Introduction to Justin’s Roth IRA Account

By:  Justin Holden

Summary

  • An in-depth view of my Roth IRA holdings with Charles Schwab
  • Long time horizon (more than 30 years from retirement age)
  • An explanation of investing strategy on this particular account

 

My first article in the series included an introduction to my investing philosophy and I listed securities held in my individual brokerage account with TD Ameritrade at the time.  Since that point in time, I have fully fleshed out my Roth IRA account with Charles Schwab.  I’ve found that my approach to investing in a retirement account is quite different from an individual brokerage account.

I purchase stocks and ETF’s with the intention to hold indefinitely and re-invest dividends.  I have no exposure to bonds nor bond funds.  I try not to buy anything that I can’t see myself holding to retirement age.  I try to be fully invested in securities and not carry a significant cash balance on the account.  I chose Charles Schwab because the commissions on buying individual stocks are relatively low ($4.95 per trade) and there’s a solid selection of commission-free ETF’s on Schwab’s select list.  All ETF’s bought for my Roth IRA are from Schwab’s select list and therefore I pay no commissions on the trades.  In addition, expense ratios on the ETF’s I invested in are quite low.  This is all part of the plan.  I don’t want my investments to be cannibalized by high expense ratios.

Analyzing the holdings in my Roth IRA up to this point, one might conclude that I focus too much on value and dividend growth when I should be focused more on picking a solid growth stock given my long time horizon.  This is a valid criticism.  However, I’d prefer to wait until a market crash scenario before researching a good growth stock to add to my Roth IRA.  I simply don’t like paying above 20 P/E multiples for stocks.  It just bugs me for some reason.  Anyway, without further ado, here are my current Roth IRA holdings:

Equities Price (as of 10/24/18) Cost Basis % of account
VTR $56.78 per share $52.36 per share 12.53
BLK $378.66 per share $385.67 per share 12.19
KIM $14.92 per share $14.13 per share 11.94
TAP $59.34 per share $61.09 per share 10.96
PRU $90.82 per share $96.83 per share 10.82
ETF’s Price (as of 10/24/18) Cost Basis % of account
MDYV $48.08 per share $52.18 per share 10.36
SCHF $30.13 per share $33.64 per share 10.35
SLYV $59.75 per share $66.67 per share 10.3
SCHD $49.05 per share $49.79 per share 10.17

I view the ETF’s as a necessary part of this retirement account for the sake of diversifying my investments and to hedge against the risks associated with my own stock picking skills.  The dividend reinvestment strategy on all securities will help to dollar cost average the account over time, and scoop up some shares on the cheap as we head towards a potential bear market.

Over time, I’d definitely like to continue diversifying my investments to the point where an individual stock makes up no more than 5% of the total account value.  I can achieve this by adding more stocks to the Roth IRA portfolio, or by increasing my percentages in the ETF’s.  I consider all ETF’s in this account to be low risk because they each have diversification among hundreds (or thousands in the case of SCHF) of securities.  Furthermore, each ETF has relatively high assets under management and very low expense ratio.  I can definitely sleep well at night with these ETF’s, without a doubt.

But I want to be invested in some individual stocks as well because that helps keep me engaged and also creates the potential of “alpha” returns by hitting a home run on an excellent stock.  The decision to not include bonds nor bond funds is because A) I am less knowledgeable on them B) I have a long time horizon C) It is a well known fact that stocks outperform bonds over the long run.

This concludes the introduction to my Roth IRA.  Please remember that earnings on Roth IRA accounts are tax-free, but cannot be withdrawn without penalty until you reach the requisite retirement age of 59 and a half.  There is also a limit to how much money you can contribute to this type of account per tax year.  For me, that limit is $5,500.

Disclosure: I am long BLK, VTR, KIM, TAP, PRU, MDYV, SCHF, SLYV, SCHD.

Additional disclosure: I am not a registered finance professional of any kind. Please do your own research and due diligence before making investment decisions.  While I only mentioned abbreviated ticker symbols in the article, you can type those ticker symbols into Seeking Alpha or Yahoo Finance to get more information about the actual stocks and ETF’s that I am invested in.

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Introducing Justin’s Stock Portfolio

By:  Justin Holden

 

  • This article covers my assets that are being held in an individual brokerage account through TD Ameritrade.  I have a separate Roth IRA account through Charles Schwab as well.
  • A brief background is provided on each company I have a long position in.
  • I discuss my ever-evolving investing philosophy.

 

I first got interested in investing when I was a junior in high school.  I took an honors economics class where they had us do a stock trading simulator competition.  Even though my partner and I didn’t win the competition, I was fascinated by the project and learned some valuable lessons from that initial experience alone.

Once I got to college, I opened an individual brokerage account with Sogotrade and made my first investments in the stock market.  Back then I had no idea what I was doing, and basically just bought stocks that were at 52 week lows hoping they would rebound for a profit.  Needless to say, I got burned a few times by taking this approach.  I closed my Sogotrade account once they changed management and were trying to get me to re-send my financial information through the mail.  Overall, I lost a small amount of money on that account, but I learned more lessons about what not to do when investing in the market.

My approach to investing now centers heavily around value, fundamentals, and a preference for companies that control assets people either need or have a proven historical demand for (i.e. water, consumer staples, alcohol, cigarrettes, etc.).  When I fully flesh out my Roth IRA, I expect a lot of those investments to revolve around companies that control fresh water resources.  But today, I want to introduce my long positions in my individual brokerage account.  I haven’t set any official rules for myself as far as what I will and won’t allow myself to do with this account.  I’m viewing it as my “play money” at the moment.  But having said that, I seem to be using it right now for practice in value investing.

My Positions:

China Mobile (CHL) is my most recent stock purchase.  I’m going long on this company because it is China’s largest telecommunications company and highly profitable.  I also believe it trades at a value and have no concerns over the balance sheet.  I’m getting good foreign exposure through this company.  The biggest risk seems to be the high Chinese government ownership within the company.  You never know what foreign governments might do with the assets they own.

Crown Crafts (CRWS) is a US micro-cap stock that I purchased shares in roughly one year ago.  This company focuses on manufacturing baby products.  I invested in this company because of the strong balance sheet, reasonable valuation, and competent management team.  I am currently underwater a bit on my investment here, but because the company has little to no debt on it’s balance sheet, I am not overly concerned and willing to wait things out.

Kimco Realty (KIM) was another recent purchase of mine.  This company is classified as a REIT.  The company owns real estate and leases their properties out to retailers in order to generate revenues.  I invested in this company because of a low P/FFO ratio and an opportunity to make a contrarian play on the “retail-apocalypse” market overreaction.  I am not expecting a quick turnaround here in terms of rising share price, but the company fundamentals are strong and I’m getting paid a solid dividend to wait.

Mind C.T.I. (MNDO) is a foreign micro-cap stock.  The company is headquartered in Israel.  Mind C.T.I. is part of the technology sector and trades at an attractive P/E ratio.  Strong balance sheet with little to no long-term debt.  I also invested in this company for a stable double-digit dividend yield.  It has been a core holding in my brokerage account for a few years now.

Sturm Ruger (RGR) is a US small-cap stock.  The company focuses on manufacturing firearms.  I consider Sturm Ruger to be the most ill-timed purchase of all stocks currently held in my individual brokerage account.  The current political climate has drastically reduced demand for guns when compared to the Barack Obama years.  Still, there is potential upside in this name should any gun control measures be implemented in the future (because fear of gun control spikes demand for the company’s products).  I’m getting paid to wait with a modest dividend and I don’t expect much further downside given that Sturm Ruger is a debt-free company.

Disclosure:  Justin owns shares in the following –  CRWS, CHL, KIM, MNDO, RGR.

Additional disclosure:  Justin is not a registered finance professional of any kind. Readers are expected to do their own research and due diligence before making any investment decisions.

REITS: Time For Investors To Take Notice

By:  Justin Holden

 

While the S&P 500 continues to be grossly overvalued as we get towards the back-end of this 9+ year bull run, investors are finding it increasingly difficult to find value and buy securities at an adequate margin of safety.  However, real estate investment trusts (or REITS for short) are currently being beaten down in price due to multiple factors.  For long-term investors, now is the time to take notice and monitor the sector’s highest quality companies.  In the event of further price declines for this sector, which would be a likely event for the remainder of 2018, we could see blue-chip REITS at bargain prices.

For novice investors who are completely unfamiliar with REITS, these companies essentially make money through real-estate related investments.  There are actually two primary classifications for REITS.  Equity REITS own and operate physical real estate, often times renting out their facilities to commercial and/or residential tenants and generating revenues off the rent that they charge those tenants.  Mortgage REITS (mREITS) tend to be a bit more complex in their operations since they primarily generate income by collecting interest on mortgage backed securities and related investments.  My preference between the two categories is for equity REITS.  To me, equity REITS are easier to understand and also safer because you’re investing in companies that own a portfolio of physical real estate properties, as opposed to investing in companies that deal with debt and paper assets.

I’ll also point out that there are some key distinctions to be made between REITS and common stocks.  In order for a company to qualify for being listed as a publicly traded REIT, it must, among other things, pay out at least 90% of it’s taxable income to shareholders in the form of dividends.  Another key distinction is in how you figure out valuations.  For common stocks, investors often look to the price earnings (P/E) ratio to determine if the security is overvalued, undervalued, or fairly priced.  But because REITS are allowed under the current tax laws to claim depreciation on properties that in reality are actually appreciating in value, this non-cash depreciation expense will artificially deflate the company’s earnings or net income on paper.  Because of this, we should use a price to funds from operations (P/FFO) ratio when discussing REIT valuations.

Now that we have covered some of the basics on REITS, let me explain to you some of the factors that are currently driving down valuations for this sector.  The market seems to be bracing itself for increased interest rates, which makes borrowing money more costly.  This will impact all companies to a certain degree, but REITS in particular seem sensitive to interest rate changes.  Perhaps this is because some of them rely heavily on the ability to take on debt in order to purchase more properties and thus fuel growth.  But another huge factor in the REIT sector selloff has been the perceived downfall of brick and mortar retail stores.  There are a number of REITS that lease properties to commercial tenants.  When those commercial tenants see their business fall on hard times, the risk is being unable to pay rent and closing stores.  The more stores that close, the more empty properties a REIT has in it’s portfolio generating zero in rent revenue until a replacement tenant is found.  The retail sector is really hurting right now due to powerful online competitors such as Amazon.  The most recent example is Toys R Us, which is closing stores all across the country and appears to be headed for bankruptcy.

But as with any market selloff, the fears tend to be overblown.  When we take a long-term perspective, it’s hard to see a future without brick and mortar retail stores.  There will be enough people that want to try on clothing before making a purchase, or enjoy the experience of going out to do their shopping.  It is difficult to envision that totally going away.  So unless you’re projecting that Amazon’s long-term outlook is taking over the world, you shouldn’t be too concerned about the downturn in retail.  As for the REIT sector selloff, we are seeing those equity REITS with high exposure to brick and mortar retail tenants getting hit hardest.  But even other classifications of REITS are going down in price.  This truly is the time to be greedy while others are fearful, and consider buying REITS on the dip.

Now sure, you could just buy a diverse fund focused on the sector like Vanguard Real Estate ETF (VNQ), but then you’ll be buying into some crap securities to go along with the truly high quality REITS, not to mention paying management fees for the fund via an expense ratio.  My recommendation would be to monitor the following list of individual REITS.  I have hand picked them because they are, in my view, the highest quality large-cap REITS for the entire sector and have a great chance to outperform over the long-term while allowing you to sleep well at night.  Just make sure that if you buy any of these securities, you do your own due diligence beforehand and buy on the dip, thus locking in a reasonable margin of safety.  Because as with any other type of securities investing, the goal is to buy low and sell high.

Justin’s REIT Watch List:

  • American Campus Communities, Inc. (ACC)
  • Digital Realty Trust, Inc. (DLR)
  • Federal Realty Investment Trust (FRT)
  • Hannon Armstrong Sustainable Infrastructure Capital (HASI)
  • Kimco Realty Corporation (KIM)
  • LTC Properties, Inc. (LTC)
  • Realty Income Corporation (O)
  • Regency Centers Corporation (REG)
  • Retail Opportunity Investments Corp. (ROIC)
  • Tanger Factory Outlet Centers, Inc. (SKT)
  • Simon Property Group, Inc. (SPG)
  • STORE Capital (STOR)
  • Ventas, Inc. (VTR)
  • W.P. Carey, Inc. (WPC)

 

Disclosure Statement:  Justin currently owns shares in Kimco Realty Corporation (KIM).  Justin is not a licensed financial analyst or financial planner.  Please do your own due diligence and research before making investment decisions.