Sunday, June 28

Month 108 - 14 Buy-and-Hold Stocks in both the Dow Jones Composite Index and the S&P 100 Index - June 2020

Situation: If you’re a stock picker, you’ll need Buy-and-Hold stocks that are suitable for retirement but you’ll also need to know how to “buy low.” The job of an investor, according to Joel Greenblatt (CEO of Gotham Capital), “is to figure out what a business is worth and pay a lot less”. Those two words (buy low) separate investors from savers. 

The objective way to “buy low” is to listen to Warren Buffett and dollar-cost average a fixed amount each month into shares of large, well managed, and long-established companies with clean Balance Sheets. You do this by using an online Dividend Re-Investment Plan (DRIP). When the price of that stock falls during a Bear Market, you’ll automatically BUY LOW and acquire more shares per month than usual. 

The subjective way to “buy low” is to resort to labor-intensive Fundamental Analysis, which uses a bespoke set of metrics to repeatedly examine stocks in each sub-industry and decide which are bargain-priced. My requirements for a company to be “A-rated” and join my Watch List of “large and well-managed companies with clean Balance Sheets” can be seen in the Tables for each month’s blog. For example, a large company is one in the S&P 100 Index. A well-managed company is one picked by the Managing Editor of The Wall Street Journal for inclusion in the 65-stock Dow Jones Composite Index. A clean Balance Sheet is one earning an S&P Bond Rating of A- (or better), with positive Book Value for the most recent quarter (mrq). I also require that Tangible Book Value (TBV) be a positive number but a negative TBV is acceptable if the company is mainly capitalized by Common Stock and its Total Debt is no greater than 2.5X EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the Trailing Twelve Months (TTM). The companies I analyze are listed in both the iShares Russell Top 200 Value ETF (IWX) and the Vanguard High Dividend Yield Index ETF (VYM). I interpret “long-established” to mean a 20+ year history of being traded on a public stock exchange.

Mission: Using our Standard Spreadsheet, analyze A-rated stocks that are in both the 65-stock Dow Jones Composite Average and the S&P 100 Index.

Execution: see Table. Columns AP and AQ give annual costs and the vendor URL for each dividend reinvestment plan (DRIP). 

Administration: The idea behind owning “value” stocks is to lose less during Bear Markets. The idea behind owning “growth” stocks is to earn more during Bull Markets. Column AO shows how much the price of each stock changed in 2008. Column D shows how much the price of each stock changed in 2018 (when the S&P 500 Index lost 19.9% in the 4th quarter). These 14 stocks lost 5% less than the S&P 500 ETF (SPY) in 2018, and 17.3% less in 2008. An additional benefit of owning shares in these “value” companies that pay above-market dividends is that 7 are also listed in the iShares Russell Top 200 Growth ETF (IWY): MRK, KO, PG, JNJ, CAT, MMM, IBM. You can have “the best of both worlds” by owning those. 

Bottom Line: The secret of stock picking is to have a short Watch List because you’ll need to practice due diligence: follow the evolution of each company’s “story” and the effectiveness of its managers. This takes time and money: online subscriptions to The Wall Street Journal, Barron’s, Bloomberg Businessweek, and The New York Times don’t come cheap. Neither do online DRIPs: For example, the average expense ratio in the first year of using a DRIP to buy into these 14 companies is 1.56% (see Column AP in the Table: $18.76/$1200 = 1.56%). And, you’ll get a bigger bill from your accountant if you decide to sell a DRIP, besides spending more time yourself to get the paperwork ready. For example, you’ll have to list the “cost basis” for each of the 16 purchases you made each year (12 monthly purchases plus 4 purchases to reinvest quarterly dividends) of each stock so your accountant can calculate capital gains.

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

Full Disclosure: I dollar-average into PFE, NEE, INTC, KO, PG, WMT, JPM, JNJ, CAT and IBM, and also own shares of MRK, DUK, SO and MMM. 

NOTE: Aside from dollar-cost averaging, there is second objective way to buy low: make “one-off” purchases of any of these 14 stocks that appear on the “Dogs of the Dow” list, which is updated every New Year’s Day. For example, the 10 dogs on this year’s list include: International Business Machines (IBM), Pfizer (PFE), 3M (MMM), and Coca-Cola (KO).

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Sunday, May 31

Month 107 - A-rated Food & Agriculture-related Companies - May 2020

Situation: Food is an “essential good.” The COVID-19 Pandemic has made us all acutely aware of this, now that we’re being told to shun restaurants and eat at home. But companies that process row crops into breakfast food have faced a topsy-turvy marketing climate in recent years. General Mills (GIS) and Kellogg (K) have had to endure an existential crisis because consumers chose to distance themselves from processed breakfast foods in favor of more nutritious, fresh, and  “organic” offerings. This was partly because fewer families came together each day for a sit-down breakfast. People became concerned about sugars being added to so much of what we eat, as well as the preservatives and obscure ingredients (like dyes) listed on each box of cereal. Debates arose about nutritional value and safety for children. Now, several years after the fact, those former icons of the food industry have admitted their failures and are marketing foods that are demonstrably good for children and contain no obscure or unsafe ingredients. Cereals contain dried strawberries or blueberries, sliced almonds, and other fruits or nuts. Serious investors welcome this state of affairs because changes in consumer behavior create volatility in the market, which translates into opportunity. And who’s to argue against a wider choice of more healthy foods? But for the casual investor, who doesn’t devote hours a week to following the food industry, this is not a good thing. Now is a good time to look at the food and agriculture companies that are left standing. 

Mission: Use our Standard Spreadsheet to analyze food and agriculture-related companies that have an A- or better S&P rating on their bonds, as well as B+/M or better S&P ratings on their stocks.

Execution: See Table.

Administration: Four of the 12 companies appear to offer exceptional value: Coca-Cola (KO), PepsiCo (PEP), Walmart (WMT) and Target (TGT). Those are all Dividend Achievers as well as being listed in the S&P 100 Index (OEF), the Vanguard High Dividend Yield Index (VYM), and the iShares Top 200 Value Index (IWX) (see Columns AL to AO of the Table).

Bottom Line: Companies close to the production of raw commodities have stock prices that tend to follow the commodity cycle, which is dominated by oil. Investors in Deere (DE) and Archer Daniels Midland (ADM) profit if the farmer profits. Investors in food processors and grocery stores face a fickle food consumer, whose only concern is to get the best taste and nutrition per dollar. The companies that have proven they can persevere in that arena are Hormel Foods (HRL), Costco Wholesale (COST), Coca-Cola (KO), Target (TGT), Hershey (HSY), Walmart (WMT), and PepsiCo (PEP). Those companies will still be doing well 10 years from now. 

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

Full Disclosure: I dollar-average into COST, UNP, KO, WMT and CAT, and also own shares of DE, BRK-B, TGT and PEP.

The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

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