Sunday, October 15

Week 328 - Precision Agriculture

Situation: Production Agriculture has created its own problems. Worldwide supply has exceeded demand for years. In early 2017, the USDA projected that farm income would fall for a 4th straight year. But it hasn’t turned out to be that bad, since crop prices have coalesced near last year’s levels, and sales volumes have risen. Much of the oversupply results from technological improvements in farming, starting with the buildout of center-pivot irrigation in the 70s and 80s. Weather prediction started improving in the 1990s, and the National Oceanic and Atmospheric Administration (NOAA) now has a number of online tools available to farmers at no cost. 

To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc

The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.

Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.

Execution: see Table.


* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.  
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs. 
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.

Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.

Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.

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Sunday, October 8

Week 327 - The 2 and 8 Club: A Strategy To Beat The S&P 500

Situation: You enjoy learning about economics through investing in specific companies but then you learn that you are “leaving money on the table.” How does that happen? Because Warren Buffett has explained to us that the Vanguard S&P 500 Admiral Fund (VFIAX) will beat professional stock-pickers 90% of the time. Why? Because a) it has an expense ratio of only 0.04%, b) it reaches all sectors of the economy, and c) capital gains taxes are negligible because there’s no point selling VFIAX shares before you retire. Instead, you can continue to dollar-average into your VFIAX account until you retire, regardless of market fluctuations.

But we can suggest a strategy for picking stocks without losing much money vs. VFIAX. Firstly, you’d need a watch list positioned in all 11 S&P sectors. Secondly, you’d need a fee-based trading account at your brokerage, one costing ~1%/yr of net asset value that allows you to buy and sell shares as needed without paying transaction costs. Alternatively, you can employ a Dividend Re-Investment Plan when transaction costs are lower. For example, computershare’s DRIP for NextEra Energy (NEE) carries no transaction costs. Thirdly, you’d need to have plan for picking stocks from your watch list, and the discipline to stick with that plan.

Our blog for this week has a workable plan that we call “The 2 and 8 Club.” It sticks to a watch list of the largest and most frequently traded companies, i.e., those in the S&P 100 Index. It picks companies that pay more than a market yield (~2%) by using the S&P 100 companies listed in the FTSE High Dividend Yield Index, which most investors in the US know as VYM, the Vanguard High Dividend Yield ETF. Not all high-yielding companies in the S&P 100 Index are found there because companies have to meet international standards of dividend predictability. 

Now you know the “2” part of The 2 and 8 Club, i.e., 2% market yield. The “8” part is a requirement that selected companies pay a dividend that has had a Compound Annual Growth Rate (CAGR) over the past 5 yrs of at least 8.0%/yr. Companies whose bonds are rated lower than A- by S&P are excluded, as are those whose stock is rated lower than B+/M.

Mission: List the current members of The 2 and 8 Club.

Execution: see Table.

Administration: To use this Plan, you simply keep track of the current members of The 2 and 8 Club, then dollar-average into half of those. Some will reach a point where they no longer qualify for membership. Chances are you will decide to stop investing in those companies but we suggest you consider replacing them with newly qualified companies. Each position is predicted to have at least a 10%/yr return (2+8=10), which is 3%/yr more than the long-term return for the S&P 500 Index. That 3% safety factor will likely be nibbled away by transaction costs of at least 1%/yr and capital gains taxes of at least 2%/yr.

Bottom Line: There are fewer than a dozen finance professionals in history with a record of beating the S&P 500 Index every year for more than 2 market cycles. So, a stock-picker like you or me is essentially a gambler. For example, 11 of the 16 companies in the Table that qualify for inclusion in The 2 and 8 Club have shown more extreme fluctuations in market price over the past 16 years than has the S&P 500 Index (see red highlights in Column M of the Table). As finance professors like to say, there are only two ways to beat the S&P 500 Index: 1) use insider information (which is illegal), or 2) have a portfolio that carries more risk of loss than the S&P 500 Index. 

But you’re more than a gambler. You’re participating in an experiential school that teaches you (through trial and error) how the economy operates, and you’re learning more about the behavior of groups (sociology) and the governance of countries (politics).

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

Full Disclosure: I dollar-average into MSFT, IBM, MMM, CAT, JPM, AMGN, UNP and NEE.

NOTE: Candidates for The 2 and 8 Club are listed at the bottom of the Table. These are S&P 100 companies that have recently been paying an above-market (SPY) dividend yield and have grown that dividend faster than 8%/yr over the past 5 years, but are not yet included in the US version of the FTSE High Dividend Yield Index (

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Sunday, October 1

Week 326 - Investing for Income

Situation: Bonds or stocks? Which will give you a larger monthly check without disrupting your sleep? For stocks, the standard would be SPDR Dow Jones Industrial Average ETF (DIA), yielding 2.2%. For bonds, the standard would be iShares 20+ Year Treasury Bond ETF (TLT), yielding 2.5%. So far, so good. But what if you want more income than those “plain vanilla” options provide? For example, a bond index fund that wouldn’t be hit for a big loss if inflation were to spike upward? Then you would want to be an investment-grade intermediate-term index fund like the Vanguard Interm-Term Bond Fund (BIV). If you’re a stock-picker and want more yield, you’ll need to start with a close look at the 400+ stocks in the Russell 1000 Index that yield more than a market average 2%. There’s an exchange-traded index fund (ETF) that holds positions in all such stocks: The Vanguard High Dividend Yield ETF (VYM). Our Table for this week pulls out 8 Dividend Achievers that we think do the job. But remember, you’d have to hold positions in all 8 to minimize selection bias. Then, you’d have an investment that yields ~2.7% and is likely to grow those dividends ~9%/yr.

Mission: Find A-rated Dividend Achievers with a higher yield than DIA, a clean Balance Sheet, and less volatility over the past 20 years than the S&P 500 Index. 

Execution: We find 8 companies in the Russell 1000 Index that meet those criteria, except for minor Balance Sheet issues (see Table).

Bottom Line: Low-risk investments that yield more than 3% have almost disappeared. We find only two: WEC Energy Group (WEC) and Procter & Gamble (PG). Of course, there are some companies and government agencies that issue bonds paying a higher interest rate, but you’d have to invest $25,000 in each to avoid paying high up-front transaction costs. And, you’d need to have positions in several such bonds to minimize selection bias.  

Risk Rating: 3 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: For equities, I dollar-average into NEE, PG and JNJ, and also own shares of TRV, WMT and MMM. For bonds, I own shares of BIV.

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