A Portfolio Update And Two Powerful Insights Every Serious Investor Should Read

Portfolio Update

Yesterday I made some adjustments to my portfolio and the portfolios I manage and I just wanted to update those positions.

Personal Portfolio and Portfolios I Manage:

• Bought Strattec Security Corporation $STRT

Personal Portfolio:

• Sold Altria $MO up 18%.
• Sold Philip Morris $PM up 24%.
• Sold Intel $INTC up < 1%, could have sold a while ago up 30%, doh!

All sold positions are after fees but before taxes.  I never bought any of the above three positions for the portfolios I manage and I bought Altria, Philip Morris, and Intel before doing any kind of valuations or any kind of in depth research so I am a bit fortunate to end up anything in those positions.

I said a couple months ago that I planned to hold the above positions for the foreseeable future because I felt that I could have my results compound well over time in all of the three companies.  I still think that is true for all of the above companies but have still decided to sell them all.  Lately I have been gaining confidence in my abilities to analyze companies, and I now think that I am at the point where I am getting pretty good at analyzing companies and think I can find better opportunities in the smaller mid to nano caps that I am concentrating on now.

Also as Red reminded me of the other day, why would I try to compete with the millions of people who are invested in and analyze those massive companies when I can find less competition, potentially less efficiency, and more upside, in the much smaller companies.

After selling those companies to free up cash for future opportunities, my current portfolio stands as follows, ranked by position size.  Portfolio does not add up to 100% because of rounding:

1. $VIVHY.PK-28% of portfolio.
2. Cash-26% of portfolio.
3. $STRT-16% of portfolio.
4. $MAIN-11% of portfolio.
5. $CMT-8% of portfolio.
6. $DOLE-8% of portfolio.

Two Powerful Insights Every Serious Investor Should Learn From and Reread.

Fundoo Professor-Presentation On Moats And Floats.

The Red Corner Blog-Kfaftwerk; A look at economies of scale and how Wal-Mart changed its industry and made a ton of money.

I hope you enjoy the above links as much as I have.

I have already started researching another company and tomorrow I will post some links and ask your advice on something I have been thinking about quite a bit lately.

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Portfolio Update and A New Dole Article Planned

I just sold my entire position in Taseko Mines (TGB).  TGB released its most recent quarterly report yesterday and yet again it was a disappointment.  It seems that ever since I bought into this company every quarter has been a disappointment at least on some level with excuses being given by its management for why it is not performing as good as it could.  Also of note is that TGB had to resubmit its New Prosperity mine assessment report at the end of September and now a decision will not be made until sometime in 2013 about if the mine will be approved or not.  The original plan was to have a decision by this month which was the only reason I had even held onto it this long.

This is yet another company I bought before doing any kind of valuations and only minimal research and again I paid the price with a total loss of 47%.  The only thing that again saved me was that at least I was smart enough to make my positions pretty small when I first started out so I didn’t lose a ton of money.

My portfolio is now 23% in cash and I am down to owning stock in only six companies. After clearing out the only remaining company that I knew for sure I was going to sell at some point, I now only own stock that I think are good companies and have the potential to continue to compound into the future.

The three remaining companies I own from before doing valuations and anywhere near the amount of research that I am doing now: $MAIN, $MO, and $PM, are all by my estimates either fairly valued or overvalued by quite a bit and I may sell stock in each of these three companies if I detect deterioration in any of their businesses.  If I do not see deterioration in the businesses I will most likely hold these companies for years because I think each of these companies will compound their results well into the future, unless of course I find a better company to put my money into.

The three companies I have bought into since doing valuations and the amount of research I am doing now are: $CMT, $VIVHY, and $DOLE.  At this point I still think that CMT and VIVHY are undervalued and will let you know if I decide to buy any more stock in either of those two.

This gets me to Dole.  I got a request from one of the readers of my original Dole article that I posted on Seeking Alpha who liked my original analysis series on Dole, Chiquita, and Fresh Del Monte and he was asking if I would do an updated valuation and analysis article on Dole now that it has sold some of its assets and is able to pay off most of its debt.

The reader asked if I would do an updated article giving my thoughts on how Dole stands now after it sold some of its assets and paid down debt, if I still think that it is undervalued, and what I think of its operations going forward now that it eliminated its biggest problem.

I have learned a lot since that time and hope to use some of my new knowledge to see what I think about Dole now, if I still think they are undervalued after rising in price as much as 75% at one point and currently still being up 47% since I originally bought into it.  I am researching its land, other assets, and history more fully now in preparation so that when its next quarterly report comes out on November 15th I am ready to value the company with updated numbers and post the article shortly after that.

In the mean time I will continue to post any updates and links that I think contain knowledge.  I may also every once in a while ask some questions of you since I know some of you are more knowledgeable in certain areas than I am.  Since I am planning on adding some new things to this article I may need some feedback making sure I am applying the new techniques correctly.

Philip Morris Brief Thoughts and Valuations

Philip Morris International’s (PM) premium positioning of its strong brands, global scale, and addictive products give the firm a wide economic moat, in our opinion. While some of the company’s more mature markets are experiencing lower cigarette demand, we expect that the company’s Asian operations will continue to be an engine for the firm’s future growth.

Philip Morris International is the world’s second-largest tobacco company, behind only China National Tobacco, and holds 28% of the non-U.S./non-China global market. The firm owns seven of the leading 15 international brands. Marlboro, the company’s flagship brand, accounted for about one third of total volume in 2011. Other key brands include: L&M, Philip Morris, Bond Street, Chesterfield, Parliament, and Lark.

Both of the above descriptions were taken from Morningstar.

Asset Valuation

• With intangible assets and goodwill $11.73 per share.
• Without intangible assets and goodwill $8.34 per share.

EBIT and Net Cash Valuation

• Philip Morris currently has -$7.59 in net cash per share.
• 5X is $42.07 per share.
• 8X is $65.97 per share.
• 11X is $89.86 per share.
• 14X is $113.76 per share.

Revenue and EBIT Valuation

• Low estimate is $27.09 per share.
• Base estimate is $49.29 per share.
• High estimate is $71.50 per share.
  

Operating Cash Flow and Free Cash Flow Valuation

• Low estimate is $76.24 per share.
• Base estimate is $111.43 per share.
• High estimate is $146.62 per share.

Debt Ratios

• Current assets to current liabilities=0.92
• Total debt to equity is not applicable because PM has negative equity.
• Total debt to total assets=58%.

As with Vodafone, Philip Morris’ valuations are all over the place.

Philip Morris was spun off from Altria so that it could get away from the massive amount of litigation that is involved in the United States tobacco industry. Foreign countries are increasingly bringing litigation and sanctions upon tobacco companies that operate in their  respective countries such as Australia and Norway, but at this point it does not look to be a massive problem for PM.  It is something to watch for continuing into the future however as the proposed plain packaging could really hurt PM’s results as it would deemphasize the Marlboro brand and packaging.

Knowing what I know about its massive competitive advantages, which are generally the same as those I outlined in my Altria article, its risks, which are also generally the same as Altria’s, I would use the 11X EBIT and cash valuations, $89.86 per share, as my estimate of Philip Morris’ intrinsic value.  Philip Morris is currently selling at $89.48 per share meaning that there is absolutely no margin of safety.  My current cost basis for PM is $69.38 per share, up 27% since I bought in June of 2011.

Again, PM is one of the companies I bought before doing any kind of valuation so I am very fortunate to be up anything at this point. Philip Morris has gigantic competitive advantages, huge margins, creates a lot of free cash flow, pays a very good dividend, and buys back its shares.  My main concerns with PM long term are the same as Altria, a lot of debt, pensions, etc.

With my cost basis being so low I plan to hold onto my PM shares for years and hopefully decades and hope to have my investment compound well into the future.