Sunday, November 2, 2014

Stock Picks For This Year


It's probably too early to start celebrating christmas unless you are a city mall already trying to lure shoppers into spending that extra christmas money months before the season starts.

I usually write a post for each of my purchases, but this was my early christmas - There was a very nice market dip a few weeks ago which resulted in prices dropping significantly. As I saw many of the companies I am interested in reaching my price targets simultaneously, I had to take advantage of such opportunity and make sure that I purchased the companies that were offering better value for their cost. At the same time, the earnings season was coming and I was very confident that strong companies would stay on course and would deliver good results again - I had to act fast!

Since I decide how much cash I will deploy into my investments at the beginning of the year, it doesn't matter to me the exact timing of my purchases as long as I reach that amount by yearend. So, I spent the latest weeks submerged in annual reports, analyzing and confirming that my previous impressions were as right as before, so I could decide which companies I wanted to buy. It's absolutely great when companies have absolutely no fundamental change but sell significantly cheaper. So, I took most of my emergency and bought aggressively adding 387$ of yearly dividend income to my portfolio. These were the positions I initiated/increased and the price that I got them for:






Ventas (VTR) - 62$

Ventas is my favorite healthcare REIT on the market. I find this sector to have an incredibly bright future, the number of seniors in the US is already a large chunk of the population and the growth of this number is expected to move even faster in the US. 



Ventas is tremendous capital allocator and has managed to increase its FFO by 10% CAGR over the last ten years, all this while reducing its debt ratio.



I'm a big admirer of Ventas CEO, Debra Cafaro, she picked up a company when it was a very small REIT in a debt downward spiral and transformed it into what it is today, providing an incredible shareholder return in the process (320% in the last 10 years period). They have a strong balance sheet and some properties in the UK and Canada. Even though the US currently offers a very promising environment, UK and Canada are expected to follow suit and can be promising hubs of future growth. Their portfolio is very well diversified by type and by tenant as show below.






I also expect that their strong balance sheet and disciplined capital allocation will allow them to take advantage of a fragmented market to consolidate through acquisitions as shown by acquisitions of Holiday and HCT. I can see them maintaining growth in the order of 9% year-on-year while they can borrow at these low interest rates and can see that growth slowing down to 6/7% on a higher interest-rate environment. The price to FFO ratio of this purchase was 14.2 which I consider very good value for such a high quality asset.






3M (MMM) - 137$ 

3M is a company that I have been following for a while. It sells simple high-margin products that are useful for a wide array of applications, but can't be easily replicated due to intellectual patents and the sheer talent that a company of this size has amassed over the years. The greatest thing about this industry is that it is not glamorous like tech is nowadays, not many people think "I'm going to start a business selling a new innovative kind of adhesive". Even in this case, these kind of product line makes it easier for 3M to acquire and integrate other companies fairly easily. These opportunities for capital deployment is highlighted by their average ROCE of 20%

They have grown earnings at close to 10% CAGR which is quite impressive for a company of this size.




3M is an aristocrat among aristocrats, paying an uninterrupted dividend for 98 years and having 56 years of consecutive increases. Their typical dividend increase is not particularly high but the company has a very high security to keep raising the dividend.

Not only do they return capital to shareholders through dividends but they also have a massive share buyback in place. This is all possible due to the very high cash conversion that they sport, with an average cash conversion of 100% they have a very high free-cash-flow, providing flexibility for acquisitions and security for shareholder returns. Their market is incredibly hard to disrupt and since they update their product lineup regularly, they can adapt incredibly fast.

This is exactly the kind of company I look for and I intend to add as much as possible to this position when the price provides opportunities. 









Johnson&Johnson (JNJ) - 99$ 

JNJ is a position increase. The latest results were great and slightly better than my expectations. Although the extra gain was based on Olysio the hepatitis C drug that should lose its competitive advantage next year, I don't see this being much of a problem and I am confident the company will keep performing in line with my expectations. Together with 3M, this is one of the companies that I want to buy as much as possible. My position increase made JNJ by biggest position at the moment which is in-line with my goals. My view on the company has not changed since my latest article








Unilever (UL) - 39.4$ 

Unilever is another position increase. The company has a very strong return on equity and a strong brand line-up, they also performed very well in emerging markets in the latest years. The price drop in this case was warranted as the company faces strong headwinds both from currency and from a very subdued market in its categories. Still, I see these as temporary and in the meantime the company managed to capture market share and grow ahead of its markets. I believe this pressure will help the company further streamline their operations which will result in even stronger growth when markets over the world start becoming a bit stronger. Overall, I maintain my previous analysis








Bank of Nova Scotia (BNS) - 60$

Nothing has changed with BNS recently and for a long-term investor like me, that's great news. Because of the energy drop the whole Canadian index dropped, dragging BNS with it. It's important to keep in mind that BNS is a very international bank with no more than 50% of it's revenues coming from Canada. Their latest results were in-line with what I expected and so I am quite happy to have added to this holding. The price I got was very close to my original price.








United Technologies Corporation (UTX) - 107$

This was a position increase of a very recent purchase. Nothing has changed but the latest results were in-line with my expectations.







AMEC - 10.80£ (Increased position)

Amec is an oil services company listed in London. Their growth was slightly lower than expected and was further beaten down by incredibly strong currency headwinds. However, their acquisition of Foster Wheeler (FWLT) has been approved and should be completed by yearend. They have very strong fundamentals with no debt (prior to the acquisition) and a very well covered 4.3% yield. The industry fundamentals have weakened slightly, but not enough to warrant such a price drop. The original analysis article can be found here.


Other Companies Considered

All these are companies that I consider to have very strong long-term perspectives and were selling at great valuations at the time. I am still making up my mind of whether it was reckless or opportunistic to invest my emergency fund like this. As I mentioned I have an yearly budget that I calculate in the beginning of each year, and since I have almost reached my investment target for this year, I will now focus on rebuilding my emergency fund. I also intend to write a dedicated article for my new positions (Ventas and 3M), both companies that I have been following for a long time.

Three companies that I thought were very strong opportunities were Chicago Bridge and Iron (CBI), Visa (V) and Apple (AAPL). I considered both CBI and V the companies that were poised for higher total returns (appreciation + dividend). However their current yield is very low and would bring my overall average down significantly. I intend to find opportunities to buy these  two companies next year, when their individual impact won't be so large on my portfolio.

Regarding APPL, their cash position is immense and just their buybacks and dividend already provides strong returns if their revenues were to keep constant. However, I find myself unable to estimate growth for them, so I decided to pass on this opportunity at this point.

What companies did you get on this dip? Did you think it was a reckless move to use my emergency fund like this?

12 comments:

  1. Great companies to add to your portfolio, DV.
    AMEC is a company that I am unfamiliar with...but I have enough stocks in the energy sector...but good to know some new names.

    Rw BNS - theres one mistake in your data. The bank generates close to 50% of its revenue from Canada. This is still much less than the other Canadian banks (which I recently went through the exercise of - going thru their annual reports last week). According to the 2013 annual report, BNS generates its revenues: 49.7% from Canada, 4.18% from US, 9.14% from Mexico, 7.8% Peru and 29.15% from Other Intl.

    Best wishes
    R2R

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    1. Hey R2R,

      AMEC will be listed in the US next year as an ADR after the acquisition of FWLT, if you're interested it might be worth waiting for that.

      Thanks for the correction on BNS, I took my data from their factsheet here http://www.scotiabank.com/ca/common/pdf/about_scotia/factsheet_e.pdf . I think I might have been misled because global wealth management and global banking and markets probably include Canada as well. Where did you get the 50% ?

      Thanks!
      Dividend Venture

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    2. Hmmm I wonder if things have changed since last year (my data is from the 2013 annual report - page 90). The reported number is actually net interest income as opposed to the revenue....unfortunately thats the only complete geographical overview they provide.

      http://www.scotiabank.com/ca/en/files/13/12/BNS_2013_Annual_Report.pdf

      I will be looking forward to the upcoming annual report - I wonder if things have changed dramatically since last year.

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    3. I see, I remember that section. Unfortunately they are not explicit about full revenue geographic distribution and like you said that is just income. For my own purposes I will consider it to be between 30% and 50% in Canada. That's good enough as the premise of being diversified internationally still stands.

      Great SeekingAlpha analysis on BNS by the way!

      Looking forward to the upcoming annual report to see if they discriminate this in detail. In the mean time I updated the article.

      Thanks!
      Dividend Venture

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  2. DV,

    Awesome stuff here. Looks like you put some serious capital to work. Adding over $300 in annual dividend income all in one fell swoop is fantastic!

    Great names there. MMM and UTX are two industrials that I'd love to add at some point. MMM has so many products for so many applications. Really amazing stuff. Their revenue and EPS growth wasn't all that great over the last 10 years, but it's a very solid company. And the last dividend increase was very nice!

    Best regards.

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    1. Hey DM,

      I'm really excited with the annual income bump I will get from these purchases. In my opinion, UTX is still offering great value at this point, MMM had a big jump with the good results. I really love these two because of how large their free cash flow is.

      Best,
      DividendVenture

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  3. Thanks for sharing your stock picks. I have to say I'm a fan of the healthcare REITs out of all the REITs that exist. Looking at VTR, HCP and OHI myself. I just added UL last month and some BNS as well. JNJ and MMM have been with me for over seven years too. So I guess what I'm saying is that I like many names on your list. I'm not familiar with AMEC though. Thanks for bringing it to my attention. Look forward to your next update.

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    1. Hey DivHut,

      I also have a big preference on healthcare REITs over other kinds. The demographic advantage is just so large, that even in harsh environment I think they will do well.

      I see that we are mostly on the same page, you pretty much own all of these stocks. I am very confident on them, let's hope they reward us accordingly!

      Best,
      DividendVenture

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  4. Great companies here for sure. I own MMM, JNJ, UL and as of last month UTX. I've been thinking of trying to get a bit higher yielders that still provide solid growth so Ventas intrigues me. I'll be taking closer look at them, well hopefully be able to. That's awesome that you add over $300 in forward income over a short time frame. Keep up the good work and keep your eyes open for more opportunities.

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    1. Hi Passive IncomePursuit,

      Thanks for stopping by! These companies are very strong dividend payers and growers, I'm not surprised that so many of us hold them. Regarding Ventas, I like them a lot but sadly their price is up a lot after this post. Definitely worth a look anyway!

      Best Wishes!
      DividendVenture

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  5. Hi DividendVenture,

    Thanks for sharing your thoughts on this. I find it interesting to see what companies are thought highly of over the pond. I'm based in the UK, so I'm predominantly focused on buying shares within the FTSE all share, but I would write off investing overseas in the future.

    As it happens I hold shares in Unilever, and I would also highly recommend them!

    All the best
    Huw

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    Replies
    1. Hey Huw,

      I am also based in the UK, but I have been seeing a lot of value in US based companies so I have been investing in mostly those.

      I'm with you on Unilever, I intend to increase my holdings every time the price goes down.

      Best,
      DividendVenture

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