Model Portfolio Update + Consumer Staples
I just cannot find any economically sensitive stocks to keep a 20% weighting in cyclicals, so I will reduce the weighting to 10%, and add the rest to defensive. After such a wild run this year, I do not mind “playing defensive”.
I think I can honestly say these changes were “bottom up” thinking, and not “top down”. I really wanted to find an industrial to replace Nordstrom, but I failed.
It is clear that my best ideas right now are Verizon - VZ, Phillips 66 - PSX, and Tyson Foods - TSN. I want to find small caps, but Wall Street’s short-term orientation is giving me large caps. I think 6 months from now I will have enough smaller ideas I will not have to “hide in the large caps”, but right now these changes feel right.
Many might let the Nordstrom - JWN position run, but I do not want to get mixed up this GameStop crap. I will take a win, call it lucky, and hope to buy JWN another day under $20. Also leaving the portfolio are marginal ideas Masco - MAS, and Evergy - EVRG.
VZ came from my examination of high yield stocks, PSX come from the Barrow Hanley review and a recent missed quarter, and TSN will be discussed below.
The 3rd draft of the model:
—- 10% economically sensitive, cyclical
Brunswick - BC - my favorite consumer cyclical, trough earnings should be better, A+
RXO - RKO - truck brokerage spin-off, neat asset-lite approach, A+
two cyclicals temporarily replaced by two defensive names
—- 20% smaller cap, $1 billion and less, economically diverse
Matrix Service - MTRX - my one micro-cap, refinery repair, A+
Argan - AGX - builds power plants, A+
Ruth’s Hospitality - RUTH - well run restaurant, A
Viad - VVI - unique travel idea, maybe to cyclical, A-
—- 20% special situation, weird stocks
Kirby - KEX - barge transport, A+
Red Rock Casinos - RRR - casinos for Vegas locals, A+
Vistra - VST - merchant power producer, A
Azenta - AZTA - just sold Brooks Automation, now only healthcare, B+
—- 50% safety, low beta, defensive, not economically sensitive
NovaGold - NG - leveraged to higher gold prices, A+
Royal Gold - RGLD - interesting smaller royalty deals, A+
Roche - RHHBY - heavy R&D yet to pay off, A
Royalty Pharma - RPRX - great exposure to diversified portfolio of drugs, A
Elanco Animal Health - ELAN - spin-off of Lily, hurt by avian flu, A+
Molson Coors - TAP - we will need beer in a recession, A-
Scotts Miracle-Gro - SMG - lawn fertilizer and marijuana cap ex, A+
Verizon - VZ - their higher margin customers should eventually pay off, A-
Phillips 66 - PSX - a pure refiner, plus some chemicals, A-
Tyson Foods -TSN - short-term results hurt by Avian flu, A-
The alternative would have been adding two industrials like GTES and TRN, maybe ALK. One retailer/apparel name I considered was Levi Strauss - LEVI. If I were really aggressive I could have used Hanesbrands - HBI.
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Consumer Staples
I started at the old Interfirst Bank in Dallas as a consumer staples analyst in 1984. In almost 40 years I have seldom found much value in this group, with the exception of the commodity processors. I just refuse to pay a premium multiple for safety. That has been my bias, and will remain my bias. The great Ralph Waldo Emerson said:
“a foolish consistency is the the hobgoblin of little minds”
Defensive stocks can have a place in a portfolio, I just refuse to pay 20+ times earnings to get them.
In the real world people who have to sit across the table from actual live clients like to own consumer staples stocks. Consistency can prevent them from getting fired. Consistent stocks can also prevent unsophisticated investors from panicking at market bottoms. The view I am presenting here is the view of the analyst, who just wants to find the best 20 stocks to beat a benchmark.
My review started and stopped with Tyson Foods - TSN. I cannot write a paragraph telling you why you should not own TSN. Wall Street hates uncertainty, and the meat processing industry is the king of uncertainty. TSN has done a nice job consolidating the industry, and has reasonable growth prospects. Selling at 10x, I must own TSN
Someday I want to understand the very complex Philip Morris International - PM, but that will have to come later.
There are also some smaller stocks that I want to understand:
Treehouse Foods - THS - $47 - recent asset sale make the balance sheet ok?
SunOpta - STKL - $8 - interesting restructuring story
Fresh Del Monte Produce - $29 - management makes me a little nervous
B&G Foods - BSG - $14 - will they cut the dividend again?
Primo Water - PRMW - $16 - is residential water a real business?
Reynolds Consumer - REYN - $30 - what could be better than tin foil
PriceSmart - PSMT - $75 - a retailer in developing countries
Dole plc - DOLE - $11 - playing the banana cycle
Limoneria _LMNR - $14 - maybe a real estate play
National Beverage - FIZZ - $45 - consistently expensive
I will just pass on Pepsi, Coke, General Mills, Proctor & Gamble, and the other big cap consumer staples.
Molson Coors - TAP - $54 - has been in the portfolio since the beginning. I think earnings power in still north of $6 when conditions normalize. Beer is a distribution business, and in the end guy with the best local distributors. Eventually I hope to find an idea more creative than TAP, but for now it will have to do.