Situation: Food is an “essential good.” The COVID-19 Pandemic has made us all acutely aware of this, now that we’re being told to shun restaurants and eat at home. But companies that process row crops into breakfast food have faced a topsy-turvy marketing climate in recent years. General Mills (GIS) and Kellogg (K) have had to endure an existential crisis because consumers chose to distance themselves from processed breakfast foods in favor of more nutritious, fresh, and “organic” offerings. This was partly because fewer families came together each day for a sit-down breakfast. People became concerned about sugars being added to so much of what we eat, as well as the preservatives and obscure ingredients (like dyes) listed on each box of cereal. Debates arose about nutritional value and safety for children. Now, several years after the fact, those former icons of the food industry have admitted their failures and are marketing foods that are demonstrably good for children and contain no obscure or unsafe ingredients. Cereals contain dried strawberries or blueberries, sliced almonds, and other fruits or nuts. Serious investors welcome this state of affairs because changes in consumer behavior create volatility in the market, which translates into opportunity. And who’s to argue against a wider choice of more healthy foods? But for the casual investor, who doesn’t devote hours a week to following the food industry, this is not a good thing. Now is a good time to look at the food and agriculture companies that are left standing.
Mission: Use our Standard Spreadsheet to analyze food and agriculture-related companies that have an A- or better S&P rating on their bonds, as well as B+/M or better S&P ratings on their stocks.
Execution: See Table.
Administration: Four of the 12 companies appear to offer exceptional value: Coca-Cola (KO), PepsiCo (PEP), Walmart (WMT) and Target (TGT). Those are all Dividend Achievers as well as being listed in the S&P 100 Index (OEF), the Vanguard High Dividend Yield Index (VYM), and the iShares Top 200 Value Index (IWX) (see Columns AL to AO of the Table).
Bottom Line: Companies close to the production of raw commodities have stock prices that tend to follow the commodity cycle, which is dominated by oil. Investors in Deere (DE) and Archer Daniels Midland (ADM) profit if the farmer profits. Investors in food processors and grocery stores face a fickle food consumer, whose only concern is to get the best taste and nutrition per dollar. The companies that have proven they can persevere in that arena are Hormel Foods (HRL), Costco Wholesale (COST), Coca-Cola (KO), Target (TGT), Hershey (HSY), Walmart (WMT), and PepsiCo (PEP). Those companies will still be doing well 10 years from now.
Risk Rating: 7 (10-yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into COST, UNP, KO, WMT and CAT, and also own shares of DE, BRK-B, TGT 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
Showing posts with label consumer staples. Show all posts
Showing posts with label consumer staples. Show all posts
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, December 30
Week 391 - Members of “The 2 and 8 Club” in the FTSE Russell 1000 Index
THIS IS THE LAST WEEKLY ISSUE. FUTURE ISSUES WILL APPEAR MONTHLY.
Situation: “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.
Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”
Execution: see Table
Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.
In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.
Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).
NOTE: This week’s Table will be updated at the end of each quarter.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.
Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Situation: “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.
Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”
Execution: see Table
Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.
In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.
Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).
NOTE: This week’s Table will be updated at the end of each quarter.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.
Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 24
Week 364 - Ethanol Producers
Situation: “Market research analysts at Technavio have predicted that the global bio-fuels market will grow steadily at a CAGR of almost 6% by 2020”. But arguments against blending ethanol with gasoline are building. In 2016, 15.2 billion gallons were produced at 214 plants, with Archer Daniels Midland (ADM), Valero Energy (VLO) and Green Plains Renewable Energy (GPRE) being the main publicly-traded producers. For example, those 3 companies operate 4 ethanol plants in Nebraska that together produced 2.2 billion gallons, representing 31% of the state’s crop. Not only is fuel a big business for the agriculture sector, but the by-product (“distillers grains”) is a rich source of animal feed. For every ton of ethanol produced, there are 0.24 tons of distillers grains.
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"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
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 17
Week 363 - Big Pharma
Situation: There are 11 pharmaceutical companies in the S&P 100 Index, with an average market capitalization of ~$130 Billion. Stocks issued by healthcare companies (including hospital chains, pharmacy benefit managers, medical insurance vendors, and drugstores) are thought to be defensive “risk-off” bets, like stocks issued by utility, communication services, or consumer staples companies. But they’re not. Healthcare consumes almost 20% of GDP but it is a highly fragmented industry, rife with government interference seeking full control. Medical innovation for the entire planet has to take place in the United States because the healthcare industry is socialized elsewhere and large amounts of private capital are needed to conduct clinical trials. That innovation makes US healthcare into an ongoing research enterprise. For biotechnology companies, there is an ever-present risk of being eclipsed by another company’s research team. Stockpickers who have some appreciation for biochemistry can perhaps identify biotechnology groups that are onto a good thing. But Big Pharma companies survive by looking to buy those same startups. Can you really scope-out a “good thing” better than their scientists?
Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.
Execution: see Table.
Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY).
Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JNJ and also own shares of ABT.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.
Execution: see Table.
Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY).
Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JNJ and also own shares of ABT.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 29
Week 356 - Defensive Companies in “The 2 and 8 Club” (Extended Version)
Situation: You don’t want to lose money but you’re starting to. That comes with having your savings in an overbought stock market. It’s time for a cautionary warning light to click on in your head. That would mean moving some money into cash equivalents and making sure that at least a third of your stock portfolio is in defensive stocks, i.e., utility, healthcare, consumer staples, and telecommunication services companies. And, review the stocks you’re dollar-averaging into. Be comfortable with the prospect of building up your share-count in those stocks throughout a market crash.
Mission: Run our Standard Spreadsheet on defensive companies in “The 2 and 8 Club” (Extended Version).
Execution: see Table.
Administration: If their dividend growth rates continue to fall, Coca-Cola (KO) and Pfizer (PFE) will no longer be members of “The 2 and 8 Club.” Conversely, Hormel Foods (HRL at Line 13 in the Table) recently raised its dividend and now has a yield that is well above the yield for the S&P 500 Index. That means it will soon be included in the US version of the FTSE High Dividend Yield Index. HRL already meets the other requirements for membership in “The 2 and 8 Club.” So, it will become a member upon being listed in that Index. The ETF for that Index is VYM (the Vanguard High Dividend Yield ETF at Line 18 in the Table).
Bottom Line: There aren’t a lot of great defensive stocks, but the 8 included in “The 2 and 8 Club” are worth your close attention. Why? Because a set of trade policies are being promulgated by several countries that restrict the cross-border flow of goods and services. If those policies blossom into a tit-for-tat Trade War, Robert Shiller (Nobel Prize winning economist) thinks a recession would be triggered: “It’s just chaos,” he said on CNBC. “It will slow down development in the future if people think that this kind of thing is likely.”
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into NextEra Energy (NEE) and PepsiCo (PEP), and also own shares of Coca-Cola (KO) and Hormel Foods (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 defensive companies in “The 2 and 8 Club” (Extended Version).
Execution: see Table.
Administration: If their dividend growth rates continue to fall, Coca-Cola (KO) and Pfizer (PFE) will no longer be members of “The 2 and 8 Club.” Conversely, Hormel Foods (HRL at Line 13 in the Table) recently raised its dividend and now has a yield that is well above the yield for the S&P 500 Index. That means it will soon be included in the US version of the FTSE High Dividend Yield Index. HRL already meets the other requirements for membership in “The 2 and 8 Club.” So, it will become a member upon being listed in that Index. The ETF for that Index is VYM (the Vanguard High Dividend Yield ETF at Line 18 in the Table).
Bottom Line: There aren’t a lot of great defensive stocks, but the 8 included in “The 2 and 8 Club” are worth your close attention. Why? Because a set of trade policies are being promulgated by several countries that restrict the cross-border flow of goods and services. If those policies blossom into a tit-for-tat Trade War, Robert Shiller (Nobel Prize winning economist) thinks a recession would be triggered: “It’s just chaos,” he said on CNBC. “It will slow down development in the future if people think that this kind of thing is likely.”
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into NextEra Energy (NEE) and PepsiCo (PEP), and also own shares of Coca-Cola (KO) and Hormel Foods (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, January 21
Week 342 - Industrial Companies in “The 2 and 8 Club” (Extended Version)
Situation: There are many industrial companies that enjoy good earnings over long time intervals. But these earnings are yoked to the economic cycle and tend to be volatile. This unsettles investors. Companies in the Financial Services, Consumer Discretionary, and Information Technology industries face the same problem. However, those 4 industries are also responsible for most of the growth in the US stock market. Stockpickers have to either stare at ugly “paper losses” from time to time, or behave like retail investors and “buy high, sell low.” For the former group, which has absorbed losses, studies show that they’ll spend 4% less money on consumer goods than customary. But when the stock market is up a lot, they’ll spend 4% more. The mechanics of maintaining what you’ve obtained may be difficult to explain to your life partner, but your heirs will understand. The harder part (for your life partner) is to understand why you allocate more money to the stock market when its down but less when its up!
The takeaway message from this is that money needs to be taken “off the table” when the market is frothy, and spent. With the current market, now would be a good time to start doing that. At every one of Berkshire Hathaway’s annual meetings that I’ve attended, Warren Buffett reprises his famous quote: “Be fearful when others are greedy and greedy when others are fearful”. In other words, allocate more of your income to the stock market when the economy is in a slump. Baron Rothschild put a fine point on it 202 years ago, when he profited mightily from the defeat of Napoleon at the Battle of Waterloo: “Buy when there’s blood in the streets, even if the blood is your own”. Caveat Emptor: The opposing argument, that “timing the market” never works, is widely respected.
Mission: If you want to at least keep up with the S&P 500 Index, you’ll have to focus much of your research on industrial stocks. So, here are 6 industrial stocks that 1) pay good & growing dividends, and 2) are highly rated by S&P and Morningstar. See our Week 329 blog for a detailed explanation of how we pick stocks from the Barron’s 500 List that have at least a 2% dividend yield and an 8%/yr dividend growth rate (over the previous 5 years).
Execution: see Table.
Bottom Line: Industrial companies take advantage of a growing economy. However, their stock prices fluctuate more widely than most investors can tolerate. You have to be a bit of a gambler to become an enthusiast. Over the long term, you’ll grow to be happy with the rewards. Just don’t expect your risk-adjusted total returns to be any better than you’d realize from owning shares in an S&P 500 Index fund, unless your hobby is to analyze industrial companies. To do so, it helps if you decide that only a few companies are likely to reward the time you spend on their study. We think the 6 industrial companies in “The 2 and 8 Club” are worth your time (see Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MMM, and also own shares of CMI and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
The takeaway message from this is that money needs to be taken “off the table” when the market is frothy, and spent. With the current market, now would be a good time to start doing that. At every one of Berkshire Hathaway’s annual meetings that I’ve attended, Warren Buffett reprises his famous quote: “Be fearful when others are greedy and greedy when others are fearful”. In other words, allocate more of your income to the stock market when the economy is in a slump. Baron Rothschild put a fine point on it 202 years ago, when he profited mightily from the defeat of Napoleon at the Battle of Waterloo: “Buy when there’s blood in the streets, even if the blood is your own”. Caveat Emptor: The opposing argument, that “timing the market” never works, is widely respected.
Mission: If you want to at least keep up with the S&P 500 Index, you’ll have to focus much of your research on industrial stocks. So, here are 6 industrial stocks that 1) pay good & growing dividends, and 2) are highly rated by S&P and Morningstar. See our Week 329 blog for a detailed explanation of how we pick stocks from the Barron’s 500 List that have at least a 2% dividend yield and an 8%/yr dividend growth rate (over the previous 5 years).
Execution: see Table.
Bottom Line: Industrial companies take advantage of a growing economy. However, their stock prices fluctuate more widely than most investors can tolerate. You have to be a bit of a gambler to become an enthusiast. Over the long term, you’ll grow to be happy with the rewards. Just don’t expect your risk-adjusted total returns to be any better than you’d realize from owning shares in an S&P 500 Index fund, unless your hobby is to analyze industrial companies. To do so, it helps if you decide that only a few companies are likely to reward the time you spend on their study. We think the 6 industrial companies in “The 2 and 8 Club” are worth your time (see Table).
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MMM, and also own shares of CMI and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 12
Week 332 - Defensive Companies in “The 2 and 8 Club”
Situation: The Dow Jones Industrial Average keeps making new highs, “confirmed” by new highs in the Dow Jones Transportation Average. According to Dow Theory, we are in a “primary” Bull Market. That is a period when investors should be paying off their debts and/or building up cash reserves. It is also a period when stocks in “growth” companies become overpriced, and stocks in “defensive” companies become reasonably priced (after having been overpriced). It’s a good time to research high-quality companies in “defensive” industries: Consumer Staples, Health Care, Utilities, and Communication Services.
Mission: Develop our standard spreadsheet for companies in “The 2 and 8 Club” (see Week 327) that are in defensive industries (see Week 327), and add any companies that are close to qualifying.
Execution: (see Table)
Administration: We’ll use the Extended Version of “The 2 and 8 Club”, which simply matches companies on two lists: The Barron’s 500 List and the 400+ companies in the FTSE High Dividend Yield Index. The Barron’s 500 List is published annually in May, and ranks companies by their 1 & 3 year Cash Flows from Operations, as well as their past year’s Revenues. The FTSE High Dividend Yield Index lists US companies that pay more than a market yield (~2%) and are thought unlikely to reduce dividends during a Bear Market. Companies that appear on both lists but do not have a 5-Yr Compound Annual Growth Rate (CAGR) of at least 8% for their quarterly dividend payout are excluded, as are any companies that carry an S&P Rating lower than A- for their bonds or lower than B+/M for their stocks.
Note the inclusion of Costco Wholesale (COST) at Line 4 in the Table. Although it has an annual yield lower than the required 2% for its quarterly dividend, the company has also issued a supplementary dividend every other year for the past 5 years. In those years, the dividend yield exceeds 5%. In calculating Net Present Value (see Column Y in the Table), we have used adjusted values for Dividend Yield (5.4%) and 5-Yr Dividend Growth (2.1%) in an effort to present an assessment closer to reality. That boosts NPV 42% over what it would be had supplemental dividends been ignored.
Note the inclusion of Coca-Cola (KO) at Line 9 in the Table. Although it has a 5-year dividend CAGR of 7.7%, which is slightly lower than our 8% cut-off, KO is a “mega-capitalized” company that has a major influence on prospects for the Consumer Staples industry.
Bottom Line: Experienced stock-pickers can usually look forward to a decent night’s sleep, if experience has taught them to overweight their portfolio in high-quality “defensive” stocks that pay a good and growing dividend. By restricting our Watch List to companies in “The 2 and 8 Club”, we’ve found that there are only 10 defensive stocks you need to consider during this opportune time, i.e, when valuations are lower for “defensive” stocks because “growth” stocks become the overcrowded trade in a primary Bull Market.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-cost average into KO and NEE, and also own shares of COST, AMGN, MO, and HRL.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Develop our standard spreadsheet for companies in “The 2 and 8 Club” (see Week 327) that are in defensive industries (see Week 327), and add any companies that are close to qualifying.
Execution: (see Table)
Administration: We’ll use the Extended Version of “The 2 and 8 Club”, which simply matches companies on two lists: The Barron’s 500 List and the 400+ companies in the FTSE High Dividend Yield Index. The Barron’s 500 List is published annually in May, and ranks companies by their 1 & 3 year Cash Flows from Operations, as well as their past year’s Revenues. The FTSE High Dividend Yield Index lists US companies that pay more than a market yield (~2%) and are thought unlikely to reduce dividends during a Bear Market. Companies that appear on both lists but do not have a 5-Yr Compound Annual Growth Rate (CAGR) of at least 8% for their quarterly dividend payout are excluded, as are any companies that carry an S&P Rating lower than A- for their bonds or lower than B+/M for their stocks.
Note the inclusion of Costco Wholesale (COST) at Line 4 in the Table. Although it has an annual yield lower than the required 2% for its quarterly dividend, the company has also issued a supplementary dividend every other year for the past 5 years. In those years, the dividend yield exceeds 5%. In calculating Net Present Value (see Column Y in the Table), we have used adjusted values for Dividend Yield (5.4%) and 5-Yr Dividend Growth (2.1%) in an effort to present an assessment closer to reality. That boosts NPV 42% over what it would be had supplemental dividends been ignored.
Note the inclusion of Coca-Cola (KO) at Line 9 in the Table. Although it has a 5-year dividend CAGR of 7.7%, which is slightly lower than our 8% cut-off, KO is a “mega-capitalized” company that has a major influence on prospects for the Consumer Staples industry.
Bottom Line: Experienced stock-pickers can usually look forward to a decent night’s sleep, if experience has taught them to overweight their portfolio in high-quality “defensive” stocks that pay a good and growing dividend. By restricting our Watch List to companies in “The 2 and 8 Club”, we’ve found that there are only 10 defensive stocks you need to consider during this opportune time, i.e, when valuations are lower for “defensive” stocks because “growth” stocks become the overcrowded trade in a primary Bull Market.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-cost average into KO and NEE, and also own shares of COST, AMGN, MO, and HRL.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 23
Week 316 - 2017 Barron’s 500 List: A-rated “Defensive” Companies That Moved Up In Rank During The Commodity Recession
Situation: A stock-picker can’t beat the market, given that transaction costs and tax inefficiencies reduce returns by 1-3%/yr compared to the lowest-cost S&P 500 Index fund (VFINX), which returns 7-8%/yr. To effectively compete with that, stock picks would need to return 9%/yr. That’s one of the reasons why we use a discount rate of 9% when calculating Net Present Value.
In business school, I was taught that there are only two ways to beat the market: Plan A is to trade on “insider information” (patently illegal); Plan B is to take outsize risks (i.e., run a portfolio where the capitalization-weighted 5-Yr Beta is greater than 1.0). Those of us who are employed full time in Financial Services may become good stock-pickers because we know a particular industry very well, the result being that we overweight our picks in that industry. In other words, we’re engaged in a legal form of insider trading. For example, doctors and dentists are often savvy traders of health-care stocks.
The stock-picker who had the longest run beating the S&P 500 Index was Peter Lynch, who managed Fidelity’s Magellan Fund from 1977 through 1990. He relied on diversification, running ~1000 stocks with the help of a dozen analysts, but focussed on retail stocks. He claimed that the insights his wife shared with him after a day of shopping were pivotal to his success. You get the point: Invest in what you know.
But what about Plan B (risk taking)? Like Plan A, that approach requires you to run a portfolio concentrated in particular industries. But unlike Plan A, those stocks have to be in boring “Defensive” industries, i.e., the ones where sales grow only as fast as the population grows (Consumer Staples, Healthcare, Communication Services, and Utilities). By overweighting defensive industries, you insulate your portfolio. When the market crashes, those industries tend to keep on growing their earnings. Than means you’re following Warren Buffett’s Rule #1: Never Lose Money.
Mission: Analyze the recent Commodity Recession (see Column D at Line 26 in the Table), which was almost severe enough to keep both GDP and the S&P 500 Index from growing.
Execution: see Table.
Administration: Commodities are a key driver of the economy, so the Commodity Recession gave us a rare opportunity to see which companies out-perform without that key driver. You’ll need some background information. Of the 22 commodity futures contracts that compose the Bloomberg Commodity Index, the 5 classified as “Energy” are strongest, with a combined weight of 30.57% (Natural Gas, Brent Crude Oil, West Texas Intermediate Crude Oil, Ultra-Low Sulfur Diesel, and Unleaded Gasoline). When those are down ~20%, the S&P 500 Index will barely rise even though GDP might keep going up. Whether we like it or not, the prices of petroleum products will be the best predictors of the stock market for the next 10+ yrs. To be successful, a stock-picker has to anticipate the ups and downs in prices for energy commodities, and be positioned to reap good returns from stocks of A-rated S&P 500 companies that maintain or improve their valuation metrics during a commodity recession.
Key metrics relate to cash-flow based ROIC, specifically the most recent year vs. the 3-Yr median, as well as sales growth for the most recent year. The Barron’s 500 List (published each May) ranks the largest 500 companies on the New York and Toronto stock exchanges in terms of those 3 metrics. We’re interested in knowing the names of ALL the A-ranked S&P 500 companies that moved up in rank. Most of those will be in “Defensive” industries. The few that are in “Growth” industries either have a business plan that allows them to be “hardy perennials,” or enjoy a special situation that allows them to take advantage of a Commodity Recession. This week we cover “Defensive” industries. Next week we’ll cover the few “Growth” industry out-performers.
Bottom Line: The costs associated with owning the Vanguard 500 Index Fund (VFINX) are nil, whereas, the costs of owning (and trading) stock in a few dozen companies are substantial. And, the capital gains taxes that you’ll pay each year for trading those stocks are erratic and immediate vs. what you’ll pay upon eventually selling your VFINX shares. Your stock portfolio has to outperform the S&P 500 Index by 2-3%/yr to equal the returns you’d realize from owning VFINX shares. Invest smart, by knowing that the market goes down eventually and doing something about it ahead of time. Either stick to industries you know, or hedge by overweighting the stocks of companies in “Defensive Industries.” The 14 shown in the Table are a good place to start your research. Pay close attention to Columns P-S because even these companies can swoon in a market crash if they have messy Balance Sheets (messiness is highlighted in purple).
Risk Rating: 6 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold)
Full Disclosure: I dollar-average into JNJ and KO, and also own shares of HRL and WMT.
In business school, I was taught that there are only two ways to beat the market: Plan A is to trade on “insider information” (patently illegal); Plan B is to take outsize risks (i.e., run a portfolio where the capitalization-weighted 5-Yr Beta is greater than 1.0). Those of us who are employed full time in Financial Services may become good stock-pickers because we know a particular industry very well, the result being that we overweight our picks in that industry. In other words, we’re engaged in a legal form of insider trading. For example, doctors and dentists are often savvy traders of health-care stocks.
The stock-picker who had the longest run beating the S&P 500 Index was Peter Lynch, who managed Fidelity’s Magellan Fund from 1977 through 1990. He relied on diversification, running ~1000 stocks with the help of a dozen analysts, but focussed on retail stocks. He claimed that the insights his wife shared with him after a day of shopping were pivotal to his success. You get the point: Invest in what you know.
But what about Plan B (risk taking)? Like Plan A, that approach requires you to run a portfolio concentrated in particular industries. But unlike Plan A, those stocks have to be in boring “Defensive” industries, i.e., the ones where sales grow only as fast as the population grows (Consumer Staples, Healthcare, Communication Services, and Utilities). By overweighting defensive industries, you insulate your portfolio. When the market crashes, those industries tend to keep on growing their earnings. Than means you’re following Warren Buffett’s Rule #1: Never Lose Money.
Mission: Analyze the recent Commodity Recession (see Column D at Line 26 in the Table), which was almost severe enough to keep both GDP and the S&P 500 Index from growing.
Execution: see Table.
Administration: Commodities are a key driver of the economy, so the Commodity Recession gave us a rare opportunity to see which companies out-perform without that key driver. You’ll need some background information. Of the 22 commodity futures contracts that compose the Bloomberg Commodity Index, the 5 classified as “Energy” are strongest, with a combined weight of 30.57% (Natural Gas, Brent Crude Oil, West Texas Intermediate Crude Oil, Ultra-Low Sulfur Diesel, and Unleaded Gasoline). When those are down ~20%, the S&P 500 Index will barely rise even though GDP might keep going up. Whether we like it or not, the prices of petroleum products will be the best predictors of the stock market for the next 10+ yrs. To be successful, a stock-picker has to anticipate the ups and downs in prices for energy commodities, and be positioned to reap good returns from stocks of A-rated S&P 500 companies that maintain or improve their valuation metrics during a commodity recession.
Key metrics relate to cash-flow based ROIC, specifically the most recent year vs. the 3-Yr median, as well as sales growth for the most recent year. The Barron’s 500 List (published each May) ranks the largest 500 companies on the New York and Toronto stock exchanges in terms of those 3 metrics. We’re interested in knowing the names of ALL the A-ranked S&P 500 companies that moved up in rank. Most of those will be in “Defensive” industries. The few that are in “Growth” industries either have a business plan that allows them to be “hardy perennials,” or enjoy a special situation that allows them to take advantage of a Commodity Recession. This week we cover “Defensive” industries. Next week we’ll cover the few “Growth” industry out-performers.
Bottom Line: The costs associated with owning the Vanguard 500 Index Fund (VFINX) are nil, whereas, the costs of owning (and trading) stock in a few dozen companies are substantial. And, the capital gains taxes that you’ll pay each year for trading those stocks are erratic and immediate vs. what you’ll pay upon eventually selling your VFINX shares. Your stock portfolio has to outperform the S&P 500 Index by 2-3%/yr to equal the returns you’d realize from owning VFINX shares. Invest smart, by knowing that the market goes down eventually and doing something about it ahead of time. Either stick to industries you know, or hedge by overweighting the stocks of companies in “Defensive Industries.” The 14 shown in the Table are a good place to start your research. Pay close attention to Columns P-S because even these companies can swoon in a market crash if they have messy Balance Sheets (messiness is highlighted in purple).
Risk Rating: 6 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold)
Full Disclosure: I dollar-average into JNJ and KO, and also own shares of HRL and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 16
Week 315 - High-quality Dividend Achievers That Beat The S&P 500 For 30 Years With Less Risk
Situation: The S&P 500 Index has risen faster than underlying earnings for the past 8 years. The main reason is that the Federal Reserve purchased over 3 Trillion dollars worth of government bonds and mortgages (including “non-conforming” private mortgages that carry no government guarantee). As intended, this flooded our economy with money that could be borrowed at historically low interest rates. Now the Federal Reserve is looking to start bringing that money back, by accepting the repayment of principal when loans mature instead of renewing (“rolling over”) the loans. This will result in a balance sheet “roll-off” that reduces the amount of money in circulation. Think of it as a “bail-in” to rebalance Treasury accounts, which will reverse the “bail-out” of Wall Street in 2008-9. Interest rates will slowly rise. Investors will once again have to consider the attractiveness of owning bonds in place of stocks. “Risk-on” investments, i.e., growth stocks and stocks issued by smaller companies, will be less sought after but “risk-off” investments (defensive stocks and corporate bonds) will be more sought after. Most of the stocks that have outperformed the S&P 500 over the past 25 years (see Week 314) and 35 years (see Week 313) have been issued by companies in “defensive” industries.
Mission: Look at 30 year statistics by using the BMW Method, to possibly find more stocks that outperform the S&P 500 Index while taking on less risk.
Execution: see Table.
Bottom Line: We have turned up 3 new companies: two from defensive industries (Archer Daniels Midland “ADM” and Kimberly-Clark “KMB”) and one from a growth industry (WW Grainger “GWW”). That makes a total of 11 companies from the 4 S&P “defensive” industries (Utilities, Healthcare, Consumer Staples, and Communication Services): CHD, MKC, BDX, WTR, ED, GIS, CVS, PEP, PG, ADM, KMB. And, 5 from the 6 S&P “growth” industries (Consumer Discretionary, Industrials, Information Technology, Materials, Energy, and Financial Services): APD, MMM, MCD, GPC, GWW.
In other words, the companies that make really good long-term investments are twice as likely to be from “risk-off” defensive industries than from “risk-on” growth industries. But think about what that implies, given that 2/3rds of the companies in the S&P 100 Index represent growth industries. If you want to beat the S&P 500 Index long-term, you’ll have to reverse that ratio and have 2/3rds of your money in defensive stocks.
Risk Rating: 5 (10-Yr Treasury Note = 1, S&P 500 Index = 5, Gold = 10)
Full Disclosure: I own shares of MCD, MMM, GIS, MKC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Look at 30 year statistics by using the BMW Method, to possibly find more stocks that outperform the S&P 500 Index while taking on less risk.
Execution: see Table.
Bottom Line: We have turned up 3 new companies: two from defensive industries (Archer Daniels Midland “ADM” and Kimberly-Clark “KMB”) and one from a growth industry (WW Grainger “GWW”). That makes a total of 11 companies from the 4 S&P “defensive” industries (Utilities, Healthcare, Consumer Staples, and Communication Services): CHD, MKC, BDX, WTR, ED, GIS, CVS, PEP, PG, ADM, KMB. And, 5 from the 6 S&P “growth” industries (Consumer Discretionary, Industrials, Information Technology, Materials, Energy, and Financial Services): APD, MMM, MCD, GPC, GWW.
In other words, the companies that make really good long-term investments are twice as likely to be from “risk-off” defensive industries than from “risk-on” growth industries. But think about what that implies, given that 2/3rds of the companies in the S&P 100 Index represent growth industries. If you want to beat the S&P 500 Index long-term, you’ll have to reverse that ratio and have 2/3rds of your money in defensive stocks.
Risk Rating: 5 (10-Yr Treasury Note = 1, S&P 500 Index = 5, Gold = 10)
Full Disclosure: I own shares of MCD, MMM, GIS, MKC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 9
Week 314 - High-quality Dividend Achievers That Beat The S&P 500 For 25 Years With Less Risk
Situation: See last week’s blog (Week 314 - High-quality Dividend Achievers That Beat The S&P 500 For 25 Years With Less Risk).
To “buy-and-hold” a stock, we want the underlying company to have a long record of stable price growth that outperforms the lowest-cost S&P 500 Index fund (VFINX). Otherwise, we would simply invest in VFINX and forget about picking stocks. We would also like those companies to have had less stock price volatility than VFINX over a long period of time. The necessary statistical data is found at the BMW Method website.
Mission: For this week’s blog, we’ll look at how publicly-traded stocks have performed over 25 year holding periods.
Execution: see Table.
Administration: We exclude companies that do not have high ratings from S&P on their stocks and bonds. We also exclude companies that S&P hasn’t designated as Dividend Achievers. “Less risk” is defined as a statistically lower risk of loss at 2 standard deviations below trendline than that for the S&P 500 Index (see Column M in the Table, where red highlights denote more risk).
Bottom Line: After analysis, we are not surprised to find that 5 of the 8 companies also starred in last week’s blog, where we used a 35 year holding period as opposed to this week’s 25 year period. The newcomers are Procter & Gamble (PG), Genuine Parts (GPC) and PepsiCo (PEP). Six of the 8 companies represent “defensive” industries, while in last week’s blog, 7 of the 10 companies were from those industries (consumer staples, utilities, healthcare, and communication services). Now we know why investors don’t overweight their portfolios with relatively safe (i.e., defensive) stocks, i.e., the ones that have a better chance of outperforming the S&P 500 Index simply because they rarely fall in price. Defensive stocks are boring! Yes, growth stocks are more likely to zip upward in price. But that comes with a statistically equal chance of zipping downward. Most of us pick stocks because we like to see that upward zip once in awhile, not because we hew closely to a disciplined approach for beating the S&P 500 long-term.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-average into PG and own shares of GIS and MKC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
To “buy-and-hold” a stock, we want the underlying company to have a long record of stable price growth that outperforms the lowest-cost S&P 500 Index fund (VFINX). Otherwise, we would simply invest in VFINX and forget about picking stocks. We would also like those companies to have had less stock price volatility than VFINX over a long period of time. The necessary statistical data is found at the BMW Method website.
Mission: For this week’s blog, we’ll look at how publicly-traded stocks have performed over 25 year holding periods.
Execution: see Table.
Administration: We exclude companies that do not have high ratings from S&P on their stocks and bonds. We also exclude companies that S&P hasn’t designated as Dividend Achievers. “Less risk” is defined as a statistically lower risk of loss at 2 standard deviations below trendline than that for the S&P 500 Index (see Column M in the Table, where red highlights denote more risk).
Bottom Line: After analysis, we are not surprised to find that 5 of the 8 companies also starred in last week’s blog, where we used a 35 year holding period as opposed to this week’s 25 year period. The newcomers are Procter & Gamble (PG), Genuine Parts (GPC) and PepsiCo (PEP). Six of the 8 companies represent “defensive” industries, while in last week’s blog, 7 of the 10 companies were from those industries (consumer staples, utilities, healthcare, and communication services). Now we know why investors don’t overweight their portfolios with relatively safe (i.e., defensive) stocks, i.e., the ones that have a better chance of outperforming the S&P 500 Index simply because they rarely fall in price. Defensive stocks are boring! Yes, growth stocks are more likely to zip upward in price. But that comes with a statistically equal chance of zipping downward. Most of us pick stocks because we like to see that upward zip once in awhile, not because we hew closely to a disciplined approach for beating the S&P 500 long-term.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-average into PG and own shares of GIS and MKC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 2
Week 313 - High-quality Dividend Achievers That Beat The S&P 500 For 35 Years With Less Risk
Situation: Most investors don’t like to micromanage their stock holdings, preferring instead to “buy-and-hold.” But we occasionally lose money because we haven’t been paying adequate attention. Deciding when to sell is much harder than deciding when to buy. The basic rule is to buy stocks with an ROIC (Return On Invested Capital) that is more than twice their WACC (Weighted Average Cost of Capital), then sell when they no longer meet that standard. But that approach doesn’t work for technology stocks, where the ROIC is many times greater than the WACC, or for many stable and/or slowly growing companies. For example, Berkshire Hathaway (BRK-B) has had an ROIC that is only a little higher than its WACC for long periods.
If we are to “buy-and-hold” a stock, the underlying company needs to have a long record of stable price growth that outperforms the lowest-cost S&P 500 Index fund (VFINX). Otherwise, we would simply invest in VFINX and forget about picking stocks. We would also like those companies to have had less stock price volatility than VFINX over a long period of time . . . decades. The necessary statistical data is found at the BMW Method website.
Mission: For this week’s blog, we’ll look at how publicly-traded stocks have performed over 35 year holding periods. Next week, we’ll run the same spreadsheet for 25 year holding periods and the following week we’ll look at the 30 year period.
Execution: see Table.
Administration: We exclude companies that do not have high ratings from S&P on their stocks and bonds. We also exclude companies that S&P hasn’t designated as Dividend Achievers. “Less risk” is defined as a statistically lower risk of loss at 2 standard deviations below trendline than that for the S&P 500 Index (see Column M in the Table, where red highlights denote more risk).
Bottom Line: After analysis, we find that all 10 companies had better price returns than our benchmark (VBINX) over the two year correction in commodity prices from July of 2014 to July of 2016. Most of these companies showed unusually strong performance, meaning investors chose to shunt money away from commodity-related companies and into these companies. It is instructive to get an idea as to why these company’s products and services seemed more valuable to investors. Yes, it was a “risk-off” decision. This is because investors know that the best way to make money is to avoid losing money. Of the 10 stocks highlighted here, only 3 (MCD, MMM, APD) are in “growth” industries; the others are in “defensive” industries (healthcare, consumer staples, and utilities) where earnings tend to hold up better in a downturn. But why not build a portfolio of “risk-off” investments in the first place, given that those appear to outperform the S&P 500 Index over long periods? We’ll check that theory out at 25 and 30 year holding periods, to see how well it holds up. In the meantime, remember Warren Buffett’s Rule #1: “Never lose money.”
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I own shares of GIS, MCD, MKC, and MMM.
Note: We use discounted cash flow from dividends and sale of the stock (after a 10-Yr holding period) to estimate Net Present Value; see Columns U-Y in the Table. The exponential growth rate in stock price over the next 10 years is estimated to be an extrapolation of the growth in stock price over the past 16 years. The Discount Rate is set at 9%, meaning that a stock with a positive NPV would return more over 10 years than a 10-Yr US Treasury Note paying 9%/Yr. Dividend Growth over the next 10 years is extrapolated from Dividend Growth over the past 4 years. Be aware that our NPV calculation is for comparative purposes only. Any rise in the rate of interest paid by 10-Yr Treasury Notes would diminish stock NPVs, provided that those Notes continue to carry a AAA credit rating from S&P.
Red highlights in the Table denote underperformance relative to our benchmark: Vanguard Balanced Index Fund (VBINX) at Line 18. Purple highlights denote metrics of concern.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If we are to “buy-and-hold” a stock, the underlying company needs to have a long record of stable price growth that outperforms the lowest-cost S&P 500 Index fund (VFINX). Otherwise, we would simply invest in VFINX and forget about picking stocks. We would also like those companies to have had less stock price volatility than VFINX over a long period of time . . . decades. The necessary statistical data is found at the BMW Method website.
Mission: For this week’s blog, we’ll look at how publicly-traded stocks have performed over 35 year holding periods. Next week, we’ll run the same spreadsheet for 25 year holding periods and the following week we’ll look at the 30 year period.
Execution: see Table.
Administration: We exclude companies that do not have high ratings from S&P on their stocks and bonds. We also exclude companies that S&P hasn’t designated as Dividend Achievers. “Less risk” is defined as a statistically lower risk of loss at 2 standard deviations below trendline than that for the S&P 500 Index (see Column M in the Table, where red highlights denote more risk).
Bottom Line: After analysis, we find that all 10 companies had better price returns than our benchmark (VBINX) over the two year correction in commodity prices from July of 2014 to July of 2016. Most of these companies showed unusually strong performance, meaning investors chose to shunt money away from commodity-related companies and into these companies. It is instructive to get an idea as to why these company’s products and services seemed more valuable to investors. Yes, it was a “risk-off” decision. This is because investors know that the best way to make money is to avoid losing money. Of the 10 stocks highlighted here, only 3 (MCD, MMM, APD) are in “growth” industries; the others are in “defensive” industries (healthcare, consumer staples, and utilities) where earnings tend to hold up better in a downturn. But why not build a portfolio of “risk-off” investments in the first place, given that those appear to outperform the S&P 500 Index over long periods? We’ll check that theory out at 25 and 30 year holding periods, to see how well it holds up. In the meantime, remember Warren Buffett’s Rule #1: “Never lose money.”
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I own shares of GIS, MCD, MKC, and MMM.
Note: We use discounted cash flow from dividends and sale of the stock (after a 10-Yr holding period) to estimate Net Present Value; see Columns U-Y in the Table. The exponential growth rate in stock price over the next 10 years is estimated to be an extrapolation of the growth in stock price over the past 16 years. The Discount Rate is set at 9%, meaning that a stock with a positive NPV would return more over 10 years than a 10-Yr US Treasury Note paying 9%/Yr. Dividend Growth over the next 10 years is extrapolated from Dividend Growth over the past 4 years. Be aware that our NPV calculation is for comparative purposes only. Any rise in the rate of interest paid by 10-Yr Treasury Notes would diminish stock NPVs, provided that those Notes continue to carry a AAA credit rating from S&P.
Red highlights in the Table denote underperformance relative to our benchmark: Vanguard Balanced Index Fund (VBINX) at Line 18. Purple highlights denote metrics of concern.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 18
Week 311 - A-rated S&P 100 “Defensive” Companies With Tangible Book Value
Situation: We know for certain that this is a period of great anxiety in credit markets. Trillions of dollars in loans have been made by banks in Southern Europe and East Asia that are now worth less than a third of their face value. Many of these loans were made by private banks, but governments are ultimately “on the hook” for the debt. With non-performing debts on their books, banks have less ability to make worthwhile loans to support economic growth, education and upgrades of infrastructure. A credit crunch is going to happen, unless these bad debts are boxed up, tied with a ribbon, and sold to the highest bidder. Remember: the credit crunch of 2008-09 quickly cut worldwide GDP growth per capita in half, from 2%/yr to 1%/yr. And it didn’t start to recover until this year.
What’s the best way for you to drill down on this subject? I suggest that you read Peter Coy’s article, which appeared in Bloomberg Business Week last October. His analysis responds to the International Monetary Fund’s 2016 Global Financial Stability Report that was hot off the press. Here are bullet points from that report: “medium-term risks continue to build”, meaning 1) growing political instability; 2) persistent weakness of financial institutions in China and Southern Europe; 3) excessive corporate debt in emerging markets. In China, combined public and private debt almost doubled over the past 10 years, and is now 210% of GDP (worldwide it’s 225% of GDP).
Mission: What’s the best way to tailor your retirement portfolio in response to these global risks? Become defensive. That doesn’t just mean having a Rainy Day Fund that is well-stocked with interest-earning cash-equivalents (Savings Bonds, Treasury Bills, and 2-Yr Treasury Notes). It means overweighting high quality “defensive stocks” in your equity portfolio. What is the Gold Standard? Companies in the S&P 100 Index that are in the 4 S&P Defensive Industries:
Consumer Staples;
Healthcare;
Utilities; and
Communication Services.
Large companies have multiple product lines, and membership in the S&P 100 Index requires a healthy options market for the company’s stock, to facilitate price discovery. You have to drill deeper in your analysis, to be sure the company’s S&P credit rating is A- or better, and its stock rating is A-/M or better. Statistical information has to be available from the 16-Yr series of the BMW Method and the 2017 Barron’s 500 List. Check financial statements for signs of high debt: long-term bonds that represent more than a third of total assets, operating cash flow that covers less than 40% of current liabilities, or an inability to meet dividend payments out of free cash flow (FCF). Exclude companies with negative Tangible Book Value.
Execution: By using the above criteria, we uncover 7 companies out of the 32 “defensive” companies in the S&P 100 Index (see Table).
Bottom Line: Defensive companies are less interesting than growth companies or companies involved in the production of raw commodities. But high-quality defensive companies, such as Johnson & Johnson (JNJ) and NextEra Energy (NEE), consistently grow earnings faster than GDP and are quick to correct any earnings shortfall. All an investor need do is learn to read financial statements, and regularly examine websites for data on companies of interest.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion).
Full Disclosure: I dollar-average into Coca-Cola (KO), NextEra Energy (NEE), and Johnson & Johnson (JNJ). I also own shares in Costco Wholesale (COST) and Wal-Mart Stores (WMT).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 15 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 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K. 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 20 in the Table. The ETF for that index is MDY at Line 14. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
What’s the best way for you to drill down on this subject? I suggest that you read Peter Coy’s article, which appeared in Bloomberg Business Week last October. His analysis responds to the International Monetary Fund’s 2016 Global Financial Stability Report that was hot off the press. Here are bullet points from that report: “medium-term risks continue to build”, meaning 1) growing political instability; 2) persistent weakness of financial institutions in China and Southern Europe; 3) excessive corporate debt in emerging markets. In China, combined public and private debt almost doubled over the past 10 years, and is now 210% of GDP (worldwide it’s 225% of GDP).
Mission: What’s the best way to tailor your retirement portfolio in response to these global risks? Become defensive. That doesn’t just mean having a Rainy Day Fund that is well-stocked with interest-earning cash-equivalents (Savings Bonds, Treasury Bills, and 2-Yr Treasury Notes). It means overweighting high quality “defensive stocks” in your equity portfolio. What is the Gold Standard? Companies in the S&P 100 Index that are in the 4 S&P Defensive Industries:
Consumer Staples;
Healthcare;
Utilities; and
Communication Services.
Large companies have multiple product lines, and membership in the S&P 100 Index requires a healthy options market for the company’s stock, to facilitate price discovery. You have to drill deeper in your analysis, to be sure the company’s S&P credit rating is A- or better, and its stock rating is A-/M or better. Statistical information has to be available from the 16-Yr series of the BMW Method and the 2017 Barron’s 500 List. Check financial statements for signs of high debt: long-term bonds that represent more than a third of total assets, operating cash flow that covers less than 40% of current liabilities, or an inability to meet dividend payments out of free cash flow (FCF). Exclude companies with negative Tangible Book Value.
Execution: By using the above criteria, we uncover 7 companies out of the 32 “defensive” companies in the S&P 100 Index (see Table).
Bottom Line: Defensive companies are less interesting than growth companies or companies involved in the production of raw commodities. But high-quality defensive companies, such as Johnson & Johnson (JNJ) and NextEra Energy (NEE), consistently grow earnings faster than GDP and are quick to correct any earnings shortfall. All an investor need do is learn to read financial statements, and regularly examine websites for data on companies of interest.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion).
Full Disclosure: I dollar-average into Coca-Cola (KO), NextEra Energy (NEE), and Johnson & Johnson (JNJ). I also own shares in Costco Wholesale (COST) and Wal-Mart Stores (WMT).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 15 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 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K. 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 20 in the Table. The ETF for that index is MDY at Line 14. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 4
Week 309 - Barron’s 500 Food Processing Companies
Situation: The food processing sector can be quite rewarding for stock-pickers, relative to risk, even though profit margins are thin. This “competitive advantage” occurs because food is an “essential good.” Consumers tend to purchase the same food items in the same quantities, month after month, regardless of price. Demand is relatively insensitive to price, so prices are said to be inelastic. This is fortunate for the food processor because input costs can change on short notice (typically due to weather events or transportation bottlenecks).
Mission: Identify and analyze all of the large and well-established US food processing companies that are publicly traded.
Execution: Provide a spreadsheet analysis (see Table) of those companies large enough to be on the Barron’s 500 List (http://online.wsj.com/public/resources/documents/500TopCompanies2016.pdf) and well-established enough to have had 16 years of trading records analyzed by the BMW Method. Exclude companies that issue “junk bonds” (those rated lower than BBB- by S&P).
Bottom Line: We’ve come up with 18 companies (see Table). In the aggregate, their stocks make a very good investment, having returned over 11%/yr since the S&P 500 peak on 9/1/2000 vs. less than 5%/yr for VFINX (the lowest-cost S&P 500 Index fund at Line 28 in the Table). Risk measures also look good. For example, the average stock gained 3.7%/yr during the 4.5 year Housing Crisis vs. a loss of 3%/yr for VFINX (see Column D in the Table), and has less than half the price volatility (as measured by the 5-Yr Beta statistic, see Column I in the Table).
What’s not to like? Well, a lot. Try picking just 3 of the 18 for your portfolio. Maybe you want to confine your research to A-rated stocks (see Columns U and V)? Only 6 qualify: HRL, COST, HSY, KO, PEP and WMT. Maybe you want stocks with a clean Balance Sheet (see Columns R through T in the Table)? Only 8 qualify: HRL, COST, WFM, INGR, KO, WMT, ADM and KR. Maybe you don’t want to gamble, so you’ll avoid the red-highlighted stocks in Column M of the Table. There are 9 of those: SJM, COST, GIS, KO, K, PEP, WMT, CPB and SYY. You get the point. Very few are “safe,” meaning that the stock is able to clear all 3 of those hurdles. There are 3 of those: Costco Wholesale (COST), Coca-Cola (KO) and Wal-Mart Stores (WMT). Not surprisingly, both are strong global brands, as shown in Columns P and Q. Only COST and KO have a projected rate of return over the next decade of at least 9%/yr, i.e., a positive NPV number in Column AA of the Table.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, and also own shares of HRL, WMT, and COST.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 27 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 32 in the Table. The ETF for that index is MDY at Line 26. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Identify and analyze all of the large and well-established US food processing companies that are publicly traded.
Execution: Provide a spreadsheet analysis (see Table) of those companies large enough to be on the Barron’s 500 List (http://online.wsj.com/public/resources/documents/500TopCompanies2016.pdf) and well-established enough to have had 16 years of trading records analyzed by the BMW Method. Exclude companies that issue “junk bonds” (those rated lower than BBB- by S&P).
Bottom Line: We’ve come up with 18 companies (see Table). In the aggregate, their stocks make a very good investment, having returned over 11%/yr since the S&P 500 peak on 9/1/2000 vs. less than 5%/yr for VFINX (the lowest-cost S&P 500 Index fund at Line 28 in the Table). Risk measures also look good. For example, the average stock gained 3.7%/yr during the 4.5 year Housing Crisis vs. a loss of 3%/yr for VFINX (see Column D in the Table), and has less than half the price volatility (as measured by the 5-Yr Beta statistic, see Column I in the Table).
What’s not to like? Well, a lot. Try picking just 3 of the 18 for your portfolio. Maybe you want to confine your research to A-rated stocks (see Columns U and V)? Only 6 qualify: HRL, COST, HSY, KO, PEP and WMT. Maybe you want stocks with a clean Balance Sheet (see Columns R through T in the Table)? Only 8 qualify: HRL, COST, WFM, INGR, KO, WMT, ADM and KR. Maybe you don’t want to gamble, so you’ll avoid the red-highlighted stocks in Column M of the Table. There are 9 of those: SJM, COST, GIS, KO, K, PEP, WMT, CPB and SYY. You get the point. Very few are “safe,” meaning that the stock is able to clear all 3 of those hurdles. There are 3 of those: Costco Wholesale (COST), Coca-Cola (KO) and Wal-Mart Stores (WMT). Not surprisingly, both are strong global brands, as shown in Columns P and Q. Only COST and KO have a projected rate of return over the next decade of at least 9%/yr, i.e., a positive NPV number in Column AA of the Table.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, and also own shares of HRL, WMT, and COST.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 27 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 32 in the Table. The ETF for that index is MDY at Line 26. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Subscribe to:
Comments (Atom)