The Shortlist

Edit: I thought I'd update this post with a chart source that better illustrates what I'm seeing.

Under Armour (UA):
At $70 a share and a P/E of over 90 UA is very expensive. Analyst estimates are at $70 a share so there needs to be a major pull back before I can buy some and it won't be until UA reports less then stellar growth numbers for the stock to return to realistic valuations. I'm waiting for under 60.

Church & Dwight (CHD):
It's P/E is at 24 which is higher than the average for this sector at 20. Low 60s would be my starting position.

EOG Resources (EOG):
The low barrel price of oil is hitting the energy sector and with a P/E of 24 and price of around $106 I could pick up half a position now but I'm waiting patiently for a down day.

Portfolio Highlight: FB

You would think for one of my most profitable holdings I would have written a post about it by now but I didn't buy Facebook (FB) based on its balance sheet or future revenue. I bought Facebook because it has no competition and is being run by its founder.

In order for a competitor to overtake Facebook they would need to provide added value, expand their user base extremely fast, have solid reliability, and hope their founders can resist the urge of selling out to a larger corporation. Back in the days when Facebook started standards were low. Personally I know many people who moved from Myspace to Facebook simply because HTML was too confusing. Facebook has brand recognition and it's impossible to make all your friends/family move onto a new service. A new rival competitor would have to start out with small groups of "technology-savy" users who vet the service and slowly convince friends/family to migrate; giving plenty of lead time to cash out of the stock. Today it's more profitable to create tech demo disrupt services that get bought out.

Facebook's biggest risk is itself. Just a few years ago there were so many new features being added that it drove people away but lately they seem to have their act together and are streamlining and simplifying the experience. I'm a holder of the stock until Mark leaves the company. These types of high value companies are just vehicles for their founder's ideas and their high valuations live and die by them. As with Amazon and Bezos, Apple and Jobs, Google and Page/Brin I would expect growth to slow without them.

Portfolio Updates

The latest change to my portfolio has been to dump The TJX Companies (TJX) for a few reasons. To begin with the retail industry has been performing terribly these past few months with same store sales being relatively flat. TJX's growth is suppose to come from its European expansion, especially for the HomeGoods brand, but with Russian sanctions and poor exchange rates as seen affecting other company earnings I'm not optimistic. Also I bought TJX with the impression that it could be a stable grower but after more research I found the retail sector to be too competitive and unpredictable. I made the mistake of focusing only on the individual company performance and not the industry as a whole.

On the opposite side I more than doubled down on my Rite-Aid (RAD) position when it was at $6 which helped bring down my cost basis. With the remodels, McKesson distribution deal, and health management acquisitions there is a lot of potential that has yet to be realized.

Finally, now that it makes up a considerable percentage of my portfolio I've included my cash position with my holdings. I have a shopping list of stocks but at these valuations everything is too expensive so I plan on holding a sizable chunk in cash in preparation for any sell-offs toward the end of the year.

Stock Research: APC

Anadarko Petroleum Corporation (APC) is another oil exploration company that attracted my interest because they have contracts with ENSCO and Rowan for ultra deepwater drillships and are still considered a growth company.

Oil production is split between US and International for 2014 but if you compare with last year's numbers it's interesting to see US production alone went from 96 to 146 million barrels of oil per day (MBOPD) versus International growth of 62 to 92 MBOPD. Further almost all capital investment for 2014 is allocated to the lower 48 states with large chucks dedicated to expanding the profitable Wattenberg field in Colorado and Delaware basin/Eagleford fields in Texas where wells counts have doubled since last year.

Capital expenditure paints the picture of where you get the most bang for your buck and right now that's in the US. The bulk of the capital will be used to expand operations in the Rockies and Texas so I'll be paying attention to their success in those regions. Considering Anadarko is only a few points off it's 52 week high I won't be buying any stock unless it drops low enough to justify the higher P/E and recent lackluster ROA/ROE track record. At the moment I don't see any advantage Anadarko has over their competition so I'm not willing to pay up for it.

Stock Research: EOG

With offshore drillers in a state of softness from the over supply of rigs and reduced number of contracts I need to bring in a different type of sub-industry to my group of energy stocks. EOG Resources (EOG) is one company I started researching because they have a large presence in all of the major US oil fields, primarily the Eagle Ford shale.

Financially EOG is in a good position with low debt, cash on hand, and enough of a backlog in good wells that they can be picky in operating only the most profitable drill sites. They have some international exposure with sites in the Caribbean and United Kingdom which will keep them diversified from the core US locations. Operationally they are primarily an onshore producer using horizontal fracking techniques to extract oil.

What I like about EOG is they are large enough to provide stable earnings but are still a growth company. The dividend is currently at 0.62 and they have a market cap of 59 billion so they are not monolithic yet. While researching other oil companies I found almost all of them started a stake in the US because it's much easier/profitable to extract oil using modern fracking techniques than the more expensive deep water drilling or drilling in unstable regions. Until something changes to cause oil production in the US to cost more then offshore drilling I think EOG would be a good investment. Just a few years ago I remember everyone was drilling in the Gulf of Mexico, then natural gas production exploded in the US, and now crude production is what's hot.

Book Club: One Up On Wall Street

One Up On Wall Street by Peter Lynch is a fantastic read that I would recommend to anyone that finds the stock market exciting. The book is completely opposite from The Intelligent Investor because Lynch is more interested in high growth stocks and is willing to pay up for it. He stresses investing in companies that others are overlooking and his favorites are when a company has a boring name, low number of analyst covering the stock, and it operates in a niche or as a monopoly.

Instead of looking for only value stocks with a low P/B, Lynch categorizes stocks into different classes and evaluates them on a series of characteristics. Slow Growth are your dividend stocks that should show a continued history of dividend growth and a low payout ratio. Stalwarts have a history of steady predictable value growth. Cyclicals are your consumer goods that maintain low inventory and operate in a monopoly. Fast Growers have EPS growth rates above 20% and proven expansion plans and Turnarounds show low debt with increasing revenue.

Lynch's techniques are how I found Rollins (ROL) and Church & Dwight (CHD). When I was reviewing stocks on my screener I just randomly clicked companies that had the most boring names I could find and lo-and-behold I came across these two companies. One operates a worldwide pest extermination monopoly and another owns niche brands with household recognition and both have company names that give no indication of that.

Quarterly Update: CNI

Canadian National Railway (CNI) reported high single to multi digit growth for Q2 as it recovered quickly from the abnormally cold winter weather that caused a slowdown across the industry. With 35% growth, grain snapped back the largest with enough orders to contribute to future quarter earnings. While coal and steel were flat, oil and frac sand picked up the slack in the energy shipments.

I'm happy to see the oil boom in the US is providing a great replacement for an industry that has a large dependence on shipping coal. Coal is on a rapid decline as government policies are restricting new power plants and utilities are transitioning away from coal and into renewables. CNI is seeing the potential for more block trains (a term used to describe when an entire trains is commissioned for one type of cargo) of heavy crude and frac sand to and from large oil drilling sites.

CNI is in my portfolio as a stalwart to balance my high growth tech stocks and it is doing a fantastic job in filling that role. On a pull back I may consider dumping my position in TJX and rolling it over to more CNI.