Sunday, March 29

Week 195 - The Tortoise and the Hare

Situation: Our blog offers a variety of ways to invest for retirement. Priority is placed on assets having returns that are almost certain to exceed inflation and transaction costs over any given 5-yr period. We also restrict ourselves to highlighting stock/bond combinations that lost no more than 15% during the Lehman Panic (10/07-4/09). Yes, losing 15% over 18 months is painful but its less painful than the 19.3% loss sustained by the lowest-cost 50:50 combination of Vanguard stock and bond index funds (see Line 18 in the Table). We comb through the  Barron's 500 List to find those stocks that return the most money long-term while taking on the least risk (or “volatility” in stock prices over various time periods). Our goal is to find the investor’s unicorn, namely, “net-net-net” combinations that are likely to make money net of transaction costs, net of inflation, and net of taxes (see Week 112).

What's wrong with that? A real estate developer sitting next to me on a ski lift once had this response to my idea of helping people build a low-risk retirement portfolio: "People don't care about saving for retirement! Look at the choices they make." He was right. Our formula for investing has about as much appeal as bland baby food. Think about it. Our favorite bond is the inflation-protected Savings Bond, our favorite stocks are Wal-Mart and McDonald’s, and our favorite mutual fund is the bond-heavy Vanguard Wellesley Income Fund!

Now that we’ve admitted the humor of our situation, let’s compare those 4 choices to 4 similarly high-quality but “swifter” bonds, stocks, and mutual funds. We’ll call our approach “tortoise” and the swifter approach “hare” in honor of Aesop’s Fable (see Table). For a swift mutual fund, we’ll go with MDLOX, the Blackrock Global Allocation Fund. MDLOX is run by a hedge fund company and had a better record during the Lehman Panic than most of the better hedge funds. For a swift bond, we’ll go with CHS Convertible Preferred stock (CHSCP), issued by the largest farmer’s cooperative in the US. For a couple of swift stocks, we’ll go with Biogen Idec (BIIB), a biotech stock, and Dover (DOV), an innovative manufacturing company. These 4 choices are not random but are instead designed to cast an aggressive approach to investing in the best light.

As you can see from the Table, the hare investments come out ahead, mitigating losses during the Lehman Panic with strong performances both before and after that deep recession. If you take a close look, you’ll know which investment style you favor for building a retirement portfolio. Admittedly, our ITR blog doesn’t give readers who like the hare’s style as many meaty articles to read as those who like the tortoise’s style. Why? Because after you pass age 60 there is very little chance you’ll be able to rebuild a retirement portfolio that takes a +20% loss during a deep recession. And, the anxiety factor is much greater for aggressive investors because their transaction costs are higher than with automated online investing, partly because of the need to make frequent trading decisions and partly because many of the stocks that catch your interest can only be obtained through a stockbroker. For example, transaction costs for a $10,000 investment in MDLOX are ~6 times greater than for VWINX over a 10 yr holding period. 

Bottom Line: There is nothing exciting about building a prudent retirement portfolio. Your goal is to have stable returns that exceed transaction costs, inflation and taxes. Inflation-protected US Savings Bonds are the only investment that will accomplish that with near certainty. Why? Because transaction costs are zero, inflation costs are zero, and taxes on accrued interest are only paid when you cash in the bond. But Savings Bonds won’t help you much with retirement expenses. So, you’ll need to take on more risk by adding stocks to your portfolio. You’ll want to minimize that risk by keeping transaction costs low (through online dividend reinvestment plans), taking a buy-and-hold approach to stock ownership, and confining your stock selections to those that have a long history of annual dividend increases that beat inflation. If you are interested in making a hobby of investing, and have enough disposable income, you can take a more aggressive approach to stock ownership by setting up a second, non-retirement portfolio. For that you’ll need to find a stockbroker.

Risk Rating for tortoise: 3; Risk Rating for hare: 6.

Full Disclosure: I dollar-average into inflation-protected Savings Bonds and WMT, and also own shares of MCD for dividend reinvestment.

NOTE: metrics that underperform our key benchmark (VBINX) are highlighted in red; metrics are current as of the Sunday of publication.

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Sunday, March 22

Week 194 - Biotechnology Companies in the Barron’s 500 List

Situation: Biotechnology companies are the high-risk sector of the US stock market. We have not previously discussed companies in this sector, aside from pointing out that Amgen (AMGN) and Biogen Idec (BIIB) had a Durable Competitive Advantage in 2012 (see Week 59). Why? Because our blog is about buy-and-hold stocks that can be expected to pay growing dividends in retirement, which is so attractive to those living on a fixed income. Biotechnology companies, on the other hand, rarely pay dividends because they make products that come off patent ~17 years after FDA approval. That means research and development of the next winning product will consume most of their profits. We’re talking about a growth industry where new technologies rapidly eclipse old technologies, and stability is a mirage.  

For investors who like to gamble in the stock market, the biotech sector provides the stocks they’re likely to pick. And they’ll have many to choose from. For instance, the main exchange-traded fund (ETF) for biotech stocks is the SPDR S&P Biotech ETF (XBI at Line 11 in the Table). It tracks the S&P Biotechnology Select Industry Index, which includes 87 companies. The NASDAQ Biotechnology Index (^NBI at Line 14 in the Table) has 151 companies. The Barron’s 500 List of the largest companies by revenue on the New York and Toronto stock exchanges only has the 4 biggest names, plus AbbVie (ABBV) at Line 10 which is a recent spin-off from Abbott Laboratories (ABT) at Line 9. We’ve included ABT as a “big pharma” reference point. 

Close examination of the Table, shows that Gilead Sciences (GILD) is the only one of the 4 long-established biotech stocks that is not overpriced by our main criterion, i.e., it has an EV/EBITDA (Enterprise Value divided by Earnings Before Interest Taxes Depreciation and Amortization) less than 14. On the negative side, GILD has a 5-yr Beta of 1.11 and an S&P stock rating of B/M, both of which signify earnings uncertainty. Only Amgen (AMGN) pays a dividend, has a low 5-yr Beta, and carries the minimum S&P stock rating (B+/M) suitable for buy-and-hold investors. You can take a look at the drugs currently being marketed by these 5 companies by consulting the APPENDIX at the end of this blog.

There is an issue with overpricing in the biotechnology industry, with respect to both product and stock prices. Some pharmacy benefits managers (PBMs), e.g. Express Scripts Holding Company (ESRX), will not sell the high-priced GILD drugs for treating Hepatitis C Virus (genotype 1). Instead, ESRX has entered an agreement with ABBV to sell its lower-priced Viekera Pak. 

Stock prices for the industry also appear high. Amgen (AMGN) and the NASDAQ Biotechnology Index (^NBI) are more than two Standard Deviations above their 16-yr log-linear trendlines, and have been labeled “potentially overpriced” at the BMW Method website. Experienced investors will look at price/sales (P/S) when such concerns arise. P/S is ~1.8 for the S&P 500 Index. However, the healthcare industry is the most “overbought” of the 10 S&P industries. So, P/S for a typical "big pharma" company like ABT is 3.4, and the 4 biotech firms at the top of our Table have an average P/S of 8.8. It looks like biotech stocks are in a “bubble.”

Bottom Line: If you’re over 50, it is time to focus on retirement savings. You should have at least 4 times your gross annual income in that account by now. None of the 4 biotechnology stocks in our Table with 20 yrs of price data fit the requirements for inclusion in a retirement portfolio. These are high-risk, high-reward stocks. That said, they represent a more prudent bet than competing high-risk assets like gold, international stocks, and high-yield bonds. Those don’t carry anything like the reward potential of biotechnology stocks, given the tens of millions of people per year who move up from poverty to enter the “middle class” in emerging economies like China, India, Brazil, Turkey and South Africa.

Risk Rating: 8

Full Disclosure: I own shares of ABBV.

NOTE: metrics that underperform VBINX have red highlights in the Table; metrics are current as of the Sunday of publication.

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APPENDIX for Week 194

Gilead Sciences (GILD) has $7.7B in cash holdings for future acquisitions, and specializes in anti-viral drugs. Its current products include 1) Truvada is a combination of two other of the company’s drugs, Viread and Emtriva. 2) Complera is a combination of Truvada and Tibotec’s Edurant. 3) Atripla is a combination of Truvada and Bristol-Myers-Squibb’s Sustiva. 4) Stribild is so far approved for use only in the European Union (EU) and is a combination of Viread, Emtriva, elvitegravir, and cobicisat). 5) Ambisome B is marketed for life-threatening fungal infections that often complicate the treatment of AIDS. 6) Viread and 7) Hepsera are used to treat chronic hepatitis B. 8) Tamiflu is used to treat influenza A and B but is marketed by Roche (which pays royalties to Gilead Sciences until the drug comes off patent in 2016). 9) Letairis is used to treat pulmonary arterial hypertension; Gilead Sciences had to acquire Myogen to obtain its patent for Letairis. 10) Ranexa is used to treat chronic angina pectoris; Gilead Sciences acquired CV Therapeutics to obtain its patent for Ranexa. 11) Cayston is used to treat cystic fibrosis that has become complicated by infection with Pseudomonas aeruginosa. 12) Sovaldi (sofosbuvir) is used to treat Hepatitis C; Gilead Sciences acquired Pharmasett for its patent to use Sovaldi against certain genotypes of Hepatitis C in combination with the established drug treatments (interferon and ribavirin), or with ribavirin alone when patients cannot tolerate interferon. 13) Harvoni, a tablet that is taken once a day for treatment of Hepatitis C genotype 1 and is used without interferon or ribavirin. This breakthrough drug has achieved ~95% cure rates in Phase III studies. Biogen Idec (BIIB) has $3.2B in cash equivalents for future acquisitions and is focused on producing drugs and monoclonal antibodies for cancer and autoimmune diseases. Current products include 1) Avonex (beta interferon) is the company’s core franchise, used to treat relapsing multiple sclerosis since FDA approval in 1996. The current version comes off patent in 2026. 2) Rituxan, a monoclonal antibody against CD-20 protein positive B-cells, is an FDA-approved treatment for non-Hodgkin lymphomas and rheumatoid arthritis. It is marketed by Roche via Genentech (Biogen Idec receives royalties). 3) Tysabri (developed with Elan) is FDA-approved for the treatment of relapsing multiple sclerosis. It is under limited distribution because of producing progressive multifocal leukoencephalopathy in patients carrying antibodies to the Jakob-Creutzfeld virus and/or those receiving treatment for more than two years. An assay is now available to detect the JC virus before starting Tysabri. 4) Tecfidera, an orally-dosed drug used to reduce relapses of multiple sclerosis, received FDA approval two years ago. 5) Plegridy, a long-acting version of Avonex, emerged from Phase III studies over two years ago and received FDA approval in August of 2014. 6) Ampyra, a drug produced by Acorda Therapeutics, is used to improve walking in multiple sclerosis patients. Biogen Idec obtained the license to sell the drug outside the U.S. in 2009; conditional EU approval was granted in 2011. Amgen (AMGN) has built up $28B in cash holdings. Current products include 1) Epogen is a genetically-engineered human erythropoietin used to stimulate red blood cell production in anemia caused by chronic renal failure. 2) Aranesp is a recombinant protein that stimulates red blood cell production, and is approved for use in treating chemotherapy-induced anemia as well as chronic renal failure. 3) Neupogen stimulates neutrophil (white blood cell) production in cancer patients undergoing chemotherapy. 4) Neulesta, another stimulant for neutrophil production. 5) Enbrel is a drug for treating rheumatoid arthritis, psoriatic arthritis, and chronic plaque psoriasis that Amgen obtained when it acquired Immunex in 2002. Enbrel has been issued a new patent that extends to 2028. 6) Sensipar, sold on license from NPS Pharmaceuticals, is used to treat hyperparathyroidism secondary to end-stage kidney disease. 7) Vectibix is used to treat advanced colorectal cancer. 8) Nplate is used to treat ITP (immune thrombocytopenic purpura). 9) Prolia (denosumab) is used to treat bone loss due to hormone ablation, postmenopausal osteoporosis, or metastatic prostate cancer. Celgene (CELG) has $6.9B in cash holdings and specializes in using its proprietary small molecule technology to develop drugs that modulate the immune response or inhibit cytokine production--mainly to treat multiple myeloma. Current products include 1) Thalomid (thalidomide) inhibits blood vessel growth and is used to treat leprosy-related illnesses and multiple myeloma. 2) Revlimib, the successor to Thalomid, is used to treat myelodysplastic syndrome and relapsed or refractory multiple myeloma. 3) Pomalyst was approved for use in refractory multiple myeloma in 2013, and is in Phase III studies for potential use in myelofibrosis. 4) Otezla was approved for treatment of psoriatic arthritis in 2014, and is in Phase III studies for potential use in ankylosing spondylitis as well as being up for FDA approval to treat psoriasis. 5) Abraxane (via acquisition of Abraxis BioScience in 2010) is approved for use in metastatic breast cancer, non-small cell lung cancer and pancreatic cancer. 6) Istodax (via acquisition of Gloucester Pharmaceuticals in 2010) is used to treat T-cell lymphoma. 7) Otezla (apremilast) is used for treatment of psoriatic arthritis. AbbVie (ABBV) has $10B in cash and investments but also carries long-term debt of $14B. Current products include 1) Humira, the injectable tumor necrosis factor (TNF) blocker that is the leading treatment for rheumatoid arthritis worldwide. It is also approved for use in juvenile idiopathic arthritis, psoriasis, ankylosing spondylitis, ulcerative colitis, Crohn’s disease, and spondyloarthritis. Its US patent expires in less than two years; competing drugs include Remicade and Simponi (both marketed by Johnson & Johnson) as well as Enbrel (marketed by Pfizer). 2) Tricor and Trilipix, for use in treating high cholesterol or high triglycerides, went off patent in 2012. 3) Niaspan, an extended-release niacin supplement. 4) Synthroid, a long-standing staple for treating hypothyroidism. 5) AndroGel (testosterone replacement therapy). 6) Lupron, for prostate cancer. 7) Synagis, for treating respiratory syncytial syndrome, is only marketed outside the US. 8) Kaletra and Norvir, for treating HIV.

Sunday, March 15

Week 193 - Barron’s 500 Companies with 25 years of Below-Market Variance in Stock Price Appreciation

Situation: Now that US stock and bond markets appear to be fully valued, it is time to pause and reflect. The metric we refer to as Finance Value is derived by subtracting risk from reward. But what is reward and what is risk? Reward is stock-price appreciation (plus appreciation due to reinvested dividend payments) over the long term. Let’s call it the 25 yr period that for most people is the most active time of saving for retirement. Risk can be summed up by a term from statistics: variance. 

As defined at the Investopedia website, variance is “a measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean. Variance is calculated by taking the differences between each number in the set and the mean, squaring the differences (to make them positive), and dividing the sum of the squares by the number of values in the set . . . Since variance measures the variability (volatility) from an average or mean, and volatility is a measure of risk, the variance statistic can help determine the risk an investor might take on when purchasing a specific security.” What does this mean in practical terms? Variance tells us how closely a company skirts the edge of oblivion (bankruptcy). The quickest way to track variance is to always check out the S&P credit report.

The S&P 500 Index has 4-5 times the level of variance that is found in an investment grade bond index. If stocks represent more than 25% of your retirement savings, you'll feel pain from a stock market crash. (Stocks can go down a lot just when you need the money.) The solution is to overweight bonds in your portfolio, or buy shares of a mutual fund that will do that for you (e.g. VWINX at Line 20 in the Table). However, few people who haven’t been to business school can embrace that idea of overweighting bonds. Why? Because it is much more entertaining to own stocks, and the incentives are greater. Those incentives include 1) greater returns over the very long term; 2) greater transparency of valuation metrics; 3) a narrower spread between bid and ask prices; 4) dividend payments that track earnings vs. interest payments that are fixed; 5) earnings growth that usually stays ahead of inflation, whereas, bonds lose value with inflation. Bondholders, however, benefit from two distinct advantages: 1) the return of principal upon maturity of the bond, whereas, stocks merely provide a return on principal; 2) in the event of bankruptcy, bondholders get money from the sale of assets but stockholders get nothing. 

We'll look at several measures of risk over a 25-yr time period, to see if we can come up with a few stocks in the Barron’s 500 List that are less risky than the S&P 500 Index by every one of those measures. 

We’ll start with the “BMW Method” to examine variance in CAGR (compound average growth rate) for stock prices over the past 25 yrs. This analysis will tell us the rate of price appreciation arrived at from the “least squares” calculation defined above for daily prices over 25 yrs. Applying the "least squares" test creates a trendline for the logarithm of daily prices. The BMW Method data set has 25-yr log-linear plots for the stocks of 560 companies, revised forward at the first of each month. At the BMW website, you’ll find that each regression line (of price over time) has two parallel lines above it and two parallel lines below it. Those represent one or two Standard Deviations (1SD or 2SD) from the rate of price appreciation. For example, the S&P 500 Index (^GSPC) has a 25-yr price appreciation of 6.4%/yr and the -1SD CAGR is 20% less (5.2%/yr).
In the Table, we list the 25-year rate of price appreciation in Column Q and the Standard Deviation (plus or minus 1SD or 2SD) in Column R. Most stocks, and the S&P 500 Index, are currently “on trend.” We’ve excluded companies whose current stock prices are 1SD or 2SD off trend, since that represents the volatility we’re trying to avoid. We’ve also excluded stocks that have a 5-yr Beta greater than the 5-yr Beta for the hedged S&P 500 Index (VBINX at Line 22 in the Table), as well as stocks with a 25-yr growth rate that has greater variance than the S&P 500 Index. Stocks that haven’t exceeded their best price in last bull market, which ended in October of 2007, are also excluded. In addition to these variance criteria, we’ve excluded companies that lost more than the 46.5% that the lowest-cost S&P 500 Index fund (VFINX at Line 24 in the Table) lost during the 18-month Lehman Panic. And, we’ve excluded companies with S&P bond ratings below BBB+ and/or S&P stock ratings below B+/M. 

Only 15 companies remain (Table). Its not surprising that 11 of those are Dividend Aristocrats, i.e., companies that have been growing their dividends annually for at least 25 years (see Column V in the Table).

Now let’s look at valuation metrics like P/E and EV/EBITDA (Columns J and K in the Table). And, we’ll add a new twist: PEGY (Column N), which is P/E divided by two metrics: estimated 5-yr rate of Growth in earnings (Column L) and dividend Yield (Column G). Recall that any P/E higher than 20 suggests that the stock is overpriced, since earnings yield then falls below 5%. Similarly, any company with an Enterprise Value that is more than 13 times higher than year-over-year operating earnings is overpriced (in our opinion). For PEGY, we think any number over 2.0 suggests that the stock is overpriced while any number under 1.2 suggests that the stock is underpriced. Taking these 3 metrics together (P/E, EV/EBITDA, and PEGY), which of the 15 stocks flunk all 3 tests? There are 4: CLX, CL, KO, HSY. The only stocks that are not overpriced by any of those 3 metrics are: McDonald’s (MCD), Microsoft (MSFT) and Comcast (CMCSA).

Bottom Line: This week we’ve tried to take the sting out of the stock market by finding stocks that have a 25-yr history of being less risky than the S&P 500 Index by every one of several volatility tests. We found 15, and 12 of those companies happen to be “defensive” stocks as defined by Standard & Poors (i.e., companies in the Consumer Staples, Healthcare, Utilities, and Communication Services industries). Then we looked at valuations, finding that 4 of the 15 are pricey by 3 metrics: P/E, EV/EBITDA, and PEGY. Those 6 are balanced by 5 stocks that aren't pricey (McDonald’s, Microsoft and Comcast).

Risk Rating: 4

Full Disclosure: I dollar-average into WMT and MSFT, and also own shares of PG, PEP, KO and MCD.

NOTE: Metrics in the Table are brought current as of the Sunday of publication; red highlights denote underperformance vs. the Vanguard Balanced Index Fund (VBINX).

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Sunday, March 8

Week 192 - Navigating Retirement

Situation: The premise of our weekly blogs is that all of us are planning ahead in order to enjoy a healthy, productive retirement. That said, each of us needs financial resources that are adequate to fund our planned retirement. In other words, this blog is focused on Classical Economics, not Behavioral Economics. But for this week, we want to step “out of frame” and examine some issues that are better examined through the eyes of the Behavioral Economists. The key point is that retirees conduct their business while living with two problems that likely received insufficient attention prior to retirement. The first problem is that exiting from your day job can create a crisis related to identity. Second, retiring means we must face the illusion that we are immortal . . . and recognize that we are not. 

If you didn’t know it prior to retiring, certainly afterwards most people will admit that their day job was a complicated mixture of being “just a job” or livelihood, and being their personhood. In retirement (and job loss), we frequently have to construct another “personhood” to replace what has been lost. As a medical doctor, I know that patients with good mental health tend to beat the odds, e.g. after treatment for cancer. I also know that depression makes one more vulnerable to illness and injury, and that losing one’s job is at the top of the list for creating Reactive Depression (along with divorce and death of a family member). Being hit with any one of those three life events is considered by most doctors to be reason enough to seek counseling. Personally, I believe that beginning retirement is the kind of loss that should also be added to the above list. (You've lost your job!)

Why is that? Well, because fundamentally, having a satisfactory retirement isn’t really about finding enough money. It’s about freedom . . . peace of mind. We’ve “slain our dragons” and now it’s time to find a sense of accomplishment, peace of mind. How do we make this transition? It starts by remembering who you were when you came of age. Those who have always worked will probably be interested in finding another job after they retire.

Another important point is that you need to stay healthy. Your mental attitude (optimism and energy) depends on feeling well. The basic keys to good health are easy to remember and cheap to apply: 1) Eat more fresh vegetables, fruit and nuts but less red meat (and no desserts); 2) do cardiothoracic conditioning, something equivalent to two miles of brisk walking and 10 push-ups a day; 3) gradually get back to your high school graduation weight; 4) limit yourself to one cup of coffee a day and one drink a week; 5) don’t smoke cigarettes, puff cigars, or hang out with smokers; 6) get regular dental care to make sure you’re not developing a tooth abscess; 7) get a colonoscopy every 10 years; 8) take a nap most afternoons; 9) drink more water than you think you need (this is because as you get older, you won’t feel the thirst until you’re weak from dehydration). 

Your main enemy is hypertension, and it is certain to afflict you if you aren’t aggressive about getting daily exercise, minimizing caffeine intake, staying away from smokers, avoiding contentious people, and getting your BMI (body mass index) under 22. Buy a blood pressure measuring kit to use at home (and keep a daily log). And, as your age advances, gradually wean yourself from driving cars; walk instead. Don’t shovel snow (way too many people get heart attacks from doing that). If you develop any kind of sudden neurological dysfunction, call 911.

Bottom Line: Retirement isn’t what it’s cracked up to be in TV ads for ocean cruises, blood thinners and Viagra. At first you’ll be surprised when friends become disabled by old age, or just up and die. You’ll soon need to take a philosophical position on the subject of death, become more aware of who you are. By knowing your core values, you’ll be better able to make a list of who and what gives you peace of mind. Doing those activities and seeing those people will lower your blood pressure. And don’t forget to make some new friends. Your goal is to find a sense of freedom, which includes freedom from deadlines, obligations and supervision by anyone (other than your cardiologist). If people you know try to get you to march to their drummer instead of your drummer, find other people who share your values. You’ll live longer and better because you’ll have a life, and do things you want to do. Think less about return on invested capital and more about return of invested capital. As you get older, you’ll sleep better if you gradually wind down “growth” investments while maintaining “defensive” investments. So, the end result of this discussion is that we have prepared a Table for this week that has two bond examples plus 5 stocks worth preserving for the growing dividends they’ll spin off. We selected those 5 from our recent list of 10 Lifeboat Stocks (see Week 174). Our goal in presenting this Table is to provide you with a sample of sound dividend and interest paying investments that will give you a stable platform for your Golden Years.

Risk Rating: 3

Full Disclosure: I dollar-average into WMT and 10-yr inflation-protected T-Notes, and also own shares of JNJ, BDX and PEP.

Note: Metrics in the Table that underperform our benchmark (VBINX) are highlighted in red; metrics are current as of the Sunday of publication.

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Sunday, March 1

Week 191 - Key Food and Agriculture Companies in the Barron’s 500 List

Situation: Here's where your investment philosophy kicks in. At ITR, we have a vision that sees markets in shades of grey, never in black and white. You'll point out that investments would turn dark pretty quickly if there were a nuclear war or a highly lethal pandemic. Warren Buffett has said as much. A wave of bankruptcies would occur and some markets would undoubtedly freeze up for a while, years maybe. But some companies would do well: gold miners, food processors, agricultural suppliers, and farmland manager/brokers.

Survival of the human species depends of producing, processing and distributing food. Large food and agriculture companies, such as those in the Barron’s 500 List, would have to take the lead in resolving a food crisis. Which companies are best positioned to play key roles in supplying farmers & ranchers with tractors, combines, seeds, animal feed, fertilizer and herbicides? Farm products have to be processed, and packaged foodstuffs have to be distributed to grocery stores, hotels, restaurants and institutions. Bear in mind that the year-over-year value of these companies is determined as much by the weather cycle as the economic cycle. So, their stock prices are “non-correlated” relative to the price of the S&P 500 Index. That “non-correlation” and the "essential" nature of food explains why Omaha out-performed all other US cities during the 2007-2009 recession.

In constructing this week’s Table, we’ve looked first to companies that have high credit ratings and stable stock performance, as indicators of companies that can weather a crisis. To evaluate long-term performance, we’ve looked for companies that have less variance than the S&P 500 Index in share appreciation, as measured from the log-linear trendline of stock prices over the past 20 yrs, as shown in Column L of the Table. We came up with 14 companies, 9 of which are Dividend Achievers with at least 10 consecutive yrs of dividend increases (see Column Q in the Table). None of the companies are overpriced on every one of the 3 metrics that we use (see Columns J, K and L in the Table).

Bottom Line: Large food and agriculture companies underpin farmland values, and farmland has historically been the most productive investment to have (see Line 19 in the Table), in terms of Finance Value (Reward minus Risk). By various estimates covering over 100 yrs of data, after-inflation returns on farmland are ~9%/yr. Large food and agriculture companies have approximately the same returns but at much greater risk of loss in value during recessions and depressions (see Column D in the Table). But they’re the next best thing to owning farmland. The source of all that value is our dependence on food for survival.

Risk Rating: 5

Full Disclosure: I have no plans to buy or sell shares of companies in the Table, but own shares in half of them (MON, HRL, GIS, KO, PEP, DE, DD).

Note: Metrics that underperform our key benchmark (VBINX at Line 24 in the Table) are highlighted in red. All metrics are current as of the Sunday of publication.

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