Sunday, December 27

Month 114 - 20 A-rated Companies in the 65-stock Dow Jones Composite Index - December 2020

Situation: Most of us tread carefully when we start picking stocks for a retirement portfolio, usually by focusing on big companies that reliably pay an above-market dividend. A good way to build your own Watch List is to start with the portfolio holdings of VYM, the Vanguard High Dividend Yield Index Fund ETF. Then you might want to check out the choices made by the most effective stock picker over the past 125 years, which is the team directed by the Managing Editor of the Wall Street Journal that picks stocks for the 30-stock Dow Jones Industrial Average (DIA), the 15-stock Dow Jones Utility Average (XLU), and the 20-stock Dow Jones Transportation Average (IYT).

Mission: Pick A-rated companies from the 65-stock Dow Jones Composite Index by applying these criteria: 1) Inclusion in the VYM portfolio; 2) an S&P Bond Rating of A- or better; 3) an S&P Stock Rating of B+/M or better; 4) positive Book Value for the most recent quarter (mrq); 5) positive Earnings Per Share (EPS) for the Trailing Twelve Months (TTM); 6) 20+ year trading history on US exchanges.

Execution: Analyze those 20 companies (see Table)

Administration: My administrative guidelines are taken from the 2020 Annual Report of Berkshire Hathaway, where Warren Buffett writes that “we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”

Bottom Line: Warren’s first point is addressed in Column Q of the Table: Return on Tangible Capital Employed. He thinks anything over 20% to be a good number. MRK, AMGN, CSCO, INTC, KO, PG and MMM pass that test. The second point is a bit harder to parse. Morningstar’s analyst reports dwell on the management team’s plan going forward (see Column AK in the Table), and the degree to which management boosts tangible assets by issuing long-term bonds indicates how much trouble management has relying on retained earnings. The applicable metric, called “gearing,” is the ratio of long-term debt to equity (see Column U in the Table). MRK, CSCO and INTC have BUY ratings from Morningstar and gearing ratios under 1.0. The third point is addressed by the 5-yr estimated PEG Ratio (see Column M in the Table): MRK, AMGN, CSCO, AEP, INTC, JNJ, TRV and UPS have PEG Ratios under 3.0 but only MRK, AMGN, INTC and TRV have ratios under 2.0. Conclusion: MRK, CSCO and INTC are BUYs.

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

Full Disclosure: I dollar-average into MRK, NEE, CSCO, INTC, KO, PG, WMT, JPM, JNJ and IBM, and also own shares of DUK, SO, CAT and MMM. NOTE: I dollar-average into 3 stocks that are overpriced per Benjamin Graham’s criteria (Graham Number and 7-yr P/E): NEE, KO and PG. This is justified by their low risk of loss in combination with their strong 20-yr record of price appreciation (see Columns N-P in the Table).

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

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Sunday, November 29

Month 113 - BUY LOW: A-rated Non-financial Value stocks in the S&P 100 Index - November 2020

Situation: The reason to buy high-yielding “value” stocks is that their low price is temporary. A company has to be large enough to have multiple product lines (to make money from one line in order to fund repairs on a troubled line) and be well-followed by analysts and business media. Numbers will tell us which stocks are temporarily undervalued. In this month’s blog we will start using the 29 A-rated value stocks identified in last month’s WATCH LIST (see Month 112). Eight have both a price that is no higher than twice the rational price or Graham Number (see Column AD in the Table), and a 7-year P/E that is no higher than 25 (see Column AF in the Table).

Mission: Using our Standard Spreadsheet, analyze those 8 companies. 

Execution: see Table.

Administration: All 8 companies meet our requirements for A-rated value companies: 1) listed in portfolio of iShares Top 200 Value ETF (IWX), 2) listed in portfolio of Vanguard High Dividend Yield Index Fund ETF (VYM), 3) S&P bond rating of A- or higher, 4) S&P stock rating of B+/M or higher, 5) 20+ year trading history on a public US exchange, 6) positive Book Value for the most recent quarter (mrq), 7) positive earnings for the Trailing Twelve Months (TTM).

Key analytics include a) the main Growth At a Reasonable Price (GARP) metric or 5-yr PEG ratio (see Column AI in the Table), b) leverage or “gearing” (see LT-debt-to-equity in Column T in the Table), c) Return on Investment or EBIT/Assets (see Column AR  in the Table), d) Weighted Average Cost of Capital or WACC (see Column P in the Table), and e) S&P Insider Activity (see Column AS in the Table). 

Bottom Line: Because of COVID-19, only 5 of these companies currently have an ROI greater than their WACC: PFE, CSCO, INTC, GD, IBM. Of those, PFE, CSCO, INTC, and GD have a 5-yr PEG ratio that is under 3; none of those use excessive leverage (i.e., the ratio of LT-debt-to-equity is less than 1). S&P Insider Activity is neutral for GD and PFE but unfavorable for CSCO and INTC.

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

Full Disclosure: I dollar-average into PFE and INTC and IBM, and also own shares of CSCO, DUK, CMCSA, SO and IBM.

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

Post questions and comments in the box below or send email to: