My recent portfolio spring cleaning
I recently mentioned in my previous post, that I have sold my Fasternal Co stocks. Subsequently, I was on leave on Friday. On that day, while running my errands, I took some time to further sell some of my stocks, namely CapitaLand and SIA.
To be frank, I have been wanting to sell the SIA stocks I own for a very long time.
I have previous sold Sun Hung Kai many months ago -what is left are the odd lots I received (in lieu of dividends) previously. So techincally I am now left with 8 stocks in my portfolio.
To put things in perspective:
- I bought the Fasternal shares on Aug 2015 (Holding period was approximately 1 yr 6 months);
- Last bought CapitaLand shares on July 2015 (Holding period was approximately 1 yr 7 months);
- Last bought SIA share on Nov 2010 (Holding period was approximately 6 yrs 3 months).
There are various reasons why I wanted to sell them:
- Big but slow growth
I consider CapitaLand and SIA relatively fundamentally weaker stocks as compared to the other stocks in my portfolio. Yes, in terms of Enterprise Value, they are giants, but in terms of growth they are not (CapitaLand has a recent ROE ttm of 6.11%, while SIA has a recent ROE ttm of 5.44%).
- Dividend (ok, but not high yield)
I did not buy these stocks due to their yield.
- CapitaLand has a reasonable yield and frankly, I don’t mind keeping it just for the yield. In 2016, CapitaLand had a dividend yield of 2.55%. This yield value has been fluctuating between 1.7% to 2.55% from 2011 to 2016.
- SIA had a yield of 4.44% in 2016. That is actually quite good. However, its dividend yield is highly inconsistent. It reached a high of 13.10% in 2011 but dropped to 1.61% in 2012. Moreover, its stock price has dropped much more (since 2010) than the total dividend received.
- Fasternal had a yield of 3.14% in 2016. Between 2011 to 2016, the dividend yield fluctuated between 1.49% to 5.28%. However, non-resident aliens face a dividend tax rate of 30% on dividends paid out by U.S. companies. So given the low amount that I have invested (plus the fact that the yield wasn’t very high) and the tax rate, the resultant dividend income wasn’t fantastic.
- Cyclical stocks (with cloudy growth forecast)
Typically, cyclical stocks do not make very good long term buy and hold stocks – unless you can time the cycle correctly. I do a terrible job at this.
However, the compelling reason isn’t because these are cyclical stocks, but rather the growth story behind these stocks.
Actually, I am optimistic about the long term growth story of CapitaLand and Fasternal. I think in the long term, there will an upward cycle. These are long term plays. However, near term wise – I am not sure about the growth prospect.
- With CapitaLand, there are growth opportunities in China and regional Southeast Asia market. Yes, the price to book value is relatively low (0.88) – but it has been that low since 2011.
- With Fasternal, it is a wide-moat company. A distributor like this is dealing with hundreds of thousands of customers and thousands of vendors for individual products. Its current price to book value is also low (7.75), but it has been hovering around that level (8.06 to 6.63) since 2013.
I bought SIA a long time ago. I think as an airline company, it faces intense competition in this industry and consequently, its fundamentals have deteriorated ever since. Its stock price has reflected that. I do not see much growth for SIA moving forward, and was really glad that I finally managed to sell the stock (although at a huge loss).
I do not see much growth for SIA moving forward, and was really glad that I finally managed to sell the stock (although at a huge loss). There was a slight uptrend in SIA stock price when oil price plunged. But the macro trend of the stock price is still downwards.
Why Spring Cleaning Now?
By selling these 3 stocks, there is a net loss. Not much, if I factor in the dividend received. The dividend received previously would cover for this loss. The recent surge in CapitaLand & Fasternal stock prices also helped.
I felt that given that the US market has reached new high recently, the odds of the markets correcting has become more.
In view of these, I like to take a more defensive position and try to reduce exposure to the weaker stocks (with relatively weak fundamentals). I do consider SIA and CapitaLand (and to a certain extend Fasternal, Sarine Tech, Golden Agri and Super Group) stocks as being more likely influenced by economic conditions.
As per the old Wall Street Adage: “let your winners run, and cut your losers.” In terms of stock price performance, if I sell my Riverstone, Colex, ISOTeam or even Vicom stocks, I would have locked in a significant amount of realized gain. Not a bad thing, given the odds of a market correction moving forward.
However, ultimately I am a bottom-up investor, not a top-down investor. If company fundamentals did not deteriorate much and overall growth story remain intact (or did not deteriorate significantly) – I would like to hold on to my ‘flowers’. My overall strategy will always be to average down as much as I can.
I also acknowledge that I can never accurately time the market crashes (ever) and will always be invested in stocks when markets correct or crash.
“It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. If you’re lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it.” Peter Lynch
Realistically speaking, I don’t see much problem with me holding on to stocks such as Riverstone, Colex, ISOTeam, Vicom and Fu Yuan Shou even during market crashes. To me, these stocks pass the ‘sleep test’ eg. I can sleep soundly when their stock price head south.
A significant part of their business is naturally resilient to adverse economic conditions eg. people would still use their services or products even if macroeconomic conditions turn south.
In this aspect, Vicom business model may be slightly arguable given that a significant part of its revenue comes from the Non-vehicle inspection (SETSCO), which is very correlated to the economic conditions.
Nevertheless, most of the remaining stocks (Sarine Tech, Super Group, Riverstone, Colex, ISOTeam, Vicom and Fu Yuan Shou) have good balance sheets, plus good growth (eg. relatively high ROE) —Not all, but most.
In gist: Defensive & Resilient business model / industry + Good balance sheet + Growth. In fact, I might buy more of their shares if their share prices drop during a correction or crash. So having an ample cash war chest ready is very important.
The only downside for some of these stocks is the lack of overseas exposure or expansion. For many, they derive most of their revenue from Singapore (eg. Colex, ISOTeam, Vicom). And also not very high dividend yield.
On another note, I might consider divesting my Super Group stocks if opportunities arise. (Growth story is debatable given the competitive instant coffee market).
However, as of now, I am quite comfortable with the amount in my war chest.
More income-driven approach
While I do not see myself plunging head first into actively buying high dividend yield stocks, I would definitely consider stocks with acceptable fundamentals and reasonable yield. The dividend yield factor would slowly make its way up my evaluation criteria.
If opportunities allow (eg. having a larger margin of safety during sharp market corrections plus other factors), I might consider slow growth companies with relatively weak fundamentals but with a long history of consistent high dividend payouts. I consider these as “Perfect Storm” situations eg. Market corrections or crash coinciding with temporary industry down-cycle or slow-down, and temporary internal company bad news. These I know is beyond my control, and I have to patiently wait.
I consider these confluences of bad news as “Perfect Storm” situations eg. Market corrections or crash coinciding with temporary industry down-cycle or slow-down, or/and temporary internal company bad news. However, provided the long-term fundamentals and growth story of the companies are still intact, and not deteriorated significantly.
I am sure a lot of people do not like market crashes or these so-called “Perfect Storm”. However, to me these are rare. I treat these as golden opportunities. For someone who has been waiting on the sideline for months (the market peaks kind of creates a psychological barrier preventing me from buying)… these might not be a bad thing, seeing it from the long term perspective.
I view these as more risky ventures (hence the need for a high margin of safety) eg. Yangzhijiang, Global Investment Limited, HPH Trust, Accordia Golf Trust and the various REITs (esp. Viva Trust, AIMS AMP Capital Industrial REIT, LIMRT, etc).
Having said that, there is a certain amount of resilient of high dividend stocks to market declines (probably due to their high yield)… well, one can never know. With no or little earnings, free cash flow or not in a net cash position, dividend payout is not guaranteed.
Lastly, I don’t just justify my purchase of these high yielding stocks by the high yield…. that is NOT a reason to purchase.