Portfolio Update for July 2019

Introduction

Today, before presenting the latest portfolio structure, I want to leave some words about a sensitive subject for me: valuations. It is indeed a sensitive and closely discussed topic among many DGI people. Especially in times when markets are constantly reaching new highs, it is the idea of finding undervalued stocks that is getting more and more popular. While there is nothing wrong about seeking for value deals, focusing too much on the price can lead to an unpleasant drawback, however. I’m talking about the risk of missing out high-quality investments just because we classify them as overvalued.

Let us be honest. Can you think of stocks that you wish you have bought but you didn’t simply because you felt the price was too rich? I can. Many of them. Valuations kept me out of owning wonderful businesses from the very start of my investing journey. In fact, my deepest regrets are not the “bad” investments I’ve made but the “good” investments I’ve missed out. And the funny thing is that those “good” investments kept raising regardless of the so obvious overvaluation. Actually, this finding wasn’t that funny for me. It was rather painful since I missed the opportunity to invest. The more I think about it, the more I change my view on that topic. I simply don’t want valuations to keep me out of investing in quality companies anymore.

With this, let me provide you with a brief example of how ignoring valuations can be a good thing. That example is Starbucks (SBUX). I own SBUX in this portfolio since July 2018. At that time I actually hesitated to invest in this company. Not because I didn’t like the business but because of my concerns regarding the high valuation. According to many metrics, SBUX was simply overvalued. Nevertheless, I’ve decided to give it a go. This is what happened since then. Towards the end of 2018 the price appreciated by almost 35%. As a result, even more experts started to call it overvalued and recommended to wait for a better entry point. Well, that makes sense, doesn’t it? Let us see. Fast forward another five months, May 2019, and SBUX is up by more than 20% since the beginning of 2019.

When SBUX was overvalued at the beginning of the year and even more in May, how about now? What do you think? On the 25th of July, Starbucks has announced another EPS and revenue beat, sending the share price in the all-time high territory. As of today, SBUX is up by 112% in this portfolio. It is the first stock that has crossed the 100% capital gain mark – dividends not included. I would have never bought it if I was waiting for better prices. And SBUX is not an exception in this regard. There are many comparable examples out there. MSFT, NEE, ABT..you name it. I have let all those opportunities go. Today, I strongly believe that successful companies will outgrow any valuation that we assign them in the present. If they keep raising earnings and beating expectations, in which direction do you think their price (and dividend) is going to move?

High-quality stocks, despite the “fact” that they look expensive, tend to go even higher. Here is an important lesson I’ve learned: if you plan to build your portfolio, investing small amounts for decades, don’t let today’s price tag be the most important thing. If you like a business, go for it. Own it. Don’t hesitate. The price that you think is high today, will look like a bargain in 10 to 20 years from now. Think about it. But enough of valuations for today. Let’s have a look at the latest portfolio snapshot.

SF Portfolio Snapshot

As of July 26, 2019, I’m invested in 31 companies.
The SF Portfolio has a total value of €59,169 ($65,973) and is expected to generate €1,860 ($2,075) in pre-tax forward annual income.

(Equity Allocation: July 2019)

The portfolio market value keeps climbing and reaching new highs almost every week. If you own a basket of high-quality dividend stocks, the chances are high that you experience the same thing. Furthermore, the earnings season serves as a big catalyst for price movements. And here the overall picture remains positive. Many companies have reported decent earnings lately, beating expectations on both, EPS and revenue side. Below I’ve written down some recent examples from this portfolio:

  • Coca-Cola (KO): EPS beat by $0.02/Revenue beat by $140M. Shares are up by 5.8% since the earnings call
  • Texas Instruments (TXN): EPS beat by $0.03/Revenue beat by $70M. Shares are up by 9.3% since the earnings call
  • Philip Morris (PM): EPS beat by $0.13/Revenue beat by $280M. Shares are up by 6.1% since the earnings call
  • Starbucks (SBUX): EPS beat by $0.05/Revenue beat by $150M. Shares are up by 10% since the earnings call

So companies continue to report strong earnings and the market is reacting favorably to it. As long as this is the case, I will continue to focus on strength. The word “strength” relates to those businesses that continue to raise revenues/earnings and beat expectations. The future looks good for them and that is the reason I want to have those winners in my portfolio.

Top 10 Holdings

(Top 10 Holdings: July 2019)

Speaking about portfolio and winners, I would like to give an update on the Top 10 holdings (by market value). As the overall market is moving, the Top 10 list is subject to a constant change. In regards to total return, some stocks are doing well, while some others are rather struggling. This is normal. As long as the overall portfolio is progressing, all is good for me. Anyway, I don’t put too much focus on total return numbers. The reason for this is simple: A great looking total return doesn’t say anything about how well I’m doing in relation to my overall goal of building a reliable and growing income stream.

A position can be up by 80%, but if it’s not big enough, I won’t be too euphoric about the capital gain. On the other side, if a position is up by only 25%, but it’s a position of size, I’m going to welcome it with arms wide open. So to achieve my cash flow goal, I need to keep building the positions. It is the share count that is going to provide me with more income; not the total return percentage.

JNJ & SBUX

Back to the Top 10 list. What were the major changes in the last month here? Firstly, I have to start with my two largest positions: Johnson & Johnson (JNJ) and Starbucks (SBUX). As you can see in the TOP 10 table, these two companies show a contrary performance development. While SBUX keeps firing on all cylinders, delivering a YTD total return of 55%, JNJ is struggling with a YTD total return of only 2.74%. For comparison, the S&P 500 (SPX) has a YTD total return of 20.5%. This picture remains unchanged when we switch to a shorter period of one month:

(1M Total Return: SBUX and JNJ)

SBUX (+18.23%) is massively outperforming the index (+2.86) while JNJ (-6.14%) keeps struggling. As a consequence, both companies are almost equally weighted in this portfolio today, 6.85% VS. 6.29%.  However back in April, JNJ used to be my largest holding by a wide margin. The market decided to change it and that is ok for me. I have no interest in trimming SBUX and taking some profits. Why should I? As stated above, I want to keep building share count to meet the cash flow goals. Furthermore, SBUX has been a winner so far. I want to keep the winners since they usually have a tendency to keep winning going forward. On the other hand, I have no plans to increase the stake in JNJ either. Although JNJ is my all-time favorite company, it is a double-weight position in this portfolio already. A full position is €1,875 ($2,085).

AVGO & TXN

Another change occurred in the technology sector. Both of my semis, AVGO, and TXN, have managed to re-enter the TOP 10 list in July. AVGO shares experienced some volatility, after the announcement that the chipmaker is interested in buying the security software vendor Symantic (SYMC). Although AVGO’s stock price has recovered recently, I expect the volatility to stay as long as the uncertainty about this deal is on the table. My second semiconductor, TXN, simply knocked it out of the park by reporting strong Q2 earnings. Both companies, AVGO and TXN, have also performed better than the overall index (SPX), as you can see in the chart below.

(1M Total Return: AVGO and TXN)

Summary

It feels like a deja vu to see the portfolio market value raising every month. It is a good feeling on the one hand. However, on the other hand, it becomes more and more difficult to strike good value deals. Personally, I have decided to prioritize strength and quality over valuation. It is not that I stopped to care about the price at all. But I’m building this portfolio by investing small amounts and I have decades of investing in front of me. Today’s price won’t matter that much in 20 years from now. So I don’t want all that wonderful businesses to slip through my hands just because I was waiting for slightly better prices. Much rather, I want this portfolio to be filled with strength and quality. This is the highest priority.

8 Comments

  1. Harsh July 28, 2019 at 5:22 pm

    The same mindset I having recently ”Wait and get discounted price’. As you said, investing small amount everytime won’t bother us about price. Thanks.

    Reply
    1. Snugfortune July 28, 2019 at 11:58 pm

      That’s the point.
      If you invest small and invest often, building quality positions up in size step by step, then today’s price shouldn’t be the most important thing to worry about.

      Reply
  2. divrider July 28, 2019 at 6:07 pm

    I like your reasoning. But it’s really hard to implement for myself, as I have the tendency to look for “cheap” stocks. The result is obvious: I’ve accumulated many “dogs” (GILD, MO, CVS, KMI, etc.). The last time it was easy to shop for high quality companies was end of last year. But waiting for a market pullback isn’t a good long term strategy for Dividend Growth Investing.

    For a consistent accumulation of quality companies, your approach is much better. Young Dividend is following the same strategy and the results are already visible.
    That’s one of the main reasons I like the investment blog community – to challenge my own vision/strategy and compare it with others.

    Keep up the great work!

    Reply
    1. Snugfortune July 29, 2019 at 12:55 am

      Great comment, Divrider! Thanks!
      I hear you when it comes to implementing that approach. I still struggle with it as well. I think what makes it hard to implement is that it goes against our conventional beliefs.
      Buying high, simply doesn’t feel right and so we escape into the waiting mode. Waiting, however, increases the risk of never owning some quality companies and also missing out the benefits of the compounding effect. I’m not willing to risk it. Especially, when considering that I invest small amounts and have a long period of investing in front of me. Of course, for someone who is investing large amounts of money, the picture might look different. Furthermore, it also depends on the age, goals and market conditions. So no black and white painting here.
      P.S. Young Dividend: I do like his approach. YD’s logic is sound and he seems to care little about valuations. And look at his portfolio. A lot of high-quality positions of size! The results speak for themselves. It was acutally him and a guy who goes by Chowder on SA, who inspired me to challenge my beliefs. I couldn’t agree more with you, that putting our own views/beliefs under review is a good thing to do.

      Reply
  3. Engineering Dividends July 28, 2019 at 9:52 pm

    Well said, SF. That’s a strong top 10, too… well diversified.
    Keep adding the best stocks you can and prepare to reap those future rewards.

    Reply
    1. Snugfortune July 29, 2019 at 9:29 am

      Thank you, ED!
      Adding great stocks, step by step, will unavoidably lead to future rewards.
      Your PF is the best proof that it works.

      Reply
  4. PassiveCash July 28, 2019 at 10:37 pm

    Great points. Sometimes you gotta pony up for the best businesses. At the same time watch out for value traps. I’m a fan of your portfolio, some great companies in there, several of which I’d like to own.

    Reply
    1. Snugfortune July 29, 2019 at 9:49 am

      Thanks, PC!
      I fell into the value trap several times in the past. So I’ve decided to ajust my priorities.
      Today, QUALITY comes first, VALUATION second. It used to be the other way round before.
      For me, the new order works magic. I’ll stay with it.

      Reply

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