This is my February 2021 FFJ Portfolio report. The portfolio was created in January 2017 for the purpose of demonstrating how investing in high quality companies with competitive advantages and with a record of consistently increasing dividends can assist investors in reaching their long-term financial goals without the need to speculate or to chase dividend yield.
The remaining days in the month of February 2021 land on the weekend so nothing within the FFJ Portfolio will change, and therefore, I am publishing this report early.
February is one of the 4 months of the year in which the dividend income generated from the FFJ Portfolio holdings is at its lowest level; the dividend income generated from holdings within the FFJ Portfolio can be accessed here.
In addition to the dividend income generated within the FFJ Portfolio, Bank New York Mellon (BK) is one company for which I received dividends in an undisclosed account where I hold no BK shares in any of the accounts included in the FFJ Portfolio.
During the month I acquired shares in the following companies for some of the 'Core' accounts and these new holdings are included in the February FFJ Portfolio holdings report which can be accessed here.
- 400 shares of TELUS International
- 300 shares of Merck
- 25 shares of Lockheed Martin
The articles in which I reviewed these companies and disclosed my purchases can be found here.
The market value of the majority of the holdings has increased since January 31st and while this might be wonderful from a psychological standpoint, it certainly is frustrating when the game plan is to acquire shares in high quality companies that are attractively valued.
In several of my February articles, my analysis has led me to the conclusion that shares of the company analyzed are too richly valued for my liking. Warren Buffett is spot on when he compares equity investing to a batter standing in the batter's box. His lesson is that you don't have to swing at every pitch. 'The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot and if people are yelling, 'Swing, you bum!,' ignore them.'
I also find one of his messages in the 2017 Letter to Berkshire Hathaway shareholders (page 3 of 16) to be very a propos:
'In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.
Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.
Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.
The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never factor in, nor do we often find, synergies.'
The same seems to be much the case in the present day but finding 'sensibly price' equities is now even more difficult than in 2017 because we now have to contend with a much larger universe of very active traders who have a complete disregard for a sensible valuation. With COVID having changed the world in which we live, many people are cooped up at home and are looking for things to do to occupy their time. With the likes of Robinhood, the commission-free stock trading and investment app, it has now become so easy for people to gamble from home.
Highly active traders likely flock to highly volatile stocks but I suspect there are a good number of traders who invest in high quality companies with no regard for valuation and with absolutely no intention of retaining their acquired shares for the long-term. They merely want the share price to move up in the short-term so they can sell at a profit and move on to another opportunity.
So...while I continue to analyze companies and find their current valuation is not to my liking I still go through my analysis so I am better prepared for when the share price of these companies becomes sensibly valued.
During the month I initiated conservative covered call option trades on CVX and NKE and disclosed them in my February 2 and 3 articles. In this February 25th article I disclosed that I had closed out my CVX position at a slight loss and my reason for doing so; the NKE position which expires March 19 is currently profitable and is still open.
Since February 10th, 10-year Treasury yields have moved from 1.13% to as high as 1.61%, a rise of 48 basis points (bps); one bps equals 0.01%. This is the highest level in a year and bond investors are getting worried about the potential for inflation. Equity investors would, therefore, be wise to stop piling into the market leaders regardless of valuation. The days of disregarding valuation might be drawing to a close.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.