Many of you have been interested in knowing which stocks in my Freedom Fund I’d be interested in buying right now if I weren’t already fully weighted.
What’s happened over time is this: I’ve invested heavily in a number of high-quality companies that I believe in for the long term. And I invested over and over again until a large position was built up – as large as I’d ever want that particular position to be.
You’ll probably find this happen to you over time as well if you maintain a fairly diversified portfolio and consistently and aggressively add capital. At some point you’re probably just going to commit as much capital to a specific stock as you’ll ever want to – the growth of the company should allow that position to grow over time, in tandem with the rest of the portfolio and positions you’re building around it.
While it’s a wonderful problem to have, it also creates a conundrum of sorts. Some of you readers out there aren’t as far along in terms of portfolio construction/value as I am. And so those opportunities I’ve already capitalized on in terms of aggressively adding capital until I couldn’t anymore have disappeared off my radar to a degree, which means I’m not really discussing them much any more. However, many of you are still in the early stages of building up your portfolio, which means your universe of potential stocks is much larger than my own. While some stocks have probably permanently fallen off my radar, that doesn’t necessarily mean they should be off of your radar.
Well, I’m going to discuss a few stocks that I’d be buying today if I didn’t already have such large positions. So this is basically looking at the fundamentals, qualitative advantages, and valuations as they stand right now and saying that, if my portfolio and these positions were 1/2 their current size or less, I’d very likely be buying shares in these companies.
What you see below are four stocks in my portfolio that I’m not currently interested in buying because of my exposure, but that I think those just starting out or maybe not as far along in terms of portfolio construction/value should consider. Keep in mind that while these picks are fairly diverse in terms of sector allocation, this doesn’t mean you should build a portfolio consisting of just these four stocks. Rather, I think all of them are attractive picks right now based on their individual quality and valuation, and should be strongly considered as part of a larger and diverse portfolio.
Johnson & Johnson (JNJ)
Johnson & Johnson researches, develops, and markets a number of products in the healthcare space. They are currently the world’s largest and most diverse healthcare company, with 265 operating companies located in 60 countries.
Perhaps my favorite stock of all. About 43% pharmaceuticals, 37% medical devices, and 20% consumer products; it’s 100% dominant.
Just some quick facts about Johnson & Johnson: 70% of fiscal year 2014 sales came from the #1 or #2 global market share position. They have 24 brands or platforms that generate over $1 billion in sales each. And they’re one of only three US-domiciled companies with a AAA credit rating.
Healthcare spending is likely only to increase as the world gets bigger, older, and richer. The long-term tailwinds are clearly evident here, and JNJ’s diversification is unlike any other company in the industry. They’ve increased their dividend for the past 53 consecutive years, which kind of speaks for itself. But it’s not just the track record; they continue to grow the dividend at a very robust rate even 53 years in – the ten-year dividend growth rate is 9.7%, with the most recent increase north of 7%. The stock yields 2.97% here, so you’re getting a pretty attractive yield along with that healthy growth.
The stock trades hands for a P/E ratio of 18.11, which is just slightly higher than that of its five-year average of 17.50. Growth over the last decade has been slowed somewhat by currency concerns, recalls, and litigation. But the company’s dominant position ensures the strong likelihood of JNJ’s increasingly profitable position for many years to come. Morningstar has it fairly valued here and so does S&P Capital IQ. Paying a fair price for a slice of a company like JNJ is never a bad idea.
I currently have 100 shares of JNJ. It’s my first-ever $10,000 investment. Even at 7% annual growth, that position should roughly double in value in a decade. So it’ll remain a fairly large position for some time. But if I were in a different place, I’d be very interested in this stock here. After all, it’s such a large position because I loaded up aggressively. I’d do it the same all over again if I had to.
Philip Morris International Inc. (PM)
Philip Morris International Inc. is the world’s largest publicly traded tobacco company, manufacturing and marketing a variety of tobacco products. Their products are sold in more than 180 countries, excluding the US.
This was my best long-term idea at the beginning of 2015. Still is. The valuation remains extremely compelling even while the company continues to surprise time and time again.
Their products are addictive, the economies of scale are huge, and the pricing power is huge. Due to the addictive nature, the demand for PM’s products remain largely price inelastic. Excellent profitability, including huge margins, are a hallmark of this business (and other large, high-quality tobacco firms). And they sport a 28.3% share of the total international cigarette market, outside of the US and China with the world’s #1 brand in Marlboro.
PM’s volumes continue to decline, but new potential growth categories like electronic cigarettes and reduced-risk products give new life to the industry. The strong dollar has weighed on PM (and other global firms), but it’s been especially notable in their results because they have no US sales. Adjusted diluted EPS for FY 2014 would have been up 7.8%, after factoring out currency. Currency-neutral growth remains quite strong, underscoring the quality of the business even while those who think the current currency situation will be extrapolated out forever avoid the stock. But they’ve increased the dividend for the past seven consecutive years (ever since being spun-off from Altria Group Inc. (MO)) with a five-year dividend growth rate of 12%. Couple that growth rate with a yield of 4.75% and you can see why this is an attractive investment.
PM is available for a P/E ratio of 17.72, which is based off of depressed earnings on the back of a strong dollar that’s hurting profit. Nonetheless, I think there’s a very compelling investment case here. Just keep in mind that profit will remain vulnerable to the dollar. But if you wait until currency turns around, it might be too late to initiate a position at a solid value. Morningstar has PM fairly valued at $92.00, while S&P Capital IQ has it fairly valued. Again, fair value or better for a quality business with an addictive product seems like a pretty good bet to me.
I own 115 shares of PM, so it’s just completely off my radar… permanently. But that doesn’t mean it’s not a good investment opportunity for those with the capital and space in their portfolio. I bought aggressively over the years, with my last purchase not far off from where the stock is priced at now. Of course, you’ll have to make sure it fits with your ethics.
Wells Fargo & Co. (WFC)
Wells Fargo & Co. is one of the four largest banks in the US, with diversified financial offerings across retail, commercial, and corporate banking services.
I just recently penned an article on WFC, pointing out that Warren Buffett continues to buy the stock even though it’s the largest position in Berkshire Hathaway Inc.’s (BRK.B) common stock portfolio. Why do you suppose that is?
Well, perhaps it’s the fact that they have access to over $1 trillion in core deposits that acts as an extremely low-cost source of capital? That kind of capital allows WFC to seek out attractive returns without taking on a lot of risk. The bank has more than 70 million customers that rely on them for services, and their cross-selling ability is unique in the banking industry. Banking is changing, but it’ll likely always remain ubiquitous and necessary. And I certainly see a lot to like here across the fundamentals.
As far as the dividend goes, they’ve increased it for the past five consecutive years after cutting it during the financial crisis. I think they’re doing a pretty good job righting past wrongs with a five-year dividend growth rate of 22.5%. A yield of 2.67% isn’t the largest in the industry, but it is attractive and well in excess of the broader market. I happen to believe that WFC will continue to grow that dividend for years to come with the potential of rising rates, a low payout ratio, and scale they never had before the crisis. Even better, their revenue mix is nicely diversified between interest income and non-interest income.
WFC’s P/E ratio is 13.73, which is above its five-year average. But this stock spent large parts of that time frame at a rather cheap valuation. Both Morningstar and S&P Capital IQ think the stock is 10% undervalued right now. I recently valued it a bit lower than that, but it’s certainly not expensive right now. I don’t think it’s a steal, but having Buffett and Berkshire on your side doesn’t hurt. And, hey, you’d have me on your side as well!
My position of 90 shares is valued a bit over $5,000 right now. It’s certainly not as large a position as PM or JNJ, but, in my view, the risks involved in investing in a bank are quite different, and so I feel comfortable maintaining a relatively smaller position there. I’m not saying I’ll never buy more WFC stock, but it’s just not on my radar right now as I continue to build up other positions. There’s a good chance that the 90 shares I currently own are all I’ll ever own.
Kinder Morgan Inc. (KMI)
Kinder Morgan Inc., through it subsidiaries, owns and operates a large network of pipelines and terminals that allow it to transport, store, and process energy products like natural gas and crude oil.
I last purchased shares in KMI in December 2013, so it’s been off my radar for some time now. But that doesn’t mean it’s not a great long-term investment, even now.
With more than 80,000 miles of pipeline, they are currently the largest midstream energy company in the country. And that infrastructure is incredibly valuable, which allows KMI to operate a “toll booth” type company where it collects fees when products run through its pipes.
KMI is one of the most interesting, dynamic, and potentially lucrative dividend growth stocks one can possibly purchase. Not far past its purchasing of all underlying partnerships and entities so as to merge into one company, the company continues to amaze. Distributable cash flow was actually up in the first quarter of fiscal year 2015 versus the same period of fiscal year 2014, representing the quality of the business, value of the infrastructure, and the fact that a large portion of their revenue is fee-based. The stock has increased its dividend for the past five consecutive years with a dividend growth rate of 31.9% over the last three years. And they continue to reiterate guidance relating to dividend growth of 10% annually through 2020. Not too many companies out there put themselves out there like that in terms of forecasting that far out and at that kind of aggressive rate, especially when the stock already yields a very attractive 4.61%.
The stock is difficult to value because of its MLP legacy. But a dividend discount model analysis with a 9% discount rate and a conservative long-term dividend growth rate of just 6% gives me a fair value of just under $68. Morningstar gives it a fair value of $43.00 and and S&P Capital’s 12-month target price isn’t too far above that. Either way, I think this stock is rather attractively valued here.
I haven’t bought shares in more than a year now, and I don’t anticipate buying shares at any point in the future. It’s currently my third-largest position and it’s in a sector (Energy) that I’m already overexposed to. Nonetheless, this is a great stock with a very attractive yield, incredible dividend growth guidance looking out over the next five years, and a network of infrastructure that is unrivaled. And there are few better examples where management’s and shareholders’ interests are better aligned – Richard Kinder, the current Chairman and CEO, owns more than 200 million shares (the largest single shareholder) and lives off of his dividend income rather than a salary (he earns just $1/year in salary).
So what you see are stocks that I would be buying right now if I weren’t already as heavily allocated to them as I’ll probably ever want to be. They, as a group, represent a substantial portion of my portfolio. And I think they’re all high-quality business with excellent long-term growth prospects trading for fairly attractive valuations right now.
Not only that, but they’re a diverse group in terms of sectors of the economy, growth, yield, geographical exposure, and business models.
I almost threw up Norfolk Southern Corp. (NSC), but I think there’s still a chance I might add a few shares there before I’m all done. We’ll see. I do think NSC is attractively valued here and would make an excellent investment. I’m just busy buying up Union Pacific Corporation (UNP) right now.
And WFC is borderline. I’m not saying I’ll never add more, but it’s somewhat unlikely. I can, however, say that I find it strongly improbable that I’ll ever buy more JNJ, PM, or KMI. And that’s no indictment against them. Just a reality of a good problem to have in that I’m all stocked up there.
I hope those readers who were asking me to put this together find value in it. I plan to revisit this topic on an annual basis as more positions become filled up over time as the portfolio grows. I suspect I’ll have at least a couple of names to discuss in 2016 if I’m fortunate enough to continue investing at my recent pace.
Full Disclosure: Long JNJ, PM, MO, KMI, NSC, and UNP.
What about you? Any stocks in your portfolio that you’re unlikely to buy more of at any point in the future?
Thanks for reading.
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