Be Greedy When Others Are Fearful

This past Wednesday marked the one-year anniversary of the real-money Inflation-Protected Income Growth portfolio. The year-in-review article that celebrated that portfolio's first successful year omitted one company whose stock is in that portfolio, pipeline giant Kinder Morgan . That stock was left out of the review for a very good reason: On Wednesday, Kinder Morgan's stock fell on disappointing guidance, and that drop provided me too good an opportunity to pass up.

On the drop, I bought shares in my wife's IRA, paying $33.16 per share (plus commissions). By buying, the Fool's disclosure rules meant I couldn't mention the stock until now. At that price, Kinder Morgan's anticipated $1.72 dividend over the next year hands her IRA a nearly 5.2% yield. In addition, the prospects for continued dividend growth that made the company a worthy IPIG portfolio pick are still fundamentally in place, although the growth may not be as quick as previously anticipated.

What made it time to buy?
Kinder Morgan doesn't often go on sale in the market. In fact, almost immediately after it was originally selected for the IPIG portfolio, its shares leaped past my buy-below price. Indeed, it almost got away from the portfolio because its shares quickly became too pricy to buy. Only a subsequent correction knocked the company's shares down to where they became reasonable to buy.

This past Wednesday, while the shares were down on the news, a quick valuation estimate suggested that Kinder Morgan still looked to be worth somewhere in the neighborhood of $36 per share. The 2014 dividend, while lower than initially expected, is still anticipated to be higher than the 2013 dividend was at this time last year, which helps buffer the drops from the lower expected growth rates. A market price around $33 with a valuation around $36 on Kinder Morgan was a deal too good to pass up.

Do as Buffett says
As master investor Warren Buffett has said, "[T]ry to be fearful when others are greedy and greedy when others are fearful." While the IPIG portfolio is willing to buy companies trading at up to a reasonable estimate of their fair values, it's also willing to pay less than that estimate, should the market offer such an opportunity. A valuation discipline helped the IPIG portfolio not overpay for Kinder Morgan when the shares were at risk of getting away, and it helped it buy other companies at decent discounts.

Perhaps the clearest case of the IPIG portfolio's picking up a discount by being greedy and buying when others were fearful came from defense contractor Raytheon . Raytheon was selected when the defense sequester spooked investors out of its shares. Raython's stock fell so far that, even if the worst of what was expected from the sequester happened, the stock still looked reasonably priced. When reality turned out better than fears, Raytheon shares took off -- and the IPIG portfolio benefited.

Similarly, the IPIG portfolio picked up shares of pharmacy retailer Walgreen at a relatively bargain price. When selected, Walgreen was finishing up a fight over reimbursements with pharmacy benefits manager Express Scripts that cost Walgreen nearly $4 billion in annual revenue.

The market feared that Walgreen wouldn't get the customers back, but the IPIG portfolio was willing to buy anyway, because Walgreen's stock looked reasonably priced even if those customers stayed away. When Walgreen's business started showing signs of recovery, its stock bounced back -- and the IPIG portfolio benefited

Solid companies at reasonable prices
While the IPIG portfolio will happily take advantage of a bargain if the market chooses to offer it one, the portfolio is primarily focused on owning solid companies purchased at reasonable prices. So long as their dividends look capable of continuing to grow, their balance sheets don't become overleveraged, and their valuations look reasonable, existing IPIG picks can remain in the portfolio. With a collection of stocks that share those key characteristics, the portfolio finished this past week looking like this:

Data from the iPIG portfolio brokerage account, as of Dec. 6, 2013.

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