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
Showing posts with label DJTA. Show all posts
Showing posts with label DJTA. Show all posts
Sunday, February 24
Sunday, November 4
Week 383 - Dow Theory: A Primary Uptrend Resumed on 9/20/2018
Situation: The Dow Jones Industrial Average (DJIA) fell 9% from the end of January to the end of March because of a developing trade war. The Dow Jones Transportation Average (DJTA) confirmed this move, suggesting that a new primary downtrend was developing. However, neither the DJIA nor the DJTA reached previous lows. By 9/20/2018, the DJIA reached a new high confirming the new high reached a month earlier by the DJTA. So, the decade-long primary uptrend had resumed after an 8-month hiccup. Why? Because trade war fears had abated.
Both the DJIA (DIA) and DJTA (ITY) have out-performed Berkshire Hathaway (BRK-B) over the past 5 years, which is unusual. This leads stock-pickers to pay more attention to the stocks that are most heavily weighted in constructing those price-weighted indices.
Mission: Take a close look at the top 10 companies in each index by applying our Standard Spreadsheet.
Execution: see Table.
Bottom Line: Eleven of the 20 companies issue bonds that carry an S&P rating of A- or better, and 6 of those 11 carry an S&P stock rating of A-/M or better: Home Depot (HD), UnitedHealth (UNH), 3M (MMM), Boeing (BA), International Business Machines (IBM), and Union Pacific (UNP). In that group, only IBM has failed to outperform BRK-B over the past 5 and 10 year periods.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
"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
Both the DJIA (DIA) and DJTA (ITY) have out-performed Berkshire Hathaway (BRK-B) over the past 5 years, which is unusual. This leads stock-pickers to pay more attention to the stocks that are most heavily weighted in constructing those price-weighted indices.
Mission: Take a close look at the top 10 companies in each index by applying our Standard Spreadsheet.
Execution: see Table.
Bottom Line: Eleven of the 20 companies issue bonds that carry an S&P rating of A- or better, and 6 of those 11 carry an S&P stock rating of A-/M or better: Home Depot (HD), UnitedHealth (UNH), 3M (MMM), Boeing (BA), International Business Machines (IBM), and Union Pacific (UNP). In that group, only IBM has failed to outperform BRK-B over the past 5 and 10 year periods.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
"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 3
Week 361 - Blue Chips
Situation: What is a “Blue Chip” stock, and why should you think highly of such stocks? There are several definitions but traders are generally talking about a stock in the Dow Jones Industrial Average when they use the phrase “Blue Chip.” More generally, they’re talking about a very large company that pays a good and growing dividend, and has a trading record that covers at least the past 40 years. This also includes any very large company that has a negligible risk of bankruptcy. These characteristics are important because traders think Blue Chip stocks are the only relatively safe bets for a “buy-and-hold” investor to place. Warren Buffett often highlights the importance of these same characteristics whenever he’s being interviewed, and Berkshire Hathaway (BRK-B) owns shares in several: Apple (AAPL), Coca-Cola (KO), International Business Machines (IBM), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Walmart (WMT).
Mission: Develop specific definitions for the above characteristics, and list all companies that meet those definitions. Use our Standard Spreadsheet to analyze those companies.
Execution: see Table.
Administration: Here are my specific definitions for the qualitative terms used above:
"A very large company": Any company in the S&P 100 Index (OEF)
"A good dividend": Any company in the Vanguard High Dividend Yield Index (VYM)
"A growing dividend": Any company in the Powershares Dividend Achiever Portfolio (PFM)
"A 40+ year trading record": Any company in the 40-Yr BMW Method Portfolio
"A negligible risk of bankruptcy": Any very large company issuing bonds that carry an S&P Rating of AA+ or AAA. There are only 5 such companies: Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Johnson & Johnson (JNJ), and Exxon Mobil (XOM).
Bottom Line: If you want to include common stocks in your retirement portfolio, Blue Chips are the ones you’ll want to Buy and Hold, provided you buy shares in at least half a dozen. Those that carry a statistical risk of loss greater than “The “Dow” (DIA, see Column M in the Table) best purchased by dollar-cost averaging. But the 6 that carry no more than a Market Risk can be owned by using a “buy the dip” strategy: MCD, PEP, KO, JNJ, PG and WMT. Of course, those are still stocks and market volatility will still affect their prices.
Caveat Emptor: Corporate debt has been steadily increasing over most of the past 10 years. Why? Because the Federal Reserve reduced to cost of borrowing money to almost nothing. So, pay attention to companies that have purple highlights in Columns P and R (see Table). In the next recession, you’ll be surprised how far their stock prices will fall.
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, JNJ, PG, MSFT, WMT, IBM, CAT and XOM, and also own shares of MCD and MMM.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Develop specific definitions for the above characteristics, and list all companies that meet those definitions. Use our Standard Spreadsheet to analyze those companies.
Execution: see Table.
Administration: Here are my specific definitions for the qualitative terms used above:
"A very large company": Any company in the S&P 100 Index (OEF)
"A good dividend": Any company in the Vanguard High Dividend Yield Index (VYM)
"A growing dividend": Any company in the Powershares Dividend Achiever Portfolio (PFM)
"A 40+ year trading record": Any company in the 40-Yr BMW Method Portfolio
"A negligible risk of bankruptcy": Any very large company issuing bonds that carry an S&P Rating of AA+ or AAA. There are only 5 such companies: Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Johnson & Johnson (JNJ), and Exxon Mobil (XOM).
Bottom Line: If you want to include common stocks in your retirement portfolio, Blue Chips are the ones you’ll want to Buy and Hold, provided you buy shares in at least half a dozen. Those that carry a statistical risk of loss greater than “The “Dow” (DIA, see Column M in the Table) best purchased by dollar-cost averaging. But the 6 that carry no more than a Market Risk can be owned by using a “buy the dip” strategy: MCD, PEP, KO, JNJ, PG and WMT. Of course, those are still stocks and market volatility will still affect their prices.
Caveat Emptor: Corporate debt has been steadily increasing over most of the past 10 years. Why? Because the Federal Reserve reduced to cost of borrowing money to almost nothing. So, pay attention to companies that have purple highlights in Columns P and R (see Table). In the next recession, you’ll be surprised how far their stock prices will fall.
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, JNJ, PG, MSFT, WMT, IBM, CAT and XOM, and also own shares of MCD and MMM.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 12
Week 258 - Barron’s 500 Multimodal Transportation Companies
Situation: If you want to feel the pulse of an economy, look at trends in transportation. Those trends won’t tell you where the economy is headed next but they will show you where it’s been, and where the pressure points are. Right now, one pressure point for the US economy is the inefficiency of off-loading cargo from ships to drayage trucks, and transferring containers to warehouses or railroads. Another pressure point is the “final mile,” or how to get goods into the hands of consumers with a minimum of inconvenience. “Vertical integration” appears to be the answer for both problems, meaning companies like FedEx and UPS (and increasingly Amazon) will try to perform as many integrated services in-house as is possible. Finally, there are environmental considerations, namely, how do we move cargo around without leaving such a large carbon footprint. One solution that is off to a good start is replacing diesel truck engines with compressed natural gas (CNG) engines. The largest US truck fleet (JB Hunt Transport Services; JBHT) is an early adopter. Given the centrality of these above-mentioned companies, it would be a good idea for you to hold shares in one, or shares in an Exchange Traded Fund (ETF) for the transportation sector such as the iShares Transportation Average ETF ( IYT at Line 21 in the Table).
Mission: Provide a capsule summary for investors in Air Freight & Logistics companies, as well as multimodal trucking companies and railroads. Examine only those companies with revenues sufficient to be included in the recently published 2016 Barron’s 500 List. Assess current value by calculating Net Present Value (see Week 256) and providing the Graham Number. That number tells you what the stock price would be if it were to reflect 15 times earnings/share and 1.5 times book value/share. Finally, we’ll take a peek at future valuation by comparing the Weighted Average Cost of Capital (WACC) to the Return on Invested Capital (ROIC).
Execution: see Table.
Bottom Line: Dow Theory is the oldest method to assess current and future value in the stock market. The critical variable is the Dow Jones Transportation Average (DJTA), a running index of stock prices for 20 transportation companies. A “primary uptrend” ( Bull Market) is not declared when the Dow Jones Industrial Average (DJIA) hits new highs, but instead is declared when the DJTA confirms that event by also hitting a new high. We saw a confirmation most recently in November of 2014. The opposite also holds: a “primary downtrend” (Bear Market) must see a new low in the DJIA being confirmed by a new low in the DJTA.
The linchpin that holds transportation together is the Surface Transportation Board (STB), which has “wide discretion...to meet the nation’s changing transportation needs.” The STB is the most powerful Federal regulatory agency that transportation companies (even pipeline carriers) must face. Its power and reach is a boon to investors, since they won’t be permitted to lose much money: There will be volatility but there will be no bankruptcies, or strategic end-runs such as trucking companies underpricing railroads. In this week’s Table, we drill down on the 11 largest companies in the transportation space. Many of you may consider Amazon (AMZN) to be an outlier here, but Amazon is both the largest warehousing operation and the largest logistics company. And there will soon be thousands of Amazon-branded tractor-trailers on the highways. Time is money.
Risk Rating = 7 (where Treasuries = 1 and gold = 10).
Full Disclosure: I dollar-average into UNP and also own shares of CNI.
NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red indicate underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX, at Line 17 in the Table). Metrics highlighted in green at Columns P and Q in the Table indicate improving performance trends for fundamental metrics (per analysis by Barron’s 500 editors). Metrics highlighted in purple at Columns Z and AA in the Table indicate a company in current difficulty, ROIC being lower than WACC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Provide a capsule summary for investors in Air Freight & Logistics companies, as well as multimodal trucking companies and railroads. Examine only those companies with revenues sufficient to be included in the recently published 2016 Barron’s 500 List. Assess current value by calculating Net Present Value (see Week 256) and providing the Graham Number. That number tells you what the stock price would be if it were to reflect 15 times earnings/share and 1.5 times book value/share. Finally, we’ll take a peek at future valuation by comparing the Weighted Average Cost of Capital (WACC) to the Return on Invested Capital (ROIC).
Execution: see Table.
Bottom Line: Dow Theory is the oldest method to assess current and future value in the stock market. The critical variable is the Dow Jones Transportation Average (DJTA), a running index of stock prices for 20 transportation companies. A “primary uptrend” ( Bull Market) is not declared when the Dow Jones Industrial Average (DJIA) hits new highs, but instead is declared when the DJTA confirms that event by also hitting a new high. We saw a confirmation most recently in November of 2014. The opposite also holds: a “primary downtrend” (Bear Market) must see a new low in the DJIA being confirmed by a new low in the DJTA.
The linchpin that holds transportation together is the Surface Transportation Board (STB), which has “wide discretion...to meet the nation’s changing transportation needs.” The STB is the most powerful Federal regulatory agency that transportation companies (even pipeline carriers) must face. Its power and reach is a boon to investors, since they won’t be permitted to lose much money: There will be volatility but there will be no bankruptcies, or strategic end-runs such as trucking companies underpricing railroads. In this week’s Table, we drill down on the 11 largest companies in the transportation space. Many of you may consider Amazon (AMZN) to be an outlier here, but Amazon is both the largest warehousing operation and the largest logistics company. And there will soon be thousands of Amazon-branded tractor-trailers on the highways. Time is money.
Risk Rating = 7 (where Treasuries = 1 and gold = 10).
Full Disclosure: I dollar-average into UNP and also own shares of CNI.
NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red indicate underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX, at Line 17 in the Table). Metrics highlighted in green at Columns P and Q in the Table indicate improving performance trends for fundamental metrics (per analysis by Barron’s 500 editors). Metrics highlighted in purple at Columns Z and AA in the Table indicate a company in current difficulty, ROIC being lower than WACC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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