Online Journal for the Moose Pond Investors Club

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.

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