Portfolio course changes for 2017


August was an eventful month. We had escalating nuclear tensions with North Korea and Hurricane Harvey that will likely go down in history as the costliest natural disaster.

Yet perhaps shockingly, the stock market remained surprisingly quiet. Volatility ticked up modestly from its summer doldrums, but the S&P 500 managed to finish the month flat, up 0.1%.

The Dividend Growth portfolio finished the month down slightly, giving up 0.28% after fees and expenses.

Year to date, the Dividend Growth portfolio was up 6.7% compared to 10.4% for the S&P 500, according to data calculated by Interactive Brokers as of August 31. (Remember, past performance is no guarantee of future results].

I made several moves in August to better position the portfolio for the remainder of 2017.

 

Investing-stocks-dividend growth portfolio

 

Teekay Corp.

To start, I took partial profits in oil and gas tanker operator Teekay Corporation (TK).

Teekay’s stock price has been volatile in 2017 (along with energy prices), and I have been adding to the position when it reaches the lower end of its wide trading range and taking partial profits when it reaches the upper end of that range.

While I expect Teekay to go much higher from current levels, I also intend to continue opportunistically trading the shares as conditions allow.

Following the announcement of a major dividend hike, I added shares of Citigroup (C) in August. I think the financial sector stands to benefit from several very favorable trends in the coming years.

 

Fed Outlook

To start, while I don’t expect the Federal Reserve to be particularly aggressive in raising short-term interest rates, I do expect rates to go at least modestly higher.

All else equal, higher interest rates and stronger economic growth mean higher profits for banks.

But beyond this, the large banks are one of the few true remaining pockets of value in a market that seems to get more expensive by the day.

Citi trades for just 90% of book value and at a modest 11 times expected 2017 earnings.

 

Portfolio Adjustments

Citi doubled its dividend last month after passing the Fed’s stress test. But even after the hike, Citi only pays out about 25% of its profits as dividends, so there is plenty of room to grow the dividend further.

Additionally, I sold three positions – Prospect Capital (PSEC), Main Street Capital (MAIN) and GameStop Corp (GME) – and have decided to keep the proceeds in cash for now.

While I do not believe a major stock-market correction is imminent, we are entering the September – October window when the market tends to be a little more volatile, and I felt it prudent to keep a little more cash on hand than usual.

Assuming no unexpected developments, I will look to redeploy this capital within the next two months.

Prospect Capital’s performance has been below expectations in my opinion for the past two quarters and, expecting a dividend cut, I decided it made sense to sell the shares. Prospect Capital did ultimately cut its dividend, vindicating my decision to sell.

 

Opportunity Cost

After the post-dividend-cut selling, Prospect now sits at a very attractive 28% discount to book value, meaning the company is worth more dead than alive. I’m evaluating Prospect for re-entry and expect to make a decision in the coming weeks.

My decision to sell Main Street was based less on fear and more on opportunity cost.

In my opinion, Main Street trades at a large premium to its peers in the business development company space.

At current prices, I don’t see a lot of upside left in Main Street in my view, so I decided to sell and keep a little extra cash on hand to take advantage of any buying opportunities in September and October.

 

GameStop

And finally, I believe that GameStop’s recent subpar performance is mostly due to negative sentiment towards brick-and-mortar retailers – negative sentiment that I consider extreme and overdone.

Nevertheless, I see no immediate catalyst to send the stock higher.

So, for now, I’m comfortable selling the stock and reevaluating it a few months from now.

 

Disclosure: For the period discussed, AAPL, ETE, OHI GM and F contributed most positively to the performance of the portfolio and TK, BX,  KKR, PSEC and OAK contributed most negatively to the performance of the portfolio. Upon request, I will provide a list of all recommendations in the portfolio over the past year.  Past performance is not a guarantee of future results.  It should not be assumed that recommendations made in the future will be profitable or equal the performance of the securities discussed herein.

Photo Credit: Gayle Nicholson via Flickr Creative Commons

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.