Sunday, June 17

Week 363 - Big Pharma

Situation: There are 11 pharmaceutical companies in the S&P 100 Index, with an average market capitalization of ~$130 Billion. Stocks issued by healthcare companies (including  hospital chains, pharmacy benefit managers, medical insurance vendors, and drugstores) are thought to be defensive “risk-off” bets, like stocks issued by utility, communication services, or consumer staples companies. But they’re not. Healthcare consumes almost 20% of GDP but it is a highly fragmented industry, rife with government interference seeking full control. Medical innovation for the entire planet has to take place in the United States because the healthcare industry is socialized elsewhere and large amounts of private capital are needed to conduct clinical trials. That innovation makes US healthcare into an ongoing research enterprise. For biotechnology companies, there is an ever-present risk of being eclipsed by another company’s research team. Stockpickers who have some appreciation for biochemistry can perhaps identify biotechnology groups that are onto a good thing. But Big Pharma companies survive by looking to buy those same startups. Can you really scope-out a “good thing” better than their scientists?

Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.

Execution: see Table.

Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY). 

Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-average into JNJ and also own shares of ABT.

"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Sunday, June 10

Week 362 - “The 2 and 8 Club” (Extended Version) = Non-S&P 100 Companies In The Russell 1000 Index

Situation: The risk of loss from owning small-capitalization stocks vs. large-capitalization stocks is material, i.e., greater than 5%. Stocks in the S&P 100 Index are safest to own, given that those are required to have actively-traded Put and Call options on the CBOE (Chicago Board Option Exchange), and are usually followed by at least a dozen analysts. Large companies also have the advantage of multiple product lines, one of which is likely to do well in a recession. This same lack of uncertainty makes their stocks boring to own, even though a number of S&P 100 stocks are statistically more likely to weather a Bear Market than the S&P 500 Index (see Column M in any of our Tables). Index investing is even more boring and predictable. 

You’re left trying to find a winner among the other 900 companies of The Russell 1000 Index. A sign that you’ve selected well for your investment occurs when you find that company highlighted in a Wall Street Journal article. Our blog for this week tries to help you do exactly that. We’ve already found a handy way to identify trendy S&P 500 companies, which we call “The 2 and 8 Club” (see Week 348). And, we published an Extended Version (see Week 350) that takes you through promising companies in The Barron’s 500 List

Caveat Emptor:The 2 and 8 Club” focuses exclusively on companies in The Russell 1000 Index that have historically paid an above-market dividend and are judged (by The Financial Times) likely to continue doing so. That means they’re bond-like, and attract investors because of the near-certainty that they will continue to pay a good and growing dividend. The downside of this benefit is that price appreciation will flatten and decline in a rising interest rate environment, just as bond prices do. Why? Because of competition from newly-issued bonds that pay a higher rate of interest and have less risk of default. 

Mission: This week we double-down and identify putative winners in The Russell 1000 Index.

Execution: see Table.

Administration: Rules for membership in “The 2 and 8 Club”: 
   1) The company is listed on the FTSE High Dividend Yield Index (US), which contains the ~400 highest-yielding companies in the Russell 1000 Index. Those are companies that have historically paid an above-market dividend (usually ~2%) without reducing that payout in periods of market stress.
   2) The company has raised its regular quarterly dividend at least 8%/yr over the past 5 years.
   3) The company’s bonds carry an S&P Rating of at least BBB+.
   4) The company’s stock carries an S&P Rating of at least B+/M.
   5) The company’s end-of-week stock price has been analyzed quantitatively by using the BMW Method for the past 16 years.
   6) The company is graded annually as to cash flow trends and revenue growth by the editors of Barron’s.
   7) The company is required to be a Dividend Achiever, to offset the risk of loss of carried by these companies because of being less well capitalized than those in the S&P 100 Index.

Bottom Line: Of the 7 companies in this week’s Table, only two are reasonably safe bets: The Travelers (TRV) and WEC Energy (WEC). In other words, their risk of loss in the next Bear Market is lower than that for investors in the Dow Jones Industrial Average ETF (DIA) (see Column M of the Table). So, why not simply buy shares of DIA instead of gambling on one of the other 5 companies? After all, DIA has an ~2% dividend yield and grows its dividend ~8%/yr. Answer: You’re a speculator and think you can do better than settle for the 7-8% long-term Total Return/Yr you’d realize from owning shares of DIA.

Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I own shares of The Travelers (TRV) and Cummins (CMI).

"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Sunday, June 3

Week 361 - Blue Chips

Situation: What is a “Blue Chip” stock, and why should you think highly of such stocks? There are several definitions but traders are generally talking about a stock in the Dow Jones Industrial Average when they use the phrase “Blue Chip.” More generally, they’re talking about a very large company that pays a good and growing dividend, and has a trading record that covers at least the past 40 years. This also includes any very large company that has a negligible risk of bankruptcy. These characteristics are important because traders think Blue Chip stocks are the only relatively safe bets for a “buy-and-hold” investor to place. Warren Buffett often highlights the importance of these same characteristics whenever he’s being interviewed, and Berkshire Hathaway (BRK-B) owns shares in several: Apple (AAPL), Coca-Cola (KO), International Business Machines (IBM), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Walmart (WMT).

Mission: Develop specific definitions for the above characteristics, and list all companies that meet those definitions. Use our Standard Spreadsheet to analyze those companies.

Execution: see Table.

Administration: Here are my specific definitions for the qualitative terms used above:
   "A very large company"Any company in the S&P 100 Index (OEF)

   "A good dividend": Any company in the Vanguard High Dividend Yield Index (VYM)

   "A growing dividend": Any company in the Powershares Dividend Achiever Portfolio (PFM)

   "A 40+ year trading record": Any company in the 40-Yr BMW Method Portfolio

   "A negligible risk of bankruptcy": Any very large company issuing bonds that carry an S&P Rating of AA+ or AAA. There are only 5 such companies: Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Johnson & Johnson (JNJ), and Exxon Mobil (XOM). 

Bottom Line: If you want to include common stocks in your retirement portfolio, Blue Chips are the ones you’ll want to Buy and Hold, provided you buy shares in at least half a dozen. Those that carry a statistical risk of loss greater than “The “Dow” (DIA, see Column M in the Table) best purchased by dollar-cost averaging. But the 6 that carry no more than a Market Risk can be owned by using a “buy the dip” strategy: MCD, PEP, KO, JNJ, PG and WMT. Of course, those are still stocks and market volatility will still affect their prices. 

Caveat Emptor: Corporate debt has been steadily increasing over most of the past 10 years. Why? Because the Federal Reserve reduced to cost of borrowing money to almost nothing. So, pay attention to companies that have purple highlights in Columns P and R (see Table). In the next recession, you’ll be surprised how far their stock prices will fall.

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

Full Disclosure: I dollar-average into KO, JNJ, PG, MSFT, WMT, IBM, CAT and XOM, and also own shares of MCD and MMM.

"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com