Over the last month or so I have reduced outsized positions in winners Microsoft (MSFT), Pfizer (PFE), and Paychex (PAYX) from between 9% – 11% to about 6.5% each. I recently redeployed some of those proceeds to a new 4% position in Unilever (UL) after they abandoned their plan to relocate from London to the Netherlands as their sole headquarters. While their big emerging markets exposure is a short term negative, it should help in the long term as that is where the economic growth will be with growing middle classes seeking to improve their standard of living.
I’m not a huge fan of the consumer staples area as a whole because of the challenges they face from upstart brands marketing on social media and concierge brands like Costco (COST) and Amazon (AMZN), but I like the odds for Pepsico (PEP), Philip Morris (PM), and Unilever, as they still seem able to generate at least modest revenue growth. I hold all three.
I also sold my small AT&T (T) position after what I came to see as a nightmare earnings call on October 24th where it became clear to me that Randall Stephenson is a disaster as both a CEO and a capital allocator. All he does is over promise and under deliver. They are losing huge numbers of profitable subscribers to their DirecTV service while adding a declining number of subscribers to their vastly less profitable over the top streaming service. Tons of debt plus a hubristic CEO in denial at the deterioration of the business are not good omens. Stephenson seems like a guy who thinks he is a genius and is surrounded by yes men but is, as the English say, too clever by half. It is doubtful he can manage Warner Media as well as Jeff Bewkes. He is certainly not John Malone. Nor is he someone I trust as a steward of my capital.
As a replacement for AT&T, I chose Ventas (VTR), the senior housing REIT. This sector has been going through a tough time with low interest rates causing overbuilding by competitors. But a disciplined and experienced management team, an ongoing shakeout from higher interest rates causing less building, and the silver wave of Baby Boomers over the age of 75 coming over the next few years would seem to have them set to take advantage of an up cycle.
Current Watchlist to Put Additional Cash to Work
BlackRock (BLK) – Yields over 3% for first time in years. Likely to continue to benefit from the shift to passive investing and ETFs. 3.24% Forward Yield.
T. Rowe Price (TROW) – The class of the active money managers. Great culture and most of their business is from retirement plans. 2.98% Forward Yield.
Fastenal (FAST) – Good growth and execution, but higher costs and fallout from China tariffs and disruptions to manufacturing supply chains in North America carry potential for short term pain. 3.24% Forward Yield.
Texas Instruments (TXN) – Great management and capital allocation policy, but they are also likely to suffer from ongoing China tariffs and rethinking of supply chains, plus a slowdown in the auto market. 3.40% Forward Yield.
“It’s very difficult for companies to earn the same kind of ROEs on acquisitions that they can harvest from their existing operations. The sellers of the acquired company generally have a good idea of what it is worth — and they want to be compensated properly for the profitability and growth potential of their business. Instead of buying growth wholesale (the investment opportunities within a firm’s existing operations), acquisitions carry full retail prices.”
— Josh Peters