The only stock that Train sold shares of last quarter was State Street Corporation (STT), a 66% reduction in shares owned. The stock is already up 25% year to date and might be getting ahead of itself. The low interest rate environment should continue to show weakness in State Street's net interest margin, and its top line revenue is being pressured due to declining trading revenue. In addition, the bottom line is not expected to be stellar either, with the company's profitability expected to be impacted by various financial regulations.
Train also sold off its entire stake in Mondelez International Inc. (MDLZ). This comes after the company split from Kraft Foods in 2012. Mondelez is now the international snack food company, while Kraft's North American grocery business trades as Kraft Foods Group.
It's possible that Train sold Mondelez after the split, given the company was no longer as fully diversified as its previous Kraft Foods parent, but the food company is worth taking a look at. It pays a 1.8% dividend yield and is expected to grow EPS at an annualized rate of 12.6% over the next five years, making it an income and growth stock.
Train's only addition was MeadWestvaco Corp. (MWV), now making up the eighth spot in its portfolio. MeadWestvaco is now focused heavily on packaging after the sale of its envelope business and the spinoff of the consumer and office products. The packaging company's revenue mix is intriguing, in that it is diverse across various consumer products, with 58% from food and beverage, 13% from home and beauty, 8% related to industrials and 18% for specialty chemicals.
Earnings growth for 2013 is expected to come from expansion to emerging markets, namely Brazil. Management has reaffirmed its targets of $1 billion in sales growth and 7% to 10% annual earnings growth over the next three to five years.
Train's top two holdings include Ingersoll-Rand PLC (IR) and Family Dollar Stores Inc. (FDO). Ingersoll-Rand is its top holding and makes up 27.3% of its portfolio. Family Dollar is second, making up 24% of the portfolio. Ingersoll-Rand provides security and safety, climate control and industrial productivity products. Recent news has Ingersoll-Rand spinning off its residential and commercial security business to shareholders, which is key for helping the company improve its business operations.
A rebound in residential housing activity in the U.S., will help Ingersoll's residential segment, which will also be positive for its commercial construction exposure. I think this turnaround stock is worth considering, where over the last 10 years the company has grown EPS at an average annualized rate of 11.8%, while growing dividends at 6.5%. In addition, return on invested capital was 12.7% in 2012, an impressive improvement from 2011's 6%.
Train's other top holding, Family Dollar, saw higher sales last quarter, but a price war among the dollar stores has put pressure on margins. Even still, gross margins remained above average at 34% last quarter. Another key point is the company's somewhat diverse revenue streams; 69% of revenues from consumables, 11% from from home products (housewares and home decor), 9% from apparel (clothing) and 11% from electronics (toys and pre-paid cellular phones).
Despite a potentially strengthening economy, Family Dollar has positioned itself nicely to remain a part of consumers' everyday shopping. Management projects second quarter comp sales growth in the range of 4% to 5% and fiscal 2013 comparable-store sales to increase between 4% and 6%, both very good signs of continued growth.
Don't Be Fooled
Billionaire Nelson Peltz runs a very niche hedge fund with over 50% of its fund invested in its top two holdings, both of which should perform well over the interim. In addition, his fund sold off the majority of its State Street position, which I agree with, but also sold off Mondelez, which I disagree with. Peltz's other big move was adding MeadWestvaco, a relatively unknown company that is a good bet on a rebounding economy.
Be sure to check out our detailed stock analysis (click here).