Stock Story Time (Part 1)

Stock Picking Psychology

Recently I was talking with some intelligent friends about stocks and investing. I was listening very closely to what they were saying about their positions, prices they paid, and why they invested.

Now, at first, I was shocked by what I was hearing. That's because the level of emotion associated with each stock was through the roof. I wasn't hearing anything about fundamentals or even stock buybacks, dividends or growth prospects.

This got me thinking deeply about my own portfolio. What I realized is that almost every investor seems to have a 1-2 sentence "story" for every stock that they own. There's usually just one or two factors that matter to investors, per stock, when they start talking about their portfolios.

So, in this article, I'm going to run you through part of my portfolio at a high level. The primary purpose is to give you a case study to review so that you can review your own portfolio and each story you carry around in your head.

Caveats, Gotchas and a Simple Disclaimer

Just to be clear, I'm not going to try to convince you to invest in any particular stock. I'm not going to make a case that this is the perfect portfolio. This is more or less of a laundry list of stocks in my portfolio with a very short story attached to each stock. It's very deliberately conversational.

Also, I'm going to try to provide you with some honest thinking about the primary strength of each position, along with my feelings about risk and my fears.

Please realize that I work hard to minimize emotions during my analysis. I'm a fan of due diligence, research and keeping my eyes on annual reports, 10-Q's, earnings call transcripts, investor presentations, and more. My stock picks are not "willy nilly" at all. I pour hours and hours into each position before and after I invest. It won't look that way based on what you read below!

Again, I'm revealing the short story I carry around in my head for each position in my portfolio. Now, let's go.

Stock Story Time

(AFL) -- I bought Aflac because it's a 31-year dividend champion on David Fish's Dividend List. But, it's also a conservative insurance business operating in Japan, which provides exposure outside of the United States. I bought at an average price of $58.57 and I'm happy with that. I also like the brand power, the CEO and the growth prospects. Abenomics freaks me a bit. Will Godzilla attack?

(BAC) -- I don't love this company, but I got a good price of $11.31 and the worst of the news is baked in. I'm happy waiting for the dividend to grow to 3-4% over the next few years and I think that stock buybacks for Bank of America are reasonable. Warren Buffett seems to think BAC is OK and he talks with Brian Moynihan in a positive way. I bought when the price to book was well below 1.0 and I feel that the good news will keep pushing this higher. But, how toxic are their assets? Any monsters under the bed?

(BDX) -- When I was doing my early research on Beckton Dickinson, I was struck by their near monopoly on basic needles and syringes. They've been around for more than 100 years. They've been paying growing dividends for over 40 years. Simple, dull, boring, steady. I bought at just over $80 and now we're at $110 so I'll just keep holding. I don't plan on selling. It still feels like a tank. Simple medical "stuff" that people must have in a growing population and customer base makes sense to me.

(BP) -- Seth Klarman was holding well over 20% of his entire portfolio in BP and that blew my mind. This is a stock that people still hate but the business is remarkably strong. The legal issues are significant but in the long haul, they won't matter too much except for some brand damage. The ratios are still good (e.g., P/E) and I'm fine with my 5.5% yield at this point.

(BRK.B) -- Warren Buffett. Charlie Munger. Bought at $73.59 and won't ever sell, even when those guys are gone. I'll also add more shares, despite no dividend, if P/B goes below 1.3 since Buffett himself will consider buying back at that level. This thing is a compounding machine.

(CF) -- I do not like that CF sells a commodity product (i.e., nitrogen fertilizer). However, they are 2nd largest in the world. Plus, they are well positioned geographically in the United States, close to raw inputs and supplies. They use natural gas; I'm loving the shale gas revolution as it relates to CF's future. Management is awesome. They know how to manage cash. Did I mention I don't like that they sell a commodity product? I bought at $187.68 which was a steal, I think. I'm thrilled with Dan Loeb's investment, and his push to increase the dividend. Thanks Dan!

(CMI) -- This is another play on natural gas. I bought at $90 and saw a strongly growing dividend; 14% average growth over 14 years. Strong fundamentals, competent management and simple business to understand. I also like their brand loyalty and I've heard many times that their diesel engines are excellent. I don't have any plans to sell any time soon. They are also a Dividend Challenger; 8 years of increasing dividends.

(CRMT) -- America's Car-Mart caught my eye because Todd Combs invested back in 2010, before joining up with Warren Buffett. They make their money with financing more than selling cars. They service a niche market and they are smart and competent. I'm worried how interest rates might impact their business model and there's no dividend since they are in growth mode. Not sure if I'll stick with them because of margin declines in the last few quarters. Have they lost their mojo?

(CVX) -- Buffett and Berkshire already have me partially covered with their (XOM) holding. I've got BP still too, as I mentioned above. I still believe in energy and the future of Big Oil. I also wanted another dividend champion (25 years and going strong) paying more than 3% right now. Out of 471 dividend champs, contenders and challengers this ranks at #25 right now. It's was good buy, but not a screaming deal. That said, I have no intentions of selling this winner.

Summary

So, I've covered 9 stocks in my portfolio thus far. Here are three things that I've noticed so far.

First, I like to get a good deal when I buy. I don't buy growth, I buy value. I like to invest in companies with a strong history and solid fundamentals. The basics matter to me more than what the crowd cares about. Popular stocks like (AAPL) and (GOOG) and (TSLA) don't appeal to me much. Old companies are awesome companies.

Second, I love consistent and growing dividends. I'll settle for lower dividends if growth is there, but I prefer companies that pay, pay, and pay again. Year after year. Those stocks with low dividends or no dividends are my least favorite and most likely to get sold going forward.

Finally, I find a lot of ideas through smart investors that I respect, such as Warren Buffett, Seth Klarman, Todd Combs, Dan Loeb and several others not mentioned here. I don't just buy because they buy. In fact, Dan Loeb bought after me. Instead, I find new ideas from investors who are smarter than me and I don't mind tailgating on their brilliance, especially their insights.

I'll continue to walk through my portfolio in Part 2. I look forward to our frank and honest conversations about the stocks I've reviewed thus far. And as a reminder, please remember that these "off the cuff" comments and thoughts are snapshots of the stories in my head. The real analysis I've done is not obvious from what I've revealed here.

Source: Stock Story Time (Part 1)

Disclosure: I am long AFL, BAC, BDX, BP, BRK.B, CF, CMI, CRMT, CVX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.