Nicholas manages a portfolio of high-quality stocks that includes both “classic” dividend growth stocks as well as a handful of more speculative growth securities. In this episode, we discuss Nick’s investment philosophy, where he’s seeing opportunity in the market, and how individual investors can position themselves to achieve above-average total returns.
Full Transcript Below
Nick: Nick I just wanted to start off by thanking you for being a guest on the share investing podcast today.
Nick W: yeah no thanks for being here you know it’s always nice and mix it up and do a little audio instead of typing away all day.
Nick: with that in mind I think our listeners would be interested to hear a little bit about who you are and what your place is in the world of investing.
Nick W: well i in the grand scheme of things I don’t know if I have much of a place. I’m just a main street you know everyday average Joe type of guy who kind of realized he really liked portfolio management and following a stock market and over the years I’ve written for various publications is probably more of a financial blogger than anything else. But sort of transition into a full-time portfolio manager and I just recently sort opened up my own website Income Minded Millennial where I’m sort of I guess have more freedom on what I share over there, so I’m excited to sort of make that transition in 2018.
Nick: yeah that does sound exciting for anyone listening on our website we’ll toss in a link to Nick’s website down in the description. just turning back the clock a little bit Nick when was it that you started to really become interested in investing and later on when was it that you decided that that might be something you want to pursue with your career?
Nick W: I became interested unfortunately after I graduated from college, and actually I give my University of Virginia Cavaliers a shout out today. We were just ranked the number one team in the nation for the AP basketball poll, so I’m excited about that.
But I studied English and studio art when I was a student there I really had no interest in the market or finances or really money at all I graduated yeah I wasn’t getting paid as much as I might have liked because I pursued the arts path rather than a more practical degree. And so ever since then, I’ve been doing everything I can to turn what I make into more money in the market.
Nick: and was there any kind of you know did you read a book that made you start to be interested in investing or was there what kind of experience that you say turned you from being interested in the arts part of academics to more being interested in investing in finances.
Nick W: I think it was more of neccessity than anything else I just looked at what my paychecks were and realized I wasn’t going to meet my long-term goals if I didn’t do something to augment them so that that led me to the market you know you always hear about the stock market as a means of wealth creation.
Once I got there you know I just I kind of found seeking alpha.com and that’s I read a lot of work there for a while and then became a contributor there and then grew alongside many others and the dividend growth investing community that this has developed there over the years.
And then I guess I haven’t really read a lot of books, but I have a big asset that taught me a lot has been the Berkshire Hathaway annual shareholder letters. I’ve read all those several times you know dating back I forget the first one I think it’s in the 70s or 80s and there’s just there’s a lot of great information that Mr. Buffett shares and his annual letters.
Nick: I would agree with that wholeheartedly I mean probably the best business book I’ve ever read is the Essays of Warren Buffett which is just a compilation of those annual reports that are pieced together in a way that kind of makes a logical progression through various themes.
Nick W: I’ve like you know Peter Lynch I’ve read some things over the years it’s you know you hear a quote someplace, and you want to hear where it comes from I think that’s kind of where that goes.
Now I’ve read I’ve read Benjamin Graham and tells it the intelligent investor because that was such a big influence on Warren Buffett but as I kind of have to admit you know a lot of this financial writing is a little bit dry for my taste. So, unfortunately, I don’t have a huge appetite for reading that stuff. I’d rather read a science fiction book or something like that.
Nick: yeah I mean I resonate with you there too. I think that I was late to read the Intelligent Investor, it was like far from the first book I read about finance or investing and given all the hype that it receives in the media and you know Mr. Buffett I praise of the book I really expected it to be better than it was.
Nick W: yeah I mean certain chapters I think really resonated with me yet you know I learned a lot about margin of safety, and that’s kind of carried over into my personal investment strategy a lot is pursue passive income. But you know my everything is on such a strong valuation foundation for me. I think which is a little bit different from a lot of other dividend growth investors who seem to be interested in yield first and foremost.
but you know I agree that wasn’t you know I probably won’t read that book again I’m okay with that.
Nick: you know you touched a little bit there about your personal investment strategy could you provide more detail and more color about what you look for when making investments and what you think are the most important characteristics of a good long-term hold.
Nick W: yeah know I’m a younger investor I just turned 28 so I prioritize growth a lot and not necessarily like hyper Tesla momentum type of growth.
I do want to see a long-term upward trajectory on the top line which to me is sort of the baseline for sustainable dividend growth long term. It’s you know financial engineering and things like this can make a dividend sustainable for a certain amount of time without growth.
But at the end of the day yeah I want to see companies that are taking market share or that are being innovative that are being disruptive.
Nick: yeah definitely. Is there any standout investments in today’s market that you think are exhibiting those characteristics?
Nick W: there are there’s a ton of companies that offer great growth the problem is finding them at attractive valuations.
I’m sure as you know that you know just the market is willing to pay up for growth and that you know maybe that’ll change as interest rates rise because that should theoretically put less of a premium on for growth estimates. But yeah and I’m just looking I put together a list of stocks that I’m looking at the moment after this sell-off.
Obviously, a lot of the FANG type tech names are attractive they’re becoming attractive anyway it’s Facebook and Alphabet specifically even though they don’t pay a dividend I’ve written about that.
But I already have such big positions in those names I’m sort of hesitant to add to them a company in the DGI space that I’m looking at right now is actually Comcast.
I own Comcast’s already I wouldn’t mind adding to that position it’s well diversified in the media space and it offers some of the best dividend growth out there. I think it just recently increases dividend another 20 percent.
Nick: 20 percent growth over even a short-to-medium period of time that amounts to some really impressive compounding.
Nick W: yeah I think I think it’s got like percent yield right now but like you said if it’s able to give 15-20 percent growth for five years you know your yield on costs becomes high really quick.
But that said I’m not a big you don’t cost fan as a metric of ownership or why you should hold on to a stock, but it is it is fun to look at that and to see what your money’s done for you over the years.
Nick: yeah for me I share the same perspective is you where yield on cost doesn’t really matter because if your yield on cost is high, but your current yield is low, you can always sell take your profits and invest them somewhere and make more money.
Nick W: yeah yeah and I’ve had that conversation too many times to count, and a lot of income or investors hate selling because then you end up having to pay taxes unless it’s in a retirement account or something like that.
But they really harp on there you don’t cost me I try to you know if it’s if I can sell a company right now even my yield on cost is 10 percent but it’s only yielding 2, and I can buy a company yielding 3 you know I’m still making more money next dividend in it that way.
Nick: yeah definitely and I mean you mentioned that you don’t place too much emphasis on current yield are there any examples of attractive low yield dividend stocks out there right now that stand out to you.
Nick W: yeah there are some Nvidia planning for me right now, and I mean you talk about low yield that’s like a 25 basis point, so that’s not much of yield at all, but it is that’s more of a speculative growth stock for me at this point. But I thought their last quarter was fantastic in the stock I think after its performance today it might even be down since then if not it hasn’t gone up much.
And you know you have the Visas, and the MasterCard’s the Disney’s the Nikes you have a lot of the popular ones, and you know the valuations.
Disney’s valuation is interesting to me at this point but it’s my second largest holding, and it is having some issues that it needs to resolve so that I’m a little hesitant to sort of push that exposure up much. I think it’s at like 4 and 1/2 percent of my portfolio right now and that’s pushing the upper limits me.
Nick: yeah definitely are you talking about ESPN issues.
Nick W: yeah ESPN cord-cutting yeah the studio in the parks are great it’s just the whole media space is interesting I covered a lot I own just about every company in the media space. I sold Time Warner recently, but I have a bunch of AT&T, and I hope that acquisition goes through and then I’ll end up having exposure to HBO and the Warner family of networks in the studio Paramount here shortly.
But you know everything but Netflix I just can’t justify the valuation. I think it’s a great company I think it’s got a lot of pricing power which is something that I look for when choosing investments but I just I can’t come to terms. You know maybe it will earn ten dollars here in another five years, and everything will be okay.
But if that doesn’t happen, I worry about multiple contractions there, but I’m looking forward to Disney’s over-the-top the stuff they’re coming out so yes means the sports ones are coming out this year and then the Disney specific one next year I think.
And yeah then they have Hulu, so I’m interested to see how all this sort of how all the chips fall in the media space.
Nick: one of the things that I find very interesting about Disney’s new over-the-top strategy is whether or not it’s going to cannibalize Hulu which they own a pretty sizable stake in, what are your thoughts on that?
Nick W: well I don’t think the sports one I don’t think will have much impact on Hulu cuz I’m not a Hulu customer, but I don’t, and you can correct me if I’m wrong they don’t offer the sports on that do they?
Nick: not that I’m aware of, but I like you I’m not a hot customer either.
Nick W: so yeah so I don’t think I think that’s they’re going after a different market there and I do I think what the Fox acquisition if that goes through they’ll end up owning I think 40 or 45 percent of Hulu.
So that will be a big part of Disney moving forward unless they’re forced to divest it by regulators which is rumors that I’ve heard. But I like them having that because if you know, they do the Disney family-oriented over-the-top thing with the superhero movies and the animated flicks and stuff like that.
You’re not going to be able to put a lot of the FX content and Deadpool and cuss words and things like that, or you don’t want to have that on a Disney children’s over-the-top. So I think they’re going to need another avenue to distribute their content, so I like having the three-pronged attack with ESPN for the sports the children stuff for the families with the young children and then Hulu for adults.
Nick: that’s a very interesting perspective I hadn’t thought about the whole children’s content versus adult content before, but you make a very good point with that.
Nick W: yeah and in Fox Studios puts out a ton of movies every year and it’ll be interesting to see because Disney highlights Disney only goes for blockbuster films, and that’s why they’re the most profitable studio in the world.
But you know I’d hate to see a lot of the more drama and just a lot of the art stuff that Fox does get sort of cut away by profit-driven Disney. But a lot of those films this wouldn’t be appropriate for an over-the-top family platform or children. So yeah like I said I think they’re going to need to figure out something else to do, or they can just sell it all the Netflix, but I think they’re at the point where they don’t want to feed that beast any longer.
Nick W: yeah definitely I mean it’s it’s clear from this short conversation that you like this do you think they’re a good business you mentioned that they’re your second largest position.
What are the things that you like about Disney as a business that you think people can generalize to other investment opportunities?
Nick W: I think I mean you’re getting decent growth that slowed down recently but in the past you know you’re getting 10 10 % top and bottom line growth and you’re paying you to know 17 to 20 times for it.
That’s that’s not a bad price the growth ratio there so I think you can you know look at that I’d much rather pay a little bit more for a company growing 10% a year than you know than to pay for a company that’s not growing at all which is the case with a lot of the consumer staples that we’re seeing today.
But just lessons that you can learn I mean I should have seen this before I wish I totally underestimated the cord cutting phenomena and if I would have gotten that right then I probably would have sold some of my shares a few years back.
You have something I’ve learned personally it’s a lot you know you get the idea that a company is a core position in your portfolio and therefore you don’t want to sell it. but I think sometimes that’s to my detriment and to anybody’s detriment you know you always hear about buying hold investing being the best way to go about it but you know sometimes when something new owns getting disrupted.
I think it probably makes sense to sort of cut back on that exposure and you know if you lose money you know if they end up doing really well and you land you lose out what the opportunity cost it is what it is I should have probably protected some of my capital there because Disney’s been a underperformer for me for a few years now.
On that since it’s such a big position for me that’s sort of put a little damper on my overall returns.
Nick: Disney is your second largest position what is your largest?
Nick W: Apple which has done really well also thank you know that sort of balance things out there.
Nick: and how much larger would your Apple estate be then your Disney’s take in terms of percentages?
Nick W: it well Disney was my number one stake probably a year or so ago Apples recent performances has allowed it to hop over it I think Apples like five and a half six percent in Disney’s like four and a half five percent right now.
Nick: and how many stocks would your total overall investment portfolio contain?
Nick W: its right around seventy-five I think a full position for me is is right around in the percent and a half to two percent weighting.
You know what my top positions are all overweight I think my top seven or eight or probably in the two and a half percent range or above and I have a ton of positions that are you know half percent or you know less than one percent. Because yeah I average into position slowly so I’ll pick a price target that I think is a good value and I’ll buy it but then if it doesn’t continue to go down to my other price targets I end up just never filling out that position which isn’t being in the world it just means I’m making money.
But it also means that I have probably more positions than I planned on,
Nick: and would you say that you’re 75 ish current portfolio diversification is that your optimal level or would you like to see yourself owning less or more stocks?
Nick W: I don’t have much of a preference I focus on value and just kind of let the market come to me. So yeah I’d know I didn’t set out with a certain number in mind you know technically I talk about a 2% full position weight that would theoretically mean I hold 50 companies.
But it doesn’t bother me holding more or less I just just over the years I’ve learned just to you know just sell things when they’re really high and divide things when they’re really low and you know I don’t I’m not living off of my passive income so I don’t have to worry about you know how much I get in January as opposed to February I just I take the dividends when they come and reinvest them when they come.
So they’ll probably be a time when I to be more strategic about my holdings from that perspective but right now just accumulating high-quality assets when I see them trading it at attractive valuations.
Nick: have you ever invested on margin or thought about investing on margin?
Nick W: I thought about it time to time more about shorting things every now and then I’ll just read something or see something and I’ll just be certain that something is a short. but one principle I’ve never done that it I guess it’s the risk reward of limiting your upside while having infinite downside is a just doesn’t it’s hard to kind of wrap my head around that.
And generally I’m pretty I don’t like having debt I’ve taken a lot of steps out you know I don’t have any credit card debt I use a credit card for the rewards but I pay that off every month. I have I’m student debt free myself my wife is actually in graduate school right now and we’re thinking about taking on some debt for that but yeah I think it’ll be good investment.
But in general I like to be as debt-free as I can my mortgage is the only exception.
Nick: I think that’s generally a wise policy for about 99.9% of investors and I think the only exceptions aren’t people can get some kind of unique form of leverage that is non-callable and charges a very low interest rate almost like insurance float.
Nick W: yeah I’ve seen I’ve seen just too many horror stories and we’ll even you saw it last week in the market I mean the reason I think a lot of the volatility had was because of margin calls on on that inverse VIX fund and too many bad things can happen not expectedly and it just isn’t worth the risk guys.
Nick W: yeah I own a lot of growth companies but I consider myself to be pretty conservative and I know what my goals are long term I’m not you know if I ever become a billionaire or something that’d be great but I’m sure that won’t happen the way that I managed the money so and I’m okay with that as long as I’m able to reach the freedom on the timetable that I have.
Nick: yeah definitely I just want to go back and talk a little bit more about your due diligence process.
When you buy stocks do you ever use anything like the dividend discount model as a valuation technique?
Nick W: I don’t use that I’m not a fan of the dividend discount model because I relies too heavily on estimated regular dividend increase rates of return. I do a lot of work myself on the where I think dividend increases will be in the future based upon earnings and earnings estimates and I do factor that into my due diligence.
But a lot of the sort of formulas that I see I guess and like I said I studied art. I haven’t taken a math class since I was a sophomore in high school I’ve just never been all that attracted to numbers and statistics.
so for me it’s a lot more of an art than a science obviously I need to pay attention to the numbers and I do in the markets but I don’t use a lot of the formulas that I see other people using.
Nick: I think Peter Lynch was very rare he said that all the math you need to be successful in the stock market you get in the fifth grade or so.
Nick W: I’II incorporate new things when I see them especially at over a period time if I find that they’re working or that I’d like the results I get. But and a lot of the times when I look at these formulas somebody asked me hey do you use this discount model or like you said you use a dividend discount model then at the time I’m not even familiar with the formula.
But then when I go look at it I realize it is something that I’m using just in my head to a certain extent so I you know I think the all the fundamental numbers there that are underneath of the market are important but I’m not a slave to any sort of outcome of a financial formula.
Nick: I agree with you completely. I mean from my perspective the dividend discount model is kind of a commingling of a bunch of things that are grounded in common sense. You know higher dividend increases are better you want the company to increase its dividend well into the future.
But the problem is that it tends to quantify those aspects with too much precision that we don’t really have in reality.
Nick W: well and it changes the price targets too much I mean if you’re you know I I don’t I’m not good enough to do off the top of my head but I do know you know you’re looking at a company you think it’s going to be a 7% long-term research and then it falls down to five.
you know that’s a 2% difference in the dividend increase rate but that changes the price target by multiple twos of that and so it’s I think you know just if you’re if you’re really buying into that I think you’re going to just have a lot of calculations that are more confusing than anything else.
Nick: yeah definitely you know you’ve got yourself identified as a dividend investor. What’s your opinion on share buybacks versus dividend payments or other forms of capital allocation policies?
Nick W: I’m a big fan of just about any time a company is willing to return cash to me as a shell shareholder. so long as it’s done sustainably.
What I mean by that is you know as long as I can expect it for the long term and predict it a lot of you know I need to be able to sort of predict my outcomes at least you know looking out a year or two.
So I’m not a big fan of special dividends I think that’s just a waste of capital I’d much rather than just invest that into the business or just buy back shares at that point in time.
I know a lot of people don’t like share buybacks and sometimes it gets a negative light with the whole financial engineering deal. But when you think you know as long as the company is able to sustainably increase their dividend every share that they buy back is saving them their current dividend plus you know their dividend growth rate of the future.
So it really just helps them to be able to sustainably raised the dividend so I do one of the when I’m looking at a company just cursory at the beginning reduced share count is one of the five or six things that I’m looking for.
Nick: are there any companies that stand out to you as being remarkably shareholder-friendly in the way that they spend their money?
Nick W: yeah I mean there’s a whole bunch of those you know I like its most of the dividend aristocrats I’m sure you could say that if you know management’s been that generous for that long they’ve obviously prioritized shareholders most of the companies that I own are I mean like I said I rely prioritize a rising dividend as well as a reduced share account that just gets into basic supply-demand principles I don’t want to see a company diluting the shares that I’ve bought by issuing new ones.
But I you know just recently I’ve been there’s been a ton of companies just giving above average dividend increases Union Pacific and Visa both just kind of gave investors a double dividend increase.
Probably due to the tax reform but you know they increased on schedule like they usually do either late last year or early this year and then they just announced that their upcoming dividends are also going to be increased I was impressed by both of those you don’t really see that very often these companies are usually sick to their schedules pretty close.
Nick: when you think of companies that buy back stock do you think that there’s a certain price above which a company should stop reversing these shares than certain price under which a company should be more aggressive in the pace that it buys back its own stock?
Nick W: well I mean theoretically you’d love to see a company you know use valuation when during their buyback that’s what I do as an individual investor but I also if they’re being consistent you know you get a company like Apple that’s just removing a percent a quarter or essentially 4% a year or more some years. But just over the long term you have these companies that are just constantly reducing the share count and I’m happy if they do that regardless of what they pay.
Just it’s sort of like dollar-cost averaging I’m sure these management teams think their stock is cheap at most valuations because they’re confident and they understand their business models well but you know I I’m sure you know a hundred times 50 times earnings obviously I would say you shouldn’t buy back your stock. but for the most part I just I think regular buybacks is pretty similar to just dollar cost averaging that most people think and you know your Main Street investors should do so I’m happy to see the corporate guys doing the same thing.
Nick: that’s interesting I’ve actually never heard that comparison before but it makes a lot of sense.
Nick W: yeah I mean just like I said for me it’s all about supplying a man you know I don’t they had the companies obviously have huge floats so it really doesn’t make much of a difference for the you know 50 or 100 or 200 shares that I own but it makes you feel good when you know that you know your value increased you didn’t do anything the company just you know gave you a little present.
Nick: the opposite of a company that repurchase stock is the company that’s constantly issuing stock and the two main categorizations of stocks that do that are REITs and MLPs because they’re always issuing equity to fund these new growth projects or buy new properties or what have you.
Given that you like stock repurchases so much what are your thoughts on REITs and MLPs? Do you own them would you own them what are your thoughts?
Nick W: I do own REITs so I’ve been out of the energy space for probably three or four years now I’m just I’m not a big I’d love you know just poor that’s almost moral you know I’m not a big fan of a lot of the environmental issues surrounding fossil fuels. So I’ve just decided I don’t need to have exposure to that in my portfolio.
But I do understand you know those are just completely different business models so I don’t mind seeing them issue shares as long as they’re the moves they make or creative long term.
I do own a fair amount of REITs and I’ve been buying reached recently at their getting you know really beating down their yields or you know you’re seeing yields right now that you haven’t seen in years because of the rising interest rates. But a lot of that just comes down to management teams I buy the blue chip companies because I trust that they have the talent and the know-how to make sure that they’re being smart with all their capital maneuvers.
Nick: good to know are there any REITS up to you as very attractive long-term investments right now?
Nick W: yeah I mean there’s like I hate I said a whole bunch already before but me I bought Gramercy Property Trust and Realty Income last week Ventas is looking interesting to me that’s I bought that years ago and at one point in time I was up like 40% and all my gains are gone now so I’m back near my cost basis on that and I may add to it.
The healthcare space is a little bit I just worry that regulation will just totally disrupt that and just kind of ruin some business models and that wouldn’t really be any fault of the management teams. But I just don’t like the risk of the change there.
But I like the industrial space I like the triple net retail space I’m not a big fan of sort of the shopping mall space yeah I think Amazon and just in general I think those big malls are probably going to be dinosaurs here in a decade or so. but yeah I’ve always wanted to be a landlord myself but I’m just too lazy and don’t like the liquidity of it and in the town I live property values are kind of absurdly high because it’s a college town.
So I’ve never gone that route but I’m happy to do it by holding shares of REITs.
Nick: very interesting now you’re comments about healthcare about government does that apply specifically to healthcare restored you have concerns about the broader healthcare sector companies like Johnson & Johnson or Abbott Labs or Abbvie?
Nick W: well I have concerns over all I was flying a ton of healthcare stocks in like 2015-16 when Hillary Clinton’s tweets and then when we’re kind of knocking the market down and then you had the sort of the Gilead news there their legislative oversight and Congress really hurt them while it goes up. at a certain point I was really overweight in health care because I thought that they had been here Ashley punished I’ve sold out of a lot of those positions since then as sort of values returned.
But I’m more I do I worry more in the REIT space just because of some of the things like senior housing and skilled nursing facilities and stuff like that it’s so expensive you know I think I read recently that you know the last five years of your life if you live in these things cost like half a million dollars and you know that doesn’t seem super sustainable to me and it seems like some low-hanging hanging fruit that the government could go after.
And or just in subsidies to so I do I worry about you know people are really a happy sort of bullish on the mega health care investors right now because it’s yield is up above ten percent and it’s been a great dividend grower recently but you know they’re so highly exposed to some industries that I’m worried about that I’m I own shares but I’m not adding at these you know pretty low prices at the moment.
Nick: yeah mega stock has been really hammered because of some issues they’re having with one large significant tenant I think they put them on cash recognition for revenue recognition and I think that’s harm that stocks price quite a bit.
Nick W: yeah and I guess and you just got to worry about that spilling over into the other tenant so I don’t I I do I look at a lot and I don’t have these numbers off the top of my head but you know with what percentage of their revenues are subsidized or not I think some of them are much served pretty much 100% private. I assume that those would be less at risk but in general I just you know you’re getting six and a half percent to 10 percent yields there but you know you look at Realty Income or National Retail Property is their Store Capital a lot of these triple net retail plays and you’re getting five five and a half percent yield. I’m happy to you know lose a percent on my yield therefore some perceived safety.
Nick: there comes a point when actually this is another good question for you do you have any kind of due diligence process that helps you determine what’s the value trap versus a stock that is actually worth quite a bit more than what it’s trading for?
Nick W: well that sort of gets back to the rising top-line when I see a trend of negative sales growth and sort of the value trap pops up that’s signals to me that you know that company has been disrupted they’re losing market share they’re not a leader in their industry any longer. Yeah like I like just sales to I think a lot of dividend growth investors don’t you know you hear so many times sales don’t matter earnings matters when you’re talking about you know like the thing names like Amazon.
But at the end of the day if you’re not increasing your sales I think you’re going to have a hard time increasing your earnings long term so I look at that I look at debt levels I hate seeing companies you know for levered and especially if they’re raising that debt to do shareholder returns and then I just read sort of the analysts the industry and analysis that the analyst put out and I found some guys and gals that trust over the years their opinions on that so if they think that a company is losing leadership I avoid it.
Nick: are there any publications that you’d recommend for our listeners?
Nick W: but yeah there’s several authors on Seeking Alpha that I like one of the questions you had sent me was and this kind of gets back to the books I’ve read but David Van Knapp has been a big influence on me especially when I was starting out he talks a lot about just portfolio management from a business ownership perspective and I like that with the brokerages that I use I have access to Morningstar S&P Capital IQ.
Morningstar seems to be a lot more conservative than S&P; Capital IQ but I generally sort of way those two against each other I go to Yahoo Finance where and they do a good job of just tracking all the analysts on the street so I do a lot of just averaging out of opinions and I’m happy to you know if you have thirty people doing something and you know you kind of take out the outliers I assume if they’re all relatively similar I assume that it’s you know 30 or 25 smart people coming up with a similar answer I’m happy to side with that.
Nick: very interesting good to know. We’ve talked a lot so far on this call about you know how to decide when to buy a stock what makes a good stock? I won’t kind of want to flip the coin and ask you are there any serious red flags upon which you’d see them and immediately sell a stock?
Nick W: I look a lot at relative valuation to the market to the history of that company and to its peers so I generally know which are the you know in most industries there’s two or three or four leaders or really high quality companies so and I usually own all of them I don’t I’II get bullish from certain areas of the market and I’ll buy basket from within that area instead of just trying to pick the one winner or loser.
I don’t have any sort of illusion that I’m going to be able to do that but if friends but if I’ve done that and I own four or five names and then one of them is you know becomes has a valuation that’s much higher than the rest I’ll sell that that just seems like a logical thing to do and same thing relative to the history I mean you see a lot of stocks that you know they might trade a 17 or 18 times over like a 20 year average and you know you can also look back and see what their previous highs.
Boeing’s an example that’s that stocks really overvalued right now and I’ve considered selling it but it hasn’t ever quite made it up to its historical tops which I think would be like 385 bucks.. so I just yeah I just look at a lot of relative stuff and I know people say you can’t you shouldn’t drive looking backwards but over the long term I think there’s just enough data as long as growth rates and expected growth rates are somewhat similar with what you would expect historically then the valuations should be in line as well.
Nick: so it sounds like you you’re very valuation focused which I appreciate and it kind of aligns with what I try to do.
It sounds like you try to identify when stocks are in kind of a little micro bubble and you’ll sell them if that’s the case is there any is there any sectors of the stock market or other asset classes where you see big bubbles today?
Nick W: I have I look at everything sort of on like an individual level I sold Union Pacific’s my favorite railroad but I sold that back in December I think it liked 126. I was in for tax reform tax reform sort of that equation a little bit and I regretted it but I couldn’t be sure that that was going to happen so but anyway before that it was just really high above its historical average and then I’m hoping that some of this weakness allows me to get back into a cheaper.
I have just as a sector-wide call I’ve been selling a lot of my consumer staples recently as kind of as hard as it is these are names household names that you know every DGI investor is aware of but you know these guys are trading at 22 to 25 times last year’s earnings or even in some cases next year’s earnings and you know they’re not growing on the top-line there they’re being cannibalized by each other and by generic products. and yeah they have yields in the three to three-and-a-half percent range but long term like we talked about with Comcast’s and some of these high-growth names if they’re only going to give you 3 to 5% annual dividend growth and in some cases that’s generous we’ve seen 1 to 3 percent increases recently.
I’m just not interested and owning that right now I would say I guess I’m most bearish on someone like their consumer staples names a lot of these slow growth companies that are trading with unjustifiable premiums in my opinion.
Nick: now when you say you know slow or negative growth consumer staples companies are you thinking of like the Procter & Gamble’s and the Colgate and the Coca Cola’s those those types of securities?
Nick W: yeah I am i I’ve sold Procter & Gamble’s one that I sold and that one I sold that I like 89 and I think was that like 80 the other day I’m sure today it’s the whole markets up today but you know you see these that one I’ve sold Schmucker’s, I sold her she’s recently I sold Nestle I think there’s a few I sold Kimberly Clark and you know want to you know you’re saying these names and you’re feeling bad about it these are sort of the stalwarts and the dividend growth space or they have been but you know moving forward I think there’s a lot of secular trends that are pointing against them.
And I’m just at this point I think if I’m just looking for a yield in that 3 2 percent range I’d rather just own legacy tech then sort of the legacy consumer staples names.
Nick: I mean I think you’re definitely right a lot of those names are very overvalued relative to how much growth they’re providing and I think that there’s a lot of investors particularly self-directed investors individual investors who get lulled into a false sense of security because they recognize that those have historically been great businesses and right now you could even argue that there’s still a great business but they’re bad stocks because of the price you have to pay relative to earnings and other fundamental metrics.
Nick W: yeah and I mean you know I could be wrong because I’m sure people have said that in the past and then these companies keep chugging along with like seven to ten percent annual returns. But like you said they’re not there most of the names that I sold have over a five year period of time they’re either flat or negative recently.
If you look at David Fish’s dividend aristocrat, champions, contenders, I forget the third one it’s a CCC list he does a great job of tracking historical data he’s got ten year five year three year and one year dividend growth trends within each of those groups and all three of the groups the one year dividend increased amount is pretty is less than three year which is less than the five year which is less than a ten year you’re seeing dividend growth rates slowed down and that’s especially the case sort of in these old-school aristocrats and I think it’s just because they’re having a hard time adapting to shore the new market a lot of the demographic trends and just the fact that their products are not as exciting as it used to be,
Nick: are there any old school stocks that do stand out to you for being attractive right now?
Nick W: I mean I own Coca-Cola and Pepsi I’ve thought about selling them both recently and in the past but I have such a hard time I mean everybody’s got a drink to survive and you know I don’t think we ought to be drinking sugary sodas and juices and sports drinks as human beings.
But I also am not naive to the pre I’m sure that’s going to continue they do taste better so I’ll give those companies that. So they’re expensive but I just I don’t sell them because they have great distribution networks and then I think they’ll just continue to buy sort of hip brands.
Kraft Heinz is interesting to me because it has sort of the Berkshire 3G backing and you expect that they’ll make a big acquisition here soon and then sort of grow with the roll up strategy that a lot of people don’t like but. so Kraft Heinz and Anheuser Busch or sort of unique in that regard I love just speak if you have you and the alcohol space is so attractive to me long-term but a lot of those names are just really expensive Constellation and Brown-Forman or two companies I would love to own just I haven’t been to buy my spot yet though.
Nick: that’s very interesting I also find the whole 3G capital you know integrate and then cut costs strategy to be quite interesting and they’ve been very successful with it in the past. a lot of people argue that it’s unsustainable but I think as long as they can keep finding acquisition candidates they should do well over the long run.
Nick: I just want to wrap up asking you one interesting philosophical question if you had to sell all your stocks and create a portfolio of five or ten positions right now what would you buy and why would you buy them?
Nick W: there’s a hard one it’s so it’s just so much against my nature to be that concentrated I would I don’t think I’d sleep at all at night if I had only owned five names.
However I will answer the question Apple would definitely be one of them you know if I had to only buy one company that would be it just in its cash pile more than anything would maybe allow me to sleep at night I think it gives the company a lot of flexibility and I know that people think the iPhone is kind of a one-trick pony but I don’t see demand for that going anywhere anytime soon.
So yeah I feel comfortable owning Apple Berkshire Hathaway I think would probably be one of them just it’s only one company but it would give me a ton of diversification doesn’t pay a dividend but you always hear rumors of that changing when Buffett steps down or god forbid dies I guess he’s not going to live forever and I think he’s like 84 years old right now.
Let’s see I probably would put in video there that’s pretty speculative but it’s just AI I think can be so huge and I would want exposure to that. in the similar light I’m not even picking dividend growth companies right now but if I only had two in five I’m looking at companies that would there’s they’re pretty diversified within themselves and give me exposure to a lot of secular growth trends so I’d probably put Alphabet there as well with under their umbrella they just do so much from Google to YouTube to Waymo and you know a lot of the crazy things they’re doing in their speculative bets category.
And the fifth company that I would choose I guess yeah I go with Boeing I think the I almost went with Disney there but I do think they have some issues that I’m a little bit worried about. Boeing on the other hand operates in a duopoly and you know air travel demand is only going up in a globalized world economy and with the urbanization happening so I think I’d go with Apple, Berkshire, Nvidia, Alphabet, and Boeing.
Nick: that is an excellent list is very nice to hear your reasoning behind them thanks for sharing. I want to wrap up Nick by saying thanks a bunch for being a guest on the podcast today we’re super happy to have you and we look forward to having you back sometime.
Nick W: I had fun and I’d be happy to do it again sometime.
Nick: thanks so much for listening to today’s episode everyone.
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