The Magic of Value and Diversification

The U.S. federal government was shut down for most of last week, but the markets took it in stride. For the real-money Inflation-Protected Income Growth portfolio, last week meant a small net decrease in value of $182.17, or about 0.5%.

Topping the portfolio's list of falling stocks since last week's update were United Technologies (NYSE: UTX  ) and Raytheon (NYSE: RTN  ) , which dropped 4.7% and 5.7%, respectively. Both companies have extensive defense-contracting businesses, and such companies have been directly hit hard by the government shutdown. Still, United Technologies is up roughly 28% since being purchased for the portfolio, and Raytheon is up about 36% since it was selected.

The beauty of valuation
When United Technologies was selected for the iPIG portfolio, it looked like a downright bargain trading at a discount of more than 20% to what appeared to be a fair price for its shares. That meant there was room for its business to stumble (say, from a government shutdown), and those shares could still be worth more than I was paying for them at the time.

Similarly, when Raytheon was picked, it had just lowered guidance on the back of the then-recent budget sequestration. While it didn't exactly scream "deep discount" at the time, it did look fairly valued for all the new pessimism that had found its way into the company and its share price. With lowered expectations in a still-unsafe world, it was reasonable to believe the company would have a strong chance of at least keeping pace with what the market was expecting.

Both stocks had a rough week due to the shutdown, but they have been strong performers for the iPIG portfolio overall, thanks to the portfolio's focus on what those shares looked to be truly worth.

Union Pacific (NYSE: UNP  ) also fell for the week, down about 1.7%. The railroad warned that lower-than-expected coal volumes would hurt the company's near-term projections, a significant blow coming from a very important commodity to that industry. Still, Union Pacific's shares are actually up more than 14% since being picked for the iPIG portfolio, a testament to its reasonable price relative to its true value at the time of its selection.

And the benefits of diversification
On the flip side, pharmacy retailer Walgreen (NYSE: WAG  ) was one of the strongest performers in the iPIG portfolio last week, up around 2.3%. As my Foolish colleagues David Williamson, Max Macaluso, and Dan Caplinger pointed out this weekend, Walgreen may be setting itself up to be one of the biggest winners of Obamacare. After all, if spending on prescription coverage is about to go up thanks to that insurance program, what will benefit more than a drugstore?

While that potential gain from increased government spending didn't factor into Walgreen's original iPIG selection, it certainly provided a nice counterbalance to the losses from the defense contractors.

Also contributing a strong gain on the week, supplemental insurance giant Aflac (NYSE: AFL  ) took home the crown as top-performing iPIG pick, up about 2.4%. The big driver there was a ratings upgrade to outperform by FBR Capital, on the potential for improvements in Japan thanks to an expanded distribution deal with Japan Post.

While the iPIG portfolio had no way of knowing that deal or upgrade would happen, the portfolio's original selection article did mention Aflac's strong position in Japan and its reasonable valuation. That Aflac's overseas operations drove its gains shows the benefits of diversifying across national boundaries. The weakness in one country can often be at least partially offset by strength elsewhere.

Take the good with the bad and wind up OK
We could have done without last week's drop in defense contractors affected by the government shutdown. Still, it's great to know that the iPIG portfolio's practice of looking for reasonably priced companies across multiple industries has again helped it soften the blow from one particular segment's troubles.

All told, the table below shows a snapshot of the iPIG portfolio as of Friday's close:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
Oct. 4, 2013

Current Yield
Oct. 4, 2013

United Technologies

Dec. 12, 2012

$1,464.82

$1,876.86

2.05%

Teva Pharmaceutical

Dec. 12, 2012

$1,519.40

$1,461.48

3.13%

J.M. Smucker

Dec. 13, 2012

$1,483.45

$1,800.81

2.19%

Genuine Parts

Dec. 21, 2012

$1,476.47

$1,854.95

2.67%

Mine Safety Appliances

Dec. 21, 2012

$1,504.96

$1,817.64

2.38%

Microsoft

Dec. 26, 2012

$1,499.15

$1,863.40

3.31%

Hasbro

Dec. 28, 2012

$1,520.60

$2,039.49

3.37%

NV Energy

Dec. 31, 2012

$1,504.72

$1,982.40

3.22%

United Parcel Service

Jan. 2, 2013

$1,524.00

$1,820.00

2.73%

Walgreen

Jan. 4, 2013

$1,501.80

$2,231.60

2.26%

Texas Instruments

Jan. 7, 2013

$1,515.70

$1,876.71

3.01%

Union Pacific

Jan. 22, 2013

$805.42

$923.40

2.05%

CSX

Jan. 22, 2013

$712.50

$869.38

2.35%

McDonald's

Jan. 24, 2013

$1,499.64

$1,515.20

3.42%

Becton, Dickinson

Jan. 31, 2013

$1,518.64

$1,807.56

1.97%

Aflac

Feb. 2, 2013

$1,466.35

$1,720.71

2.20%

Air Products & Chemicals

Feb. 11, 2013

$1,510.99

$1,807.27

2.67%

Raytheon

Feb. 22, 2013

$1,473.91

$2,004.75

2.96%

Emerson Electric

April 3, 2013

$1,548.12

$1,791.16

2.56%

Wells Fargo

May 30, 2013

$1,525.48

$1,528.10

2.91%

Kinder Morgan

June 21, 2013

$1,518.37

$1,486.80

4.52%

Cash

   

$514.85

 

Total Portfolio

   

$36,594.52

 

Data from the iPIG portfolio brokerage account as of Oct. 4, 2013.

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Read/Post Comments (6) | Recommend This Article (8)

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 October 07, 2013, at 8:24 PM, Lsmartin1488 wrote:

    Think your purchase dates are off. Think the first eight are supposed to be 2012?

  • Report this Comment On October 07, 2013, at 9:20 PM, TMFBigFrog wrote:

    Hi Lsmartin1488 --

    You are correct -- I'll ask the editor to correct the table.

    Best regards,

    -Chuck

    Inside Value Home Fool

  • Report this Comment On October 07, 2013, at 10:36 PM, mesConfitures wrote:

    The purchase dates are showing this upcoming Dec., which isn't really possible unless you're reporting back from the future?

  • Report this Comment On October 08, 2013, at 12:30 AM, TMFBigFrog wrote:

    Hi mesConfitures --

    There was an error in formatting the table. The December 2012 dates were accidentally formatted as December 2013 dates. A correction request has been submitted to the editors. The table should be fixed fairly soon.

    Best regards,

    -Chuck

    Inside Value Home Fool

  • Report this Comment On October 12, 2013, at 1:59 PM, jaybird43 wrote:

    Your original article extolled the virtues of KO and ABT for their dividends over a 50plus year period. So why are they not part of this group?. Especially KO which is trading in bargain basement areas.

  • Report this Comment On October 12, 2013, at 2:58 PM, Mathman6577 wrote:

    Any short term dip for companies like UTX is a good opportunity to buy. UTX just increased dividend 10% and has been paying one since 1936.

    Also we need to ignore the screaming headlines from the left wing about the government shutdown and debt limit... the U.S. is not going to default.

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