My Ian’s Million Fund, IMF, is a quasi-index fund where I have two main goals. One, beat the S&P 500 over time with my own diversified basket of stocks, while avoiding any ongoing management fees. Two, build a model that my non-investment professional friends can copy. If I didn’t have other investments and had $1,000/month to invest, what retirement portfolio would I build to ensure I ended up with a strong solid nest egg? The IMF answers that question.
This month I found it a bit easier to make purchases than March. I’ve complained in recent articles about the difficulty in assembling a dozen or more good buys each month. However, the recent sell-off caused more damage in many stocks than you’d expect given the rather shallow dips in the indexes. While tech stocks remain very strong, and in fact have led the market back to new all-time highs, there were values elsewhere.
I made my purchases on April 10th. I didn’t catch the month’s lows, but the prices paid were satisfactory. Here are the 14 purchases for the month:
The first order of business this month was starting new positions in this portfolio in the two names I discussed at length within Ian’s Insider Corner – First Solar (FSLR) and GameStop (GME). If you want the full story, head there for the details. For a brief investment case for both companies, read on here.
The market is overly bearish on GameStop, assuming that physical video game sales will drop off much more quickly than is actually likely. A new video game console cycle that will hit full swing this holiday season should also help improve sentiment.
With a 7% dividend and 5% share buyback, GameStop has a 12% shareholder return annually. Keep the lights on for a decade and you make a decent profit; if the Tech Brands stores continue to grow, major upside is possible. It’s hard to overstate how good an investment is if you buy at under 7x earnings with an aggressive share buyback and the company is able to hold EPS flat or nearly so.
On First Solar, the market is giving almost no credit to the company’s actual solar business, as the majority of the valuation here comes from the company’s cash pile. It’s as though First Solar’s R&D isn’t worth anything, despite it pulling ahead of the Chinese companies on performance with the latest generation of panels. Trump is a serious negative for the stock, but I’d argue at $27 that’s already priced in and then some.
Sticking with energy and natural resources, let’s turn to Potash (POT). I opened a small position in this company early last year, and it immediately rallied. With the pullback of late, however, it’s back on my radar. I’m long-term bullish on fertilizer demand for the same reasons I’ve highlighted in the series about changing nutrition trends away from carbs and toward proteins.
It takes a lot more agricultural effort – generally 5x or more – to produce a calorie of animal food as opposed to a calorie of cereal grain. Even calorie-dense fruit and vegetable options such as avocados or olives tend to require significantly more agricultural intensity than the staples such as corn, wheat, and soybean that the modern American diet is based upon.
In the near term, however, the market remains oversupplied and the strong dollar makes life difficult for this sort of commodity producer. Weaker players such as Intrepid Potash (IPI) are in danger of going bust. Meanwhile, Potash and Agrium (AGU) appear likely to merge, thus creating – by a wide margin – the biggest North American player in the industry. When buying into a boom/bust sector, buy a market share leader with a reasonable balance sheet.
The combined Agrium/Potash would start off a bit overly-leveraged for my liking; but with the substantial cost savings – as much as half a billion dollars a year – the debt position would be manageable while retaining plenty of upside leverage to hedge inflation, should a weak US dollar cycle kick off.
Turning to oil, I added to BP (BP) again this month. In this $34-35 range, the stock offers a strong dividend that it has a reasonable chance of maintaining. The Europe-based oil companies are much cheaper than the US ones; even a dividend cut wouldn’t be disastrous since the starting valuation and yield are so much better. As I get somewhat more positive on oil prices over the next 12-24 months, I see increasing appeal to non-US oil majors at present prices.
Frank’s International (FI) is another addition within the oil patch. The offshore oil exploration market remains weak, and as such Frank’s remains in a weak stretch. But with no debt and 15% of the market cap backed up by cash, this is a good position to hold while waiting for the market to come back and collect a reasonable dividend along the way. It’s now trading back near its 52-week low despite a decent lift in oil prices.
Within the resource circuit, our last stop is a new position in the CatchMark Timber Trust (CTT).
Other US stocks this month include Brown-Forman (NYSE:BF.A) (NYSE:BF.B), which is now starting to lag peers, as other alcohol names such as Diageo (DEO) and United Breweries (CCU) have shot up to 52-week highs. I’m happy to keep adding as the market’s concerns about B-F are short-term in nature.
New York Community Bank (NYCB) continued to trade lower until just recently and at one point reached a 5% yield. While I understand why many investors are upset, the stock has been overly punished by sentimental traders at this point. NYCB is one of the safest banks in the country – its New York lending niche is profoundly secure and the bank operates with near-zero loan losses. It’s remarkable how tight a ship it runs. The bank may not trade straight back up to fair value, but with the current administration likely to relax regulations on systemically important financial institutions, NYCB’s earning power should jump once it can finally grow its balance sheet.
Rounding out the US names, Gilead Sciences (GILD) remains crushed by the tyranny of low expectations. Modest downside if things continue to go wrong, high single digit returns if things develop reasonably well from here, and the chance of greater upside if something in its pipeline hits big and/or it finds another good acquisition. Happy to collect the dividend and see what it comes up with. Same thinking goes more or less for embattled Teva Pharmaceutical (TEVA).
I continued to add to the Mexican airport operators – PAC and OMAB – despite the big run-ups of late since they still represent some of my favorite ideas. I’d rather add at my cost basis of $85 than $100, but they are still valued at a good enough price to be worth adding to. And while the dividends on these names aren’t as high as they were three months ago, mid-4% dividends with double-digit growth rates are still exciting.
Finally, I’ve restarted purchases of BT Group (BT). The company announced downbeat earnings and an accounting scandal in Italy earlier this year. Shares tanked from $23 to $19.50. Since then, the company reaffirmed the dividend, no more shoes have dropped with accounting and the company found a favorable resolution to the big problem it had with the UK government concerning regulation of its Openreach monopoly.
Despite the positives, the stock has faded in recent days and is now back near the accounting-scandal lows. I’m happy to buy under $20 and bring down my cost average on this 4.8% yielder. BT has problems, but it’s a mega-cap, not a fly-by-night business – generally good things happen when you buy big companies in conservative industries after their stocks get cut in half.
With Monday’s post-French election rally, the IMF portfolio powered to a new all-time high. We’ll check in on how it’s performing in more detail at the end of April.
This article appeared first in Ian’s Insider Corner and has been lightly updated to reflect changes subsequent to initial publication.
Disclosure: I am/we are long GME.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long all other stocks shown in the table as well.