Two New Investments I’m Considering At Today’s Prices

European or U.S. company?

Lately, I’ve been just as amazed as many of you. I continue to watch the stock market seemingly rise day after day, often breaking new records in the process. That leaves a value-focused dividend growth investor like me scratching my head, wondering how I’m going to put new capital to work when attractive opportunities are few and far between.

First, it should be noted that I believe in dollar cost averaging my way into the stock market and individual positions. I believe that timing the market is useless at best, and harmful at worst. Rather than try to time an entire market, I try to “time” individual investments whereby I invest fresh, available capital in what I believe is the most attractively valued security or securities while also considering portfolio weight and objectives.

When scanning for potential investments I consider my own portfolio to be the best possible screening tool. If I’ve done the research necessary to invest my hard earned cash into a select pool of equities, then I consider a wise decision to revisit that pool as often as possible. However, like the general market many of the companies I’ve already invested in have advanced to the level where I consider them less than attractive. And the few that I do still find relatively attractive, like BP Plc (BP), International Business Machines Corp. (IBM) and Aflac Incorporated (AFL), are already represented at weights I feel comfortable with. I’d rather not overexpose myself to one company and reduce the effects of diversification only in the name of value if I can help it. However, I would consider temporarily increasing the weighting I have to a particular company beyond my normal comfort zone only if I could find no other opportunities. I would then simply prefer to allow the rest of my portfolio to “catch up” and reduce this outsized weighting over time.

So, to broaden my search I’ve decided to look outside my fine pool of equities to see if Mr. Market is offering any decent deals on new investments. Although the two investments I’m going to present below aren’t “steals”, I find both of them attractively valued at today’s prices based on all known quantitative fundamentals and qualitative qualities. I’m likely going to invest in one of the two companies in the coming days, pending either mania or depression from Mr. Market.

Unilever Plc (UL)

Unilever is a global consumer goods company. They operate primarily in four segments: Personal Care, Home Care, Food and Refreshment. They sell products in more than 190 countries. Food and Refreshment accounted for 47% of 2012 sales, while Personal Care and Home Care accounted for 53% of sales.

Unilever is one of those great companies that I haven’t yet been able to get my greedy little DGI claws into yet. I’m not sure how I was able to build a portfolio of 42 positions and not yet include the likes of this company, but that will likely soon be rectified.

This company has fourteen $1 billion brands, some of which include: Dove, Axe, Hellman’s, Lipton and Magnum. They offer a #1 global position in product categories like ice cream, dressings and deodorants.

Growth has been a bit of a mixed bag over the last decade. From 2003-2012, revenue has grown at a compounded rate of 2.23% annually. But while it looks like the Great Recession took its toll on the company, they’ve been strong out of the gate. Revenue has risen from $55.3 billion in 2009 to $65.9 billion in 2012. Earnings per share has a CAGR of 7.53% over the same time period listed above.

Obviously, one item of special interest to me is the dividend. Unilever has paid dividends since 1937, and has an active record of increasing the dividend. UL stated its dividend policy back in 2009 as such: “Unilever’s policy is to seek to pay an attractive, sustainable and growing dividend to shareholders.” They switched from a semi-annual dividend to a quarterly payout when the new dividend policy was announced, and since then the company has been true to its word. The dividend for the UL ADR shares are pegged to the pound sterling, so U.S. dollar payouts fluctuate a bit based on currency conversions, but the 2010 payout totaled $1.13 per share. Based on the last quarterly dividend, the annual payout amounts to $1.47. Fairly impressive growth over such a short period of time. Based on the current payout, shares yield an impressive 3.7%. The dividend is currently well covered by both EPS and FCF.

UL sports an attractive balance sheet with a debt/equity ratio of 0.5, and long-term debt has been sustainable over the last decade. The company is also actively interested in reducing its carbon footprint and improving the life of people around the world, including its customers. You’ll find metrics including greenhouse gasses emitted from production and gallons of water used in addition to the standard numbers like products sold and sales growth.

Shares are currently priced at a P/E ratio of 19. Again, not a steal. However, an investment in UL offers access to many fantastic products like Ben & Jerry’s, Lipton Tea and Axe which are aggressively promoted in emerging markets around the world. Performing a Dividend Discount Model analysis using the current dividend payout and slapping a 10% discount rate and a long-term 7% growth rate gives me a fair value on shares of $52.43. This means I’m looking at a fairly attractive margin of safety on shares here, and the numbers make sense as S&P Capital IQ is predicting a 7% growth in EPS over the next three years.

Target Corporation (TGT)

Target is a retailer that operates in the U.S. and Canada. They operate in two segments: U.S. and Canadian. They’ve paid a dividend every quarter since going public in 1967.

While I’ve always preferred to invest in companies that produce the products that people all over the world purchase, investing in the retailers that provide access to these products also makes sense if the valuation is attractive. Currently, I’m only invested in Wal-Mart Stores, Inc. (WMT) as far as retailers go, but TGT makes sense at today’s prices.

TGT is currently priced at a P/E ratio of 15.75. Shares yield a lowly 2.63% here, but dividend growth has been particularly robust with this merchandiser; they’ve raised dividends for the last 46 years, with a 10-year dividend growth rate of 18.6%.

Revenue has grown by a compounded annual rate of 7.53% from 2003-2012, while EPS has a CAGR of 8.76%. While we can’t make new money off past growth rates, S&P Capital IQ predicts a EPS growth rate of 12% over the next three years. Not too shabby.

Target is looking to aggressively expand in both grocery and Canada. They plan to open 124 stores in Canada during this year. They’ve opened 68 thus far, passing the half-way mark. While for now expansion is reducing margins and EPS expectations due to costs relating to opening new stores and furthering the operations in a lower-margin grocery business, the hope is that these moves will drive above-average EPS growth in the years to come.

TGT remains a good steward of shareholder capital. The balance sheet is attractive with a deb/equity ratio of 0.8. They continue to aggressively buyback shares, purchasing 13.3 million shares in the second quarter of 2013 alone. They also continue to reward loyal shareholders with above-average dividend growth as discussed above.

Target is seen as an upscale competitor to the likes of Wal-Mart and the dollar stores. However, competition remains strong among retailers and this is unlikely to abate anytime soon. Due to this, seeking a margin of safety on shares is imperative. I performed a Dividend Discount Model analysis on shares, and used a 10% discount rate and a 8% growth rate (to account for the higher expected growth) and received a fair value on shares of $92.88. I think it’s fair to say that paying today’s prices of ~$65 per share offers a long-term investor an attractive entry point, although only with the knowledge that EPS growth may slow in the short-term due to aggressive expansion into grocery and Canada.

Conclusion

These are a couple of new investments that look attractive to me at today’s prices. I’m considering one of the two companies (possibly even both) based on what prices do from here over the next few days or so. I think both would fit well within my portfolio and offer me further diversification and exposure to great companies with rich histories of rewarding shareholders. Furthermore, both companies have vastly underperformed the S&P 500 over the course of 2013; UL is up some 2.69% YTD and TGT is up 10.6% YTD vs. the S&P 500′s +24% YTD performance.

How about you? Considering either of the above companies, or any others at today’s prices? 

Full Disclosure: Long BP, IBM, AFL, WMT. 

Thanks for reading.  

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Comments

    • says

      FFdividend,

      I think they both offer value here, but I could see how TGT might be the more attractive of the two from certain perspectives. However, both Morningstar and S&P Capital IQ give the valuation edge to UL funnily enough.

      I don’t think you can really lose buying either one, as both are pretty high quality companies with excellent histories. However, TGT had a healthy pop today so now I’m waiting for it to just come back down to the price it was yesterday. It seems I can’t win right now! :)

      Best wishes.

  1. says

    Interesting picks, Mantra. I have been keeping an eye on Unilever as well. Lately, more and more of their revenues have been coming from emerging markets, which is a good play on those markets in a way. You are right that the stock isnt really a steal at the moment so I am just keeping my eye on it.

    • says

      Roadmap2Retire,

      UL is huge into emerging markets, and a number of industry reports show that it’s kicking PG’s butt in many international markets. (which is unfortunate as I own PG).

      I think UL should reward loyal shareholders over the long haul here, as their products are fairly secular and demand remains high for food/beverage and personal care items. Plus, they’ve got killer brands. I only touched on a few, but they own more than 400.

      Best regards!

  2. says

    I like both of these companies as potential options, with Unilever being closer to the top of my list than Target. Certainly the PE is a touch on the high side, but I believe UL has tremendous potential in emerging markets which will continue to foster growth in EPS and dividends.

    Looking forward to seeing if you pull the trigger on either of these companies.

    • says

      w2r,

      I’m hoping to buy one or the other here soon, but it’ll really depend on what Mr. Market offers me. I was hoping to get in 1% or so less than the prices published when I was writing this article, but TGT is already up almost 2% from that spot. Tough to hit a moving target (pun intended) when it’s constantly trying to evade you.

      Let’s hope for cheaper prices!

      Take care.

  3. Spoonman says

    TGT looks compelling and 2.63% ain’t that bad, thanks for the tip. I vaguely recall TGT’s yield being way lower than that, around 2.2%, which is why I never initiated a position. At 2.63% it looks way more attractive.

    I agree with FFdividend’s assessment, Chuck Carnevale’s calculations show UL to be overpriced. It has traditionally traded at a premium, but still.

    Anyway, I’m having the same problem right now of finding good deals in today’s market. I’m just waiting for Uncle Ben to sneeze or something so that markets get spooked and sell off =).

    • says

      Spoonman,

      Yeah, TGT is sitting near a historic high in terms of yield. I don’t find 2.5% or so particularly compelling by itself, but the dividend growth is quite strong and allows the YOC to rise fairly quickly.

      I’m surprised that F.A.S.T. shows it as overvalued. Morningstar and S&P Capital IQ both show it to be fairly attractive here, as did my own analysis. It’s slightly cheaper than a lot of other options like KO, PG, PEP and the like. Although that’s not saying much because many other options are expensive, it does allow cheaper exposure to a secular consumer goods company with a fairly high yield.

      It’s definitely tough to find values right now. I continue to scan and research (and pray). We’ll see what we get.

      Best regards!

    • says

      Spoonman,

      I got what you were saying. I’ll have to sign up for F.A.S.T. sometime. It looks like a great resource, and I find Chuck C. to be a refreshing and intelligent force.

      It’s still interesting though how 10 different analysts will get 10 different prices. M* currently has UL as a 4/5 star value with a $45 fair value on shares. S&P Capital IQ has UL at a 4/5 star Buy. Meanwhile, M* has TGT as a 3/5 star value near fair price right now. I think both offer unique opportunities.

      Best wishes.

  4. says

    This market is strange and continues to climb DM. It will end someday, though I’m not the one to call the top. I am afraid of the retail consumer. I think easy monetary policy and low interest rates have masked the consumer’s debt burdens. When interest rates climb their credit will contract, and they will slash their spending. Only time will tell.

    I appreciate that you continually comb the markets looking for value. I do as well, but we often come up with different prospects…..which I really appreciate. I am looking at big tech, energy (on crudes continued slide), and emerging markets. Have a great day
    -Bryan
    -Bryan

    • says

      Bryan,

      It’s tough to find value right now outside of tech and energy. I tried to look elsewhere because that’s what I’ve been writing about and buying lately and I thought it would be interesting to see what else the market offered. Plus, I need to personally diversify away from some of these names (especially energy). Trying to find value in the consumer space was particularly difficult, and while UL isn’t a “steal”. it’s cheaper than many alternatives, with a higher yield to boot. Plus, the brands are fantastic.

      We’ll see what happens to some of these stocks and the general market. Anything’s possible, but like always I’ll just continue to focus on what I can control.

      Take care!

  5. Anonymous says

    I have always had difficulty convincing myself that retailers have a good economic moat. Personally I will go to Target if they are the cheapest. If not, I go to Walmart or Amazon or Costco. I know people have made lots of $ investing in these companies, I just have trouble convincing myself that TGT won’t end up like Sears or Blockbuster or Circuit City etc ….

    You seem to have a good eye for these thing so I am sure it will all work out.

    Good Luck

    Roger H

    • says

      Roger H,

      Retailers are indeed difficult to quantify as far as a moat goes. I’ll agree with you on that. I like TGT because it differentiates itself through the perceived quality of some of its merchandise and the scale it enjoys. I like WMT for slightly different reasons: It has immense scale, but it’s aiming to be the cheapest.

      Amazon is interesting. Great business model but has almost no profit at all.

      Best wishes.

  6. Chicago81 says

    I’ve held TGT in my dividend portfolio for a little while now. I’m a little bit underwater from where I purchased the shares. My broker’s website shows me to be down about $90 on the P&L so far. But I have been collecting dividends and will continue to do so :)

    My TGT purchases have been:

    12/19/2012 – Bought 26 shares of TGT at $61.80 per share
    05/28/2013 – Bought 34 shares of TGT at $70.80 per share

    • says

      Chicago81,

      Hey, thanks for sharing your purchase prices. I think we can all appreciate that. Although you’re fairly even now, I think (as you probably do as well) that you’ll do very well with TGT over the long haul. Although expansion into Canada and grocery will hamper margins and earnings in the short-term, I think it’ll spring back after ’14.

      Best regards.

  7. says

    DM,

    Good piece here. I was reading Dividend Growth Investors take on TGT this morning, and his analysis from August. Price does look compelling, as does the payout ratio. I’ve been looking at the DRIP program but the fees are too high. So I’m hoping to pick it up soon in my brokerage account. Need some fresh cash first, and to finalize an entry price.

    -RBD

    • says

      RBD,

      I wasn’t aware of the DRIP program and the fees. That’s unfortunate for investors looking to buy a small lot at a time. I only buy through my brokerage account over at Scottrade, so I’m sometimes oblivious to DRIP fees.

      TGT is up some 2% today, so it’s now orbiting outside of what I was willing to pay for it. I think $65 and below gets me pretty interested.

      Cheers!

  8. Anonymous says

    As a classic value investor myself, I was thinking you were going to put Deere (DE). I think they’re really undervalued and been in business for at least 100 years. (I should really sign up here so I don’t have to keep going anonymous….too lazy)

    • says

      Anonymous,

      Great idea on DE. I took a look at it not too long ago and had a hard time separating the financing unit from true debt, which also made analyzing the cash flow situation a bit difficult. From what I remember, management was forecasting difficulties over the next year or so, but I think long-term trends favor DE as the world will obviously need much more food and there will probably be less people to produce that food.

      My other concern with DE is the CapEx, as they need to constantly reinvest significant money back into the business for new products and innovation. I’ve kind of considered DE like CAT in that regard, and a reason I’ve stayed away from both. Although DE is a bit less cyclical than CAT because of the industry it operates in (ag vs. mining/building), there are still cyclical trends regarding the purchasing of its products because of duration. I try to stick with secular plays when I can, but DE doesn’t seem like a bad pick here if you’re in it for the long haul (which I would hope you would be).

      Best wishes!

  9. Anonymous says

    I guess “enraptured” was on your Word of the Day toilet paper. Now you’ve used it. Congrats.

    He’s bought DLR 3 times this year already, including 20 shares at the current lower prices 13 days ago. Just because a stock is lower than its calculated fair value doesn’t mean you should load up your portfolio and unbalance it with one specific position.

    What else ya got?

    • Anonymous says

      DLR is 2.2% of the portfolio. Adding more now would cause an unbalance? By what matrix are you using?

      I thought the game plan was to buy stocks on sale. TGT and UL are certainly not on sale at these levels.

      Over $59 it had “compelling value” – at $46 it will cause an unbalance to add more shares when it only makes up 2.2% of it?

    • Anonymous says

      Like I said, he already purchased 20 additional shares 13 days ago. He grabbed some shares on the down slide, and now he’s finding other companies with value.

      He’s writing a blog that seems to help a lot of investors. This isn’t DLR Manta, it’s Dividend Mantra. I applaud him for diving in to a variety of companies, sharing his research and buying value. Yes, DLR seems to be at a good price point, but why not continue to diversify?

    • Anonymous says

      not sure why anon #2 just got so defensive…I thought it was a reasonable question and I’d be interested to know DivMan’s thoughts, I’m sure he has his reasons.

    • Anonymous says

      I think DM pretty much summed it up in his Recent Buy article 2 weeks ago:

      “This was an interesting purchase for me. I actually wasn’t particularly interested in adding to my DLR position at all. I never planned on it being a large position, and instead due to the risks involved and exposure to heavily changing technology pursued a strategy to keep it as a low weighting within my portfolio.”

      Clearly he believes in the company but also doesn’t have interest in making it a significant portion of his portfolio. 2.2% seems to fall in line with his statement. I’m confused why everyone has the blinders on for DLR. It’s one of thousands of dividend paying stocks. DM invested in it, explained why he expanded his position and also explained why he wasn’t expanding it further. Case closed, for now.

      I, for one, appreciate DM giving attention to other companies, in this case UL and TGT.

    • says

      Anonymous,

      I think the answer you were seeking has been summed up pretty well. I never intended for DLR to be a core position in my portfolio because the outsized risk in the business. Data center demand is not as visible as, say, beverage or medicine demand so my attitude regarding DLR dropping would not be quite the same as a KO or JNJ drop. Where I might be willing to load up on some of the latter, the former gives me pause. That being said, I ventured a bit beyond my comfort zone in purchasing some additional DLR shares not that long ago because I felt the value was particularly compelling.

      I tend to walk the walk rather than just talk the talk, so I’m not sure why you’re referencing my original purchase price, rather than the two subsequent purchases. Maybe you only read some of my articles?

      Either way, I hope this helps. The quote above from another Anonymous commenter sums up my feelings pretty accurately, and my feelings haven’t changed since I originally wrote those words. DLR is an aggressive play, and while I feel comfortable going out on a limb, I don’t want the entire tree.

      That quote was:

      “This was an interesting purchase for me. I actually wasn’t particularly interested in adding to my DLR position at all. I never planned on it being a large position, and instead due to the risks involved and exposure to heavily changing technology pursued a strategy to keep it as a low weighting within my portfolio.”

      Best wishes.

    • says

      Zol,

      Absolutely relevant. I remember seeing that picture before. It’s really awesome when you’re looking at it like that. I just smile when I see that picture. Great stuff. Thanks for adding it!

      I hope to one day be a part-owner of almost all of the companies within that graphic! One at a time…

      Take care.

  10. says

    I’m choosing to include some stocks with lower dividends in the mix IF they have strong EPS growth and are showing a commitment to high dividend growth. Two of my favorites have been Ross Stores (ROST) and VF Corp (VFC). Both of these companies have had fantastic EPS growth for many years & are in the process of ramping up their dividends – take a look.

    • says

      Chris,

      Nice picks there. I like both of them. Although I would probably prefer VFC for a couple of reasons, the price and yield on both of them are a little outside my normal comfort zone. A pullback of 5% or more on VFC shares might get me interested, however.

      They both have excellent track records. I bet you’re doing very well with your investments. Keep up the great work! :)

      Best wishes.

    • says

      DiYPensionFund,

      WEC has been an outstanding utility play over the last few years. I remember reading about that company over at Seeking Alpha not long ago and I was amazed. Really tremendous stuff. However, I do wonder if it’ll continue from here? Also, the yield is low for a utility. I just have to wonder how much growth it can possibly still have as utilities are naturally limited by geography and regulations. Still, seems like a reasonable pick to me!

      Best wishes.

  11. says

    Hey DM,

    During times when it seems the markets are overvalued and deals are hard to find, have you ever considered paying off your student loans instead of purchasing equity?

    Would be an nice immediate reduction of your monthly budget by a significant percentage, and would immediately increase your monthly savings rate, which would allow you to purchase more during times when there are deals out there.

    Not sure if you have addressed this angle in the past, but I’d like to get your thoughts on it.

    • says

      The Money Monk,

      Hey, long time no talk. Hope all is well with business.

      My student loans come with a fairly low interest rate. It’s near 3% right now averaged across all the loans (4 of them). Plus, the interest is tax deductible. I’m just not sure that I can’t do better than that with equities. If I thought that equities were poised to return less than 3% from here I would definitely be looking elsewhere.

      Another great reason I hold on to the debt is because it’s fairly flexible in terms of payoff. If I lose my job or suffer a dramatic pay cut I can alter the payouts to a small percentage of my income, or seek a temporary deferment. That offers a little peace of mind.

      Those are my thoughts on it. What do you think?

      Take care.

    • says

      Anonymous,

      Seems like reasonable choices to me. I’ve been trying to catch CSCO below $22 and it proves elusive. It has a relatively short dividend track record, but the company appears genuine in its efforts so far.

      I like T as well, but my telecom exposure is already as large as I’d like it to be. Love that yield, though it may be a bit vulnerable if/when rates continue to rise.

      Best wishes!

    • Anonymous says

      Today may be your day! Down to 21ish area (-12%) pre-market. Short term drop…this company is the IT player long term.

  12. says

    I’ve been struggling with finding value here as well. TGT seems to be decent here and I’ve been looking at UL and Nestle for a while too. It’s getting hard to just sit on cash but eventually the time will come when there’s better opportunities. I just wish the better values out there weren’t tech and oil as I’ve got around the tech exposure that I’d like and I’m way overallocated to big oil right now. I guess I’ll just sit on the sidelines or look at the options market, although even there I’m a bit weary of putting capital at risk.

    Also, I noticed you’ve started writing at SA. Hope that goes well for you.

    • says

      Pursuit,

      Nestle was another I considered. I looked at the numbers after currency conversion and it looked like it was at a P/E of about 22, if I’m correct. Great brands with that company. However, the annual dividend leaves a little to be desired.

      I’m with you on allocation problems. I share your problems. I’m also heavily allocated to Big Oil and energy in general, and really need to move away from that. Tech is another I’m not particularly interested in, not due to over-allocation necessarily but rather my personal aversion to tech. CSCO and IBM don’t look too bad here.

      Thanks for the support! SA actually started republishing my articles, so I’m glad to get the additional exposure while also giving back to the community in a very small way. It’s a win-win. :)

      Best regards!

    • says

      Aspenhawk,

      Looks like some pretty solid buys there. MSFT has been on an absolute tear! I missed the boat completely on that one. My mistake. I chose INTC instead. You can see how that’s been working out for me. Not that the share price is the big deal, but the dividend growth has been polar opposites with these two companies.

      Thanks for stopping by!

      Take care.

    • says

      ED,

      Nice buy on TGT. They have huge plans in store regarding shareholder remuneration, and they’ve been true to their word thus far. I don’t see that changing. I was seriously considering buying it today, and it popped right from the start. I continue to stalk my prey…

      Best regards.

    • says

      Jail,

      For U.S. investors, the UL shares don’t come with any foreign tax withholding due to a tax treaty we have with the U.K.

      Unilever is a dual-listed company, and the UN shares do face withholding from the Dutch government. Because of this, I’m only considering the UL shares right now.

      I hope that helps!

      Take care.

  13. says

    Thanks for pointing out UL as a potential dividend stock to invest in right now.
    I added it on my watch list.

    I am really looking forward for a market dip… but afraid that we will have to wait for 2014 now.

    • says

      FabSavings,

      Glad I could bring one to your attention. I think if you take a look at all of its brands (400 or so) you’ll find quite a few that you’d recognize. They are also the world’s largest ice cream manufacturer. It’s really a great company with a rich history and is genuinely looking to improve the world.

      I’m not sure what we’ll see with the market, but I keep my fingers crossed just like you. :)

      Best regards.

  14. Fairfaxnut says

    Have you ever considered DE? 40% ROE, dividends have nearly doubled since 2010. P/E around 10, Debt looks high, but that’s because they run Deer Financial which offers financing and crop insurance. Big moat with farmers, and at only 32 billion market cap, there is a lot of room to grow as the worlds food output needs to double by 2050.

    • says

      Fairfaxnut,

      DE was mentioned a couple times earlier in the comment thread. I agree that it looks attractive right now. I agree with you regarding the debt load being distorted due to the financing arm, however my big concern would be with CapEx and the cyclical nature of its products. I prefer to stick with secular plays when I can, and businesses that are less capital intensive.

      However, the long term trends do favor DE with global food production slated to grow significantly from here while less people producing it. That means machines will continue doing the heavy lifting.

      Best wishes!

    • says

      Anonymous,

      I’ve looked at UVV before and I don’t know why you’d consider it over traditional, direct tobacco plays like MO, PM, LO and the like. The manufacturers and distributors of the finished product have the moat and brand names. UVV is just a commodity supplier.

      CALM doesn’t look like something I’d be interested in with the high valuation, low yield and inconsistent dividend history.

      Best regards.

  15. says

    It is more fun to purchase stocks. But you have to take what the market gives you, right now I do not think it is much. Do not buy either. Just enjoy for a while seeing your cash balance grow

    • says

      fymb,

      I agree with you somewhat that now is not a good time to purchase stocks. I’ve been cautious over the last few months, and I’ve been pretty open about that. However, just because the stock market is modestly overvalued doesn’t mean all stocks within the market are therefore also overvalued. Furthermore, my plan requires the constant addition of snow to my compounding snowball. Just because it’s difficult to find good snow right now doesn’t mean you should necessarily stay inside and give up. Obviously, right now it’s prudent to be choosy and make sure the margin of safety is there just in case we get the pullback that everyone has been calling for.

      I believe in dollar cost averaging, but I don’t believe in doing it blindly. It’s important to be vigilant right now, and make sure you know what you’re buying and have a reasonable idea of what it’s worth.

      Best wishes.

  16. says

    if you’re considering CSCO, I think AAPL beats them on most metrics. Dividend yield isn’t quite as juicy, but I wouldn’t be surprised if it’s raised by double digits again next year. Also, have you looked at KRFT or ACN recently? I topped off my KRFT position when it got to $51.85 the other day–not a huge growth story but if you’re looking to build out your consumer staples stocks, I think it’s one of the better values and higher yields.

    • says

      also, I forgot to mention Ford, which I believe is undervalued and will do well as Europe improves. And I think banks like WFC will continue to go higher in the face of higher interest rates–so you might consider adding more.

    • Anonymous says

      In Ford since 8 dollars. Best investment in my portfolio and the most solid earning record the last couple years on the Street. Amazing buy.

    • says

      kolpin,

      I went back and forth on AAPL when it took that big tumble a few months ago. I probably should have bought, but tech still really scares me. I think you have a quasi tech/consumer company in AAPL so that’s a bit more interesting than, say, a CSCO which is mostly directly selling to businesses and perhaps more exposed to the cyclical side of tech. I think AAPL is doing great things right now, and major investors are keeping their feet on the pedal regarding buybacks and dividends (which is good for us small players).

      I looked at KRFT very recently. Are you concerned at all about the growth in a mature U.S. and Canadian grocery market? I think the yield is attractive here, but I can’t see the dividend being raised much more than maybe 5% or so per year. Still, that means you might be looking at 9% returns on a fairly conservative pick. However, I did an analysis on it and I found it pretty fairly valued here. Although UL is probably fairly close to fairly valued as well I have to wonder if you don’t have greater growth opportunities there with a similar starting yield?

      I remember when F was a couple bucks a share right before my interest in stocks really sparked. I remember thinking to myself “that seems like a great opportunity to make some serious money”, but I didn’t really know anything about investing so I stayed away. Plus, I didn’t really have much money back then.

      I like WFC. I think they have both headwinds and tailwinds right now. Certainly being the major mortgage player here in the U.S. could be a headwind as far as interest rates go because mortgage origination demand is starting to slow. Although that’s not just due to interest rates rising, but also probably due to the fact that a lot of pent up demand coming out of the gate has already been exhausted. Something to think about. However, I still really like WFC over the long term.

      Best regards!

    • says

      Kraft’s forward PE is 16.3 while Unilever’s is 20.6 (according to Morningstar), so I think KRFT is arguably fairly valued while UL is overvalued. KRFT is not necessarily a growth story as much as a dividend story, but with the high current yield, I’m fine with that. I own MDLZ as well for the international component–sort of like my MO/PM pairing.

      But if I had to pick just one of the 4 stocks I listed above, I’d go with Ford. I bought at $10 and just added more at $16. I think it’s still undervalued here, and I bet there will be another nice dividend bump next year. And they beat on earnings and raised guidance…can’t ask for better than that. The only downside is if Mulally goes to MSFT–I could see a temporary pullback if that happens.

      Also, I like GE too and some of their industrial internet stuff they’re doing too. Perhaps worth adding more to that position.

    • says

      kolpin,

      Interesting perspective there. Funnily enough, Morningstar actually has UL as the cheaper stock of the two based on their valuation technique. I think they’re similarly valued personally, as UL probably deserves a slightly higher P/E based on the growth prospects. However, I still like KRFT and I especially like your strategy of owning both KRFT and MDLZ. That way you own the legacy Kraft and that’s very much like the MO/PM strategy (which I also employ). It’s wonderful to have access to the richest market in the world now (U.S.) and also what should propel great growth going forward (everyone else). Great stuff!

      I’m not so sure about Ford. It might be cheap right now, but I have a personal strategy of staying away from auto and airline stocks specifically. They have just historically been rather poor investments as an aggregate. That’s not to say incredible money can’t be made at the right time with the right company, but as a buy-and-monitor investor it’s tough for me to stomach the cyclical ups and downs. And besides, picking exact winners at exactly the right time isn’t something I’m good at, nor is it my strategy.

      I agree with you on GE, however. I wish I would have bought a bigger position when I initiated an investment with the company. It’s always tough to buy near 52-week highs, but sometimes you gotta bite the bullet when you know the value is there. I still think value is there.

      Best wishes.

  17. Anonymous says

    Hi DM,

    I am a regular reader of your blog from Europe, so I am of course delighted that you are considerung to add a European name to the list.

    I am in the portfolio building phase & just bought some Unilever shares on Monday, IBM and Cisco today. Heineken is also very high on my list.

    All the best & take care!

    • says

      Anonymous,

      Hi! Glad to have you stop by all the way from Europe. Thanks for reading. :)

      It looks like we’re on the same page regarding UL here. I’m biding my time, just waiting for a little dip.

      I like the tech buys. I prefer IBM over CSCO, however. I’m t a bit concerned about the guidance and revised revenue outlook. It looks like a scary ’14 for them. Although I like buying on the dips, the fundamentals look a little shaky right now to me. However, I’m certainly no expert on all things tech. :)

      Best of luck with the purchases. Stay in touch!

      Take care.

  18. Slight Edge says

    DM,

    I have also been watching UL. I bought some DLR after reading your blog a few days ago. Several months ago I bought MSFT after a huge quarterly miss at around 31.50 a share. I am considering buying some CSCO after its big miss today.

    What are your thoughts on CSCO. I am also considering buying some more T.

    Thanks,

    Slight Edge

    • says

      Slight Edge,

      I’m just not sure about CSCO here. I took a look at them in the summer and really liked what I saw. The dividend history is relatively short, but the revenue growth, EPS growth, net income and margins all looked great over the last 10 years. Plus, they have almost $50 billion on the balance sheet. The valuation is very reasonable here A lot of things to like. However, their acquisition history has been sub par and there are also questions regarding management compensation with executive stock options. I think my biggest concern of all is the lowered guidance. A quarterly miss is really no big deal, but a quarter of negative revenue growth and possibly much more is troubling. At that point, I’d have to question whether the fundamentals are still sound or if this is the start of something more sinister.

      DLR, for instance, is still growing – albeit slowly. The fundamentals remained sound throughout my three purchases. CSCO is guiding for negative growth, at least for the visible future. It’s a bit different for me. I’m very cautious regarding CSCO here.

      One bright side to CSCO is that Yacktman is a major shareholder, and he’s a well-regarded value investor. I would never invest based on what someone else does, but that is reassuring.

      Cheers!

  19. says

    I love UL and have been wanting to add that company for a while. I was just hoping for a little more of a pullback. I could just “tiptoe” in and keep averaging my position.

    As for TGT, I’ve been adding that company recently and have finally brought it up to a full position. I’m a little biased with TGT as I shop there over WMT but both are great companies.

    I’ve been loading up on energy companies and they are now a little overweight in my portfolio (mainly BP and RDS.B). I don’t mind going a little overweight and I know the rest of my portfolio will catch up as you mentioned.

    Take care and I look forward to seeing what you buy!

    • says

      AAI,

      Great buy there on TGT. I’ve long preferred WMT (and still do), but the valuation is just slightly better with TGT right now – along with a slightly higher yield. Plus, I’d like to diversify my retailer exposure a bit and TGT is a great opportunity to do so.

      I hear you on energy. I’m also quite heavy on energy right now with CVX, BP, COP and KMI all being significant positions for me. I’m also invested in XOM, RDS.B and PSX. I still really love some of the opportunities here in energy – KMI seems pretty attractive here – but I just need to look at other opportunities right now.

      Best wishes.

  20. says

    DM –
    I’ve been eyeing TGT for sometime eagerly waiting for pullback. I like their expansion plans in US and Canada too. This market seems to be in steroids, we’re not getting any pullback. I’m deploying only 1/2 of my cash at current market levels to build my cash position. I will wait for low 60′s for my entry point into TGT. Lets see when we get that.

    • says

      investlikeafool,

      I’m also deploying capital quite cautiously; I’m not particularly anxious to go out on a spending spree. Opportunities need to be picked off when appropriate, and while I think TGT and UL look attractive at today’s prices I’m still hoping for a slight dip to make it just a bit easier to part with my cash.

      Good luck out there. :)

      Take care.

    • says

      investlikeafool,

      Indeed. I’m hoping it comes down to that ~62 level. I’d definitely be interested in adding to my position at that price. :)

      Let’s keep our fingers crossed!

      Best regards.

  21. says

    warren buffet just announced a nearly $4B stake in XOM, so you’re in good company with building your energy holdings high :) I’ve been building my CVX position lately and even selling long dated puts on it to see if i can build it even bigger down the road for cheaper. Using finviz.com for UL it says the 5 yr est growth eps for UL is 1.4%. usually finviz is pretty accurate, where do you see the 7% 5 year growth that you said in the article? at 7% im more interested. I saw the 1.4% and instantly looked elsewhere. I also bought 100 shares of KMI yesterday, I think KMI is a great buy at these levels. ofcourse i popped 1.5% today so no value stays there for long in this market..

    • says

      Took2Summit,

      Wow! Nice. Looks like WB and I were on the same page regarding XOM recently. I felt XOM was pretty compelling when it dipped into the low $80s. Glad to see the validation. :)

      I found the growth rate for UL from S&P Capital IQ. They predicted a 3-year EPS growth rate of 7%. That jives very well with what they’ve been able to acheive over the last decade. While my ability to forecast EPS growth rates is as poor as anyone else who can’t predict the future, 1.4% seems awfully low for a global powerhouse like UL. I think their success or lack thereof will hinge on how much emerging markets grow from here. While the global middle class is burgeoning, there are still plenty of hurdles to overcome.

      Nice buy on KMI. I’d love to buy more KMI here, but I’m just a bit concerned that it’s already one of my larger positions individually, and energy as sector is definitely fully weighted for me here. On top of that, KMI is highly leveraged. However, the yield and dividend growth rate is unbelievable and just about impossible to replicate anywhere else. Like I said in the article I wouldn’t mind temporarily over-allocating to a position in the short run while the rest of my portfolio catches up, but I’d prefer not to if I can avoid it. While my portfolio is still in full-on asset accumulation mode, if a large position suffers a catastrophic event it can still hamper my progress here. It’s something I go back and forth on.

      Thanks for stopping by!

      Best regards.

  22. says

    I am trying to get more exposure to European companies, but thru ETFs rather than individual stocks as I do not understand them much. So I play is safe.
    Maybe later I might enter the individual European stocks territory. Their reporting system is weird compared to US.

    • says

      Martin,

      Well, I think when you’re investing in foreign companies it’s best to stick to global multinationals that have easy access to reports and have a regular history of rewarding shareholders. Also, it’s probably best to stick to countries that have clear and strict regulations. China, for instance, is out of my realm right now because of their lack of accounting standards.

      Best wishes.

  23. says

    Target operates with significantly higher gross margins i.e. 30.1% compared to its competitors Walmart, which has a gross margin of 25%, and Costco Wholesale Corporation which has a gross margin of 12.6%.

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