Tuesday, September 19, 2017

Updating My Investing Rules.....

I've been thinking about the rules I wrote when I started this Dividend Growth IRA.  I went back and looked at the rules I wrote in 2012, and here they are:

After 5 years of running this portfolio, its time I reviewed and updated these rules a bit.

1.  I've eliminated the "core" and "non-core" designations.  This is tough to track and doesn't make a ton of sense anymore.  I have a taxable account where I invest in lower yielding stocks, and that serves as the non-core.  Today, I only invest in 2.5% yield or higher stocks for this account (usually)

2.  The 10% cash goal is still valid, and I'm a little light today.  I need to trim some of my larger/overpriced names.

3.  I still only add stocks at nice undervaluation, so that's been good.  I'm a bit slow to sell stocks if they are 15% overvalued.  I'll need to change that to higher overvaluation number, perhaps 30% or so.  I also rarely use stop losses.  I find they don't work too well, and usually get triggered, then the stock recovers quickly.

4.  There are other factors I like to look at these days, among them are:
  • Debt level (50% or less preferred)
  • Credit rating (at least BBB+)
  • Morningstar rating (4* or better is what I usually require)
  • ROIC, lately looking for higher than 10% here...though a soft target
  • Revenue.  In addition to eps growth, I also like to see a growing revenue line
  • Insider action (I like to see insiders buying the shares, and especially hate to see them selling)
  • I also read the 10Q for the latest 2 quarters carefully, this is usually instructive, and gives me a feel for the CEO and whether or not she is a "bullshitter"

Friday, September 8, 2017

Selling AFL, Buying SJM

Put orders in today to sell my position in AFL, and start a position in SJM

AFL has been a decent performer, and is a modestly overvalued today.  The dividend is down to 2.14%, and also hold a larger position in my taxable account.  As a result, I'm closing the AFL position in favor or something more undervalued with a better yield.

Enter Smucker (SJM).  JM Smucker came to attention today via Chuck Carnivale, article here:


Thoughts on the matter:

  • AFL is a big position in two accounts.  Closing out one makes sense, and reduces risk
  • Growth prospects are better for SJM
  • Yield higher for SJM
  • AFL is a bit overvalued today, has a low yield, and is very stingy with dividend increases
  • I recently opened a position in ORI, another insurance name, so I feel fine closing AFL in the Chump account
  • SJM is a more defensive stock, and should fair well if the market tanks, or the economy slows

In short, this is an upgrade from my AFL holding here, a more defensive stock, and a better fit for my retirement portfolio given the higher yield, around 2.95% today....  Added the stock at $107, 1/2 position.



Monday, August 28, 2017

What Do the Best Investors Do that the Rest Don't? Great Little Article


What Do the Best Investors Do That the Rest Don’t?
by Gary Mishuris, CFA

Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s partner said
something simple yet profound at the 2017 Berkshire Hathaway Annual Meeting: “A lot of
other people are trying to be brilliant and we are just trying to stay rational. And it’s a big
advantage.” Some might think that becoming an excellent investor requires off-the-charts
intelligence or some highly proprietary model that leads to an edge that nobody else can
replicate. That is not what experience has shown.

Here are some traits and behaviors that have allowed investors to excel over the long-term:

1. Temperament. Temperament is the most important quality for an investor to have. My
observation of many investors over my 15+ years of professional investing has led me to
believe that temperament cannot be learned, but rather it is an innate characteristic of
one’s personality. Some people are able to remain rational and continue to follow their
process even under great duress or during periods of external upheaval. Others get
swept up in the emotion that typically runs amok during such circumstances, and
abandon their discipline.

2. Ability to do nothing most of the time. Most of the time there are few good investments
that combine sufficient business quality with a large margin of safety in the form of a
large gap between price and intrinsic value. That doesn’t mean that great investors are
spending all of their time relaxing on the beach – to the contrary, they are typically
avariciously reading and studying business and industries, preparing for the moment
when securities of companies they understand well can be purchased at attractive
prices. It does mean that they make investments infrequently, and that most of the time
when they look at a potential opportunity they end up passing. Those who are unable to
maintain this state of low activity frequently end up making questionable investments to
satisfy their desire to do something, and more often than not it is their brokers who are
the biggest beneficiaries of their elevated activity levels.

3. Accumulation of mental models. Understanding different disciplines helps great
investors look at questions of business analysis in new ways. While studying economics
and industry-specific information can certainly help, the best investors also use insights
from other fields to reach better decisions.

4. Focus on process over outcome. Benjamin Graham wrote: “In the short-term the market
is a voting machine, but in the long-term it is a weighing machine.” What he meant was
that in the short-term security prices fluctuate purely based on the opinions of market
participants, and can deviate widely from the underlying business values. In the longterm,
it is the company’s assets and cash flows that determine its value and exert a
force of gravity upon the price of its securities. With security prices available on a minute-
by-minute basis, the run-of-the-mill investors focus on analyzing randomness – allowing
themselves to become happy or sad over short-term price fluctuations that are
disconnected from whether they were fundamentally right in their investment analysis.
The best investors work hard to not be affected by the short-term price fluctuations, and
instead focus on both improving their process and consistently executing it. Over the
long-term their performance is a result of the quality of their process and of the
consistency with which they execute it.

5. Minimizing behavioral biases. Behavioral biases are pervasive and nearly impossible to
eliminate, but the best investors work hard to be consciously aware of them and to take
specific steps to mitigate them. As I wrote in Behavioral Defense in Decision Making,
there are a number of steps one can take to stay as unbiased as possible. One of my
favorites is to consciously seek out the strongest possible opposite point of view that
contradicts my thesis. If done well, this can lessen the impact of many biases, such as
anchoring, over-confidence and base-rate neglect.

I frequently get asked by prospective investors about what my ‘edge’ is as an investor.
Sometimes I think the answer that they are looking for is some proprietary model, some
black-box that spits out superior answers that nobody possesses, or an ability to know what
the future holds based on some deeply proprietary network of sources. The real answer is
less exciting, but nonetheless quite effective. It is the combination of the traits and
behaviors that I described above. I would add a sixth one to the list – staying humble while
maintaining your confidence. History is littered with many seemingly great investors who fell
apart and produced disappointing results for their clients just as they had accumulated the
greatest amount of assets after a good run of performance. Perhaps some of them were
never as great as they seemed, but in other cases I can’t help but think that it was a
combination of hubris and complacency that led them astray.

The best investors stay humble – always thirsting to learn and improve as well as accepting
that they are fallible and can make mistakes. This helps them to be on guard against the
traps of complacency and overconfidence. Some view this posture as inconsistent with
confidence in one’s abilities – after all, this is an industry where some think that the best
investors are supposed to be on CNBC or on the cover of some financial magazine telling the
world how great they are, which seems incompatible with a humble, introspective approach.
Believe me, the people I admire most as investors have rejected this false dichotomy, and
are able to balance humility with confidence and competence in a way that allows them to
continue to improve for many years.

About the Author
Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value
Partners, an investment firm with a concentrated long-term intrinsic value strategy. Prior to
founding the firm in 2016, Mr. Mishuris was a Managing Director at Manulife Asset
Management since 2011, where he was the Lead Portfolio Manager of the US Focused
Value strategy. From 2004 through 2010, Mr. Mishuris was a Vice President at Evergreen
Investments (later part of Wells Capital Management) where he started as an Equity Analyst
and assumed roles with increasing responsibilities, including serving as the co-PM of the
Large Cap Value strategy between 2007 and 2010. He began his career in 2001 at Fidelity
as an Equity Research Associate. Mr. Mishuris received a S.B. in Computer Science and a
S.B. in Economics from the Massachusetts Institute of Technology (MIT).

Tuesday, August 15, 2017

Portfolio Composition on 8-04-2017

Here are the holdings in the Chump portfolio today:

38 stocks, and 3% cash.  Total portfolio yield is around 3.3%.

Tuesday, July 18, 2017

Looking at Old Republic International (ORI)

I recently screened the current world of Dividend Aristocrats of which there are 108.  Companies that have continued to increase the dividend for 25 years or more.  My screen was a simple PE vs. Normal PE screen.  Here are the top results (via FASTGraphs):

From the screen above, Old Republic International, ORI, caught my attention with the lowest blended PE on the list.

ORI is a 94 year old insurance company based in Chicago, IL.  They have been paying a dividend since 1942, and have been increasing the dividend for the past 35 years straight.

I next took a look at ORI's 2016 CEO letter and 10K from the company website, and have attached the link below. For those considering an investment in the stock, these are worth reading in their entirety.


Here are some of my takeaways from these materials:
  • ORI historically provided insurance products for three main segments: General Insurance, Mortgage Insurance (MI), and Consumer Credit Insurance (CCI)
  • The financial crisis in 2008 hit the MI and CCI segments of ORI pretty hard, thus a big increase in claims for the years 2009-2011, which is reflected in their historical financials
  • Since that time, they've re-classified these segments as "run-off" businesses, which means they continue to operate, but will be phased out over time, and resources will be invested in growing the General Insurance and other new insurance segments
  • One area of new growth is title insurance, which has been growing rapidly
  • A second area of new growth is accident and life insurance, which is just getting started
  • The culture of the ORI seems very employee and shareholder friendly, and employees own 9% of the company via various compensation and retirement plans
  • The company prefers to grow organically, and is not pursuing questionable acquisitions
  • The company is managed very conservatively, and is focused on maintaining a strong balance sheet to weather difficult times
  • ORI and the leadership team are committed to the dividend, but while its never been halted or cut, it has only been increasing by a penny a year since the financial crisis
Here is a summary of their focus segments going forward, and target % contribution to the business (from the 10K):

And from an update on their website dated June, 2017, here is a recent snapshot summary:

Based on the book value above, the Price/Book ratio for ORI is an attractive 1.11 (stock trading right around the $19.56 as I write this).

A 20 year FASTGraph for ORI follows:

From these data, I note the following:
  • Operating results look good prior to, and a few years after the great recession
  • This firm was particularly hard hit by the financial crisis
  • Operating results seem to have stabilized since 2012
  • The stock is currently trading at a reasonable valuation
  • Market cap of $5B, good credit rating of BBB+, and a low level of debt at 24%
  • Dividend yield is excellent at 3.9%
  • And of course, this is a Dividend Aristocrat...they continued to pay and raise the dividend throughout the financial crisis and difficult times.  35 straight years with an annual increase
Here is a look at their dividend history the past 20 years:

Prior to the recession, they were maintaining a payout ratio of around 25%, and increasing dividends at a nice pace.  During the recession, when earnings and cash flow suffered, they continued to pay and increasing dividend, only 1% increases, while the payout ratio ballooned to 182% in 2012.  Since 2012, the business has stabilized, and the payout ratio is dropping.  Perhaps a larger increase in the dividend will begin as the payout ratio reaches a more normal historical level?

Here is a look at the forecasted growth and cash flow:

Growth projections merit a higher PE estimate or expansion to 15.  At PE 15, the return on revenue, or ROR, is estimated to hit 18.5% annually by the end of 2018.

Taking another look at the valuation today, with a six year history to reflect more recent operations and the market's valuation of the stock give this FASTGraph:

Since 2012, the average PE of the stock as been around 14.7.  Today's price provides a discount to fair value of roughly 10%, so I view this as a good time to initiate a position.

Insiders are supporting the stock recently as well.  Looking at insider transactions since the start of 2016 yields the following chart, showing some buys by both Directors and the CEO at prices between $16.50 - $19.56....

Based on my analysis of this stock, and its current valuation, I initiated a position in the stock on July 18, at a price of $19.52.

I'll finish with the outlook for ORI as stated in the recent CEO letter from March, 2017:

Old Republic’s Outlook is Very Positive 

"Assessing the current insurance scene and the competitive forces at work makes us very comfortable with our state of affairs. We are not and have no aspiration to be among the biggest in our industry. But we’re confident in our ability to compete toe-to-toe with those players. Our current capitalization is more than enough to 1) provide a necessary financial cushion, and 2) add capital to individual subsidiaries so they may take advantage of existing and new opportunities.

As long-term observers and practitioners in insurance, we have a great appreciation for the merits of purposeful rather than growth “because we can.” Acquisitions – many of which we’ve done over the decades – can be a good way to add impetus, access new approaches to organic growth, and fill product distribution channels gaps. But acquisitions can also bring problems and cultural differences that may be so intractable as to distract management’s attention from a wellknown and reliably performing enterprise. To us, the bottom line is that we see very little of worth to acquire in today’s insurance landscape.

The preferred sources of growth, however, will continue to come from our existing business. They will spring from the relationships, intellectual capital, and independent mindset that our people bring to the table. It will come from Old Republic’s good name, and its reputation for being a good place to do business. We’re convinced that ideas will arise that will be a fit with our culture, values, and dedication to doing things right for customers and shareholders alike. With all this, we plan to support and enhance organic growth, and to sponsor highly focused, specialty underwriting ventures (as we last did early in 2015). Most of the operating challenges encountered during the Great Recession years and their lingering aftermath are behind us.

We’re optimistic that our Company is on track to see positive performance which will benefit our customers and serious investors in our stock."

Respectfully submitted on behalf of the Board of Directors, Aldo C. Zucaro Chairman and Chief Executive Officer Chicago, Illinois March 10, 2017

Tuesday, July 11, 2017

Selling Coca-Cola

I sold my full position in KO today, price was $44.42.  I bought the stock back in 2011, have have a cumulative gain in the stock since then of around 28%, which trails the S&P 500 significantly over the same period.  Here is a FastGraph for KO:

What concerns me about KO is their shrinking top line.  They've been losing sales for 5 consecutive years, and seem unable to turn it around.  They've also had declining EPS since 2013, and they are borrowing money to buy back back shares.  This is increasing their debt, and artificially inflating their EPS.  Not a recipe for long term success.

Further, from a big picture standpoint, I think increasingly, there is a war developing on sugar and sugary drinks, and at today's price, the stock is pretty significantly overvalued.

So I'm selling.  I'm banking the cash for now until a better opportunity arrives.....I may dump the money into a telecom or utility for the dividends while a wait.

KO has been riding on its brand name for years.....too much risk for me.