It’s time for a broad review of my core holdings, starting with the technology sector.
I only buy stocks that pay a dividend, so Google (GOOG), Amazon (AMZN) and Yahoo (YHOO) are out. However, based on other fundamentals such as PEG Ratio and Gordon Return. Google looks pretty good here.
Looking at the stocks I own – Apple (AAPL) and Intel (INTC) – we see two very different pictures. Apple has a decent indicated Internal Rate of Return (IRR) of 8%, a smallish dividend, but a good PEG Ratio and strong earnings growth. I still like Apple, especially after recent price decline (down from the $700s to $620s). Intel is a disaster. Growth is down to 1.4% driving the PEG Ratio to over 7. IRR is almost 10%, due primarily to the depressed price, and the dividend is the highest in the sector. I think that I have already suffered through the worst of Intel’s price declines and, based on my key measure of IRR, it is worth owning here. I’m sticking with Intel on the fundamentals.
Of the other stocks that do pay a dividend, MicroSoft (MSFT) and Cisco (CSCO) have the strongest indicated IRR, each over 10%. They both have decent PEG Ratios, PE Ratios and dividend yields. Microsoft has a markedly higher earnings growth rate. I have tried to buy MicroSoft before, and thought it was a little expensive. Perhaps I should try again?
Back in March I decided to move a portion of my portfolio to cash. The summer has indeed been rocky for stocks. But now it’s time to prepare my shopping list for the fall. I want to be in best of breed stocks in each of the following sectors:
- Canadian Banks
- Canadian Insurers (I own Power Corp)
- Canadian Utilities (I own TransAlta)
- Canadian Energy (I own Canadian Oil Sands)
- Canadian Telco (I own Telus)
- US Information Technology (I own Apple and have ordered MicroSoft and Intel)
After analyzing the bank stocks I think that CIBC (CM.TO) looks the best.
This, together with my orders for Intel (INTC) and MicroSoft (MSFT), make up my shopping list. I have placed an order below the current price and will wait for a dip.
Today, 9th August, I updated my order:
Today, 28th August, CIBC is at $76 with no sign of falling. Seems I picked the right stock but was greedy with my bid. I took the opportunity to re-evaluate the Canadian banks. I judge that BMO is now the best value, especially since it upped its dividend today to a touch under 5%. I cancelled the CIBC order and placed an order for BMO.
Today, 4th September, my BMO buy order was executed at $57.
Today, 4th October, this trade looks like a good call. BMO closed at $59.06 today, up 3.6% in a month.
Back in May I identified Microsoft (MSFT) and Intel (INTC) as core positions. I have been waiting for a pullback to get into these stocks. Tech stocks are generally cyclical – peak in winter and trough in summer – and it looks like that pattern will hold true again this year. Both are down since their recent highs and both fell around 3% today. I have placed orders 10% below current market prices and I’ll wait for a bite.
- BUY MSFT @ $26.75
- BUY INTC @ $23.50
These orders were not executed as the price has remained too high. Today, 23rd July, I have increased the bid prices.
- BUY MSFT @ $28.55
- BUY INTC @ $24.70
Today, 8th August, I updated these orders.
- BUY INTC @ $25.90
- BUY MSFT @ $29.60
Today, 23rd August, my Intel order was executed. The price had fallen as Warren Buffett exited his Intel position.
Today, 10th September, the Microsoft order expired. The price is simply too high for me. I’ll wait to see how US markets perform in September (usually a bad month) before placing another order.
Today, 24th September, the Intel order looks like a bad call. Intel opened today at $22.93, down 8%!! Looks like it’s a bad idea to bet against Buffett.
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:
||Great-West Lifeco Inc
||Power Financial Corp
||Canadian Imperial Bank Of Commerce
||Husky Energy Inc
||RioCan Real Estate Investment Units
||Bank Of Montreal
||Power Corp Of Canada
||Canadian Oil Sands Ltd
||Igm Financial Inc
||Brookfield Properties Corp
||The Bank Of Nova Scotia
||National Bank Of Canada
||Shaw Communications Inc
||Rogers Communications Inc
||Rogers Communications Inc
||Toronto Dominion Bank
||Royal Bank Of Canada
||CI Financial Corp
||Inter Pipe Fund Units
||Cisco Systems Inc
||Taiwan Semiconductor Manufacturing ADR Representing Five Ord Shs
||International Business Machines Corp
||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).
Last week I purchased some Microsoft (MSFT) today for my kids’ accounts. As always, I used a limit order. I selected the price of the order based upon a glance back at the last year’s trading and seeing that the stock generally takes a dip every month or so. I placed an order for $29.
Today the stock dipped to just below $29 (triggering my order) before launching up to $29.60. This was a great piece of pricing and shows that, for stocks that take regular dips, it pays to wait for that dip before buying.