Strategy

Recent debt restructuring has left the portfolio D/E ratio way above the limit defined in my strategy. I’m aiming at 0.1 ratio during normal market conditions and calling current market normal is a stretch as well. At the moment the ratio sits at 0.154 and as we are more likely to be at or near peak of the market, ratio should really be more in the neighbourhood of 0.05 0r less. Then again central banks are making it very difficult to define market normal or abnormal. This may very well be the new normal for years to come.

After some consideration I’ve decided to move into a conditional maintenance mode. By this I mean a mode in which majority of the new capital is used to pay down portfolio debt. Conditional in that sense that should there be significant corrections in value for some of my holdings and/or companies in my watch list, I will execute planned purchases regardless the portfolio debt level. Short term execution should be quite easy as my broker still has the small purchase order campaign active which allows me to make small maintenance purchases in a cost effective way. One unknown factor is Nordea Bank AB. If they decide to move their HQ to Denmark, I might have to eventually sell my position due to taxes. In such case timing would be a bit tricky and I most likely would invest at least some of the money in Sampo in order to increase my indirect Nordea position. Some of the money could be used to pay down debt and speed up the planned debt rebalancing. There are many alternative plays here and some analysis and planning is required before proceeding with any of them.

For new positions I have some in my radar. I’ve been thinking about hydrogen sector for some months now and might initiate a position in NEL Hydrogen if the stock revisits sub 2 NOK levels. It’s a risky play and in a sense not suited for this portfolio as it doesn’t pay a dividend at the moment. Then again it could be considered as ultimate dividend growth stock if and when it starts to pay one. The sector has a lot to like. Public discussion is way too focused on standard electric cars when the actual beef is in larger scale mid-storage solutions, ships and busses and so worth. Family cars and fuel cell applications would be interesting possibility as well since the refuelling process would be similar with the current one, transportation and storage would be closer to the current method which should appeal to current big players such as NEL partner Shell. Easier taxation would be interesting factor as well as it might lead to not so market driven subsidies. There’s a lot to like in the sector even though it’s very speculative.

Recently I have been thinking about the strategy to apply during the second half of the year. There are quite a few issues making it very difficult: all time high valuations in general, EUR/USD exchange rates, political tensions, terrorism, brexit and Trump to mention few. Typically I consider such issues as a positive thing (in investment sense) as long as they produce the expected outcome which is fear and panic. A lot of that is missing though mainly due to politics on both sides of the pond but I’m pretty sure we will get there eventually. The problem is that nobody can tell when this will happen. I’m guessing that it will not happen during the second half of the year, maybe not even during 2017.

As the world lies at the moment, I’ll be considering mainly the following options for the second half: weapons, defence and security sector, alcohol and other similar substances and lastly car makers. For the weapons part I would really like to increase my position in LMT but I would like to get a bit better valuation and really don’t like the idea of converting euros to dollars with the current exchange rate. For the security part I could consider something like Securitas AB but it will require better analysis of the company details. For the alcohol part I have my eye on Olvi Plc. If the price hits my target during Q4, I most likely will open a position on it.

Car makers is a sector I have the most trouble with. I have been playing with this idea since the still ongoing VW scandal but perhaps with a bit different point of view, the overall sector valuation caused by the scandal was just a positive trigger. I’ve approached this mainly from the partially political electrification of transportation point of view. Pure electric cars is the obvious way to achieve it but personally I feel that it’s not the whole story. Some companies have been introducing fuel cell powered electric cars with moderate success but such companies are in minority and it’s easy to understand why. However, I’ll consider it to be a strategic position worth maintaining for now and here’s why: in the end it could be very much like with beta versus VHS back in the 80’s. No, not because of the porn industry but because of the infrastructure, user experience and even politics. It’s not very hard to envision the partly false appeal it would have: refuelling process would be essentially the same, less need for rare earth metals and there would still be a large job providing distribution and storage infrastructure in place which would be anyway needed for the transition period. And then there’s also the geographic factor which could make the fuel cell viable option e.g. for the northern hemisphere. True, much of this applies also for gas and even for EV recharging.

All this makes me wonder if a strategic position in fuel cell cars would be a nice to have feature in a EV capable car company waiting for technological breakthroughs in fuel cells and in battery technology. It could be a decent long term investment as long as the company can produce decent profits in current situation. In general this is a sector I don’t really like: very competitive low margin, labor intensive business with expensive unit prices. There really aren’t many companies capable to differentiate themselves expect for smaller companies like Tesla in which I will probably never invest in. They are pretty much all building relatively similar products using the same suppliers and repeating the process each year. On top of that they all depend on the overall economic situation which is somewhat dependant on the politics as well. Having said that, I’m still looking at Hyundai Motor Company for H2 with mixed feelings about the whole sector.

Bull market just keeps on going and it’s very difficult to see a major shift happening very soon. It seems that the most likely outcome of the QE operations is a significant bubble which will continue to grow for couple of years. Volatility might increase in near term but it’s very difficult to imagine all the loose money not going to stocks especially in Europe. All this makes it a bit difficult to come up with a solid shopping list for the next 6 months or so. In general I’d need to consider or address the following issues:

• Portfolio balancing would require adding on existing positions in companies such as Baxter International, General Electric, AT&T, Aflac Inc and perhaps Deere. Baxter is special item here since I’d like to increase my position before the upcoming Baxalta spin-off.
• I’m not a huge fan of the idea of converting euros to dollars with the current exchange rate (existing USD income will help a bit)
• It’s much more difficult to find high quality companies from euro zone (especially ones that pay a quarterly dividend)
• In general I would like to increase my position in currencies other than euro and US dollar

Having said that, the expected shopping list and order to  go as follows:

1. Baxter International
2. Unilever/Diageo/something european
3. Telia-Sonera/Nordea/Gjensidige if there’s a temporary and significant enough drop during spring (otherwise these will be considered during Q4/2015 and Q1/2016)
4. Canadian bank (looking at Royal Bank of Canada and Bank of Nova Scotia at the moment even though I have some concerns about the housing bubble)
5. General Electric/AT&T/Aflac/Deere (it remains to be seen how the dollar valuation moves or is moved, I might consider converting dollars to euros as well)

Investement strategy as follows:

• passive income through dividend growth investing
• limited number of high quality companies (eventually in the range of 20-30)
• reinvest all passive income
• inject new capital every month
• target single purchase per month
• be prepared to increase the rate of investments when blood is in the streets
• utilize changes in currencies when possible
• buy & hold, selling something might sometimes be the best thing to do but to try to avoid ending up in that situation

Stock selection strategy:

• diversify, diversify and then diversify a little bit more (focus on global companies or companies operating in large enough market areas)
• home market bias is evil
• target company must be able to benefit from the following: growing population, aging population, people’s fear of death, people’s tendency to kill each other, people’s tendency to exchange long term benefit for short term pleasure
• mix dividend growth stocks and high yielding stocks, target portfolio yield growth close to average inflation rate