relative return of stock instruments is substantially impacted by currency returns, and thus if you are selecting an ADR of a foreign country you are betting on 1) the future price of the stock vs. today’s price 2) an increase or decrease in that country’s currency vs. the US dollar, with increases in that country’s currency vs. the dollar “boosting” your return here in that stock in the US. This can be seen clearly by the three components listed above. Since stock investors are (generally) trying to earn a long term return above inflation and inclined to take some risks, these risks are reasonable given the “mission” of stock investing and thus is in line with investor motives (depending on their risk profile).

For instance, why are people discussing the relative merit of a split of stocks vs. bonds vs. cash? When I sign into my brokerage online what jumps up instantly is a split of my instruments and a split of what is stock vs. bonds. This is due to the fact that there is a basic premise that “stocks are risky money” and “bonds are safe money”, thus investors should split their dollars between these two pools of money in order to provide for upside risk (stocks) and avoid downside risks (bonds).

A recent New York Times article titled “The Search for Calm In Bond Markets” discusses this impact among other issues in the article.

A 2011 study by the Vanguard group showed that currency fluctuations, not market moves, account for a vast majority of the overall volatility in foreign bonds.

Thus what are you trying to accomplish with bonds in the first place? Is it preservation of capital and “keeping up” with inflation, which is the implied theme in most investing literature? If this is the case, then investing in foreign bonds generally violates this “purpose” of investing in debt.

However, another “implied” conceit underlying the typical bond / stock discussion is that depreciation or decline in the value of the “base” currency (the US dollar, for this discussion) doesn’t really matter, when in fact it matters greatly, especially over time. The net value lost to US citizens caused by the US government’s zero interest rate policy (ZIRP) which contributes to the currency’s decline, along with other elements, is very significant and over 30% depending on how you measure us against other economies and currencies.

To jump around a bit more, CIB (the Columbian bank) is now issuing debt for Western (US investors), denominated in US dollars! While debt doesn’t always directly impact a stock price, moves in a currency now could significantly impact the company depending on whether or not that debt is hedged against the dollar (and if it is hedged, the cost of those hedges must be considered in addition to the interest rate on the debt from the perspective of a stock holder, since it isn’t free). Recently I wrote about the vast riskiness of these plays, given that currencies can move significantly and the issuer must be prepared for these moves. CIB issued $1 Billion in bonds denominated in US dollars with a 10 year maturity payable annually at an interest rate of about 6%. Western investors who are hungry for yield apparently snapped up the bonds, and this went virtually unnoticed in the popular press. Given the (stale) perception of Columbia as a drug haven tied to virtual civil war, it is pretty amazing that they are now able to borrow $1 Billion US dollars at 6% over a period of 10 years and it isn’t news anymore. I hope whomever bought those bonds understands the risks, and the fact that 1) this is Columbia, not a state down the street 2) the bonds are denominated in US dollars and CIB needs to be prepared for swings in relative values of currencies, which have moved over 25% on a given year 3) 6% is a rate that would have been unheard of even 5 years ago.

If I was advising someone getting into the finance industry today I’d say that bonds is where the action is, not stocks. Bonds range from some of the most risky instruments on the low or high end and encompass all sorts of risks and opportunities. To someone just looking at bonds as a safe asset class, you are missing the mark.

Re-Update On Portfolio One Performance

It is time to update all of the portfolios on the site. Since I track it manually in excel (in order to check all the fees, etc… on the brokerage account) it takes me a while to do this by hand. I check performance day-to-day (or at least periodically) using the google portfolio tool, which works great. Since I was going to do the other portfolios I figured I’d re-update portfolio one since we had a great month and it is easy to do the update when there are no buys or sells.

Portfolio One is nearing the $20,000 mark, at $19,775.   This file has been seeded with $15,000 of contributions, so it is up about 32% over its life, which is approximately 9 years. The “effective” life is much smaller, since we have been making contributions of $1500 / year for all years except the first one, when it was $500. That is a pretty good rise since the indexes (US) have been worse over that time, although to calculate it effectively I would need to break the $1500 “tranches” into unique components and then determine their annual performance through today… which I will probably break down and automate some time.

This portfolio is nicely balanced with about 15 stocks. At anything more than about 10 stocks or so you get a reasonably diversified portfolio, assuming that they aren’t all the same types of stocks. Also comparing to US benchmarks probably isn’t quite right since I have been advocating about 50% overseas stocks for the last several years since most growth is overseas and this means that I should be tracking against worldwide developed countries, instead.

More importantly than talking about how the portfolio has DONE is talking about STRATEGY. I highlighted individual active stocks and put those with more than $200 “up” as green, and with more than $200 “down” as red. Since we sold Nokia (a disaster) and Microsoft (flat) we have a lot of green and not much red anymore. The point is to have a strategy going forward, not backwards, and the question is whether or not they will go up from here and when to sell, if something has reached a peak. Generally I should try to sell before they hit the $200 mark on the down side; this would have saved some heart-ache with Nokia. On the flip side some have gone pretty far down and come back (mostly), like eBay. But as a strategy point I should try to sell or at least consider it seriously around the $200 mark.

As far as the “up” stocks, it seems that the Chinese oil firms are in a bubble stage. We will watch those, just like we watched China Mobile and BHP. We aren’t with them forever, and their huge market cap means that a big multiple means that there has to be a lot of profits earned in the future. A lot of the gains are a bet on China itself and away from the US dollar, so that has to be figured in, too.

Of the ones we sold before, Netscout (NTCT) gave us a nice gain but we missed the jump from $14 to $24. It came back down to where we bought it so it seemed like a good move at the time but we also need to watch the long term. There likely will be a consolidation in the tech market as the big players seek to utilize a lot of their cash and look for growth so if we make some sells I might be looking for some smaller tech players to jump into.