The Generation Portfolio: JPMorgan, Praxair And Vereit

By | September 27, 2015

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Summary The Generation Portfolio is an account I manage to which I began adding stock positions in late August 2015 and continue to work on; During this past week, I added positions in JPMorgan, Praxair and VEREIT; Looking ahead, the market volatility shows no signs of abating, and indications are growing that the stock market is in no hurry to hit new highs. Background The Generation Portfolio is an account that I manage for others. I discuss its genesis here . This series of articles includes previous weekly updates (in temporal order) here , here , here and here . I converted the account to cash when I took it over during the spring of 2015, and then began adding positions to the Generation Portfolio again in late August 2015. I manage the account for no compensation, but the experience has been very personally rewarding and it does give me something to write about. My hope is that this series helps those looking for stock ideas and also those interested in seeing how someone else trades. In a sense, you are “looking over my shoulder” as I trade. There is no intent to suggest that any investment discussed in this series is suitable for anyone else. It is easy to talk a good game about buying on weakness or buying “value” or buying whatever stock serves today’s agenda, mouthing empty words without consequence. We see that sort of thing all the time on the Internet, and such articles do serve a purpose – I’ve written almost a hundred of them myself. This series will provide a slightly different perspective, actual trading decisions and the consequence, for better or worse. It also will put some of my ideas from previous articles into practice. This Generation Portfolio is but one of several related accounts, each with a different purpose. Thus, it is not intended as a comprehensive portfolio solution. Rather, this account focuses primarily on dividend-paying income stocks, with perhaps an occasional more speculative play as well. Stocks are bought on weakness and, when the time comes, sold on strength, with the aim of long-term performance, preservation of capital and the consistent generation of income. Previous Purchases During the week of 24 August 2015, I added the following positions: Wells Fargo (NYSE: WFC ); Disney (NYSE: DIS ); Bristol-Myers Squibb (NYSE: BMY ); MFA Financial (NYSE: MFA ). During the week of 31 August 2015, I added the following positions: Omega Healthcare (NYSE: OHI ); Chevron (NYSE: CVX ); Procter & Gamble (NYSE: PG ); CYS Investments (NYSE: CYS ). During the week of 7 September 2015, I added the following positions: Coca-Cola (NYSE: KO ); Medical Properties (NYSE: MPW ); Wal-Mart (NYSE: WMT ); Ventas (NYSE: VTR ); Kinder Morgan (NYSE: KMI ). During the week of 14 September 2015, I added the following positions: W.P. Carey, Inc. (NYSE: WPC ); Verizon Communications (NYSE: VZ ) AT&T Inc. (NYSE: T ); 3M Inc. (NYSE: MMM ). Entering this week, and excluding legacy positions that I retained but did not initiate, the Generation Portfolio had 17 positions comprising 37.4% of available trading funds. Summary of the Past Week The market continued suffering post-traumatic stress from the Fed meeting that concluded on 17 September 2015, when the Fed unexpectedly decided not to raise interest rates. While there were many intraday swings, the overall direction throughout the week was lower. The major averages closed at the lower end of the trading range that has characterized September 2015. General Strategy During the period of market turbulence that began in late August 2015, after keeping the Generation Portfolio 100% in cash for about six months, I finally began adding positions. The focus is on individual stocks and not just index funds for reasons (among others) that I explained here . There has been increasing commentary on the financial channels about the relative underperformance of passive index funds during periods of market turmoil and stock declines. Active stock pickers also can take advantage of some of the monolithic movements in the market caused by the huge crowd that either prefers, or is forced through retirement plans, to invest in index funds. As I discussed in a previous article, I side with those who prefer wide diversification, both between sectors and within them. I would rather own smaller positions of two leaders in a sector rather than just place all of my chips solely on “the leader.” Accordingly, the Generation Portfolio is shaping up to have about 40-50 positions, each with a projected weighting of 2-3%. In accordance with the overall objective mentioned above, the overwhelming majority of positions will pay good dividends. I like the tax advantages and strong cash flow of REITs, so they will form a substantial subset of the Generation Portfolio. This will give the Generation Portfolio a certain rate sensitivity, but the reality is that entire market has that same sensitivity to one degree or another. I have no problem at all about investing in several companies with similar risk profiles as long as there is overall diversification. It’s all about tactics, and bad tactics can ruin the best strategy. Most Recent Purchases During the week of 14 September 2015, I added the following positions: JPMorgan (NYSE: JPM ); Praxair Inc. (NYSE: PX ); VEREIT Inc. (NYSE: VER ). The Portfolio as it Stands Now Just to get everything in one place, and with related information, below is a chart of the Generation Portfolio as it currently stands. The Generation Portfolio as of 26 September 2015 Stock Purchase Date Purchase Price Recent Price Change Since Purchase WFC 8/25/2015 51.75 51.46 (0.52%) DIS 8/25/2015 98.75 100.10 1.47% BMY 8/25/2015 59.75 60.25 0.84% MFA 8/25/2015 7.05 7.03 (0.28%) OHI 8/31/2015 33.95 35.65 4.68% CVX 9/02/2015 77.90 77.55 (0.28%) PG 9/03/2015 69.95 72.66 3.86% CYS 9/04/2015 7.68 7.42 (3.39%) KO 9/09/2015 38.50 39.60 2.91% MPW 9/10/2015 10.89 11.55 6.06% WMT 9/10/2015 64.40 63.75 (0.99%) VTR 9/10/2015 52.80 56.92 7.80% KMI 9/11/2015 29.95 29.33 (1.77%) WPC 9/14/2015 56.75 58.99 3.75% T 9/17/2015 32.50 32.32 (0.55%) VZ 9/17/2015 44.95 44.34 (1.65%) MMM 9/18/2015 139.90 139.56 (0.25%) JPM 9/22/2015 60.89 61.48 1.29% PX 9/23/2015 101.30 100.92 (0.38%) VER 9/25/2015 7.87 7.96 0.89% Recent Prices are those supplied by my broker as of the close on 9/25/2015. A large legacy position in Ford Motor Company is omitted. Percentage changes since purchase are those supplied by my broker. Overall, according to my spreadsheet, the account on a sheer price basis is up by between 1-2%. That does not take into account pending dividends, some substantial, from CYS, MFA, and KO. I will account for them as they hit the account in coming weeks. The percentage changes, supplied by the broker, conflict sometimes with the “last” prices it supplies. I just go with whatever my broker shows. With the four purchases made this week, the twenty positions (less some legacy positions, which are not included in any calculations), based on initial purchase value and not subsequent price movements, now occupy 44.5% of the available trading funds. The position sizes are not all equal, as like most humans I prefer to trade in even lots, but they are of roughly equivalent total values. Analysis of Holdings I am feeling pretty good about the core holdings assembled to date. With all of the confusion about interest rate policy recently, the banks and bond equivalents such as the REITs have been particularly volatile. I took the weakness in banks early in the week to add some J.P. Morgan, which pays a nice dividend and was at the bottom of its recent range. In addition, for the reasons discussed below, it seemed prudent to add a bank or two due to the growing likelihood that a rate hike actually is going to happen this year. I also added Praxair, which I wrote an article about almost exactly a year ago, because it has sold off over 30%. That is most likely due to fears about its business in Brazil. It also is one of David Fish’s Dividend Contenders , having paid a rising dividend for at least ten straight years. The third addition this week was VEREIT, a diversified (though not as diversified as it would like to be) REIT. I wrote a series of articles on VER back when it was called American Realty Capital Properties. It was a turnaround play after some accounting issues that had a nice run that petered out over the summer. It since has settled back toward its lows despite reinstating its dividend and getting new management, and at about a 7% yield should provide some nice cash flow. General Discussion The market appeared confused for most of the week. While the market did not travel very far, it was still volatile intraday. Bob Pisani at CNBC noted that the steady decline during the week was not due to high selling volume, which would indicate panic, but an absence of buying. This is called a Buyer’s Strike, as potential buyers show their disdain for current prices and sit on the sidelines. In a sense, the market threw a tantrum about being collectively “misled” by the Fed last week about the “certain” rate hike that never happened. Price declines based on buyers’ strikes are more comforting for longs than panic selling, because they don’t suggest that anything is dramatically wrong with the world or the market. However, they aren’t necessarily any indication that the buyers are only going to be absent for a short period of time. I can remember similar buyer’s strikes in 2001 and various other times when the market didn’t subsequently do very well. Politics also intruded during the week. The big pharmaceuticals and biotechs were doing well, and then Hillary Clinton tweeted about a company that appeared to be engaged in price gouging. That sent the biotechs, which had been one of the pillars of the market this year, and the pharmaceuticals tumbling. While there was a lot of carnage, it wasn’t enough for me to dip my toe back into the sector. Johnson & Johnson (NYSE: JNJ ) is becoming tempting, but the chart pattern is absolutely horrendous, with a classic head and shoulders pattern and shaky congestion support from 2013. (click to enlarge) JNJ 2013-2015, a fairly common stock pattern right now. The banks should get a lift from ongoing Fed attempts to calm the market by strongly hinting that a rate hike is coming. There has been an ongoing blizzard of speeches from the different Fed Presidents and Chair Yellen since the Fed gravely disappointed traders expecting a hike in September. Nobody is saying anything new, but apparently it is considered fresh because now they are saying it after the Fed did nothing. There is a strong likelihood that the market will decide once again that a rate hike in the near future is inevitable because that, pretty obviously, is what the Fed wants the market to believe. That doesn’t mean it will happen, though. Adding to the market uncertainty about rates is the fact that Chair Yellen is having some health issues. Also, the federal government is going through one of its annual convulsions with worries about a shutdown and the resignation of House Speaker John Boehner. The market is uneasy as it is, it doesn’t need much of that to keep buyers on the sidelines. (click to enlarge) Main Street Capital, 2013-2015. Main Street Capital Holdings (NYSE: MAIN ) is down around long-term support and may be worth a poke soon. Defense stocks also could become buys due to various budget machinations flowing from Speaker Boehner’s resignation that are so arcane that nobody really knows how everything will work out in the end. The idea is to snap up some value while everybody is confused and uncertain, then wait for sanity to reassert itself. A general market move lower also could make some core position stocks such as General Mills (NYSE: GIS ), Kellogg Company (NYSE: K ) and Colgate-Palmolive (NYSE: CL ) interesting, so they are always on the watch list. Stocks Under Consideration This is a general list of the stocks I am considering. While I also watch other stocks and am opportunistic, these should give some idea of what is near the top of the list. Many of my previous buys have come straight off this list. (NYSE: ABT ), (NASDAQ: AGNC ), (NYSE: BPL ), (NYSE: CAH ), (NYSE: CAT ), (NYSE: COP ), (NYSE: CSX ), (NYSE: CY ), (NYSE: DE ), (NYSE: DLR ), (NYSE: EV ), (NYSE: EMR ), (NYSE: FCX ), (NYSE: GE ), (NASDAQ: GILD ), (NYSE: GS ), (NYSE: HD ), (NYSE: HON ),(NYSE: KKR ), (NYSE: KMB ), (NYSE: LLL ), (NYSE: LMT ), (NYSE: MO ), (NYSE: MS ), (NASDAQ: NFLX ), (NYSE: NKE ), (NYSE: NNN ), (NYSE: NSC ), (NYSE: O ), (NYSE: OXY ), (NYSE: PANW ), (NYSE: PBY ), (NYSE: PEP ), (NYSE: PFE ), (NYSE: PM ), (NYSE: PSX ), (NYSE: RDS.B ), (NYSE: RTN ), (NYSE: SCG ), (NYSE: STAG ), (NYSE: KSS ), (NYSE: SDRL ), (NYSE: STWD ), (NYSE: TOL ), (NYSE: UNH ), (NYSE: UNP ), (NYSE: UTX ), (NYSE: XOM ). Actionable Ideas MAIN is at the top of the list, with a yield around 7.7%. Defense stocks such as LMT, RTN and LLL, and staples such as General Mills could be good pickups depending upon price action. The real buys, though, will only come if the market tests the August lows. Conclusion This September has not disappointed in terms of the volatility that invariably seems to accompany the ninth month of the year. Even though the daily closes have not shown dramatic changes, the intraday swings have been whipsawing short-term traders. It is, however, a good environment for the active trader to pick up value on swings lower. It remains to be seen, though, whether the August lows will hold, and the wisest move may be to keep some powder dry for more opportunities. Scalper1 News

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