FFJ Portfolio – July 2020 Report

This is my July 2020 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 Great Financial Crisis' wreaked extensive damage to the lives of so many who have never fully recovered...even a decade later. COVID-19, however, is truly decimating the lives of many and, in my opinion, circumstances are going to get much worse within the next few months because I think it will be several months before a vaccine is developed, approved, and widely distributed. Until such time as one is available, I can assure you the numbers reflected here will continue to skyrocket. What is truly frightening is that US cases are probably 10 times higher than the official numbers! Despite this, some investors are behaving as if all is well.

With Federal governments printing money as fast as they can and an extremely low interest rate environment, many investors are of the opinion there is no other investment alternative than the equities markets. In fact, I frequently read of novice investors turning to 'day trading' (some successfully and others with horrific outcomes) and can not help but think back to the 'dot.com' timeframe!

In 2000, I remember learning of clerical employees at one particular branch of the bank with which I was employed who were taking turns 'day trading'. While some employees served customers, others would go on our employer's online self directed trading platform to trade stocks. Some employees saw their net worth increase dramatically within a VERY short timeframe and, in fact, some were making more money day trading than from their full time employment...only to lose it all...and more!

In addition, one of my MBA classmates who was employed with Nortel suggested to me in 1999 that I should be investing in 'high tech'. Here was a guy whose employment income came from the 'high tech' sector AND he was investing in 'high tech' companies. In essence, all his 'eggs' were in the 'high tech' basket!

Why do I say all this? Because the current behavior of many investors reminds me of the dot.com era.

There is no denying that some of today's leading tech companies have a very promising future. In fact, I have exposure to:

  • Microsoft Corporation (MSFT)
  • Cisco Systems, Inc. (CSCO)
  • Apple Inc. (AAPL)

My concern is that valuation levels have been bid up to the extent where it might be difficult to generate decent returns in these and other leading tech companies over the next decade. And this comment about current valuation levels is not restricted to 'high tech' companies!

Recent Additional Purchases

So, if valuation levels of today's 'darlings' appear to be excessive, what am I buying?

Well, I am trying to identify companies whose earnings have taken a beating...good companies which have fallen out of favor with investors even though the long-term prospects are positive.

You're probably wondering how it is possible for me to make an investment decision when, in many cases, management has refrained from providing guidance because current conditions are too fluid and difficult to forecast. I totally agree it has become increasingly difficult to determine a company's current valuation in the absence of guidance so in many cases I have to go with my 'intuition'.

Let's look at some of my recent purchases...

Automatic Data Processing, Inc. (ADP)

I covered this company in a very recent article.

Brookfield Asset Management Inc. (BAM-a.TO)

What you have in this conglomerate are some very shrewd investors who have built a successful track record where the wealthy of the wealthy come to them saying 'Here is our money. Go invest it for us'. I have covered this company in several previous articles and continue to be of the opinion that this is a great way in which to invest in 'alternative assets'.

I encourage you to listen to Bruce Flatt, BAM's CEO, in this recent interview.

Chevron Corporation (CVX)

The energy space is a very difficult space in which to invest as it will likely experience extremely challenging business conditions for several more months and the long-term trend toward more environmentally friendly sources of energy will continue to result in pressure on oil and gas prices. CVX, however, is perhaps the best option in this space. Some of its peers have 'written off' assets, suspended share buybacks, slashed their dividend (Shell and BP), and/or cut their workforce. In this recent article I explain why I acquired shares in CVX.

Stryker Corporation (SYK)

If you are unfamiliar with this company I recommend you read its 2020 10-K. It is one of the world's leading medical technology companies and, together with its customers, is driven to make healthcare better. SYK offers innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine that help improve patient and hospital outcomes.

Although COVID-19 has resulted in the postponement of many surgical procedures I fully expect these postponed procedures to resume when the environment permits. I also like that demographics are in SYK's favor! As our population ages I fully expect a greater number of medical procedures which will require SYK products.

Purchases Made for Young Investors

In previous articles I have indicated that I would be helping my daughter and her boyfriend (both in their 20s) build their net worth through equity investing.

As part of this process I have stressed the importance of slashing expenses and they seem to be doing well in this regard. Far too often I see people in their 20s spending money on 'things'...depreciable assets that may provide instant gratification but are unlikely to create long-term wealth.

Although I have no empirical evidence...just casual observations over the last few decades....I see people, who never developed sound personal financial management skills when they were young, relegated to a life of 'working far too long because they have no alternative'. I have said this before but 'it is tough to soar with the eagles if the pigeons are pooping on your head'.

As an employee you may certainly be generating a decent income but never forget you are trading time for money. Stop putting in the time and the money stops coming in. Secondly, stuff happens. You might think your 'JOB' is secure but job security is very rare in this day and age. Third, you may truly enjoy what you are doing but we tend to change as time passes. What was once enjoyable may no longer be enjoyable a few decades into the future. Fourth, technology has a way of changing the workforce. What is to say that what you are currently doing can't be done through the use of technology?

In a nutshell, get your money working for you and start early in life. Really early!

So, earlier in July we acquired shares in:

  • The Royal Bank of Canada (RY.TO)
  • Alimentation Couche-Tard Inc. (ATD-b.TO)
  • Intact Financial Corporation (IFC.TO)
  • Brookfield Asset Management Inc. (BAM-a.TO)

These purchases were disclosed in this July 5th article.

These purchases were followed up with a purchase of Enbridge Inc. (ENB.TO) shares which was disclosed in this article.

On July 31st additional shares were acquired in Ecolab Inc. (ECL). I encourage you to read ECL's Fact Book, the 2019 Annual Report to get a better understand of this company's operations as well as its July 28th 2020 Earnings Release (see here and here and its accompanying Earnings Presentation).

On February 28, 2020 I initiated a position in ECL and disclosed same in this article. Shortly after initiating this position COVID-19 was declared a pandemic and ECL's share price plunged to a low of ~$124. I should have acquired more shares but chose to deploy funds toward the purchase of shares in other companies.

By early June ECL's share priced had rocketed to ~$230 and I viewed ECL has being too rich to acquire more shares.

With ECL's share price having retraced to ~$187 I decided to acquire more shares even though the company is currently experiencing challenging business conditions because its customer base has been hard hit by COVID-19.

In addition, ECL announced in February 2019 that it intended to spin-off its upstream energy business. This recently completed spin-off was the culmination of the previously announced separation of the Upstream Energy segment in a Reverse Morris Trust transaction, in which ChampionX was merged with a subsidiary of Apergy Corporation; following the transaction the combined company was renamed ChampionX Corporation (CHX).

ECL recorded a previously disclosed $2.1B non-cash charge in Q2 which represents the difference between the $3.7B net assets of ChampionX less the $0.5B cash consideration received and the $1.1B value of the 5 million ECL shares exchanged in the transaction.

I recognize ECL is experiencing headwinds which may not end soon but it is the largest player in the fragmented cleaning and sanitation industry, which allows it to service large
global organizations that are outside the reach of local and regional players; it controls roughly 10% of the $130B+ global market.

Based on my analysis I think ECL will continue to experience headwinds but is poised to benefit from long-term trends (clean water, safe food and healthy environments). As a result, I am prepared to increase my position even though short-term results may look unappealing.

FFJ Portfolio

The FFJ Portfolio represents the holdings which I am prepared to publicly disclose. The list of holdings within the FFJ Portfolio’s ‘Core’ and ‘Side’ accounts can be found here and the monthly FFJ Portfolio dividend income reports can be accessed here.

The ADP shares recently acquired are held in an account for which I do not disclose details. In addition, the shares acquired by my daughter and her boyfriend are excluded from the FFJ Portfolio.

Final Thoughts

I am trying to acquire shares in companies which have reported weak results and where the broad investment community appears to have cast them aside. While some may disagree with me...I want the share price of good companies to TANK because of short term challenges and not because they are on the verge of going under. I want to acquire shares in companies I think will bounce back if/when we get a COVID vaccine.

I think trying to determine a fair value of many companies is extremely difficult in this environment. In fact, many companies are reluctant to provide guidance so I am now relying more on qualitative factors and intuition versus hard numbers when making my investment decisions.

Although I do not dispute many technology companies are great companies, everybody and their dog wants to invest in them so I am reluctant to join the herd. This does not mean I intend to sell my Microsoft Corporation (MSFT), Apple Inc. (AAPL), and Cisco Systems, Inc. (CSCO) holdings. It just means I am not excited about increasing my position in these companies.

While some people might want to invest in airlines, travel and entertainment companies, and other companies which have been extremely hard hit by COVID, companies in these industries are far too risky for my liking. The companies reflected in this article in which I have disclosed the recent acquisition of additional shares, however, are companies which I think are facing short-term headwinds but will thrive in the future.

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.