Every now and then it’s good to look back and evaluate how your own stock picks have succeeded. It is easy to get excited some stocks and give your tips, but to take a responsibility and analyze your work is much tougher. Of course I have written such a short period of time that it’s impossible to draw far-reaching conclusions. Especially when my investment style is long-term oriented. However, some sort of interim statement is appropriate to do now.
Three company analysis
Last fall I made brief analysis of the three companies. Nokian Tyres (26 April 2016), Richardson Electronics (15 September 2016) and Bittium (8 October 2016).
When I analyzed Nokian Tyres it was trading (NRE1V- OHEL) at 32.95 EUR. I thought that valuation was quite a challenging and I recommended to wait a while and be ready when some bad news show up. So far there have not been any dramatic event and stock price is advanced to 37.13 EUR. I think all the fundamentals of my analysis are still valid.
My second company was US net-net Richardson Electronics. This analysis was made 15 September 2016, when the price of company was $6.94, which gave about 20 % margin of safety to net current asset value. Currently the stock is trading at $6.30, so not much has happened. Fundamentals and company’s situation have remained almost same. In my opinion you can find better net-nets, but if you have a position I recommend to stay with, as I do – patience may be rewarded.
My third investing idea was shorting Bittium, written on 8 October 2016. I made my analysis just after Bittium announced that significant customer cooperation with a global network equipment manufacturer (Ericsson) will reduce during 2017. I assessed that its impact will be more significant than a short time share price reaction. Although Bittium is overvalued and Ericsson case will reduce next year’s earnings their strategy of trusting own products help over the worst. Short sellers can still be right in the long-term, but I would cover the position with small loss.
Last October I wrote about dividend investing and I divided it into two parts; dividend income and dividend growth investing. For dividend income investor sufficient yield, safety and sustainability of dividends are important. Otherwise dividend growth investor favor stocks, whose dividends are growing steadily in the long-term.
Although my stock picks were more examples than recommendations, it’s good to look at how these companies have made their job. My candidates for dividend growth investor were Wells Fargo, IBM, Flowers Food, Helmerich & Payne, Deere, CVS Health, AXA, Leifheit and Investor B.
Regarding Wells Fargo price advance from 45.09 to nearly 60 is good news, but both dividends and earnings have remained at the same level which is a little disappointment in the short term. IBM is simple in the right path. Flower Foods is a darling for dividend growth investor. The company continue its incredible 29 years record of steady or rising dividends. The only concern is the possible slow revenue growth in the future. If oil prices remain low for a long time, Helmerich & Payne would not keep its high five years dividend growth rate. So far everything is fine. Deere’s revenue and earnings are facing a lot of pressure. Although dividends of the company are still stable, recent results have had a distinct impact on Deere. Currently I will drop the company from my list. Thanks to its strong business model, CVS Health generates a lot of cash flow. This should help the company continue growing its dividend at a high rate. CVS has already announced that its board of directors has approved a quarterly dividend of $0.50 for 2017. Insurance giant AXA is strong and stable company. The biggest risk is French political risk. And as we know this risk is difficult to price. German household supplier Leifheit has done its job well. Business is profitable and dividends are increasing year by year – no complaints. The same applies to Investor B. In summary, I can say that I would have changed only one of my nine dividend growth picks.
My candidates for dividend income investor were Johnson & Johnson, Verizon, Consolidated Edison, Southern Company, Colgate-Palmolive, HCP, Sanofi and Sampo A.
Johnson & Johnson has not caused any surprises – except positive market price advance during the Q1/2017. Stock is very stable and appropriate for dividend income investor. Telecom giant Verizon is doing exactly what the investor expects. Comparable choice – and as good as VZ – would have been AT&T. It is not a big secret that utility stocks are great for income. Consolidated Edison and Southern Company are two of the largest utilities in the U.S. Their business model is very stable, defensive and recession-resistant. Over 200 years old Colgate-Palmolive is really dividend king. It has raised its dividend for 54 years in a row. Dividend yield is a bit modest, which signals the slight overvaluation. My example of REIT was HCP Inc. REITs are legally required to pay at least 90% of their earnings as distributions to shareholders. It generally drives high yields that benefit investors looking for current income. Healthcare REIT HCP reduced its dividend only because it spun off ManorCare. Company has very favorable future prospects because of many factors driving healthcare industry growth. The stock of Sanofi has provided a pleasant surprise increasing its price from €69.20 to over €80. Sanofi is a shareholder friendly company combining increasing dividend payments to regularly share buy backs. Finnish insurer and holding company Sampo offers a steady dividend stream. Its dividend policy is very shareholder friendly. I can stand behind all of my choices for dividend income investor, but because of Colgate-Palmolive’s low dividend yield you can find better candidate instead.
Finally, I have to say that this half year period is absolutely too short time to evaluate any dividend investing strategies which are inherently very long-term focused.
I wrote about Japanese net-nets because business and market environment in Japan has been very special already during the couple of decades. Japan has proved to be great place for bargain hunting.
My net-net picks on 9 October 2016 were:
11/9/16 5 months later Return
Otec JPY 911 1500 65%
Charle JPY 458 511 12%
Original Engineering Consultants JPY 377 478 27%
Tiemco JPY 492 488 -1%
Yotai Refractories JPY 310 386 25%
Daiken JPY 609 866 42%
Nansin JPY 419 555 32%
Taiyo Kisokogyo JPY 689 770 12%
Terasaki Electric JPY 750 912 22%
Kawaden Corp JPY 2045 2269 11%
Nadex JPY 492 664 35%
Toba Inc JPY 2048 2195 7%
Yonkyu JPY 1120 1231 10%
Short time results of my Japan net-net picks have been promising. A total of 23% return in five months, which means 55% annual return. Five months is definitely too short time to make any serious conclusions. To make any comparison we should know the results of all Japanese net-nets for the same period. Unfortunately, I don’t have this kind of statistic. Nikkei index return over the same period was about 15%. For me this tells more how valid Graham’s net-net strategy is than how correct my picks have been.
Christmas gifts for bargain hunter
Just before the Christmas I wrote about two kind of bargain stocks. The first category were turnaround candidates and the second one were net-nets mainly from Singapore.
Turnaround candidates were Nokia, Novo Nordisk, Resolute Forest Products, Gilead Science and Mylan. Nokia has been doing turnaround and proceeds company’s chosen path. Only future will tell how profitable our investment will be, but chances are good.
Lowered growth expectations for Novo’s U.S. business and their effects are behind. Although healthcare industry is highly competitive, Novo’s position as a profitable cash flow machine is strong. Novo Nordisk can produce outstanding long-term results depending which price you have managed to purchased it.
Like I mentioned in my article permanent turnaround of Resolute Forest Products can take longer than someone would wish and the fact is that the market is unwilling to believe that Resolute will ever be a successful and profitable enterprise. I dare to disagree. Stock is clearly undervalued, but you surely need patience to wait positive outcome.
I think regarding Gilead Science the basic facts have not changed. The big question is whether the bottom is already reached or not? Waiting requires once again patience, but it belongs to value investing.
As a business Mylan has already started recover. Q4 2016 results were all in all promising. But there’s a peril behind the corner. Probably penalties from the antitrust lawsuits could be even $5 billion. So the risk is actual. In this case Mylan is more like a lottery coupon than value investment – at least speculative investment.
In summary we will be much wiser after one year. Then we can make more serious conclusions.
Net-net recommendations 19 December 2016 were Support from U.S. and S i2i Ltd, Sing Holdings, SP Corporation and Brook Crompton Holdings from Singapore.
12/19/16 3/9/17 Return
Support $2.10 2.05 -0.02%
S i2i Ltd SGD 1.74 2.50 44%
Sing Holdings SGD 0.31 0.36 16%
SP Corporation SGD 0.48 0.67 40%
Brook Crompton Holdings SGD 0.40 0.52 30%
Again net-net method works. Especially in Asia where Singapore, Hong Kong and Japan are lucrative markets.
Like I mentioned many times before it’s far too early to give a final certificate regarding above mentioned stock picks, but an interim analysis with comments are always in place.