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.

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Sunday, October 25

Month 112 - WATCH LIST: 28 A-rated Non-financial Companies in the iShares Top 200 Value ETF - October 2020

Situation: Savers eventually come to realize that they need to invest for income, to realize a positive return on investment (ROI). ROI is the most common profitability ratio.

    ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the “cost of investment”, and, finally, multiplying by 100. For an asset in an investor’s portfolio, the “cost of investment” equals inflation + transaction costs.

Inflation is the only cost from owning Savings Bonds or an FDIC-insured savings account, there being no transaction costs. But savers typically incur a negative ROI because the interest rate credited to their account is almost always lower than the inflation rate, unless they bought Inflation-protected Savings Bonds.

The woke saver’s goal is to invest in assets that have low transaction costs but also have interest or dividend rates that cover inflation: stocks and bonds. An “investment-grade intermediate-term” bond fund, like the Vanguard Total Bond Market Index ETF (BND), is a suitable choice except during periods of hyperinflation. That’s because the value of bonds already held in the fund, referred to as “legacy” bonds, will fall when inflation is rising briskly. Why? Because the interest rate on legacy bonds will be lower than the rate of inflation. 

The dividend yield on stocks and stock ETFs could also lag behind rising inflation. However, the companies that pay those dividends usually grow their earnings and dividends faster during inflation, partly because the value of the dollar keeps falling. The investor’s ROI will likely remain positive, since it reflects growth in the stock’s price (from faster earnings growth) and growth in the dividend payout. 

Our saver, whom we now call an investor because she knows enough to seek out value (by looking to pay low transaction costs for apparently underpriced assets), will need to shop among different high-yielding assets to sustain ROI growth: 1) a bond-heavy “balanced” mutual fund like the Vanguard Wellesley Income Fund (VWINX), 2) a high-yielding stock index ETF like the Vanguard High Dividend Yield Index Fund (VYM), and 3) individual stocks selected from the VYM portfolio

Mission: Analyze stocks in the iShares Top 200 Value Index ETF (IWX) that are also in VYM’s portfolio and meet these 5 criteria: have a) at least a 20-year trading record, b) an S&P bond rating of A- or higher, c) an S&P stock rating of B+/M or higher, d) a positive Book Value for the most recent quarter (mrq), and e) positive earnings for the Trailing Twelve Months (TTM). These criteria narrow your choices to a manageable but high quality Watch List. If you don’t have time to follow all 28 companies, confine your attention to the 21 companies that are also in the S&P 100 Index (see Column AR in the Table) or the 16 companies that are also in the 65-stock Dow Jones Composite Average (see Column AS in the Table).

Execution: see Table.

Administration: For comparison purposes, I list the 9 Financial Services companies separately because the Federal Open Market Committee (FOMC) has promised to keep interest rates near zero through 2023. Financial Services companies profit from the “spread” between what they pay for money and what they make from that money. With interest rates for 15-year home mortgages moving lower than 2.5% and 5-year inflation rates moving higher than 1.8%, there is little profit potential on the horizon.

To calculate the annual ROI of a publicly-traded corporation, divide Earnings Before Interest and Taxes (EBIT line of Net Income statement) by Total Assets (at the bottom of the Balance Sheet statement). You want the most recent information available, which is ROI for the Trailing Twelve Months (TTM). That is similarly calculated using the 4 most recent quarterly Net Income and Balance Sheet statements (see Column AT in the Table). 

Bottom Line: You’ll need to focus on large-capitalization stocks in your retirement account that pay a good and growing dividend. Why? There are 4 reasons: Those companies have 1) multiple product & service lines that likely can be managed to allow the company to continue growing earnings during a recession; 2) multi-billion dollar credit lines are already in place, 3) banking relationships are already in place that make it possible for each company to issue new long-term bonds with low interest rates during a recession, and 4) these companies are what you need to invest in, if you want to achieve total returns that come close to those achieved by the gold standard that we all measure our investment returns against, which are the capitalization-weighted S&P 500 Index ETFs like SPY (see Line 47 in the Table), which large brokers like Fidelity offer at negligible cost. 

Possible BUYs among Value Stocks (i.e. those with green highlights in both Column AD and Column AF of the Table). There are 9 such stocks: Pfizer (PFE), Cisco Systems (CSCO), Intel (INTC), American Electric Power (AEP), Duke Energy (DUK), Comcast (CMCSA), Southern (SO), Eaton PLC (ETN) and International Business Machines (IBM). The “possible BUYs” need to    1) not be overburdened with debt (see red highlights in Columns S-U of the Table);

  2) have a PEG ratio no greater than 2.5 (Column AI), and

  3) have high Returns On Tangible Capital Employed (Column O) and Returns On Investment (Column AT).

Intel (INTC) and Cisco Systems are the only ones that have a Return On Investment (TTM) greater than 15% (see Column AT in the Table). Findings: PFE, CMCSA and IBM are overburdened with debt; AEP, DUK, SO, ETN and IBM have high PEG ratios. The only remaining companies, CSCO and INTC, do have high returns (Earnings Before Interest and Taxes) on Tangible Capital Employed and Total Assets (see Columns O and AT in the Table), and are therefore “possible BUYs.”

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

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

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

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