Investment Activity Review – January 2014

The New Year has brought a great deal of volatility to the stock market (finally). After enjoying ridiculous double-digit returns in 2013 (thank you Federal Reserve for the sugar kicker), stocks started pulling back in January. The main driver was the mass exodus of capital out of the Emerging Market economies, thanks to the tapering activities of Central Banks which created an excess of liquidity that was in search of yield, risks be damned. A lot of that sugar got parked in countries like Turkey, India, Thailand, China, and other developing countries which helped to float the boats of many global stock market indexes. The tide rolled out in January and all of a sudden companies got exposed. Risk and fundamentals became a factor again. In times of great volatility, stocks of all forms get thrown out with the bath water. January brought about for the first time in a long time an opportunity to bank some profits and buy some well-run, financially sound companies at a bit of discount. I executed quite a few trades to take advantage of the fear factor that was permeating the markets.

SELL TRADES:

I had an opportunity to bank some profits in December to make my meagre 2013 performance numbers look better, but I don’t work on Bay Street, and I’m not trying to sell a fund, so I didn’t bother. My investment horizon runs in years not months. I decided to wait until the New Year and re-evaluate a couple companies that have crossed my 20% return threshold that I seek in all my investments.

SOLD Oracle Corporation (20% gain)
Oracle was not getting a lot of love by analysts and the market in 2013, but slowly and quietly it edged up the charts and posted a decent return. It is still the dominant company in the database space. It has a well-established client base that will throw predictable, consistent cash for a long period time. It has a balance sheet which is still pretty clean. There is still upside on the stock, but I was satisfied to bank a 20 percent return to start the year off on a positive note. Confidence is an important part of investing and seeing yourself sell a stock for a healthy return can give you some confidence (without inflating your ego) that the work you are doing to crunch numbers, research and analyze stocks has some merit. If the stock were to return back to the low $30’s on a market correction, I wouldn’t hesitate to open new positions.

SOLD Tyson Foods (34.6% Gain)
I wasn’t expecting Tyson to move so far so fast in the short time I owned it, but thanks to the Sugar Daddy that is the Federal Reserve, Tyson has made a pretty solid move. It is a best of breed in terms of meat processing and they have their paws in the entire food chain. They continue to generate consistent Returns on Invested Capital that is well in excess of their Cost of Capital. There is still some upside to the stock, but I was happy to book a healthy 35% gain. Like Oracle, I wouldn’t hesitate to go back into the stock if it were to pull back significantly and the fundamentals of the company are intact.

NEW BUY TRADES:

This month, with the market pullback, I decided to open a few new positions. The intent was to establish a position and if the stock were to fall further on market weakness, to buy additional stock. If the stock pops, then I would ride it up. Either way, I’m looking to buy companies that I plan to hold on to for a long period.

OPENED position in Costco (Ticker: COST )
Costco is a wonderful company with a unique business model. I can’t remember a time whenever I went there and the parking lot wasn’t full and the lines at the cash being long. They are the textbook case in terms of operational efficiency and utilizing a product mix strategy of less is more. Their business model revolves around a value system that treats its employees as assets and not as cost centres. They show it by paying higher wages than other grocery/retailer operations (for those against raising the minimum wage, take note. You can actually make more money if you pay good people well). When you drill into the numbers, the financial performance is there. Consistent high Returns On Capital and cash flow generation. The balance sheet is pretty clean and simple. I’ve always wanted to buy the stock as long term holding but it’s always been on the pricey side. The stock dropped about 4% during the month, I thought it may be a decent time to open the position. I bought it within my son’s RESP as I feel Costco is a type of stock can generate long term value, so I’ve viewing Costco as a core long-term holding.

OPENED position in Whole Foods (Ticker: WFM )
Another food retailer, Whole Foods has established itself as best of breed in the organic, higher-end grocery retailer spectrum. Many of the same principles that revolve around Costco are in play with the company. Whole Foods, fits my view of the retail space which is morphing into a barbell playing field with high-end, luxury and uber discount chains achieving significant gains at the expense of the middle-level retailers which are becoming hollowed out as incomes become polarized. Again it’s a company that I’ve wanted to own, but I thought it was too expensive and it may still be too expensive. In the January market downturn, the stock fell about 6.5% and is almost 20% below its 52 week highs. Analysts are lamenting that more grocery retailers are trying to enter the high-end space which is forcing Whole Foods to compete on price rather than quality. I thought at the current levels that there is more upside in the stock, so I decided to open a small position and build on weakness.

OPENED position in Coca-Cola (Ticker: KO )
Coca-Cola as well as other soda pop makers are not getting a lot of great press these days especially from the obesity, health crowd. Movements are springing up to ban sodas from schools, and to limit the size of the packaging. Everyone likes to slam Coke and Pepsi saying they wouldn’t be caught dead drinking the stuff. So why did I buy it? Because yet somehow year after year, the company sells billions upon billions of these drinks. It is one of the most recognizable brands in the world and it sells its drinks everywhere. If you drink anything non-alcoholic and not coming out a tap, chances are it will be Coca Cola product. Granted they seem to be selling less of the iconic Coke and Sprite brands, but they are more than making it up by selling a variety of bottled water and natural beverages. It is not about just having a Coke and a smile anymore. They have a very diverse portfolio of brands. In the developed world, sales have been flat but everywhere else they are more than holding their own. Despite the Coca Cola pop beverage being portrayed as the poster child for obesity and the new tobacco of the 21st century, the company pushes on and has stayed consistent with increasing its dividends every year for almost 40 years. Because of this, Coca Cola the stock is becoming more and more like a tobacco stock. Out of favour and boring but generates consistent cash flows, excess returns on invested capital and pays its investors back year after year. In some ways, the stock and yield is more stable than a Government bond. The stock has dropped about 8 percent during the downturn, so I thought this would be a good time to build a long term position.

If you are detecting a trend here in that I’m investing with my stomach, you are correct. In my article on how to find stocks to invest, food related companies are a core area to explore because, at the end of the day, we gotta eat and drink. So these types of companies play to that theme and with valuations that appear to be at a discount and generate meaningful, consistent economic profit, you can do a lot worse. (NOTE: As of writing, I still have a position in McDonalds as well)

ADDITIONS TO EXISTING INVESTMENTS:

ADDED to S&P 500 Short Position (Ticker: HSD )
I have commented on numerous times over the past year on how difficult it has been to be an investor in a world where Central Banks are influencing stock prices rather than market fundamentals. Within that backdrop I have been keeping a short position on the S&P 500 index via the Horizon ETF because I have had a hard time linking tepid growth in earnings with an explosion in stock prices. Factor in sentiment that was uber bullish and that was willing to ignore risk at any cost and I felt stock prices are due for a pullback. So I had in the later part of the year been adding little by little to my short position. It hasn’t gone well but I continued to stick to my position. In January we finally saw some cracks thanks to the EM exodus. Even in the downturn, I decided to continue to add to the short position to average down the price as well my take that we still really haven’t seen enough of a pull back. I’m still under water but the gap is closing.

ADDED to position in Apple (Ticker: AAPL )
Stock was trending up into the high $500’s and I was feeling like a really smarty pants considering how much the company has been slammed by the smart people. First the smart people said they should sell cheaper phones. Then smart people said they can’t innovate. Then the smart people said, can’t sell in China. Well the cheaper 5c has been a dud and the more expensive 5s with its “innovative ” finger ID button has been flying out of the shelves. In China they sold a million phones on PRE-ORDER through their new vendor China Mobile and their 750 million customers. It was a good run and a lot of smart people looked, well, not so smart. The company reported record sales of iPhones and their new iPads, yet the analysts still piled on causing the stock to fall back to the $500 range. With all the above in context and the reality that the company continues to mint an insane amount of cash as well as there are several potential new products coming down the pipeline, I viewed the pullback as an opportunity to buy some more stock on the cheap.

ADDED to position in IBM (Ticker: IBM )
IBM is a core holding in my sons RESP portfolio. It is still best of breed when it comes to providing enterprise technology services to Fortune 500/1000 level clients. It has a stable client list of some of the largest, most influential companies in the world that have an ongoing need for its services and support. The company has been generating a lot negative feedback from analysts who claim, IBM has been pumping their earnings by financial engineering rather than bread and butter sales. It’s true and as bureaucratic as it is, the company has an ability to reinvent itself and chart new waters. It continues to shed its hardware businesses and is focussed more on its service delivery and monetizing its R&D (i.e. the Watson project). It is looking to go all in on providing cloud-based services and has been out buying companies to build its knowledge base. The stock has pulled back from the low $200’s and is now in the $170 range. Based on this, I decided to add more to our position to average the cost down.

ADDED to position in iShares Emerging Markets (Ticker: EEM )
I’ve held positions in the Emerging Market ETF mainly because I believe that the world is undergoing a redistribution of capital away from developed countries to the developing world. They have only just begun to embrace many of the capitalist system enabled lifestyles. They have had a taste of consumption and somehow I doubt they will return back to their former controlled, inefficient lifestyles of the past. The correction being experienced in the EM is a product of growing pains as these countries find their way in a bigger, globalized world. The Central Banks didn’t help. Unlike the EM crisis of the late 90’s, the EM countries have much more liquidity and capital behind them and can withstand these shocks. The demographics and education level work in their favour over the long term. They will do fine. So as everyone has declared EM a failure, I decided to use the weakness to add to my existing position.

A much busier month than normal. I’m usually lucky to make 1-2 trades in a month, but with the sell-off and a change in investor sentiment towards becoming more fearful and selling off assets more on emotion, I decided we are in a zone where if there were opportunities to buy companies on sale to jump on it and build positions. If the market continues to pull back, I have resources to add to lower the cost base as I am investing in well-managed companies with solid brands, clean balance sheets, and market leaders within their sectors. These are the times to buy stocks…when the market is hand wringing and fearful. It runs counter to how we are wired as humans, but that is the reality of how investing works.