Watchlist January 2018

Stocks are currently trading at high premiums and it’s hard to find companies where there is a reasonable margin of safety. When looking at the CAPE, which is the cyclical adjusted price to earning ratio, the likely future returns from equities over the timescales of 10 to 20 years is low. Only energy seems like a reasonable investment, and maybe telecom. Both have been lagging the s&P500 for a while, but so what? Does that mean it’s time to invest?

What about taxes?

The following diagram shows us the companies in the S&P 500 with the highest share of cash held overseas.  As you know, the guy at the white office is very eager to “make america great again”, and therefore bringing cash back home.

Source: Bloomberg

The illustration involves many great companies, but most trade at very high premiums.

 

Watchlist January 2018

I’m not going to make any purchase this month. In 2018, I want to focus on being a bit more passive, a bit more patient. While the frase “time in the market beats timing the market” has become very popular, there is also a saying that “patience is rewarded”. Something to think about.

If I had to buy something, it would have been something from this list:

  • Amgen
  • Hormel
  • Medtronic
  • Omnicom
  • Kimberly Clark
  • Realty Income Group
  • Royal Dutch Shell
  • Southern Company
  • Dominion Energy
  • Kopparbergs
  • Kinnevik B 

That’s it. What is on your watchlist this month? Are you a buyer? Please do tell.

Stockles

14 comments

  1. Thanks for sharing the charts on cash held overseas. That’s useful info.

    I like your watchlist too, but wondering if the order matters to you? For example, if you only had enough money this month to invest in one company from the list, which company would you invest first? Which would be the second, the third and so on. What criteria would you use to set that order?

    I’m asking this, not to annoy you, but just curious as to how you pick from the list. I’ve been doing the same and decided to use my current yield target as a main criteria to set the order in which l would buy stocks from my list.

    1. Hi Mr. ATM,

      Thanks! Glad you found the illustration useful.

      This list is not prioritized, but if I had to choose top 3, I would first go for Hormel since the turkey issue they have right now is short term issues. I’m confident that they will fix this problem and then earnings per share will go up. Second would be Kopparbergs because the issue right now is the pound, but management are working hard to become less dependent of that (another short term problem). At last, I´d go with southern company. The price seems okey / fair, and I´m low on utilites.

      Kimberly Clark and Omnicom is a close and could have been third instead of southern company. Both are core positions trading at fair values, but as I said, I’m low on utilites, so that’s why I choose SO.

      As for Dominion Energy, mergers are always hard and often, the paid price is high. However, in this case, I still think the biggest issue is regulation. It’s the unknown liabilities Dominion could be inheriting related to
      SCANA’s partially-completed nuclear plant which “troubles me”. Time will tell! If I did not want to add SO, then I would replace SO with D.

      Several of the stocks are trading at prices close to fair value, maybe a bit above. I would love to add to O under $50, but I’m not sure if that will happen in the close future. For most of the stocks, I want a moat, low payout ratio, dividend in line with 5 year average yield or under, p/e less than p/e sector, not too much debt, ROE over 10%. I do favour short term issues where the current price is either fair value are undervalued. As for Kopparbergs, which you can read about soon in my article on Seeking Alpha, I think it’s a great compamy which will last for a long time.

        1. Sounds good Stockles. I think it’s a good idea to build up your core positions first before venturing into new stocks.

          Between SO and D, I would pick D mainly due to their higher dividend growth and strong commitment from management, not to mention diverse energy portfolio including midstream assets.

          As for the risk due to mergers, D will be getting SCG at a pretty cheap multiple. After paying for the upfront SCG liabilities, D will end up boasting its service area and become an even bigger and stronger player in utilities. D is also a darling of regulators unlike SCG.

          I like and own SO as well, but they have their own issues with the new Vogtle plant construction and related cost runs. Both SO and SCG were the victims of Westinghouse bankruptcy, though SO being a bigger player, was able to weather the storm (even got Westinghouse to payback some money to SO) and even got the approval from regulators to continue construction, while SCG almost came close to getting bankrupted as the regulars wanted SCG to payback higher rates they were charging customers for years.

          Thanks for sharing your thinking behind the stocks you listed.

    1. Hi Tom,

      Thanks. Always got to try to improve! Omnicom is very special company which suits my portfolio very well. Ah, that post is way more profound. I´ll tweet you when it´s published!

    1. Hi fellow millennial!

      I´m not going to purchase anything in January. But I have a few rules: I always keep 50000 NOK, about $5000 in my bank for safety / buffer or whatever you want to call it. Having enough cash stay sane and to pay the bills, go on vacation while still being invested is important for me. That´s how I stay rational.

      Okey, over to the question:
      I have about 5-10% cash which I could deploy right now, but I don´t feel any stress on adding right now. Going to work more on being patient this year, which also means doing nothing. I want transaction cost to be lower this year (pay around $6 per trade)

      Thanks for commenting

  2. I like the list. Looks like a bunch of the REITs have been getting hit lately so O is for sure on my watch list. Would be able to average down soon. Wouldn’t be a bad idea to take advantage of HRL’s short term problems either. I own D but wouldn’t mind adding more but also have been looking to add a position with SO for some time. Lots of value right now. Looking forward to seeing what you choose to buy next.

    1. Hi Dividend Daze!

      Yes, the REITs have gone down from the high levels. However, with rising interest rates, it’s understandable, and I’m not so sure if the current prices are a “bargain”. Sure, it’s around fair value and then, who cares about overpaying a bit. Would probably also add to O if I had extra cash.

      About SO, yes, but I think 2018 will be another bad year for REITs and Utilites, so no rush in buying.
      Thanks for commenting!

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