BAMGF - My Portfolio March Update: 5 Buys

2023-04-17 17:44:40 ET

Summary

• This month I had 5 transactions.
• New forward dividends are approximately $1,121.
• Next month I will look at Morgan Stanley, Prudential Financial, CVS Health, and Brookfield Asset Management.

March was a bad month for my portfolio, as it declined multiple percentage points. This was the result of the underperformance of the European real estate sector and the small crisis in the financial sector. The decline in the European real estate sector might have been predictable when looking at the results of other European real estate stocks, but hindsight is 20/20. On top of their price decline, two of them cut their dividends. Although this has a negative impact on the short-term performance of my stocks, I believe that these stocks will do well in the mid to long term. As a result, I decided to keep them. As for the financial companies that I own, I do not expect them to be impacted significantly by the negative sentiment as none of them run a business as risky as Silicon Valley Bank. In terms of new money, I added $1000 in new capital, which I used to add capital to 5 positions.

For the people that have not read my previous articles: I am a 25-year-old investor from the Netherlands who is trying to start early so that I will have the option to retire early or at least earlier (the current retirement age is 67 in NL and is trending upwards). If you are interested in previous updates on my portfolio, you can find them here:

• My Portfolio December And End Of Year Update: Outperformance Despite FX Headwinds

• My Portfolio January Update: 3 Buys

• My Portfolio February Update: 4 Buys, 1 Sale

March Update

March was a terrible month in terms of stock performance for my portfolio. Mainly driven by the terrible performance of European real estate which was down over 10% on average. In addition to the abysmal performance of the real estate sector, there was some turmoil in the US banking industry, which further added fuel to the fire. The S&P500 and the DJIA on the other hand were up during the month which worked as a palliative for my portfolio. Nevertheless, as a long-term investor, I use these moments to add additional capital to positions of which the investment thesis did not change but sold off anyways. This month this led to the addition of capital to 5 different positions.

My other portfolios had mixed performances. The portfolio that I run together with my student association has lost value as a result of the new strategy that we use. The new strategy is significantly riskier and requires a clear catalyst for the next 2 months, earnings plays, and/or M&A among other things. We hope that this strategy will pay off. My concentrated portfolio on the other hand performed significantly better. This was mainly the result of the closing of the M&A transaction of F-Star Therapeutics ( FSTX ) and the stellar performance of the Italian Sea Group which has more than doubled since I first bought it in November.

The final thing that I want to say in this update is that this is most likely my last for the next 3 months. I have accepted a real estate equity research internship position at a bank in the Netherlands. As this might give me access to additional information the combination of Seeking Alpha and the internship is a compliance department's nightmare and therefore I have agreed to refrain from writing for the duration of the internship.

Transactions

Rules

Beginning of March

Vonovia ( VONOY ) - Bought 11 shares for €22.34 each:

When I bought Vonovia at the beginning of the month the company’s stock had just declined a couple of Euros. This was a result of the weak outlook and subsequent dividend cut of one of their competitors. As Vonovia had not cut its dividend and the fact that there is a housing shortage and not enough is being built as a result of high-interest rates, the company looked attractive. Nevertheless, when Vonovia announced results for Q4 and FY 2022, the company also announced that it cut its dividend in half to €0.85. This was because the company was unsure about its future outlook and its liquidity needs. In my personal opinion, this is a prudent move from a long-term perspective. In the short term this decision will have a negative impact on the company’s stock price, but when inflation and interest rates stabilize the company should be well positioned to profit from it. From that perspective, the presentation that I attended from the European Central Bank was an interesting one as they expect inflation to go back to 2.1% by 2025. Thus, for the long-term investor, this stock could be extremely attractive as the company is currently trading significantly below its net asset value.

CBOE Global ( CBOE ) - Bought 2.1 shares for $127.10 each:

CBOE or the Chicago Board Options Exchange runs multiple exchanges in the USA and worldwide. The company is one of the 3 largest options providers in the USA together with the Nasdaq ( NDAQ ) and Intercontinental Exchange ( ICE ). Over the past few years options trading has won significantly in popularity and this has boosted the results of CBOE. In addition to this, the company acquired the BATS exchange in 2017 which has further boosted the results of the company. As exchanges are relatively high-margin businesses the company has used a significant amount of cash flow to buy back shares and increase its dividends. Since the acquisition of BATS the company has bought back approximately 5 million shares and grown dividends by approximately $0.80 per share. To me, this makes it a very attractive business and if you add the undervaluation of approximately 10% to that this should be a good long-term investment.

Mid/end of March

Prudential Financial ( PRU ) - Bought 3 shares for $81.61 each:

After the implosion of Silicon Valley Bank, the entire financial sector was hit significantly. This made a lot of companies very attractive. In order to profit from that I added an additional $250 to my account which I used to increase my position in Prudential Financial. I did not add to this position for a significant amount of time as dividend growth has slowed and the company had recovered from its Covid lows. Around the $100 mark, I was actually contemplating if it was time to move on. Nevertheless, after the stock fell over 15% in a matter of days it made more sense to add more capital to the position than to sell it. The reason for this is that I do not see a reason that warrants the decline. Thus, at a discount of 17.5% to my estimated fair value I added to this position.

L3Harris ( LHX ) - Bought 1.5 shares for $194.56 each:

I have mentioned my interest in increasing my position in L3Harris for a couple months now. This is the result of the decline in share price over the past year, in which the company’s stock declined from over $240 to its current price. During that period the thesis has not changed much. Most countries have pledged to increase their defense spending as a percentage of GDP. Nonetheless, the USA has only increased its defense budget minimally which, if you take into account inflation, is actually more like a cut. However, the main concern of investors is the pending acquisition of Aerojet Rocketdyne ( AJRD ). A deal to acquire Aerojet was initially pursued by Lockheed Martin ( LMT ), but after opposition to the deal, the company decided to pull the plug. L3Harris decided to swoop in and made an offer. The reason why this might work is that L3Harris’ business has less overlap with Aerojet. Investors aren’t a big fan though as the stock has fallen to new 52-week lows after the announcement of the deal. Personally, I think this is a great moment to increase my position, which is what I have been doing and will most likely continue to do in the coming months.

Enbridge ( ENB ) - Bought 7.5 shares for $38.05 each:

The addition of capital to Enbridge had two main reasons. First of all the company’s share price has fallen significantly over the past few weeks, while the thesis remains the same. Secondly, the company pays a high dividend to its investors, which after the cut by Vonovia and Aroundtown will help in reaching my dividend goal for the year. My thesis for Enbridge is that as a result of the Russian invasion of Ukraine the demand for US/Canadian oil and gas will remain elevated for the coming years and what better way to transport it through the pipelines of Enbridge. The company also has its own facilities in Texas to export oil and gas to the European Union and other countries, which makes the company an even more important player in this sector. There are some risks when it comes to Enbridge such as the ongoing litigation between the company and the state of Michigan about the line 5. It also faces a lengthy review of its planned tunnel through the Straits of Mackinac by the US Army Corps of Engineers. Nevertheless, I feel like the positives outweigh the negatives and at a discount of more than 10% compared to my estimated fair value it should be a decent long-term buy.

Dividends

Compared to last year I received slightly more dividends during March. This was mainly driven by the addition of new capital and the proceeds of the sale of Reinsurance Group of America ( RGA ) being reinvested at a higher yield.

This month two of my holdings decided to cut their dividend as a result of an uncertain outlook. These companies (Vonovia and Aroundtown) are both active in the German real estate sector and their cut did not necessarily come as a surprise. Nevertheless, this has impacted my forward dividends which is now back at €1.015 ($1.121).

* annual dividend payment

Sector Overview

Compared to last month my allocation to REITs has declined significantly and this has been the result of the abysmal performance of my European real estate stocks. As mentioned before two of them cut their dividends and in combination with the bad outlook this has weighed the stock down. Interestingly enough my allocation to financials has not changed significantly although the financial sector declined after the implosion of the SVB bank. I personally don’t expect to make many changes to my sector allocation in the coming months. Thus, all the changes in allocation will be due to performance.

Current Holdings

Going Forward

In the coming month, I will try to add an additional €800 to my portfolio. For now, I am planning to add more capital to the companies mentioned below. Nevertheless, opportunities might arise throughout the month that will make me deviate from these names.

Morgan Stanley

Morgan Stanley was one of the companies that sold off as a result of the banking turmoil that started with the implosion of SVB. Compared to SVB the company’s business model is more focused on fee-earning services than customer deposits and loans. Although the company has moved towards more traditional banking services, the company does not have the same exposure. Additionally, the company is one of the most efficient banks in the world which led to one of the highest returns on tangible common equity in the business. For those reasons I think that the sell-off is a great buying opportunity, especially considering the 20% discount to my estimated fair value. For these reasons, I would love to add more capital to the business at current prices.

Prudential Financial

Prudential Financial also sold off as a result of the banking turmoil. The company has a relatively large exposure to long-term bonds and treasuries. In some ways this resembles SVB but in contrast to SVB the company’s liabilities are a lot more long-term. Prudential Financial mainly operates as an insurance company and the increase in interest rates and subsequent decline in long-term assets does not lead to problems. The insurance claims tend to be long-term which allows the company to hold bonds until maturity. This technically means that the company only has paper losses but this does not equal actual losses. Although, if interest rates are higher than the yield they receive from the bonds, the company is losing purchasing power in real terms. Nevertheless, at the current discount, I would like to add some more.

CVS Heath

CVS Health is a company that I have had a position in for a couple of years and until the end of last year was one of my best-performing stocks. Since then the company has acquired Signify Health and is in the process of acquiring Oak Street Health ( OSH ). Investors did not like this move as it increases the company's debt levels again and the company might decide to freeze the dividend again. At the same time, the acquisitions make CVS a one-stop shop in the healthcare industry. The company will have pharmacies, clinics, and insurance among other things. This gives the company the ability to keep customers within its system and thus make more money from them. For that reason, I am fairly positive about the company from an investor perspective.

Brookfield Asset Management

The final company that I am currently looking to add capital to is Brookfield Asset Management. People that regularly read my updates will know that I have been gradually adding money to the company. This is done because the asset management business can be very lucrative and BAM is one of the best in the business. The company is run by Bruce Flatt who has shown to be a very competent CEO since he got the role in 2002. In the current volatile environment, I expect the company to be able to scoop up some great bargains. Additionally, alternative assets have grown significantly as an asset class and are expected to become even more important in the future. If this becomes reality, BAM stands to profit as it is one of the largest alternative asset managers. At the same time, investors receive a dividend of more than 3% that is expected to grow significantly over the coming years. Therefore, I would love to add more capital to this position.

Conclusion

The sell-off of European real estate and the turmoil in the US banking sector weighed on my portfolio this month. As the thesis did not change for my investments I decided to add slightly more than usual this month.

During this month I received approximately $114 in dividends, which was up approximately $22.50 compared to last year. My forward dividends at the end of March were $1,121 down approximately $130 compared to last month

I hope you enjoyed the update about my progress, and I would love to hear your thoughts on my portfolio. As this was most likely my last update for the next 3 months, I want to thank you for reading.

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