05 Sep Portfolio Update – September 2017
A few comments on both new and existing additions to the Top Holdings. The companies mentioned are all leaders in their respective industries and because of near term concerns have declined to a point where it made sense to start buying.
Starbucks — the company’s mobile order-and-pay feature has become such a major hit that pre orders have actually created bottlenecks at Starbucks’ counters, as pickups collide with in-store orders. The company is rethinking store layouts and hiring pre order specialists to handle the demand. Because of this and concerns over market saturation, the stock price declined from the low 60’s to the mid 50’s — a level that I felt fair enough relative to its historical valuation to start a position. Most companies only wish they had more business than they can handle – this will get corrected and combined with the 5,000 new stores slated to open in the Asia-Pacific region the stock should do just fine.
Costco — the recent acquisition of Whole Food Markets by Amazon has thrown the food industry in a tailspin and Costco has been no exception. The stock declined from the low $180’s to the low $150’s. The difference between Costco and everyone else is that Costco already has cheaper prices than Amazon and they make the majority of their profits from the near 90% annual renewal membership fees. But like Starbucks, the stock is rarely cheap and even now in the low $150’s is pretty expensive. I decided to start a position with the thought that both Starbucks and Costco are two of the best growth retailers on the planet and I would rather own them on these declines than hope they get a lot cheaper.
Whirlpool – the world leader in home appliances is not immune to the ups and downs of the global economy. Even though the United States is growing nicely, a downturn in Brazil along with recent increases in steel prices and two major acquisitions in China and Europe have caused this year’s earnings to be less than expected. The stock declined from the $190’s to the $160’s where we began purchasing shares. If the company can grow the business in the +4% range and generate in excess of $1 billion cash annually – as they say they can – the stock is a bargain.
Schlumberger – with oil prices in the mid $40’s it is no shock that oil & gas stocks are down. Schlumberger’s stock price has declined from the mid $80’s to the low $60’s where I started buying. The dividend yield is 3.15% – the highest in well over 20 years and the company believes we are in the early innings of a recovery in spending by the large international oil companies. We are getting paid nicely to wait and see.
Cabot Oil and Gas – the low-cost producer of natural gas in the Marcellus Basin of Pennsylvania declined to the low $20’s where we purchased shares – the same price the company has also been repurchasing shares. I got interested in Cabot after reading a company presentation outlining the amount of discretionary cash they expect to generate beginning in 2018. If they are correct, Cabot will be a cash generating machine for the foreseeable future. With this excess cash, they can increase the dividend and continue repurchasing shares. A strategy that should work well for us!
Range Resources – I may have made a mistake on this one! I purchased shares in Range in the upper $20’s after the stock had declined from the mid $40’s. At the time of purchase, the company seemed too cheap relative to its historic valuation. Like Cabot Oil & Gas, the company’s main attraction is its low cost long lived natural gas reserves in the Marcellus Basin of Pennsylvania. In 2016 Range made a major acquisition of a company in Northern Louisiana for approx. $4.5 billion. In hindsight in appears they paid way too much and I struggle also with why they aren’t as efficient as Cabot in the Marcellus. At today’s price of $17 Range’s reserves are trading at a large discount to its peers – but there’s usually a reason. This one may be a 2017 tax loss candidate.
General Electric – GE was the worst performing stock in the Dow for the last 20 years. That was yesterday– today I am very enthusiastic about the ability of a new management team to maximize GE’s potential after the previous CEO spent the last 10 years repositioning the company. With a 3.90% dividend yield I really like this idea.
Exxon Mobil – like GE, Exxon’s near term attraction is the dividend. The company has stated it’s committed to a steady and growing dividend and at 4% that works for me. As a reminder, commodities (things that come out of the ground) were the worst performing asset class for the last 10 years and are trading at one of the lowest valuations relative to financial assets in history. What goes around usually comes around.
Wells Fargo – there is no shortage of bad publicity for Wells Fargo and all well deserved. As a result of their bad behavior both the CEO & Chairman have been replaced. Wells Fargo will get this behind them, and trading at 12x earnings and paying a 3% dividend, the stock is an excellent value. If interest rates ever go up they will make a lot more money and so will we!
Thank you for your business and trust,