What an October, huh?
The broader stock market was certainly volatile, as we watched the S&P 500 index drop by slightly more than 5.5% from the 1st to the 15th.
And while I don’t really worry about what the S&P 500 index does due to that fact that I’m an investor that focuses on individual companies and their respective valuations, there were a number of companies that I both own equity in and don’t own but track that experienced noteworthy volatility as well.
International Business Machines Corp. (IBM, Financial) dropped by 10% over just a few days after a rough third quarter. This took it from an already attractive valuation to one even more so. The Coca-Cola Company (KO, Financial) dropped by 6% in one day after what was arguably an even worse third quarter report.
And then there’s American Realty Capital Properties Inc. (ARCP, Financial). Down by more than 30% at one point yesterday, but nothing to do with the stock market or any other macroeconomic issues. Instead, it’s come to light that a really disappointing and frustrating accounting cover-up was propagated by certain key managers, leading to the overstatement of adjusted funds from operations. Those managers have since resigned, rightfully so. It appears that AFFO will be adjusted by $0.04 to $0.05 when the dust settles.
So the company was guiding for $1.06 to $1.08 in AFFO for this fiscal year. I guess you have to ask yourself if a ~4% overstatement is worth a 30% reduction in the value of the company, which is off of a value that was already heavily discounted from peers. Now, I’m not interested in buying more shares here because accounting fraud is extremely serious and management needs to indicate that they have it together. Furthermore, there could be additional major headwinds that develop as a result, such as difficulty accessing credit markets and/or legal action. However, I would be careful about automatically selling here before everything is hashed out. I’m personally not real interested in selling here, other than perhaps as a tax-loss strategy (to repurchase later). But if the dividend is cut, I’ll most likely move on.
Anyway, let’s look at what other opportunities might exist in the market right now!
I have three particular stocks that I’m looking at for November’s investment capital. I probably won’t be very aggressive in regards to total capital deployment due to what turned out to be a very busy October. However, I’m always interested in attractively valued, high-quality stocks. As such, I’m confident I’ll be able to make at least one purchase.
The following three stocks are currently at the top of my watch list. I arrived at this list based on current valuations, the quality of the companies, the yields that are currently being offered, and the available space in my portfolio for these stocks due to weighting.
I initiated a position in this European consumer powerhouse in mid-October. Shares are more or less priced the same right now, so this isn’t really an opportunity to average down, like I’d prefer. However, I don’t think I need to. I think shares are already attractively priced here, as the stock tumbled 7% over the course of the month preceding my purchase.
But you’re looking at an extremely stable business with 14 €1 billion brands, spread out among food and personal care brands. Some of their more popular brands include Ben & Jerry’s, Dove, Hellman’s, Knorr, Lipton, Magnum, and Vaseline.
The stock offers a yield of 3.8% right now, which is really attractive considering the stable and defensive nature of the business, in my view. Unilever is conservatively managed, and I think the valuation here, with a P/E ratio of 17.45, is more than fair, considering it’s been growing earnings at an 11.44% annual clip over the last decade. The company has been increasing its dividend in its native currency since at least 1999, so the dividend growth credentials are alive and well. The dividend growth rate stands at 7.5% over the last decade, but the payout ratio, at 61.7%, is a tad high.
I think shares are worth at least $45, so UL remains very high on my watch list for the coming month.
Armanino Foods of Distinction Inc. (AMNF, Financial)
I bought equity in this really tiny food company based out of California back in September. Shares are priced more than 7% higher right now, but I’m actually okay with buying more here at a higher price.
This is a really interesting stock. It’s like a value, growth, and high-yield stock all rolled into one. It really checks all the boxes for me. The only special considerations are its small size and OTC status.
But it’s been able to grow earnings per share by a compound annual rate of 39% since fiscal year 2008. And they just reported another record quarter. The stock yields 3.64% right now, and trades hands for a P/E ratio of 18.50. AMNF might not get a lot of attention among dividend growth investors, but it’s been increasing their dividend for the last 10 consecutive years, and over that period has increased its payout by an annual rate of 10%. The one item of very slight concern might be the payout ratio, currently at 61%. But the company is growing really fast, so I’m confident this isn’t an issue.
This is a really small company, but it’s just firing on all cylinders. I thought shares were worth $2.19 a month ago, and I’m even more confident of that figure after looking through the third quarter report.
I initiated a position in the world’s largest global payments processing company back in July for almost the same price as it’s trading for now. However, after a strong third quarter and a recent 20% boost in the dividend payout, it looks like shares are set to jump here today. That’s not surprising, as this company is just dominating.
The yield here on V is a lot lower than I’m usually willing to accept – only 0.89%, even after the raise. However, the company’s ability to grow the dividend at double-digit rates is really what I’m excited about. And that ability is fueled both by a low payout ratio of only 21.8%, and also by the fact that the company is growing earnings so fast. Over the last 10 years the company grew EPS at a compound annual rate of25.09%. The company’s reported five-year dividend growth rate of 45.9% is mind-boggling, but set to drop after the most recent increase. However, we’re still talking about massive numbers here.
The P/E ratio seems a bit high here, at 24.45. But it’s warranted, in my opinion, considering the company’s historical growth and huge growth potential moving forward.
Visa is a company that I would love to build up a larger position in, but there are always a number of opportunities competing for my attention (and limited capital) at any given time. That being said, if I can grab shares in V this month near my cost basis I might just load up. I think shares are more or less fairly valued right now, which is probably appropriate considering that the broader stock market is near an all-time high and Visa exudes quality.
Full Disclosure: Long IBM, KO, ARCP, UL, AMNF, and V.
What’s on your radar? Any opportunities you’re really excited about?
Thanks for reading.
