Month 142 - Dow Jones Industrial Average - May 2023

Situation: We have yet to help you create a scorecard for your side business, which is saving for retirement. That means we have to address Warren Buffett’s Rule #1 (“Never lose money”) and his Rule #2 (“See Rule #1”) in a direct and straightforward manner.

Mission: Set up a thought experiment wherein your side business has invested equal amounts of money in each of the 30 stocks in the Dow Jones Industrial Average. Then assume you retire after either one or ten years (liquidate your side business). For each stock, calculate the Weighted Average Cost of Capital (WACC) and the Return on Invested Capital (ROIC) after each holding period. In the Bottom Line section, list the companies that returned the full value of your money (or more) after both holding periods.

Execution: see Columns V-W and Columns D-E in the Table. Purple highlights denote a return on capital that is less than the cost of capital.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year (lfy) is a good number. Twelve companies do so: MRK, UNH, AMGN, KO, V, JNJ, MCD, PG, MSFT, AAPL, HD, CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which managers capitalize the company by issuing long-term bonds (see Column Y). Nine companies have a BUY rating from Morningstar (HON, GS, CSCO, VZ, WBA, MMM, CRM, DIS, DOW), and 15 companies have a Long-term Debt to Equity ratio lower than 1.0 (CVX, MRK, UNH, TRV, V, JNJ, WMT, PG, MSFT, CSCO, NKE, CRM, DIS, INTC, DOW). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 26 companies meet that standard (CVX, MRK, UNH, CAT, TRV, AMGN, HON, KO, V, JNJ, MCD, WMT, BA, IBM, PG, AXP, MSFT, GS, AAPL, JPM, HD, CSCO, MMM, CRM, DIS, DOW). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (see Columns N and O); 9 companies (UNH, CAT, TRV, AMGN, V, AXP, CRM, DIS, DOW) have PEGs under 2.0 at both intervals. Five companies are A-rated (MRK, JNJ, WMT, PG, CSCO). Eight companies are cited 4 times (MRK, UNH, V, JNJ, PG, CSCO, DIS, DOW).

Bottom Line: Your side business didn’t lose money when invested for 1-year and 10-year periods in 15 DJIA stocks: MRK, UNH, CAT, AMGN, HON, V, JNJ, MCD, WMT, PG, MSFT, AAPL, JPM, HD, NKE. Your batting average is 0.500.

Risk Rating: 7 (10-yr U.S. Treasury Note = 1; S&P 500 Index = 5; gold bullion = 10) 

Full Disclosure: I dollar-average into MRK, CAT, JNJ, MSFT, HD, WMT, PG, WBA, and also own shares of UNH, AMGN, HON, KO, MCD, CSCO, NKE, VZ, INTC, BA, JPM, IBM, MMM.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 141 - 24 A-rated Mid-Caps and Large-Caps - April 2023

Situation: This is our most important Watch List, so we update it every 6 months. Since the last version appeared (Month 135 - October 2022), we’ve added mid-cap companies and 3 new requirements for the A-rating (see Appendix). As a result, 10 companies have been deleted (ADP, WM, TXN, HON, KO, PEP, RTX, ITW, CAT and QCOM) and 11 added (PCAR, ED, SNA, ATO, XEL, WEC, LIN, HRL, LNT, UPS and CSCO).

Mission: Analyze all companies in the FTSE Russell 1000 Index ETF (IWB) having a reliably above-market dividend yield, low price volatility, and strong Balance Sheet. 

Execution: see Table of 24 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year (lfy) is a good number. Nine companies do so: MRK, LMT, LLY, SNA, JNJ, PG, PFE, UPS, and CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AQ) and is negatively impacted by the degree to which managers capitalize the company by issuing long-term bonds (see Column Z). Six companies have a BUY rating from Morningstar (AEP, APD, NEE, LNT, PFE and CSCO), and 14 companies have a Long-term Debt to Equity ratio lower than 1.0 (MRK, ADM, GD, PCAR, ATO, SNA, APD, JNJ, WMT, LIN, PG, HRL, PFE and CSCO). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 16 companies meet that standard (MRK, LMT, LLY, ADM, GD, PCAR, SNA, JNJ, WMT, LIN, PG, HRL, LNT, PFE, UPS and CSCO). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (see Columns O and P); 6 companies (MRK, LLY, GD, APD, UPS and CSCO) have PEGs under 2.5 at both intervals. Four companies are cited 4+ times (MRK, PFE and CSCO).

Bottom Line: A-rated companies are our response to the observation that “It is the destruction of capital during market declines that has the greatest impact on long-term portfolio performance.” (Gerard Minack, Morgan Stanley strategist.) Ten stocks outperformed the S&P 500 (i.e., exhibited Alpha) over the past 10 years while having a lower 5-yr Beta (MRK, LMT, LLY, GD, ATO, SNA, APD, NEE, LIN and CSCO). We call those Hardy Perennials.

Risk Rating: 6, where 10-year Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10.

Full Disclosure: I dollar-average into MRK, LMT, LLY, SNA, AEP, JNJ, WMT, NEE, PG, PFE, UPS and CSCO, and also own shares of ATO, APD, LIN and TGT. 

Appendix: Eleven criteria required for an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF), 2) being listed for 16+ years at the New York Stock Exchange, 3) having at least an A- S&P rating on the company’s corporate bonds, 4) having the company’s common stock rated at least B+/M by S&P, 5) having positive earnings per share (EPS) for the trailing twelve month period (TTM), 6) having a positive book value per share for the most recent quarter (mrq), 7) having long-term debt no greater than 2.5 times equity, 8) having a 10-year actual rate of return greater than the 10-year required rate of return (RRR), 9) having no dividend cuts in the past two years, 10) having a 5-year Beta lower than 1.00, 11) having a total debt to EBITDA (mrq) ratio no higher than 2.5 unless there is collateral (tangible book value).

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 140 - 18 Large-Cap Low-Beta Dow Jones Composite Average stocks - March 2023

 Situation: When does a temporary loss of capital become permanent? Answer: When we sell. Lesson: Pay more attention to low-volatility large-capitalization blue-chip companies.

Mission: Screen the 65-stock Dow Jones Composite Average for low Beta, large-cap stocks, meaning those listed in the iShares Russell Top 200 ETF (IWL) that have a 5-year Beta of 1.00 or lower (per Barron’s). Include all companies having a 5-yr Beta lower than 0.70, which traders call Sleep-Well-At-Night stocks (SWANs). For companies with a 5-yr Beta between 0.70 and1.00, include only those with a 10-yr total return/yr that exceeds the 10-yr total return/yr for the S&P 500 Index ETF (SPY).

Execution: see Table of 18 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table (Return on Tangible Capital Employed). He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. Seven companies meet that standard (MRK, AMGN, KO, JNJ, MCD, PG, CSCO). His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (see Column AQ), and is negatively impacted by the degree to which managers have capitalized the company by issuing long-term bonds (see Column Z). Six companies have a BUY rating from Morningstar (AEP, HON, NEE, DUK, CSCO, VZ), and 7 companies have a Debt to Equity ratio lower than 1.0 (MRK, UNH, CAT, JNJ, WMT, PG, CSCO). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow a company to expand operations (or pay down debt) at zero cost. Free Cash Flow remains after paying dividends at 12 companies (MRK, UNH, AMGN, CAT, HON, KO, JNJ, MCD, WMT, PG, UNP, CSCO). His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns O and P): Six companies have a PEG lower than 2.5 for both time periods (MRK, UNH, AMGN, CAT, HON, CSCO). Nine companies are A-rated (MRK, CAT, AEP, HON, JNJ, WMT, NEE, PG, CSCO). Six companies are cited 4 or more times (MRK, CAT, HON, JNJ, PG, CSCO).

Bottom Line: We find two Pricing Anomalies that should interest investors. 1) Eight companies have 10-yr total returns that beat the S&P 500 Index (MRK, UNH, CAT, HON, MCD, NEE, UNP, CSCO). We call those License-To-Print-Money (LTPM) stocks because they are high-reward and low-risk. 2) There are 5 SWANs with a 10-yr Required Rate of Return that is higher than their 10-yr Actual Rate of Return (KO, SO, DUK, D, VZ), meaning their cost of capital exceeds their return on capital. Stocks in such straits normally do not have a low enough 5-yr Beta to be SWANs. So, difficulties being faced at those companies are likely temporary.  

Risk Rating: 6 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into MRK, CAT, AEP, JNJ, MCD, KO, SO, WMT, NEE, PG, UNP, CSCO and VZ, and also own shares of UNH, AMGN, HON, DUK and D.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 139 - Dogs of the Dow - February 2023

Situation: We’re always on the lookout for value stocks issued by Blue Chip companies, which makes January the most important month in the calendar. That’s when we know the Dogs of the Dow for the upcoming year, meaning the 10 highest-yielding stocks in the Dow Jones Industrial Average. That’s like finding Brooks Brothers shirts at T.J.Maxx. All we have to do is figure out why they’re on sale. Remember, the Efficient Market Hypothesis tells us that today’s stock price reflects all available information on the company, the market, the Federal Reserve, the economy, and the geopolitical situation. 

Mission: Use our Standard Spreadsheet to analyze this year’s Dogs of the Dow.

Execution: see Table of 10 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table (Return on Tangible Capital Employed). He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. Three companies meet that standard (CSCO, AMGN, MMM). His second point (that the company be “run by able and honest managers”) is addressed in Morningstar.

Reports (see Column AQ), and is negatively impacted by the degree to which managers have capitalized the company by issuing long-term bonds (see Column Z). Five companies (CSCO, VZ, INTC, WBA, DOW) have a BUY rating from Morningstar, and 4 companies have a Debt to Equity ratio that is lower than 1.0 (CSCO, INTC, CVX, DOW). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow a company to expand operations (or pay down debt) at zero cost. Eight companies have Free Cash Flow remaining after they pay dividends (CSCO, AMGN, JPM, CVX, WBA, MMM, IBM, DOW). His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns O and P): But none of these struggling companies have a PEG lower than 2.0 for both time periods. One company is A-rated (JPM).

Bottom Line: Only two companies (AMGN and JPM) have an Actual Rate of Return after 10 years that exceeds their Required Rate of Return (RRR). But, we’re in a good position (being near the bottom of a Bear Market). Why? Because that reduces the risk of buying a stock on sale. Benjamin Graham's advice for finding value in down markets is to look for stocks priced lower than their Graham Number (Column AJ) that also have a 7-yr P/E (Column AL) lower than 26. In that light, JPM, VZ, INTC and WBA are BUYs (in agreement with Morningstar).  

Risk Rating: 8 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into INTC, VZ, WBA, JPM, and also own shares of CSCO, AMGN, MMM and IBM.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 138 - 18 A-Rated Low-Beta Defensive Stocks - January 2023

Situation: Investors currently face a period of uncertainty due to macroeconomic and geopolitical events. Opportunities abound but safety is the byword. That means you’ll be taking greater interest in SWANs (Sleep Well At Night stocks), which offer an above-market dividend yield combined with low price volatility. 

Mission: Use our Standard Spreadsheet to analyze stocks in the Vanguard High Dividend Yield ETF (VYM) that have a 5-yr Beta lower than 0.7. Omit VYM stocks that don’t have all the safety factors we require for our A-rated designation: 1) at least a 16-yr trading history on public US stock exchanges; 2) issued corporate bonds rated A- or better by S&P; 3) an S&P Stock Rating of B/M or better; 4) positive earnings for the Trailing Twelve Month (TTM) period; 5) a positive Book Value for the most recent quarter (mrq); 6) capitalization from issuing corporate bonds that doesn’t exceed 2.5 times Equity; 7) a 10-yr Actual Rate of Return that exceeds the 10-yr Required Rate of Return calculated by using the Capital Asset Pricing Model. 

Execution: see Table of 18 stocks.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table (Return on Tangible Capital Employed). He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. Eight companies meet that standard (LLY, MRK, WEC, PG, HSY, JNJ, PEP, LMT). His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AQ), and is negatively impacted by the degree to which managers have capitalized the company by issuing long-term bonds (see Column Z). One company (LNT) has a BUY rating from Morningstar. Eight companies have a Debt to Equity ratio lower than 1.0 (MRK, HRL, ATO, PFE, PG, JNJ, LMT, WMT). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow a company to expand operations (or pay down debt) at zero cost. Twelve companies have Free Cash Flow remaining after they pay dividends (LLY, MRK, HRL, PFE, LNT, PG, ES, KO, HSY, JNJ, LMT, WMT). His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns O and P): No companies have a PEG lower than 2.0 for both time periods. Four companies are cited 3 times (MRK, PG, JNJ, LMT). 

Bottom Line: SWANs have low price volatility, under-participating in both Bear and Bull Markets. As a group, however, these 17 SWANs have outperformed the S&P 500 ETF (SPY) after both 5-yr and 10-yr holding periods (see Columns E and H).

Risk Rating: 5 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into LLY, MRK, AEP, PFE, PG, KO, JNJ, PEP, LMT, WMT.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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