H2/2016 Strategy

Recently I have been thinking about the strategy to apply during the second half of the year. There are quite a few issues making it very difficult: all time high valuations in general, EUR/USD exchange rates, political tensions, terrorism, brexit and Trump to mention few. Typically I consider such issues as a positive thing (in investment sense) as long as they produce the expected outcome which is fear and panic. A lot of that is missing though mainly due to politics on both sides of the pond but I’m pretty sure we will get there eventually. The problem is that nobody can tell when this will happen. I’m guessing that it will not happen during the second half of the year, maybe not even during 2017.

As the world lies at the moment, I’ll be considering mainly the following options for the second half: weapons, defence and security sector, alcohol and other similar substances and lastly car makers. For the weapons part I would really like to increase my position in LMT but I would like to get a bit better valuation and really don’t like the idea of converting euros to dollars with the current exchange rate. For the security part I could consider something like Securitas AB but it will require better analysis of the company details. For the alcohol part I have my eye on Olvi Plc. If the price hits my target during Q4, I most likely will open a position on it.

Car makers is a sector I have the most trouble with. I have been playing with this idea since the still ongoing VW scandal but perhaps with a bit different point of view, the overall sector valuation caused by the scandal was just a positive trigger. I’ve approached this mainly from the partially political electrification of transportation point of view. Pure electric cars is the obvious way to achieve it but personally I feel that it’s not the whole story. Some companies have been introducing fuel cell powered electric cars with moderate success but such companies are in minority and it’s easy to understand why. However, I’ll consider it to be a strategic position worth maintaining for now and here’s why: in the end it could be very much like with beta versus VHS back in the 80’s. No, not because of the porn industry but because of the infrastructure, user experience and even politics. It’s not very hard to envision the partly false appeal it would have: refuelling process would be essentially the same, less need for rare earth metals and there would still be a large job providing distribution and storage infrastructure in place which would be anyway needed for the transition period. And then there’s also the geographic factor which could make the fuel cell viable option e.g. for the northern hemisphere. True, much of this applies also for gas and even for EV recharging.

All this makes me wonder if a strategic position in fuel cell cars would be a nice to have feature in a EV capable car company waiting for technological breakthroughs in fuel cells and in battery technology. It could be a decent long term investment as long as the company can produce decent profits in current situation. In general this is a sector I don’t really like: very competitive low margin, labor intensive business with expensive unit prices. There really aren’t many companies capable to differentiate themselves expect for smaller companies like Tesla in which I will probably never invest in. They are pretty much all building relatively similar products using the same suppliers and repeating the process each year. On top of that they all depend on the overall economic situation which is somewhat dependant on the politics as well. Having said that, I’m still looking at Hyundai Motor Company for H2 with mixed feelings about the whole sector.

Recent Buy: Sampo PLC A

Brexit aftermath part 2: new position in Sampo Plc. As most stocks have traded significantly lower today, I decided to initiate a new position in Sampo. Main focus is on Nordea which dropped quite a lot today. I already have a full position on it but decided to add some exposure via Sampo. This also brings in some diversification in the form of IF insurance company and Mandatum Life subsidiaries. I bought 60 shares for 35,75 EUR per share and consider that as a decent valuation for the time being. Sampo is the type of company that rarely trades with discount anyway so I’m glad to take this valuation.

For this purchase I had to dip into my cash reserves a little bit. For the next months I really have to plan my moves. Depending on the market I have the option to increase my debt load and to spend the cash reserves even more. That would however require some once in a lifetime valuations for grade A companies. For the September I have my eye on Olvi as well so until then I just might focus on building up the cash reserves. It could be either or some kind of combination of both.

Recent Buy: Hennes & Mauritz AB

Yet another addition to existing position with a purchase of additional 50 shares of Hennes & Mauritz AB for 242 SEK per share. Lately there has been multiple reasonable valuations on existing positions and this was one of them. In fact this decreased my average price significantly. Today also Diageo went down enough to enter a really interesting value range. Lately I’ve been considering my short term strategy options. Slowly decreasing my investment debt load has been one option as it’s a bit over my intended 10% mark. Then again my cash position and debt potential allows strategic moves in the case of major meltdown on the market.

Recent Buy: Telenor ASA

Balancing act for the portfolio as this transaction wasn’t motivated by timing. Yesterday I bought additional 65 shares of Telenor ASA for 164,50 NOK per share. Since I’ve gone a bit overweight on some assets, there’s a bit catching on to do. In the following months I should balance my position on General Electric, Coca-Cola and Vereit. Vereit is a tough one as the company has a bit problematic past which hardly justifies a full position. Then again it’s the only fully speculative position on the portfolio and in that sense fits to my current strategy. I’ll most likely build a half position on it.

I’ve also build a 10% position with external liabilities. These positions are also covered by my emergency fund which I’ve been building up lately. I would like to continue doing so for couple of months so it will be a bit problematic to come up with additional free cash for next month’s  transaction. I might even skip that since this month has had plenty of extra action. It remains to be seen.

Telenor Investors Site: http://www.telenor.com/investors/

Recent Buy: Omega Healthcare Investors, Inc.

Yet another addition to an existing position on Omega Healthcare Investors (NYSE:OHI) as I bought additional 40 shares for 35,78 USD per share. Lately I have also updated the strategy to allow external liabilities up to 10% of the portfolio value. Such liabilities can pump up the ROE as I would be paying an interest rate of 0.99% for it. Comparing that to a dividend yield above 6% in case of NYSE:OHI makes it a no brainer as long as the involved risks are understood. Then there are the tax benefits on top of that.

Corporate profile: http://www.omegahealthcare.com/corporateprofile.aspx?iid=103065

 

Shopping List Update

Bull market just keeps on going and it’s very difficult to see a major shift happening very soon. It seems that the most likely outcome of the QE operations is a significant bubble which will continue to grow for couple of years. Volatility might increase in near term but it’s very difficult to imagine all the loose money not going to stocks especially in Europe. All this makes it a bit difficult to come up with a solid shopping list for the next 6 months or so. In general I’d need to consider or address the following issues:

  • Portfolio balancing would require adding on existing positions in companies such as Baxter International, General Electric, AT&T, Aflac Inc and perhaps Deere. Baxter is special item here since I’d like to increase my position before the upcoming Baxalta spin-off.
  • I’m not a huge fan of the idea of converting euros to dollars with the current exchange rate (existing USD income will help a bit)
  • It’s much more difficult to find high quality companies from euro zone (especially ones that pay a quarterly dividend)
  • In general I would like to increase my position in currencies other than euro and US dollar

Having said that, the expected shopping list and order to  go as follows:

  1. Baxter International
  2. Unilever/Diageo/something european
  3. Telia-Sonera/Nordea/Gjensidige if there’s a temporary and significant enough drop during spring (otherwise these will be considered during Q4/2015 and Q1/2016)
  4. Canadian bank (looking at Royal Bank of Canada and Bank of Nova Scotia at the moment even though I have some concerns about the housing bubble)
  5. General Electric/AT&T/Aflac/Deere (it remains to be seen how the dollar valuation moves or is moved, I might consider converting dollars to euros as well)

Q4/2014 Results

Total dividends received (before taxes) during Q4/2014 were 244,30 USD. Overall portfolio performance during 2014 was above expectations as the market value in euros increased by 20,70% (including increased valuations, dividends and changes in EUR/USD exchange rate). Total dividends for the whole year were 123 EUR and 584,32 USD.

This was first full year for this portfolio. Strategy for the new year shall remain the same unless political situation offers extraordinary circumstances. Oil prices and NOK (currency, not stock) valuation is something I have my eye on in 2015. Otherwise I expect mainly to add on existing positions and perhaps open one or two new positions depending on the market situation and valuations.

Investment Strategy #1

Investement strategy as follows:

  • passive income through dividend growth investing
  • limited number of high quality companies (eventually in the range of 20-30)
  • reinvest all passive income
  • inject new capital every month
  • target single purchase per month
  • be prepared to increase the rate of investments when blood is in the streets
  • utilize changes in currencies when possible
  • buy & hold, selling something might sometimes be the best thing to do but to try to avoid ending up in that situation

Stock selection strategy:

  • diversify, diversify and then diversify a little bit more (focus on global companies or companies operating in large enough market areas)
  • home market bias is evil
  • target company must be able to benefit from the following: growing population, aging population, people’s fear of death, people’s tendency to kill each other, people’s tendency to exchange long term benefit for short term pleasure
  • mix dividend growth stocks and high yielding stocks, target portfolio yield growth close to average inflation rate