Core Positions

The first level of my Investment Process is asset allocation.  My current asset allocation is:

  • 25% cash
  • 25% bonds
  • 6% gold
  • 44% stocks

I do not currently have any plans to change this.  The next quarterly asset allocation review is at the end of June 2012.

The second level of my process is the establishment of core positions.  My process requires that we perform a fundamental analysis of the stocks in my portfolio and my watch list.  So, how do we establish a watchlist?

Step 1: I want to begin with biggest stocks on the TSX (those with market cap of more that $5B).  I then remove any stocks that do not meet the basic criteria in my Investment Policy (dividend below 3%, P/E Ratio over 20).  This gives me a list of 24 stocks.

Step 2: Canada does not have a strong technology sector (Nortel and RIM are bankrupt and nearly bankrupt respectively).  So I prepare a list of all US technology stocks with market cap of more than $50B.  This gives me 13 stocks.

This gives me my watchlist:

Ticker Name
GWO Great-West Lifeco Inc
PWF Power Financial Corp
CM Canadian Imperial Bank Of Commerce
HSE Husky Energy Inc
REI.UN RioCan Real Estate Investment Units
BMO Bank Of Montreal
POW Power Corp Of Canada
COS Canadian Oil Sands Ltd
IGM Igm Financial Inc
ERF Enerplus Corp
BPO Brookfield Properties Corp
BNS The Bank Of Nova Scotia
BCE Bce Inc
NA National Bank Of Canada
SJR.B Shaw Communications Inc
RCI.B Rogers Communications Inc
RCI.A Rogers Communications Inc
TD Toronto Dominion Bank
T.A TELUS Corp
T TELUS Corp
RY Royal Bank Of Canada
CIX CI Financial Corp
IPL.UN Inter Pipe Fund Units
FTS Fortis Inc
AAPL Apple Inc
INTC Intel Corp
QCOM QUALCOMM Inc
CSCO Cisco Systems Inc
TSM Taiwan Semiconductor Manufacturing ADR Representing Five Ord Shs
CAJ Canon ADR
EMC EMC Corp
BA Boeing Co
IBM International Business Machines Corp
MSFT Microsoft Corp
GOOG Google Inc
ORCL Oracle Corp
SAP SAP Aktiengesellschaft ADR Rep 1 Ord Shs

When American Depository Receipts (ADRs) and duplicates (A/B shares) are removed from the list, our watch list contains 32 stocks.

Step 3: Using a spreadsheet I analyze the fundamentals to identify stocks with the best IRR using the method outlined in my Fundamental Analysis page.

Finally, for diversification I attempt to find the one or two best stocks in each major sector.  The resulting core positions are:

  • Bank of Montreal (BMO.TO)
  • Power Financial (POW.TO)
  • Canadian Oil Sands (COS.TO)
  • Intel (INTC)
  • Microsoft (MSFT)
  • Apple (AAPL) if it’s price falls a little
  • Telus (T.TO) (IRR is a little low but Gordon Return is high so I’ll accept it for diversification)
  • TransAlta (TA.TO) (IRR is a little low but Gordon Return is high so I’ll accept it for diversification)

I own all of these except Intel, Microsoft, Apple, and BMO.  I own Shaw but it is not a core position.  I will consider trading Shaw for BMO and might buy the others once I have more cash (e.g. when I change my asset allocation).

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