Monday, June 6, 2016

Two Longs and a Short - June 2016 Watch List

After posting about how much I enjoyed reading Dead Companies Walking, I decided to try something related to the book for this month's stock considerations. The book's author, Scott Fearon outlines a contest he conducts with other money managers, asking them for two of their current long 'Buy' picks, and one company they would short 'Sell'. Although I traditionally think about dividend growth companies in which I want to invest for the long-term, I can see the benefit of determining a company that I consider overpriced. I would be remiss if I did not mention that this new 'Two Longs and a Short' watch list is also a reflection of an exceptional post I read last month (or possibly in April?) on another blog where a DGI investor talked about dividend stocks he would not buy. Sadly, I simply cannot remember which blog this article appeared on. Feel free to remind me in the Comments section so that I can give them the credit they deserve.

Two Longs

1. Iron Mountain (NYSE = IRM)

One of my plans within my RRSP is to create a basket of US REITs covering industries that I cannot invest in through the Canadian markets. This specialized REIT offers storage and information management services to companies worldwide. Although I am usually reluctant to buying a stock trading near its 52-week high ($37.08), there is a lot to like about this unique company. The 5.3% dividend yield, guidance indicating double digit annual dividend growth in 2017 & 2018 with 4% growth thereafter, Price to estimated 2016 FFO =~ 17X, Price to estimated 2016 AFFO =~ 15X, and a recently upgraded BB-/Stable credit rating from S&P all help provide me comfort initializing a position. For a more detailed analysis of the company, here's a link to Brad Thomas's recent Seeking Alpa article. 

2. A&W Revenue Royalties Income Fund (TSE = AW.UN)

As I hinted at in my response to one of the comments on my post related to Ten Canadian Restaurants With Growing Dividends, I was leaning toward A&W as an investment in this sector. Despite the fact the stock is trading near its 52-week high ($31.90), the strong same-store-sales growth (7.6% in 2015), four dividend increases over the past year (11% growth), and the P/E ratio of about 20 lead me to believe the company is fairly valued. Also of interest is the fact that none of their 2015 distribution was a return of capital, which is rare in the royalty fund / investment trust space. My only issue with this company is the relatively low number of shares that trade each day (~15K). However, as a long-term investor, the larger Buy/Sell spread would not stop me from initiating a position.

One Short

1. Chevron Corporation (NYSE = CVX)

Although I acknowledge that there is a very low probability that Chevron will file for Chapter 11 in the next year, there are numerous red flags that scare me away as an investor. The company's rising debt level ($42B at Q116 vs $34B at Q115), falling revenues ($130B in FY15 vs $200B in FY14), negative free cash flow in FY13 - FY15, no dividend growth and selling off quality projects / properties lead me to believe that this is not an attractive long-term investment. The fact that the stock is trading just off its 52-week high ($104.26) baffles me. I can understand that optimists might think that the oil industry is turning a corner with oil back around $50 barrel, but why not wait for improved business results before investing one's hard earned dollars in this company? 

The last change to this month's watch list is a lack of target prices relating to the two companies I am considering buying. Not only did I find setting price targets extremely difficult, I had a tendency to anchor on those targets and not update them when new material information was announced. Going forward, instead of trying to initiate and add to positions at an arbitrary price point, my focus will be on making purchases at fair prices.

What are your two long and one short stock picks for June?

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