Sunday, December 18

Week 285 - 2017 Master List

Situation: You want to make money from investments, and you know that the best way to do that is not to lose money. Stocks pose the risks of volatility and selection bias, so you need to pick stocks that represent all 10 S&P industries while taking care to focus on large companies with competitive advantages, i.e., strong brands and clean balance sheets. Those advantages will help to insure your portfolio against market outages.

Mission: Develop a spreadsheet of A-rated S&P 100 companies with clean balance sheets that are both Global 500 Best Brands and S&P Dividend Achievers. Exclude companies with less than 25 yrs of trading data. Some companies in the Table have more than one top brand (see Appendix A). 

Execution: see Table. There is one caveat: Union Pacific (UNP) will not qualify for S&P Dividend Achiever status until February, 2017.

Administration: We think a Balance Sheet isn’t “clean” if long-term debt represents more than a third of total assets, dividend payments in the two most recent quarters could not be met from Free Cash Flow, or Tangible Book Value is a negative number (see Columns N-P in the Table).

Bottom Line: There really is no need to take a risk with stocks. You already know volatility is “just around the corner” and that you shouldn’t “concentrate your bets”. All you need to do is follow metrics that have a solid track record for identifying companies that have executed their Business Plan in a safe and effective manner. We have selected 12 S&P 100 companies by using what we consider to be the most impactful metrics (see Table). We like S&P 100 companies because a) they are large enough to have multiple product lines (i.e., internal lines of support that insure against company-wide losses during a recession), and b) are required to have actively traded put and call options on the Chicago Board Options Exchange (i.e., the CBOE facilitates efficient price discovery 24/7/365).  

Risk Rating: 5 (where 10-yr Treasury Notes = 1 and gold bullion = 10)

Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, and MSFT. I also own shares of CAT, MMM, WMT and EMR. 

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr trendline (“least squares”) CAGR found at Column K ( Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 20.

Appendix A: Companies in the Table that have more than one top brand (2016/2015 rank #):

Microsoft: Microsoft (5/4), Xbox (200/196), LinkedIn (334/476).
Wal-Mart Stores: Wal-Mart (8/7), Sam’s Club (101/78).
Johnson & Johnson: Johnson’s (79/60), Neutrogena (250/143).
Procter & Gamble: Gillette (185/138), Pampers (214/225), Pantene (296/264), Tide (493/NR).

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