It’s part of my strategy to keep a relatively small cash position. Unlike others that seek to “time” the market to a relatively large extent with sizeable cash positions of 5-25% in order for what they view as strategic deployments at low valuation. While I’m not inherently opposed to the strategy as such, and I do maintain some cash for such crashes, for me this is no more than 1-4%.
Because my cash position has been rising well above 5% of late, and I’m expecting massive dividend injections in May and June, I’m doing an active plan for investing large portions to cut it back down to 2.5%.
You see, if you have a long-term investment plan – and I, at the age of 36 do have that – time in the market is more important than market timing. There are plenty of studies to this fact. This article from Schwab is one of my favorites.
It goes into detail as to why market timing, as a whole, is a far inferior strategy to just time in the market – at least provided you have a long-term investment horizon, and you don’t use unrealistic comparisons (such as 100% perfect market timing, which does not exist).
The conclusion is clear.
Even bad market timing trumps inertia.
Armed with this knowledge, we investors can invest safely in quality stocks knowing that data is on our side.
If we combine this with a degree of valuation knowledge and an ability to analyze results, the results here can be absolutely amazing. That is what I attempt to do.
I’m not doing anything fancy. I’m not finding “multibaggers” or “the next Amazon”. The risks in such a venture are, frankly, way too high. For every bitcoin millionaire, there are 100,000 people that lost more money than they made. That’s the way of the world.
Instead, my approach focuses on finding undervalued quality companies with upsides of more than 15-50%, giving us significant potential RoR over a space of 3-10 years. Once I make an investment, my thesis is well-researched to the degree that I haven’t left an investment of over $10,000 behind since I began my investing career. Why, I’ve certainly had “dogs”; none of them have been significant investments to that degree.
I have positions underwater right now – one significant one on this list, as a matter of fact. But given the company quality we find here and given our timeframe and RoR potential as well as fundamentals, I believe that “quality will win out”.
In the long term, it does. Always. I’ve had investments that paid off 100% RoR, 200%, 350%, one that even gave 732% RoR in less than 4.5 years when I sold it. This has become the foundation of my approach.
And those are the companies we look at here.
Quality above all.
These companies are in no particular order, by the way.
1. adidas (OTCQX:ADDYY) ~36% annual upside
adidas isn’t without its near-term risks. I write about these in some of my articles and updates on the company. The supply side in China/Vietnam isn’t the easiest – but adidas isn’t alone in this. The entire space that adidas plays in is a bit of a wild card in terms of volatility and predictability as far as returns go.
However, the relative upside we see here both annually and in total is really nothing short of amazing, which is why I’ve invested tens of thousands in the company and certainly continue to average down here.
For the ADR, we can calculate annualized RoR based on a peer-average multiple of around 30x P/E. This might seem high, but this is the range target that we see for peers like Nike (NKE).
On the back of sales growth due to increasing market share, efficiency increases, large ongoing buyback programs, downstream optimization, and solving its issues with Reebok, it’s not unrealistic that we might see a total RoR of over 125% in less than 3 full years.
This is based on normalization – not premiums. Based on these targets, my expectation is for my investment in adidas to double in around 3-5 years. This also is my “target” for this investment and would be a level where I would take a look at perhaps rotating it, depending on how high it was trading at the time.
At this time, my official stance on adidas is a solid “BUY”. I’m buying more, and this is one of the best opportunities in the consumer sector I see here, despite the low yield.
We move on.
2. Munich Re (OTCPK:MURGY) ~37% annual upside
The biggest reinsurance company in the entire world with a 37% annual upside and a total RoR on 2024E of 137% to a valuation of 16.8x P/E, which just happens to be the 5-year P/E average, that’s a decent investment proposal to me. Like all of the companies on this list, this company is IG-rated – and more with an AA-rating.
Risks and downsides? Sure – they do exist. But they are incredibly small to my mind. Munich Re, aside from reinsurance, runs a primary insurance business, one of the only large Res to do so. It doesn’t exactly show sector-winning margins, but it’s profitable. It’s excessively conservative to the degree that it impacts returns, but I count this as a positive for the next few years.
Furthermore, Munich Re expects around €300M of COVID-19 impacts for 2022, which is fairly high.
Aside from this… the largest reinsurance business in the world, class-leading return ratios, and a rock-solid century-old history with its sister company, Allianz (OTCPK:ALIZY).
I’m long Munich Re to the tune of almost 4% of my TPV, and I mean to invest more.
Here are my long-term expectations for Munich Re.
I expect more than 100% returns from Munich Re in 5 years. At that point, I may look into rotating some of those profits here – but until then and at this valuation, I’m buying more.
Munich Re is a “BUY”.
3. LVMH (OTCPK:LVMUY) – ~15% annual upside
So, fair warning – this company’s overall upside is far lower compared to some of the other companies mentioned here. However, LVMH is one of those “safe” picks – it’s the world’s largest luxury company representing some of the most appealing and desired brands on this earth. An investment in this business is always at a premium, and the upside is always calculated at a premium. It’s one of those companies I don’t really intend to sell unless things go well above 30% overvalued.
This is one of the bedrock companies in my portfolio. I’m happy with the overall close to 50% 3-year RoR that’s being forecasted with a return to premium here.
The case for LVMH is a very simple one. People will continue to buy luxury.
I find it an easy bet to make, to bet on human nature.
This is one of those companies I keep adding, and adding, and adding to. Not for the yield, but for a combination of long-term safety and upside.
LVMH is a “BUY”.
4. BASF (OTCQX:BASFY) – ~28% Annual Upside
Back to higher upsides. In less than 3 years, BASF is likely, even with Russia-adjusted EPS, to generate returns of triple-digits while providing a. 6.5%+ yield. While the Wintershall DEA IPO is postponed, and while we need to heavily adjust and discount future earnings due to energy and other risks, the core of BASF remains an inherently attractive company with an A-grade credit rating.
BASF is the world’s largest chemical company. Any risk it faces from the aforementioned trends is, in my mind, easily mitigated by its Verbund-based operations with representation all around the globe.
I’ve averaged down to a cost basis of less than €52/share, and my position is now close to 5% – I might even expand it more if we continue to see negative pricing/valuation trends.
Here is the conservative upside for BASF.
BASF is an investment where I expect a 3-7% RoR of over 100% – and I’d be selling once that return has materialized and the company is overvalued.
For now, I’m very happy to keep buying this A-rated company at a cheap valuation.
5. HeidelbergCement (OTCPK:HDELY) – 30% Annual Upside
HeidelbergCement is one of those rather volatile commodity companies. Concrete isn’t the easiest thing to invest in – but at a valuation such as the one we’re seeing, I’m more than happy to push cash to work here. There are risks to Heidelberg – some of the return numbers aren’t as good as some of its closest competitors, the company has done some very questionable M&As over the past 25 years, and in order to properly value the company’s return rate, we need to add back some CapEx into cash flow conversion numbers, as the company’s calculations are a bit sugared here.
But as long as we know these things, the upside trumps the risks in this investment. The M&A of Italcementi is going to add capacity and upside, despite some lower profitability. There’s also the simple fact that in order to replace the capacity that HeidelbergCement has, competitors would have to pay or construct at a substantial premium.
That makes this company a value play at a dirt-cheap valuation, and I see more than a 40% upside to my target.
At this upside, I consider this company a solid “BUY” with a massive overall upside. I’m in about 2.5%, and I’m expanding this position further.
6. Verizon Communications (VZ) – 19% Annual upside
I love free money – don’t you? A telco undervalued to this degree, with Verizon’s safeties, credit rating, and a 5%+ yield, that’s free money to me. I’ve written on Verizon before. Risks do exist to all telcos, but at this upside, I’m most definitely a “BUY” here.
All of these companies I’m presenting to you here are businesses I view as one degree of “free money” or another. But out of all of them, I would say that Verizon is probably the easiest and safest bet out there, even if it’s not necessarily the largest upside. But this exemplifies pretty accurately what I’m looking to do.
I invest large amounts of cash, wait for those upsides to be realized, then determine whether to sell or to keep my investment based on the upside from that particular point in time.
This is a good time to do exactly that with Verizon.
7. Whirlpool (WHR)- 20.5% annual upside
I tend to use normalized valuation or P/E ratios for companies. That includes cases when the normalized P/E is actually far lower than I believe to be justified for the company. So is the case with Whirlpool, where the 5-year normalized P/E ratio is around 10x – which is clearly below what I would usually consider being valid for a company such as this.
Still, we should strive for truth above all – and the truth is that Whirlpool is volatile, and the average is around 10x. To this valuation, there’s still a 66% 3-year upside, and this is obviously quite an excellent potential RoR for a company of Whirlpool’s caliber.
There is very little to be said about this. I’m once again 1.5% deep in Whirlpool, and my intention is to be at 3-4% until the year is over, if the undervaluation persists.
I follow a lot of different investors, specializing in a multitude of different fields. Everyone knows “their stuff” and everyone targets returns of between 15-30% or more on an annual basis. Good investors and capable analysts seem able, to one degree or another, to guide investors to these returns.
My recipe for doing so might be more boring than most. I don’t invest in fancy tech stocks, a combination of prefs, or options. Instead, I invest in undervalued, quality companies, usually with BBB or A-rated credit, between 3-5% yield, or sometimes lower, and in the long term, such investments tend to produce very good returns indeed.
My specialty is obviously, as you can see from this piece, EU stocks, though I focus on US-based dividend stocks as well.
Value is really my focus. In the end, I don’t really care what company gives me the returns I’m looking for. What I want is to be safe and secure in my assessment, get a very decent yield, and be able to sleep well at night during my investing time.
As I’m sure you can see from all the companies above, all of these allow for this.
These also happen to be 7 of my most currently-highest-conviction buys. Not all of them – no. And there are speculative ones that have a higher upside. But these are definitely some of the safer ones I see. I own over at least 1% in all of them, and I intend to hold onto each of them until my upside has been realized.
I hope some of these are of interest to you.
Questions? Let me know!