Situation: Once you retire, you’ll start to worry about outliving your nest egg, wondering when the next recession will start, and how bad it will be. If a market meltdown happens soon after you retire, and kicks off a long and deep recession, half of your retirement savings could go out the door.
You need to close that door ahead of time by focusing your portfolio on haven assets that you won’t sell under any circumstances. The problem is that haven assets are boring things, like Savings Bonds, 10-Yr US Treasury Notes, and stock in American Electric Power (AEP). On the opposite side of the coin are assets with moxie, like JPMorgan Chase (JPM), which are likely to lose a lot of value in a market crash. Why? Because buyers of moxie assets pile on, while sellers become relatively scarce. Market crashes can happen fast, especially those due to a credit crunch, so prices for moxie assets can fall too far too fast while their investors rush for the exit. “A run on the bank” is the apt analogy. The lesson is not to exclude moxie (i.e., growth stocks) from your retirement portfolio but to be careful not to overpay for those shares. That means you have to buy before the mania sets in. If your shares double in price but then fall 50% in the next market crash, you haven’t lost money. "For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments." -- Warren Buffett.
The trick is to know when the shares you own in an “excellent company” are overpriced. Once you’ve made that determination, stop buying more but continue reinvesting dividends. To be clear, haven stocks aren’t just high-yielding stocks or value stocks. Growth stocks can also qualify, if not overpriced. So let’s look at metrics that Benjamin Graham used to determine if a stock is overpriced. Remember, he was Warren Buffett’s favorite professor at Columbia University’s business school. Graham started by calculating what a stock’s price would be if it reflected ideal valuation, meaning a price 1.5 times Book Value and 15 times Earnings per Share (EPS). He called that price the “Graham Number,” and calculated it as follows: multiply Book Value per share for the most recent quarter (mrq) by Earnings Per Share for the trailing twelve months (ttm), then multiply that number by 22.5 (1.5 x 15 = 22.5). Then calculate the square root of that number on your calculator. A stock priced more than twice the Graham Number is overpriced.
Another number he thought helpful is the 7-yr P/E, which is the stock’s current price divided by average EPS for the last 7 years. Graham thought that number should be no more than 25 for a stock to be considered fairly priced. In other words, a company that historically has a P/E of ~20 (which Graham thought to be the upper limit of normal valuation) might grow its EPS for 7 years at a typical rate of 3.2%/yr. That would result in a 7-yr P/E of 25. The “danger zone” for a stock’s current price to be thought of as overpriced is 2.0 to 2.5 times the Graham Number and 26 to 31 times average EPS over the past 7 years. So, if one of those numbers is in the danger zone and the other exceeds the danger zone, don’t even think about buying it for your retirement portfolio (see Column AG in our Tables, where that degree of overpricing is denoted with a “yes”).
Mission: Use our Standard Spreadsheet to analyze stocks likely to survive a deep recession. I’ll do this by referencing companies that are named in both of the most conservative indexes: 1) FTSE High Dividend Yield Index (VYM, the U.S. version marketed by Vanguard Group); 2) iShares Russell Top 200 Value Index (IWX).
Execution: see Table.
Administration: Any company listed in both those indexes that issues debt rated lower than A- by S&P is excluded, as are any that issue common stocks rated lower than B+/M by S&P. Stocks that don’t have a 16+ year trading record are also excluded because the data is insufficient for statistical analysis of their weekly share prices by the BMW Method. Companies with a zero or negative Book Value in the most recent quarter (mrq) are also excluded, as are companies with negative EPS over the trailing 12 months (ttm).
Bottom Line: The idea behind owning Haven Stocks is that you’ll “live to fight another day” after enduring an economic crisis. During a Bull Market, some of those value stocks will lag behind the market’s performance. But during Bear Markets, they’ll fall less in value. If market crashes haven’t become extinct, value stocks will outperform both growth stocks and momentum stocks over the long term. Just remember: When you buy a stock for your retirement portfolio, it needs to pay an above-market dividend because a time will come when you’ll want to stop reinvesting that stream of dividends and start spending it.
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into PFE, NEE, KO, INTC, PG, WMT, JPM, JNJ, USB, CAT, MMM, IBM, XOM, and also own shares of AMGN, DUK, AFL, SO, PEP, TRV, BLK, WFC.
"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
Showing posts with label BMW Method. Show all posts
Showing posts with label BMW Method. Show all posts
Sunday, February 23
Sunday, January 26
Month 103 - Berkshire Hathaway's A-rated "Value" Stocks with High Dividend Yields - January 2020
Situation: In case your reason for buying stocks in your working years is to have growing income from dividends in your retirement years, we suggest that you prioritize “value stocks.” The bible of value investing is a book (The Intelligent Investor) written by Benjamin Graham, who was Warren Buffett’s instructor while Warren was earning his Master of Science in Economics degree at Columbia University.
Why value investing, and what is a value stock? The main idea is to not overpay for either Earnings Per Share (EPS over the trailing twelve months, abbreviated ttm) or Book Value per share in the most recent quarter (abbreviated mrq). On page 349 of the Revised Edition (1973) of The Intelligent Investor, Benjamin Graham says “Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings [per share] below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the [EPS] multiplier times the ratio of price to book value should not exceed 22.5.” That is, 1.5 x 15 = 22.5.
How do you calculate the “Graham Number” -- the “rational” stock price listed in Column AA of the Table? It is the square root of 22.5, times (Earnings Per Share for the ttm), times Book Value per share for the mrq. We suggest that you think of the share price of a value stock as being no greater than: a) twice the Graham Number, b) 25 times average 7-year Earnings Per Share (see page 159 of The Intelligent Investor), c) 3 times Book Value per share (ttm), and d) 3 times sales per share (mrq). If a company meets 3 out of 4 of those criteria, we call its stock a “value stock” in Column AF of the Table.
Berkshire Hathaway’s stock portfolio contains 48 holdings worth $214,673,311,000 as of the last 13F SEC filing dated 11/14/19. The top 5 holdings (AAPL, BAC, KO, WFC, AXP) are worth ~$142B (66% of the total). We rate 8 of the 48 as being high-yielding “value” stocks (KO, PG, JPM, JNJ, TRV, USB, PNC, WFC), in that those companies meet an additional 4 criteria we like to use: 1) their bonds are rated A- or better by Standard & Poor’s (S&P), 2) their stocks are rated B+/M or better by S&P, 3) their stocks have the 16+ year trading record that is required for quantitative analysis using the BMW Method, and 4) their stocks are listed in both the iShares Russell 200 Value Index (IWX) and the Vanguard High Dividend Yield Index (VYM). You’ve probably figured out, by this point, that I’m encouraging you to think along these lines when building your own portfolio of retirement stocks. You can get a feel for the process by looking at 8 such stocks Warren Buffett has picked for Berkshire Hathaway’s portfolio.
Mission: Update our Month 98 blog, using our Standard Spreadsheet to analyze value stocks in Berkshire Hathaway’s stock portfolio.
Execution: see Table.
Administration: The 10 largest positions in Berkshire Hathaway’s portfolio are:
Apple AAPL ($56B)
Bank of America BAC ($27B)
Coca-Cola KO ($22B)
Wells Fargo WFC ($19B)
American Express AXP ($18B)
Kraft Heinz KHC ($9B)
U.S. Bancorp USB ($7B)
JPMorgan Chase JPM ($7B)
Moody’s MCO ($5B)
Delta Air Lines DAL ($4B)
Six of those 10 are are either not high-yielding stocks or not “value” stocks (AAPL, BAC, AXP, KHC, MCO, DAL). Data for those 6 companies can be found in the BACKGROUND Section of the Table.
A system for buying stocks can be boiled down and presented in a spreadsheet, as long as you realize that it omits assumptions used to estimate intrinsic value. But our Standard Spreadsheet won’t go far in helping you decide to sell a stock. All we have to go by is that Warren Buffett has told us he might sell for two reasons: 1) When a higher return is expected by trading to another asset (to include the loss incurred by capital gains tax); 2) When the company changes its fundamentals. He has also named two stocks he would never sell: Coca-Cola (KO) and American Express (AXP). American Express didn’t make our list for two reasons: 1) the S&P Rating for the company’s bonds is BBB+ as opposed to our minimum requirement of A-, and 2) the company is not in the Vanguard High Dividend Yield Index ETF VYM.
Bottom Line: The 8 A-rated high-yielding value stocks account for $57B (27%) of Berkshire’s stock portfolio. Five of those are in the Financial Services industry (Warren Buffett’s area of expertise). Take-home points include a) don’t overpay for a stock, b) buy what you know, and c) remember that the best bargains are to be found in the Financial Services industry. But note that all 4 of his bank stocks have above-market volatility in share prices (see Column I in the Table), which goes far toward explaining why they’re underpriced (average P/E = 13). Also note that while Coca-Cola (KO) and Procter & Gamble (PG) seem overpriced (see Columns AB-AH in the Table), you’d need to consider intrinsic value before coming to that conclusion.
Risk Rating: 6 (where 1 = 10-yr US Treasury Notes, 5 = S&P 500 Index, and 10 = gold bullion)
Full Disclosure: I dollar average into PG, JPM, JNJ and USB, and also own shares of KO, TRV and WFC.
"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
Why value investing, and what is a value stock? The main idea is to not overpay for either Earnings Per Share (EPS over the trailing twelve months, abbreviated ttm) or Book Value per share in the most recent quarter (abbreviated mrq). On page 349 of the Revised Edition (1973) of The Intelligent Investor, Benjamin Graham says “Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings [per share] below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the [EPS] multiplier times the ratio of price to book value should not exceed 22.5.” That is, 1.5 x 15 = 22.5.
How do you calculate the “Graham Number” -- the “rational” stock price listed in Column AA of the Table? It is the square root of 22.5, times (Earnings Per Share for the ttm), times Book Value per share for the mrq. We suggest that you think of the share price of a value stock as being no greater than: a) twice the Graham Number, b) 25 times average 7-year Earnings Per Share (see page 159 of The Intelligent Investor), c) 3 times Book Value per share (ttm), and d) 3 times sales per share (mrq). If a company meets 3 out of 4 of those criteria, we call its stock a “value stock” in Column AF of the Table.
Berkshire Hathaway’s stock portfolio contains 48 holdings worth $214,673,311,000 as of the last 13F SEC filing dated 11/14/19. The top 5 holdings (AAPL, BAC, KO, WFC, AXP) are worth ~$142B (66% of the total). We rate 8 of the 48 as being high-yielding “value” stocks (KO, PG, JPM, JNJ, TRV, USB, PNC, WFC), in that those companies meet an additional 4 criteria we like to use: 1) their bonds are rated A- or better by Standard & Poor’s (S&P), 2) their stocks are rated B+/M or better by S&P, 3) their stocks have the 16+ year trading record that is required for quantitative analysis using the BMW Method, and 4) their stocks are listed in both the iShares Russell 200 Value Index (IWX) and the Vanguard High Dividend Yield Index (VYM). You’ve probably figured out, by this point, that I’m encouraging you to think along these lines when building your own portfolio of retirement stocks. You can get a feel for the process by looking at 8 such stocks Warren Buffett has picked for Berkshire Hathaway’s portfolio.
Mission: Update our Month 98 blog, using our Standard Spreadsheet to analyze value stocks in Berkshire Hathaway’s stock portfolio.
Execution: see Table.
Administration: The 10 largest positions in Berkshire Hathaway’s portfolio are:
Apple AAPL ($56B)
Bank of America BAC ($27B)
Coca-Cola KO ($22B)
Wells Fargo WFC ($19B)
American Express AXP ($18B)
Kraft Heinz KHC ($9B)
U.S. Bancorp USB ($7B)
JPMorgan Chase JPM ($7B)
Moody’s MCO ($5B)
Delta Air Lines DAL ($4B)
Six of those 10 are are either not high-yielding stocks or not “value” stocks (AAPL, BAC, AXP, KHC, MCO, DAL). Data for those 6 companies can be found in the BACKGROUND Section of the Table.
A system for buying stocks can be boiled down and presented in a spreadsheet, as long as you realize that it omits assumptions used to estimate intrinsic value. But our Standard Spreadsheet won’t go far in helping you decide to sell a stock. All we have to go by is that Warren Buffett has told us he might sell for two reasons: 1) When a higher return is expected by trading to another asset (to include the loss incurred by capital gains tax); 2) When the company changes its fundamentals. He has also named two stocks he would never sell: Coca-Cola (KO) and American Express (AXP). American Express didn’t make our list for two reasons: 1) the S&P Rating for the company’s bonds is BBB+ as opposed to our minimum requirement of A-, and 2) the company is not in the Vanguard High Dividend Yield Index ETF VYM.
Bottom Line: The 8 A-rated high-yielding value stocks account for $57B (27%) of Berkshire’s stock portfolio. Five of those are in the Financial Services industry (Warren Buffett’s area of expertise). Take-home points include a) don’t overpay for a stock, b) buy what you know, and c) remember that the best bargains are to be found in the Financial Services industry. But note that all 4 of his bank stocks have above-market volatility in share prices (see Column I in the Table), which goes far toward explaining why they’re underpriced (average P/E = 13). Also note that while Coca-Cola (KO) and Procter & Gamble (PG) seem overpriced (see Columns AB-AH in the Table), you’d need to consider intrinsic value before coming to that conclusion.
Risk Rating: 6 (where 1 = 10-yr US Treasury Notes, 5 = S&P 500 Index, and 10 = gold bullion)
Full Disclosure: I dollar average into PG, JPM, JNJ and USB, and also own shares of KO, TRV and WFC.
"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
Sunday, December 29
Month 102 - A-rated Stocks in Vanguard’s Wellesley Income Fund (VWINX) - December 2019
Situation: For retiree savings accounts, most of the financial advisors that I follow prefer that half be allocated to bonds and the rest to stocks that reliably pay an above-market dividend. There is a convenient, low-cost way to anchor one’s portfolio in that direction, which is to invest in VWINX -- Vanguard’s Wellesley Income Fund. The managers allocate almost 60% to bonds and the rest to stocks that have been selected from the FTSE High Dividend Yield Index. Vanguard markets the U.S. version with the stock ticker of VYM. The ~400 stocks in VYM are selected from the Russell 1000 Index of large-capitalization companies (IWB).
As a prospective retiree, you’ll want a balanced portfolio--one with approximately a 50:50 balance between stocks and bonds. The transaction costs for buying a corporate bond are high so you’ll want a mutual fund with a mix of government bonds and corporates. For stocks, you have the option of picking your own while keeping transaction costs (expense ratio) at ~2%/yr. But the expense ratio is much lower if you leave stock picking to professional managers (or computers) and opt for a mutual fund or Exchange-Traded Fund (ETF). The easy way to start is with VWINX, which has an expense ratio of 0.23%, and a 10-yr total return of 9.7%/yr. That’s 60% bonds, so supplement it with a stock mutual fund, stock ETF, or stocks of your own choosing. The Fidelity Balanced Fund (FBALX) is also weighted 60:40 in favor of bonds, also has a 10-yr total return of 9.7%/yr, but has a higher expense ratio of 0.53%. VWINX lost 9.8% in 2008 while FBALX lost 31.3%. That difference occurs because stock managers at VWINX are required to confine their selections to the ~400 companies in the FTSE High Dividend Yield Index while managers at FBLAX opted for a wide range of stocks typifying the S&P 500 Index. In other words, VWINX lost much less in the 2008 stock market crash because it held bond-like stocks. For a detailed analysis that compares VWINX to other balanced funds, read this Seeking Alpha article.
Mission: Use our Standard Spreadsheet to analyze companies in VWINX that have: 1) an S&P bond rating of A- or better, 2) a S&P stock rating of B+/M or better, 3) the 16+ year trading record needed for quantitative analysis by the BMW Method, and 4) are found in the current list of companies in the Vanguard High Dividend Yield Index.
Execution: see the 26 companies in this week’s Table.
Administration: We have emphasized the safety features inherent in confining stock selections to companies in the S&P 100 Index. The managers of VWINX apparently agree, given that 17 of their 26 selections (see Column AK in the Table) are in that index.
Bottom Line: We offer this view of stocks picked by managers at VWINX because that fund serves as a beacon for retirees. It has had only 5 down years in the past 40, and was down only 9.8% in the Great Recession of 2008. Since inception on 7/1/1970, it has returned 9.7%/yr.
Risk Rating: 4, where 10-year US Treasury Notes = 1; S&P 500 Index = 5; gold bullion = 10.
Full Disclosure: I dollar-average into PFE, NEE, INTC, PG, JPM, JNJ and CAT, and also own shares of CSCO, DUK, KO, PEP, TRV, MMM, BLK and XOM.
"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
As a prospective retiree, you’ll want a balanced portfolio--one with approximately a 50:50 balance between stocks and bonds. The transaction costs for buying a corporate bond are high so you’ll want a mutual fund with a mix of government bonds and corporates. For stocks, you have the option of picking your own while keeping transaction costs (expense ratio) at ~2%/yr. But the expense ratio is much lower if you leave stock picking to professional managers (or computers) and opt for a mutual fund or Exchange-Traded Fund (ETF). The easy way to start is with VWINX, which has an expense ratio of 0.23%, and a 10-yr total return of 9.7%/yr. That’s 60% bonds, so supplement it with a stock mutual fund, stock ETF, or stocks of your own choosing. The Fidelity Balanced Fund (FBALX) is also weighted 60:40 in favor of bonds, also has a 10-yr total return of 9.7%/yr, but has a higher expense ratio of 0.53%. VWINX lost 9.8% in 2008 while FBALX lost 31.3%. That difference occurs because stock managers at VWINX are required to confine their selections to the ~400 companies in the FTSE High Dividend Yield Index while managers at FBLAX opted for a wide range of stocks typifying the S&P 500 Index. In other words, VWINX lost much less in the 2008 stock market crash because it held bond-like stocks. For a detailed analysis that compares VWINX to other balanced funds, read this Seeking Alpha article.
Mission: Use our Standard Spreadsheet to analyze companies in VWINX that have: 1) an S&P bond rating of A- or better, 2) a S&P stock rating of B+/M or better, 3) the 16+ year trading record needed for quantitative analysis by the BMW Method, and 4) are found in the current list of companies in the Vanguard High Dividend Yield Index.
Execution: see the 26 companies in this week’s Table.
Administration: We have emphasized the safety features inherent in confining stock selections to companies in the S&P 100 Index. The managers of VWINX apparently agree, given that 17 of their 26 selections (see Column AK in the Table) are in that index.
Bottom Line: We offer this view of stocks picked by managers at VWINX because that fund serves as a beacon for retirees. It has had only 5 down years in the past 40, and was down only 9.8% in the Great Recession of 2008. Since inception on 7/1/1970, it has returned 9.7%/yr.
Risk Rating: 4, where 10-year US Treasury Notes = 1; S&P 500 Index = 5; gold bullion = 10.
Full Disclosure: I dollar-average into PFE, NEE, INTC, PG, JPM, JNJ and CAT, and also own shares of CSCO, DUK, KO, PEP, TRV, MMM, BLK and XOM.
"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
Monday, November 25
Month 101 - Moving the Needle: A-rated S&P 100 Companies in “The 2 and 8 Club” - November 2019
Situation: You’re now in your 50s. The “sunset years” loom ahead. While you have the advantage of being a more experienced investor, you’re losing time and may retire short of where you need to be. Even now, you need to have a “nest egg” at least 6 times your current salary. Your retirement account is likely to be 60% in stocks but that allocation falls to 50% by the time you retire. You’ll need to hold safer but more effective stocks. “The 2 and 8 Club” is one way to do that: buy stocks that carry both a higher dividend yield and a faster rate of dividend growth compared to the S&P 500 Index (SPY), i.e., stocks that yield at least 2%/yr and grow dividends at least 8%/yr. For safety, confine your picks to stocks issued by “mega-cap” companies in the S&P 100 Index. Why those? Because they’re large enough to have multiple product lines, i.e., they’re more able to respond to diverse market conditions. And, they’re required to have active hedging positions at the Chicago Board Options Exchange. Those “put and call” stock options are side-bets made by professional traders, which makes “price discovery” for the underlying stocks more rational.
Mission: Use our standard spreadsheet to analyze companies in the S&P 100 Index that a) issue debt rated at least A- by S&P, b) issue stock rated B+/M or better by S&P, c) are listed in the U.S. version of the FTSE High Dividend Yield Index--marketed by Vanguard Group as VYM, d) have the 16+ year trading record that is needed for quantitative analysis by the BMW Method, and e) have grown their dividend at least 8%/yr for the past 5 years.
Execution: see the 13 companies at the top of this week’s Table.
Administration: Let’s explain the Basic Quality Screen (see Column AH in the Table). The idea is to give readers a quick take on which stocks are worthwhile to consider as a new BUY. The maximum score is 4. Overpriced stocks (see Column AF) are penalized half a point. Reading from left to right across the spreadsheet, the first opportunity to score a point is found in Column K. Stocks that have a 16-yr price appreciation that is more than 1/3rd the risk of ownership (Column M) score one point. A negative value in Column S for Tangible Book Value (highlighted in purple) results in a loss of one point if the debt load is either greater than 2.5 times EBITDA (Column R) or LT-debt represents more than 50% of the company’s total capitalization (Column Q). In Columns U and V, all 13 companies earn 2 points because their S&P ratings meet the requirement of being at least A- for the company’s debt and B+/M for the company’s stock. In Column Z, one point is earned if the stock appears likely to meet our Required Rate of Return over the next 10 years, which is 10%/yr, i.e., the dollar value is not highlighted in purple.
Bottom Line: As you approach retirement, look more closely at the stocks and ETFs in your portfolio. Those equities will need to be half your retirement savings. Where possible, choose stocks issued by large companies that offer higher dividend yields and faster dividend growth than the S&P 500 Index. Five of this week’s stocks are worth researching for possible purchase because of being rated 3 or 4 on our Basic Quality Screen (see Column AH): CSCO, JPM, USB, CAT and BLK.
Risk Rating: 6 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE, JPM, USB, CAT and IBM, and also own shares of AMGN, CSCO, PEP, BLK and MMM.
"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
Mission: Use our standard spreadsheet to analyze companies in the S&P 100 Index that a) issue debt rated at least A- by S&P, b) issue stock rated B+/M or better by S&P, c) are listed in the U.S. version of the FTSE High Dividend Yield Index--marketed by Vanguard Group as VYM, d) have the 16+ year trading record that is needed for quantitative analysis by the BMW Method, and e) have grown their dividend at least 8%/yr for the past 5 years.
Execution: see the 13 companies at the top of this week’s Table.
Administration: Let’s explain the Basic Quality Screen (see Column AH in the Table). The idea is to give readers a quick take on which stocks are worthwhile to consider as a new BUY. The maximum score is 4. Overpriced stocks (see Column AF) are penalized half a point. Reading from left to right across the spreadsheet, the first opportunity to score a point is found in Column K. Stocks that have a 16-yr price appreciation that is more than 1/3rd the risk of ownership (Column M) score one point. A negative value in Column S for Tangible Book Value (highlighted in purple) results in a loss of one point if the debt load is either greater than 2.5 times EBITDA (Column R) or LT-debt represents more than 50% of the company’s total capitalization (Column Q). In Columns U and V, all 13 companies earn 2 points because their S&P ratings meet the requirement of being at least A- for the company’s debt and B+/M for the company’s stock. In Column Z, one point is earned if the stock appears likely to meet our Required Rate of Return over the next 10 years, which is 10%/yr, i.e., the dollar value is not highlighted in purple.
Bottom Line: As you approach retirement, look more closely at the stocks and ETFs in your portfolio. Those equities will need to be half your retirement savings. Where possible, choose stocks issued by large companies that offer higher dividend yields and faster dividend growth than the S&P 500 Index. Five of this week’s stocks are worth researching for possible purchase because of being rated 3 or 4 on our Basic Quality Screen (see Column AH): CSCO, JPM, USB, CAT and BLK.
Risk Rating: 6 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE, JPM, USB, CAT and IBM, and also own shares of AMGN, CSCO, PEP, BLK and MMM.
"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
Sunday, September 29
Month 99 - Starter Stocks - September 2019
Situation: When I started investing, I picked up the phrase “stocks for widows and orphans.” Typically, Probate Court will assign fiduciary responsibility for investments made on behalf of a widow or orphan to lawyer. I later became acquainted with one of those and learned that she expected after-inflation returns from low-risk stocks to be well over 5%/yr. But she hadn’t fully considered transaction fees, taxes, or the need to balance stocks 50-50 with 10-yr US Treasury Notes (to hedge against what could be a catastrophic loss for a widow or orphan). And, few stocks make suitable long-term holdings in a portfolio that is supposed to be immune to gambling. Given that a stock broker’s main talent is to wisely supervise gambling, a broker is likely to welcome the prospect of building a portfolio of “boring” stocks that will have little turnover.
Many young but upwardly mobile “salary workers” face the same problem that lawyer is facing: how to invest wisely without gambling. I have 4 children who are trying to grapple with this problem; none have gained lasting satisfaction from consulting investment advisors. And, they don’t much like my advice, which is to research the problem and find their own solution, which is called DIY investing. But, they already have the most important asset: which is to be disinclined to gamble.
Starter Stocks, like those for widows and orphans, are usually (but not always) boring. Consumer Staples are most likely to be Starter Stocks, and Utilities are close behind. But then you’ll find that technology-related companies start to pop up from Health Care and Information Technology industries.
Mission: Use our Standard Spreadsheet to screen out companies that are missing from either of the two key value indexes, which are the iShares Russell 1000 Value Index ETF -- IWD and the income-oriented variant of the Russell 1000 Index that was created as the FTSE High Dividend Yield Index but is marketed in the US as the Vanguard High Dividend Yield ETF -- VYM. Companies that issue bonds having an S&P rating lower than A- are also excluded, as are companies that issue stocks having an S&P rating lower than B+/M. Stocks must have a 16+ year trading record, to allow quantitative analysis by the BMW Method.
Administration: Most of the strategies that are likely to give high returns from owning stocks in a bull market also carry a high risk of loss in a bear market. So, when the market falls 25% those stocks might fall 50%. That means a 100% gain would have to occur over ensuing years just to get back to where the stock was priced when the last bull market ended. Banking and Finance faculty at business schools teach that this strategy is the only legal way to beat the market. In other words, reversion to the mean growth rate is sacrosanct. One way for an investor to hedge against such volatility is to pick stocks that go up or down less than 75% as much as the S&P 500 Index. In other words, exclude stocks with a 3-yr Beta that is higher than 0.75. Another way is to pick stocks issued by very large companies, namely those found in the S&P 100 Index. To be included in that index, companies are required to have an active market in put and call options at the Chicago Board Options Exchange, which means that “price discovery” for the underlying stock is efficient and relatively well insulated from “momentum” investors who are trading on the basis of fleeting rumors or sentiment. The other advantage of very large companies is that they have multiple product lines, at least one of which is expected to produce an attractively priced product during a recession. Integrated oil companies, for example, maintain a fleet of refineries that would be paying less for their feedstock (oil) during a recession--thereby allowing the company to make a nice profit from selling gasoline at a lower price than the customer had been used to paying.
Bottom Line: The problem with screening for “Starter Stocks” is that you’ll pull up some that are broadly thought of as desirable. Both gamblers and non-gamblers will bid up such stocks but forget to sell them when shares become overpriced. Given that most Starter Stocks (see Table) are found in channels of the economy that are already saturated (i.e., companies can grow their revenues no faster than GDP grows), there is little reason to hold overpriced stocks in expectation that earnings will explode upward. For example, the stocks issued by all four of the Consumer Staples companies on our list (KO, PG, PEP, WMT) are overpriced (see Columns AB to AD in our Table). You’ll have to figure out when to buy (or sell) overpriced shares of such high-value stocks. A common strategy is to buy more shares when the price drops 5-10% below its usual range. This is called the buy the dip strategy.
The easiest (and probably best) way to be certain of buying shares when they’re bargain-priced is to do it automatically. Sign up for a dividend reinvestment plan (DRIP) that takes a fixed amount of money out of your checking account on a specific date each month to buy more shares. That strategy is called dollar-cost averaging, and is the strategy that Warren Buffett favors to build a position in stocks that are often overpriced.
How well do our 10 Starter Stocks (at Line 10 in the Table) perform vs. the underlying ETFs -- VYM and IWD (at Lines 19 and 20)? Answer: quite a bit better (see Columns E, F and K).
Risk Rating: 6 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into NEE, KO, PG, INTC, WMT and JNJ, and also own shares of PFE, DUK, SO and PEP.
"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
Many young but upwardly mobile “salary workers” face the same problem that lawyer is facing: how to invest wisely without gambling. I have 4 children who are trying to grapple with this problem; none have gained lasting satisfaction from consulting investment advisors. And, they don’t much like my advice, which is to research the problem and find their own solution, which is called DIY investing. But, they already have the most important asset: which is to be disinclined to gamble.
Starter Stocks, like those for widows and orphans, are usually (but not always) boring. Consumer Staples are most likely to be Starter Stocks, and Utilities are close behind. But then you’ll find that technology-related companies start to pop up from Health Care and Information Technology industries.
Mission: Use our Standard Spreadsheet to screen out companies that are missing from either of the two key value indexes, which are the iShares Russell 1000 Value Index ETF -- IWD and the income-oriented variant of the Russell 1000 Index that was created as the FTSE High Dividend Yield Index but is marketed in the US as the Vanguard High Dividend Yield ETF -- VYM. Companies that issue bonds having an S&P rating lower than A- are also excluded, as are companies that issue stocks having an S&P rating lower than B+/M. Stocks must have a 16+ year trading record, to allow quantitative analysis by the BMW Method.
Administration: Most of the strategies that are likely to give high returns from owning stocks in a bull market also carry a high risk of loss in a bear market. So, when the market falls 25% those stocks might fall 50%. That means a 100% gain would have to occur over ensuing years just to get back to where the stock was priced when the last bull market ended. Banking and Finance faculty at business schools teach that this strategy is the only legal way to beat the market. In other words, reversion to the mean growth rate is sacrosanct. One way for an investor to hedge against such volatility is to pick stocks that go up or down less than 75% as much as the S&P 500 Index. In other words, exclude stocks with a 3-yr Beta that is higher than 0.75. Another way is to pick stocks issued by very large companies, namely those found in the S&P 100 Index. To be included in that index, companies are required to have an active market in put and call options at the Chicago Board Options Exchange, which means that “price discovery” for the underlying stock is efficient and relatively well insulated from “momentum” investors who are trading on the basis of fleeting rumors or sentiment. The other advantage of very large companies is that they have multiple product lines, at least one of which is expected to produce an attractively priced product during a recession. Integrated oil companies, for example, maintain a fleet of refineries that would be paying less for their feedstock (oil) during a recession--thereby allowing the company to make a nice profit from selling gasoline at a lower price than the customer had been used to paying.
Bottom Line: The problem with screening for “Starter Stocks” is that you’ll pull up some that are broadly thought of as desirable. Both gamblers and non-gamblers will bid up such stocks but forget to sell them when shares become overpriced. Given that most Starter Stocks (see Table) are found in channels of the economy that are already saturated (i.e., companies can grow their revenues no faster than GDP grows), there is little reason to hold overpriced stocks in expectation that earnings will explode upward. For example, the stocks issued by all four of the Consumer Staples companies on our list (KO, PG, PEP, WMT) are overpriced (see Columns AB to AD in our Table). You’ll have to figure out when to buy (or sell) overpriced shares of such high-value stocks. A common strategy is to buy more shares when the price drops 5-10% below its usual range. This is called the buy the dip strategy.
The easiest (and probably best) way to be certain of buying shares when they’re bargain-priced is to do it automatically. Sign up for a dividend reinvestment plan (DRIP) that takes a fixed amount of money out of your checking account on a specific date each month to buy more shares. That strategy is called dollar-cost averaging, and is the strategy that Warren Buffett favors to build a position in stocks that are often overpriced.
How well do our 10 Starter Stocks (at Line 10 in the Table) perform vs. the underlying ETFs -- VYM and IWD (at Lines 19 and 20)? Answer: quite a bit better (see Columns E, F and K).
Risk Rating: 6 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into NEE, KO, PG, INTC, WMT and JNJ, and also own shares of PFE, DUK, SO and PEP.
"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
Sunday, August 25
Month 98 - Berkshire Hathaway’s A-rated High Dividend Yield “Value” Stocks - August 2019
Situation: In case your reason for buying stocks in your working years is to have a growing income from dividends in your retirement years, this blog has emphasized “value stocks.” The bible of value investing is Benjamin Graham’s book: The Intelligent Investor. His most famous student is Warren Buffett, who graduated from Columbia University in 1951 with a Masters Degree in Economics.
Why value investing, and what is a value stock? The central thought is to discipline yourself not to overpay for earnings and/or assets (“book value”). On page 349 of the Revised Edition (1973) of The Intelligent Investor, Benjamin Graham says “Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the [earnings] multiplier times the ratio of price to book value should not exceed 22.5.” In other words, 1.5 times 15 equals 22.5.
How do you calculate the “Graham Number” or rational stock price? It is the square root of 22.5 times Earnings Per Share for the Trailing Twelve Months (TTM) times Book Value per share for the most recent quarter (mrq). We suggest that you think of the share price of a value stock as being no greater than: a) twice the Graham Number, b) 25 times the 7-year average for Earnings Per Share (see page 159 of The Intelligent Investor), and c) no more than 4 times Book Value per share. When you purchase a stock meeting those 3 requirements, it is demonstrably worth what you paid for it. The details are shown in Columns AA-AE of Tables accompanying our recent blogs.
Berkshire Hathaway’s stock portfolio contains 46 holdings worth $201,828,368,888 as of the last 13F SEC filing dated 8/14/19. The top 5 holdings (AAPL, BAC, KO, AXP, WFC) are worth $133,600,000,000 (66% of the total). Eight of the 46 companies have issued A-rated value stocks, since the company meets the following 4 criteria: 1) its bonds are rated A- or better by Standard & Poor’s (S&P), 2) its stocks that are rated B+/M or better by S&P, 3) its stocks have the 16+ year trading record that is required for quantitative analysis using the BMW Method, and 4) its stocks are listed in both the iShares Russell 1000 Value Index (IWD) and the Vanguard High Dividend Yield Index (VYM).
The top 10 stocks in Berkshire Hathaway’s portfolio, listed by valuation, are:
Apple AAPL ($51B)
Bank of America BAC ($25B)
Coca-Cola KO ($21B)
American Express AXP ($19B)
Wells Fargo WFC ($18B)
Kraft Heinz KHC ($8B)
U.S. Bancorp USB ($7B)
JPMorgan Chase JPM ($6B)
Moody’s MCO ($5B)
Delta Air Lines DAL ($4B)
Mission: Use our Standard Spreadsheet to analyze value stocks in the portfolio, based on the 4 criteria listed above.
Execution: see Table.
Administration: Six of the top 10 stocks in the portfolio are not value stocks (AAPL, BAC, AXP, KHC, MCO, DAL). Data for those can be found in the BACKGROUND Section of the Table.
Bottom Line: The 8 A-rated value stocks account for $54 Billion (27%) of the portfolio’s value. These show that Warren Buffett’s area of expertise is not only value stocks generally but financial services stocks specifically, since 5 of the 8 companies are from that industry. The take-home points for retail investors are: a) don’t overpay for a stock, b) buy what you know, and c) remember that the best bargains are often in the Financial Services industry. But those stocks also tend to have the greatest volatility, which is a key reason why they are underpriced.
Risk Rating: 7 (where 1 = 10-year U.S. Treasuries, 5 = S&P 500 Index, and 10 = gold bullion)
Full Disclosure: I dollar average into KO, PG, JPM and JNJ, and also own shares of AAPL and TRV.
"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
Why value investing, and what is a value stock? The central thought is to discipline yourself not to overpay for earnings and/or assets (“book value”). On page 349 of the Revised Edition (1973) of The Intelligent Investor, Benjamin Graham says “Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the [earnings] multiplier times the ratio of price to book value should not exceed 22.5.” In other words, 1.5 times 15 equals 22.5.
How do you calculate the “Graham Number” or rational stock price? It is the square root of 22.5 times Earnings Per Share for the Trailing Twelve Months (TTM) times Book Value per share for the most recent quarter (mrq). We suggest that you think of the share price of a value stock as being no greater than: a) twice the Graham Number, b) 25 times the 7-year average for Earnings Per Share (see page 159 of The Intelligent Investor), and c) no more than 4 times Book Value per share. When you purchase a stock meeting those 3 requirements, it is demonstrably worth what you paid for it. The details are shown in Columns AA-AE of Tables accompanying our recent blogs.
Berkshire Hathaway’s stock portfolio contains 46 holdings worth $201,828,368,888 as of the last 13F SEC filing dated 8/14/19. The top 5 holdings (AAPL, BAC, KO, AXP, WFC) are worth $133,600,000,000 (66% of the total). Eight of the 46 companies have issued A-rated value stocks, since the company meets the following 4 criteria: 1) its bonds are rated A- or better by Standard & Poor’s (S&P), 2) its stocks that are rated B+/M or better by S&P, 3) its stocks have the 16+ year trading record that is required for quantitative analysis using the BMW Method, and 4) its stocks are listed in both the iShares Russell 1000 Value Index (IWD) and the Vanguard High Dividend Yield Index (VYM).
The top 10 stocks in Berkshire Hathaway’s portfolio, listed by valuation, are:
Apple AAPL ($51B)
Bank of America BAC ($25B)
Coca-Cola KO ($21B)
American Express AXP ($19B)
Wells Fargo WFC ($18B)
Kraft Heinz KHC ($8B)
U.S. Bancorp USB ($7B)
JPMorgan Chase JPM ($6B)
Moody’s MCO ($5B)
Delta Air Lines DAL ($4B)
Mission: Use our Standard Spreadsheet to analyze value stocks in the portfolio, based on the 4 criteria listed above.
Execution: see Table.
Administration: Six of the top 10 stocks in the portfolio are not value stocks (AAPL, BAC, AXP, KHC, MCO, DAL). Data for those can be found in the BACKGROUND Section of the Table.
Bottom Line: The 8 A-rated value stocks account for $54 Billion (27%) of the portfolio’s value. These show that Warren Buffett’s area of expertise is not only value stocks generally but financial services stocks specifically, since 5 of the 8 companies are from that industry. The take-home points for retail investors are: a) don’t overpay for a stock, b) buy what you know, and c) remember that the best bargains are often in the Financial Services industry. But those stocks also tend to have the greatest volatility, which is a key reason why they are underpriced.
Risk Rating: 7 (where 1 = 10-year U.S. Treasuries, 5 = S&P 500 Index, and 10 = gold bullion)
Full Disclosure: I dollar average into KO, PG, JPM and JNJ, and also own shares of AAPL and TRV.
"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
Sunday, June 30
Month 96 - Watch List for S&P 100 Companies in the Vanguard High Dividend Yield Index - June 2019
Situation: All investors have an objective as well as a plan to reach that objective. I started with the objective of getting my children through college, then moved on to having a comfortable retirement. Direct stock ownership has been a key part of both plans. Why stocks? Because mutual funds are sold on the basis of long-term performance records, not safety from market crashes. But a small group of stocks are relatively safe because of being issued by a large company that reliably pays a good and growing dividend. The trick is to have a Watch List of 20-30 such companies and know “the story” behind each company.
Mission: Use our Standard Spreadsheet to evaluate companies in the S&P 100 Index that also appear in the FTSE High Dividend Yield Index, i.e., the ~400 companies in the FTSE Russell 1000 Index that reliably pay an above-market dividend. Our source document is the list of companies in VYM (the capitalization-weighted Vanguard High Dividend Yield ETF,
which is the US version of the FTSE High Dividend Yield Index.
Execution: see Table showing a spreadsheet with 36 columns of information for commons stocks issued by 27 US companies.
Administration: 54 companies are common to both indexes but 27 have been excluded from our Watch List because an item of information needed to populate a cell in the spreadsheet is missing and/or the company's S&P ratings are too low to denote above-average safety. We require an A- bond rating or better and a B+/M stock rating or better.
A key requirement is to avoid overpaying for a stock. I’m a numbers guy, so I use two numbers to decide if a stock is overpriced (where “price” or P is defined as the 50-day moving average):
1) the 7-yr P/E is greater than 30 (see Column AD in the Table.
2) the stock’s Graham Number, which is the square root of 22.5 times EPS (Earnings Per Share) multiplied by BV/Sh (Book Value Per Share), is greater than 250% of its price (see Column AB in the Table).
If only one of those two numbers is over the limit, the stock is still overpriced if the other number is close to the limit (more than 25 or 200%, respectively).
Another key requirement is to know whether a company's stock is a worthwhile investment, given its current price. As a starting place, I’ve devised a Basic Quality Screen that has only 6 elements and a maximum score of 4 (see Table):
1) If price appreciation over the past 16 years has been greater than 1/3rd the risk of short-term loss as determined by the BMW method, one point is added. In other words, 16-Yr price appreciation in Column K is greater than 1/3rd the risk in Column M.
2) If Tangible Book Value in Column S is negative and either LT-debt represents more than 50% of Total Capital (Column O), or Total Debt is more than 250% of EBITDA (Column P), one point is subtracted.
3) If the S&P Bond Rating in Column U is A- or better, one point is added.
4) If the S&P Stock Rating in Column V is B+/M or better, one point is added.
5) If Net Present Value of dividend growth (based on trailing 5-Yr dividend growth in Column H) and cash-out value after a 10 year Holding Period (determined by extrapolation of trailing 16-Yr price appreciation in Column K) is a positive number when applying a Discount Rate of 10% (see Column Z), one point is added.
6) If the two markers of an overpriced stock noted above (see Columns AB and AD) indicate that the stock is indeed overpriced, half a point is subtracted.
The final SCORE is found in Column AJ.
Bottom Line: As expected, these 27 companies have not performed as well as SPY, the S&P 500 Index ETF (see Line 29 to Line 35 at Columns C through F in the Table). But these 27 companies pay a higher dividend (Column G) and have lower price volatility (see Columns I & M) than SPY. Estimates for Net Present Value after a 10 year holding period (assuming a continuation of the trailing 5 year dividend growth rate and the trailing 16 year price growth rate and trading costs of 2.5% at the time of purchase and sale) were higher than SPY (see Column Z).
Conclusion: These 9 stocks appear to be over-priced (see Columns AB and AD): CSCO, KO, TXN, PEP, JNJ, LMT, MMM, CL and UPS. These 12 appear to be bargain-priced “value stocks” based on Book Value, Graham Number and average 7 year P/E (see Columns AA-AE): PFE, NEE, DUK, INTC, TGT, SO, JPM, CMCSA, USB, BLK, XOM and WFC. These 10 appear to be worthwhile investments because of having a score of either 3 or 4 on our Basic Quality Screen (see Column AJ): PFE, NEE, DUK, INTC, PG, SO, JPM, WMT, CAT, BLK.
Risk Rating: 6 (where 10-Yr US Treasury Bonds = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE, KO, INTC, PG, JNJ, JPM, WMT, CAT and IBM. I also own shares of PFE, CSCO, DUK, SO, PEP, MMM, BLK, UPS and XOM. Note that all but two (BLK and PEP) of those 18 are in the 65-stock Dow Jones Composite Average.
"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
Mission: Use our Standard Spreadsheet to evaluate companies in the S&P 100 Index that also appear in the FTSE High Dividend Yield Index, i.e., the ~400 companies in the FTSE Russell 1000 Index that reliably pay an above-market dividend. Our source document is the list of companies in VYM (the capitalization-weighted Vanguard High Dividend Yield ETF,
which is the US version of the FTSE High Dividend Yield Index.
Execution: see Table showing a spreadsheet with 36 columns of information for commons stocks issued by 27 US companies.
Administration: 54 companies are common to both indexes but 27 have been excluded from our Watch List because an item of information needed to populate a cell in the spreadsheet is missing and/or the company's S&P ratings are too low to denote above-average safety. We require an A- bond rating or better and a B+/M stock rating or better.
A key requirement is to avoid overpaying for a stock. I’m a numbers guy, so I use two numbers to decide if a stock is overpriced (where “price” or P is defined as the 50-day moving average):
1) the 7-yr P/E is greater than 30 (see Column AD in the Table.
2) the stock’s Graham Number, which is the square root of 22.5 times EPS (Earnings Per Share) multiplied by BV/Sh (Book Value Per Share), is greater than 250% of its price (see Column AB in the Table).
If only one of those two numbers is over the limit, the stock is still overpriced if the other number is close to the limit (more than 25 or 200%, respectively).
Another key requirement is to know whether a company's stock is a worthwhile investment, given its current price. As a starting place, I’ve devised a Basic Quality Screen that has only 6 elements and a maximum score of 4 (see Table):
1) If price appreciation over the past 16 years has been greater than 1/3rd the risk of short-term loss as determined by the BMW method, one point is added. In other words, 16-Yr price appreciation in Column K is greater than 1/3rd the risk in Column M.
2) If Tangible Book Value in Column S is negative and either LT-debt represents more than 50% of Total Capital (Column O), or Total Debt is more than 250% of EBITDA (Column P), one point is subtracted.
3) If the S&P Bond Rating in Column U is A- or better, one point is added.
4) If the S&P Stock Rating in Column V is B+/M or better, one point is added.
5) If Net Present Value of dividend growth (based on trailing 5-Yr dividend growth in Column H) and cash-out value after a 10 year Holding Period (determined by extrapolation of trailing 16-Yr price appreciation in Column K) is a positive number when applying a Discount Rate of 10% (see Column Z), one point is added.
6) If the two markers of an overpriced stock noted above (see Columns AB and AD) indicate that the stock is indeed overpriced, half a point is subtracted.
The final SCORE is found in Column AJ.
Bottom Line: As expected, these 27 companies have not performed as well as SPY, the S&P 500 Index ETF (see Line 29 to Line 35 at Columns C through F in the Table). But these 27 companies pay a higher dividend (Column G) and have lower price volatility (see Columns I & M) than SPY. Estimates for Net Present Value after a 10 year holding period (assuming a continuation of the trailing 5 year dividend growth rate and the trailing 16 year price growth rate and trading costs of 2.5% at the time of purchase and sale) were higher than SPY (see Column Z).
Conclusion: These 9 stocks appear to be over-priced (see Columns AB and AD): CSCO, KO, TXN, PEP, JNJ, LMT, MMM, CL and UPS. These 12 appear to be bargain-priced “value stocks” based on Book Value, Graham Number and average 7 year P/E (see Columns AA-AE): PFE, NEE, DUK, INTC, TGT, SO, JPM, CMCSA, USB, BLK, XOM and WFC. These 10 appear to be worthwhile investments because of having a score of either 3 or 4 on our Basic Quality Screen (see Column AJ): PFE, NEE, DUK, INTC, PG, SO, JPM, WMT, CAT, BLK.
Risk Rating: 6 (where 10-Yr US Treasury Bonds = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE, KO, INTC, PG, JNJ, JPM, WMT, CAT and IBM. I also own shares of PFE, CSCO, DUK, SO, PEP, MMM, BLK, UPS and XOM. Note that all but two (BLK and PEP) of those 18 are in the 65-stock Dow Jones Composite Average.
"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
Sunday, May 26
Month 95 - Dow Jones Industrial Average - Spring 2019 Update
Situation: The S&P 500 Index has recently posted a new all-time high, and “The Dow” is only 1% away from a new all-time high. However, Dow Theory won’t label that achievement (if it happens) as the beginning of a new Primary Uptrend. Why? Because the Dow Jones Transportation Average still has to go somewhat higher before it “corroborates The Dow.” Conclusion: Dow Theory still places the US stock market in a Short-term Downtrend. If you’re a stock-picker, that means you still need to consider selling the overpriced stocks in your portfolio. Why? Because things are likely to get worse before they get better.
Mission: Use our Standard Spreadsheet to highlight DJIA stocks that appear to be overpriced.
Execution: see Table.
Administration: It is almost impossible to distinguish an overpriced stock from a stock that is pulling in more investors because they see a bright future. If the company is already highly regarded because of its Balance Sheet, Product Lines, and Brand Penetration, I would hesitate to call its stock overpriced at any P/E (think of Amazon with its P/E of 81).
I’m a numbers guy, so I use two numbers to decide if a stock is overpriced (where “price” or P is defined as the 50-day moving average):
1) the 7-yr P/E is greater than 30.
2) the stock’s Graham Number, which is the square root of 22.5 times Earnings Per Share multiplied by Book Value Per Share, is more than 250% of its price.
If only one of those two numbers is over the limit, the stock is still overpriced if the other number is close to the limit, i.e., more than 25 or 200%, respectively. (For Amazon, those numbers are 53 and 752%. So, it’s overpriced and I sold my shares.)
Deciding whether or not to buy a stock is also tricky. To give a more nuanced estimate of a stock’s value to the investor, I’ve devised a Basic Quality Screen that has only 6 elements and a maximum score of 4 (see Table):
1) If price appreciation over the past 16 yrs has been greater than 1/3rd the risk of short-term loss as determined by the BMW Method, one point is added. In other words, price appreciation in Column K is greater than 1/3rd the risk in Column M.
2) If Tangible Book Value in Column S is negative and LT-debt represents more than 50% of Total Capital (Column O), or Total Debt is more than 250% of EBITDA (Column P), one point is subtracted.
3) If the S&P Bond Rating in Column U is BBB+ or better, one point is added.
4) If the S&P Stock Rating in Column V is B+/M or better, one point is added.
5) If Net Present Value of accumulated dividends and cash-out after a 10 year Holding Period is a positive number, when applying a Discount Rate of 10% (see Column Z), one point is added.
6) If the two markers of an overpriced stock noted above (see Columns AB and AD) indicate that the stock is indeed overpriced, half a point is subtracted.
The final SCORE is found in Column AJ.
Bottom Line: How to sell a stock is always harder to learn than how to buy a stock. The 30 stocks in the Dow Jones Industrial Average are great companies. So, those are even harder to abandon once you’ve seen the way their stocks perform in your portfolio. And, the prominence of these companies in the press is guaranteed to attract investors who don’t think they need to do their own due diligence before adding stock in a famous company to their portfolio. You see the problem: We have here the makings of a Perfect Storm that will hit someday.
Conclusion: There are 11 Dow stocks that appear to be overpriced now: MRK, MSFT, V, NKE, BA, UNH, MCD, KO, HD, JNJ and MMM. And, even though the stock market is generally thought to be overpriced, an equal number appear reasonably priced (see Column AJ in the Table): PFE, CSCO, DIS, AAPL, INTC, PG, TRV, JPM, WMT, CAT and UTX.
Risk Rating: 6 (where 1 = 10-yr US Treasury Notes, 5 = S&P 500 Index, and 10 = Gold bullion).
Full Disclosure: I dollar-average into MSFT, NKE, BA, INTC, KO, PG, JNJ, JPM and CAT, and also own shares of PFE, CSCO, MCD, AAPL, TRV, WMT, MMM, XOM and IBM. (All dividends are automatically reinvested.)
My holdings of stock in those 18 “Dow” companies are meant to represent a cross-section of the US economy. But you shouldn’t think my future returns (adjusted for risk, transaction costs, and capital gains taxes) will beat The Dow. Only a full-time trader has better than a one in twenty chance of beating the Dow Jones Industrial Average over the next two market cycles. And that trader will likely find it necessary to buy and sell stock options (so as to protect large positions from market-turning events). She might also minimize transaction costs by working from a Globex Terminal, meaning her trades are guaranteed by a firm with Globex Registration at the Chicago Board of Trade.
The rational basis for us, as retail investors, to buy shares of stock in specific companies is to have a growing stream of Dividend Income during retirement years, while leaving Principal intact, i.e., the shares that generate those dividends would only be sold to handle a severe financial emergency.
P.S.: Warren Buffett advises his friends and family to invest 90% of their savings in a low-cost S&P 500 Index fund marketed by the Vanguard Group , such as VFIAX.
NOTE: This text was written on 5/6/2019.
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Mission: Use our Standard Spreadsheet to highlight DJIA stocks that appear to be overpriced.
Execution: see Table.
Administration: It is almost impossible to distinguish an overpriced stock from a stock that is pulling in more investors because they see a bright future. If the company is already highly regarded because of its Balance Sheet, Product Lines, and Brand Penetration, I would hesitate to call its stock overpriced at any P/E (think of Amazon with its P/E of 81).
I’m a numbers guy, so I use two numbers to decide if a stock is overpriced (where “price” or P is defined as the 50-day moving average):
1) the 7-yr P/E is greater than 30.
2) the stock’s Graham Number, which is the square root of 22.5 times Earnings Per Share multiplied by Book Value Per Share, is more than 250% of its price.
If only one of those two numbers is over the limit, the stock is still overpriced if the other number is close to the limit, i.e., more than 25 or 200%, respectively. (For Amazon, those numbers are 53 and 752%. So, it’s overpriced and I sold my shares.)
Deciding whether or not to buy a stock is also tricky. To give a more nuanced estimate of a stock’s value to the investor, I’ve devised a Basic Quality Screen that has only 6 elements and a maximum score of 4 (see Table):
1) If price appreciation over the past 16 yrs has been greater than 1/3rd the risk of short-term loss as determined by the BMW Method, one point is added. In other words, price appreciation in Column K is greater than 1/3rd the risk in Column M.
2) If Tangible Book Value in Column S is negative and LT-debt represents more than 50% of Total Capital (Column O), or Total Debt is more than 250% of EBITDA (Column P), one point is subtracted.
3) If the S&P Bond Rating in Column U is BBB+ or better, one point is added.
4) If the S&P Stock Rating in Column V is B+/M or better, one point is added.
5) If Net Present Value of accumulated dividends and cash-out after a 10 year Holding Period is a positive number, when applying a Discount Rate of 10% (see Column Z), one point is added.
6) If the two markers of an overpriced stock noted above (see Columns AB and AD) indicate that the stock is indeed overpriced, half a point is subtracted.
The final SCORE is found in Column AJ.
Bottom Line: How to sell a stock is always harder to learn than how to buy a stock. The 30 stocks in the Dow Jones Industrial Average are great companies. So, those are even harder to abandon once you’ve seen the way their stocks perform in your portfolio. And, the prominence of these companies in the press is guaranteed to attract investors who don’t think they need to do their own due diligence before adding stock in a famous company to their portfolio. You see the problem: We have here the makings of a Perfect Storm that will hit someday.
Conclusion: There are 11 Dow stocks that appear to be overpriced now: MRK, MSFT, V, NKE, BA, UNH, MCD, KO, HD, JNJ and MMM. And, even though the stock market is generally thought to be overpriced, an equal number appear reasonably priced (see Column AJ in the Table): PFE, CSCO, DIS, AAPL, INTC, PG, TRV, JPM, WMT, CAT and UTX.
Risk Rating: 6 (where 1 = 10-yr US Treasury Notes, 5 = S&P 500 Index, and 10 = Gold bullion).
Full Disclosure: I dollar-average into MSFT, NKE, BA, INTC, KO, PG, JNJ, JPM and CAT, and also own shares of PFE, CSCO, MCD, AAPL, TRV, WMT, MMM, XOM and IBM. (All dividends are automatically reinvested.)
My holdings of stock in those 18 “Dow” companies are meant to represent a cross-section of the US economy. But you shouldn’t think my future returns (adjusted for risk, transaction costs, and capital gains taxes) will beat The Dow. Only a full-time trader has better than a one in twenty chance of beating the Dow Jones Industrial Average over the next two market cycles. And that trader will likely find it necessary to buy and sell stock options (so as to protect large positions from market-turning events). She might also minimize transaction costs by working from a Globex Terminal, meaning her trades are guaranteed by a firm with Globex Registration at the Chicago Board of Trade.
The rational basis for us, as retail investors, to buy shares of stock in specific companies is to have a growing stream of Dividend Income during retirement years, while leaving Principal intact, i.e., the shares that generate those dividends would only be sold to handle a severe financial emergency.
P.S.: Warren Buffett advises his friends and family to invest 90% of their savings in a low-cost S&P 500 Index fund marketed by the Vanguard Group , such as VFIAX.
NOTE: This text was written on 5/6/2019.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, March 31
Month 93 - Members of "The 2 and 8 Club" in the S&P 500 Index - Winter 2019 Update
Situation: Some investors are experienced enough to try beating the market, but few tools are available to help them. Business schools professors like to point out that it is a settled issue, with only two routes are available: A stock-picker can either seek information from a company insider (which is illegal) or assume more risk (buy high-beta stocks). The latter route can provide higher returns but those will eventually be eroded by the higher volatility in stock prices. In other words, risk-adjusted returns (at their best) will not beat an S&P 500 Index fund (e.g. VFINX) or ETF (e.g. SPY).
Mission: Develop an algorithm for investing in high-beta stocks. Use our Standard Spreadsheet for companies likely to have higher quality.
Execution: see Table.
Administration: We call the resulting algorithm “The 2 and 8 Club” because it focuses on companies that a) pay an above-market dividend and b) have grown that dividend at least 8%/yr over the most recent 5 year period. Quality criteria require that a company’s bonds carry an S&P rating of BBB+ or better, and that its common stock carry an S&P rating of B+/M or better. We also require 16 or more years of trading records on a public exchange, so that weekly prices can be analyzed by the “BMW Method”. We use the SPDR Dow Jones Industrial Average ETF (DIA) as our benchmark, given that it rarely has a dividend yield lower than 2% or a dividend growth rate lower than 8%. And, we use the US companies listed in the Financial Times Stock Exchange (FTSE) High Dividend Yield Index as our only source for stocks paying an above-market dividend. That index is based on the FTSE Russell 1000 Index. The Vanguard Group markets both a mutual fund (VHDYX) and an ETF (VYM) for the ~400 companies in the FTSE High Dividend Yield Index. The same companies are found on each list, and weighted by market capitalization and updated monthly.
Bottom Line: As expected, this algorithm beats the S&P 500 Index (see Columns C, F, K & W) at the expense of greater risk (see Columns D, I, J & M). Its utility lies in risk mitigation (see Columns R & S), where the cutoffs for S&P rankings make these companies above-average for the S&P 500 Index with respect to the risk of bankruptcy. Only 23 companies in the S&P 500 Index qualify for membership in “The 2 and 8 Club”, and only 5 of those are in the Dow Jones Industrial Average (JPM, TRV, CSCO, MMM, IBM). An additional 5 companies are found in the FTSE Russell 1000 Index but have insufficient market capitalization to be included in the S&P 500 Index (WSO, HUBB, SWX, EV, R; see COMPARISONS section in the Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JPM and NEE, and also own shares of TRV, MMM, BLK, IBM, R and CMI.
Caveat Emptor: This week’s blog is addressed to investors who a) have been investing in common stocks for more than 20 years, b) don’t use margin loans, and c) have more than $200,000 available for making such investments. Most investors are best served by maintaining a 50-50 balance between stocks and bonds, e.g. by investing in the total US stock and bond markets (VTI and BND at Lines 30 & 38 in the Table). That 50-50 investment has returned ~8%/yr over the past 10 years and ~5%/yr over the past 5 years. The same result can be found by investing in a balanced mutual fund where stocks and bonds are picked for you: The Vanguard Wellesley Income Fund (VWINX at Line 35 in the Table). Either way, you’re likely to have no more than 2 down years per decade: VWINX has had only 7 down years since 1970. NOTE: all of the stocks in VWINX are picked from the same FTSE High Dividend Yield Index that we use for “The 2 and Club”.
"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
Mission: Develop an algorithm for investing in high-beta stocks. Use our Standard Spreadsheet for companies likely to have higher quality.
Execution: see Table.
Administration: We call the resulting algorithm “The 2 and 8 Club” because it focuses on companies that a) pay an above-market dividend and b) have grown that dividend at least 8%/yr over the most recent 5 year period. Quality criteria require that a company’s bonds carry an S&P rating of BBB+ or better, and that its common stock carry an S&P rating of B+/M or better. We also require 16 or more years of trading records on a public exchange, so that weekly prices can be analyzed by the “BMW Method”. We use the SPDR Dow Jones Industrial Average ETF (DIA) as our benchmark, given that it rarely has a dividend yield lower than 2% or a dividend growth rate lower than 8%. And, we use the US companies listed in the Financial Times Stock Exchange (FTSE) High Dividend Yield Index as our only source for stocks paying an above-market dividend. That index is based on the FTSE Russell 1000 Index. The Vanguard Group markets both a mutual fund (VHDYX) and an ETF (VYM) for the ~400 companies in the FTSE High Dividend Yield Index. The same companies are found on each list, and weighted by market capitalization and updated monthly.
Bottom Line: As expected, this algorithm beats the S&P 500 Index (see Columns C, F, K & W) at the expense of greater risk (see Columns D, I, J & M). Its utility lies in risk mitigation (see Columns R & S), where the cutoffs for S&P rankings make these companies above-average for the S&P 500 Index with respect to the risk of bankruptcy. Only 23 companies in the S&P 500 Index qualify for membership in “The 2 and 8 Club”, and only 5 of those are in the Dow Jones Industrial Average (JPM, TRV, CSCO, MMM, IBM). An additional 5 companies are found in the FTSE Russell 1000 Index but have insufficient market capitalization to be included in the S&P 500 Index (WSO, HUBB, SWX, EV, R; see COMPARISONS section in the Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JPM and NEE, and also own shares of TRV, MMM, BLK, IBM, R and CMI.
Caveat Emptor: This week’s blog is addressed to investors who a) have been investing in common stocks for more than 20 years, b) don’t use margin loans, and c) have more than $200,000 available for making such investments. Most investors are best served by maintaining a 50-50 balance between stocks and bonds, e.g. by investing in the total US stock and bond markets (VTI and BND at Lines 30 & 38 in the Table). That 50-50 investment has returned ~8%/yr over the past 10 years and ~5%/yr over the past 5 years. The same result can be found by investing in a balanced mutual fund where stocks and bonds are picked for you: The Vanguard Wellesley Income Fund (VWINX at Line 35 in the Table). Either way, you’re likely to have no more than 2 down years per decade: VWINX has had only 7 down years since 1970. NOTE: all of the stocks in VWINX are picked from the same FTSE High Dividend Yield Index that we use for “The 2 and Club”.
"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
Sunday, February 24
Month 92 - Dow Jones Industrial Average - Winter 2019 Update
Situation: There have been 30 companies in the $7 Trillion “Dow” index since it was expanded from 20 companies on October 1, 1928. Since then 31 changes have been made. On average, a company is swapped out every 3 years. Turnover decisions are made by a committee directed by the Managing Editor of The Wall Street Journal. Dollar value is determined at the end of each trading day by adding the closing price/share for all 30 companies, and correcting that amount with a divisor that changes each time a company is removed & replaced. State Street Global Advisors (SPDR) markets an Exchange-Traded Fund (ETF) for the Dow under the ticker DIA. To get “a feel for the market” before buying or selling a stock, investors around the world look to the Dow. They’re aided in that decision by Dow Theory, which uses movement of the Dow Jones Transportation Average to “confirm” movement in the Dow. If both march together to higher highs and higher lows, the primary trend in the market is said to be up if trading volumes are large. If the reverse is true, then the primary trend is said to down.
Mission: Use our Standard Spreadsheet to analyze all 30 companies in the Dow.
Execution: see Table.
Administration: Many investors use a tried-and-true “system” called Dogs of the Dow (see Week 305), which calls for buying equal dollar-value amounts of stock in each of the 10 highest-yielding companies in the Dow on the first trading day of January and selling those on the last trading day of December. The idea is to have better total returns on your investment over a market cycle than you would from simply investing in DIA. The system works most years and over the long term. Why? Because a high dividend yield a) moderates any price decreases during Bear Markets and b) is such a large contributor to total returns.
Bottom Line: As a stock-picker, you need to keep up-to-date on Dow Theory and also know which high-yielding Dow stocks are among the 10 Dogs of the Dow. Dow Theory tells us that the stock market switched from being in a primary uptrend to being in a primary downtrend on December 20, 2018. The Dogs of the Dow for 2019 are the same as last year (see bold numbers in Column G of the Table), except that General Electric (GE) has been removed from the Dow and replaced by Walgreens Boots Alliance (WBA), which doesn’t have a high enough dividend yield to be considered a Dog. Instead, General Electric’s place has been taken by JP Morgan Chase (JPM).
When picking stocks from the Dow Jones Industrial Average, be aware that the historically low interest rates we’ve seen over the past decade have led to excessive corporate borrowing. You’ll want to pay close attention to Columns N-S in the Table, where different consequences of corporate debt are addressed. Companies with items that are highlighted in red carry a greater risk of loss in the upcoming credit crunch than has been recognized in the price of their shares.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NKE, MSFT, JPM, KO, INTC, JNJ and PG, and also own shares of MCD, TRV, CSCO, MMM, IBM, CAT, XOM and 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
Mission: Use our Standard Spreadsheet to analyze all 30 companies in the Dow.
Execution: see Table.
Administration: Many investors use a tried-and-true “system” called Dogs of the Dow (see Week 305), which calls for buying equal dollar-value amounts of stock in each of the 10 highest-yielding companies in the Dow on the first trading day of January and selling those on the last trading day of December. The idea is to have better total returns on your investment over a market cycle than you would from simply investing in DIA. The system works most years and over the long term. Why? Because a high dividend yield a) moderates any price decreases during Bear Markets and b) is such a large contributor to total returns.
Bottom Line: As a stock-picker, you need to keep up-to-date on Dow Theory and also know which high-yielding Dow stocks are among the 10 Dogs of the Dow. Dow Theory tells us that the stock market switched from being in a primary uptrend to being in a primary downtrend on December 20, 2018. The Dogs of the Dow for 2019 are the same as last year (see bold numbers in Column G of the Table), except that General Electric (GE) has been removed from the Dow and replaced by Walgreens Boots Alliance (WBA), which doesn’t have a high enough dividend yield to be considered a Dog. Instead, General Electric’s place has been taken by JP Morgan Chase (JPM).
When picking stocks from the Dow Jones Industrial Average, be aware that the historically low interest rates we’ve seen over the past decade have led to excessive corporate borrowing. You’ll want to pay close attention to Columns N-S in the Table, where different consequences of corporate debt are addressed. Companies with items that are highlighted in red carry a greater risk of loss in the upcoming credit crunch than has been recognized in the price of their shares.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NKE, MSFT, JPM, KO, INTC, JNJ and PG, and also own shares of MCD, TRV, CSCO, MMM, IBM, CAT, XOM and 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
Sunday, January 27
Month 91 - Food and Agriculture Companies - Winter 2019 Update
Situation: We all have to eat, so food is an essential good. Even in a commodity bear market, the valuations of food and agriculture companies will likely hold up better than the S&P 500 Index ETF (SPY - see Column D in this month’s Table). Which is amazing, given that grains and livestock account for 29% of the Bloomberg Commodity Index. Another way of saying this is that the volumes of food sold are inelastic, much like gasoline. This gives investments in food and agriculture companies a special, almost unique, competitive advantage.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
"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
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 30
Week 391 - Members of “The 2 and 8 Club” in the FTSE Russell 1000 Index
THIS IS THE LAST WEEKLY ISSUE. FUTURE ISSUES WILL APPEAR MONTHLY.
Situation: “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.
Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”
Execution: see Table
Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.
In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.
Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).
NOTE: This week’s Table will be updated at the end of each quarter.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.
Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.
"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
Situation: “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.
Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”
Execution: see Table
Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.
In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.
Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).
NOTE: This week’s Table will be updated at the end of each quarter.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.
Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.
"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
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