In the real-money portfolio I run for The Motley Fool, I've let cash build up to where it's pushing 20% of the portfolio's value. With the market trending down recently, I believe it's now time to put some of that to work, so I'm going to add to a few of my current holdings. What you own already can be the best place to invest, often because you're more familiar with the company and have a sense for how its share price behaves.
Cessna is not the whole story
The first I'll add to is Textron (TXT 0.78%), maker of Cessna airplanes and Bell helicopters, among other things. When it reported first-quarter results in April, the reduced earnings guidance for the year – thanks to a softer business jet market than expected – led traders to drop the price 13.4% that day. The price has bounced around quite a bit since then, but remains in the $25-$28 range. The company believes that a turnaround in the moribund business jet market is coming – CEO Scott Donnelly pointed to several favorable factors in the conference call – it's just not here yet.
Yet not all is bad at this diversified manufacturer. For instance, Textron's Bell division and its partner Boeing (BA -0.24%) were recently awarded a $4.9 billion extension to a $1.4 billion preliminary contract with the Defense Department to deliver 99 V-22 Osprey tilt-rotor aircraft to the Marine Corps and Air Force, with an option for an additional 22 aircraft. Plus, it's widely expected that foreign militaries will be a source of sales for many in the U.S. arms industry, helping both Bell and Textron Systems (which sells, for instance, unmanned aircraft, surveillance systems, and intelligence software).
I'll be adding to the position by the end of the week.
Digging deeper
When Freeport-McMoRan Copper & Gold (FCX -1.10%) announced that it was purchasing McMoRan Exploration and Plains Exploration & Production for cash and stock last December, I really didn't like it. However, often the best action with one's investments is to not trade on news like that. (And you'll save from not paying commissions or capital gain taxes.)
While the price of Freeport is down about 11% since then, that is much more because of dropping copper prices for most of this year. Prices have fallen from about $4 per pound at the start of the year to about $3 per pound today. Freeport is still much more a copper company than an oil company. Offsetting these lower prices for copper is the expected improvement in the ore grade coming out of the Grasberg mine this year and next, which should lower the company's average production cost per pound. (The company expects cash cost of $1.45 per pound for this year.)
For a long-term investor like myself (I've held Freeport in this portfolio since October 2011), the decline in the share price for this miner is, I believe, an opportunity. Copper is still one of the most highly used metals and the long-term-demand trend is upward. Copper prices have likely fallen because of China's slowdown and Europe's economic mess, but those areas will not always be that way. Plus, don't forget about emerging countries that will need lots of copper themselves over time.
I'll be adding to the position at this reduced price, while keeping an eye on the integration and performance of the oil business going forward.
Drilling to dividends
Long-time holding Transocean (RIG 2.16%) – it was the first purchase in this portfolio – is continuing to improve. It paid a first installment of $400 million toward the $1.4 billion settlement with the Dept. of Justice arising from the Gulf of Mexico Macondo well incident. It had an incident off the shore of Brazil resolve in its favor. And, it now feels that it has enough certainty to reinstate its dividend (after an absence of over a year), pushed along by pressure from Carl Icahn, the company's biggest shareholder.
While I'm currently down overall in this position, there are enough encouraging signs to make me want to stay invested and add to it. I mentioned several above. There is also the continued move of the company out of the jack-up rig business (it has only a few left to sell) along with reducing the company's debt level. The goal is to pay $1 billion in excess repayment by the end of next year with a target of reducing the $11.2 billion in debt down to $7 billion-$9 billion. That's a plus and will go a long way toward improving the balance sheet of the company.
I'll be adding to the position at this reduced price. Earnings are expected to grow for the next several years and management says the plan is to grow the dividend, too, so this should turn out well in the long run.
Beep, beep
I've only purchased Hertz (HTZG.Q) twice in this portfolio, keeping the stake rather small, which is unfortunate because it's done quite well. In the two-plus years the portfolio's owned shares, the position is up 59% overall.
Today, Hertz is a much bigger company, having recently absorbed Dollar Thrifty. In the most recent quarter, car rental revenue is up – 25.7% year over year for the first quarter – and, more interesting, so is equipment rental – up 16.2%. (Bet you didn't know that Hertz rents all kinds of equipment, from boom lifts to earth movers.) Car rental revenue growth was largely driven by the acquisition which helped the U.S. business grow 38%. But the rental revenue increase is coming from non-residential construction growth.
The company's expanding into China, taking a 20% equity stake in China Auto Rental, the largest (by far) rental company in that country. This brings in more income and gives Hertz a Chinese presence via co-branding to take advantage of a market expected to grow by 15% a year for the next several years.
Hertz is doing a lot of things right, its market conditions are improving, and the portfolio's position is up. I'll be adding more.
Wrap up
So that's a quick overview of four positions in the Messed-Up Expectations portfolio and why I'll be adding to them by the end of the week, as soon as Fool trading rules allow. Come discuss these and more on my discussion board.
