Stock Selections for 2018

Stocks to choose from for 2018:

US Stocks

  • CME Group (CME) – a financial firm that trades and clears futures products and has a high dividend (they have an annual dividend plus a special year end dividend of 3.5%+ in total).  They make money from trade volume which tends to increase in times of volatility or disruption in the markets, and are thus kind of a “hedge”
  • PayPal (PYPL) – PayPal spun off from eBay and makes more money as the world moves to digital payment methods from cash.  They also own Venmo which they have yet to monetize (existing stock owned by Portfolio One)
  • Union Pacific (UNP) – Union Pacific is a large and well-run railroad company (existing stock owned by Portfolios Five and Six)
  • Electronic Arts (EA) – An American video game developer that has been hit lately but could be a bet on the potential of this sector and streaming

Foreign Stocks

  • Inditex (IDEXY) – this Spanish company is known in the USA as “Zara” and is a leader in “fast fashion” and integrating e-commerce with direct retail
  • Alibaba (BABA) – the Chinese e-commerce giant has been growing and expanding into different domains (existing stock owned by Portfolios Three and Seven)
  • Taiwan Semiconductor Manufacturing Company (TSM) – this manufacturer of semiconductors counts Apple as a large customer and has been doing very well for many years (existing stock owned by Portfolio One)
  • Infosys (INFY) – Indian outsourcer and technology company has been doing well and benefits from the weaker Indian currency (existing stock owned by Portfolios One and Three).  Note – this stock just split 2/1 effective 9/12 so the price history will look strange if you see it online

Other

  • Gold ETF (IAU) – this ETF tracks the price of gold.  Gold does not provide a dividend but could be a hedge against inflation or disruption

Between the eight portfolios, there are almost 40 different stocks to follow.  Generally, we select “new” stocks rather than re-recommend existing stocks.  However, for this round, we will have some “new” stocks but also continue to recommend some existing stocks that the portfolios can choose from.  This will slow the overall growth of stocks across all the portfolios which will make it simpler to track.

We will continue to recommend a mix of US and foreign stocks to choose from, although each portfolio can select whatever they’d like (they don’t have to split their investments equally between both).  Recently the US dollar has gone up, resulting in (relatively) poorer performance for foreign stocks.  However, this can change and these are long-term portfolios so we recommend US and foreign stocks rather than taking an effective “position” on the future direction of US currency (i.e. if you thought the dollar was going up indefinitely you would buy US based assets exclusively).  Folks often fail to remember the past, when the US dollar fell for years against many different currencies.

Portfolio Two Updated July, 2018

Portfolio two is almost 14 years old.  The beneficiary contributed $7000 and the trustee $14,200 for a total of $21,200.  The current balance is $39,012 for a gain of 84% or ~8% / year when adjusted for the timing of cash flows.  You can see the detail here or at the link on the bottom.

This portfolio is unique because it has moved to ETF’s and ~ 25% cash position.  The ETF’s have been doing well, with a large position in VTI (total US market) and a split between VEU (all world non US) and HEFA (all world non US hedged against the US dollar to get local market performance).  There also is a small biotech position (IBB) and gold ETF position (IAU).

When we moved to ETF’s from individual stocks in 2016, we also purchased a 2 year CD which paid 1.55% interest, because our money market fund was essentially offering “zero” interest on our money and we wanted to keep about $10,000 or so in cash and yet get some sort of return on the money.  This CD recently redeemed into cash in the account.  We could buy a new CD, but we are currently getting 1.85% return in our money market so we can just leave it there because the 2 and 3 year CD’s aren’t offering much more than that, and interest rates seem more likely to go up than down.  Thus we are planning (for now) to just leave cash in the money market instead of buying a CD because the incremental interest is negligible.

I want to have the beneficiary contribute now and have the trustee match, make our investments for summer 2018, have everything clear, then move the fund out of UTMA status and to the beneficiary (like we did with Portfolio One).  Then we can give the (technically former) trustee “agency” capabilities so that we can still take advantage of my free trades (which apply to the accounts that are under me or I have agency capabilities for).

 

Stock Selections for 2017

Below are our stock selections for 2017:

US Stocks

  1. Appian (APPN) – $24, 52 week range $17-$27, $1B market cap, no dividend, almost no debt.  Appian is an internet software company that provides automation software for corporate customers.  Well run and growing fast, went public recently and has done well since the IPO

2. Nvidia Corporation (NVDA) – $179, 52 week range $63-$191, $107B market cap, almost no dividend, $4B debt.  Nvidia makes chips for games and graphics cards and these chips are also being used for AI and machine learning use cases.

3. General Motors (GM) – $42, 52 week range $30-$42, $61B market cap, 3.8% yield, $55B debt.  GM is an iconic, global auto manufacturer with strong worldwide presence including China and has invested heavily in electric car technology.  Non US sales total 58% of volume (but a smaller percentage of profits).

4. Snapchat (SNAP) – $15, 52 week range $11-$29, $18B market cap, no dividend, no debt.  Snapchat went public and recently has lost almost half its value.  The company has over $2B in cash but is running a large loss due to operational expenses and acquisitions.  However, it is still strong in market and mind share and could also be an acquisition candidate for the right price

International Stocks

5. Baozun (BZUN) – $36, 52 week range $11-$41, $2B market cap, no dividend, little debt.  Baozun is a Chinese e-commerce provider for many major companies.

6. ABB (ABB) – $25, 52 week range $20-$25, $54B market cap, 3% yield, $7B debt.  ABB is a Swiss company and European conglomerate with strong interests in power and electricity generation.

Other

7. Gold ETF (IAU) – $12, 52 week range $11-$13, no dividend.  This ETF tracks the price of gold.  In case of a market correction (prices go down), gold often holds its value on a comparative basis.  On the other hand, gold pays no dividends and does not generate profits

We looked at bitcoin but there currently isn’t a direct bitcoin ETF and if someone wanted to trade bitcoin or ether they would be better off trading it directly.  These sorts of crypto currencies can cause taxation and other related issues and are too complex for this portfolio at the current time.

Interim Stock Selections for January 2013

During the course of 2012 several of the trust funds have sold off stocks for various reasons, including:

– Exelon (utility) started to go down significantly as their dividend came under threat
– Canon (Japan) fell as part of the overall Japanese stock market
– Metro PCS rose quickly on a takeover attempt

As stocks are sold, cash is returned to the money market account. It is time to re-invest those proceeds in different stocks. Here are the candidates:

– Garmin (GRMN) – the provider of integrated and stand-alone GPS devices for air, water, and land navigation. Current price $38 (52 week range between $35 and $50), dividend yield 4.6% (high). The company seems well run and able to deliver on their dividend with growth

– Gold ETF (GLD) – this exchange traded fund (ETF) invests in gold, and is priced at $161 (52 week range between $148 and $174). There is a management fee of 0.4% / year (taken out of the price). There are no dividends on gold, which just represents physical gold held in storage. Gold as an investment moves higher when there is inflation in currencies and / or times of turmoil. Many also say gold is overvalued, and it does not provide a dividend. When gold is sold, you pay a 28% tax rate (ordinary income) since it is classified as a “collectible”

– Molson Coors Brewing Company (TAP) – the brewer of fine (ha ha) Coors and Molson, with a low P/E and decent track record. The price is $45, near the 52 week high of $46, and the dividend is 2.8%

– Splunk (SPLK) – a provider of software for real-time analytics recently went public and is a potential buyout candidate for a larger firm. The stock price is $33 (52 week range $25 – $39). There is no dividend.

– NTT Docomo (DCM) – a Japanese mobile communications company with many subsidiaries. The price is $14 (52 week range $13 – $18) and the dividend is 4.8%.

– WIPRO (WIT) – an Indian outsourcing firm with worldwide reach. The current price is $9 (52 week range $7 – $11) and the dividend is 1.1%

Low Interest Rates and Side Effects

I was recently at a bank as part of a non-profit (else I rarely step foot in a bank) when I was talking to the banker about setting up a new account and we started discussing the interest rates that each of the potential accounts would receive.  After a bit of discussion I said

At these rates, it doesn’t matter

Basically interest rates on savings accounts and non CD accounts are effectively zero unless you have an immense amount of money in that account.  For example, the Chase “savings” account offered .01% – which means that if you have $100,000 in the account all year long, you are going to make $100.  That is the definition of negligible.  Certainly you can shop around a little more and get a higher interest rate, but you aren’t going to get near 1% unless you buy some sort of vehicle with other conditions (i.e. locking up your money for a period of time).  The woman at the bank was apologetic but I knew that there was no reason for her to be – it wasn’t her fault that the nation had undergone a massive ZIRP experiment.

One side effect is that banks have now effectively become a vehicle for 1) making transactions 2) providing services.  They are no longer really a vehicle for making money (i.e. earning interest, especially compounded interest, that is meaningful over time).  Thus your money now is more of a way to avoid charges on those services (free checking, or avoiding low balance charges, or access to certain types of transactions without fees) than a means of making money.

The traditional function of banks is to take your deposits and turn around and “leverage” that money to make loans to others.  Since banks can count on not everyone to show up and demand their deposits back on the same day (unless there is a bank run), and they should be able to earn money on the difference between the cost of the money to them (they can borrow at the lowest rates) and what they charge loan customers, this should fund much of their profits.

The newspaper industry is dying because they provided journalism as a service but made their money selling advertising (effectively as a local monopoly for many years).  When businesses and individuals stopped buying advertising (hello, Craigslist), the “service” that they provide, journalism, had to pay the bills.  As a result this industry has gone into free fall since then.

Banks and many other financial institutions generally do a lot of services but make their money on the spread between what they pay you and what they pay for interest in terms of their cost of money.  Then they take that difference and it generally subsidizes everything else.  If that difference becomes negligible, then the financial institution has to make money in some other manner, or see their profits wither like the newspaper industry.

With interest rates so low and money washing into their doors, banks should be able to make up for everything on loans.  However, everyone is conservative about loaning money right now unless it is secured, and the home equity loan pipeline has mostly dried up since many houses have lost their equity buffer.  I don’t have direct experience with this but have heard that it is generally not easy getting a business loan, the type of loan that is riskiest unless it too is essentially secured in some other manner (property, receivables, etc…).

As a customer, if in the medium to longer term, if you assume that interest rates will stay very low, then you have options that you probably wouldn’t have considered otherwise.  For one – you may just want to consider taking a portion of your money out of the bank and just convert it into gold in your safety deposit box.  The biggest argument against gold historically is that it doesn’t produce a return – it just sits there, and has storage costs to boot.  While both items are true, a safe deposit box is cheap to rent each year (mine is about $100) but on top of it keeping your money in a financial institution has transaction costs, as well.  You can do the same thing by buying GLD the Gold ETF which may have other advantages with regards to transaction costs and sales taxes

Another alternative is to purchase foreign currency and put it in your safe deposit box.  This traditionally has been a terrible strategy because it earns nothing but in an era of almost zero returns on major currencies around the world the side effects of this strategy are lessening almost by the day.

Since the banks can only make so many loans that are basically secured and there hasn’t been a lot of impetus by them to move into more risky types of business loans, they are basically awash in cash.  In some circumstances, they have considered paying negative interest rates for large blocks of cash, and this has happened with short term debt instruments quoted in some markets, as well.

The last part of this is to strip the concept of “compound interest” out of your heads.  One of my blogs is for teaching kids about investing and if I was starting this years ago I would have made a big pitch for the advantages of investing your money for long periods of time and watching it grow with the “magic” of compounding interest.  It is hard to make this case with interest rates far below 1% unless you have large quantities or buy specific vehicles which take you near 1% and even that is a gigantic time frame to “double” your money.  If you assume 1% / year then it takes about 70 years (give or take) to double your money – better than the straight-line model of 100 years but in all cases virtually irrelevant for practical purposes (nice calculator here).

Thus some interesting side effects for me are

1) the lost “opportunity cost” of holding cash in gold is now negligible

2) the lost “opportunity cost” of physically holding non-US currencies is now negligible

3) the margin that financial institutions receive on interest is now very low and they will need to either expand into riskier non-secured loans (which they haven’t done) or start charging for services and transactions (or see their margins crumble)

4) with 3) above and interest rates near zero the real “value” of your money with the bank is in avoiding / minimizing transaction costs and being able to take advantage of better services 

5) the concept of “compounding interest” is basically dead on risk-less instruments, and for riskier instruments it is but one component of total return (probably the least essential component)

Cross posted at Chicago Boyz