July's real money trades / Two old school, cheap stocks / A solid energy play
I always talk about stocks that I find interesting, but often neglect to talk about my real world portfolio because Motley Fool employees and contractors are not allowed to talk about stocks within ten days of purchasing or selling them. So I figured that I would take some time share a few of the real-world transactions that I made in July.
I plan to use this list as an outline for future blog posts. Hopefully, I can do a small write-up on each of these companies over the next couple of weeks, for my benefit as much as for others. Keep in mind that while I am contributing money to my portfolio every month, it is not as much as I would like (with one child in daycare, a wife going on maternity leave in a few weeks, and another child on the way) so I have had to part ways with some decent companies in order to reallocate the funds to what I believe are more attractive investments. Too bad real life isn't like CAPS where I can hold as many stocks as I want ;) (OK only up to 200).
- Bought a double position Veolia Environment (VE) – Man this thing is cheap. Thanks for encouraginig me to really dig into it, DemonDoug.
- Doubled down on my existing Melco Crown Entertainment (MPEL) stake – Man this thing is cheap.
- Sold my entire stake in Altria (MO) - I don’t dislike Altria, but beer isn’t working as well as I thought it would and the Democrats are banging their anti-tobacco drums louder and louder every month. I never intended to keep Altria anyhow, but rather just purchased my stake in it a year or so ago to get the Philip Morris International spin-off.
What an odd logo
- Sold my entire stake in Sasol (SSL) – I don’t dislike Sasol either, but new GTL and CTL plants are not coming on-line any time soon. I needed to consolidate my energy plays by eliminating some of my smaller positions. South Africa is considering implementing some sort of carbon tax and this company is one dirty birdy.
- Sold Dow Chemical (DOW) – That 70% premium that it paid for Rohm and Haas really rubbed me the wrong way. I prefer and continue to hold Dupont (DD).
I also have been consolidating my E&P and drilling plays by selling my smaller positions and rolling the proceeds into my two favorite plays in these sectors, but alas I cannot talk about them yet.
And now for my normal Monday discussion of this week’s Barron’s. Even though I don’t always agree with its articles, I’m normally able to find all sorts of interesting nuggets in it. For whatever reason, I usually find that I either disagree with or am not all that interested in its flashy cover stories. However, I often enjoy some of the smaller, less publicized articles.
One of the smaller articles that caught my eye this week was an interview with Douglas C. Lane. He is an old-school, long-only, low turnover, buy and hold sort of value investor, almost in the mold of some of the Motley Fool services. While I don’t agree with his decision not to invest in foreign companies, I was intrigued by two of his current holdings.
The first is General Electric (GE). I personally think that investors who pick up shares of GE at this level will be very happy that they did so several years from now. I put a couple percent of my personal portfolio in GE in June when it was trading at $27.64 per share.
Yeah, I know that GE Capital is a messy black box that could end up hurting the company in future quarters. And I’m not a big fan of GE’s NBC / Universal either, though I do believe that the Olympics will prove to be a big winner for it. Looking past those two negatives, GE pays a solid 4% dividend that it is easily able to cover. That is a very solid yield in today’s environment. As the old saying goes, this company pays you to wait for it to turn around.
Furthermore, GE has been able to maintain its AAA rating, so it should be able to take advantage of the recent market weakness and actually add quality businesses to its stable at reasonable prices.
Here’s what Mr. Lane said about GE: “If you are only paying 12 times earnings for that growth, that is OK. Plus, you get the dividend. If you can get 4% from the dividend, you only have to get 4% from the stock for an 8% total return. You don’t have to grow a lot to get an 8% return, and there is not much risk.”
I know that GE is not going to set the world on fire, which is why I didn't go wild and buy tons of it, but I strongly believe that the strength of its energy and infrastructure units will enable it to outperform the major indicies for the next several years.
The other stock that Lane mentioned is Gannett (GCI). I blogged about GNI a week or two ago (see post: There's cheap and then there's CHEAP!). Yeah, I know that newspapers are dying and that advertising revenue is shrinking as companies try to cut costs in this tough environment, but as I mentioned earlier this stock is dirt cheap. Only a year and a half ago it was at $60. Today it sits at $18. Ouch. I’m glad that I didn’t ride that puppy down. It currently sits at only six times its forward earnings.
Rather than looking at Gannett as a stogy newspaper, Lane says to look at it as a “news-gathering organization” that will likely be able to find a way to monetize the news through the Internet and other means. People will continue to need both local and national news in some format, Gannett as one of the better financed companies in the industry is in good enough shape to survive the newspaper implosion. If it is one of the few major players that is left, it will be in a strong position…sort of like the homebuilders that survive the housing disaster. Besides, I highly doubt that newspapers will completely disappear. There will still always be a core group of people who want to read the paper, even if it is smaller. As Lane mentioned in his article, radio never completely disappeared when television was invented.
As I mentioned when I wrote about this stock last time, I am not going to purchase a stake in it for my real portfolio, but I have added it in CAPS.
This week’s issue also had an article how energy stocks are still cheap even though oil has experienced the necessary 20% drop that classifies this as a bear market. We all know that I agree with that premise and while the article itself actually wasn’t all that impressive. Of the companies that were featured, the one that I personally like the best is XTO (XTO, of course). It has gotten absolutely crushed lately, falling from a high of 73 in June to the mid-40 level that it sits at today. I am long XTO and I have not sold a single share, but alas I do not have the liquid funds or the desire to add to my already large energy position to buy more at this point.
The thing that I like best about this company is, unlike some of the major oil companies, like ExxonMobil (XOM) that are having a tough time growing their reserves and production XTO is growing by leaps and bounds. Assuming that it doesn’t overpay for acquisitions, this production growth will help the company grow its earnings even during a time that oil and nat gas prices are flat to down slightly. Its recent acquisitions should enable it to double its production over the next several years, compare this to XOM which actually saw its production decline 8% last quarter.
XTO recently became the United States’ largest producer of natural gas. It is currently trading at only 10 times its projected 2008 earnings and at less than $2.50 per thousand cubic feet of natural gas reserves. I suspect that anyone purchasing shares of this company at this level will be very pleased with their decision several years down the road.