Sunday, January 14

Week 341 - Companies in “The 2 and 8 Club” with Strong Global Brands

Situation: You’d like to own stocks that won’t give you heartburn when the market crashes. There are only two ways a company can predictably weather a recession better than others in its industry. By having 1) a clean Balance Sheet (see Columns P-S in any of our Tables) and/or 2) a strong Global Brand. During a recession, consumers will have less money to spend because they’re not making as much. They’ll cut back on frills but keep spending on necessities marketed by companies they respect. Economists call such spending inelastic, and also speak of those companies as having a strong brand. Accountants struggle to define brand value, even though it obviously runs to the billions of dollars for a number of companies, so they call it an intangible asset.  

Mission: Use our Standard Spreadsheet to analyze the 33 companies in the Extended Version of “The 2 and 8 Club” (see Week 329), selecting only those that have a Top 500 Global Brand.

Execution: see Table, where all 21 such companies are ranked by brand value in Column AC.

Administration: We need to know what fraction of sales for each company originate outside the United States. That information should be in every company’s Annual Report but is often missing. Perhaps the reason is that those companies often retain revenues in the country of origin (to avoid double taxation should revenues be repatriated to the USA). But we know that Microsoft, the largest company in this week’s Table, draws more than 60% of its revenues from outside the United States. Over the past 5 years, I have seen two articles estimating that 45-50% of all revenues for S&P 500 companies occur outside the United States.  

For you to attempt to own shares in a third or half of the 21 companies on our list (see Table), you’ll need to keep track of two variables: 1) Dividends (Yield & Growth rates), and 2) Global Brand value. Both will change over time. Brand values are easy to follow (see link above). But some companies will mature in their market and no longer be able to grow dividends faster than 8% a year. A company might cut its dividend, in which case it would no longer be listed in the US version of the FTSE Global High Dividend Yield Index. There will also be new members of “The 2 and 8 Club.”

To move in and out of positions as indicated by your research, you’ll have to become an active stock trader. Dollar-cost averaging is still a good idea, but you’ll likely find that an online Dividend Re-Investment Plan (DRIP) doesn’t have the flexibility you’ll require. A recent study of 13 broker-dealers offers detailed information about those that have the low transaction costs and attractive reward programs. Ally Financial (ALLY) is their top-ranked brand.

Bottom Line: There are only two ways a company can insulate itself from a looming recession: 1) maintain a Clean Balance Sheet, and 2) keep making money because of having a strong Global Brand. This week’s Table highlights 21 brand leaders, over half of which have clean Balance Sheets.

Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, and gold bullion =10)

Full Disclosure: I dollar-cost average into MFST, MMM, IBM, KO and JPM, and also own shares of MO, TRV, PFE, CAT, and TXN.

"The 2 and 8 Club" (CR) 2017 Invest Tune

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Sunday, January 7

Week 340 - Financial Services Companies in “The 2 and 8 Club”

Situation: Ten years ago, you were probably burned in the recession by owning stocks (or bonds) served up by the Financial Services industry. OK, I’ll give you that. But now the industry is back on its feet and paying good dividends, and your job is to invest. “Once bitten, twice shy” can’t be your approach. Instead, you need to know a little about when to get in and when to get out. Why? Because it’s one of the two industries where you stand to make a lot of money--the other being Information Technology. You can’t be a stockpicker and keep up with the S&P 500 Index unless you invest ~15% of your stock portfolio in each of those.

The leading company in this space is Berkshire Hathaway, which is an insurance company that makes side bets by using income from premiums (while waiting for claims to be filed). This sounds easy but it all depends on the quality of those side bets and the amount of cash set aside to pay claims. Greed will doom that project, which is why Berkshire’s CEO (Warren Buffett) says “be fearful when others are greedy and greedy when others are fearful.” These days, he must think that others are being very greedy because he has set aside over $100 Billion in cash. But, with Berkshire Hathaway being an insurance company, recent hurricanes have already shrunk that pile of cash by $3 Billion.

Mission: Run our standard spreadsheet for Financial Services companies in “The 2 and 8 Club” (see Week 329). 

Execution: see Table

Administration: Let me use an example to explain why banks can be so profitable. Banks set a price on your use of their money. That interest rate has to appear attractive or you won’t sign up for a repayment plan. If the counterparty (loan officer) thinks the project is too risky, she can still make the loan at an attractive rate, provided that the collateral (e.g. your home) becomes bank property if you default on the loan and is worth enough to cover the bank’s risk. 

Let’s say you need money to dig a gold mine. Chances are, that won’t “pan out” and the bank will have to claim collateral, i.e., all or part of the tangible assets (land, equipment, and structures that you purchased with their money). But sometimes the mine “proves up” and you’ll want to expand it. The loan officer is happy to extend credit because now there is new collateral (gold). The bank will accept a royalty in lieu of repayment. If you are a stockholder in a bank that specializes in loaning money to gold (or silver) mining companies (see Week 307), your payoff is much greater than it would be from owning a mutual fund of gold mines, e.g. VanEck Vectors Gold Miners ETF (GDX). Go to Lines 19-21 in the Table and compare Royal Gold (RGLD, a company that finances gold mines through royalty agreements) with the total returns from owning a gold bullion ETF (GLD) or stock in GDX. You’ll see that RGLD is a reasonably good investment (indeed, it’s a Dividend Achiever), whereas, GLD and GDX are anything but.  

Bottom Line: The reality is that the hopes and dreams of people who are “cash short” can be fulfilled by borrowing money, and their risk of a crippling loss from various enterprises can be reduced by taking out insurance. The bank (or insurance company) wins, even if the borrower defaults on the loan (or is wiped out by a natural disaster). In fact, it often prefers that outcome. Over time, the bank’s Return on Equity (ROE) can be amazing, say 15-20%. But the bank may be funding those loans with too much borrowed money (e.g. more than 20-25 times the amount of cash equivalents and stock that is backing those loans). On the other hand, when ROE grows because the bank is able to sell the assets it acquires at a nice profit (or the insurance company is able to double its premiums on new contracts because recent disasters proved that premiums had been too low), the risk-adjusted returns for stockholders are very good.

Risk Rating: 7 (where US 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-cost average into J. P. Morgan Chase (JPM), and also own shares of The Travelers Companies (TRV) and Berkshire Hathaway (BRK-B).

"The 2 and 8 Club" (CR) 2017 Invest Tune

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