2019 has been a pretty rough year in the market with benefactors such as tweetstorms from Trump, decreasing global industrial production and manufacturing numbers, and escalating conflicts between the west and the east. Economists believe that 2020 will be the most volatile year in the stock market history, and we are late in the business cycle. What to do? Which income producing asset should you buy? First, let’s understand what’s happening in various sectors.


Disclaimer:
The information contained on this Website and the resources available for download through this website is not intended as, and shall not be understood or construed as, financial
advice. I am not an attorney, accountant or financial advisor, nor am I holding myself out to be, and the information contained on this Website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.



Industrials

Industrials are often seen as the temperature measurement for the global economy, as they are highly sensitive to either increased or decreased global demand and supply. While other sectors are more protected, industrials are more heavily linked together with the global economy.

Producers of materials are often the first to struggle, as we note from observing the global steel producer Outokumpu – the firm’s share price has already lost more than 53% during the past 3 years. Even the famous dividend aristocrat, 3M, is trading 25% lower than what it did 6 months ago.

My take on this is that global growth is somewhat slowing down and industrial as a sector is probably something you don’t want to overweight right now. I do though think many firms, such as 3M, trade at interesting prices and will surely still be here a decade from now.

Additionally, the concept of extrapolating positive and negative news is always present, especially among market commentators, and I often find that the true outcome lies somewhere in between in what the bear and what the bulls state. Just something to keep in mind.

Please note the following graph displaying the volatility within the industrial sector. Notice how low revenue volatility the utility sector has? That’s one of the key reasons why dividend investors like them. They fluctuate less, and hence, it’s easier to hold.

ROIC SS

 

Banks

Banks are the backbone of the economy, and back in the 1990’s everybody also believed that banks were doomed. As a guy working in the financial technology industry, I observe two things: 1) Banks are slow to change, but they are doing everything they can to meet the disruption of IoT, 2) Banks are still here to stay due to the governmental regulations and they are often the only ones who can handle very large amounts of capital.

What we see now in the Nordic bank market are due to negative or very low-interest rates. In short, negative interest rates are bad for both consumers and banks. Consumers are forced to pay a fee to store their money, and banks are forced to pay for having money in the federal reserves.

The issue with countries such as Sweden is that they don’t have strong monetary policies in terms of being able to perform huge governmental purchases (example new infrastructure projects to boost local economics). I do though see the negative interest rate environment as something temporarily and think that the major Swedish banks are still sound and investable.

The Swedish bank, Swedbank, is one of my major positions, and I think the price is heavily affected by Danske Bank’s money-laundering scandal too. I follow the price to book ratio as well as the profitability ratios. When those turn, I become more skeptical.

 

High yielding stocks (Utilities, REITs, and Telecom)

What really decides the price of high yielding stocks is the 10-year treasury yield which states how much money people can earn by having money in the bank, i.e. the alternative cost to owning high yielding stocks. This number has come down significantly in the past 6 months, and what’s happening now is that investors can’t find other places to earn reasonable high single-digit returns on their investments. Consequently, they need to buy income producing assets instead.

I find most utilities trading at reasonable valuations too. Example Dominion Energy trades at $81 which is close to a reasonable value given EPS (2019) x reasonable P/E at 19x. In total, until the 10-year Treasury yield goes back, utilities should be performing quite okay in this low-interest environment. To learn more about this valuation technique, read here.

 

What I do in 2020

It shouldn’t come to you as a surprise that my main way of getting ready for a recession is to make sure my investments actually make money in most stages of the business cycle. This is the key thing you can do, and which will help you once the market actually goes down. I do this by making sure I check 3 boxes:

1) Do most of my firms generate consistent free cash flow

2) Are most of my firms rated safe by Simply Safe Dividends

3) Do most of my firms have a product that has a somewhat stable demand?

Most of my time is actually spent here. Understanding how my firms make money, how much they generate in returns on their investments with respect to their cost of borrowing, i.e. ROIC vs WACC. To learn more about how to actually think about valuation and metrics such as ROIC, read the interview I did with former morningstar president Brian at Valuentum.

 

What’s the key to outperforming a bear market?

I argue that the key to outperformance is making sure that your investments will do good in any market condition. Simple as that.

Once you start buying stocks were the earnings fluctuate and highly depend on the economic state we are in, your control is gone. You don’t decide the outcome of your investments, and that’s why you sell. Not because you lose money that intraday, but because you don’t know if your investment is sound or not. Remember the phrase, keep it simple stupid. Stick with that.

 

Dividend Growth Portfolio Update

How has my Dividend Growth Portfolio been doing lately? The year to date return is 18.30% and year to year return is 19.53%. The Sharp Ratio (which measures excess return with respect to volatility), is 1.75

Return

What’s quite fun is that both my portfolios, also the fund portfolio which is up 16% this year, has been given 3 stars by Shareville (Nordnet’s investment community) and thus, I’m currently among the top 10% of more than 200 000 investors.

If you’re interested in joining Nordnet’s investment community and follow my portfolio in live action you can do it here: Join Investment Community for Free (affiliate link)

The portfolio currently holds 18 positions and looks like this:

Portfolio

Dividend Growth Income Update

The portfolio has generated in total $2.901 or 26.693 kr for 2019, which is 24% more than what it generated in 2018. Naturally, before the compounding effect has really done its thing, most of the increase is due to increased portfolio value (i.o. additions to portfolio in terms of investments).

 

Passiv Inntke

Investment transactions

Here I highlight which income producing asset I’ve added to the portfolio lately.

1# Income producing asset:  Altria Group was added at $40.30 to the portfolio. The risk/reward seemed appealing, and until the ROIC and FCF go down, I’ll hold.

2# Income producing asset:  Rollins was added at $34.50 to the portfolio. This is probably the best firm in America, and never get’s cheap. I’ve waited 3 years to buy this firm with ROIC over 60%. The P/E is high, but as long as they can operate with ROIC that high, it’s fine. The enterprise value will increase as the years go by, mark my words: Rollins is a firm to watch.

3# Income producing asset: An additional portion of Sampo was added to the portfolio at £35. It’s a Finnish finance conglomerate, and I believe that the value is fair, if not cheap.

4# Income producing asset:  Aker was added to the portfolio as the net asset value discount was historically high, at 26%.

5# Income producing asset: Ørsted was added to the portfolio as I believe capital will continue to go to ESG and renewable stocks.

6# Income producing asset: Equinor was added to the portfolio at 165 NOK as they continue to generate a lot of cash, and they will perform buybacks in the range of 9%, which I find to be very positive.

 

Some trimming in Apple and Dominion happened to fund the purchase, but strictly because they started to weigh more than 14% in the portfolio.

Apple

Apple transcations

Dominoio

Dominion transactions

 

2020 will most likely be a year with a lot of volatility which might create a few opportunities.  I’m very keen on adding Visa to the portfolio, and in general just adding more and more money to the machine. If you want to follow my portfolio in live-action, you can either click on the link here, or click on the photo below.

 

980x150

Best

Stockles

Ps: Feel free to add me on LinkedIn here: https://www.linkedin.com/in/arne-magnus-lorentzen-ulland-76151784/


Disclaimer
:
The information contained on this Website and the resources available for download through this website is not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, accountant or financial advisor, nor am I holding myself out to be, and the information contained on this Website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.

 

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