A Brief History
...as we "bank" towards a financial buy
by Jeff Fischer ([email protected])
ALEXANDRIA, VA (Aug. 4, 1998) -- Today's 3.6% decline in the stock market represents another chance to dollar-cost average into great companies at lower prices. Foolish investors that plan to be net buyers of stock over the coming years should be a happier troupe today -- the dollars that they invest in the near future will buy more stock, at higher yields, and earn a better return (all things being equal) over the years ahead. Dividend reinvestment investors who sock money into equities every month truly benefit from a weak market -- though the benefit usually arrives years later.
Rather than thinking ahead, though, today some Drip Port history is in order. Imagine the voice of (who else) James Earl Jones reciting these words, "And now, the Majestic History of the Drip Port."
Majestic is a strong word -- as is the idea of "history" itself -- when it comes to this young portfolio. Yet, though just over one-year-old, the Drip Port does have a history behind it and principles that stand to be restated. Readers since the beginning might recall that when the portfolio launched, I wrote about Coca-Cola (NYSE: KO) for many columns. We had first spent a few weeks introducing the portfolio's goals and objectives, and some readers were anxious for a buy, so I approached what I thought might be the best beginning stock (and the most patriotic!) for the new portfolio. (By the way, the Drip Port was the first portfolio of its kind that I know of -- one that discusses its buys for months on end in public before actually making them, and then sometimes not making them at all!).
After I wrapped up Coca-Cola, Randy Befumo, the port's initial co-manager, stepped in with his thoughts. We had a pact to agree on every purchase that we made. Randy shared that he didn't care for Coca-Cola because of the valuation and because he had concerns about its ability to grow earnings consistently. I respected his reluctance and we moved to another company that we might agree on -- Intel (Nasdaq: INTC). Intel, as it turned out, became the first Drip Port holding. (Hey, that's fairly patriotic.)
As the months passed, Randy and I bantered back and forth about Coca-Cola, and there was even a time when I came to see his viewpoint clearly and agreed with it. I still see his argument and its merits, but I wonder if the market will ever see it, too. Investors of course know the name "Coca-Cola" and whenever they see the stock dip, they see a buying opportunity rather than an equity that might actually decline to a more reasonable valuation over a period of years. This "buy the dip" mentality has existed the past several years and is partially the result of a bull market, but I believe that, overall, Coca-Cola will be granted a premium valuation for a long time and in any market as long as the business fundamentals remain intact. (Not a giant revelation.) This year -- though being only one example -- indicates that the company needn't even grow earnings every single year. It still gets the respect of Wall Street.
Anyway, following Coca-Cola and Intel, I began to look at pharmaceutical companies while Randy investigated potentially beaten-down or unlocked value stories such as Owens Corning (NYSE: OWC) and Kansas City Southern (NYSE: KSU). After considering four pharmaceutical leaders, I narrowed the list to Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE). Randy wrote and agreed. Then he entered the fray to consider them both and see which he liked more. We had earlier broken J&J's business apart (its consumer and pharmaceutical businesses) and saw extra value, while Pfizer was trading at a premium price -- a price that has become slightly more premium over time. Randy liked J&J's valuation better and said so, and then we put it to readers. Readers were split between the two. Many liked J&J's diversity. Many others loved Pfizer's drug pipeline, including Viagra -- which, last fall, only the investing public was aware of, not the talk show hosts of the world.
We agreed on J&J for many reasons, while we agreed to consider Pfizer as a second pharmaceutical investment at a later date. We then formally moved to food and beverage companies and between us considered 21 industry leaders, from PepsiCo to Philip Morris to Hershey. The initial study narrowed the prospects to PepsiCo (NYSE: PEP), Philip Morris (NYSE: MO), and Campbell Soup (NYSE: CPB). Then only the final two remained, with PepsiCo -- looking about fairly valued -- dropped from contention. Philip Morris looked inexpensive (of course, with many long-term risks), while Campbell Soup was reasonably priced and reconfiguring its business to aim for higher margins and higher growth.
In fact, Campbell had all the right ingredients for even an intermediate-term Dripper -- aggressive share buybacks, increasing margins, market share that rivals Intel's share of the CPU market, several leading brand names (Campbell Soup, Pepperidge Farm, Prego), increased distribution and promotion, and so forth. The old Soup King was breathing new life into its already leading businesses. All things considered, Randy agreed to this purchase, but I believe that he would have bought Philip Morris first. We made a compromise, essentially. I remember him saying, "Campbell Soup isn't badly priced, but Philip Morris is just flat-out cheap." In the end, though, it was easy for me to justify Campbell Soup over big Mo'. (Meanwhile, throughout each industry analysis we struggled with the issue of current valuation vs. the fact that we'd be dollar-cost-averaging into the stocks over time. Despite that fact, we didn't want to ignore valuation or the chances of achieving our long-term goals diminished.)
Our first three purchases made, Randy soon left to work with one of the top performing mutual fund firms of the past few decades. Either way, whether Randy had stayed or not, we were ready to ask Dale to step up and teach everyone about one of his areas of expertise -- financial and banking investments. If a Fool should know his companies and their businesses, when it comes to this industry, Dale is a FFOOOOLL with two F's, four O's, and two L's. As you've seen, he definitely knows his stuff, and he's in the best position here to educate everyone in this arena.
Now that he has done so and is nearing a buy decision, though, that doesn't mean that the Drip Port will immediately take his advice and send the check to invest. Doing that would all but defeat the purpose and almost border on Wise. Dale has taught us how to look at financial and banking stocks over the past six months so that we would collectively and individually be in a position to do just that -- look at them and know them and decide on our own (just as readers have done in the past, with many buying Pfizer or Coca-Cola rather than J&J or Campbell, for example).
After Dale presents his ultimate buy, we'll consider the options and I'll decide whether or not I like it best, just as Randy and I did with each company in the past. I'll of course consider Dale's top two picks, Norwest and Mellon Bank, but we might even look at others on his pared down list of 11. After I present my favorite, Dale will either agree or disagree, and then declare why or why not. Before long, if not right away, we'll near a buy decision and ask you for your thoughts, too -- and share them.
As always, the Drip Port is a team effort that aims to show exactly why something is bought or rejected. Thanks to the past six months, we're now in a position to invest in the financial industry and live with our decision comfortably -- rather than looking for Dale whenever we had a question. Dale should be presenting his final arguments and his number one choice this week, and then we'll use what he's taught here to look at his favorite companies and decide which company we like best -- and we'll bounce that off of Dale if it differs from his pick. The key is that we agree with and understand what we -- the Drip Port -- is about to buy for the coming years. That goes for all Fools, of course...
As for today's 3.6% decline in the market -- it's another chance to dollar-cost average into great companies at lower prices, for the long term.
Until next time, Fool on!
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