Investment Activity Review - January 2016 Part 1

Happy New Year indeed…..what a month!

The hangover from 2015 was barely clearing when all heck broke loose in January as stocks just nosedived.  For those who have been following these posts, I’ve been a bit of Downer when it comes to the stock market and I’ve always said there would be a meaningful pullback. Eventhough I was expecting something to go down, you can never be prepared for when it actually does. Funny thing is besides oil prices tanking and a symbolic interest rate hike in the US, there’s nothing “new” or game changing that happened in January.  The latest iteration of the China pullback is nothing new. As Robert Shiller said, an asset bubble is a pretty random event. They just happen.

To say January was an active month of investing for me is quite an understatement. In the past few years, if I was able to scratch out a few transactions, that would have been quite a bit of move. This month however was not a typical month. From the first day of trading for 2016, it’s been ugly.  It’s also got me excited about stocks again as finally some opportunities to put some money to work meaningfully may be at hand. I made 12 trades in January. Only one was a sell. The rest were either adding to existing positions or adding brand new positions.  There’s no way I can speak to these actions and my thoughts in one post, so I’ll be breaking these into separate posts. This post will focus on the Sell and Adding decisions.  I’ll preface everything by saying all these stocks fell in price in January, some more than others and this is what I did with it.

Sold Coach for 19.01% gain

Maybe at some level I may have been influenced by the violent pullback in the first week of January. At the end , I decided to bank the profit as the stock was very near my 20 percent threshold return. I thought maybe right now it is as good as it could get for the stock and so decided to bank the profit and maybe buy back again in the future if the market got a bit more ugly. I added to the stock to my List. Recently there has been rumblings of things turning around in the company but I've been seeing more market research calling for the handbag industry ripe to slow down in medium term.

As you can see, Coach was the only stock I sold in January and I didn’t’ sell it on fear. I sold it because it did what I wanted it to do which was provide me with a minimum return I was seeking. Instead of panicking and making emotional decisions, I used the pullback in stock prices to strategically build on current stocks that I held as well as to execute my investing ideology buy purchasing companies that I have identified in my cheat sheet (aka The List) which have fallen to earth a little bit.

 

Added to position in Southern Copper Corporation (SCCO)

The stock pulled back to the $22.50 range which was down from the $26 level that I bought in. I decided that this would be a good time to add to the position to average down the cost. I doubled my position which lowered my cost level to $24.50. It’s still a small position in my portfolio so if commodity prices and more specifically copper prices fall then I would look to buy further. Considering what’s happened to copper prices, SCCO has held up pretty nicely compared to Freeport MacMoRan which has fallen like a stone to almost $4.00! It was only a few years ago the stock was in the high $30’s and it was a stock I had on The List. The company got caught in the trap of diversifying away into oil and gold and used a lot of debt to do so. Now it’s stuck. SCCO on the other hand is still a pure copper company and it still has the best cost structure in the space. The fact that the company is still making profits in such a depressed market tells me how well managed the company is. The stock could still tank, but right now I’m happy to own a best of breed company at a discounted price. Make no mistake this stock, like other commodity stocks will take a while to come back.

Added to position in General Electric (GE)

In any significant market pullback, I’m always looking for blue chip companies that will likely be on sale. GE in December was trading near $31 and I was seriously debating whether to sell as my position had crossed the 20 percent level, but then the market pulled back violently and the stock came back into the $27 level. Nothing fundamentally had changed in the business other than its oil equipment and services which have taken a hit because of slowdown in drilling activities, but that is just one segment. The company is immersed in a wide range of industries from health care to aerospace.

From Valuentum Securities:

"...General Electric generated $16.4 billion in cash flow from operating assets in 2015, up 8%, as it drove total industrial and industrial segment margins higher 110 basis points and 80 basis points, respectively. The company’s orders grew 3% (1% organically) on a year-over-year basis in the fourth quarter ($13.8 billion versus $13.1 billion), and its backlog grew to an impressive $315 billion (up from $266 billion and +7% organically), though we note some of the incremental expansion includes a contribution from Alstom. During the period, its ‘Power’ segment generated organic orders growth of 29%, it landed its largest-ever deal in India in its ‘Transportation segment,’ it won a $600+ million services contract with Cheniere (LNG), and it landed $17 billion in new business from the Dubai airshow. ‘Life Sciences’ and ‘Bioprocessing’ continue to be strong areas with its ‘Healthcare” division..."

So instead of selling, I decided to add more to the position to take advantage of the pullback. I believe the stock will right itself back up and hopefully my position should benefit. GE continues to transition out of the finance space and is becoming a more pure industrial conglomerate that owns significant market share in a plethora of major industries. As a result, the market appears to not have recognized this much but before the pullback, it appears the stock was ready to make a serious move.

Added to position in Walmart (WMT)

Despite all the carnage in the markets, Walmart was one of a handful of stocks to actually go up in January. At one point during the malaise the stock went up from $59 to $64. In mid-January during another pullback, the stock finally retreated back to the $60 level and I decided to take the opportunity to add to my position.  I even decided to buy the stock for my son’s RESP account as I think the company is a solid long term holding. As far as I could tell, whenever I go into the Walmart store near me, it's always full and busy so the stock market pullback didn’t seem to dissuade shoppers. In fact with oil prices continuing to tumble, I would expect that their stores would become even busier.

Added to position in Vanguard All-Cap Canadian ETF (VCN)

As Warren Buffett has infamously said, the best time to buy stock is when there is “blood on the streets”.  Well for Canadian stocks and the economy as a whole, there is more than enough blood flowing. When you put on the evening news the first couple of stories are all about the falling stock market, falling Canadian dollar and Canadian economy as a whole. A lot of hand wringing is going on in Bay Street, so I thought this is just as good a time to use the pullback to average down and build up on my position. When I bought the ETF it was at the $29.75 level and I have slowly been adding to it on various pullback opportunities. The latest purchase puts my cost base at now $26. There’s no reason for Canadian stocks to stop pulling back and if it does, I’m happy to keep adding to my position. I plan to hold the ETF for a multi-year period and at some point the hemorrhaging will stop and Canadian stocks will reset back up. I have no problem waiting and building slowly.

Added to position in Las Vegas Sands (LVS)

January marked the return of the China Syndrome as Chinese stocks again resumed their descent from the previous iteration last August. I added to my position in LVS a couple of times in January as the stock just seemed to be freefalling with no real reason behind it. Sales were still falling in Macau but we already knew that Macau was still struggling across the board. Drilling down deeper, there was some good news. Margins were up, and revenues were up overall despite the 22 percent drop in Macau revenues. The Venetian property in Macau still managed to generate $1 billion in operating profit. VIP gaming volume was up 5 percent compared to 2 percent in the overall market. The company despite the issues was still making very healthy profits but it was getting beat down because of China. So I bought a few times to bring the costs down. My average cost base has now fallen from the initial purchase of $60 to now $47. I’m down about 17% but when converted to Canadian dollars I’m down about 10 percent. Factor out the almost 7 percent yield and I’m not that bad off.  Like commodities this one is going to take some time to recover and I think it will because there have been tangible statements by the Chinese Government that they will do whatever it takes to make sure Macau is viable. Whether that is through loosening regulations or putting more money into the infrastructure that remains to be seen.

Added to position in Global Water ETF (CGW)

Yes I’ll admit it. This post has become a bit mundane as the same premise seems to be repeating itself. Water is one of my long term investing themes so I decided to hold a basket of water related companies. What’s different in our case is that my wife decided to use the pullback to open a small position in CGW in her RRSP portfolio and she will add to it should stocks continue to falter.

Added to position in Imperial Oil (IMO)

Finally, my last move was to use the plunging price of oil to add to my position in Imperial Oil. My cost level has now fallen from the original $50 level to about $45. I’ll continue to slowly add to this position if oil prices keep falling. I have no idea how far lower it can go. It can and even if it does, I trust that blue chip oil companies like Imperial can manage through this and still create some level of tangible wealth.  They have that kind of pedigree. What I’ll be looking out for now are the annual reports as they will be posting these weaker numbers. I’ll want to dive in and see despite that lower revenues, are companies like Imperial still generating sufficient Return on Invested Capital to cover their cost of capital. I’ll let you know.

So there you have my moves in my existing positions. I’m hoping that you can see that I used the market pull back not to retreat from it but to instead play offense and build on my current positions by buying stocks that essentially to me were on sale. Having The List on me was very helpful as it kept me focussed on my stocks and allowed me carry out my investment ideology without emotion driving the decision making.  In my next series of posts I’ll dive in the new stocks I added to my portfolio in January.