Situation: Investors should pay attention to asset classes that fluctuate in value out-of-sync with the S&P 500 Index. Such asset classes are said to have minimal or negative “correlation” with large-capitalization US stocks. Emerging markets and raw commodities are important examples. Those are a natural pair, given that most countries in the emerging markets group have an economy that is based on the production of one or more raw commodities.
The idea that you can find a safe haven for your savings, one which will allow you to ride out a crash in the US stock market, is a pleasant fiction. Articles in support of that idea are published almost daily. But unless you are a trader who can afford to rent or buy a $500,000 seat on the Chicago Mercantile Exchange, you probably aren’t deft enough to arbitrage the various risks accurately enough before they develop (and at low enough transaction costs) to avoid losing money in a crash.
If you really want to ride out most crashes, invest in a bond-heavy balanced mutual fund that is managed by real humans. The Vanguard Group offers one best, and it comes with very low transaction fees (Vanguard Wellesley Income Fund or VWINX). To refresh yourself on the competitive advantages of investing in food and agriculture companies, see our most recent blog on the subject (see Month 91). To refresh yourself on the competitive disadvantages, study this month’s Table and Bottom Line carefully.
The essential fact is that economies require money for spending and investment. That comes down to having consumers who are confident enough about their employment prospects and entrepreneurs who are confident enough about their ability to invest. Those consumers and entrepreneurs can be relied upon to transfer their successes to the larger economy by saving money, taking out loans, and paying taxes. National economies are interlinked. Because of the size and innovation of its marketplace, the US economy is the main enabler for most of the other national economies. Logic would suggest that the valuation for any asset class will roughly track the ups and downs of the S&P 500 Index, either as a first derivative or second derivative.
Mission: Use our Standard Spreadsheet to analyze US and Canadian food and agriculture companies that carry at least a BBB rating on their bonds (see Column R).
Execution: see Table.
Administration: Of the 25 companies listed in the Table, only one meets Warren Buffett’s criteria of low beta (see Column I), low volatility (Column M), high quality (Column S), strong balance sheet (Columns N-R), and TTM (Trailing Twelve Month) earnings plus mrq (most recent quarter) Book Values that yield a Graham Number which is not far from the stock’s current Price (Column Y). That company is Berkshire Hathaway. We use a Basic Quality Screen that is less stringent as his: 1) an S&P stock rating of B+/M or better (Column S), 2) an S&P bond rating of BBB+ or better (Column R), 3) 16-Yr price volatility (Column M) that is less than 3 times the rate of price appreciation (Column K), and 4) a positive dollar amount for net present value (Column W) when using a 10-Yr holding period in combination with a 10% discount rate (to reflect a 10% Required Rate of Return).
Bottom Line: Only 8 companies on the list pass our Basic Quality Screen (see Administration above): HRL, COST, PEP, KO, DE, FAST, CNI, UNP. At the opposite end of the spectrum, 9 companies have a below-market S&P bond rating of BBB. So, those stocks represent outright gambles.
Aside from Berkshire Hathaway, none of the 25 companies can be said to issue a reasonably priced “value” stock. We’re dealing with 24 “growth” stocks, only a third of which are of high quality. Three of the 9 with BBB bond ratings have high total debt levels relative to EBITDA (see Column O in the Table) that are unprotected by Tangible Book Value (Column P): SJM, MKC, GIS. The good news is that only one of the 9 appears to be overpriced, and that company (MKC) is a quasi-monopoly that has little risk of bankruptcy because it has “cornered” the US spice market.
In summary, you can do well by investing in this space as long as you understand that you’re dealing with a fragmented food industry, one that is flush with companies of dubious quality. You might like to be well-informed about these companies because food, like fuel, is an essential good, and the food industry enjoys steady growth. Why? Because the number of people in Asia & Africa who can afford to consume 50 grams of protein per day grows by tens of millions per year.
Risk Rating: ranges from 6 to 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion =10).
Full Disclosure: I dollar-average into TSN, KO and UNP, and also own shares of AMZN, HRL, MO, MKC, BRK-B, CAT and WMT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Showing posts with label foreign stocks. Show all posts
Showing posts with label foreign stocks. Show all posts
Sunday, April 28
Sunday, September 25
Week 273 - The “Great Game” Will Be Won (or Lost) in Africa
Situation: The “Great Game” is a 19th Century term that refers to competition between the British Empire and Russia for dominance of Central Asia. Now, a similar diplomatic game is being played in Africa between the US and China. Much more capital (and diplomacy) is being invested by China, which is sending workers to execute ambitious infrastructure projects. Given that large sub-Saharan countries are among the fastest-growing emerging markets, investors need to stay abreast of Foreign Direct Investment. Much of that FDI is done at the corporate level, aided perhaps by loans from the US Export-Import Bank. But the China-Africa Industrial Cooperation Fund has been loaning far larger sums to Chinese companies.
Mission: The population of Africa is growing 3.3%/yr and is on track to double by 2040, reaching two billion. Investors need to know which publicly-traded companies are making a strong push in Africa, what their strategies are, and whether or not ROIC exceeds WACC. We will confine our attention to international companies on the 2015 list of the top 500 companies in Africa, which is an article that is supplemented by a discussion of recent developments.
US companies on the Top 500 list include Newmont Mining (NEM), Wal-Mart Stores (WMT) and Exxon Mobil (XOM). Major International companies include Orange (ORAN, a French telecommunications company), Total SA (TOT), AngloGold Ashanti (AU), Unilever plc (UL), Harmony Gold (HMY), Nissan Motors (NSANY), Diageo plc (DEO), ArcelorMittal (MT) and British American Tobacco (BTI).
Execution: see Table.
Administration: US companies face a number of problems that deter investment. The near-absence of shopping malls in even the largest country (Nigeria) has made it difficult for Wal-Mart Stores, and its partner in South Africa (Massmart), to expand operations beyond South Africa. McDonald’s has restaurants in only 3 African countries (Morocco, Egypt, South Africa) but will soon open one in Tunis (Tunisia) and one in Lagos (Nigeria). The problems that prevent McDonald’s from opening restaurants in the other 49 African countries include: 1) difficulty maintaining the security of its food supply chain to be certain that its meals are safe for consumption; 2) unreliable electric power grids that make it necessary to install back-up generators; 3) low average caloric intake because the country's population has insufficient disposable income. Nike has not opened any retail outlets in Africa, even though wholesale and Internet sales are strong and growing. Procter & Gamble derives 40% of its sales from emerging markets and has built a new plant in South Africa to support sales that are growing there, as well as in Kenya and Nigeria. Microsoft is also pushing into Africa. Newmont Mining has two large gold mines in Ghana, and Coca-Cola operates across an extensive distribution network.
You get the picture: Africa is full of developing countries, yet none outside of South Africa are developed. The overriding theme remains one of resource extraction, mainly gold and oil. Shopping centers are beginning to appear but power grids support only 40% of demand. So, diesel generators are widely used in even the largest country (Nigeria). Companies in the Health Care industry are only beginning to find a foothold. Nonetheless, Unilever plc (UL) has built a strong market in consumer staples and Nissan Motors’ (NSANY) Renault cars have sold well for over 50 years.
Bottom Line: Except for South Africa, infrastructure remains too limited to attract Foreign Direct Investment beyond that needed to extract, and sometimes process, natural resources (including agricultural products). Business is not booming. Direct commercial flights on US carriers to Africa have not been profitable; Delta is the only remaining carrier, and it continues to reduce available seat-miles. But major US corporations continue to expand operations in Africa, and China is making a big push.
Risk Rating: 7
Full Disclosure: I dollar-average into XOM and also own shares of WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H in the Table. Price Growth Rate is the current 16-Yr CAGR found at Column L in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is based on returns from a stock index of similar risk to a portfolio of individual stocks, i.e., the S&P 400 MidCap Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: The population of Africa is growing 3.3%/yr and is on track to double by 2040, reaching two billion. Investors need to know which publicly-traded companies are making a strong push in Africa, what their strategies are, and whether or not ROIC exceeds WACC. We will confine our attention to international companies on the 2015 list of the top 500 companies in Africa, which is an article that is supplemented by a discussion of recent developments.
US companies on the Top 500 list include Newmont Mining (NEM), Wal-Mart Stores (WMT) and Exxon Mobil (XOM). Major International companies include Orange (ORAN, a French telecommunications company), Total SA (TOT), AngloGold Ashanti (AU), Unilever plc (UL), Harmony Gold (HMY), Nissan Motors (NSANY), Diageo plc (DEO), ArcelorMittal (MT) and British American Tobacco (BTI).
Execution: see Table.
Administration: US companies face a number of problems that deter investment. The near-absence of shopping malls in even the largest country (Nigeria) has made it difficult for Wal-Mart Stores, and its partner in South Africa (Massmart), to expand operations beyond South Africa. McDonald’s has restaurants in only 3 African countries (Morocco, Egypt, South Africa) but will soon open one in Tunis (Tunisia) and one in Lagos (Nigeria). The problems that prevent McDonald’s from opening restaurants in the other 49 African countries include: 1) difficulty maintaining the security of its food supply chain to be certain that its meals are safe for consumption; 2) unreliable electric power grids that make it necessary to install back-up generators; 3) low average caloric intake because the country's population has insufficient disposable income. Nike has not opened any retail outlets in Africa, even though wholesale and Internet sales are strong and growing. Procter & Gamble derives 40% of its sales from emerging markets and has built a new plant in South Africa to support sales that are growing there, as well as in Kenya and Nigeria. Microsoft is also pushing into Africa. Newmont Mining has two large gold mines in Ghana, and Coca-Cola operates across an extensive distribution network.
You get the picture: Africa is full of developing countries, yet none outside of South Africa are developed. The overriding theme remains one of resource extraction, mainly gold and oil. Shopping centers are beginning to appear but power grids support only 40% of demand. So, diesel generators are widely used in even the largest country (Nigeria). Companies in the Health Care industry are only beginning to find a foothold. Nonetheless, Unilever plc (UL) has built a strong market in consumer staples and Nissan Motors’ (NSANY) Renault cars have sold well for over 50 years.
Bottom Line: Except for South Africa, infrastructure remains too limited to attract Foreign Direct Investment beyond that needed to extract, and sometimes process, natural resources (including agricultural products). Business is not booming. Direct commercial flights on US carriers to Africa have not been profitable; Delta is the only remaining carrier, and it continues to reduce available seat-miles. But major US corporations continue to expand operations in Africa, and China is making a big push.
Risk Rating: 7
Full Disclosure: I dollar-average into XOM and also own shares of WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H in the Table. Price Growth Rate is the current 16-Yr CAGR found at Column L in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is based on returns from a stock index of similar risk to a portfolio of individual stocks, i.e., the S&P 400 MidCap Index.
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Sunday, March 20
Week 246 - Corn Belt Prosperity: Is It Gone?
Situation: The farming counties of the Corn Belt are in a recession due to the collapse in corn price per bushel, but the US economy is still growing. “In the past 50 years, every recession has seen the number of jobs in the economy decline by at least 1%. And jobs have never declined by that much outside of a recession. Today, the number of jobs in the U.S. has been growing briskly—up 292,000 in December and up 2.7 million over the past year. This is why many economists remain confident the U.S. can avoid recession.” That quotation from the Wall Street Journal summarizes the way we measure growth vs. contraction in the economy but jobs are a “lagging” indicator. The country is already on the brink of recession because of the “knock-on” effects of slow growth and high indebtedness in emerging market countries, mainly China. Their plight is made worse by our Federal Reserve’s policy of raising interest rates. The “capital flight” that has been happening in emerging market countries simply gets accelerated as the dollar gets stronger and as interest rates move higher. In other words, investors are pulling money out of emerging markets but those are the very markets where real growth is happening. A third of the revenue for S&P 500 Index companies comes from those countries. Earnings for the S&P 500 Index will fall as those countries head into recessions, triggered in part by our strong dollar. News Flash: almost all of the 45 major stock markets around the world are currently in a Bear Market.
Mission: Drill down on the Corn Belt centered in Illinois, Iowa, southern Minnesota and the eastern half of Nebraska, where 57% of US production occurs. That’s also where almost half of US ethanol plants are located. Cropland in those states has been falling steadily in price/acre for 3 years, and 2015 showed no hint of relief. The average price per acre in those 4 states in 2015 was $6418, which is 2.9% lower than in 2014. For Iowa, where 2015 values were $8200 per acre, prices were down 6.3%. But farm incomes have fallen 55% in the past two years, so it is only a matter of time before cropland values start to reflect that loss in productivity.
Execution: Let’s see how large AgriBusiness companies based in North America are doing, specifically those that meet our quality standards: Monsanto (MON), Potash (POT), DuPont (DD), Dow Chemical (DOW) and Deere (DE). Looking at this week’s Table, we see that they mirror what’s happening to commodity producers everywhere, namely, too much supply is being generated just when demand is collapsing for a variety of reasons.
Administration: What you can do, as an investor, is to remember that this is a very rewarding group of 5 stocks to own over 2-3 market cycles (see Column C in the Table). Mostly, you need to avoid taking action. Don’t go out and buy cropland, don’t sell any of these stocks that you already hold, and keep dollar-averaging into those that you do own long-term. The thing about commodity markets is that during bear markets producers either fail or barely survive. Production eventually falls enough that remaining companies have to struggle to catch up with demand (demand that is no longer being satisfied). It will not be difficult to ramp up operations at that point because stocks (and bonds) issued by commodity producers will be snapped up by investors. However, these capital expenditures won’t take effect for a while because so much investment has to be directed at replacing fixed assets and skilled labor lost during the downturn. But production eventually catches up to (and then exceeds) demand. That is why these are called long-cycle investments. Boom-bust-boom turnarounds typically span two or three stock market cycles.
Bottom Line: This commodity supercycle is finished. Most estimates show that global commodity-related production is approximately 150% of demand. Farm commodities are no different. Those produced in the US have to be marketed at too high a price in foreign countries, because of the “strong” dollar. That means farmers in Brazil, Argentina, the Ukraine, Australia and Canada have a competitive advantage over US farmers. The US-based AgriBusiness companies that have worldwide operations will recover faster than US farmers but a difficult decade lies ahead. In rural counties of the Corn Belt, prosperity is unlikely to recover soon.
Risk Rating: 8 (on a scale where gold-related investments are 10 and inflation-protected US Savings Bonds are 1).
Full Disclosure: I dollar-average into MON, and own stock in DD, ADM, and DE.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark. Total Returns in Column C of the Table date to 9/1/2000 because that marks the peak of the S&P 500 Index before the “dot.com” recession. There have been two peaks since, in 2007 and 2015, so we’re entering the third market cycle since 2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Drill down on the Corn Belt centered in Illinois, Iowa, southern Minnesota and the eastern half of Nebraska, where 57% of US production occurs. That’s also where almost half of US ethanol plants are located. Cropland in those states has been falling steadily in price/acre for 3 years, and 2015 showed no hint of relief. The average price per acre in those 4 states in 2015 was $6418, which is 2.9% lower than in 2014. For Iowa, where 2015 values were $8200 per acre, prices were down 6.3%. But farm incomes have fallen 55% in the past two years, so it is only a matter of time before cropland values start to reflect that loss in productivity.
Execution: Let’s see how large AgriBusiness companies based in North America are doing, specifically those that meet our quality standards: Monsanto (MON), Potash (POT), DuPont (DD), Dow Chemical (DOW) and Deere (DE). Looking at this week’s Table, we see that they mirror what’s happening to commodity producers everywhere, namely, too much supply is being generated just when demand is collapsing for a variety of reasons.
Administration: What you can do, as an investor, is to remember that this is a very rewarding group of 5 stocks to own over 2-3 market cycles (see Column C in the Table). Mostly, you need to avoid taking action. Don’t go out and buy cropland, don’t sell any of these stocks that you already hold, and keep dollar-averaging into those that you do own long-term. The thing about commodity markets is that during bear markets producers either fail or barely survive. Production eventually falls enough that remaining companies have to struggle to catch up with demand (demand that is no longer being satisfied). It will not be difficult to ramp up operations at that point because stocks (and bonds) issued by commodity producers will be snapped up by investors. However, these capital expenditures won’t take effect for a while because so much investment has to be directed at replacing fixed assets and skilled labor lost during the downturn. But production eventually catches up to (and then exceeds) demand. That is why these are called long-cycle investments. Boom-bust-boom turnarounds typically span two or three stock market cycles.
Bottom Line: This commodity supercycle is finished. Most estimates show that global commodity-related production is approximately 150% of demand. Farm commodities are no different. Those produced in the US have to be marketed at too high a price in foreign countries, because of the “strong” dollar. That means farmers in Brazil, Argentina, the Ukraine, Australia and Canada have a competitive advantage over US farmers. The US-based AgriBusiness companies that have worldwide operations will recover faster than US farmers but a difficult decade lies ahead. In rural counties of the Corn Belt, prosperity is unlikely to recover soon.
Risk Rating: 8 (on a scale where gold-related investments are 10 and inflation-protected US Savings Bonds are 1).
Full Disclosure: I dollar-average into MON, and own stock in DD, ADM, and DE.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark. Total Returns in Column C of the Table date to 9/1/2000 because that marks the peak of the S&P 500 Index before the “dot.com” recession. There have been two peaks since, in 2007 and 2015, so we’re entering the third market cycle since 2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 10
Week 201 - Barron’s 500 Companies with 16 years of Below-market Variance and Above-market Returns
Situation: You should invest in the lowest-cost S&P 500 Index fund (VFINX) unless your stock picks have a history of doing better while taking on less risk. Why? Because stock-picking takes up a lot of your time and costs more money than buying shares in an index fund. For investing in smaller capitalization stocks or foreign stocks, don’t even consider any option other than low-cost index funds. Those are the rules so what are the exceptions? There’s really only one, and that is to pick from large capitalization stocks have a history of granting annual dividend increases that more than compensate for inflation. The trick is to find a low-cost dividend reinvestment plan (DRIP) to dollar-average your monthly purchases. After you retire, have those dividends sent to your mailbox and enjoy the one source of retirement income that grows faster than inflation.
Mission: Identify large-capitalization stocks that have below-market variance and above-market returns while paying a dividend that grows more than twice as fast as inflation.
Execution: In our Week 193 and Week 199 blogs, we have presented a system for assessing price variance at multiple points over 25 yrs. The BMW Method provides monthly updates of 16-yr, 20-yr, 25-yr, 30-yr, 35-yr and 40-yr variance, which are “least squares” calculations based on the logarithm of weekly prices for over 500 stocks (fewer at 30, 35 and 40yr intervals). The graphs give a trendline (CAGR at Column S in the Table) with adjacent lines at one and two Standard Deviations from the trendline. The spread between the base trendline and the -2SD trendline is the percent loss you can expect once every 20 yrs (see Column U in the Table). In constructing the Table, a stock that follows a track one Standard Deviation away from the S&P 500 Index (^GSPC) over recent months is at variance with ^GSPC and has therefore been excluded (see Column T in the Table). To further assess variance exceeding that for the S&P 500 Index, we look at Total Return during the Lehman Panic (see Column D in the Table), and at the 5-yr Beta (see Column I in the Table). S&P ratings are used to exclude companies that issue bonds with a rating lower than BBB+ and stocks with a rating lower than B+/M.
Using this information, we’ve come up with 14 companies, all but one of which is a Dividend Achiever (see Column R in the Table). You’ll remember that "Dividend Achiever" is S&P’s term for a company that increases its dividend annually for at least the past 10 yrs. That one exception on our list is Campbell Soup (CPB), and S&P will soon designate it a Dividend Achiever. Several columns in the Table point to the outperformance of these 14 stocks, as well as documenting less volatility than the S&P 500 Index. What is their key to success? Column L (estimated 5-yr earnings growth/yr) offers the key: 3/4ths of these companies are expected to grow earnings slower than the average company in the S&P 500 Index. By itself, that speaks volumes about why these companies outperform with less risk. Their earnings growth is relentless, with only minor hiccoughs. When earnings balk, a stock’s price will usually fall and it may take years to recover (certainly many months). IBM is a case in point. It recently sold off a couple of slow-growth divisions and re-tasked a couple of others, taking an earnings hit. The stock price fell 20% as soon as these moves were announced, and it has stayed at that level for more than 6 months. Is the company worse off or better off as a result of those structural adjustments? Warren Buffett decided that it is better off and bought more shares of IBM for Berkshire Hathaway.
Bottom Line: Companies that rarely disappoint on earnings enjoy steady growth in their stock price. Mature companies with stable earnings growth can outperform the S&P 500 Index, even with earnings growth that is predictably less than for the average S&P 500 company. We’ve only found 14 companies that have better growth with less risk, but those “diamonds in the rough” are worth close examination as prospective investments for your retirement portfolio.
Risk Rating: 4
Full Disclosure: I dollar-average into WMT, NKE, NEE and JNJ, and also own shares of GIS, PEP and ITW.
NOTE: Metrics in the Table that underperform our key benchmark (VBINX) are highlighted in red. All metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Identify large-capitalization stocks that have below-market variance and above-market returns while paying a dividend that grows more than twice as fast as inflation.
Execution: In our Week 193 and Week 199 blogs, we have presented a system for assessing price variance at multiple points over 25 yrs. The BMW Method provides monthly updates of 16-yr, 20-yr, 25-yr, 30-yr, 35-yr and 40-yr variance, which are “least squares” calculations based on the logarithm of weekly prices for over 500 stocks (fewer at 30, 35 and 40yr intervals). The graphs give a trendline (CAGR at Column S in the Table) with adjacent lines at one and two Standard Deviations from the trendline. The spread between the base trendline and the -2SD trendline is the percent loss you can expect once every 20 yrs (see Column U in the Table). In constructing the Table, a stock that follows a track one Standard Deviation away from the S&P 500 Index (^GSPC) over recent months is at variance with ^GSPC and has therefore been excluded (see Column T in the Table). To further assess variance exceeding that for the S&P 500 Index, we look at Total Return during the Lehman Panic (see Column D in the Table), and at the 5-yr Beta (see Column I in the Table). S&P ratings are used to exclude companies that issue bonds with a rating lower than BBB+ and stocks with a rating lower than B+/M.
Using this information, we’ve come up with 14 companies, all but one of which is a Dividend Achiever (see Column R in the Table). You’ll remember that "Dividend Achiever" is S&P’s term for a company that increases its dividend annually for at least the past 10 yrs. That one exception on our list is Campbell Soup (CPB), and S&P will soon designate it a Dividend Achiever. Several columns in the Table point to the outperformance of these 14 stocks, as well as documenting less volatility than the S&P 500 Index. What is their key to success? Column L (estimated 5-yr earnings growth/yr) offers the key: 3/4ths of these companies are expected to grow earnings slower than the average company in the S&P 500 Index. By itself, that speaks volumes about why these companies outperform with less risk. Their earnings growth is relentless, with only minor hiccoughs. When earnings balk, a stock’s price will usually fall and it may take years to recover (certainly many months). IBM is a case in point. It recently sold off a couple of slow-growth divisions and re-tasked a couple of others, taking an earnings hit. The stock price fell 20% as soon as these moves were announced, and it has stayed at that level for more than 6 months. Is the company worse off or better off as a result of those structural adjustments? Warren Buffett decided that it is better off and bought more shares of IBM for Berkshire Hathaway.
Bottom Line: Companies that rarely disappoint on earnings enjoy steady growth in their stock price. Mature companies with stable earnings growth can outperform the S&P 500 Index, even with earnings growth that is predictably less than for the average S&P 500 company. We’ve only found 14 companies that have better growth with less risk, but those “diamonds in the rough” are worth close examination as prospective investments for your retirement portfolio.
Risk Rating: 4
Full Disclosure: I dollar-average into WMT, NKE, NEE and JNJ, and also own shares of GIS, PEP and ITW.
NOTE: Metrics in the Table that underperform our key benchmark (VBINX) are highlighted in red. All metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 11
Week 110 - Capitalization-weighted Index of 20 Leading Food Producers
Situation: In our blog for Week 100, we studied the overall food and beverage industry, noting that it is fragmented but remarkably profitable. For investors, the problem is to find out which companies can remain efficient at cost & debt control while having a sustainable business plan.
So we’ve drilled down on producers around the world and come up with 20 companies (Table), by evaluating long-term Finance Value (Col E in Table) and recent trends in cash-flow and sales. The list includes 3 seed producers (MON, DD, SYT), fertilizer producers (POT, AGU, MOS), one agricultural products wholesaler (ADM), two soft-drink companies (PEP, KO), and 11 producers of packaged foods and meats (MDLZ, CAG, CPB, HRL, K, GIS, SJM, HSY, TSN, NSRGY, DANOY). When 10-yr total returns (Col C in the Table) are compared to the market capitalization of these companies (Col L), we see that stock performance (Col C) times capitalization weight (Col M) gives an overall 10-yr total return of 11.9%% (Col N). This is significantly different from the average return of 14.2% (Col C), indicating that outperformance by smaller companies is distorting the average performance (which is a finding with almost all industries). Interestingly, 4 of the top 6 companies (performance X capitalization) are based outside the US: Potash (POT), Nestle (NSRGY), Syngenta (SYT), and Danone (DANOY); Coca-Cola (KO) and Monsanto (MON) are the US-based companies.
Bottom Line: The problem US investors have picking food stocks is that many of the best companies are foreign, with Nestle being the most familiar name. Buying stock in a foreign company is challenging, since currency fluctuations can have a remarkable influence on the dollar-denominated conversion value of the stock, particularly for companies like Syngenta and Nestle that are based in Switzerland.
News Flash: Commodity investing is a global game. You're a player to the extent that such companies in your portfolio are either based outside the US, or get most of their sales there.
Risk Rating: 7
Full Disclosure: I have stock in KO, POT, GIS, DD, and HRL.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
So we’ve drilled down on producers around the world and come up with 20 companies (Table), by evaluating long-term Finance Value (Col E in Table) and recent trends in cash-flow and sales. The list includes 3 seed producers (MON, DD, SYT), fertilizer producers (POT, AGU, MOS), one agricultural products wholesaler (ADM), two soft-drink companies (PEP, KO), and 11 producers of packaged foods and meats (MDLZ, CAG, CPB, HRL, K, GIS, SJM, HSY, TSN, NSRGY, DANOY). When 10-yr total returns (Col C in the Table) are compared to the market capitalization of these companies (Col L), we see that stock performance (Col C) times capitalization weight (Col M) gives an overall 10-yr total return of 11.9%% (Col N). This is significantly different from the average return of 14.2% (Col C), indicating that outperformance by smaller companies is distorting the average performance (which is a finding with almost all industries). Interestingly, 4 of the top 6 companies (performance X capitalization) are based outside the US: Potash (POT), Nestle (NSRGY), Syngenta (SYT), and Danone (DANOY); Coca-Cola (KO) and Monsanto (MON) are the US-based companies.
Bottom Line: The problem US investors have picking food stocks is that many of the best companies are foreign, with Nestle being the most familiar name. Buying stock in a foreign company is challenging, since currency fluctuations can have a remarkable influence on the dollar-denominated conversion value of the stock, particularly for companies like Syngenta and Nestle that are based in Switzerland.
News Flash: Commodity investing is a global game. You're a player to the extent that such companies in your portfolio are either based outside the US, or get most of their sales there.
Risk Rating: 7
Full Disclosure: I have stock in KO, POT, GIS, DD, and HRL.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 24
Week 51 - International Stocks
Situation: In last week’s blog, Lifeboat Stocks Revisited (Week 50), we described unexpected changes in 3 iconic Lifeboat Stocks (KO, PEP, PG) that occurred during the 2007-09 bear market. Losses to investors (i.e., the total return from dividends and sale) were greater than 20%. While this loss is better than the more than 40% loss for investors in the S&P 500 Index, it is still a shock. How did this happen? Well, those companies had come to a point where half or more of their profits were generated outside the US, and those profits couldn’t be repatriated because of US tax laws. This required Coca-Cola, PepsiCo, and Procter & Gamble to invest those profits in their countries of origin, mainly China. In other words, KO, PEP and PG have become international companies, like 3M, VFC and MCD. Unfortunately, international stock markets were especially hard hit by the 2007-09 recession. Typical returns are shown in the accompanying Table (as represented by Artisan International Fund).
Our advice at ITR is that 1/6th of your equity holdings should consist of stock in companies whose focus is on international sales. And, we also advise investing in US companies that sell products aggressively in emerging markets like Brazil, Russia, Mexico, China and India. Why not invest in foreign companies, in case the dollar loses value relative to international currencies? That might be a good idea someday but for the current situation the dollar is regarded as a safe haven. We recommend that you hedge that “currency risk” by investing 1/3rd of your bond holdings in an international bond fund like T. Rowe Price International Bond Fund (RPIBX). That fund tracks the value of a trade-weighted basket of non-dollar currencies but has more volatility than a comparable investment-grade US bond fund like T. Rowe Price New Income Fund (see the attached Table).
Overseas markets are going to outperform, ultimately. Think about it. “There are 270 cities with a population of 1 million in Asia today that don’t have an airport. Emerging Asia is clearly where the opportunities are in the next 20 or 30 years.” (Mr. D. Lavigne of Frost & Sullivan, as quoted in the NYT on 6/13/12.) The same article noted that the Asia-Pacific segment of the airline industry will earn $2B in 2012, i.e., twice the airline industry’s earnings from the rest of the world combined. This means we need to take the long-term view of events in Asia and make a point of regularly adding to a dividend re-investment plan (DRIP) for one or two of the 6 International Stocks in the ITR Master List (Week 39) that earn most of their profits there: KO, PEP, PG, MCD, VFC, MMM (see the attached Table). McDonald’s (MCD) looks like a good candidate for a “starter” DRIP for those investors who are new to DRIP investing.
Bottom Line: This will be Asia’s Century. Make sure you invest some money there and reap some of the rewards that will be found.
Our advice at ITR is that 1/6th of your equity holdings should consist of stock in companies whose focus is on international sales. And, we also advise investing in US companies that sell products aggressively in emerging markets like Brazil, Russia, Mexico, China and India. Why not invest in foreign companies, in case the dollar loses value relative to international currencies? That might be a good idea someday but for the current situation the dollar is regarded as a safe haven. We recommend that you hedge that “currency risk” by investing 1/3rd of your bond holdings in an international bond fund like T. Rowe Price International Bond Fund (RPIBX). That fund tracks the value of a trade-weighted basket of non-dollar currencies but has more volatility than a comparable investment-grade US bond fund like T. Rowe Price New Income Fund (see the attached Table).
Overseas markets are going to outperform, ultimately. Think about it. “There are 270 cities with a population of 1 million in Asia today that don’t have an airport. Emerging Asia is clearly where the opportunities are in the next 20 or 30 years.” (Mr. D. Lavigne of Frost & Sullivan, as quoted in the NYT on 6/13/12.) The same article noted that the Asia-Pacific segment of the airline industry will earn $2B in 2012, i.e., twice the airline industry’s earnings from the rest of the world combined. This means we need to take the long-term view of events in Asia and make a point of regularly adding to a dividend re-investment plan (DRIP) for one or two of the 6 International Stocks in the ITR Master List (Week 39) that earn most of their profits there: KO, PEP, PG, MCD, VFC, MMM (see the attached Table). McDonald’s (MCD) looks like a good candidate for a “starter” DRIP for those investors who are new to DRIP investing.
Bottom Line: This will be Asia’s Century. Make sure you invest some money there and reap some of the rewards that will be found.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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