My Ian’s Million Fund, IMF, is a quasi-index fund where I have two main goals. One, beat the S&P 500 over time with my own diversified basket of stocks, while avoiding any ongoing management fees. Two, build a model that my non-investment professional friends can copy. If I didn’t have other investments and had $1,000/month to invest, what retirement portfolio would I build to ensure I ended up with a strong solid nest egg? The IMF answers that question.
First things first, I didn’t write a portfolio review for last month, as I was traveling. In brief, the IMF was up 1.6% for June, beating both the S&P 500 at 0.6% and the total world stock market (NYSEARCA:VT), which was also up 0.6%. The IMF has now outperformed the S&P 500 every month this year except January, and is 2% ahead of the market for the year. All in all, the portfolio is soundly beating the market and meeting my objectives.
For July, I made my purchases early in the month, specifically on July 5th. As has been the case since the election, stocks simply refuse to correct. As such, there hasn’t been much point in waiting for better entry points on the month’s buys. On the 5th, a variety of stocks I was watching dipped pretty sharply – here was the intra-day action for this month’s buys on the 5th:
Ideally, we’ll get a market correction that allows buys at cheaper prices one of these months. However, I decided not to delay July’s purchases any longer, the sell-off in the specific names I wanted to buy was strong enough to grab my attention, when a whole watch list you are interested in buying drops 1.5-3% on the day, it’s worth making a move.
For the month I made 15 purchases, 13 of which are additions to existing holdings, and two new stakes. Due to the one-off capital return from National Grid (NGG) last month, the portfolio again received a large amount of dividends and distributions in June, allowing for another dividend reinvestment. I sent these funds back into Hormel Foods (HRL), which remains my favorite buy and hold steady dividend growth play at this time. Besides that, what else did the IMF buy? Here’s the full list:
Let’s start with the new positions since they are both on the same theme – buybacks. Long-time members with a good memory may recall that I previously used Brinker International (EAT) as a model case study for what happens when firms buy back stock aggressively for years at a time.
As it is, the proposition on EAT stock interested me then, but the price wasn’t quite right. However, Brinker shares have continued to move sharply lower in recent months, and at this point, I see a decent risk/reward proposition. When a company aggressively repurchases its stock, as Brinker is doing, the price it pays is a key driver of how effective the buyback (and thus EPS growth) will be. As the stock moves lower, the buyback becomes significantly more powerful.
Chili’s certainly isn’t a brand that’s hitting on all cylinders at this point, but I think analysts are overly fixated on the downside at this point. Labor costs, in particular, will moderate, either through a reduced rate of minimum wage increases or robotization of the labor force. People are making inaccurate projections well out into the future based on unusually high labor cost increases that aren’t sustainable and won’t continue.
Also, restaurants have been getting hammered due to lower food prices. That may sound contradictory, but remember that the big restaurant costs include labor, regulatory compliance, rent, utilities, etc. In fact, the rule of thumb is that a successful restaurant can only spend 25% of revenues on food. Thus, when the prices of both meat and grains tank (as has happened concurrently), grocery store prices deflate, but restaurants get only minimal benefit (since 75% of their cost structure is not food-centered).
However, as with many commodities, in food, the cure for low prices is low prices. Persistently low grain and meat prices will cause farmers and producers to cut supply, eventually bringing the market back to equilibrium and relieving pressure on restaurants from low food prices at the grocery store. As such, two big factors that have been against restaurants will moderate in coming quarters, reviving the flagging sector’s sentiment level. Let’s throw other restaurant purchase-of-the-month DineEquity (DIN) since it is a similarly-positioned restaurant chain facing the same general headwinds.
The other new position for the month follows the same share buyback theme. AutoZone (AZO) shares have gone up as much as 40x over the past twenty years, a home run investment by any measure. However, shares have slumped from $800 to just $500 today recently. I’ll leave it at that for now – look for my article on the company here in coming days.
In recent months, I’ve felt the IMF has been getting a little heavy on small-caps, international names, and other such under-the-radar stuff. Ultimately, that’s where much of the alpha comes from, compared to the S&P 500. However, I’ve designed the IMF to be a quasi-index fund, and as such, I need to make sure it has some core meat and potato industry-dominating large-cap names.
Hence, the addition to the portfolio’s Intel (INTC) position this month. While I’m no big fan of the Mobileye acquisition (it overpaid – probably by a lot), otherwise it has continued delivering solid performance. Intel isn’t that exciting, its growth projects, while promising, aren’t that large compared to the steady cash-flow generating but low/no-growth core business.
That said, the whole semiconductor space has levitated over the past year, and Intel certainly has the chops to compete with the peers whose stocks have soared recently. Even more stable dividend-paying giants like Texas Instruments (TXN) have rallied more than 50% over the past 18 months, so it’s quite surprising to find Intel sitting around near its 52-week low.
Intel is far from the most thrilling stock out there, but there’s a decent chance the semiconductor enthusiasm spreads to its stock sooner or later. If not, downside is limited, given the low P/E ratio and healthy dividend.
However, BF flatly shot it down, and the stock price has receded back largely to where it had come from. In my book, that’s perfectly fine; I see this as one of the highest-probability stocks out there offering a steady 10-12% compounding rate for the long run, particularly from a halfway-decent starting price. While the market may not price BF at $60 again for a little while, it’s still one of the safest Dividend Aristocrats around, and its intrinsic value should continue to steadily climb.
Also, within the high-quality dominant blue-chip category, I continue adding to Public Storage (PSA), whose stock has settled in at the $210/share level in recent weeks. As I’ve said before, I’d love for it to leg lower under $200 and allow buying in the $180-185 range. However, even at $210, the value proposition is reasonable, offering a 3.8% starting dividend that will compound quickly and probably come with substantial capital gains over time as well.
Sticking to REITs, the IMF continues its interest in the beaten-down retail plays. Apparently the sector had some sort of holiday indigestion, as the whole space got whacked following July 4th. This made for timely purchases on CBL & Associates (CBL), Kimco (KIM), Tanger Factory Outlet (SKT), and Urstadt Biddle (UBA). Of these, CBL is the most attractive on a pure yield basis, and Kimco is probably the best of the higher-quality plays with a 6%-area yield.
To be clear, I’m not buying these because I need yield now. In fact, the dividends off these stocks are getting shoveled back into more Hormel stock (2.0% yield), showing my general ambivalence toward yield now or higher dividend-growth rates.
However, I think many investors err by suddenly deciding they want to chase yield (such as reaching retirement and making a major portfolio overhaul.) Instead, you’re likely to get much better prices by buying things when they’re cheap, regardless of yield, and getting a diversified portfolio at attractive price levels over time. The market has put this class of REIT on sale now, and I’ll keep buying until the sale ends, but don’t misread it as yield-chasing. Later in life, I’ll want yield out of this portfolio to spend, and by accumulating quality plays at good prices now, it ensures the dividend stream will be there already in place when it is needed.
Speaking of yield, I took advantage of the recent sell-off in natural gas to add to the pureplay nat gas royalty trust San Juan Basin (SJT). This is the opposite of a traditional dividend-growth stock, instead it pays an abnormally-high yield now that will gradually decline over time as reserves are tapped. However, the lifetime expected cash flow off this asset (at a mid-6s price) is significantly discounted, and thus the high initial dividends can be steered back into more traditional growth opportunities. I’m no huge natural gas bull; however, I expect prices to settle somewhat above where we are now, leading to a modest upturn in SJT’s dividend and stock price. This isn’t the sort of core holding you want for a retirement portfolio, but it’s a decent source of re-investable dividends at this price as a small position.
Our last US-domiciled stock of the month is small Pittsburgh area-based bank CB Financial Services (CBFV). This firm was one of the names that always popped up on my valuation screeners last year as I invested heavily in the sector. Since then, most community and regional banks have soared, and CBFV was no exception at first, going from the IMF’s $22 cost basis to as high as $29. However, it’s given back half of the post-Trump gains.
This is perhaps due to its low liquidity and lack of index inclusion. Or, maybe investors are losing confidence in the Western PA economy as Trump’s commodity rally (and coal in particular) seem to be losing steam. In any case, I’m happy to keep adding reasonably-priced smaller US banks. This one’s 3.4% dividend yield is quite nice as well. For those wondering, I have no complaint with New York Community Bancorp (NYCB), the bank I’ve been buying aggressively in recent months. Just that its stock has moved up quite a bit off the lows, and it’s already a large IMF position.
Finally, in what’s probably a record-low for the IMF, we have just two international purchases this month. And they’re both Mexican airports. However, for once, there’s no sign of Grupo Aeroportuario del Pacifico (PAC) – my top pick for 2017 – as its shares are up from $73 to $115 since January and nearing my $120 price target. As much as I love PAC stock, it’s already the IMF’s top position, and I’m not keen on chasing it up 26% on recent cost basis. As a result, the IMF adds Grupo Aeroportuario del Centro Norte (OMAB) and Grupo Aeroportuario del Sureste (ASR) instead this month. ASR stock hasn’t moved up enough yet on the recent Colombian airport purchases, while OMAB simply has more near-term upside than PAC, assuming Trump remains a virtual non-event for the Mexican economy.
Disclosure: I am/we are long ALL THE STOCKS IN THE TABLE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.