Saturday, February 1, 2020

Likely buying opportunities: Coronavirus

It looks like we may finally be getting the catalyst to start a correction or recession, the moment value investors have been long waiting for. This will offer an opportunity to purchase more shares at low prices. China was already hit with trade taxes with the US, and had been slowing down due to it. And now paired with the Coronavirus, the hit to the second largest economy will be impactful. Factories are closing down and citizens are being asked to not go to work or work from home. Stores are also closed such as Starbucks and Apple for example. This will have ramifications globally if it extends for a long period of time, as revenue is basically stopped.

We have cases of temporary blips in market valuation from pandemics like SARS or Ebola, with corrections around 20-25%. However, nobody knows if the Coronavirus will be far more severe. Currently the number of cases for Coronavirus is already exceeding that of SARS, but today we have much better technology to combat these viruses.

In terms of buying, I have not pulled the trigger. I think in the month of February, my cash pile will start to approach $30,000 USD. My plan will not be to deploy it all at once and try to time the bottom. I will add as the market drops or stays depressed. For example if we get to -10% off S&P highs I will start deploying a bit. And -15 to -20% I will deploy more. 

Going forward, I plan to invest heavily into a few names that I feel are winner type companies. I have already built a portfolio over $800,000 USD in a diversified set of dividend aristocrats and consistent dividend payers. I think it's getting too diversified, to the point that it hinders performance. That is the nature of diversification, it dilutes the good ideas with the average ideas. However, I am not saying in any way I am not happy with the portfolio, it has done its job very well and is very conservative.

I think all my positions are great holdings, but only a few are truly outstanding companies. Going forward, since I am still young, I will focus more on growth and dividend growth, and less on the dividend income. I have found that the companies that yield higher but raise dividends more slowly are hindering growth opportunities for my portfolio. And since I am not 30 years old yet (almost), I want to start prioritizing some growth since I have already finished building much of my portfolio's foundations. I want to start picking some companies with high growth which will in the future after many years become the new set of dividend aristocrats, and by then their yields should be high and growth lower.

Watchlist (my high growth selection):
Technology 
 - ADP: Automatic Data Processing
 - MSFT: Microsoft

Financials
 - MA: Mastercard
 - V: Visa

Discretionary
 - ROST: Ross Stores

Healthcare
 - SYK: Stryker
 - TMO: Thermo Fisher Scientific

Staples
 - MKC: McCormick
 - CHD: Church and Dwight

12 comments:

  1. I like your plan to deploy cash incrementally and focus on growth. You own a strong core of defensive businesses (Staples, Utilities, Healthcare) that represent more than 50% of your PF market value. My defensive share is standing at 43% now and I plan to bring it up to 50% this year. In addition, I want to mix some growth as well. I’m thinking about following names:

    Defensive & good growth prospects:
    MKC
    SYY
    ABT
    SYK
    DG

    Cyclical/Sensitive & good growth prospects:
    ADP
    ACN
    MSFT
    LMT
    MA

    Value play
    MMM

    In the past years, value investing has been an inferior strategy compared to momentum investing (building on strength). However, if the market conditions change, indicating favorable signals for value investing, I'm going to adapt and put more focus on value. In case we continue to see strength, I will continue to build on strength (not worrying to much about valuations as I have decades of investing in front of me).

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    Replies
    1. Great list. I like ABT as well for healthcare, but SYK has the better balance sheet and credit rating.

      ACN is strong too, offers a dividend, but I prefer ADP and MSFT's business model to consulting. ACN has nearly 500,000 employees/consultants. I prefer lower headcount businesses.

      MMM is a great value opportunity now for a strong balance sheet, strong history of dividends. I'm confident a turnaround there is possible. GD is also very cheap with a strong balance sheet, conservative, but has lagged behind LMT. I prefer GD's balance sheet over LMT's.

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  2. What are your thoughts on TXN as a growth opportunity?

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    Replies
    1. It's a great company and likely dividend aristocrat in the future. However, its history is too cyclical to me so I prefer to avoid, and that's fair because it's in the electrical component business which is cyclical. In my work, I use a lot of their components,they are very good and essential. You can refer to the Fast Graphs blue line (earnings). I prefer more consistent companies like the ones I list above with consistent "straight line" predictable earnings growth.

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  3. Young Div -

    I vote Visa, Microsoft, Church & Dwight. Nice picks.

    -Lanny

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  4. Hi, YD. Yee I think so too that this might be the catalyst. This should trigger China slowdown as you mentioned production is on hold = export. Consumption is on hold. Altough China is planned economy with large cash reserves, so they might build more roads, bridges, airports, sea ports and other infrastructure stuff just to have the gdp growth. China is for long time a big big bubble. Economy growing 10-6% for past 20y or so is not sustainable for sure. Im pilling up cash also. Altough bought some shares lately. Now looks like my initial plant to accumulate cash was right :)

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  5. YD, I like your picks, but think that MKC and CHD are medium growth companies and not high growth as they once were a decade ago. So their current P/FCF and P/E seems a bit on the high side given their growth prospects.

    Since you are still so young, why not also buy growth companies that don't pay a dividend today, but might some time in the near future? The likes of CRM, FB, GOOGL, ADBE, AMZN etc. All are cash flow positive companies with wide economic moats...

    I think as a long-term investor, it's also important to understand if the companies we own are price setters or price takers. Also certain companies that were price setters could quickly become price takers if they don't connect well with the consumers/end customers in this day and age of digital transformation...

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    Replies
    1. I think my investing style is slowly changing and I am getting more accommodating of those types of companies that need to retain all their earnings and reinvest in themselves, hence no dividend. Their growth will likely be higher than dividend paying companies since they are identifying that it is better to use excess cash to reinvest back into their business than to pay it out in cash.

      TMO for example is one growth stock I listed here, that isn't really a dividend growth company. My mentality is still really stuck in dividends, as it resonates with me as a business owner. As my portfolio grows larger and larger with a foundation established, I am more comfortable taking less core positions like non-dividend paying companies with high growth.

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    2. at the end of the day, compounding rate is the only thing that matters! one should try to maximize his compounding rate without taking more risk, I don't think investing in the likes of AMZN, ADBE, CRM at the right price is more risky, on the contrary, it's safer than many dividend aristocrats.

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  6. Bingo. The companies I listed above belong in the reinvestment moat category while most of the companies in your portfolio are legacy moat type companies with very little to no reinvestment opportunities, so they return most of their cash back to shareholders in form of dividends and buybacks.

    Currently my portfolio is about 70% allocated to dividend paying names while the rest 30% is non-divi growthier names. GLTU in your financial endeavors.

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  7. I am excited that you are evolving your investing strategy into something less conservative by focusing a little more on growth and less on dividend payout (as long as the company on track to increase dividend long term.
    What are your thoughts on Shares Lending programs to help offset low paying dividend stocks? A lot of USA brokers now offer some kind of shares lending program. Would his helps provide additional monthly income for low dividend paying stocks so that you can have the best of both world?

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  8. Unfortunately the market just kept going higher despite the Coronavirus situation getting worse.
    The Federal reserve asset purchase plan is too strong, Coronavirus does not stand a chance to dent the US markets.

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