Investment update – August 2016

After doing the analysis for my article on how overvalued the S&P 500 is today I realized I needed to make some changes to my portfolio. Specifically, I decided I wanted to reduce the risk of the current portfolio and raise cash so I’m better prepared for the inevitable bear market.

Since my research shows that when the Shiller P/E ratio is as high as it is today (27+) future returns in the market are low, the best use of my money is not in the market. As a result, I’ve sold the following stocks:

Company Symbol Shares Price Total
Intel INTC 264.244 $50.35 $13,304.40
Bank of Nova Scotia BNS 249.392 $35.05 $8,741.85
Kinder Morgan KMI 1105.839 $20.40 $22,563.38
Walmart WMT 296.155 $73.70 $21,824.75
Total sales $66,434.38

 

Rationale for sales

  • Intel – their core business is shrinking and I’m not convinced they will be able to successfully transition into mobile processors.
  • Bank of Nova Scotia – I’m actively moving away from banks, as they tend to have a tendency to blow themselves up every decade or two. In addition, this was one of my smallest positions, and monitoring it was more trouble than it was worth. I will continue to hold Wells Fargo, as I believe it’s one of the best-managed banks.
  • Kinder Morgan – as I mentioned in my post on debt and dividends, I am becoming increasingly wary of companies with large amounts of debt. Given that KMI’s debt to equity ratio is over 5, saying they have a lot of debt is an understatement.
  • Walmart – sales have been essentially flat for 4 years. I’m not sure where their growth comes from – they are already everywhere. They don’t seem to have a very good online strategy, and their recent purchase of jet.com seems like a panic move. In addition, I don’t like shopping there. I already have Target and I prefer that investment, so if I can get Target at a reasonable price in the next 3-5 years I’ll happily redeploy this cash to Target.

As you can see, there were a variety of reasons for making the moves I did.  In general I’m trying to steer away from companies with lots of debt/leverage, high-tech companies, and slow or no growth companies. I’m also trying to reduce the number of stocks we hold (reducing the amount of time following our holdings).

I have no immediate plans to redeploy this money. I’ll hold it in cash until either the market provides some better values or I decide to use the money to pay down some of our real estate loans.

 

8 thoughts on “Investment update – August 2016

  1. Commando, what was the P/E on the shares you sold? If the Shiller P/E drove your decision, shouldn’t you have sold the stocks in your portfolio with the highest P/E ratio?

    I like reading what you’ve wrote so far in your posts. You’ve amassed a great net worth at a young age (I’m guessing you’re now 40 +/- 1 year) and look forward to reading more.

  2. Wow – that’s a GREAT question!

    I didn’t make my decision based on the P/E of the individual stocks, as just looking at a stock’s P/E ratio isn’t very informative. After all, we’d expect the stock of a company growing profits at 50%/year to have a much higher P/E than the stock of a company whose profits have been stagnant for the last 10 years.

    My thesis for trimming some of my decisions is this – the market as a whole is overvalued. And just as a rising tide lifts all boats, a bear market will drag down all stocks. The quality stocks will get hit less than the more speculative or lower quality stocks.

    So, I decided to sell the stocks I had the least conviction in. For example, as I mentioned in the article, after doing a lot of thinking and analysis I’m going to avoid technology stocks going forward. Since I work in the technology sector I know just how quickly things can change – a dominant company today can be tomorrow’s has-been. That lead to me trimming Intel.

    I am also avoiding companies with large debt loads (KMI), which I think could be a significant liability in a weaker economy.

    In short, the decision was made more with an eye towards positioning myself for an upcoming downturn in the market than trimming the most overvalued stocks.

  3. Hi Commondo,

    I am a long term buyer looking at 20+ years, do you think American water works(AWK) , Waste management(WM), SCI/HI stocks are forever stocks given its hard to entry and near monopoly. I read an article where you mentioned you held Lockheed martin for ever. What do u think about my picks.

    1. I think there’s a place in everybody’s portfolio for steady, slow-growing, high dividend stocks. The issue is that because they are slow-growing, valuation matter more for these stocks than for others. If you overpay for the stock upfront it could take a decade to burn off the overvaluation.

      Let’s look at AWK. This is a great, stable company. However, right now the P/E is just a shade under 28. That’s about the same P/E as Visa, one of my favorite stocks. In 2013 AWK’s yield bounced between 3.2% and 2.4%. It’s now at 1.8%. The P/E ratio is around its highest level ever.

      I wouldn’t put new money into anything right now, but especially not into slow growth companies. They will eventually revert to their average valuation and you might find yourself “underwater” (ha!) for years.

      1. You are right. Once the market goes into bear market which is bound to happen in few years and AWK might go down by a lot. Since its slow moving stock I will be under for few years. Visa is one stock which I love too but it has gone up by 50% in the last few years after joining Dow. So I am kind of skeptical to get into Visa. But I am looking for a really long position for 20 years.

        Is there any other mid sized company which u like and has high barrier to entry and can stay there with reasonable returns (around 5-10% a year is sufficient for me). Utilities and mobile company stocks are pretty good bets but they are too big.

        1. Well, don’t let the fact that Visa is up by 50% dissuade you from purchasing it. Remember, it doesn’t matter what a stock has done in the past, only what it will do in the future.

          How about looking at something like OHI? It’s a health care REIT. They have long-term leases so their earnings are pretty stable, it’s attractively priced right now, and health care is pretty recession resistant.

  4. I’m with you Commando, I have been selling off stocks and moving to cash if possible. My 401k is 100% in short-term U.S. Treasury securities which is the safest place I can put that money. I do believe the bear market is looming. Once I do start purchasing again, I will be buying dividend stocks.

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