Online Journal for the Moose Pond Investors Club

American International Group (AIG)

SSG and PERT | Google Finance | Company Website

corporate logo We purchased an initial position in American International Group on June 13, 2007.  This replaces Capital One Financial in the financial sector of our portfolio.  Here is the stock selection guide we used for the purchase decision.


Microsoft (MSFT)

SSG and PERT | Google Finance | Company Website

corporate logo We purchased an initial position in Microsoft on June 13, 2007. Here is the stock selection guide we used for the purchase decision.


Portfolio Transactions

We made the following changes to our portfolio:

  • Added to our positions in Bed Bath & Beyond (BBBY) and Amgen (AMGN).
  • We sold Commerce Bancorp (CBH) and Capital One Financial (COF). There will be replaced with American International Group (AIG) and Wells Fargo (WFC). That will keep the same exposure to financials but with better stocks that have a higher projected average return.
  • We purchased Microsoft (MSFT) and SAP AG (SAP).
  • We are replacing Occidental Petroleum (OXY) and ChevronTexaxo (CVX) with Conoco Phillips (COP) and Helmerich & Payne (HP). These keep about the same exposure to the energy sector but split between a mega cap oil company and an oil services company. Both companies pay dividends (COP 2.1% and HP 0.6%).

All of these trades together will increase the overall quality and projected average return of the portfolio. See Manifest Investing dashboard. We are still a little ahead of the S&P 500 for the year.


Proposed Portfolio Changes

Between our cash position (4.5%) and funds temporarily invested in Vanguard’s Total Market Index ETF (9.3%), we have sufficient funds to take new positions in up to four companies. Here are several suggestions.

Adding to Existing Positions. It is always a difficult question whether to add to existing positions or buy new companies. Look at our Manifesting Investing dashboard. Of the stocks that account for less than a 4% position in the portfolio, three companies show a good projected average return (PAR > 13.7%) and high quality (quality rating > 65). They are AMGN, BBBY, and GYI. We could add to these positions, perhaps adding the equivalent of 1% of the total portfolio value to each.

Analysts have reassessed Amgen’s drug pipeline and have reduced their earnings projections for Amgen. As a result, the price has declined about 20% this year. With the bad news largely priced in, Amgen may be a bargain. (Of course, I still have the scars from catching other falling knives.)

A Stock to Sell or Exchange. Commerce Bancorp has been a good performer in our portfolio. It has appreciated at an annualized rate of 14.3% since we acquired it in August 2003. However, the fundamentals for CBH seem to be declining. Its return on assets (ROA), one of the key measures of a bank’s performance, has declined to 0.70%. (The ROA was around 0.90% when we purchased CBH.) Margin on net interest income, the return it makes from lending, has also declined. Year-to-date the price is down 3.5%. While declining prices should never be the reason to sell a company, declining fundamentals are. The declining price is probably confirming what we see in the fundamentals. Here is a current stock selection guide for CBH.

The SSG for CBH does not scream “sell” rather it is a “hold.” However, there probably are better opportunities in the financial sector. Two companies to consider as replacements are American International Group (AIG) and Wells Fargo (WFC). WFC pays a 3.2% dividend and has a ROA of 1.7%. For a number of different reasons, AIG’s price has remained relatively static for the past three years while earnings have continued to grow. Look at the two stock selection guides.

Stocks to Consider Buying. The portfolio might benefit from a little more exposure in the technology sector. Two quality large-cap stocks with relatively high PAR are SAP and Microsoft. Microsoft has a near monopoly position in a number of different PC market niches including office products. SAP is probably the last major competitor to Oracle for enterprise software. Like Oracle, SAP has captured a large installed base of customers who annot easily or inexpensively change. Comparing stock selection guides for SAP and Oracle, SAP seems to be the better bargain now. Here are the stock selection guides for Microsoft and SAP.

The final stock to consider buying is General Electric. The stock price has moved sideways, while earnings growth slowed to 7% over the past five years. Value Line projects 7% sales growth and 12% earnings growth over the next 3-5 years. GE’s foreign sales are a plus. Here is a stock selection guide for General Electric. Boring, yes, but the 3.2% dividend, international exposure exposure, financial strength, and steady earnings growth make it a solid core holding.

Summary. Here are the various proposals.

  • Add to existing positions in AMGN, BBBY, and GYI when these stocks are in the buy range shown on the stock selection guide. Currently AMGN and BBY are in that range.
  • Replace Commerce Bancorp with either American International Group or Wells Fargo.
  • Buy one or more of the following: Microsoft, SAP, and General Electric.

Investing Podcasts

With the advent of digital broadcasting via the Internet, you can find a growing number of investment-related programs. However, they vary widely in quality and content. Here are two excellent broadcasts available in MP3 format.

The Wise Investor Program hosted by Randy Beeman of the Wise Investor Group (affiliated with Ferris Baker Watts) airs on WMAL (630 AM) each Sunday in the D.C. area. This program, started by Ric Malone, has been broadcast for 17 years. It follows a value oriented approach to building a portfolio. You can download the program from the WMAL website the day after the regular broadcast.

Your Money with Chuck Jaffe is another excellent investment program. He broadcasts and records a daily one-hour radio program. He interviews a wide range of interesting guests who discuss stocks, mutual funds, and personal financial planning. MarkeyWatch posts an edited 30-minute version of the radio show. From both technical and content perspectives, this is high quality broadcast. You can also use Apple iTunes to download the MarketWatch version. The full one-hour program can be found on Chuck Jaffe’s website, http://www.yourmoneyradio.net.

If you download the free Apple iTunes software, you will discover hundreds of interesting podcasts on a wide range of topics (besides investing). Install iTunes on your PC and get an MP3 player. Your walking, exercising, and driving around town will take on a new dimension.

While the iTunes program was designed for the iPod, you still can use it to download and organize podcasts for use with any MP3 players. (Both Mac and PC versions of iTunes are available.) It won’t automatically sync with a non-iPod player but the work around is easy, just manually drop and drag the files to your MP3 player. It you have an iPod, it is seemless.


Finding Outliers in a Portfolio

Our lowest PAR, highest P/E stock is FDS

One of the activities in portfolio management is to look for “outliers” in a portfolio. That is part of the continuous process of improving a portfolio. Comparing the projected average return, P/E ratio, projected sales growth, projected revenue growth, and quality metrics for each stock in a portfolio, can help spot outliers. To borrow an airborne term, at least one stock will be standing in the door, ready to jump. Outliers make good candidates for sale when a better opportunity comes along.

The dashboard for our portfolio shows the projected average return for each stocks. Factset Research Data (FDS) is the outlier, with the lowest projected average return (6%) of all our stocks except ChevronTexaco. Looking at the portfolio summary, FDS has a current current P/E of 34 making it the highest P/E stock in the portfolio.

FDS has been one of our winners, +12.3% YTD. However, its run-up in price has reduced its projected average return (PAR) to about 6%. (See updated stock selection guide.) Value Line rates its financial strength B++ and earnings predictability 100. Morningstar rates it “three stars” meaning it is fairly priced.

So the dilemma is do we “let the winner run” or “take profits.” It is probably a hold at this point. If the PAR falls any lower, however, it will be candidate for replacement.


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