When Go-Nowhere Companies Go Somewhere Big

When Microsoft (NASDAQ: MSFT  ) was originally picked for the real-money Inflation-Protected Income Growth portfolio last December, its shares traded as though the company would never grow again. Since then, Microsoft's stock is up about 39%, making it one of the top-performing companies in the portfolio. In addition, Microsoft was the top-performing iPIG pick since last week's update.

Two key items drove Microsoft's gains for the week. The first was news that its Windows Phones were gaining market share internationally. The second was that its CEO search committee was making progress toward finding a new boss. While that news helped on the week, the larger, longer-term gains that the iPIG portfolio has seen from Microsoft's stock have been driven by the simple truth that the company is doing better than "go nowhere."

Expectations rule the market
In its most recently reported quarter, for instance, Microsoft booked $18.5 billion in revenue, which is up substantially from the $16 billion it booked during the same quarter last year. Growth at that rate (a touch more than 15%) is probably not sustainable for Microsoft, but it does seriously challenge the belief that the company is too big to grow at all.

And with that challenged assumption, Microsoft's shares are up over the past year in part because the market's expectations for its future have improved. It's still a slow-growth behemoth, but when it comes to valuation, "slow growth" earns a higher price than "no growth."

Indeed, improving expectations are behind all of the top performing companies in the iPIG portfolio.

Overall top performer Walgreen (NYSE: WAG  ) was originally purchased for the iPIG portfolio as it wrapped up a battle with Express Scripts (NASDAQ: ESRX  ) over reimbursement rates. The fear priced into Walgreen's stock at the time came from concern that the pharmacy giant would permanently lose the customers who had moved elsewhere during the battle. As Walgreen demonstrated the ability to bring back customers, the market's expectations improved -- taking its shares up with it.

Likewise, No. 2 performer Raytheon (NYSE: RTN  ) was selected for the iPIG portfolio as fears of reductions from Defense Department budget sequestration sent shares tumbling. In spite of those fears, Raytheon continued to post respectable numbers, including this most recent quarter when it posted essentially flat net income per share versus last year.

Raytheon took the Pentagon sequester, did what was necessary to streamline costs, bought back some shares, but basically kept on going. The company's ability to survive, and in some sense thrive, in spite of the cuts from its key customer showcased its adaptability. And that adaptability helped the market adjust upward its expectations for Raytheon's future, lifting the company's stock price.

Then there's Hasbro (NASDAQ: HAS  ) , the third-best overall performer in the iPIG portfolio. Shortly after Hasbro was selected for the portfolio, it announced that it missed expectations for the all-important 2012 holiday shopping quarter. Yet after cost-cutting and an improvement to its business in the first part of 2013, the market's expectations for the toy maker are now higher, lifting its stock price accordingly.

Only the ticking of the clock and the turning of the calendar pages will tell whether Hasbro will successfully reach those loftier expectations. But it's those expectations that have driven the company's stock price higher, and after this holiday season gets reported, it'll be the expectations for next year that will drive the company's price going forward.

Expectations, meet reality
While the market's expectations for the future drive a company's stock price, what the company actually delivers every quarter helps influence the Street's perspective of things to come. After all, a strong company that is generating a lot of cash has more resources to plow into future growth opportunities than a company struggling to post profits. So while the past is no guarantee of the future, it is a useful guidepost of what may very well come.

Put together a group of companies, each with their own histories behind them and expectations for their futures priced into them, and you have some key foundations for a portfolio. For the Inflation-Protected Income Growth portfolio, the key expectation of each company is that it can continue increasing its dividends on a regular basis.

Those dividends, to be sustainable, have to come from cash the companies generate from their operations. To increase those dividends, the companies themselves have to grow -- maybe not every year, but fairly consistently over time. Nobody can accurately predict the future or guarantee that the companies will live up to those expectations, but we all can watch and see how they perform over time.

The table below has a snapshot of how the iPIG portfolio has performed:

Company Name

Purchase Date

Total Investment (including commissions)

Value
as of Nov. 8, 2013

Yield
as of Nov. 8, 2013

United Technologies (NYSE: UTX  )

Dec. 10, 2012

$1,464.82

$1,953.90

2.17%

Teva Pharmaceutical (NYSE: TEVA  )

Dec. 12, 2012

$1,519.40

$1,416.26

4.1%

J.M. Smucker (NYSE: SJM  )

Dec. 13, 2012

$1,483.45

$1,846.37

2.14%

Genuine Parts (NYSE: GPC  )

Dec. 21, 2012

$1,476.47

$1,855.87

2.66%

Mine Safety Appliances (NYSE: MSA  )

Dec. 21, 2012

$1,504.96

$1,755.00

2.46%

Microsoft

Dec. 26, 2012

$1,499.15

$2,077.90

2.96%

Hasbro

Dec. 28, 2012

$1,520.60

$2,170.64

3.17%

NV Energy (NYSE: NVE  )

Dec. 31, 2012

$1,504.72

$2,000.88

3.19%

United Parcel Service (NYSE: UPS  )

Jan. 2, 2013

$1,524.00

$1,992.40

2.49%

Walgreen

Jan. 4, 2013

$1,501.80

$2,388.00

2.11%

Texas Instruments (NASDAQ: TXN  )

Jan. 7, 2013

$1,515.70

$1,973.06

2.86%

Union Pacific (NYSE: UNP  )

Jan. 22, 2013

$805.42

$930.24

2.04%

CSX (NYSE: CSX  )

Jan. 22, 2013

$712.50

$904.74

2.25%

McDonald's (NYSE: MCD  )

Jan. 24, 2013

$1,499.64

$1,552.16

3.34%

Becton, Dickinson (NYSE: BDX  )

Jan. 31, 2013

$1,518.64

$1,938.78

1.84%

AFLAC (NYSE: AFL  )

Feb. 5, 2013

$1,466.35

$1,775.25

2.25%

Air Products & Chemicals (NYSE: APD  )

Feb. 11, 2013

$1,510.99

$1,860.65

2.59%

Raytheon

Feb. 22, 2013

$1,473.91

$2,304.72

2.58%

Emerson Electric (NYSE: EMR  )

April 3, 2013

$1,548.12

$1,875.16

2.57%

Wells Fargo & Co (NYSE: WFC  )

May 30, 2013

$1,525.48

$1,580.27

2.81%

Kinder Morgan (NYSE: KMI  )

June 21, 2013

$1,518.37

$1,470.00

4.69%

Cash

   

$529.70

 

Total Portfolio

   

$38,151.95

 
Data from the iPIG portfolio's brokerage account, as of Nov. 8, 2013.

To follow the iPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the iPIG portfolio, simply click here.

Why dividends rule
The iPIG portfolio is built on a foundation of dividend paying companies. A key reason is that dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine.

With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list of nine in this free report. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2013, at 3:10 PM, bellpa wrote:

    Chuck,

    I have been following your portfolio and currently own 2 of your picks. Do you think that any of them are worth buying now at current valuations?

    By the way, looks like some helluva good picks and gains. Congrats.

  • Report this Comment On November 14, 2013, at 12:04 AM, TMFBigFrog wrote:

    Hi bellpa,

    Thanks for taking the time to read the article, and I'm honored that you're following the iPIG portfolio. I've been amazed at how well it has performed.

    The portfolio is based on a fairly defensive strategy for stock investing, yet it has more or less kept pace with a rapidly rising market. I can't guarantee that performance will continue, but I'm certainly not going to complain about it.

    As for the stocks in the portfolio, I can't give individual investing advice, but I will tell you that in addition to these weekly portfolio review pieces, I do wade through reviews of each active pick.

    You can reach the more recent of those reviews from my article archive page: http://www.fool.com/author/1308/index.aspx . Just go to that link and search for a company's name. Many of my recent pieces with company names in the titles are iPIG portfolio pick review pieces.

    Alternatively, you can join the discussion on the iPIG portfolio discussion board, here: http://boards.fool.com/ipig-portfolio-120773.aspx . I try to post links to iPIG related articles on that board, and you can search that board for a pick to see the most recent review.

    Best regards,

    -Chuck

    Inside Value Home Fool

    Disclosure: I still own all the iPIG picks mentioned in the disclosure line of the article, above.

  • Report this Comment On November 14, 2013, at 12:26 PM, bellpa wrote:

    Enjoyed your reply.

    I must admit that I am not adept at using the boards other than the ones for specific stocks I own.

    Am going to mosey on over to the ipig portfolio board for further enlightenment.

    Appreciate the link.

    bellpa

  • Report this Comment On November 16, 2013, at 11:30 AM, MarkH118 wrote:

    Chuck:

    Just discovered this portfolio. The fact that all are currently "winners" - even if attributable to some degree to the bull market as a whole - is still impressive nonetheless. Great job, keep up the good work.

    Couple of questions -

    Are all of these picks still a "buy" at current valuations?

    What are your general criteria for adding (akin to "screening inputs") and deleting stocks for this portfolio?

    If you have previously posted an investing thesis that serves as a guide for this portfolio, could you please provide a link to this info?

    Again - good job. Look forward to following your posts and this portfolio in the years ahead.

    Thanks.

    Mark

  • Report this Comment On November 17, 2013, at 10:57 AM, TMFBigFrog wrote:

    Hi Mark,

    Thanks for your kind words. Unfortunately, I can't give individual investing advice, but I will mention that in addition to these weekly articles, I do wade through the picks in the portfolio and review them.

    You can reach the more recent of those reviews from my article archive page: http://www.fool.com/author/1308/index.aspx . Just go to that link and search for a company's name. Many of my recent pieces with company names in the titles are iPIG portfolio pick review pieces.

    Alternatively, you can join the discussion on the iPIG portfolio discussion board, here: http://boards.fool.com/ipig-portfolio-120773.aspx . I try to post links to iPIG related articles on that board, and you can search that board for a pick to see the most recent review.

    In terms of the investing criteria, the iPIG portfolio FAQ talks about the strategy in more detail: http://boards.fool.com/ipig-portfolio-faq-v-101-30688299.asp...

    I'm glad you enjoy the portfolio, and I hope you keep involved in the future.

    Best regards,

    -Chuck

    Inside Value Home Fool

    Disclosure: I still own all the iPIG portfolio stocks mentioned in this article.

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