After a quiet month of February where I made no investment decisions, I decided to take on a few actions for March.
In my previous update, the hysteria in US with the Mad King and all his executive orders and travel bans and accusations just made me want to take pause and reflect a bit on how to approach things for the next while let alone 4 years. It may seem like an eternity but the reality is time goes fast.
Over the last few months, I’ve seen a few themes slowly emerge, especially as it pertains to how capital will be invested in the US and I am slowly trying to integrate some of these themes in my portfolios.
Bought shares in Spider Aerospace and Defense ETF (Ticker: XAR)
As much as I don’t like it, one thing that seems clear is that the Mad King is going to ramp up spending on defense. I think it’s dumb, but as investors we are looking for opportunities and I think defense could be a big benefactor over at least the next four years. I decided that I wanted to get some exposure to the sector in my portfolio but I just don’t have that kind of time to do a deep dive to figure out which stocks to buy. There are a few defense ETF’s out there and they are all in the US. I liked the Spider version for a few reasons:
- Lowest MER of 0.35% so more money will stay in my pocket
- Passive portfolio that tracks the broad S&P Aerospace and Defense index
- Relatively high trading volume compared to other similar ETF’s so it’s somewhat liquid
- Breakdown of the portfolio pretty decently distributed and all the big names are accounted for
I opened up a small position with the intention of adding more periodically as time goes on. My intention is to hold this position for multi-years and it is very possible that it could go down a fair bit at times, so I am comfortable buying more to average in the position.
Bought shares in CVS Health Corp (Ticker: CVS)
I’ve always been looking to integrate some level of exposure to health services companies for all the normal reasons revolving around the aging population/increased health care support themes. As always my decision to buy shares was helped by trying to answer the 8 questions we all need to ask when we're debating about buying or selling a stock.
Question 1: What do they sell?
From Valuentum Securities:
The 2007 merger of CVS Corp and Caremark created the largest pharmacy health care provider in the US. The company has more than 7,800 retail locations and operates in 98 of the top 100 US drugstore markets. Its PBM business serves more than 60 million plan members. The company was founded in 1892 and is headquartered in Rhode Island.
CVS recently acquired Target's pharmacies and clinics and it will operate the acquired pharmacies in a store-within-a-store format. The deal expands its footprint of pharmacies by ~20% (adding more than 1,660) and clinics by ~8% (adding ~80 clinics).
Question 2: Who do they compete with?
CVS competes with other major pharmacy chains such as Walgreens as well the big retailers like Walmart and Costco. The acquisition of Targets pharmacy footprint, essentially makes them de facto direct retailers.
Question 3: Who buys their products and services?
Anybody that is not well or anybody that is well and wants to stay that way.
Question 4: Will they buy their product over and over again?
Medicine and health products are one of those core pillars that each of us rely on a day to day basis with demand rarely tailing off.
Question 5: Do they make money?
The company does generate capital on a consistent basis. Returns on Invested Capital have tracked around 20-22 percent while their cost of capital has been around 9 percent.
Question 6: What do they own and who do they owe money to?
The company’s balance sheet is decent, but by no means pristine. This reflects a strategy by the company to grow through acquisition. In terms of liquidity the company has more Current Assets than Current Liabilities so it is decent. The company carries a pretty high level of Goodwill and intangible assets so that is something that could potentially be concerning. They are using resources to acquire pharmacies to build some scale. Cashflows are rising which is healthy.
Question 7: How risky is their business?
Like anything in the retail space, the risks usually start with Amazon. In the case of selling drugs, Amazon is not there yet in terms of flexing its muscles, but there are sure enough other online pharmacies that can put a dent into the bricks and mortar pharmacy. Pharmacies besides selling medicine also sell staples type of goods so in a way they can be more like a traditional corner store that sells basic staples at a slightly higher price point to tap into the “grab a few things in a pinch” crowd. Pharmacies are almost like a comfort food. They address key demand points we all need; food and health. We know when were in a jam for something, they’re right there to bail us out. I’m not sure how an Amazon can fill that insatiable, human need. A game changer moment could be if Amazon or someone like an Uber can figure out how to deliver these “rush” orders cost effectively and in a timely manner.
Question 8: Is the stock cheap?
On a relative basis the stock is cheaper than similar businesses, trading at forward multiple in the 13 range compared to its peers which are trading at a forward multiple in the high teens. The stock value comes in at between $82 and $124 which is much higher than its current $80 range, so there appears to be some upside on the stock.
So we have a company that provides a service that is a core need to consumers in terms of health and food related goods and services. It is one of the largest companies in their sector. The company is making healthy economic profits. The balance sheet, while not pristine is decent enough. There is enough liquidity in the business. While there are risks with the pharmacy model, they don't appear to be imminent threats and finally the stock appears to be cheap on a relative and discounted cashflow basis. The stock is a bit out of favour right now, hence the lower price. With the Mad King backing off any meaningful changes to health services, the stock could see a move up. To me this is a basic staple kind of business that is somewhat boring but continues to generate decent cashflows. Factoring these elements gave me comfort level to buy a little bit of stock and to slowly build up the holdings.
Added to short position in S&P 500 (Ticker: HSD)
With all the hysteria and lament in the air right now, you’d think the stock market would start fraying at the edges. Hardly. The market continues to see a bright future and has no problem breaking records on a daily basis. At one point, the S&P500 went almost 100 days with a 1 percent fall. If there is a malaise in the American landscape, Wall Street isn’t seeing it. For regular readers of this blog you already know how negative I am on the market, yet here we are smashing record after record. As much as the FOMO feelings try to come out, I continue to resist and continue to maintain my painful short position. It continues to be a tough investment decision, but I am convinced that severe market correction is out there waiting to strike, so I continue to hedge my portfolios for this possibility. While some sort of Halo effect has been there, the reality is economic growth has been pretty meh and here we have the Federal Reserve embarking on what appears to be a meaningful path to raising interest rates to historically normal levels. Something has to give here. I have no idea when, but the fundamentals reflect something will go down.
Bought shares in Neulion Inc (Ticker: NLN)
I think NLN has become my play stock. This is the 3rd time in the last couple of years that this stock has found it’s way into my portfolio. The fundamentals of the business hasn’t changed much from my previous observations. The stock has fallen from the $1.15-1.25 range down to the mid $0.80 range, so I decided to buy back in with again another small positions. The move is really more of an asset play as the company has been entrenching itself as a go to place for streaming live sports events. Since losing the NHL contract, it has kept going and continues to make a strong push into the European markets. The stock I think has a floor in terms ofvaluation given that multiple that Disney paid for a piece of the MLB streaming business. With that the value comes in much higher for Neulion. I’m happy to buy it and bank any small chunks of profits and rotate through it. It’s been OK so far as I’ve banked returns of 23 percent and 10 percent in the previous iterations.
I’m not a fan of short term trading and investment decisions, however I don’t see any harm in taking some very small speculative positions in a portfolio as long as you realize that there is always that risk that you could some if not all your money in that stock and you don’t put all your savings in to them. Finally you still need to do your homework and have a comfort level with the business and their ability to create tangible wealth. Throwing darts will not get you there.