Saturday, May 24, 2014

Initial positions in my Buffet beating portfolio

Last week I wrote that I was creating a portfolio on Marketocracy and that I would be discussing which stocks I selected for the portfolio and my reasoning behind each selection. Here are the initial four positions; Devon Energy (DVN), General Electric (GE), American International Group (AIG), and Energy XXI (EXXI).

American International Group (AIG)

Why it is in the portfolio?
  • The stock is trading at around .8 of book value. Other insurers trade at 1.1 to 1.2 times book value
  • Pays a dividend of 1% but I expect that to be raised to the 2-3% range in the future
  • Buying back stock
  • Still out of favor due to legacy issues from financial crisis
  • Sentiment is turning regarding company as it continues heal from financial crisis
Devon Energy (DVN)

Why it is in the portfolio?
  • Continued transformation from natural gas to oil producer
  • Recent Eagleford shale acquisition to drive near term growth
  • Undervalued and overlooked upside in Permian basin stacked plays
  • Divested non-core plays and is deploying proceeds into higher growth areas
Energy XXI (EXXI)

Why is it in the portfolio?
  • Undervalued Gulf of Mexico assets
  • Recent proposed merger with EPL Oil and Gas will yield cost savings and operating synergies
  • Horizontal wells may be game changer for the company
  • Oil at $100 and production is 70% oil

General Electric (GE)

Why is it in the portfolio?
  • Spinoff of GE Financial later this year will focus company on industrial business
  • Yielding over 3% dividend and poised to grow dividend at 8-10%
  • Buying back stock
  • Focus on energy a good strategy over the next few years

You will notice that I have two oil and gas producers in the portfolio. I am a big believer in the energy renaissance we are seeing in North America. In fact it is one of the few if not the only high growth area in the US. What I find interesting with respect to oil is that with the economy in the US only growing at 1-2% we still have oil prices at over $100 per barrel. What will happen to oil prices if we see any upswing in growth? At $100 per barrel the two companies that I have included in the portfolio make tons of money. GE also has been growing their energy business and in particular their oil and gas service business. I think this is a pretty good start to the portfolio. The portfolio is currently not compliant with the rules as I must not hold more than 35% in cash. Money managers get paid to invest and deploy cash not sit on it. Nevertheless with the market at near all time highs and sentiment very bullish I will slow to deploy cash as there are not many current bargains in the market.

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