Recent Buy – 05/01/2015

I wanted to do something different than normal, and actually explain my process for making my investment this month! Hope it helps you understand how I think and why I do what I do, especially since my purchases may not be very common or deal with “non-canon” dividend growth stocks.

So for basics, I have a large bias towards buying new stocks off my wishlist rather than adding to existing positions. That’s because I feel being diversified is currently more important than generating a lot of income per position. And I personally don’t feel all that diversified in some sectors. However, barring special considerations like spinoffs, I will still consider companies that I own if my cost basis is higher than the current share price. As an arbitrary cutoff, I normally do 5%. So if I am down more than 5%, on the list it goes. When I look this month, I get to add the following stocks:

• American Express (AXP)
• Baxter International (BAX)
• Chevron (CVX)
• National Oilwell Varco (NOV)
• Occidental Petroleum (OXY)

Okay, cool. We can narrow down a few right now. Currently, a full position for me is about $3,000 worth of shares. All except NOV have reached that size, or are close enough that I count it. As a result, I don’t really want to add to most of these; only NOV is still a valid choice for me.

With that done, let’s look at my wishlist and see what’s good to buy. “Good to buy” means that the stock passes all criteria or all minus one criteria.

I occasionally throw in a stock that passes all criteria but is overvalued, which is common. A great quote from “Robert_A” on SeekingAlpha says it perfectly: “I’ve found that owning a little bit of a highly desired stock even if I overpay, helps cushion the disappointment of not owning the stock at all and watching it make new highs.” [sic] And another quote from the master of buy and hold himself, “Buyandhold 2012″: “The number one thing that matters when you buy a terrific stock such as 3M is not to sell it. Is this the perfect time to buy 3M? Probably not. But if you are going to hold it for 20 or 30 years, it doesn’t matter a lot whether or not you buy it at the perfect time. If you buy 3M now and at some point in the future it drops a lot below your original purchase price, then just buy more shares so that you can lower your average cost.” That, of course, is only if I’m adding less than $3,000 that month, which is the norm, at least until July this year. Don’t want to start a full position in an overvalued stock, you know? I sometimes will also throw in a stock if a spinoff is in the works, or some such delightful little bonus. And remember, since I’ve already vetted these, I don’t use my new yield screening criterion here.

So, this month we have …

• Chubb Corp (CB)
• Digital Realty Trust (DLR)
• Ventas (VTR)
• Biogen* (BIIB)
• Precision Castparts Corp* (PCP)
• Chicago Bridge & Iron* (CBI)
• Expeditors International (EXPD)
• Apple Inc* (AAPL)

Remember that an asterisk means I consider it a growth stock, and therefore grade it with different criteria.

I immediately saw when running my filters that there were several stocks that passed my criteria easily. Because of that, there was no point in considering overvalued stocks, so I just removed them right off the bat. And all that done, boom, only six more stocks to look at. Very easy.

Let’s make our choice:

• AAPL – I love Apple, not gonna lie. It’s still the only tech stock on my to-buy list. Almost as a nod to my thesis, AAPL crushed EPS and revenue estimates this quarter. The company even increased the dividend this quarter by 11%. Awesome news all around. The euphoria has subsided a bit, and now shares are off about $8 off their high. Definitely adding.

• BIIB – I just analyzed it here, and liked what I saw. My only concern is that I don’t know the pipeline well enough, though I have looked deeper into it. I also am interested in the price due to the minor correction in biotech that occurred in the past week. I still feel comfortable passing until I get the pipeline more.
• CB – Very good company. Love everything besides the Chowder number, which at 9.3, is a little lower than my Dividend Champion cutoff of 10. But since it passes all other criteria, it makes the final round for the month. Here’s the FAST Graph for CB:

• CBI – The FAST Graph, for your pleasure:

Shit, talk about some deep value. Although I don’t like the dividend history, due to the elimination after the recession, I wouldn’t be owning this for dividend growth, as is my policy for my growth portfolio. This company also has a resounding vote of confidence from Warren Buffett, who owns a 9.72% stake in the company. CBI has been under pressure recently for two reasons (besides your good old oil issues): cost overruns at a nuclear construction project for Southern Company (SO), and allegations of accounting fraud. See this SeekingAlpha article for more information, and for why I don’t believe the accounting issues are legitimate. And more generally, if people like Buffett, Munger, Wechsler, and Combs have dug deeply enough into the company to buy any stock, then continue to add enough to own nearly a tenth of the company, I’m not all that scared. Ditto for David Einhorn and Greenlight Capital. If someone who has solid experience in detecting frauds also approves of CBI, I’m even more assuaged. Further, the company has been around since 1889. I don’t view it as an ARCP, with less than 4 years of public ownership and with a sketchy CEO at the helm. CBI has been around the block, and I suspect it’ll be around for much longer. My only complaints are how I can’t fully wrap my mind around some reported numbers, as well as how deep value it is (I can still buy it later at a big discount). I still don’t feel it’s a buy-and-hold-forever stock just yet, so I’m passing right now.

Fun fact: the company was actually a spinoff of Praxair (PX) from 1997. The more you know …

• DLR – I’m leery of REITs until the interest rate situation is more clear. Moving on.
• EXPD – Also a good company. I recently analyzed it here. Love everything besides the semi-annual dividend, but I made an exception for the company due to the strong management team and debt-free balance sheet. Here’s the FAST Graph for EXPD:

• NOV – Observe this lovely FAST Graph here:

Two takeaways here: NOV is very undervalued. Like, short of a massive instantaneous rally, it will stay undervalued for a long time. Basically no need to rush in again. Second, earnings are much lower than the previous years. I want to see how this affects the dividend (and the share price) before making substantive purchases again. Since I own it already, I am passing.

• PCP – I do love this company, having analyzed it a while back. While I realized it’s clearly not a dividend growth stock, due to having the world’s shittiest dividend, it makes an interesting growth stock. It passes all my growth criteria, and I love its strong presence in the aerospace sector; nearly every plane on this earth has a Precision Castparts component in it. Like CBI above, It’s also a prized holding of Warren Buffett & Co; Berkshire Hathaway (BRK.B) owns a 2.01% stake in the company. Even better, BRK has has been adding to their stake recently. I feel the company has been unfairly beaten down due to low oil prices. While the company does have exposure to O&G, aerospace is by far the largest focus, at 58% of revenues in 2014, so I think the drop is more unwarranted than not. And, of course, the FAST Graph:

• VTR – I like VTR because of the recently announced spinoff of its assisted-living facilities. While I view it as a positive, I don’t really want to put money into the stock right now. According to my criteria, it is overvalued and doesn’t pass my quality ranking. While the quality ranking miss is okay due to the nature of REITs, I’m not really okay with the current price. Looks like that with the announcement, VTR shares spiked and still haven’t come back to earth. I’ll wait until next month to buy.

So, after starting with 60+ stocks, we’ve narrowed it down to four after only an hour or so of work. Our final round choices are Apple (AAPL), Chubb (CB), Expeditors International (EXPD), and Precision Castparts (PCP). Making it simpler, I feel EXPD is more fairly valued than CB. CB also has a bit higher yield and pays the dividend quarterly. Because of that, I’ll pass on EXPD until later.

So that leaves us with three stocks: one of my favorite tech plays in AAPL, the Dividend Champion, top-notch insurer CB, or the unfairly-beaten down king of aerospace PCP. And I chose to buy …

 

 

5 shares of AAPL @ $126.11 (total outlay $637.55, +$10.40 in annual income)

2 shares of PCP @ $207.98 (total outlay $422.96, +$0.24 in annual income)

Apple is self-explanatory. Earnings beats, a solid dividend increase, clearly undervalued. I was actually long AAPL pre-split (sometime in 2012?). Bought in at $380, sold around $500. I was so proud of myself that I saw some decent profits, but goddamn do I feel stupid now. It’s good to be back, and this time I’m never selling. PCP is also self-explanatory, after my thoughts above and earlier full analysis. I wish the dividend was higher, but love it otherwise. The stock is well off its highs, so it’s a good time to add. The share price is in a downtrend, and while I’m neither a technical trader nor much of a market timer, I feel this will give me even better places to add over time. But if I’m wrong, good for me; I’m still happy with my current entry price.

Why not CB? One reason –  this newly-released article saying that Wells Fargo (WFC) wants to expand its insurance business. I don’t want too much exposure to insurance, so I’m holding off until I see how this affects my portfolio allocation.

So two brand new, strong growth stocks. Although the total additional dividend income isn’t insanely high at $10.64 (I’m killin’ it with that PCP income!), every little bit helps!

What are you buying this month?

Disclosure: Long AAPL, AXP, BAX, CVX, NOV, OXY, PCP, WFC. My portfolio holdings have been updated appropriately. Image source is available here.

Tags: AAPL, Apple Inc, CB, Chubb Corp, EXPD, Expeditors International, Expeditors International of Washington Inc, investment-philosophy, PCP, Precision Castparts Corp, stock-purchase