Situation: Growth at a reasonable price (GARP) is often mentioned as an investing goal because value underlies the decision to buy. Warren Buffett is the king of value investing and has over $80 Billion in cash (his “elephant gun”) that he’d like to spend. We’re in a Bear Market fueled by the adverse economic consequences of the COVID-19 pandemic. So, he’ll soon spend that cash pile to buy a large company. Let’s look at his options, considering the ways he has prioritized purchases in the past. Firstly, he likes large and long-established companies. Why large companies? Because those have multiple product lines, one of which is usually designed to help the company maintain a stream of revenue during a recession. In addition, those companies are large enough to have the marketing power needed to maintain and grow their brands.
Mission: Let’s see which choices look attractive among A-rated “haven stocks” in the S&P 100 Index (see Month 104). Remember: These companies reliably pay an above-market dividend, so they’re found in the Vanguard High Dividend Yield Index (VYM), and they’re also listed in the iShares Russell Top 200 Value ETF (IWX). Warren Buffett places high store in companies that don’t overuse debt and also retain Tangible Book Value, so we’ll exclude companies with negative Tangible Book Value that also have a total debt load greater than 2.5 times EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization) or have sold long-term bonds to build more than 50% of their market capitalization. Finally, the company's stock price has to meet both of our two value criteria: 1) Share price isn't more than twice the Graham Number; 2) share price isn't more than 25 times average 7-yr earnings per share.
Execution: (see Table).
Administration: These 9 companies include 4 from the two most deeply cyclical industries: banks and semiconductor manufacturers. Berkshire Hathaway’s portfolio already includes the 3 banks on the list, i.e., JPMorgan Chase (JPM), U.S. Bancorp (USB), and Wells Fargo (WFC) but doesn’t include the semiconductor manufacturer, Intel (INTC). Berkshire Hathaway is at heart an insurance company, so Warren Buffett always needs to diversify away from the Financial Services industry. There are only 4 non-financial companies on the list: Intel (INTC), Cisco Systems (CSCO), Pfizer (PFE), and Target (TGT), and only TGT is within the price range that Mr. Buffett is looking to spend ($80 to $100 Billion).
Bottom Line: Target (TGT) appears to be the most attractive company to add to Berkshire’s stable, given that it is priced right and Mr. Buffett already has experience owning companies in the Consumer Discretionary industry..
Risk Rating: 7 (where 10-yr U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold = 10).
Full Disclosure: I dollar-average into INTC and JPM, and also own shares of PFE, CSCO, TGT, USB, BLK and WFC.
The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label bear market. Show all posts
Showing posts with label bear market. Show all posts
Sunday, April 26
Sunday, September 29
Month 99 - Starter Stocks - September 2019
Situation: When I started investing, I picked up the phrase “stocks for widows and orphans.” Typically, Probate Court will assign fiduciary responsibility for investments made on behalf of a widow or orphan to lawyer. I later became acquainted with one of those and learned that she expected after-inflation returns from low-risk stocks to be well over 5%/yr. But she hadn’t fully considered transaction fees, taxes, or the need to balance stocks 50-50 with 10-yr US Treasury Notes (to hedge against what could be a catastrophic loss for a widow or orphan). And, few stocks make suitable long-term holdings in a portfolio that is supposed to be immune to gambling. Given that a stock broker’s main talent is to wisely supervise gambling, a broker is likely to welcome the prospect of building a portfolio of “boring” stocks that will have little turnover.
Many young but upwardly mobile “salary workers” face the same problem that lawyer is facing: how to invest wisely without gambling. I have 4 children who are trying to grapple with this problem; none have gained lasting satisfaction from consulting investment advisors. And, they don’t much like my advice, which is to research the problem and find their own solution, which is called DIY investing. But, they already have the most important asset: which is to be disinclined to gamble.
Starter Stocks, like those for widows and orphans, are usually (but not always) boring. Consumer Staples are most likely to be Starter Stocks, and Utilities are close behind. But then you’ll find that technology-related companies start to pop up from Health Care and Information Technology industries.
Mission: Use our Standard Spreadsheet to screen out companies that are missing from either of the two key value indexes, which are the iShares Russell 1000 Value Index ETF -- IWD and the income-oriented variant of the Russell 1000 Index that was created as the FTSE High Dividend Yield Index but is marketed in the US as the Vanguard High Dividend Yield ETF -- VYM. Companies that issue bonds having an S&P rating lower than A- are also excluded, as are companies that issue stocks having an S&P rating lower than B+/M. Stocks must have a 16+ year trading record, to allow quantitative analysis by the BMW Method.
Administration: Most of the strategies that are likely to give high returns from owning stocks in a bull market also carry a high risk of loss in a bear market. So, when the market falls 25% those stocks might fall 50%. That means a 100% gain would have to occur over ensuing years just to get back to where the stock was priced when the last bull market ended. Banking and Finance faculty at business schools teach that this strategy is the only legal way to beat the market. In other words, reversion to the mean growth rate is sacrosanct. One way for an investor to hedge against such volatility is to pick stocks that go up or down less than 75% as much as the S&P 500 Index. In other words, exclude stocks with a 3-yr Beta that is higher than 0.75. Another way is to pick stocks issued by very large companies, namely those found in the S&P 100 Index. To be included in that index, companies are required to have an active market in put and call options at the Chicago Board Options Exchange, which means that “price discovery” for the underlying stock is efficient and relatively well insulated from “momentum” investors who are trading on the basis of fleeting rumors or sentiment. The other advantage of very large companies is that they have multiple product lines, at least one of which is expected to produce an attractively priced product during a recession. Integrated oil companies, for example, maintain a fleet of refineries that would be paying less for their feedstock (oil) during a recession--thereby allowing the company to make a nice profit from selling gasoline at a lower price than the customer had been used to paying.
Bottom Line: The problem with screening for “Starter Stocks” is that you’ll pull up some that are broadly thought of as desirable. Both gamblers and non-gamblers will bid up such stocks but forget to sell them when shares become overpriced. Given that most Starter Stocks (see Table) are found in channels of the economy that are already saturated (i.e., companies can grow their revenues no faster than GDP grows), there is little reason to hold overpriced stocks in expectation that earnings will explode upward. For example, the stocks issued by all four of the Consumer Staples companies on our list (KO, PG, PEP, WMT) are overpriced (see Columns AB to AD in our Table). You’ll have to figure out when to buy (or sell) overpriced shares of such high-value stocks. A common strategy is to buy more shares when the price drops 5-10% below its usual range. This is called the buy the dip strategy.
The easiest (and probably best) way to be certain of buying shares when they’re bargain-priced is to do it automatically. Sign up for a dividend reinvestment plan (DRIP) that takes a fixed amount of money out of your checking account on a specific date each month to buy more shares. That strategy is called dollar-cost averaging, and is the strategy that Warren Buffett favors to build a position in stocks that are often overpriced.
How well do our 10 Starter Stocks (at Line 10 in the Table) perform vs. the underlying ETFs -- VYM and IWD (at Lines 19 and 20)? Answer: quite a bit better (see Columns E, F and K).
Risk Rating: 6 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into NEE, KO, PG, INTC, WMT and JNJ, and also own shares of PFE, DUK, SO and PEP.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Many young but upwardly mobile “salary workers” face the same problem that lawyer is facing: how to invest wisely without gambling. I have 4 children who are trying to grapple with this problem; none have gained lasting satisfaction from consulting investment advisors. And, they don’t much like my advice, which is to research the problem and find their own solution, which is called DIY investing. But, they already have the most important asset: which is to be disinclined to gamble.
Starter Stocks, like those for widows and orphans, are usually (but not always) boring. Consumer Staples are most likely to be Starter Stocks, and Utilities are close behind. But then you’ll find that technology-related companies start to pop up from Health Care and Information Technology industries.
Mission: Use our Standard Spreadsheet to screen out companies that are missing from either of the two key value indexes, which are the iShares Russell 1000 Value Index ETF -- IWD and the income-oriented variant of the Russell 1000 Index that was created as the FTSE High Dividend Yield Index but is marketed in the US as the Vanguard High Dividend Yield ETF -- VYM. Companies that issue bonds having an S&P rating lower than A- are also excluded, as are companies that issue stocks having an S&P rating lower than B+/M. Stocks must have a 16+ year trading record, to allow quantitative analysis by the BMW Method.
Administration: Most of the strategies that are likely to give high returns from owning stocks in a bull market also carry a high risk of loss in a bear market. So, when the market falls 25% those stocks might fall 50%. That means a 100% gain would have to occur over ensuing years just to get back to where the stock was priced when the last bull market ended. Banking and Finance faculty at business schools teach that this strategy is the only legal way to beat the market. In other words, reversion to the mean growth rate is sacrosanct. One way for an investor to hedge against such volatility is to pick stocks that go up or down less than 75% as much as the S&P 500 Index. In other words, exclude stocks with a 3-yr Beta that is higher than 0.75. Another way is to pick stocks issued by very large companies, namely those found in the S&P 100 Index. To be included in that index, companies are required to have an active market in put and call options at the Chicago Board Options Exchange, which means that “price discovery” for the underlying stock is efficient and relatively well insulated from “momentum” investors who are trading on the basis of fleeting rumors or sentiment. The other advantage of very large companies is that they have multiple product lines, at least one of which is expected to produce an attractively priced product during a recession. Integrated oil companies, for example, maintain a fleet of refineries that would be paying less for their feedstock (oil) during a recession--thereby allowing the company to make a nice profit from selling gasoline at a lower price than the customer had been used to paying.
Bottom Line: The problem with screening for “Starter Stocks” is that you’ll pull up some that are broadly thought of as desirable. Both gamblers and non-gamblers will bid up such stocks but forget to sell them when shares become overpriced. Given that most Starter Stocks (see Table) are found in channels of the economy that are already saturated (i.e., companies can grow their revenues no faster than GDP grows), there is little reason to hold overpriced stocks in expectation that earnings will explode upward. For example, the stocks issued by all four of the Consumer Staples companies on our list (KO, PG, PEP, WMT) are overpriced (see Columns AB to AD in our Table). You’ll have to figure out when to buy (or sell) overpriced shares of such high-value stocks. A common strategy is to buy more shares when the price drops 5-10% below its usual range. This is called the buy the dip strategy.
The easiest (and probably best) way to be certain of buying shares when they’re bargain-priced is to do it automatically. Sign up for a dividend reinvestment plan (DRIP) that takes a fixed amount of money out of your checking account on a specific date each month to buy more shares. That strategy is called dollar-cost averaging, and is the strategy that Warren Buffett favors to build a position in stocks that are often overpriced.
How well do our 10 Starter Stocks (at Line 10 in the Table) perform vs. the underlying ETFs -- VYM and IWD (at Lines 19 and 20)? Answer: quite a bit better (see Columns E, F and K).
Risk Rating: 6 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into NEE, KO, PG, INTC, WMT and JNJ, and also own shares of PFE, DUK, SO and PEP.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 31
Month 93 - Members of "The 2 and 8 Club" in the S&P 500 Index - Winter 2019 Update
Situation: Some investors are experienced enough to try beating the market, but few tools are available to help them. Business schools professors like to point out that it is a settled issue, with only two routes are available: A stock-picker can either seek information from a company insider (which is illegal) or assume more risk (buy high-beta stocks). The latter route can provide higher returns but those will eventually be eroded by the higher volatility in stock prices. In other words, risk-adjusted returns (at their best) will not beat an S&P 500 Index fund (e.g. VFINX) or ETF (e.g. SPY).
Mission: Develop an algorithm for investing in high-beta stocks. Use our Standard Spreadsheet for companies likely to have higher quality.
Execution: see Table.
Administration: We call the resulting algorithm “The 2 and 8 Club” because it focuses on companies that a) pay an above-market dividend and b) have grown that dividend at least 8%/yr over the most recent 5 year period. Quality criteria require that a company’s bonds carry an S&P rating of BBB+ or better, and that its common stock carry an S&P rating of B+/M or better. We also require 16 or more years of trading records on a public exchange, so that weekly prices can be analyzed by the “BMW Method”. We use the SPDR Dow Jones Industrial Average ETF (DIA) as our benchmark, given that it rarely has a dividend yield lower than 2% or a dividend growth rate lower than 8%. And, we use the US companies listed in the Financial Times Stock Exchange (FTSE) High Dividend Yield Index as our only source for stocks paying an above-market dividend. That index is based on the FTSE Russell 1000 Index. The Vanguard Group markets both a mutual fund (VHDYX) and an ETF (VYM) for the ~400 companies in the FTSE High Dividend Yield Index. The same companies are found on each list, and weighted by market capitalization and updated monthly.
Bottom Line: As expected, this algorithm beats the S&P 500 Index (see Columns C, F, K & W) at the expense of greater risk (see Columns D, I, J & M). Its utility lies in risk mitigation (see Columns R & S), where the cutoffs for S&P rankings make these companies above-average for the S&P 500 Index with respect to the risk of bankruptcy. Only 23 companies in the S&P 500 Index qualify for membership in “The 2 and 8 Club”, and only 5 of those are in the Dow Jones Industrial Average (JPM, TRV, CSCO, MMM, IBM). An additional 5 companies are found in the FTSE Russell 1000 Index but have insufficient market capitalization to be included in the S&P 500 Index (WSO, HUBB, SWX, EV, R; see COMPARISONS section in the Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JPM and NEE, and also own shares of TRV, MMM, BLK, IBM, R and CMI.
Caveat Emptor: This week’s blog is addressed to investors who a) have been investing in common stocks for more than 20 years, b) don’t use margin loans, and c) have more than $200,000 available for making such investments. Most investors are best served by maintaining a 50-50 balance between stocks and bonds, e.g. by investing in the total US stock and bond markets (VTI and BND at Lines 30 & 38 in the Table). That 50-50 investment has returned ~8%/yr over the past 10 years and ~5%/yr over the past 5 years. The same result can be found by investing in a balanced mutual fund where stocks and bonds are picked for you: The Vanguard Wellesley Income Fund (VWINX at Line 35 in the Table). Either way, you’re likely to have no more than 2 down years per decade: VWINX has had only 7 down years since 1970. NOTE: all of the stocks in VWINX are picked from the same FTSE High Dividend Yield Index that we use for “The 2 and Club”.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Develop an algorithm for investing in high-beta stocks. Use our Standard Spreadsheet for companies likely to have higher quality.
Execution: see Table.
Administration: We call the resulting algorithm “The 2 and 8 Club” because it focuses on companies that a) pay an above-market dividend and b) have grown that dividend at least 8%/yr over the most recent 5 year period. Quality criteria require that a company’s bonds carry an S&P rating of BBB+ or better, and that its common stock carry an S&P rating of B+/M or better. We also require 16 or more years of trading records on a public exchange, so that weekly prices can be analyzed by the “BMW Method”. We use the SPDR Dow Jones Industrial Average ETF (DIA) as our benchmark, given that it rarely has a dividend yield lower than 2% or a dividend growth rate lower than 8%. And, we use the US companies listed in the Financial Times Stock Exchange (FTSE) High Dividend Yield Index as our only source for stocks paying an above-market dividend. That index is based on the FTSE Russell 1000 Index. The Vanguard Group markets both a mutual fund (VHDYX) and an ETF (VYM) for the ~400 companies in the FTSE High Dividend Yield Index. The same companies are found on each list, and weighted by market capitalization and updated monthly.
Bottom Line: As expected, this algorithm beats the S&P 500 Index (see Columns C, F, K & W) at the expense of greater risk (see Columns D, I, J & M). Its utility lies in risk mitigation (see Columns R & S), where the cutoffs for S&P rankings make these companies above-average for the S&P 500 Index with respect to the risk of bankruptcy. Only 23 companies in the S&P 500 Index qualify for membership in “The 2 and 8 Club”, and only 5 of those are in the Dow Jones Industrial Average (JPM, TRV, CSCO, MMM, IBM). An additional 5 companies are found in the FTSE Russell 1000 Index but have insufficient market capitalization to be included in the S&P 500 Index (WSO, HUBB, SWX, EV, R; see COMPARISONS section in the Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JPM and NEE, and also own shares of TRV, MMM, BLK, IBM, R and CMI.
Caveat Emptor: This week’s blog is addressed to investors who a) have been investing in common stocks for more than 20 years, b) don’t use margin loans, and c) have more than $200,000 available for making such investments. Most investors are best served by maintaining a 50-50 balance between stocks and bonds, e.g. by investing in the total US stock and bond markets (VTI and BND at Lines 30 & 38 in the Table). That 50-50 investment has returned ~8%/yr over the past 10 years and ~5%/yr over the past 5 years. The same result can be found by investing in a balanced mutual fund where stocks and bonds are picked for you: The Vanguard Wellesley Income Fund (VWINX at Line 35 in the Table). Either way, you’re likely to have no more than 2 down years per decade: VWINX has had only 7 down years since 1970. NOTE: all of the stocks in VWINX are picked from the same FTSE High Dividend Yield Index that we use for “The 2 and Club”.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 24
Month 92 - Dow Jones Industrial Average - Winter 2019 Update
Situation: There have been 30 companies in the $7 Trillion “Dow” index since it was expanded from 20 companies on October 1, 1928. Since then 31 changes have been made. On average, a company is swapped out every 3 years. Turnover decisions are made by a committee directed by the Managing Editor of The Wall Street Journal. Dollar value is determined at the end of each trading day by adding the closing price/share for all 30 companies, and correcting that amount with a divisor that changes each time a company is removed & replaced. State Street Global Advisors (SPDR) markets an Exchange-Traded Fund (ETF) for the Dow under the ticker DIA. To get “a feel for the market” before buying or selling a stock, investors around the world look to the Dow. They’re aided in that decision by Dow Theory, which uses movement of the Dow Jones Transportation Average to “confirm” movement in the Dow. If both march together to higher highs and higher lows, the primary trend in the market is said to be up if trading volumes are large. If the reverse is true, then the primary trend is said to down.
Mission: Use our Standard Spreadsheet to analyze all 30 companies in the Dow.
Execution: see Table.
Administration: Many investors use a tried-and-true “system” called Dogs of the Dow (see Week 305), which calls for buying equal dollar-value amounts of stock in each of the 10 highest-yielding companies in the Dow on the first trading day of January and selling those on the last trading day of December. The idea is to have better total returns on your investment over a market cycle than you would from simply investing in DIA. The system works most years and over the long term. Why? Because a high dividend yield a) moderates any price decreases during Bear Markets and b) is such a large contributor to total returns.
Bottom Line: As a stock-picker, you need to keep up-to-date on Dow Theory and also know which high-yielding Dow stocks are among the 10 Dogs of the Dow. Dow Theory tells us that the stock market switched from being in a primary uptrend to being in a primary downtrend on December 20, 2018. The Dogs of the Dow for 2019 are the same as last year (see bold numbers in Column G of the Table), except that General Electric (GE) has been removed from the Dow and replaced by Walgreens Boots Alliance (WBA), which doesn’t have a high enough dividend yield to be considered a Dog. Instead, General Electric’s place has been taken by JP Morgan Chase (JPM).
When picking stocks from the Dow Jones Industrial Average, be aware that the historically low interest rates we’ve seen over the past decade have led to excessive corporate borrowing. You’ll want to pay close attention to Columns N-S in the Table, where different consequences of corporate debt are addressed. Companies with items that are highlighted in red carry a greater risk of loss in the upcoming credit crunch than has been recognized in the price of their shares.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NKE, MSFT, JPM, KO, INTC, JNJ and PG, and also own shares of MCD, TRV, CSCO, MMM, IBM, CAT, XOM and WMT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Use our Standard Spreadsheet to analyze all 30 companies in the Dow.
Execution: see Table.
Administration: Many investors use a tried-and-true “system” called Dogs of the Dow (see Week 305), which calls for buying equal dollar-value amounts of stock in each of the 10 highest-yielding companies in the Dow on the first trading day of January and selling those on the last trading day of December. The idea is to have better total returns on your investment over a market cycle than you would from simply investing in DIA. The system works most years and over the long term. Why? Because a high dividend yield a) moderates any price decreases during Bear Markets and b) is such a large contributor to total returns.
Bottom Line: As a stock-picker, you need to keep up-to-date on Dow Theory and also know which high-yielding Dow stocks are among the 10 Dogs of the Dow. Dow Theory tells us that the stock market switched from being in a primary uptrend to being in a primary downtrend on December 20, 2018. The Dogs of the Dow for 2019 are the same as last year (see bold numbers in Column G of the Table), except that General Electric (GE) has been removed from the Dow and replaced by Walgreens Boots Alliance (WBA), which doesn’t have a high enough dividend yield to be considered a Dog. Instead, General Electric’s place has been taken by JP Morgan Chase (JPM).
When picking stocks from the Dow Jones Industrial Average, be aware that the historically low interest rates we’ve seen over the past decade have led to excessive corporate borrowing. You’ll want to pay close attention to Columns N-S in the Table, where different consequences of corporate debt are addressed. Companies with items that are highlighted in red carry a greater risk of loss in the upcoming credit crunch than has been recognized in the price of their shares.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NKE, MSFT, JPM, KO, INTC, JNJ and PG, and also own shares of MCD, TRV, CSCO, MMM, IBM, CAT, XOM and WMT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 27
Month 91 - Food and Agriculture Companies - Winter 2019 Update
Situation: We all have to eat, so food is an essential good. Even in a commodity bear market, the valuations of food and agriculture companies will likely hold up better than the S&P 500 Index ETF (SPY - see Column D in this month’s Table). Which is amazing, given that grains and livestock account for 29% of the Bloomberg Commodity Index. Another way of saying this is that the volumes of food sold are inelastic, much like gasoline. This gives investments in food and agriculture companies a special, almost unique, competitive advantage.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 9
Week 388 - Has The 4-Yr Commodities Bear Market Ended?
Situation: In Q2 of 2014, the trade-weighted index of 19 Futures Contracts for raw commodities peaked (DJCI; see Yahoo Finance), as did the SPDR Energy Select Sector ETF (XLE; see Yahoo Finance). Both hit bottom in early Q1 of 2016. That should have been the end of the Bear Market but prices have not risen much since then. On the plus side, both ETFs tested their early 2016 bottom in Q3 of 2017 and failed to reach it, suggesting that prices for both are in a new (albeit weak) uptrend.
Interestingly, the SPDR Gold Shares ETF (GLD; see Yahoo Finance) has traced a similar track, peaking in Q1 of 2014, bottoming at the beginning of Q1 2016, and failing a test of that low point late in 2016. Other metrics also suggest that the Bear Market has ended. For example, recently posted earnings for Exxon Mobil (XOM) in Q3 of 2018 were robust enough to have reached a level last reached in Q3 of 2014.
Mission: Use our Standard Spreadsheet to track key investment metrics for companies that buy and/or extract raw commodities for processing, transport those by using 18-wheel tractor-trailers or railroads, or manufacture the diesel powered and natural-gas powered heavy equipment tractors that are used to mine and harvest raw commodities. Confine attention to companies that have at least a BBB+ S&P rating on their bonds and at least a B+/M rating on their common stocks, as well as the 16+ year trading record on the NYSE that is needed for long-term quantitative analysis by the BMW Method.
Execution: see Table.
Bottom Line: Near-month futures prices for commodities have come down off a supercycle that blossomed in 1999, and are now back to approximately where they started. This represents a classic “reversion to the mean”, likely due to supply constraints growing out of the somewhat rapid buildout of China’s economy. We’re not at the end of a 4-Yr Bear Market. Instead, we’re in the long tail of a remarkably strong 2-decade commodities Bull Market. It is important to note that commodity production is changing away from fossil fuels. However, petroleum products still represent more than 30% of trade-weighted commodity production. Going forward, the composition of that production will shift toward environmentally cleaner transportation fuels. Gasoline and diesel will yield dominance to CNG (compressed natural gas) and hydrogen (sourced from natural gas). This will mirror the shift toward clean electrical energy that has replaced coal with natural gas during the build-out of wind and solar sources, along with the necessary enhancements to electricity storage and transmission.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into CAT, XOM, R and UNP, and also own shares of NSC, BRK-B and CMI.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Interestingly, the SPDR Gold Shares ETF (GLD; see Yahoo Finance) has traced a similar track, peaking in Q1 of 2014, bottoming at the beginning of Q1 2016, and failing a test of that low point late in 2016. Other metrics also suggest that the Bear Market has ended. For example, recently posted earnings for Exxon Mobil (XOM) in Q3 of 2018 were robust enough to have reached a level last reached in Q3 of 2014.
Mission: Use our Standard Spreadsheet to track key investment metrics for companies that buy and/or extract raw commodities for processing, transport those by using 18-wheel tractor-trailers or railroads, or manufacture the diesel powered and natural-gas powered heavy equipment tractors that are used to mine and harvest raw commodities. Confine attention to companies that have at least a BBB+ S&P rating on their bonds and at least a B+/M rating on their common stocks, as well as the 16+ year trading record on the NYSE that is needed for long-term quantitative analysis by the BMW Method.
Execution: see Table.
Bottom Line: Near-month futures prices for commodities have come down off a supercycle that blossomed in 1999, and are now back to approximately where they started. This represents a classic “reversion to the mean”, likely due to supply constraints growing out of the somewhat rapid buildout of China’s economy. We’re not at the end of a 4-Yr Bear Market. Instead, we’re in the long tail of a remarkably strong 2-decade commodities Bull Market. It is important to note that commodity production is changing away from fossil fuels. However, petroleum products still represent more than 30% of trade-weighted commodity production. Going forward, the composition of that production will shift toward environmentally cleaner transportation fuels. Gasoline and diesel will yield dominance to CNG (compressed natural gas) and hydrogen (sourced from natural gas). This will mirror the shift toward clean electrical energy that has replaced coal with natural gas during the build-out of wind and solar sources, along with the necessary enhancements to electricity storage and transmission.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into CAT, XOM, R and UNP, and also own shares of NSC, BRK-B and CMI.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, August 26
Week 373 - 10 Dividend Achievers In Defensive Industries That Are Suitable For Long-term Dollar-cost Averaging
Situation: Which asset class do you favor? Stocks, bonds, real estate or commodities? On a risk-adjusted basis, none of those are likely to grow your savings faster than inflation over the near term. You might want to hold off making “risk-on” investments, unless you're a speculator, because markets are likely to fluctuate more than usual. If you think a “risk-off” approach is best, then you need to pick “defensive” stocks for monthly (or quarterly) investment of a fixed dollar amount (dollar-cost averaging). To minimize transaction costs, you’ll want to invest automatically in each stock through an online Dividend Re-Investment Plan (DRIP).
Now you will be positioned to ride-out a Bear Market, knowing that you’re accumulating an unusually large amount of shares in those companies as their stocks fall in price. And, those prices won’t fall far enough to scare you because that group of stocks has an above-market dividend yield. So, you’ll stick with the program instead of selling out in a moment of panic.
Mission: Run our Standard Spreadsheet for high-quality stocks issued by companies in defensive industries, i.e., utilities, consumer staples, healthcare, and communication services.
Execution: see Table.
Administration: Companies that don’t have at least an A- S&P rating on their bonds and at least a B+/M rating on their stock are excluded, as are those that don’t have at least a 16-yr trading record suitable for quantitative analysis by using the BMW Method. Companies that aren’t large enough to be on the Barron’s 500 List are also excluded.
Bottom Line: We find that 10 companies meet our requirements. Companies in the Consumer Staples industry dominate the list: Hormel Foods (HRL), Costco Wholesale (COST), PepsiCo (PDP), Coca-Cola (KO), Procter & Gamble (PG), Walmart (WMT), and Archer Daniels Midland (ADM). As a group, these 10 companies have above-market dividend yields and dividend growth (see Columns G & H in the Table). Risk is below-market, as expressed by 5-Yr Beta and predicted loss in a Bear Market (see Columns I & M).
Risk Rating: 4 for the group as a whole (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into NEE, KO, JNJ, PG and WMT, and also own shares of HRL and COST.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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Now you will be positioned to ride-out a Bear Market, knowing that you’re accumulating an unusually large amount of shares in those companies as their stocks fall in price. And, those prices won’t fall far enough to scare you because that group of stocks has an above-market dividend yield. So, you’ll stick with the program instead of selling out in a moment of panic.
Mission: Run our Standard Spreadsheet for high-quality stocks issued by companies in defensive industries, i.e., utilities, consumer staples, healthcare, and communication services.
Execution: see Table.
Administration: Companies that don’t have at least an A- S&P rating on their bonds and at least a B+/M rating on their stock are excluded, as are those that don’t have at least a 16-yr trading record suitable for quantitative analysis by using the BMW Method. Companies that aren’t large enough to be on the Barron’s 500 List are also excluded.
Bottom Line: We find that 10 companies meet our requirements. Companies in the Consumer Staples industry dominate the list: Hormel Foods (HRL), Costco Wholesale (COST), PepsiCo (PDP), Coca-Cola (KO), Procter & Gamble (PG), Walmart (WMT), and Archer Daniels Midland (ADM). As a group, these 10 companies have above-market dividend yields and dividend growth (see Columns G & H in the Table). Risk is below-market, as expressed by 5-Yr Beta and predicted loss in a Bear Market (see Columns I & M).
Risk Rating: 4 for the group as a whole (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into NEE, KO, JNJ, PG and WMT, and also own shares of HRL and COST.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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Sunday, August 19
Week 372 - DJIA Companies in “The 2 and 8 Club”
Situation: The Dow Jones Industrial Average (DJIA) is generally thought to be the most stable reflection of the stock market. As it should be. Those 30 companies are picked by the Managing Editor of the Wall Street Journal to do exactly that. Here at ITR, we have our own, less subjective, measure of stability: companies that pay a good and growing dividend. In other words, companies with a dividend yield and dividend growth rate that are as good (or better than) the DJIA’s ~2% yield and ~8% growth rate. We propose that you pick such stocks out of the DJIA, thinking you’ll just have to do better than you would have done by investing in the Exchange Traded Fund (ETF) for the DJIA (DIA), which is called “Diamonds” for good reason.
Mission: Run our Standard Spreadsheet for the 8 companies in the DJIA that are members of “The 2 and 8 Club” (see Week 360).
Execution: see Table.
Administration: We have made two changes to “The 2 and 8 Club”: 1) Companies with a BBB+ S&P rating for their bonds are no longer accepted (see Column T in the Table); 2) all companies in the Russell 1000 Index that meet requirements (see Week 327) are included in “The 2 and 8 Club”(see Week 366). So, that phrase no longer refers specifically to companies in the S&P 100 Index.
Bottom Line: These 8 stocks have performed remarkably well vs. DIA. Total Returns over the past 11 years (see Column C) were 26% greater, Finance Values (see Column E) were 25% better, dividend yields were almost 30% better (see Column G), dividend growth was almost 80 faster (see Column H), and the rate of price appreciation over the past 16 years was more than 70% faster (see Column K). So far so good, but the devil is in the details. We also measure risk. The story there is a bit shocking, even though these very stable companies were able to shake off challenges posed by the recent crash in commodity markets (see Column D).
Five year price volatility was almost 25% greater (see Column I), P/E was twice as great (see Column J), and quantitative analysis of stock prices over the past 16 years predicts that losses will be almost 40% greater in the next Bear Market (see Column M). In other words, the risk-adjusted returns for these 8 companies are not significantly different than those for the DJIA. This conclusion is consistent with what we were taught in Business School, i.e., there are only two ways for a stock picker to “beat the market.” 1) use insider information (illegal), 2) take on more risk. Your best chance to beat the market without incurring more risk is to invest in the highest quality utilities, beverages, and pharmaceuticals (see Week 367).
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-average into MSFT, JPM, CAT and IBM, and also own shares of TRV, MMM and CSCO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Mission: Run our Standard Spreadsheet for the 8 companies in the DJIA that are members of “The 2 and 8 Club” (see Week 360).
Execution: see Table.
Administration: We have made two changes to “The 2 and 8 Club”: 1) Companies with a BBB+ S&P rating for their bonds are no longer accepted (see Column T in the Table); 2) all companies in the Russell 1000 Index that meet requirements (see Week 327) are included in “The 2 and 8 Club”(see Week 366). So, that phrase no longer refers specifically to companies in the S&P 100 Index.
Bottom Line: These 8 stocks have performed remarkably well vs. DIA. Total Returns over the past 11 years (see Column C) were 26% greater, Finance Values (see Column E) were 25% better, dividend yields were almost 30% better (see Column G), dividend growth was almost 80 faster (see Column H), and the rate of price appreciation over the past 16 years was more than 70% faster (see Column K). So far so good, but the devil is in the details. We also measure risk. The story there is a bit shocking, even though these very stable companies were able to shake off challenges posed by the recent crash in commodity markets (see Column D).
Five year price volatility was almost 25% greater (see Column I), P/E was twice as great (see Column J), and quantitative analysis of stock prices over the past 16 years predicts that losses will be almost 40% greater in the next Bear Market (see Column M). In other words, the risk-adjusted returns for these 8 companies are not significantly different than those for the DJIA. This conclusion is consistent with what we were taught in Business School, i.e., there are only two ways for a stock picker to “beat the market.” 1) use insider information (illegal), 2) take on more risk. Your best chance to beat the market without incurring more risk is to invest in the highest quality utilities, beverages, and pharmaceuticals (see Week 367).
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-average into MSFT, JPM, CAT and IBM, and also own shares of TRV, MMM and CSCO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, May 13
Week 358 - Hedge the Crash With Low-Beta Dividend Achievers
Situation: It’s really tough to own stocks when the market crumps. Yes, you can follow Warren Buffett’s advice and tough it out with dollar-cost averaging. His other main idea, which is to buy great businesses at a fair price, may be useful someday down the road. He hasn’t been able to find any in this overpriced market, and neither will you. But after the market crashes, you’ll both be glad you kept a hefty dollop of cash in reserve to serve that very purpose.
But what about hedging against the crash? That’s what hedge funds are supposed to do. Why can’t you and I do it? It’s not that simple. Hedging means that your portfolio pulls ahead in a Bear Market but lags on a Bull Market. Given that the market is historically up 3 years out of 4, you see the problem with hedging. But looking deeper, volatility is what you want to hedge against. You can do that year in and year out by adopting the “School Solution”: overweight low-beta stocks in your portfolio at all times.
By hedging against volatility, your portfolio won’t necessarily fall behind in a Bull Market. Having less volatility only means that your gains will be less than those for the S&P 500 Index in a Bull Market, AND your losses will be less in a Bear Market. It doesn’t mean you’ll underperform that Index long-term. Why? Because trending stocks become overbought in a Bull Market. But you’re underweighting those high-beta Financial Services and Information Technology stocks! Half of the market capitalization in the S&P 500 Index is currently in those two industries, vs. the long-term average of 30%. Owning high-beta stocks will make you richer faster, but you’ll have to do daily research so that you know when to BUY and when to SELL. My approach to those two industries is to dollar-average into Microsoft (MSFT), International Business Machines (IBM) and JP Morgan Chase (JPM). And keep dollar-averaging no matter what.
Mission: Run our Standard Spreadsheet to identify low-beta stocks of high quality:
1. S&P Bond Ratings of A- or better (Column T in the Table);
2. S&P Stock Ratings of B+/M or better (Column U in the Table);
3. 5-Yr Beta of less than 0.7 (Column I in the Table);
4. Lower statistical risk of loss than the S&P 500 Index (Column M in the Table);
5. Higher Finance Value than the S&P 500 Index (Column E in the Table)
6. Dividend Achiever status (Column AC in the Table).
Execution: see Table.
Bottom Line: Try not to be a momentum investor. The exciting stories that underlie every Bull Market create a crowded trade for stocks issued by Financial Services and Information Technology companies. To usefully deploy the cash that’s rolling into their coffers, those companies will try to innovate and deploy new services and equipment sooner than planned. Things will get messy, bordering on chaos. Parts of the “story” will collapse, or end in court. Current examples abound. So, we’re back to the Tortoise and Hare story because it will be trotted out at the end of every market cycle. Will you channel the Hare, or will you channel the Tortoise?
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into NEE, PEP and NKE, and also own shares of KO and JNJ.
"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
But what about hedging against the crash? That’s what hedge funds are supposed to do. Why can’t you and I do it? It’s not that simple. Hedging means that your portfolio pulls ahead in a Bear Market but lags on a Bull Market. Given that the market is historically up 3 years out of 4, you see the problem with hedging. But looking deeper, volatility is what you want to hedge against. You can do that year in and year out by adopting the “School Solution”: overweight low-beta stocks in your portfolio at all times.
By hedging against volatility, your portfolio won’t necessarily fall behind in a Bull Market. Having less volatility only means that your gains will be less than those for the S&P 500 Index in a Bull Market, AND your losses will be less in a Bear Market. It doesn’t mean you’ll underperform that Index long-term. Why? Because trending stocks become overbought in a Bull Market. But you’re underweighting those high-beta Financial Services and Information Technology stocks! Half of the market capitalization in the S&P 500 Index is currently in those two industries, vs. the long-term average of 30%. Owning high-beta stocks will make you richer faster, but you’ll have to do daily research so that you know when to BUY and when to SELL. My approach to those two industries is to dollar-average into Microsoft (MSFT), International Business Machines (IBM) and JP Morgan Chase (JPM). And keep dollar-averaging no matter what.
Mission: Run our Standard Spreadsheet to identify low-beta stocks of high quality:
1. S&P Bond Ratings of A- or better (Column T in the Table);
2. S&P Stock Ratings of B+/M or better (Column U in the Table);
3. 5-Yr Beta of less than 0.7 (Column I in the Table);
4. Lower statistical risk of loss than the S&P 500 Index (Column M in the Table);
5. Higher Finance Value than the S&P 500 Index (Column E in the Table)
6. Dividend Achiever status (Column AC in the Table).
Execution: see Table.
Bottom Line: Try not to be a momentum investor. The exciting stories that underlie every Bull Market create a crowded trade for stocks issued by Financial Services and Information Technology companies. To usefully deploy the cash that’s rolling into their coffers, those companies will try to innovate and deploy new services and equipment sooner than planned. Things will get messy, bordering on chaos. Parts of the “story” will collapse, or end in court. Current examples abound. So, we’re back to the Tortoise and Hare story because it will be trotted out at the end of every market cycle. Will you channel the Hare, or will you channel the Tortoise?
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into NEE, PEP and NKE, and also own shares of KO and JNJ.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, September 18
Week 272 - Ten Commodity Producers with Improving Fundamentals
Situation: There are only a few ways that a retail investor can buffer her stock portfolio against losses during a Bear Market. To build that buffer, we suggest including stocks from 4 different types of companies:
1) those that are “shareholder-friendly” in that the company pays a good and growing dividend, e.g. Johnson & Johnson (JNJ);
2) those that have Tangible Book Value and maintain a clean Balance Sheet in that long-term debt is less than 30% of total assets and the company is able to fund its dividends from Free Cash Flow, e.g. Wal-Mart Stores (WMT);
3) those that sell products having strong Brand Recognition worldwide, based on value-pricing and utility, e.g. Microsoft (MSFT);
4) those that produce commodities and have a stock price history that roughly tracks the commodity “supercycle” rather than the S&P 500 Index. This week we look more closely at that group of companies, to uncover stocks likely to track the next commodity supercycle.
This is a timely endeavor because there is reasonable evidence that the next supercycle is just now starting. In other words, the Dow Jones Commodity Index has recently “tested” the low set in late 1998, and is now rising. Yes, the last commodity supercycle began following a recession in Asia and was launched by a massive build-out of infrastructure in China that didn't stabilize until 2014. The trigger for the next supercycle will only become clear in retrospect, but Creative Destruction can be counted on to co-produce the event. Brexit may be the herald for what’s coming.
Mission: Using the 2016 Barron’s 500 List, we’ll select commodity producers that have shown improvement based on these metrics that Barron’s editor uses to rank companies with sufficient revenues to be included on the Barron’s 500 list: 1) median 3-yr cash-flow based ROIC; 2) 2015 ROIC vs. 3-yr median; 3) 2015 sales growth. Then we’ll analyze those companies by using our standard spread-sheet (see Table).
Bottom Line: Some commodities track (or even predict) market cycles. For example, the American Chemistry Council’s “Chemical Activity Barometer” tracks the economy and is helpful in predicting recessions. But we’re looking for a way to track (or even predict) the rise and fall of a Commodity Supercycle that spans 2 or 3 market cycles. Those cycles are long because large amounts of capital have to be deployed upfront to get things out of the ground in scalable quantities, whether those things are in liquid, solid, or plant form. We’re looking for a company whose stock was moderately impacted by recessions in 2001 and 2008 but mainly tracked the infrastructure buildout in China. Mosaic (MOS), a fertilizer producer, is one example; another is Caterpillar (CAT), which makes heavy equipment used in construction, mining, drilling and farming.
Risk Rating: 8 (where Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into XOM, and own shares of CAT and ADM.
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 in TBV growth. 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 = moving average for stock price over 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 in the Table. Price Growth Rate is current 16-Yr CAGR found at Column K in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%.
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1) those that are “shareholder-friendly” in that the company pays a good and growing dividend, e.g. Johnson & Johnson (JNJ);
2) those that have Tangible Book Value and maintain a clean Balance Sheet in that long-term debt is less than 30% of total assets and the company is able to fund its dividends from Free Cash Flow, e.g. Wal-Mart Stores (WMT);
3) those that sell products having strong Brand Recognition worldwide, based on value-pricing and utility, e.g. Microsoft (MSFT);
4) those that produce commodities and have a stock price history that roughly tracks the commodity “supercycle” rather than the S&P 500 Index. This week we look more closely at that group of companies, to uncover stocks likely to track the next commodity supercycle.
This is a timely endeavor because there is reasonable evidence that the next supercycle is just now starting. In other words, the Dow Jones Commodity Index has recently “tested” the low set in late 1998, and is now rising. Yes, the last commodity supercycle began following a recession in Asia and was launched by a massive build-out of infrastructure in China that didn't stabilize until 2014. The trigger for the next supercycle will only become clear in retrospect, but Creative Destruction can be counted on to co-produce the event. Brexit may be the herald for what’s coming.
Mission: Using the 2016 Barron’s 500 List, we’ll select commodity producers that have shown improvement based on these metrics that Barron’s editor uses to rank companies with sufficient revenues to be included on the Barron’s 500 list: 1) median 3-yr cash-flow based ROIC; 2) 2015 ROIC vs. 3-yr median; 3) 2015 sales growth. Then we’ll analyze those companies by using our standard spread-sheet (see Table).
Bottom Line: Some commodities track (or even predict) market cycles. For example, the American Chemistry Council’s “Chemical Activity Barometer” tracks the economy and is helpful in predicting recessions. But we’re looking for a way to track (or even predict) the rise and fall of a Commodity Supercycle that spans 2 or 3 market cycles. Those cycles are long because large amounts of capital have to be deployed upfront to get things out of the ground in scalable quantities, whether those things are in liquid, solid, or plant form. We’re looking for a company whose stock was moderately impacted by recessions in 2001 and 2008 but mainly tracked the infrastructure buildout in China. Mosaic (MOS), a fertilizer producer, is one example; another is Caterpillar (CAT), which makes heavy equipment used in construction, mining, drilling and farming.
Risk Rating: 8 (where Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into XOM, and own shares of CAT and ADM.
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 in TBV growth. 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 = moving average for stock price over 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 in the Table. Price Growth Rate is current 16-Yr CAGR found at Column K in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%.
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Sunday, August 21
Week 268 - "Buy and Hold" Barron’s 500 Growth Stocks
Situation: Every investor has to know when to leave the party. Or, as Warren Buffett says, “be fearful when others are greedy and greedy when others are fearful.”
Mission: Design a template for leaving the party.
Execution: You’ll need a Central Thought. Mine is to stay invested in growth stocks, the ones that do badly in a recession. That means continue to invest in companies from the following 6 S&P industries: Consumer Discretionary, Financial, Information Technology, Industrial, Basic Materials, and Energy. The trick is to dump stocks with problematic Balance Sheets and buy stocks with clean Balance Sheets.
Administration: Start by defining a clean Balance Sheet. Accountants do this by picking their favorite ratios. My favorite ratios are (see Columns Y thru AB in the Table):
1. Total Debt:Equity is under 200%. That means senior managers will still “call the shots” in a crisis, not the bankers.
2. Long-Term Debt:Total Assets is under 30%. Long-term debt has to either be renewed upon maturity or returned to the lender. In a crisis, the rate of interest that bankers charge for a renewal loan (called a “rollover”) will likely be higher than for the original loan. In the Lehman Panic, many companies found that rollovers were unavailable at any rate of interest. To avoid declaring bankruptcy, those companies had to either repay maturing loans by selling company assets at firesale prices or find a “White Knight,” such as another company willing to assume that obligation as part of an acquisition.
3. TBV:Px is a positive number. You want the stock’s price to include Tangible Book Value. Most S&P 500 companies don’t have TBV. Their book value lies in the perceived value of their brand.
4. Div:FCF is a positive number. Going into a Bear Market, you don’t want to own stock in companies that make a habit of borrowing money to pay their dividend. Always be suspicious of companies that don’t pay their dividend out of Free Cash Flow.
There are other ways to know a company is likely to come through a Bear Market or recession unharmed. S&P stock and bond ratings are worth taking seriously: try to hold stock in A-rated companies (see Columns P and Q in the Table). Stick to companies with multiple product lines, i.e., those large enough to warrant inclusion in the Barron’s 500 List (see Columns N and O in the Table). That list ranks companies by cash flow and revenue. You can tell how a company is doing by comparing this year’s rank to last year’s.
You’ll also want to restrict your choices to companies that pay growing dividends, even if the dividend is low. An S&P Dividend Achiever is a company that has raised its dividend annually for the past 10 yrs. With one exception, all of the companies in this week’s Table are Dividend Achievers. Union Pacific is the exception but UNP will become a Dividend Achiever next February with a scheduled dividend increase.
Bottom Line: You can’t hope to keep up with the lowest-cost S&P 500 Index fund (VFINX at Line 21 in the Table) unless you stay invested in growth stocks. So, learn to pick growth stocks with clean Balance Sheets. Those are the ones likely to hold value in a Bear Market. Invest small amounts at a time by dollar-averaging your stock purchases automatically online. Then you’re certain to buy more shares per dollar invested when the market’s down.
Risk Rating: 6 (Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into NKE, MSFT and UNP, and also own shares of ROST, TJX, MMM, and EMR.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Net Present Value inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for 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 dividend CAGR for the past 16 years. Price Growth Rate is mean Price CAGR for the past 16 years (http://invest.kleinnet.com/bmw1/). Price Return from selling all shares in the 10th year is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Design a template for leaving the party.
Execution: You’ll need a Central Thought. Mine is to stay invested in growth stocks, the ones that do badly in a recession. That means continue to invest in companies from the following 6 S&P industries: Consumer Discretionary, Financial, Information Technology, Industrial, Basic Materials, and Energy. The trick is to dump stocks with problematic Balance Sheets and buy stocks with clean Balance Sheets.
Administration: Start by defining a clean Balance Sheet. Accountants do this by picking their favorite ratios. My favorite ratios are (see Columns Y thru AB in the Table):
1. Total Debt:Equity is under 200%. That means senior managers will still “call the shots” in a crisis, not the bankers.
2. Long-Term Debt:Total Assets is under 30%. Long-term debt has to either be renewed upon maturity or returned to the lender. In a crisis, the rate of interest that bankers charge for a renewal loan (called a “rollover”) will likely be higher than for the original loan. In the Lehman Panic, many companies found that rollovers were unavailable at any rate of interest. To avoid declaring bankruptcy, those companies had to either repay maturing loans by selling company assets at firesale prices or find a “White Knight,” such as another company willing to assume that obligation as part of an acquisition.
3. TBV:Px is a positive number. You want the stock’s price to include Tangible Book Value. Most S&P 500 companies don’t have TBV. Their book value lies in the perceived value of their brand.
4. Div:FCF is a positive number. Going into a Bear Market, you don’t want to own stock in companies that make a habit of borrowing money to pay their dividend. Always be suspicious of companies that don’t pay their dividend out of Free Cash Flow.
There are other ways to know a company is likely to come through a Bear Market or recession unharmed. S&P stock and bond ratings are worth taking seriously: try to hold stock in A-rated companies (see Columns P and Q in the Table). Stick to companies with multiple product lines, i.e., those large enough to warrant inclusion in the Barron’s 500 List (see Columns N and O in the Table). That list ranks companies by cash flow and revenue. You can tell how a company is doing by comparing this year’s rank to last year’s.
You’ll also want to restrict your choices to companies that pay growing dividends, even if the dividend is low. An S&P Dividend Achiever is a company that has raised its dividend annually for the past 10 yrs. With one exception, all of the companies in this week’s Table are Dividend Achievers. Union Pacific is the exception but UNP will become a Dividend Achiever next February with a scheduled dividend increase.
Bottom Line: You can’t hope to keep up with the lowest-cost S&P 500 Index fund (VFINX at Line 21 in the Table) unless you stay invested in growth stocks. So, learn to pick growth stocks with clean Balance Sheets. Those are the ones likely to hold value in a Bear Market. Invest small amounts at a time by dollar-averaging your stock purchases automatically online. Then you’re certain to buy more shares per dollar invested when the market’s down.
Risk Rating: 6 (Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into NKE, MSFT and UNP, and also own shares of ROST, TJX, MMM, and EMR.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Net Present Value inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for 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 dividend CAGR for the past 16 years. Price Growth Rate is mean Price CAGR for the past 16 years (http://invest.kleinnet.com/bmw1/). Price Return from selling all shares in the 10th year is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 14
Week 267 - Interesting Q3 Stock Picks From Merrill Lynch
Situation: At the beginning of each quarter, Merrill Lynch picks 10 stocks (often including two “shorts” to bet against). I have come to respect their picks but rarely act on those. Why? Because they are, for the most part, risky companies in risky industries. But when the Q3 picks came out on June 30, I was startled. Most of the picks are Dividend Achievers, i.e., companies with a record of increasing dividends for 10+ yrs. As the industry leader, with $2.2 Trillion in client assets under management, Merrill Lynch is encouraging its clients to make defensive investments. They see a Bear Market coming.
Mission: Highlight reasons to expect a Bear Market, and analyze the recommendations by Merrill Lynch.
Execution: The US economy is on solid footing. Jobs are becoming more plentiful, and wages are climbing faster than inflation. The unemployment rate in June 2016 was 4.9% (vs. 4.6% in June of 2006). However, labor market participation (62.7% in June 2016) hasn’t returned to it’s high from 10 yrs ago (66.2% in June 2006). When those who are underemployed (i.e., part-time workers), and those who are out of work but too discouraged to look for jobs, are added to the officially unemployed (i.e., job seekers), the “U-6” unemployment rate for June 2016 was 9.7% (vs. 8.4% in June 2006). Another problem is that many of the jobs that had been available to those without a college education, and paid well enough to allow those workers to become homeowners, have disappeared. The Information Revolution is replacing the Industrial Revolution but beneficiaries need to have a 4-yr college degree in math, science, engineering or technology to participate fully.
On a global scale, the US economy is an outlier. No other economy can be said to have recovered from the Lehman Panic. Great Britain was recovering but now faces recession due to fallout from Brexit. The rest of Europe is mired in economic troubles mainly caused by an over-reliance on debt financing that cannot be resolved without increases in productivity through education, “creative destruction” of outmoded industries and employment practices, automation, and increased free trade to leverage its competitive advantages. China has an “800 pound elephant in the room” called State-Owned Enterprises. Those continue to grow through municipal borrowing despite the best efforts of China’s economic leaders. Japan has found no way to emerge from decades of recession. Brazil and Russia are in deep recessions. India and South Africa are on growth trajectories but remain mired in structural unemployment. The “Arab Spring” unleashed unimaginable levels of discontent that remain poorly understood but affect the entire globe. The economies of those countries will remain in stasis until political solutions acceptable to those populations can be implemented. What is the “root cause” for underperformance in so many regional economies? Experts point to modern communications, like social media. Anyone with access to a cell phone, laptop or TV is a candidate to develop a more materialistic lifestyle, by whatever means necessary.
We don’t know how the next Bear Market will be triggered, so the S&P 500 Index continues to make new highs driven by ever-lower interest rates. There are many candidates, overvaluation being prominent among them, with the S&P 500 Index sporting a P/E of 25. Growth of the US economy (GDP) faster than 3%/yr could cure that problem but it doesn’t appear to be happening. Perhaps our government agencies, our corporations and our households have borrowed too much money, and interest payments consume too much of those budgets to allow enough investment in growth. There is also too much uncertainty about the future, so companies are reluctant to move forward with hiring and expand operations. No one issue, whether Brexit or the upcoming US election, has the capacity to trigger a recession on its own. But the above-mentioned points will amplify any crisis atmosphere that arises out of a destabilizing event like a natural disaster, a nuclear accident, or a civil war.
Administration: The Merrill Lynch Q3 recommendations include two candidates for short sales and a company that recently went public. We’re not interested in those. But do check out the other 7 (including 6 Dividend Achievers) that are worth a look by anyone seeking “buy-and-hold” stocks for a retirement portfolio (see Table).
Bottom Line: Merrill Lynch analysts apparently think a Bear Market is coming soon, and have advised clients to pick stocks that are likely to hold value in such an environment. Seven appear suitable as long-term holdings (see Table). Six of those are Dividend Achievers: NextEra Energy (NEE), Realty Income (O), AT&T (T), Raytheon (RTN), Walgreen Boots Alliance (WBA) and Lowe’s (LOW). The non-dividend paying stock, salesforce.com (CRM), is the seventh and has growth prospects that could support continued price accumulation in a recession. However, our analysis suggests that only NEE is worth buying when the market is overheated (see Table).
Risk Rating: 6 (Treasuries = 1 and gold = 10)
Full disclosure: I dollar-average each month into NEE and T.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table. Net Present Value inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% used to buy ~$5000 worth of shares), Dividend Growth Rate is Dividend CAGR for the past 16 years, Price Growth Rate is the mean Price CAGR for the past 16 years (http://invest.kleinnet.com/bmw1/), and Price Return for selling shares in the 10th year is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Highlight reasons to expect a Bear Market, and analyze the recommendations by Merrill Lynch.
Execution: The US economy is on solid footing. Jobs are becoming more plentiful, and wages are climbing faster than inflation. The unemployment rate in June 2016 was 4.9% (vs. 4.6% in June of 2006). However, labor market participation (62.7% in June 2016) hasn’t returned to it’s high from 10 yrs ago (66.2% in June 2006). When those who are underemployed (i.e., part-time workers), and those who are out of work but too discouraged to look for jobs, are added to the officially unemployed (i.e., job seekers), the “U-6” unemployment rate for June 2016 was 9.7% (vs. 8.4% in June 2006). Another problem is that many of the jobs that had been available to those without a college education, and paid well enough to allow those workers to become homeowners, have disappeared. The Information Revolution is replacing the Industrial Revolution but beneficiaries need to have a 4-yr college degree in math, science, engineering or technology to participate fully.
On a global scale, the US economy is an outlier. No other economy can be said to have recovered from the Lehman Panic. Great Britain was recovering but now faces recession due to fallout from Brexit. The rest of Europe is mired in economic troubles mainly caused by an over-reliance on debt financing that cannot be resolved without increases in productivity through education, “creative destruction” of outmoded industries and employment practices, automation, and increased free trade to leverage its competitive advantages. China has an “800 pound elephant in the room” called State-Owned Enterprises. Those continue to grow through municipal borrowing despite the best efforts of China’s economic leaders. Japan has found no way to emerge from decades of recession. Brazil and Russia are in deep recessions. India and South Africa are on growth trajectories but remain mired in structural unemployment. The “Arab Spring” unleashed unimaginable levels of discontent that remain poorly understood but affect the entire globe. The economies of those countries will remain in stasis until political solutions acceptable to those populations can be implemented. What is the “root cause” for underperformance in so many regional economies? Experts point to modern communications, like social media. Anyone with access to a cell phone, laptop or TV is a candidate to develop a more materialistic lifestyle, by whatever means necessary.
We don’t know how the next Bear Market will be triggered, so the S&P 500 Index continues to make new highs driven by ever-lower interest rates. There are many candidates, overvaluation being prominent among them, with the S&P 500 Index sporting a P/E of 25. Growth of the US economy (GDP) faster than 3%/yr could cure that problem but it doesn’t appear to be happening. Perhaps our government agencies, our corporations and our households have borrowed too much money, and interest payments consume too much of those budgets to allow enough investment in growth. There is also too much uncertainty about the future, so companies are reluctant to move forward with hiring and expand operations. No one issue, whether Brexit or the upcoming US election, has the capacity to trigger a recession on its own. But the above-mentioned points will amplify any crisis atmosphere that arises out of a destabilizing event like a natural disaster, a nuclear accident, or a civil war.
Administration: The Merrill Lynch Q3 recommendations include two candidates for short sales and a company that recently went public. We’re not interested in those. But do check out the other 7 (including 6 Dividend Achievers) that are worth a look by anyone seeking “buy-and-hold” stocks for a retirement portfolio (see Table).
Bottom Line: Merrill Lynch analysts apparently think a Bear Market is coming soon, and have advised clients to pick stocks that are likely to hold value in such an environment. Seven appear suitable as long-term holdings (see Table). Six of those are Dividend Achievers: NextEra Energy (NEE), Realty Income (O), AT&T (T), Raytheon (RTN), Walgreen Boots Alliance (WBA) and Lowe’s (LOW). The non-dividend paying stock, salesforce.com (CRM), is the seventh and has growth prospects that could support continued price accumulation in a recession. However, our analysis suggests that only NEE is worth buying when the market is overheated (see Table).
Risk Rating: 6 (Treasuries = 1 and gold = 10)
Full disclosure: I dollar-average each month into NEE and T.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table. Net Present Value inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% used to buy ~$5000 worth of shares), Dividend Growth Rate is Dividend CAGR for the past 16 years, Price Growth Rate is the mean Price CAGR for the past 16 years (http://invest.kleinnet.com/bmw1/), and Price Return for selling shares in the 10th year is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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