It’s Stock Picking Time for 2016!

Every year at the end of the summer we select stocks.  Here are the choices for 2016.

US Companies

Spirit Airlines (SAVE) – $40 (52 week high / low $53 / $33), $2.8B market cap, no dividend, $0.6B debt.  Spirit Airlines is a low cost airline that is challenging the oligopoly domestic carriers.

Gilead Sciences (GILD) – $77 (52 week high / low $113 / $77), $101B market cap, 2.4% dividend, $21B debt.  Gilead Sciences is a pharmaceutical company.

General Electric (GE) – $31 (52 week high / low $33 / $23), $281B market cap, 2.9% dividend, $145B debt.  General Electric is a conglomerate that has exited financial services.

International Companies

Unilever ADR UK (UL) – $48 (52 week high / low $38 / $48), $150B market cap, 2.9% dividend, $13B debt.  Unilever is a British consumer goods company with a strong global presence.  This is the ADR that pays out in British Pounds so that there is no tax withholding.

SAP ADR (SAP) – $89 (52 week high / low $62 / $89), $112B market cap, 1.5% dividend, $8B debt.  SAP is a German software company with a strong global presence.

Elbit Systems ADR (ESLT) – $97 (52 week high / low $72 / $103), $4B market cap, 1.6% dividend, $0.4B debt.  Elbit Systems is an Israeli defense contractor.

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Stock Selections for 2015

Attached are the stock selections for 2015.  We are expanding the list slightly because most of the funds not only have new cash to invest for 2015 but we also did a recent round of selling that needs to be re-invested.

US Stocks

  1. Box (BOX) – $13, 52 week range $11-$24, $1.5B market cap, no dividend, little debt.  Box provides a cloud-based document storage and governance capability and is growing rapidly among Fortune 500 corporations
  2. Mastercard (MA) – $101, 52 week range $75-$101, $114B market cap, 0.7% yield, $1.5B debt.  Mastercard is a global credit card brand that benefits from the long-term migration of cash and checks to credit.  Their biggest competitor, Visa, recently announced a merger with Visa Europe which likely will distract that company for several years and give Mastercard an opportunity to pick up market share
  3. ConocoPhillips (COP) – $55, 52 week range $41-$74, $68B market cap, 6% yield, $25B debt.  ConocoPhillips is an oil and gas exploration company that is a major bet on future price rises for natural gas and oil with technical knowhow and efficient production.  They recently made major cuts in response to the commodity price collapse
  4. Union Pacific (UNP) – $86, 52 week range $79-$124, $73B market cap, 2.6% yield, $13B debt.  Union Pacific operates a massive US rail network and has been hit recently by reductions in the industrial and commodity economies.  However, they are highly efficient and represent a solid long term bet on industrial growth and recovery

Foreign Stocks

  1. Tata Motors (TTM) – $30, 52 week range $21-$51, $19B market cap, no dividend, $11B.  Tata Motors is an Indian based company that benefits from low costs and growth in the Indian car market and also owns Jaguar and Land Rover.  The stock will be down a bit early next week because they just released earnings and showed an unexpected loss due to a one time event
  2. China Eastern Airlines (CEA) – $30, 52 week range $20-$50, $8B market cap, no dividend, $6B debt.  China Eastern Airlines can benefit from the growth in outbound Chinese tourism and investment as well as potential government mandated consolidation in the airlines sector which could result in higher profits and reduced competition
  3. Alibaba (BABA) – $83, 52 week range $57-$120, $207B market cap, no dividend, $8B debt.  Alibaba is a major web commerce / mobile player in China.  Much of Yahoo’s value was based on an ownership stake in this entity (we recently sold off Yahoo)
  4. Novartis (NVS) – $89, 52 week range $88-$106, $214B market cap, 2.7% yield, $22B debt.  Novartis is a major Swiss based drug maker

Wildcards

This is a new section.  These are some riskier stocks either because of high prices or uncertain outcomes.

  1. Tesla (TSLA) – $232, 52 week range $181-$286, $30B market cap, no dividend, $2.6B debt.  Tesla is a maker of electric cars led by the charismatic Elon Musk.  Their valuation is very high considering that they lose money, gas prices are low which reduces the savings from electricity, and they deliver a fraction of the cars that a “major” automotive giant would.  On the other hand, their fan base is passionate and their design is praised
  2. Facebook (FB) – $107, 52 week range $72-$110, $301B market cap, no dividend, little debt.  Facebook is the ubiquitous social media presence with a huge and growing global and mobile footprint and messaging.  Their market cap has almost tripled since their IPO and are led by the charismatic Mark Zuckerberg
  3. Cheniere (LNG) – $46, 52 week range $43-$82, $11B market cap, no dividend, $16B debt.  Cheniere is a long term bet on liquified natural gas, which takes (relatively) cheap US gas and ships it to offshore countries seeking clean energy and diversified energy sources.  This is a risky but possible bet because the facilities are mostly built but yet to ship gas and prices are falling, but the long term upside is also large if they can survive and prosper

Stock Selections for Summer 2015

There have been stock sales in some of the portfolios so we will have another round of stock selections.  Here are the choices.

INTERNATIONAL

  1. Vale ADR (VALE) – $7, ($5 – $14 over 52 weeks), $35B market capitalization, 5.5% yield, $35B in debt.  The Brazilian mining giant has been hit hard by the reduction in demand for the commodities that it produces as well as difficulties in Brazil as the economy is stagnant and the currency is falling.  With these factors it is a solid candidate for a rebound in future years if they can continue to focus on efficiency and cost reductions
  2. Alibaba (BABA) – $88, ($77 – $120 over 52 weeks), $220B market capitalization, no dividend, $8B in debt.  Alibaba is a Chinese e-commerce giant.  They are listed directly on the NYSE and not an ADR.  While the Chinese stock market has made a huge advance recently, Alibaba has slowed as the company re-groups and reduces hiring and focuses on execution.  If you already own Yahoo don’t buy Alibaba because Yahoo has ownership of a portion of their stock which is already reflected in Yahoo’s value
  3. Infosys ADR (INFY) – $31, ($25 – $37 over 52 weeks), $35B market capitalization, 1.6% yield, no debt.  The Indian outsourcing and consulting company is poised to grow with India and benefits from the strong dollar since much of its costs are in Indian currency but much of its revenues are received in dollars

US Market

  1. Celgene (CELG) – $115, ($72 – $129 over 52 weeks), $91B market capitalization, no dividend, $7B in debt.     Celgene is a US biotech / drug company with a variety of drugs under patent and a pipeline of many other potential future products
  2. Juniper Networks (JNPR) – $27, ($18 – $27 over 52 weeks), $11B market capitalization, 1.5% yield, $2B in debt. Juniper Networking is a high technology company specializing in fast networking gear.  The company is well run and has beaten analyst profit estimates recently
  3. Dow Chemical (DOW) – $51, ($41 – $54 over 52 weeks), $59B market capitalization, 3.3% yield, $20B in debt.  Dow Chemical provides processed material for manufacturing and agriculture.  The company benefits from lower US natural gas costs which provide advantages since it is a major component of their products.  The company recently fended off an activist investor which reduced their stock price.

Purchasing New Stock in Spring

Thanks to sales we have some cash in the portfolio and we will be looking at additional stock purchases in the spring.

– Portfolio 1 – one stock
– Portfolio 2 – one stock
– Portfolio 3 – two stocks
– Portfolio 4 – no stocks
– Portfolio 5 – one stock
– Portfolio 6 – no stocks

We will also look to see if we should put stop losses on any of the stocks. All of the prior stop losses have expired (they are only good a certain amount of days under the brokerage system that we use).

Stock Selections for 2014

It is time to select 2014 stocks.  Generally each fund selects 2 new stocks, although there are some significant cash balances available on the other funds (due to stock sales) and they may need to pick more than 2.  Each year we offer a mix of US and non-US stocks for selection.

US Stocks

Linked In (LKND) – $201 / share, $24B market cap, 52 week range $136-$258, no dividend, no debt.  Linked In is a growing and well run web company for business professionals to make contacts and find new opportunities.  They recently had excellent earnings for Q2 2014

Exxon Mobil (XOM) – $99 / share, $424B market cap, 52 week range $84-$104, 2.7% dividend, $11B long term debt.  Exxon Mobil is viewed as the best run energy company in the world and has a disciplined use of capital with a long term horizon.

General Motors (GM) – $33 / share, $53B market cap, 52 week range $31-$41, 3.3% dividend, $40B debt.  While GM has been in the news recently regarding recall efforts, they have a long term growth story with their presence in China and the growth of vehicles in that market, which passed the US in terms of cars purchased and has larger growth opportunities

eBay (eBay)  – $52 / share, $65B market cap, 52 week range $48-$59, no dividend, $5B debt.  eBay is a well run e-commerce company that also owns the payments company PayPal.  They have moved successfully to mobile and offer many products with “buy it now” and not just auction sales.

Foreign Stocks

Anheuser Busch Inbev (BUD) – $107 / share, $171B market cap, 52 week range $92-$116, 1.9% dividend, $49B debt. The iconic US company that makes Budweiser was bought by hard-charging Brazilians and headquartered in Belgium.  This is the dominant worldwide beer company.

Weibo Corp (WB) – $19 / share, $6B market cap, 52 week range $16-$24, no dividend, little debt.  Weibo runs a Chinese microblogging platform.  It is kind of a Chinese twitter.  They release earnings on August 5 we will also see the market reaction to those results.

Coca-Cola Femsa (KOF) – $108 / share, $22B market cap, 52 week range $92-$149, 1% dividend, $4B debt.  This Mexican company runs the successful Coca-Cola franchise along with beverages in many other latin and Spanish speaking countries.

China Life Insurance (LFC)  – $44 / share, $83B market cap, 52 week range $35-$49, 1.6% dividend, $14B debt.  China Life Insurance is a large insurer in mainland China, where the population is aging and opportunities for insurance will grow as a result.

Stock Selections for 2014 and Diversification

Every year we select stocks right about the time when the summer ends and the kids go back to high school or college.  Doing this at the end of the summer gives them time to earn their $500 for the match and sets up a consistent annual pattern for how we make incremental investments.

Due to Stop Loss orders and other sales there is additional money that we need to put back into more stocks.  Many of the beneficiaries will have to make more selections.

Diversification and the Number of Stocks in Each Portfolio

As the portfolios get bigger, we also try to pick fewer stocks and put more money into each individual stock.  As a rule of thumb you have a “diversified” portfolio if you have about ten or so stocks equally weighted.  This only applies if the stocks themselves are diversified, however, across industries and countries.  Since most of the portfolios have stocks concentrated in a few sectors or countries, my “rule of thumb” is to try to go up to 15-20 stocks to get additional diversification.  At that point if we are buying newer stocks, I will recommend making larger single purchases and we can bring up the average value of stocks in the portfolio.

For example, Portfolio one, which has been growing for almost 13 years, has 17 stocks and about $34,000, with $2000 cash on hand.  Thus of the $32,000 invested in stocks, the “average” balance would be just under $2000 per stock.  While that is true, we still have a few closer to the $1200 mark and some that are larger than $2000.  New purchases will be made in excess of $1500 and as there are sales we will try to keep the portfolio at 20 or less stocks, and even 15 or so is probably about right.

Portfolio Two is also at a level where we have begun consolidating and buying in larger blocks, with 15 stocks, $22,000 invested in stocks, and about $3000 in cash.  Going forward we will also be buying in larger lots of $1500 / each and consolidating through stop loss orders and the like.

The other portfolios, three through six, are still at a level where it makes sense to make smaller purchases to get beyond the 10 or so stocks in the portfolio so that if there is a big drop in a single stock it won’t totally dent the portfolio.

Stock Selection for 2014 – Where to Look?

I follow the markets in general due to my line of work in finance and am aware of most sector trends.  I have some knowledge of foreign markets and macro economic trends but less so the further you move away from the USA.

I use Google stock screeners to look for stocks in the US and abroad, by looking at stocks with certain market caps (above $1B) and with other characteristics like price performance and dividend yield.  Much of the time I am looking for negative performance (i.e. stocks that have declined 0 – 25% over the last 12 months) because I believe that some portion of the portfolio should be tied to “regression to the mean” (i.e. what’s down comes back up) and some on growth stocks.

For foreign stocks I look at those that trade ADR’s in the US, generally on the bigger exchanges (NYSE or NASDAQ).  I usually don’t buy ADR’s on the “pink sheets” or OTC markets, although Siemens recently moved away from US accounting and consequently was de-listed from NYSE and picked up on the OTC markets, so I ended up buying one, anyways.  I don’t think it will trade that much differently than on NYSE but this is something to watch.

I have a lot of friends in the markets and ask them about stocks or types of areas that they find interesting.  Sometimes they laugh at me and tell me everything is overvalued but I usually can get some good ideas.

Barrons and some of the online sources also have interesting information, although I would never just buy something based on a single article.  No one should just buy based on something that they’ve seen on the Internet or based on a “tip”.

The standard boiler-plate warning is to “read the financials”.  This is true, although slogging through 10-k and annual reports with footnotes can be mind numbing.  They have to make so many disclosures of potential risks and there are reams of footnotes and much of this doesn’t directly impact the stock price.  On the other hand, I will look at their power point presentations available that the company makes to investors on quarterly calls or conferences where the company actually tries to explain “in english” what their strategies are and why their company is strong (which indirectly goes to valuation).  I also will look at various analyst reports on stocks, although once again this is more about sentiment in the market than any particular insight since those reports are often notoriously un-correlated with investor success.

In the end I thing through all this information, pick a bunch of stocks to watch for a while, and then cull this down to my list.  Sometimes I even re-recommend stocks’ I’ve previously had on the list, since many of the beneficiaries don’t pick them (if there are 8 stocks on the list often they only take 2).

Valuation

Valuation is difficult right now with the markets hitting new highs.  For an individual, I wouldn’t recommend putting all of your money into stocks (especially individual stocks) like I do in this portfolio.  However, this money is different than a standard “nest egg” in that it is an investing vehicle for kids where they put in some money with additional money added that is designed to teach them about saving, investing, and the stock market.  It is “real” money and they either win or lose depending on what happens in the market, just like real life.  These lessons are sound and something that they will take with them through their whole life going forward.

While the portfolios have benefitted from rising values, they will now be putting money to work on new stocks with high valuations.  This cannot be avoided.  We will do our best to consider valuation with our new investments, and put in “stop loss” orders on stocks that are getting either too frothy or when we don’t necessarily want to ride all the way down if we’ve had big gains.  With this model, however, we do eventually put all the money back to work on new stocks, so overall valuation is always an issue.  This is a real-life investing lesson for all.

Timing of the List and Selections.

I will get these items selected in the next couple of weeks and start working with everyone on investing.  The kids need to get me a check and the money gets deposited and then they need to make the selection.  Everyone comes to the selection in different ways and it can be tough for them to make a decision about real money with real consequences.  But this is real life and decisions need to be made, which is a lesson in and of itself.  I want to get this done before they start going back to school by the middle or end of August.

The other thing that I have to do before then is update all the portfolios with the latest prices and valuations and dividends, as well as buys’ and sells’.  This also takes me a while because I comb through the statements and do it by hand as well as in excel.  Maybe someday I will farm out this process or create a system but for now I am doing it manually.  Maybe this is a 2015 project.  At least with google finance I can see the portfolios daily without doing much work and this is a big help for monitoring moves.

 

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.