Sunday, September 30

Week 65 - 2012 Master List (3Q Update)

Situation: Stock market fluctuations continue but since 2009 the 250 day moving average (S&P 500 Index) has kept moving higher without a break. Why? We need to remember that this trend line is forecasting conditions 6-9 months down the road. Similarly, when the Federal Open Market Committee (chaired by Ben Bernanke) moves interest rates up or down the effect appears 6-9 months later.

Our ITR Master List (see Week 5) is based on fundamentals that long-term investors use in making stock purchase or sale decisions. That means we need to update our list quarterly. Our requirements for including a company in the Master List have become more stringent, given that the economy is struggling with slow growth and there is little prospect of a breakout in either direction. Unfortunately, it’s a “Muddle Through Economy." To make the list, we currently require companies to have:
   a) at least an A- S&P rating for both debt and equity issues;
   b) to have increased their dividend for at least 10 yrs in a row;
   c)  to have a dividend yield that is equal to or greater than the S&P 500 Index's (currently 1.9%).

In addition, companies (other than regulated utilities) have to meet certain standards pertaining to investment efficiency, dividend coverage, and long-term debt. In other words, ROIC (Return On Invested Capital) has to be 12% or greater, Free Cash Flow (as reported by the WSJ) must be sufficient to pay the entire dividend, and long-term debt has to be no greater than 35% of total capitalization. The attached Table lists 20 companies that presently meet those standards. Three have been dropped since the last Master List update (see Week 52) and no new companies have been added.

Bottom Line: This is not a good time to take a chance on a risky stock, so stick to the fundamentals. Take a look at the Table and think about starting a DRIP in one or two of the companies that have been struggling, and are therefore under-priced. Look for those that have a Durable Competitive Advantage (see Week 42), and projected 10-yr growth that exceeds the past 9 yrs of growth in Tangible Book Value (indicating an under-priced stock): Becton Dickinson (BDX), Chevron (CVX), ExxonMobil (XOM), 3M (MMM), and Medtronic (MDT). Then do your homework. Spend time reading articles in the responsible business press. For example, the kind of information you need on Medtronic is found in a lead story in Barron’s.

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