Investing Ideas: February 2018
Most of the time, I simply blog about the investments I’ve made after the fact. Usually I report the new investment purchases (or sales) as part of my regular monthly updates. In the past, I haven’t shared my “investing ideas” currently under consideration.
This is about to change.
When I see bloggers posting about their favorite investing ideas, I generally enjoy those posts — so I figured “Why Not? If I enjoy those investing posts, other people might as well!” This is the concept behind today’s post, and the reason why I’m giving it a shot.
Please consider this post an experiment — if you like the concept, please let me know in the comments. If you hate it, please let me know in the comments as well. If I get enough positive interest, I’ll keep doing more of these posts in the future.
So, without further adieu — here are my favorite investing ideas for February 2018!
LyondellBasell
LyondellBasell (Symbol: LYB) is a global manufacturer of plastics, chemicals, and fuels. They’re headquartered in London, but have operations all over the globe. They produce a huge variety of chemicals and polymers that get used in daily life. The chemicals business is a “slow growth” industry but has historically grown slightly faster than GDP. This consistent growth looks set to continue over the next 5 years.
The stock has recently fallen from it’s 52-week high to currently around $110/share. The shares are starting to look attractive again. At the current price, the stock trades at a PE of 8.97 and has a dividend yield of 3.36%. Earnings are a little inflated because of recent tax-reform changes.
Technically the company is headquartered overseas, but the dividends are fully qualified for lower dividend tax rates.
I first purchased share in LYB over a year ago, and it’s been a good ride. I’ve been consistently impressed by how well the company is managed. It’s not a rocket ship investment, but earns good returns on capital. The company has opportunities to grow, and rewards shareholders adequately. If share prices fall further, I’m interested in picking up more shares.
Wells Fargo Advantage Multi-Sector Income Fund
The Wells Fargo Multi-Sector Income Fund (Symbol: ERC) is a closed-end “income fund” that pays monthly dividends. Currently the fund sports a 9.9% dividend yield. The fund generates this impressive yield using 27% leverage to invest in corporate bonds, foreign government bonds, bank loan securities, and foreign bonds.
Leveraged investing isn’t something I would normally consider doing myself, but in this case the fund is very well diversified. Borrowing at 2% and then lending it 8% makes a certain amount of sense if the leverage is reasonable, and the investments are diversified. Similar to a bank.
The fund currently trades at a 7.76% discount to NAV. Probably this is because the fund distributes slightly more cash than it earns, causing NAV to slowly sink. Real returns are probably closer to 6% if I account for the return of capital over time. The expense ratio is 1.22% plus a 0.55% interest expense, for a total expense ratio of 1.77%.
While the expense ratio is pretty high, I’m looking to replace some lost income from recent preferred share redemptions. High yields are hard to find right now. Perhaps a leveraged income fund like this one could be a way to do it.
Bank Of Nova Scotia
Speaking of banks, the Bank Of Nova Scotia (Symbol: BNS) is one idea brought to my attention by fellow blogger Tawcan. This bank sounds like just a little Canadian bank, but roughly 50% of its earnings actually come from Central and South America. It also has a small banking presence in Asia. Surprise, it’s a global banking operation!
Slow and steady growth in the Central/South American region is set to continue. As far as the Canadian operations go, I can’t say I’m very optimistic about the Canadian real estate market. Recent legislation changes have slowed the property market in Canada, but that’s probably a good thing. Real estate prices have been inflated in major cities for some time.
This bank is so well diversified I believe it could survive a Canadian real estate market crash. Earnings per share growth is slow but consistent, at 4-5% annually. The stock trades at a PE of 11.76.
Currently the stock yields 4.22%, and dividends would not be qualified for holders in the United States. This one would be best to hold in a tax advantaged account.
Like any foreign currency investment, there is a certain amount of currency risk here. If the Canadian dollar falls, this would affect earnings negatively when converted into USD. Conversely, if the Canadian dollar rises it can have the opposite effect.
This doesn’t sound like a huge deal over the long term, but it can have a rather large effect on shareholder returns held in USD accounts. I personally experienced this with my former investment in Telus (a Canadian mobile phone company). The currency swings were enough to make that investment something of a failure.
SouthWest Airlines
Southwest Airlines (Symbol: LUV) is another stock I currently own, but may pick up more shares on current weakness. Southwest is one of the big 3 U.S. airlines, and is arguably the best run of those 3 airlines. They’re know for low prices, and a friendly corporate culture.
Recently Southwest has begun expanding to international destinations and new states like Hawaii. Air travel is basically a mature industry, so growth is expected to be very slow (in the 3-4% range). Couple that with considerable share buybacks, and EPS is could grow at roughly 5-6% annually.
The stock has a PE of 9.84 and a dividend yield of 0.99%. It’s not a big dividend payer, but has significant room for dividend growth. The stock has a payout ratio of <10%.
In late 2017, Southwest’s share price rose like crazy on the assumed benefits of U.S. tax reform. At the time, I questioned the logic behind such price increases. It appears the market has now come to its senses. Prices have declined back to the $55-$57 range, which is fairly attractive.
If the U.S finally heads into that long awaited recession, air travel would typically decline and depress Southwest’s share price. That might be a good opportunity to pick up more shares.
AerCap Holdings
AeroCap Holdings (Symbol: AER) is an aircraft leasing company headquartered in Ireland. Their assets consist of aircraft like Boeing 737’s and Airbus aircraft which they then lease to airlines around the world. Many airlines choose to lease their aircraft instead of purchasing them directly. Believe it or not, this is a huge global industry with GE and AeroCap being the two most dominant players.
Like most investments on this list, AeroCap isn’t a fast grower. Revenues have been roughly flat over the past 3 years.
I consider this investment to be more of a defensive play. The stock is very cheap, currently trading at a PE of 7.61 and a price to book value of 0.94. AeroCap does not currently pay a dividend.
Shareholders are rewarded by the company mainly with share buybacks. These are accretive to earnings when share prices happen to be below book value. As long as this happy mathematical opportunity continues, I would expect share prices to continue to rise.
I’m undecided about this investment idea. While the share price is expected to rise in the short term, longer term success in aircraft leasing industry means AeroCap must to maintain or grow their market share. It’s a competitive industry, and I see no evidence that suggests this is happening.
Summary
While I do currently own shares in a couple of these companies, I’m not endorsing or advising anyone purchase these investments. These are merely investing ideas that I’m considering.
Please consider this post as “entertainment only”, and not a recommendation to purchase. Do your own investing research, or (if you have one) consult with your financial advisor.
I hope you enjoyed this look into some of my current investing ideas. I do realize that not all of my readers are going to be interested in this kind of post, and that’s totally OK. Just let me know in the comments.
That’s the beauty of investing of course — there is no right or wrong way to go about it. We can all take different approaches and still find success.
What other investments are you considering in 2018?
I think Bank of Nova Scotia stock is a good buy plus it pays an eligible dividend for Canadian tax purposes.
I like some of your other suggestions too.
Thanks Caroline! BNS is an interesting one. Like everything on this there’s positives and negatives. Canadian dividend stocks pose some challenges for US investors, but are not insurmountable.
This is such an interesting analysis. I think it will be helpful to many investors, especially newbies like me.
I have only heard of Southwest and Wells Fargo. Not sure about the other two. I personally like traveling with Southwest 😀
Technically it’s not “Wells Fargo”, but rather a fund they operate. Much like Vanguard or Fidelity have funds.
Good to get an insight into your thoughts. It will be interesting to follow these picks over the coming months.
Love to see your investing ideas Mr. Tako!
Thanks Keenan!
I am into high dividend paying stocks because I am looking for passive income. So i am eyeing NLY and CYS.
What are your thoughts?
They look like extremely risky income investments. Almost like a super risky bond. Capital appreciation is going to be almost impossible with them.
Which stocks would you recommend for passive income?
Thanks.
I’m not going to make any “recommendations”. That’s just asking for trouble. However, many of the stocks mentioned in this post (and the comments) I happen to like.
Hello Mr. Tako,
I’m Thiago (チアゴ) from Brasília, Brazil and around my 30’s yrs old. After viewing a recomendation to your blog, i’m really appreciating your texts, despite the big differences between US and brazilian markets, it’s very interesting your approach to dividends, i’m quite a newcommer on stock market, and since the begining, i’m planning to accumulate for the retirement. Even with the continuous unstability present in my country, make the money compound is my challenge. Thanks for your work! Regards!
Thanks for reading Thiago! 🙂
Im been waiting for you to provide your investment ideas and holdings for some time. So glad you made the leap. Whatever happened to the well know energy company? Was that LYB?
No it wasn’t. Haven’t made a decision on WKEC yet.
I’d buy more BNS if I have more cash. 😀
AerCap sounds interesting, need to do more research.
I believe Aircraft Leasing is High Risk. The leases are setup by flight hour. In a recession, the airlines just stop using the aircraft and the lessors take all the market risk.
Real world results during the last recession disagree with your analysis. You might want to study the performance of those leases through the market cycle a little more carefully.
You’re tempting me Sir Tako….
Is that a good thing? Or bad? 🙂
Lil’ of both! We’re a bit low on cash reserves right now. Hubby dipped into our emergency fund to put money into my IRA. We have to wait to replenish. It’s funny we have to learn to save but not from spending, from investing.
Thanks for sharing your thoughts. I vote to keep it going.
Thanks ThinkingAhead!
I find this post very helpful. thank you. Even though we all go through some of the same resources on locating great dividends(thank you for the dividendchampion site info from another post) , but it is more of an art than science. It is great to see how you actually analyze and identify stocks when you lay out your reasoning for specific ones. I found both of LYB and Southwest in the “challenger” list of the Dividend Champion sheets, both does have really good metrics. But LYB seem to indicate slower growth both this and next year. Southwest seems great. Both stocks only have a 6-7 year dividend paying history, do you worry about that? Generally wouldn’t it be good to see a company to have had at least maybe 15 years of dividend paying history to make sure they have weathered a depression/recession or two?
Wow, you did write a novel. Earnings history is more important to me than dividend history. Don’t let the dividend tail wag the investing dog.
Would love to read more post’s like this. Most of my investments are in Norway, Denmark and Sweden and i should invest more in us/canadian companies when you consider the ralative small economy of Norway, Sweden and Denmark. But it’s easier to feel comfertable with investments close to home i guess. Will take a closer look at BNS when more capital falls into my account
Thanks for the input Norwegian guy!
Good insight and analysis, enjoyed reading this. Always nice to hear about new ideas and perspectives.
Thanks Logan!
Very nice post. Even though I am not a US citizen it’s nice to see the way you approach and analyze dividend stocks. I would like to see more of these posts. Have a good day. thank you.
Thanks for your input Eli!
Very interesting to see what types of companies Mr Tako is looking at. I have not reviewed the other companies before (other than the Cdn banks). Thanks for sharing!
I like Canadian banks in general, but I do not differentiate between BNS and the other big ones like TD, CM, BMO, RY. I own all five ( the case could also be made for owning NA.to).
If you hold those in a Roth IRA, there is no withholding tax on dividends.
Some very smart buys DGI. I like TD too.
Thanks for sharing – love this idea!
Nice post!
Ever consider Albemarle? If you believe the EV evolution over the next decade, they have some nice lithium assets.
On the surface, ALB seems like a decent company. I’m not seeing much in the way of “growth” that would support a higher stock price. There’s some strange things going on with the balance sheet too. Tread carefully.
Thanks for your input. If you don’t mind, what on the balance sheet seems strange to you?
Wish there was more obvious investments out there. Too me, stock values seem extremely high yet with the tax cuts companies are planning to do a lot of buybacks.
I don’t see Warren Buffet’s company doing any buybacks at these prices. Maybe best to stay in cash until market values seem more favorable.
There’s a LOT of moving parts here. Asset sales and purchases, pension re-adjustments, foreign exchange changes, tax re-evaluations, share repurchases, etc, etc. Despite pumping tons of money into the business every year, assets on the balance sheet haven’t consistently risen. Nor has operating income. Management doesn’t seem to be building value very well. It’s a mess.
Just my opinion of course! YMMV
Hi Mr. Tako, I enjoy reading your posts. What are your ideas on investing in Tax free Municipal bond funds ? There are are closed end municipal bond funds which provide more than 6% dividend and dividends are federal tax free. More info you can find it in http://www.cefconnect.com . Have you considered anytime investing in it ?
6% tax free is pretty good, and I like muni’s. However, I avoid muni bond funds. Why?
Why would I pay someone fees annually for something I can buy extremely low cost and never pay a fee? Paying someone thousands of dollars a year for what amounts to clicking a few buttons isn’t terribly smart.
I like reading how you analyse the stocks, and reading the comments is useful too, like how you give importance to history earnings rather than dividend history. This is something I cannot get from an investment book as your blog is like an ongoing case study.
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Thanks Leo!
Always interesting to see other peoples ideas on stocks. I also own BNS and LYB with LYB being one of my largest holdings. As always it seams there is plenty to worry about. I bought most of my LYB during the correction that lasted a couple of years, so got lucky there, it was just too cheap and had a good dividend yield and high return on invested capital. Just recently I discovered that they actually went though bankruptcy in 2008-2009, I guess they were hit with the perfect storm and not sure how I missed this. Had I known that I probably would not have invested near as much, but it does seam to be paying off. I am also a little concerned at their more aggressive use of debt. I have no plans of selling as they have a bright future if they continue as usual. Your thoughts on their recent acquisition of A. Schulman’s ? It’s a deal for $1.24 which doesn’t seam bad but they also are taking over their debt so the total is more like $2.25 billion which seams a little pricey to me. It’s small to LYB but it still matters what you pay.
You bring up some points about LYB I didn’t mention in the post, but not everyone may know the whole story…
First, the bankruptcy. LyondellBasell used to be two large public companies (Lyondell Chemical and Basell Polyofins). The companies were merged using a leveraged buyout. All that debt pushed the company into bankruptcy when the economy went south. However, the guys who created this merger weren’t idiots — they bought up the debt for pennies on the dollar and restructured the finances (to their advantage of course). They made billions doing it. Today, most of LYB’s debt is very low cost and the interest rates are low. It’s a incredibly manageable debt situation. The old debt holders are now majority equity holders. I don’t worry about the debt or another bankruptcy.
Second, the A. Schulman buyout. On the surface this all cash deal seems like a smart buy. Better than repurchasing their own shares by a small margin, but not as good as some internal projects which will return 20-25% on invested capital. When you think about uses for cash however, they can’t just push it all to the internal projects and “call it good”. Those projects take people, permits, government approval, and time. None of those things scale easily.
Rather than letting that cash sit around, they’re diversifying for a reasonable price. Overall, I support the move. Management seems to be doing smart things with capital. Only time will tell if the merger actually works out better than repurchasing shares, but on paper it seems OK.
Hi Mr. Tako,
Please keep these articles coming. They are insightful and fun to read and I’m fairly certain there are no big fund managers reading this who are going to front run your ideas!
I bought 1000 shares of BNS and 1000 shares of TD in my IRA rollover account back in 2015 and have been happy with them both. Growing profits and dividends- like you said, I would avoid holding these in an after tax account to avoid withholding taxes.
I’ll have to check out LYB some more.
Cheers,
Mike
Thanks Mike!
i like the LYB idea. looks like a winner. i also like somebody in this community buying a closed end fund in spite of the fees. i just bought a preferred closed end called JPS with over 7% yield after the fees. as far as LUV, i like that the dividend has double over 5 years with plenty of coverage. the airline on my watchlist is hawaiian (HA) which has had their pullback and initiated a dividend a few months ago. i haven’t bought any yet. i have ALB on a watchlist too as it’s off it’s highs by 25%. the 2 dividend growers i just bought are ROP and PRGO in case you want to have a peek.
let’s keep getting paid!
I looked at ERC. I guess if you invest in it you are accepting the risk of primarily investing in junk bonds and you are just comparing who can provide the best return at equivalent durations and credit quality? (like vs Vanguard below investment grade bond fund VWEHX – no leverage and lower return). How do you evaluate your downside risk for this? If you look back to 2008/2009 it took the same 50% dive as everything else – you’re comfortable with that in exchange for the high current income? Any reason you think this is less risky than any other below investment grade fund?
Do you ever consider any alternative investments like Peerstreet etc? I have about $80K here, all invested in $1k increments (took a long time to get it fully deployed at that increment) average return is a little over 7%, less liquidity obviously but if you’re not looking to pull it out and only looking for income – shouldn’t matter.
No, I’m not invested in ERC. It was just one idea. Generally these funds are extremely diversified, so any issues with defaults or credit downgrades would have minimal effect. You’re correct of course that this is an exchange traded closed end fund, the price will fluctuate with the mood of the market.
Never looked at Peerstreet. Links?
https://www.peerstreet.com
I find your articles and now your investing ideas helpful in conjunction with my own homework. TY hope you continue
Thanks Dave!
AerCap is definitely interesting – still haven’t pulled the trigger myself, but I’m doing my own research on it 🙂
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Airlines are high risk in general. No airline has consistently been profitable except SW. So if you were going to buy an airline stock it would be SW.
Good thing I did invest in SouthWest. You might want to read the blog a little more carefully.
I think you are about to experience quite a bit of growth in traffic on MTE. You seem to have a solid formula for evaluating investments that your readers could benefit from. Thank you!
Love this type of blog – please keep us updated on these ideas.