Sold: SCHZ – Schwab US Aggregate Bond ETF
Bought: FL – Footlocker
Thinking: My older son got interested in the stock market and asked some questions. I had done a decent amount of work in the past developing some tools to value companies using the value approach (Buffett, Graham & Dodd, Etc.). I had never really polished off a toolset or process that I liked. I was too busy with work and life to commit the time to it. I told my son if you want to invest in individual stocks (rather than just buy indexes) that 1) it would be a ton of work, 2) it would likely not wind up beating the indexes (most don’t). So hard…and harder! But the subject interests me, and I was interested in seeing some of my prior efforts through (plus my life is in a different place now) so I decided I’d do it. I built some tools and developed a process that I felt comfortable with. One night about 3AM (after many, many late nights) I beat the final roadblock on my previous tools and got my deep dive spreadsheet calculating the numbers I hadn’t been able to get solved before. I was ready! I ran everything and it kicked out a list of a few stocks to look at out of input of several thousand. The last day of October I pulled the trigger on my first investment! Footlocker!
FL (Specialty Retail) – It was in the beaten down speciality retail space. Several of their competitors had already closed up shop. Direct to consumer and the death of the malls have everyone convinced this company will go away. I think there will always be room for brick and mortar retail…especially in shoes. Footlocker not only sells shoes (which wear out often) but they put a large focus on ‘premium’ sneakers (which is an interesting market itself). Maybe they go away but I don’t think so. They have no debt (which should help them as they figure out the changing landscape). So after a ton of work…I pulled the trigger on my first investment @ $31.21 with an 80% certainty rating.
Sold: SCHB – Schwab US Broad Market / SCHZ – Schwab US Aggregate Bond ETF / RJI – Rogers International Commodity Index / VGSLX – Vanguard REIT Index / VT – Vanguard Total World Stock / FSIVX – Fidelity International Index / SCHF – Schwab International Equity / VTSMX – Vanguard Total Stock Market / FXSIX – Fidelity S&P 500 Index / SWPPX – Schwab S&P 500 Index
Bought: VIAB – Viacom Class B
Bought: TPRE – Third Point Reinsurance
Bought: MEET – Meet Group
Bought: HA – Hawaiian Holdings
Bought: GILD – Gilead Sciences
Bought: ESRX – Express Scripts
Bought: PCMI – PCM
Thinking: Busy month! I began transitioning my portfolio away from some great, low costs, low turnover index funds which have served me well for quite some time into some individual positions. I am not extremely comfortable buying individual positions honestly because what if I pick the wrong stocks because I’m a dumbo who knows nothing. It is a huge…and likely risk to be honest. Ha. But I’m not at all happy with the state of the ‘buy and hold the index’ strategy with the state of the world today (with S&P Shiller PE pegging near all time highs). So in the opposite vein of if you can’t beat them join them…I’ll try to beat them! Strangely I am less stressed than more stressed about this. For me owning highly valued assets is way more stressful than buying/owning assets during times of crisis. The indexes I owned had me at about 40% US Stock, 15% REITs/Real Estate, 30% International Stock, 15% Bonds. By the end of the month I had transitioned to several individual stocks (with the rest in a broad stock ETF). A little over 40% of my holdings were in these individual stocks that I’d selected through my process.
VIAB (Media) – If I can own Spongebob I will! Ha. I looked at several media companies when looking at this one and really struggled with which one was best. Everyone is worried with cord-cutting and the decline of traditional media delivery methods. Viacom is literally almost no where outside of the traditional places so they will have to figure that out. I’d imagine they will and when they do it will be huge. They have a knack for owning certain hard to get populations and have great assets that are on the rebound (MTV, Nickelodeon, BET, and Paramount Pictures). My take is that the content they own will be valuable regardless of how it is delivered. There is also all kind of weird stuff going on with the Redstone/National Amusement ownership structure that are likely to continue. Family infighting and ownership infighting is never good for stocks short term. Again, long term I think this all works out. I would normally not invest in a company with so much debt. But they are hyper focused on it and have been decreasing it rapidly (while also buying back a ton of shares). The debt level is really my only concern with this company and it is a huge concern and the reason for my 60% certainty rating (but not enough to keep me from buying it @ $24.47).
TPRE (Insurance) – I don’t know too terribly much about the reinsurance industry but I like the concept and company here. Tons of industry veterans from large insurance companies started this company (so what I don’t know I’m guessing the industry veterans do know). Started in 2011 and has grown to $1 billion in revenue from a standing start. That is impressive. Their investment portfolio is managed by Dan Loeb an activist investor. Debt is negligible. There are some secondary offerings going on right now where early investors are selling their shares (no increase in shares outstanding). I imagine the results for this company will be choppy with the way the reinsurance operations work + with the way the investment portfolio will potentially swing earnings quarter to quarter. That said I want to own it because it seems very Berkshire-esque with the insurance business feeding the investment portfolio. Then the investment portfolio being managed by an activist value manager. I think over time it will be a winning formula (or at least be a little different risk profile for my portfolio). So I don’t know a ton about the industry and their history is short which is why I’m buying @ $16.11 with a 70% certainty rating.
MEET (Internet Software & Services) – I mainly bought this because I actually had this idea recently to make an app where lonely people can find friends who have their interests. Not like Facebook where you socialize with people you already know. I’m too lazy to do that so…I’ll buy this one instead. Their target market is everyone on earth who might sometimes be lonely and look for a friend. They have been doing acquisitions which have been done without adding any debt at all (but are adding stock options). They are a stock option heavy company (like most software companies) meaning they give stock out to employees like candy (while also paying them salaries). I’ve worked in software companies like this and if it works it can create a pretty focused workforce. Many of the original founders are still in place. In a highly competitive industry to even remain a viable company competing against the likes of Facebook and Match says something. My gut says if they’ve made it this far they can keep grinding for some kind of long term value creation. There is some insider buying earlier in the year at prices higher than today. The CFO is leaving at the end of this year and is their second largest insider shareholder (who knows why he is leaving). What they do is not rocket science and they could easily be targeted by larger players who could copy/recreate what they do. They are growing mainly right now through acquisition and the organic growth seems to have stalled out a bit (which is not good long term). Buying @ $2.48 with an 80% certainty rating.
HA (Airlines) – There are plenty of airlines that are showing up in my hit list. I looked at several before settling on this one. Hawaiian Airlines has had a good run already. They are a great company and are well run under current management (which hasn’t always been the case). Their current CEO just retired. At the moment they basically have a little monopoly on air traffic to and around Hawaii. They have 80-90% market share on interisland travel (which is 25% of their revenue) and their major competitor just went out of business. They’ve diversified out of this business to US to HA flights which is now 50% of their revenue and intercontinental flights to HA which is now 25% of their revenue. Basically if you want to go to HA you will fly with them. Their debt to equity is higher than I’d like (airlines often are) but it is lower than similar airlines and has been dropping (but has slowed with cap ex and share buybacks). The biggest risk many people think is the risk of larger players adding routes to compete with them (like Southwest who has already said they will and United/Continental). Buying @ $37.89 with a 75% certainty rating.
GILD (Biotechnology) – They target life-threatening and life-long illnesses (the kind that once people get they have for life, like HIV and HCV). They have huge market share in the markets they serve (like 80% in HIV). They also have ‘single dose’ technology to make the treatment routines easier on the patient. So lifelong illnesses that are terminal if untreated, combined with huge market share, combined with good technology, combined with high margins should be a great investment. Morningstar gives them a wide moat and I agree. They also have high gross margins…which can make up for many, many sins. They are goosing ROE by doing debt fueled buybacks. So their debt to equity is higher (116%) than I want but with current and quick ratios above 3 it can be effective if managed properly. Half their revenue comes from HIV and the other half comes from HCV. The HCV drug is going according to plan but revenue will decline because the drug isn’t needed once administered. Their HIV drugs will come off patent as well. So they will need to manage their pipeline to replace the lost revenue. This is why their shares are priced the way they are now. I’m betting they will navigate all this effectively. Buying @ $73.83 with an 80% certainty rating.
ESRX (Health Care Providers & Services) – They bought Medco (their largest competitor) which was having a bad year so they scooped them up. The combined companies have 40% market share. This gives them greater supplier leverage (which is what their business is all about) and more importantly, I think, scale to decrease their already low cost structure. They are losing their largest client Anthem in 2019 (17% of revenue). Each year they have to recontract with 1/3 of their customers. Things like this will happen (they’ll win some and lose others). In my opinion demographics and industry trends will more than make up for losses like players like Anthem moving around. The infrastructure these guys have built is valuable (at least to somebody). They currently don’t service the Medicaid market at all and have not chased that business. Their debt to equity is higher than I’d like at 88% but it has been stable and they have been buying back shares (down 30% since the Medco deal). So the higher debt and losing a key client cause me to buy this one @ $60.61 with a 75% certainty rating.
PCMI (Electronic Equipment, Instruments & Components) – This is a pretty small player and the stock is teetering between being in the Russell 3000 and not. They missed on revenues but explained the miss completely. The business is in no way falling off a cliff as the recent stock price moves would suggest. Their operating profits are down but explained completely. They are actively working to transform the business to a service based model (currently less than 10% of revenue). They are doing acquisitions and buybacks and all with no debt. I think the recent move down is a huge overreaction and that if they just keep the wheels on the cart and execute their current plan they will be easily back in the Russell 3000 (ha). I don’t love their business but evidently no one else does either and this stock is absurdly cheap (I think just because it is so small and underfollowed and is getting whipsawed buy some big money moving in/out). Buying this @ $9.89 with a 100% certainty rating.
Bought & Sold: TX – Ternium
Bought & Sold: OGZPY – Gazprom
Thinking: I opened positions in two international companies (TX – Ternium & OGZPY – Gazprom) that I thought were undervalued and was looking at a third (KEP – Korea Electric Power Corporation (ADR)). Immediately following these two investments I wanted to better understand the currency risks associated with owning international stocks (and why the Korean currency didn’t fluctuate…which I later found out was due to the USD peg). I did several days of research on this and came to the conclusion that I was not in the business of managing currency risks (and didn’t want to be). To me it is like owning options (you have to be right on too many things). I not only need to find a good undervalued company to own but I also have to know how the currencies will impact my returns (which no one can know). So even if I’m right and pick a good company I could have my entire gain wiped out by a currency move (and vice versa). I’m no where near smart enough for all this. I decided that I don’t need to be playing in this sandbox at all. I immediately closed out the two positions I had opened. There are plenty of companies for me to look at inside my own currency so I will focus my efforts there (unless something really compelling comes along).
#investments #investing $FL $VIAB $TPRE $MEET $HA $GILD $ESRX $PCMI