Current State of the Market
I did not realize during the pandemic that my stock portfolio would replace a trip to my local Six Flags Fiesta Texas. I experienced the highs, some screaming, entertainment, impending doom, and the ultimate “it’s gonna be okay” feelings. And that was yesterday.
Regardless of the long term outlook, the short term drops will challenge the best investors. The competition between growth stocks and Wall Street heated up these last two weeks. See my tweet below from Saturday, following a decent day for the market on May 7th. Growth stocks actually started the day very strong, but retraced their gains by the end of the day and barely finished up.
Of course my portfolio sits in the midst of this race. With the uncertainty surrounding growth stocks, I focused my new capital on cash flow companies paying dividends. A couple weeks ago, I identified my investment in Simon Property Group (Ticker: SPG).
SPG reported last night and discussed the surge in retail, but the list of challenges stemming from the pandemic continue to include forced closures, capacity limits, and tenants skirting rent (not to mention the challenge of e-commerce). Of note on the call, they detailed their continued redevelopment plans to bring in new tenants and create mixed use facilities, which I believe will unlock a ton of value in future years. In the mean time, I will collect a 4%+ dividend.
Side Note: My portfolio swung from being 6% down to positive 0.03% yesterday. Nuts!
Two New Cash Flow Additions
Along with SPG, I added the telecom giant AT&T (Ticker: T) and the drug giant Merck (Ticker: MRK) to my portfolio. Both companies pay a healthy dividend, 6.5% for T and 3.3% for MRK. And they both highlighted strong catalysts moving forward on their earnings calls.
AT&T (Ticker: T)
T continues to transition from its legacy businesses like cable and satellite to growing businesses like wireless, streaming, and broadband. Their 1st quarter report and earnings call offered the first glimmer of this transition working.
On the earnings call, CEO John Stankey stated (with the deepest voice known to man) that mobility, fiber, and HBO Max increased customer acquisitions for the quarter. And they will soon launch HBO Max internationally (excited about the Game of Thrones prequel). Check out a short clip on CNBC with CEO John Stankey by clicking here. I love their 2021 focus “to grow customer relationships” and will look to see them execute on this over the course of the year, and moving forward.
I still believe T has a long way to go, especially with their customer service and paying down their debt. With this upcoming decade being dominated by 5G wireless and streaming, I believe T should see some unlocked value as a result. Again, in the mean time I will collect the 6%+ dividend.
Merck (Ticker: MRK)
MRK’s blockbuster drug called Keytruda, a humanized antibody used in cancer immunotherapy, has experts estimating the potential for it to become the best selling drug of all time. Merck relies heavily on patient access and the healthcare provider’s capacity to treat, which the pandemic diminished. As vaccines roll out and the US opens back up, Merck should see improving revenue and margins across their entire suite of products.
Sadly Ken Frazier held his last call as CEO recently, announcing 3 months ago that he was stepping down. Leading the company since 2011, Ken Frazier will be replaced by the CFO Robert Davis. This should be a smooth transition in leadership, and (paraphrasing Ken Frazier’s words) help MRK capitalize on the changing industry moving forward. Ken Frazier will remain the Chairman of the Board and an advisor to Robert Davis.
As with the others (T and SPG), I purchased each company at a strong current point in time in anticipation of their potential future growth, and will happily collect the dividend while I wait. These cash flow style companies also lack drastic price fluctuations (especially compared to the growth stocks), so I hope to not experience the same whiplash as I do on my growth portfolio.
Current State of My Portfolio
I eliminated the SPACs and moonshots from my portfolio. And with the valuation reset in progress as described above, I let go of some very stretched valuation companies that were smaller positions in my portfolio. Those companies like Crowdstrike, Cloudflare, and Peloton now stand at the top of my list to rebuy later as their valuations become more reasonable and I hold more capital. I am not proud, and understand that I might need to buy those companies back at higher prices later on, but the valuations will need to measure up.
For my portfolio, I will look to allocate 70% of my cash to growth companies and 30% of my cash to cash flow companies. Although, as I have capital added to the portfolio, this allocation split could adjust based upon what I see as the best perceived value at that point in time.
I anticipate my quality growth businesses to continue building up that quality during this valuation reset, creating a bumpy ride in 2021. And once these companies get past their Covid comparables from 2020, I think the institutions will take notice of the quality and add them back to their portfolio.
Growth Companies:
Pinterest PINS
DocuSign DOCU
Redfin RDFN
Roku ROKU
PagerDuty PD
GoodRx GDRX
Teladoc Health TDOC
Nvidia NVDA
AirBnB ABNB
MercadoLibre MELI
Square SQ
DraftKings DKNG
Sea Limited SE
Cash Flow Companies:
Simon Property Group SPG
AT&T T
Merck MRK
Video Streaming Subscriptions Have Become the New Magazine Subscriptions
Have you noticed how many video streaming (or even media) subscriptions the world now contains? Here are a few:
Netflix
Disney +
Spotify
HBO Max
Peacock
Paramount +
Discover +
Amazon Prime
Apple TV+
Hulu
ESPN
Pandora
Sirius XM
YouTube TV
FuboTV
Sling
Audible
Financially, this stresses me out. The idea of cutting cable to save money, approximately $100/month when we made the switch, seems to have disappeared. Internet expenses remain about $60-$70/month, so if you begin to tack on Netflix at $15/month, Disney+ at $8/month, HBO Max at $16/month, Peacock at $5/month, etc., it starts to compete with the former per-month bill for cable. Crazy!
I liken it to the days when I had 5 magazine subscriptions, of which I would read 2-3 occasionally. So I got rid of them all except two, and have been testing myself on whether or not I actually read the remaining two subscriptions.
Maybe the time has come to do the same to my streaming services. My wife would kill me if I cut Spotify, so that service will stay. Amazon Prime offers 2-day shipping, so again another must have. Outside of that, I feel like we should pick two, watch the shows on those services for three months, cancel them, and then pick two more for the next three months. And just continue this rotation to get the most out of the services for a drastically lower price.
Unless the companies begin to bundle their services for lower prices, I believe we will soon be heading down this path.
Thank You!
If you’ve made it this far, then you are an amazing human. Let me know what you think by leaving a comment. Or drop me a question. Share it with others who you think might appreciate the information. Looking forward to sending out the next issue!
**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.