Welcome to the 14th episode of the AMM Dividend Growth Podcast.
If this is your first time listening I’m Glenn Busch the lead portfolio manager for the AMM Dividend Growth Strategy. And this podcast is all about that portfolio. What we’re investing in, how we’re managing a concentrated portfolio, portfolio updates, and what we’re selling.
This episode is about why we sold United Technologies. You might be asking yourself “Wait wasn’t United Technologies the subject of the last podcast? And you’re selling it? And you call yourself a long-term investor?
All valid questions and I’ll explain our reasoning after this disclaimer.
Yes, we sold United Technologies. Yes, it was the subject of our last podcast episode. Yes, United Technologies has only been in our portfolio since October.
I’ve said before. I don’t want this podcast to be another stock idea podcast. I want it to be an audio diary of how we’re managing a concentrated portfolio. Most of you listening to this are not our clients but some of you are. I make this podcast for you. So you, our clients, know what we’re thinking and why we did what we did in your portfolios. For the rest of you, I hope you learn something, that you’re mildly entertained, and maybe you’ll think about becoming a client of AMM. If you are then give me a call at (858) 755-0909.
So then why did we sell United Technologies?
We have a list of companies that we follow that we would like to own at the right rice. But over the last year or so they were not trading at prices that we wanted to buy them. Instead we increased our efforts to find special situation investments. Investments with specific short-term catalysts that could unlock value. United Technologies met this criteria and we saw an opportunity for the spun-off companies to become dividend stalwarts.
Then the world and the stock market shifted drastically. With the broad market correction a lot of those companies are now trading at prices that are attractive to us.
We are using this opportunity to buy those companies and to add to existing positions.
We’re probably early on some of our purchases but we’re not doing all our buying right now. We’re spreading it out and hitting a position or two per week because we don’t know when the bottom will be in. But buying throughout an extended period means will get lucky with timing on some positions, poor timing on others, but that it should average out to average timing across the portfolio.
Newer accounts, accounts opened within the last year or so have plenty of cash. We were slow to get them invested because we didn’t like the price of some of the stuff we wanted to buy. We’re not worried about them having enough cash to do all the buying we want to do over this period.
An issue pops up with seasoned accounts. Accounts that are more or less fully invested.
To free up the cash in their accounts to do the buying we want to do means we need to sell other positions. United Technologies falls into this category.
We run a concentrated portfolio. We’re not looking to own 50+ names. Our upper limit is 30 but we tend to run with 25-27 positions. I’m comfortable running with only 10 names but 20+ positions is a good balance between concentration and diversification.
We hate to sell into a panic but we will take the capital loss on United Technologies to offset some of the gains taken earlier this year in taxable accounts.
Over the coming days and weeks we may sell other positions positions or a portion of a position to free up capital to invest in companies that we’ve been wanting to own for serval years. We may also initiate trades to free up capital to reinvest in our highest conviction ideas.
I did update my 2020 sum of the parts 2020 target price for United Technologies. It came down like I said it would and I’m getting a price of $110. With the stock now trading around $80 it still is trading at a discount to our target price.
The thing is we have to be comfortable with the increased risks and unknowns of the commercial aviation industry and the various supply chains.
In the previous podcast, I did say the big new risk is the sudden demand shock and decline in air travel. Airlines are cutting capacity and grounding planes. They don’t need more planes to service more routes or new planes to replace older ones because barely anyone is traveling right now. Airlines will seek to delay delivery or outright cancel new plane orders.
The airplane leasing companies are getting hammered because of this too so that is another source of plane deliveries that could dry up.
Airlines in the US are seeking bailouts which could provide relief but still wouldn’t increase the need for more planes until travel demand picked back up.
Air travel will come back. The human desire to explore and see new things will always be there. The virus risks just need to subside to take the current excess risks of air travel out of the system. We just don’t know when this will happen.
I like to think people as a whole have short-term memories when it comes to natural disaster. I would technically label this pandemic as a natural disaster. People tend to revert back to their old ways in a relatively short amount of time after a natural disaster. I think air travel will come back online quickly once the virus dies down and especially when a vaccine is wildly available.
We have some big handicaps that we have to overcome to continue with our investment in United Technologies when it comes to the remaining aerospace company. Versus the company we just bought using the proceeds from the UTX sell.
Again, I still believe there is value in the UTX spin-off but we were given the opportunity to invest in a company that we’ve been following for a couple years and we took it.
We’ll keep an eye on the United Technologies and its merger with Raytheon as well as Otis Elevators after it is spun off. But I think we’ll have too many opportunities to buy other companies that we’ve been wanting to buy once this is all over with.
I hope you enjoyed this portfolio update episode and it helped give you a better picture of how we’re managing our dividend growth portfolio. If you’re an inidividual investor interested in our dividend growth strategy or a financial advisor interested in out dividend growth stagey as a separately managed account, then give me a call at (858) 755-0909 and check us out at americanmoneymanagement.com
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Until next time.