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 annual dividend increase. Show all posts
Showing posts with label annual dividend increase. Show all posts
Sunday, February 23
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, October 28
Week 382 - Steady Eddies
Situation: Some high-quality companies don’t pay good and growing dividends, don’t have high sustainability (ESG) scores, and aren’t blue chips, but do hold up well in bear markets. In theory, a hedge fund will take long positions in such companies (until retail investors take notice and the shares become overpriced). After reading this preamble, you’ll have figured out that we’re mostly talking about utilities. But that’s OK. You can still dollar-average into the non-utilities and do well, even though they’re often overpriced.
Mission: Run our Standard Spreadsheet on companies with A- or better S&P bond ratings and B+/L or better S&P stock ratings. Exclude companies in popular categories: “The 2 and 8 Club” (see Week 380), Blue Chips (see Week 379), the Dow Jones Industrial Average (see Week 378), and Sustainability Leaders (see Week 377). Also exclude companies that don’t do well in Bear Markets (see Column D in any of our Tables).
Execution: see Table.
Administration: This is a work in progress. The 7 examples in the Table are well-known to me; no doubt there are others in the S&P Index.
Bottom Line: A smart investor knows that a Bear Market in a particular S&P industry will usually begin with little or no warning. By the time she starts to think about selling shares, it’s too late. Some kind of insurance will have to be in place before that happens. Warren Buffett’s well-known recommendation is that you dollar-average your stock investments and back those up with a short-term investment-grade bond fund. (He also recommends that you avoid the two habits that in his experience are likely to derail investors: drinking alcohol and borrowing money.) Here we add a third option, which is to find stocks that “fly under the radar” and hold up well in a Bear Market.
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own shares of HRL.
"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: Run our Standard Spreadsheet on companies with A- or better S&P bond ratings and B+/L or better S&P stock ratings. Exclude companies in popular categories: “The 2 and 8 Club” (see Week 380), Blue Chips (see Week 379), the Dow Jones Industrial Average (see Week 378), and Sustainability Leaders (see Week 377). Also exclude companies that don’t do well in Bear Markets (see Column D in any of our Tables).
Execution: see Table.
Administration: This is a work in progress. The 7 examples in the Table are well-known to me; no doubt there are others in the S&P Index.
Bottom Line: A smart investor knows that a Bear Market in a particular S&P industry will usually begin with little or no warning. By the time she starts to think about selling shares, it’s too late. Some kind of insurance will have to be in place before that happens. Warren Buffett’s well-known recommendation is that you dollar-average your stock investments and back those up with a short-term investment-grade bond fund. (He also recommends that you avoid the two habits that in his experience are likely to derail investors: drinking alcohol and borrowing money.) Here we add a third option, which is to find stocks that “fly under the radar” and hold up well in a Bear Market.
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own shares of HRL.
"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, July 1
Week 365 - “Dogs of the Dow” (Mid-Year Review)
Situation: The 10 highest-yielding stocks in the Dow Jones Industrial Average are called The Dogs of the Dow (see Week 305 and Week 346). The only time-tested formula for beating an index fund (specifically the Dow Jones Industrial Average) is based on investing equal dollar amounts in each Dog at the start of the year. That would have worked in 6 of the past 8 years. Why? Because those are high quality stocks that have suffered a price decline and are likely to recover within ~2 years, which would lower their dividend yield and release them from the “Dog pen.”
Mission: Predict which Dogs will emerge from the Dog pen by the end of 2018, using our Standard Spreadsheet.
Execution: see Table.
Administration: For various reasons, the 2018 Dogs are unlikely to post greater total returns this year than the Dow Jones Industrial Average (DIA). But we can still try to play the game by predicting which of this year’s Dogs will be missing from next year’s Dog pen. Those will probably come from those posting lower dividend yields at the mid-year point (see Column G in the Table): Coca-Cola (KO), Cisco Systems (CSCO), General Electric (GE), Merck (MRK) and Chevron (CVX).
Bottom Line: Given current trends, Cisco Systems (CSCO) and Chevron (CVX) are likely to be released from the Dog pen at the end of the year.
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into KO, PG, XOM and IBM, and also own shares of CSCO.
Mission: Predict which Dogs will emerge from the Dog pen by the end of 2018, using our Standard Spreadsheet.
Execution: see Table.
Administration: For various reasons, the 2018 Dogs are unlikely to post greater total returns this year than the Dow Jones Industrial Average (DIA). But we can still try to play the game by predicting which of this year’s Dogs will be missing from next year’s Dog pen. Those will probably come from those posting lower dividend yields at the mid-year point (see Column G in the Table): Coca-Cola (KO), Cisco Systems (CSCO), General Electric (GE), Merck (MRK) and Chevron (CVX).
Bottom Line: Given current trends, Cisco Systems (CSCO) and Chevron (CVX) are likely to be released from the Dog pen at the end of the year.
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into KO, PG, XOM and IBM, and also own shares of CSCO.
"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
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 6
Week 318 - Growing Perpetuity Index: A-Rated Dow Jones Composite Companies With Tangible Book Value that pay a “Good and Growing” Dividend
Situation: You need a way to save for retirement that is safe and effective. We agree with Warren Buffett’s approach which is to use a low-cost S&P 500 Index fund combined with a low-cost short-intermediate term US Treasury fund. If you’re wealthy, make the stock:bond mix 90:10. If not, move toward a 50:50 mix.
If you’re a stock-picker but fully employed outside the financial services industry, find a formula that won’t require a lot of your time for oversight and maintenance. The S&P 500 Index has too many stocks, so stick to analyzing the Dow Jones Composite Index. Those stocks have been picked by the Managing Editor of the Wall Street Journal. Start with the 20 companies in that 65-stock index that pay at least a “market dividend” and are Dividend Achievers, i.e., have raised their dividend annually for at least the past 10 years. We call that shortened version The Growing Perpetuity Index (see Week 261). It also excludes companies with less than a BBB+ S&P Bond Rating or B+/M S&P Stock Rating. But companies with with ratings lower than A- tend to develop problems, as do companies with negative net Tangible Book Value. (The SEC requires that the sale of newly-issued shares on a US stock exchange not dilute a company’s net Tangible Book Value below zero.)
Mission: Revise “The Growing Perpetuity Index” to exclude companies with negative Tangible Book Value, as well as companies with an S&P Bond Rating less than A- or an S&P Stock Rating less than A-/M.
Execution: We’re down to 9 companies (see Table).
Administration: Our Benchmark for companies that pay a “good and growing” dividend is the Vanguard High Dividend Yield ETF (VYM at Line 14 in the Table). That fund represents a subset of the Russell 1000 Index of the largest publicly-traded US companies which pay at least as high a dividend yield as the average for the full set. As it happens, all of the companies in the subset that have A ratings from S&P on their bonds and stocks are Dividend Achievers.
In next week’s blog, we highlight the 11 companies in VYM that aren’t in the Dow Jones Composite Index. Then you’ll need to track only 20 companies on your adventure into stock-picking! But be aware: 30% of those 20 companies are boring utilities, meaning that clear-eyed stock-picking isn’t glamorous at all. It’s just making money by not losing money, which is Warren Buffett’s #1 Rule.
Bottom Line: Stock-picking becomes a problem for non-gamblers at the Go/No-Go point, i.e., after 5 years of trying, you need to think about giving up if you can’t beat the total return/yr for an S&P 500 Index fund (SPY or VFINX) by at least 2%/yr. This is because you need to cover your greater transaction costs and capital gains taxes that are being expensed out. We’re suggesting that you start with 9 “blue chip” stocks that have a reasonable likelihood of letting you stay in the game after a 5 year probation period. Of course, you’d be opening yourself up to selection bias because there is a greater risk of loss vs. investing in all 500 stocks. Academic studies have shown that you’d need to own shares in at least 50 companies to largely overcome that risk.
Risk Rating: 6 (10-Yr Treasury Note = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into NEE, MSFT, JNJ, KO, and UNP. I also own shares of MMM, TRV, and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If you’re a stock-picker but fully employed outside the financial services industry, find a formula that won’t require a lot of your time for oversight and maintenance. The S&P 500 Index has too many stocks, so stick to analyzing the Dow Jones Composite Index. Those stocks have been picked by the Managing Editor of the Wall Street Journal. Start with the 20 companies in that 65-stock index that pay at least a “market dividend” and are Dividend Achievers, i.e., have raised their dividend annually for at least the past 10 years. We call that shortened version The Growing Perpetuity Index (see Week 261). It also excludes companies with less than a BBB+ S&P Bond Rating or B+/M S&P Stock Rating. But companies with with ratings lower than A- tend to develop problems, as do companies with negative net Tangible Book Value. (The SEC requires that the sale of newly-issued shares on a US stock exchange not dilute a company’s net Tangible Book Value below zero.)
Mission: Revise “The Growing Perpetuity Index” to exclude companies with negative Tangible Book Value, as well as companies with an S&P Bond Rating less than A- or an S&P Stock Rating less than A-/M.
Execution: We’re down to 9 companies (see Table).
Administration: Our Benchmark for companies that pay a “good and growing” dividend is the Vanguard High Dividend Yield ETF (VYM at Line 14 in the Table). That fund represents a subset of the Russell 1000 Index of the largest publicly-traded US companies which pay at least as high a dividend yield as the average for the full set. As it happens, all of the companies in the subset that have A ratings from S&P on their bonds and stocks are Dividend Achievers.
In next week’s blog, we highlight the 11 companies in VYM that aren’t in the Dow Jones Composite Index. Then you’ll need to track only 20 companies on your adventure into stock-picking! But be aware: 30% of those 20 companies are boring utilities, meaning that clear-eyed stock-picking isn’t glamorous at all. It’s just making money by not losing money, which is Warren Buffett’s #1 Rule.
Bottom Line: Stock-picking becomes a problem for non-gamblers at the Go/No-Go point, i.e., after 5 years of trying, you need to think about giving up if you can’t beat the total return/yr for an S&P 500 Index fund (SPY or VFINX) by at least 2%/yr. This is because you need to cover your greater transaction costs and capital gains taxes that are being expensed out. We’re suggesting that you start with 9 “blue chip” stocks that have a reasonable likelihood of letting you stay in the game after a 5 year probation period. Of course, you’d be opening yourself up to selection bias because there is a greater risk of loss vs. investing in all 500 stocks. Academic studies have shown that you’d need to own shares in at least 50 companies to largely overcome that risk.
Risk Rating: 6 (10-Yr Treasury Note = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into NEE, MSFT, JNJ, KO, and UNP. I also own shares of MMM, TRV, and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 7
Week 305 - Dogs of the Dow
Situation: We all know that Compound Interest is the most powerful force in the investing universe but the second most powerful force is less well known: Reversion to the Mean. That’s the force that makes many of the poorly-performing stocks from the last business cycle look good in the next business cycle. How this “magic” works is through the decisions made by investors, who either don’t put more money into a good but overbought stock (thereby marking its “high”), or do put more money into that same stock after it has become oversold (thereby marking its “low”). In the case of large and well-established companies, this “now I like it/now I don’t” oscillation can evolve faster than the normal business cycle; but for commodity-related companies it will evolve slower. Investors are eager to know when a “low” has been reached for actively traded stocks, such as those in the 30-stock Dow Jones Industrial Average (DJIA). That’s why we have “The Dogs of the Dow,” a respected investment theory that identifies high-quality but temporarily struggling stocks by their attractive dividend yields. Most DJIA stocks pay an above-market dividend, which that may go up or remain unchanged but will almost never go down. If the stock drifts lower in price, investors will be alerted to this by its rising dividend yield. Why? Because they’re getting paid more to own the stock and will tell their friends.
“Proponents of the Dogs of the Dow strategy argue that blue-chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with a high dividend relative to stock price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low-yield companies.”
At the end of each year, “Dogs” are identified as the 10 highest-yielding stocks DJIA. “Dogs of the Dow Theory” instructs you to invest equal dollar amounts in each of those 10 stocks in the first week of January. You can be certain that some of those stocks will show remarkable price appreciation over the next 12 months, but most won’t. By following this Theory, your odds of beating the DJIA are better than even, but most investors think they can improve on the odds by “winnowing out” companies having a business plan that appears likely to remain ineffective longer than a year.
Mission: Subject the 2017 Dogs of the Dow to our spreadsheet-based analysis.
Execution: see Table. Metrics highlighted using purple mark issues that will reduce the chances of that stock outperforming the DJIA this year.
Bottom Line: A great deal of research backs up Dogs of the Dow Theory. And, it has more value that Dow Theory in generating an series of Buy Signals. If you learn nothing else from our blog, learn Dow Theory and use it to ignore market pundits.
The thing to understand about the Dogs of the Dow strategy is that you aren’t going to restructure your equity portfolio every January by seeking to own equal dollar amounts of all 10 Dogs. But the list is very useful when Dow Theory is generating "Buy" signals. On such occasions, find a way to winnow the list down to 4 or 5 stocks and buy shares in companies you don’t already own. The most popular method is to pick the 5 lowest-priced, which have come to be called “Small Dogs of the Dow”. This year’s Small Dogs are Coca-Cola (KO), Verizon Communications (VZ), Merck (MRK), Pfizer (PFE) and Cisco Systems (CSCO). Two of those stocks, VZ and MRK, have S&P ratings of B/M, i.e., a clear message to the retail investor that these are best avoided.
Of the remaining 3, Coca-Cola (KO) shares are likely to be the most “safe and effective” to own. Emerging markets are past the Great Recession and starting to grow, giving Coke an opportunity to capitalize on its dominant position in countries where the middle class is growing at 10%/yr.
CSCO is attractive for a different reason. Companies around the world are finally increasing their capital expenditures faster than GDP. Computers and software are the fastest-growing class of capital expenditures. Cisco Systems (CSCO) has been increasing its sales and earnings faster that expected, and the company has been aggressively raising its dividend (see Column H in the Table).
Returning to the full list of 10 companies, Boeing (BA) is the hands-down winner in terms of Net Present Value (see Column Y in the Table) and has no serious issues with its balance sheet (see Columns P-R). As noted above, companies are investing more in computer-managed equipment and nothing tops aircraft in that regard. For example, the Department of Defense and NASA spend over $20 Billion a year on Boeing equipment. One thing you can be sure of under President Trump is that he will ramp up expenditures on right-wing jobs programs like the military. IBM also will benefit from the above-noted increase in corporate spending on capital equipment.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into both KO and IBM.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 24 in the Table. The ETF for that index is MDY at Line 17. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
“Proponents of the Dogs of the Dow strategy argue that blue-chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with a high dividend relative to stock price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low-yield companies.”
At the end of each year, “Dogs” are identified as the 10 highest-yielding stocks DJIA. “Dogs of the Dow Theory” instructs you to invest equal dollar amounts in each of those 10 stocks in the first week of January. You can be certain that some of those stocks will show remarkable price appreciation over the next 12 months, but most won’t. By following this Theory, your odds of beating the DJIA are better than even, but most investors think they can improve on the odds by “winnowing out” companies having a business plan that appears likely to remain ineffective longer than a year.
Mission: Subject the 2017 Dogs of the Dow to our spreadsheet-based analysis.
Execution: see Table. Metrics highlighted using purple mark issues that will reduce the chances of that stock outperforming the DJIA this year.
Bottom Line: A great deal of research backs up Dogs of the Dow Theory. And, it has more value that Dow Theory in generating an series of Buy Signals. If you learn nothing else from our blog, learn Dow Theory and use it to ignore market pundits.
The thing to understand about the Dogs of the Dow strategy is that you aren’t going to restructure your equity portfolio every January by seeking to own equal dollar amounts of all 10 Dogs. But the list is very useful when Dow Theory is generating "Buy" signals. On such occasions, find a way to winnow the list down to 4 or 5 stocks and buy shares in companies you don’t already own. The most popular method is to pick the 5 lowest-priced, which have come to be called “Small Dogs of the Dow”. This year’s Small Dogs are Coca-Cola (KO), Verizon Communications (VZ), Merck (MRK), Pfizer (PFE) and Cisco Systems (CSCO). Two of those stocks, VZ and MRK, have S&P ratings of B/M, i.e., a clear message to the retail investor that these are best avoided.
Of the remaining 3, Coca-Cola (KO) shares are likely to be the most “safe and effective” to own. Emerging markets are past the Great Recession and starting to grow, giving Coke an opportunity to capitalize on its dominant position in countries where the middle class is growing at 10%/yr.
CSCO is attractive for a different reason. Companies around the world are finally increasing their capital expenditures faster than GDP. Computers and software are the fastest-growing class of capital expenditures. Cisco Systems (CSCO) has been increasing its sales and earnings faster that expected, and the company has been aggressively raising its dividend (see Column H in the Table).
Returning to the full list of 10 companies, Boeing (BA) is the hands-down winner in terms of Net Present Value (see Column Y in the Table) and has no serious issues with its balance sheet (see Columns P-R). As noted above, companies are investing more in computer-managed equipment and nothing tops aircraft in that regard. For example, the Department of Defense and NASA spend over $20 Billion a year on Boeing equipment. One thing you can be sure of under President Trump is that he will ramp up expenditures on right-wing jobs programs like the military. IBM also will benefit from the above-noted increase in corporate spending on capital equipment.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into both KO and IBM.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 24 in the Table. The ETF for that index is MDY at Line 17. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 23
Week 303 - A-rated Barron’s 500 Industrial Companies That Are Dividend Achievers
Situation: There are a number of large and well-established industrial companies. By taking a “buy and hold” approach to owning stock in a few of those, you’ll likely realize your best results as a stock-picker. Yes, they’re cyclical. But the level of reward found in purchasing these stocks is generally higher than their level of risk.
Mission: Focus on companies that 1) pay a good and growing dividend, 2) are big enough to be included in the Barron’s 500 List of US and Canadian companies with the highest revenues, 3) have been analyzed statistically over the past 20 yrs by the BMW Method, as shown in Columns K-M in the Table, 4) issue bonds and stocks that S&P rates as A- or better, and 5) have a clean Balance Sheet (see Columns P-R in the Table), which means that a) long-term debt constitutes no more than 1/3rd of total assets, b) Tangible Book Value is not a negative number, and c) dividends are consistently paid out of Free Cash Flow (FCF).
Execution: see Table.
Administration: We have applied our standard spreadsheet with one change. The compound annual growth rate (CAGR) of weekly prices is 20 yrs, instead of the customary 16 yrs (see Column K).
Bottom Line: To help you narrow your choices, we have focused on A-rated Dividend Achievers that have clean balance sheets. We have also calculated the Net Present Value (NPV) of owning a stock for the next 10 yrs then selling it (see Column Y in the Table). That statistic assembles income streams from the current dividend (Column G), maintenance of the dividend growth rate that has been established over the past 3 yrs (Column H), and maintenance of the price growth rate that has been established over the past 20 yrs (Column K). A positive number suggests a total return of 9%/yr or more, whereas a negative number projects a lower rate. Per NPV, the leading choice is Canadian National Railway (CNI).
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, and also own shares of CNI, CAT, MMM, and GD.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 22 in the Table. The ETF for that index is MDY at Line 15. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Focus on companies that 1) pay a good and growing dividend, 2) are big enough to be included in the Barron’s 500 List of US and Canadian companies with the highest revenues, 3) have been analyzed statistically over the past 20 yrs by the BMW Method, as shown in Columns K-M in the Table, 4) issue bonds and stocks that S&P rates as A- or better, and 5) have a clean Balance Sheet (see Columns P-R in the Table), which means that a) long-term debt constitutes no more than 1/3rd of total assets, b) Tangible Book Value is not a negative number, and c) dividends are consistently paid out of Free Cash Flow (FCF).
Execution: see Table.
Administration: We have applied our standard spreadsheet with one change. The compound annual growth rate (CAGR) of weekly prices is 20 yrs, instead of the customary 16 yrs (see Column K).
Bottom Line: To help you narrow your choices, we have focused on A-rated Dividend Achievers that have clean balance sheets. We have also calculated the Net Present Value (NPV) of owning a stock for the next 10 yrs then selling it (see Column Y in the Table). That statistic assembles income streams from the current dividend (Column G), maintenance of the dividend growth rate that has been established over the past 3 yrs (Column H), and maintenance of the price growth rate that has been established over the past 20 yrs (Column K). A positive number suggests a total return of 9%/yr or more, whereas a negative number projects a lower rate. Per NPV, the leading choice is Canadian National Railway (CNI).
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, and also own shares of CNI, CAT, MMM, and GD.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 22 in the Table. The ETF for that index is MDY at Line 15. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 9
Week 301 - Fertilizer
Situation: Want to bet on agriculture? Then pay attention to fertilizer stocks. That’s where returns outweigh risk (whereas, risk outweighs returns from commodity futures in grain and soybeans because futures incorporate borrowed money). But realize that net farm income has fallen 46% over the past 3 yrs here in the US. A decline that large and lasting that long hasn’t happened since the Great Depression. The reasons for that decline relate to improvements worldwide in technology (e.g. GMO seeds), infrastructure (e.g. paved roads), and logistics (e.g. free trade agreements), resulting in an overproduction of crops. The USDA Foreign Agricultural Service website is a good starting place, if you want to learn more about how this happened.
US farmland has grown 7%/yr in value since 2002, going from an average price of $1,590/acre to $4,090/acre, partly because 8% of the acreage disappeared due to urbanization and the conversion of farmland to parks and pasture. Farmers increasingly overuse their land to justify its cost, which leads to a greater dependence on improvements in technology, infrastructure and logistics. But at the most basic level, “overuse” means that more fertilizer will be applied to counteract the depletion of nitrogen, potassium and phosphate from the soil.
Mission: Apply our standard spreadsheet analysis to large fertilizer companies in the US and Canada, namely those that have appeared on the annual Barron’s 500 List in recent years. Exclude companies that haven’t had their stock traded long enough to appear on the 16-yr BMW Method List. Include 5-yr returns on key commodity contracts (corn, soybeans, wheat, cattle and copper). In making this analysis, we find that only 5 companies meet our requirements, and none are Dividend Achievers.
Execution: see Table.
Administration: Commodity-related investments are speculative. With farming, there are additional variables to consider, namely, dependence on soil, sunshine and water. Soil has to supply 5 of the 7 elements essential for life: nitrogen, phosphorus, and potassium being the most important. In addition, soil provides sodium and chlorine ions that come from the life cycle of small organisms living within the soil. Finally, sunshine and water allow healthy plants to synthesize the other two essential elements by combining carbon dioxide in the atmosphere with water: oxygen, and useful forms of carbon -- sugar and cellulose.
Farmers have traditionally tried to reverse soil depletion by 1) rotating crops, 2) leaving fields fallow every 3 yrs, and 3) pasturing cows on the field in the off-season, to distribute natural fertilizer (manure). But the costs for farm implements and land have risen so much that farmers reach for the maximum yield of whatever crop will give them the greatest return on investment. Therefore, they will over-plant every field every year. This over-planting leads to the purchase of more fertilizer, which is distributed using bigger sprayers. As millions of farmers around the world are adopting this approach, the supply of grain and soybeans has come to exceed demand. The result has been that the prices farmers receive for their grain and soybeans collapsed 3 yrs ago, and has yet to recover. Farmers have tried to stop buying new machinery and the most expensive seeds, i.e., the seeds that have been genetically engineered to carry yield-maximizing traits. And, farmers have tried to spend less on fertilizer, water, insecticides, fungicides and herbicides. In other words, the vendors that serve farmers are merging operations in a desperate attempt to stave off bankruptcy.
Bottom Line: You can make a lot of money on volatile commodity investments like fertilizer stocks but if you don’t know when to sell, you’ll incur large losses. To allay that risk, it is necessary to study the trends in a) crop prices, b) weather cycles (El Nino and La Nina), and c) inventories of foodstuffs and agronomy chemicals, particularly fertilizer. Or, you can follow a Warren Buffett recommendation: dollar-cost average your investment, and continue spending a fixed-dollar amount each quarter on that (now) cheapened stock. You’ll have bought many shares at absurdly low prices, so you’ll be ahead nicely on your investment when prices recover. But beware: Shares in Potash Corporation of Saskatchewan (the largest fertilizer company) went for $61.60 in 2/1/11 and $18.55 on 2/1/17. That’s a 70% loss over 6 yrs. When it comes to commodity-related stocks, dollar-averaging is a fool’s errand. You have to sell quickly whenever you conclude that earnings are likely to stop growing.
Which fertilizer stock of the five in the Table looks the most promising? Not surprisingly, the two largest players (by market capitalization) are merging with one another: Agrium (AGU) and Potash Corporation of Saskatchewan (POT). Why? Because the multi-year collapse in grain and soybean prices has pulled the rug out from under fertilizer sales (see Column F in the Table under “commodity futures”). If you buy stock in either POT or AGU you’ll eventually be rewarded because 1) population growth increases the demand for food, and 2) urban sprawl (combined with droughts due to global warming) reduces the availability of arable land.
Risk level: 9 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and Gold Bullion = 10)
Full disclosure: I own shares of AGU.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-5 Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 31 in the Table. The ETF for that index is MDY at Line 14.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
US farmland has grown 7%/yr in value since 2002, going from an average price of $1,590/acre to $4,090/acre, partly because 8% of the acreage disappeared due to urbanization and the conversion of farmland to parks and pasture. Farmers increasingly overuse their land to justify its cost, which leads to a greater dependence on improvements in technology, infrastructure and logistics. But at the most basic level, “overuse” means that more fertilizer will be applied to counteract the depletion of nitrogen, potassium and phosphate from the soil.
Mission: Apply our standard spreadsheet analysis to large fertilizer companies in the US and Canada, namely those that have appeared on the annual Barron’s 500 List in recent years. Exclude companies that haven’t had their stock traded long enough to appear on the 16-yr BMW Method List. Include 5-yr returns on key commodity contracts (corn, soybeans, wheat, cattle and copper). In making this analysis, we find that only 5 companies meet our requirements, and none are Dividend Achievers.
Execution: see Table.
Administration: Commodity-related investments are speculative. With farming, there are additional variables to consider, namely, dependence on soil, sunshine and water. Soil has to supply 5 of the 7 elements essential for life: nitrogen, phosphorus, and potassium being the most important. In addition, soil provides sodium and chlorine ions that come from the life cycle of small organisms living within the soil. Finally, sunshine and water allow healthy plants to synthesize the other two essential elements by combining carbon dioxide in the atmosphere with water: oxygen, and useful forms of carbon -- sugar and cellulose.
Farmers have traditionally tried to reverse soil depletion by 1) rotating crops, 2) leaving fields fallow every 3 yrs, and 3) pasturing cows on the field in the off-season, to distribute natural fertilizer (manure). But the costs for farm implements and land have risen so much that farmers reach for the maximum yield of whatever crop will give them the greatest return on investment. Therefore, they will over-plant every field every year. This over-planting leads to the purchase of more fertilizer, which is distributed using bigger sprayers. As millions of farmers around the world are adopting this approach, the supply of grain and soybeans has come to exceed demand. The result has been that the prices farmers receive for their grain and soybeans collapsed 3 yrs ago, and has yet to recover. Farmers have tried to stop buying new machinery and the most expensive seeds, i.e., the seeds that have been genetically engineered to carry yield-maximizing traits. And, farmers have tried to spend less on fertilizer, water, insecticides, fungicides and herbicides. In other words, the vendors that serve farmers are merging operations in a desperate attempt to stave off bankruptcy.
Bottom Line: You can make a lot of money on volatile commodity investments like fertilizer stocks but if you don’t know when to sell, you’ll incur large losses. To allay that risk, it is necessary to study the trends in a) crop prices, b) weather cycles (El Nino and La Nina), and c) inventories of foodstuffs and agronomy chemicals, particularly fertilizer. Or, you can follow a Warren Buffett recommendation: dollar-cost average your investment, and continue spending a fixed-dollar amount each quarter on that (now) cheapened stock. You’ll have bought many shares at absurdly low prices, so you’ll be ahead nicely on your investment when prices recover. But beware: Shares in Potash Corporation of Saskatchewan (the largest fertilizer company) went for $61.60 in 2/1/11 and $18.55 on 2/1/17. That’s a 70% loss over 6 yrs. When it comes to commodity-related stocks, dollar-averaging is a fool’s errand. You have to sell quickly whenever you conclude that earnings are likely to stop growing.
Which fertilizer stock of the five in the Table looks the most promising? Not surprisingly, the two largest players (by market capitalization) are merging with one another: Agrium (AGU) and Potash Corporation of Saskatchewan (POT). Why? Because the multi-year collapse in grain and soybean prices has pulled the rug out from under fertilizer sales (see Column F in the Table under “commodity futures”). If you buy stock in either POT or AGU you’ll eventually be rewarded because 1) population growth increases the demand for food, and 2) urban sprawl (combined with droughts due to global warming) reduces the availability of arable land.
Risk level: 9 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and Gold Bullion = 10)
Full disclosure: I own shares of AGU.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-5 Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 31 in the Table. The ETF for that index is MDY at Line 14.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 26
Week 299 - “Basic Materials” And “Energy” Companies That Are Dividend Achievers
Situation: A Retirement Portfolio may benefit from some exposure to commodity-related Energy and Basic Materials companies. Yes, I know. During the 4.5 year Housing Crisis (from April 2007 to October 2011), stocks in the Basic Materials index fund (XLB) lost more than the S&P 500 Index, and stocks in the Energy index fund (XLE) didn’t do much better (see Column D in the Table). So let’s confine our attention to companies that kept increasing their dividend throughout that crisis, i.e., companies that S&P calls Dividend Achievers.
Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.
Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into MON and own shares of ENB.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.
Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into MON and own shares of ENB.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 19
Week 298 - Barron’s 500 “Financial Services” Companies That Are Dividend Achievers
Situation: Even a Retirement Portfolio needs some exposure to Financial Services companies. Yes, I know. During the 4.5 year Housing Crisis (from April 2007 to October 2011), stocks in the Financial Services index fund (XLF) lost 20%/yr vs. 3%/yr for the S&P 500 Index (see Column D in the Table). So, let’s confine our attention to companies that kept increasing their dividend throughout that crisis, i.e., companies S&P calls Dividend Achievers.
Mission: Apply our standard spreadsheet analysis to financial services Dividend Achievers on the 2016 Barron’s 500 List, specifically those that have traded their stock long enough for it to appear on the 16-Yr BMW Method List, and have an investment-grade bond rating from Standard & Poor's. Only 5 companies meet our requirements, but all of those have clean balance sheets (see Columns P-R).
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, 3 of the 5 companies outperformed the lowest-cost S&P 500 Index Fund, VFINX at Column D in the Table. But read the fine print:
Caveat emptor: You’ll want to know exactly why it’s a good idea to add Financial Services companies to your retirement portfolio. Relatively safe stocks, i.e., dividend-growing stocks issued by companies in one of the 4 “defensive” S&P Industries (Utilities, HealthCare, Consumer Staples, Communication Services), are what you buy to reduce Risk. Unfortunately, there are so many “savers” who seek to reduce risk that those stocks are almost always overvalued. You can’t get them at a fair price, so you have to break a key Warren Buffett rule to build a sizable position over time. You can only make real money if you sell those stocks when savers are desperate to buy them. But there’s another side to that coin: growth stocks. Those are issued by companies in the Financial Services, Information Technology, Industrial, and Consumer Discretionary industries. Buy them when they have a bad smell due to the powerful aversion training (think Pavlov’s dog) that we all experience from untoward events like the Housing Crisis. That calamity had such a negative effect on the value of Financial Services companies that their Return on Invested Capital (ROIC) didn’t rise above their Weighted Average Cost of Capital (WACC) until last year. You had a 7-yr opportunity to buy stock in fundamentally sound companies at absurdly low prices. Now, it’s too late to make real money on that trade. Almost any flavor of Financial Services stock is speculative: you need to know when to buy and when to sell. You sell when ROICs are twice as high as WACCs, and stock brokers start recommending Financial Services stocks to financially naive people. I’m afraid we’ve already reached that point, with respect to Money Center banks (see Columns AB and AC at Line 16).
Bottom Line: These companies represent high-risk/high-reward investments (see Columns D, I, and M in the Table). Four of the 5 sell insurance products. The exception is Franklin Resources (BEN), which sells mutual funds to institutions and wealthy individuals. Standard & Poor’s has A-ratings for stocks and bonds issued by Travelers (TRV) and Aflac (AFL), so consider buying one of those through an online dollar-averaging program. The Net Present Value calculation is higher for TRV (see Column Y in the Table).
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I own shares in TRV.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 21 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Apply our standard spreadsheet analysis to financial services Dividend Achievers on the 2016 Barron’s 500 List, specifically those that have traded their stock long enough for it to appear on the 16-Yr BMW Method List, and have an investment-grade bond rating from Standard & Poor's. Only 5 companies meet our requirements, but all of those have clean balance sheets (see Columns P-R).
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, 3 of the 5 companies outperformed the lowest-cost S&P 500 Index Fund, VFINX at Column D in the Table. But read the fine print:
Caveat emptor: You’ll want to know exactly why it’s a good idea to add Financial Services companies to your retirement portfolio. Relatively safe stocks, i.e., dividend-growing stocks issued by companies in one of the 4 “defensive” S&P Industries (Utilities, HealthCare, Consumer Staples, Communication Services), are what you buy to reduce Risk. Unfortunately, there are so many “savers” who seek to reduce risk that those stocks are almost always overvalued. You can’t get them at a fair price, so you have to break a key Warren Buffett rule to build a sizable position over time. You can only make real money if you sell those stocks when savers are desperate to buy them. But there’s another side to that coin: growth stocks. Those are issued by companies in the Financial Services, Information Technology, Industrial, and Consumer Discretionary industries. Buy them when they have a bad smell due to the powerful aversion training (think Pavlov’s dog) that we all experience from untoward events like the Housing Crisis. That calamity had such a negative effect on the value of Financial Services companies that their Return on Invested Capital (ROIC) didn’t rise above their Weighted Average Cost of Capital (WACC) until last year. You had a 7-yr opportunity to buy stock in fundamentally sound companies at absurdly low prices. Now, it’s too late to make real money on that trade. Almost any flavor of Financial Services stock is speculative: you need to know when to buy and when to sell. You sell when ROICs are twice as high as WACCs, and stock brokers start recommending Financial Services stocks to financially naive people. I’m afraid we’ve already reached that point, with respect to Money Center banks (see Columns AB and AC at Line 16).
Bottom Line: These companies represent high-risk/high-reward investments (see Columns D, I, and M in the Table). Four of the 5 sell insurance products. The exception is Franklin Resources (BEN), which sells mutual funds to institutions and wealthy individuals. Standard & Poor’s has A-ratings for stocks and bonds issued by Travelers (TRV) and Aflac (AFL), so consider buying one of those through an online dollar-averaging program. The Net Present Value calculation is higher for TRV (see Column Y in the Table).
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I own shares in TRV.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 21 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 12
Week 297 - Sugary Soft Drinks And Milk Lead The Food & Beverage Sector In Sales
Situation: Milk is still the leading category of food expenditures for the 80% of households that pay with cash or credit/debit cards, but the 20% of households that pay with Food Stamps bring sugary soft drink sales up to first place nationwide. Milk is perhaps the single most nutritious food (see Week 254), whereas, refined sugar is the only “food” found in sugary soft drinks. Those drinks are being held responsible for the strong link between poverty and obesity, as well as the strong link between obesity and Type II diabetes.
So, let’s revisit the large and well-established Food & Beverage companies to see which are doing well from an investor’s standpoint. We need to know how much refined sugar contributes to their prosperity, as opposed to milk, those being the top revenue producers. Has publicity about the detrimental effects of refined sugar been effective? In other words, are sugary soft drink sales still rising and milk sales still falling?
Mission: Apply our standard spreadsheet analysis to Food & Beverage companies on the 2016 Barron’s 500 List that have had their stock traded long enough to appear on the 16-Yr BMW Method list.
Execution: see Table.
Administration: We find that 19 companies meet the requirements for size and longevity. But only 8 are Dividend Achievers (see Column AD in the Table), and only 4 of the 16 dividend payers have clean Balance Sheets, HRL, INGR, KO and ADM (see Columns P-R). This tells me that the largest and best-established food companies are struggling. Their managers must be having a hard time figuring out how to grow sales faster than the rate of population growth. A favorite tactic is to have a large advertising budget to promote products that the consumer is expected to like (based on marketing studies). That strategy has pushed Coca-Cola and PepsiCo to the top of the pack, with market capitalizations more than 4 times higher than the next largest food processor: General Mills (GIS; see Column AA in the Table).
Bottom Line: Food & Beverage stocks are thought to be “defensive” because of being in the S&P Consumer Staples industry. However, they’re commodity-related (high risk/high reward) because of being tied to global weather cycles. In my opinion, only 2 of the 19 companies in the Table are sufficiently safe and effective for your retirement portfolio (HRL and KO). Procter & Gamble (PG) is perhaps a better way to invest in Consumer Staples (see Line 23 in the Table).
Coca-Cola (KO) and/or PepsiCo (PEP) dominate sales for sugary soft drinks in every country, even though the sales of such drinks have fallen for 11 yrs in a row, and great efforts have been made to find healthy alternatives. Coca-Cola still derives 70% of its revenue from sugary soft drinks, even though it has diversified into milk (Fairlife), fruit juice (Minute Maid, Simply Orange), sugary vegetable drinks (Suja Juice, Fuze, Odwalla), energy drinks (Monster), and Coca-Cola Life that uses the natural sweetener Stevia. The good news is that the detrimental effects of sugary soft drinks have become well known and consumers expect companies do something about it. Both PepsiCo and Coca-Cola appear to be making every effort to comply, while continuing to rely on the aggressive marketing of sugary soft drinks. In summary, the trendline for sugary soft drink sales is tilting downward while milk continues to fall without pausing.
With regard to milk sales here in the US, the main processor, Dean Foods (DF), almost faced bankruptcy because sales have fallen 30% since 1975. Dean Foods survived by splitting off its most successful subsidiary, WhiteWave Foods, the producer of Horizon Organic milk and Silk soy milk. “The move was designed to get investors to pay more for shares in a business unit with higher profit margins and faster growth prospects than conventional milk.”
Kroger (KR) operates 16 dairies that distribute milk to 34 states, and Coca-Cola (KO) has assembled a large group of dairy co-operatives to produce “ultra-filtered milk.” That new technology separates milk ingredients then recombines those selectively to produce a more nutritious product called "Fairlife," which has half the sugar and twice the protein. Fairlife Milk is distributed to grocery stores nationwide by the Minute Maid division, and is currently priced at an 11% premium to Parmalat Milk in Wal-Mart Stores. Fairlife Milk has been available for less than two years; people who shop with food stamps presumably don’t yet know its benefits and would perhaps shy away from paying the 11% premium price even if they knew.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into KO, and also own shares of HRL and PG.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 28 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 33 in the Table. The ETF for that index is MDY at Line 27.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
So, let’s revisit the large and well-established Food & Beverage companies to see which are doing well from an investor’s standpoint. We need to know how much refined sugar contributes to their prosperity, as opposed to milk, those being the top revenue producers. Has publicity about the detrimental effects of refined sugar been effective? In other words, are sugary soft drink sales still rising and milk sales still falling?
Mission: Apply our standard spreadsheet analysis to Food & Beverage companies on the 2016 Barron’s 500 List that have had their stock traded long enough to appear on the 16-Yr BMW Method list.
Execution: see Table.
Administration: We find that 19 companies meet the requirements for size and longevity. But only 8 are Dividend Achievers (see Column AD in the Table), and only 4 of the 16 dividend payers have clean Balance Sheets, HRL, INGR, KO and ADM (see Columns P-R). This tells me that the largest and best-established food companies are struggling. Their managers must be having a hard time figuring out how to grow sales faster than the rate of population growth. A favorite tactic is to have a large advertising budget to promote products that the consumer is expected to like (based on marketing studies). That strategy has pushed Coca-Cola and PepsiCo to the top of the pack, with market capitalizations more than 4 times higher than the next largest food processor: General Mills (GIS; see Column AA in the Table).
Bottom Line: Food & Beverage stocks are thought to be “defensive” because of being in the S&P Consumer Staples industry. However, they’re commodity-related (high risk/high reward) because of being tied to global weather cycles. In my opinion, only 2 of the 19 companies in the Table are sufficiently safe and effective for your retirement portfolio (HRL and KO). Procter & Gamble (PG) is perhaps a better way to invest in Consumer Staples (see Line 23 in the Table).
Coca-Cola (KO) and/or PepsiCo (PEP) dominate sales for sugary soft drinks in every country, even though the sales of such drinks have fallen for 11 yrs in a row, and great efforts have been made to find healthy alternatives. Coca-Cola still derives 70% of its revenue from sugary soft drinks, even though it has diversified into milk (Fairlife), fruit juice (Minute Maid, Simply Orange), sugary vegetable drinks (Suja Juice, Fuze, Odwalla), energy drinks (Monster), and Coca-Cola Life that uses the natural sweetener Stevia. The good news is that the detrimental effects of sugary soft drinks have become well known and consumers expect companies do something about it. Both PepsiCo and Coca-Cola appear to be making every effort to comply, while continuing to rely on the aggressive marketing of sugary soft drinks. In summary, the trendline for sugary soft drink sales is tilting downward while milk continues to fall without pausing.
With regard to milk sales here in the US, the main processor, Dean Foods (DF), almost faced bankruptcy because sales have fallen 30% since 1975. Dean Foods survived by splitting off its most successful subsidiary, WhiteWave Foods, the producer of Horizon Organic milk and Silk soy milk. “The move was designed to get investors to pay more for shares in a business unit with higher profit margins and faster growth prospects than conventional milk.”
Kroger (KR) operates 16 dairies that distribute milk to 34 states, and Coca-Cola (KO) has assembled a large group of dairy co-operatives to produce “ultra-filtered milk.” That new technology separates milk ingredients then recombines those selectively to produce a more nutritious product called "Fairlife," which has half the sugar and twice the protein. Fairlife Milk is distributed to grocery stores nationwide by the Minute Maid division, and is currently priced at an 11% premium to Parmalat Milk in Wal-Mart Stores. Fairlife Milk has been available for less than two years; people who shop with food stamps presumably don’t yet know its benefits and would perhaps shy away from paying the 11% premium price even if they knew.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into KO, and also own shares of HRL and PG.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 28 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 33 in the Table. The ETF for that index is MDY at Line 27.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 5
Week 296 - Testing Our Stock-picking Algorithm
Situation: The “normal” way to invest in stocks is to play the Market as a whole. Typically, that means dollar-cost averaging into index funds such as those offered by Vanguard Group (VFINX, VEXMX, VTSMX, VGTSX) or SPDR State Street Global Advisors (SPY, MDY, DGT). That way, transaction costs are minimized and you can’t miss out on market moves. Or, you can try to beat the Market by building (and managing) a portfolio composed of many stocks representing all 10 S&P Industries. There’s no shortage of books on the subject but one will suffice: “The Four Pillars of Investing: Lessons for Building a Winning Portfolio” by William J. Bernstein, 2002, McGraw-Hill. There you’ll find a mathematical exercise proving that the only logical way to do well from investing in stocks is to focus on dividend growth.
Mission: Lay out an algorithm for stock selection.
Execution: Start with companies that have grown their dividend annually for 10 or more years, i.e., S&P Dividend Achievers. Select the ones that have grown their dividend faster than our benchmark S&P 500 index fund, VFINX, over the past 10 years, which is 6.8%/yr. Narrow that list down to those companies large enough to be on the Barron’s 500 List. Why? Because large companies a) have multiple product lines, and b) their stock has enough activity on the CBOE (Chicago Board Options Exchange) to facilitate price discovery. Remove any companies that don’t have an S&P Bond Rating of at least A- and an S&P Stock Rating of at least A-/M. Remove any companies that don’t have a 16-yr trading record that has been analyzed statistically by the BMW Method. Exclude companies that rely on long-term debt for more than 1/3rd of total capitalization, or couldn't meet dividend payments from free cash flow (FCF) in the two most recent quarters. Also exclude companies that are over-reliant on short-term debt, i.e., have more than 5% negative Tangible Book Value.
Administration: There are 27 companies that pass the above screen. By using the BMW Method, we have separated those into a group of 16 that has no greater chance of loss in a future Bear Market than the S&P 500 Index (see Column M of the Table under “Non-Gambling”), and a group of 11 that has a greater chance of loss (see red highlights in Column M under “Gambling”). If you do choose to invest in one of the Gambling companies, watch price-action because you’ll likely want to SELL at some point. In Columns N-P we provide data on 3 ratios that assess the overall health of Financial Statements.
Bottom Line: The purpose of stock-picking is to Beat the Market. It is very difficult, expensive, and time-consuming to do so over more than one Market Cycle. We have laid out a system for picking stocks, and back-tested it. It has a Failure Rate of 4%. In other words, 25 of the 26 stocks beat the S&P 500 Index over the past 16 years (see Column K in the Table). Just to be clear, we recommend that you dollar-average into index funds (see BENCHMARKS section of Table), and/or Berkshire Hathaway B-shares (where you would be building a position in over 100 large and mid-cap companies).
Of the 16 stocks we designate as non-gambling investments, most carry market multiples (or lower) for EV/EBITDA: GWW, UNP, CNI, WEC, APD, NEE, TRV, WMT, TGT. Those stocks are attractive for purchase if no issues arise from your further research, such as reading the Morningstar evaluation.
Risk Rating is 7 for the stock selection system outlined above. Why is that? Because of Selection Bias (https://en.wikipedia.org/wiki/Selection_bias) and Transaction Costs (http://www.investopedia.com/terms/t/transactioncosts.asp).
Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, NEE and MSFT, and also own shares of CNI, MMM, WMT, HRL, TRV, MKC, ROST, TJX, GD and CAT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 40 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends collected in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 5-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 45 in the Table. The ETF for that index is MDY at Line 39.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Lay out an algorithm for stock selection.
Execution: Start with companies that have grown their dividend annually for 10 or more years, i.e., S&P Dividend Achievers. Select the ones that have grown their dividend faster than our benchmark S&P 500 index fund, VFINX, over the past 10 years, which is 6.8%/yr. Narrow that list down to those companies large enough to be on the Barron’s 500 List. Why? Because large companies a) have multiple product lines, and b) their stock has enough activity on the CBOE (Chicago Board Options Exchange) to facilitate price discovery. Remove any companies that don’t have an S&P Bond Rating of at least A- and an S&P Stock Rating of at least A-/M. Remove any companies that don’t have a 16-yr trading record that has been analyzed statistically by the BMW Method. Exclude companies that rely on long-term debt for more than 1/3rd of total capitalization, or couldn't meet dividend payments from free cash flow (FCF) in the two most recent quarters. Also exclude companies that are over-reliant on short-term debt, i.e., have more than 5% negative Tangible Book Value.
Administration: There are 27 companies that pass the above screen. By using the BMW Method, we have separated those into a group of 16 that has no greater chance of loss in a future Bear Market than the S&P 500 Index (see Column M of the Table under “Non-Gambling”), and a group of 11 that has a greater chance of loss (see red highlights in Column M under “Gambling”). If you do choose to invest in one of the Gambling companies, watch price-action because you’ll likely want to SELL at some point. In Columns N-P we provide data on 3 ratios that assess the overall health of Financial Statements.
Bottom Line: The purpose of stock-picking is to Beat the Market. It is very difficult, expensive, and time-consuming to do so over more than one Market Cycle. We have laid out a system for picking stocks, and back-tested it. It has a Failure Rate of 4%. In other words, 25 of the 26 stocks beat the S&P 500 Index over the past 16 years (see Column K in the Table). Just to be clear, we recommend that you dollar-average into index funds (see BENCHMARKS section of Table), and/or Berkshire Hathaway B-shares (where you would be building a position in over 100 large and mid-cap companies).
Of the 16 stocks we designate as non-gambling investments, most carry market multiples (or lower) for EV/EBITDA: GWW, UNP, CNI, WEC, APD, NEE, TRV, WMT, TGT. Those stocks are attractive for purchase if no issues arise from your further research, such as reading the Morningstar evaluation.
Risk Rating is 7 for the stock selection system outlined above. Why is that? Because of Selection Bias (https://en.wikipedia.org/wiki/Selection_bias) and Transaction Costs (http://www.investopedia.com/terms/t/transactioncosts.asp).
Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, NEE and MSFT, and also own shares of CNI, MMM, WMT, HRL, TRV, MKC, ROST, TJX, GD and CAT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 40 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends collected in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 5-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 45 in the Table. The ETF for that index is MDY at Line 39.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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