New Year, New Stock Positions

One of my New Year's Resolutions is to find new companies to invest in.  Even though my portfolio did well in 2011 in spite of the end of year Euro woes, I still need to have more diversity that would shore up my performance and hedge my bets from volatility.

In 2011, I noticed most of my gains came from AAPL and at times, LULU.  I am grateful but I believe I need something that would perform well and would take the load off AAPL and LULU.

Therefore, I'm looking for companies that would be a great fit in my portfolio.

I am currently looking at Altria (MO). This company is in the Consumer Goods sector where it is in good company with Pepsi (PEP, General Mills (GIS), Clorox (CLX) and Kraft (KFT).  Basing on the PEG rations, only KFT beat MO in terms of being "cheap" in an apples-to-apples comparison.

Looking at the charts, both MO and KFT trended closely together throughout 2011.  Both outperforming the S&P 500.

MO's financials looks solid according to their latest 10-Q filing and they are cash flow positive this last quarter thanks to a debt refinance that was done in the previous quarter.  MO had a pre-tax judgement made against them, however, they have been proactive in lowering their yearly guidance and enacted some cost-cutting measures in order to preserve the dividend yield and business did well enough to off-set the additional expense for this quarter.  Even though there was a slight decrease of market-share among smokers, the success of the e-cigarette helped boost MO's earnings.  As sad as I am to say this, as long as people smoke, I would remain bullish with MO.  I'll just watch out for government regulations, additional taxes and class-action lawsuits against MO.

Altria's Numbers: Jan 10, 2012 end of trade day
last trade = $28.91
day's range = $28.78-$29.00
52 week high = $30.40 low = $23.20
P/E = 17.30
EPS = $1.67
Div & Yield = $1.64 (5.70%)
PEG = 1.74

Kraft's Numbers: Jan 10, 2012 end of trade day
last trade = $38.02
day's range = $37.90-$38.15
52 week high = $30.21 low = $38.05
P/E = 20.74
EPS = $1.83
Div & Yield = $1.16 (3.10%)
PEG = 1.66

Kraft is in the diversified foods industry and keeps MO company in the consumer goods sector.  It would be almost impossible to not find a KFT product in a typical household pantry.  In the Nov 4, 2011 10-Q filing, KFT proposed to spin-off its businesses into 2 independent public companies: 1) The Global Snacks Business and 2) The North American Grocery.  Of course, this would be subject to regulatory review and it would probably cost the company a lot of money and might trigger some sell-off from nervous investors.  KFT posted an increase in net revenues and is expected to keep growing as the operating costs would go done as soon as the integration of Cadbury is complete.

Not everything is rosy in KFT as they have a legal dispute with the Starbucks CPG Business over breach of agreements concerning the control of the Starbucks packaged coffee products in the grocery store.  This dispute can be a distraction and legal fees might eat in the gross profits of KFT.

KFT's income statement looked solid although the cash flow statement made me a little uneasy.  As I mentioned before, I am wary of companies who have a negative cash flow.  Although KFT can explain this by the Cadbury acquisition and the spin-off proposal, I still worry about debt repayments that are due and interest payments from these loans.  I'm sure management would refinance and pay down these debts but the prospect of not having enough cash could mean a cut in the dividends or massive lay-offs just to keep the stock price from dropping.

My worries were alleviated a bit by the knowledge that Berkshire Hathaway and the Vanguard Group are invested in KFT.  Cramer also recommended getting some KFT along with wallstreet analyst giving it a strong buy.  If I were to buy KFT, I would base it it's growth estimates and customer mind share.  Besides, packaged food is not a cyclical product as people would still eat in spite of the recession.

Here's what I'll do:

I'll buy MO and KFT.  I'll put in $100 in each position which after fees would yield me 3.32 share of MO and  2.52 shares of KFT (est based on today's closing prices).  My target to ride the current upward trend of these stocks and to keep buying if these stocks end up in a sell off.  I'll use these positions as my recession defense stocks which I expect would take the load of my AAPL and LULU stocks.