It is time, yet again, for the monthly airing of my private financial laundry. My hope is that maintaining a journal of my savings will help provide additional motivation to save and allow me to spot trends. It will also serve as a record, so that I can look back and analyze. This time, I’m also going to sprinkle in some investing observations and curate some finance media for you.
Last month, my portfolio bounced back nicely from my ten year anniversary and the sell off in foreign stocks. As I have mentioned before, I am “overweight” foreign stocks. See Media Pin of the Week – More GMO, Weekly Media Pin – Grantham on Graham, Best Foreign Value Factor ETFs, Resource Roundup: More CAPE, and Foreign Value Factor ETFs Update.
I still have about 50% of my liquid assets allocated to foreign stocks. This month that proved to quite a headwind as the the EAFE index (foreign developed ex-Canada) was down about 1.9% last month and emerging markets were down 2.7%. The S&P 500 was up 3.3%. Ouch! BTW if you don’t feel like pulling together these asset class returns monthly The Capital Spectator is a good blog that does that monthly. I am still plowing into foreign stocks as I buy that they have higher future returns, in expectation. It’s kind of just math. I also don’t buy all these comparisons that normalize for sector exposure. First, sector exposure is like 50% of security returns historically (if memory serves), and I think that misses the point that the sales, margins and therefore profits of most foreign sectors haven’t rebounded as much as U.S. companies since the GFC, so yeah the one years trailing or foreign earnings ratios might look similar, sector adjusted, but that’s why the CAPE and Tobin’s Q and other metrics that smooth the earnings have demonstrated superior predictive powers, because the limit some of the noice from the economic vicissitudes. At least, that’s my take.
As far as investment moves, I have a couple of orders outstanding to redeploy my GPT proceeds. See Merger Monday Comes to my Portfolio. Not that I believe in making macro-type decisions, but I found some opportunities to keep the money in the real estate/REIT sector. I had a post planned about this, but I wanted to get the fills first before my hundreds of readers bid up the names (sarcasm). I think I can go ahead and spill the beans.
First, here’s a good research piece I was going to highlight in that post: Verdad Capital, The Lasting Value of Real Estate. I have highlighted Verdad before. See Newell Brands and Uncle Carl. You should consider signing up for their email list. They put out good stuff.
Anyway, this paper discusses the historical performance of REITs which has been very strong, especially on a risk-adjusted basis. They conclude that REITs have historically outperformed private real estate and have performed on par with small cap stocks, with lower volatility. They propose some theories for why this is the case, including lower expenses (compared with private RE), better alignment of interest, greater diversification, and more transparency. Most of the underlying data can be found via Nareit’s site.
Granted, this isn’t a huge sample size, since REITs haven’t been around that long. They were also dominated by mortgage/debt REITs for most of their early history. Given the dislocations in that sector and the fact that it is fertile ground historically, I’ve decided to keep my GPT proceeds in the sector.
First, I decided to pass on GGP. I was thinking about getting a little merger arb and staying with the equity investment as it seemed like the deal was designed to “cashier” retail investors (kind of at the bottom, too if you look at the bounces in other retail REITs since they finalized the deal). See Retail REITs: Brookfield’s Acquisition of General Growth Properties, Retail REITs – Mission Accomplished?.
I am not comfortable with the external management agreement with Brookfield. Not that I think they are likely to behave abusively or in bad faith, or anything but the incentives are not aligned, they are smart capitalists, and they are going to take a large chunk of the upside. Incentives matter…a lot. Paying high investment fees via a conflicted arrangement is not how we operate around here.
I recently updated some of the valuation ratios/touchstones that I looked at in the prior posts. See Retail REITs: Apocalypse or Opportunity?, Retail REITs – Mission Accomplished?. These figures are as of 08/24/18, but I don’t think the market caps (and EVs) have moved materially since then. I generally used trailing figures and most of the data came from Capital IQ (via Morningstar, Rocketfinancial, or Gurufocus). Here’s the info:
BRX KIM KRG VER
EV ($MM) $1,091 $1,201 $299 $1,350
EV/FFO 18.02 19.28 17.86 20.61
EV/EBITDA 12.34 14.40 12.15 13.50
EV/REV 8.67 9.94 8.35 11.44
Yield 5.96% 6.51% 7.20% 7.07%
P/B 1.91 1.33 .97 1.02
As you may recall, I liked BRX’s exposure to neighborhood and grocery centers. See Retail REITs: Apocalypse or Opportunity?, Retail REITs: Brookfield’s Acquisition of General Growth Properties, Retail REITs – Mission Accomplished?. They are also putting their money where their mouth is by selling RE and buying back shares. KIM has also been doing some of this. KRG is basically constrained by leverage and they seem to be using extra cash to reduce debt and redevelop some properties. One negative for KRG is that the CFO recently left. Analysts said the departure, or at least the timing, was unexpected and he didn’t leave to take a CEO role or step up to a bigger company, so it seems like he really resigned or was fired. I suppose he could have been terminated because KRG views their leverage as a little high.
VER is holding a lot of cash due to pending litigation from their prior management. One surprise to me is that VER isn’t really cheaper than the other options. They also have kind of a lot of crappy leases, with fixed rent, because the prior management was just scummy and was probably trying to just grow to hit compensation incentives or to allow for more accounting gimmicks or something. I may go ahead and move my VER investment into one of these other options, but I don’t like making a lot of transactions and paying fees and bid/ask spreads, so I might just redeploy the dividends. I like the portfolio of KIM and BRX better (although VER does have some industrial/e-commerce stuff…it also as a ton o’ red lobsters).
So basically, I put in some buy orders, a little lower, for BRX and KRG (more for BRX). I would like to buy some KIM too on weakness.
Media Curation: Buffett Interview (CAG and CPG Companies)
I haven’t done anything with ConAgra Brands (“CAG”) yet. CAG announced an agreement to acquire Pinnacle Foods. While analysts and the press (and Jim Cramer) seem enthusiastic about the deal, CAG is diluting my shareholdings and KHC reportedly passed on the deal over price. CAG did pay a handsome price and as we know the “base rate” for mergers is a big pile of problems. I am feeling that right now with COTY.
I will use KHC as the hurdle/opportunity cost for the analysis. They are passing on the current high-priced deals on offer but they bought some stuff back before the deal premia increased. I know there has been a fair amount of bad press about them lately, but frankly I prefer to buy in that kind of an environment (although there is likely no rush). I think their process is replicable and even assuming slow declines in U.S. they can produce great returns overseas while maintaining those fat ROEs.
This week, Buffett commented on the large control premiums as being a hinderance to deals in CPG (in the context of rumors about a KHC/Campbell’s deal). His entire interview is in the CNBC Buffett Archive.
So, I’m sort of thinking:
- I thought CAG paid through the nose at the time.
- KHC passed on PF.
- Buffett is saying the deals are too rich in this sector.
- Maybe it is time to ring the register on CAG?
Unlike most so-called Buffett aficionados, I want to try hard to not profess to be a huge fan and acolyte while blithely ignoring pretty much everything he says and does (except for regularly dropping some opaque, self-serving quotes, of course). I don’t want to do anything precipitous, but I did stop dripping my CAG dividends. I mean I thought they got ripped off and the GOAT and KHC basically agree.
All that being said, let’s get down to the personal finance diary:
In our last episode (end of July) I bounced back to about $183,000. As a reminder, I only include liquid investments in these monthly figures, as I don’t think it is very helpful to start marking my real estate and other illiquid assets monthly. I will mark those at year end.
As of the end of August, I was able to grind up to a little over $186,000 in investments. Not a great performance. My foreign stocks were a headwind.
Spending was pretty elevated as well. My kid is breaking me up with a bunch of doctor visits. Not only do I get to pay through the nose for daycare, my kid also has some weekly bespoke communicable disease (freshly brewed by the most expensive daycare in town) about 80% of the time.
The poor little guy had to have a surgical procedure to insert tubes put in his ears this month. The out of pocket expenses, even with my wife’s beast-mode insurance, were over $1,500 bucks. I won’t rant about the U.S. healthcare system here, since the post is already long, but it is totally unacceptable. I agree with Munger on the next likely step.
One other reason that I’ve not been posting as often is that I have been “up in the gym” a lot more lately. I started off doing an intermittent-fasting-type eating plan. Something like this:
It has really worked quite well for me so far. Although, I have to admit I was kind of pre-disposed to “skipping” breakfast. I’ve now built up to doing 24 hour fasts pretty regularly (a few times per week).
As often sort of happens, once I started thinking about health and fitness via the eating plan/diet, I got more motivated to go to the gym. So, I’ve been pumping a lot more iron (and posting less). I’m down 36 lbs so far (since about June). I’ve also added a fair amount of muscle.
Once I get an “8 pack” I will be sure to post some pics. I’m sure you guys would enjoy that very much.
To sum up, this month was just a grind. A ton o’ baby expenses continue to impact my budget, but I was able to overcome. The overweight to non U.S. stocks isn’t helping me any, but I can easily handle the pain since it’s just an overweight, not an all or nothing bet. The move was pretty much all due to contributions of about $4,000 to my investment accounts. My investments basically did nothing.
I am still hoping to cross $200,000 by the end of the year.
As far as investing, I’m thinking hard about dumping my CAG (booking a nice gain). I am also on the hunt for some retail REIT shares to occupy the proceeds from the GPT go private transaction (Blackstone’s funding was actually secured).
Thanks for reading. Raider loves you!