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
Showing posts with label materials. Show all posts
Showing posts with label materials. Show all posts
Sunday, July 16
Sunday, March 26
Week 299 - “Basic Materials” And “Energy” Companies That Are Dividend Achievers
Situation: A Retirement Portfolio may benefit from some exposure to commodity-related Energy and Basic Materials companies. Yes, I know. During the 4.5 year Housing Crisis (from April 2007 to October 2011), stocks in the Basic Materials index fund (XLB) lost more than the S&P 500 Index, and stocks in the Energy index fund (XLE) didn’t do much better (see Column D in the Table). So let’s confine our attention to companies that kept increasing their dividend throughout that crisis, i.e., companies that S&P calls Dividend Achievers.
Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.
Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into MON and own shares of ENB.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.
Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into MON and own shares of ENB.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, October 16
Week 276 - Barron’s 500 Companies With Clean Balance Sheets and Improving Fundamentals
Situation: Stock market valuations are still in nosebleed territory. The S&P 500 Index is 25 times trailing 12-mo earnings. The cyclically-adjusted PE ratio is 27 times trailing 10-yr earnings, i.e., just shy of the last peak reached in October of 2007. You get the point, so you’re in “risk-off” mode. But you’re not going to save for the future by hiding money under your mattress. How should a prudent investor continue adding money to the market, knowing that a precipice looms? With dollar-cost averaging, an investor can add small amounts each month to stocks from several different industries, i.e., more shares per dollar when the market swoons. But which stocks? When you’re in risk-off mode, those need to be A-rated, large-capitalization stocks with improving fundamentals, and at least a 25 yr trading record.
Mission: Screen the 2016 Barron’s 500 List for companies that have improved in rank and have 25 yrs of quantitative data at the BMW Method website. Eliminate companies that don’t have a clean Balance Sheet (as defined in the Appendix for Week 271). Assess growth prospects by calculating Net Present Value (NPV) for each stock. For companies with Top 500 Global Brands, provide 2016 and 2015 brand ranks.
Execution: see Table.
Bottom Line: We’ve used a tight screen to come up with 10 companies worth dollar-averaging through a Bear Market. Three represent the Consumer Staples industry: HRL, COST, WMT. Four represent the Consumer Discretionary industry: ROST, TJX, NKE, DIS. There’s also one Industrial company (PH), an Information Technology company (ADP) and a Basic Materials company (APD). All but the 3 companies with strong brands (NKE, COST, ADP) are likely to fall in value as much as the S&P 500 Index in the next Bear Market (see Columns AC and AD in the Table). NPV calculations (see Column V in the Table) suggest that buying shares in any of the 10 companies would result in a greater gain after 10 yrs than buying shares in the lowest cost S&P 500 Index fund (VFINX at Line 18 in the Table).
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, and gold = 10)
Full Disclosure: I dollar-average into NKE and also own shares of ROST, TJX, HRL and WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 17 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. Price Growth Rate for this week is the25-Yr trendline CAGR found at Column K (http://invest.kleinnet.com/bmw1/), done to emphasize “reversion to the mean”. 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 owning a small portfolio of large-cap stocks, i.e., the S&P MidCap 400 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Screen the 2016 Barron’s 500 List for companies that have improved in rank and have 25 yrs of quantitative data at the BMW Method website. Eliminate companies that don’t have a clean Balance Sheet (as defined in the Appendix for Week 271). Assess growth prospects by calculating Net Present Value (NPV) for each stock. For companies with Top 500 Global Brands, provide 2016 and 2015 brand ranks.
Execution: see Table.
Bottom Line: We’ve used a tight screen to come up with 10 companies worth dollar-averaging through a Bear Market. Three represent the Consumer Staples industry: HRL, COST, WMT. Four represent the Consumer Discretionary industry: ROST, TJX, NKE, DIS. There’s also one Industrial company (PH), an Information Technology company (ADP) and a Basic Materials company (APD). All but the 3 companies with strong brands (NKE, COST, ADP) are likely to fall in value as much as the S&P 500 Index in the next Bear Market (see Columns AC and AD in the Table). NPV calculations (see Column V in the Table) suggest that buying shares in any of the 10 companies would result in a greater gain after 10 yrs than buying shares in the lowest cost S&P 500 Index fund (VFINX at Line 18 in the Table).
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, and gold = 10)
Full Disclosure: I dollar-average into NKE and also own shares of ROST, TJX, HRL and WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 17 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. Price Growth Rate for this week is the25-Yr trendline CAGR found at Column K (http://invest.kleinnet.com/bmw1/), done to emphasize “reversion to the mean”. 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 owning a small portfolio of large-cap stocks, i.e., the S&P MidCap 400 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 21
Week 268 - "Buy and Hold" Barron’s 500 Growth Stocks
Situation: Every investor has to know when to leave the party. Or, as Warren Buffett says, “be fearful when others are greedy and greedy when others are fearful.”
Mission: Design a template for leaving the party.
Execution: You’ll need a Central Thought. Mine is to stay invested in growth stocks, the ones that do badly in a recession. That means continue to invest in companies from the following 6 S&P industries: Consumer Discretionary, Financial, Information Technology, Industrial, Basic Materials, and Energy. The trick is to dump stocks with problematic Balance Sheets and buy stocks with clean Balance Sheets.
Administration: Start by defining a clean Balance Sheet. Accountants do this by picking their favorite ratios. My favorite ratios are (see Columns Y thru AB in the Table):
1. Total Debt:Equity is under 200%. That means senior managers will still “call the shots” in a crisis, not the bankers.
2. Long-Term Debt:Total Assets is under 30%. Long-term debt has to either be renewed upon maturity or returned to the lender. In a crisis, the rate of interest that bankers charge for a renewal loan (called a “rollover”) will likely be higher than for the original loan. In the Lehman Panic, many companies found that rollovers were unavailable at any rate of interest. To avoid declaring bankruptcy, those companies had to either repay maturing loans by selling company assets at firesale prices or find a “White Knight,” such as another company willing to assume that obligation as part of an acquisition.
3. TBV:Px is a positive number. You want the stock’s price to include Tangible Book Value. Most S&P 500 companies don’t have TBV. Their book value lies in the perceived value of their brand.
4. Div:FCF is a positive number. Going into a Bear Market, you don’t want to own stock in companies that make a habit of borrowing money to pay their dividend. Always be suspicious of companies that don’t pay their dividend out of Free Cash Flow.
There are other ways to know a company is likely to come through a Bear Market or recession unharmed. S&P stock and bond ratings are worth taking seriously: try to hold stock in A-rated companies (see Columns P and Q in the Table). Stick to companies with multiple product lines, i.e., those large enough to warrant inclusion in the Barron’s 500 List (see Columns N and O in the Table). That list ranks companies by cash flow and revenue. You can tell how a company is doing by comparing this year’s rank to last year’s.
You’ll also want to restrict your choices to companies that pay growing dividends, even if the dividend is low. An S&P Dividend Achiever is a company that has raised its dividend annually for the past 10 yrs. With one exception, all of the companies in this week’s Table are Dividend Achievers. Union Pacific is the exception but UNP will become a Dividend Achiever next February with a scheduled dividend increase.
Bottom Line: You can’t hope to keep up with the lowest-cost S&P 500 Index fund (VFINX at Line 21 in the Table) unless you stay invested in growth stocks. So, learn to pick growth stocks with clean Balance Sheets. Those are the ones likely to hold value in a Bear Market. Invest small amounts at a time by dollar-averaging your stock purchases automatically online. Then you’re certain to buy more shares per dollar invested when the market’s down.
Risk Rating: 6 (Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into NKE, MSFT and UNP, and also own shares of ROST, TJX, MMM, and EMR.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Net Present Value inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for stock price over the past 50 days, corrected for transaction costs of 2.5% when buying ~$5000 worth of shares. Dividend Growth Rate is the dividend CAGR for the past 16 years. Price Growth Rate is mean Price CAGR for the past 16 years (http://invest.kleinnet.com/bmw1/). Price Return from selling all shares in the 10th year is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Design a template for leaving the party.
Execution: You’ll need a Central Thought. Mine is to stay invested in growth stocks, the ones that do badly in a recession. That means continue to invest in companies from the following 6 S&P industries: Consumer Discretionary, Financial, Information Technology, Industrial, Basic Materials, and Energy. The trick is to dump stocks with problematic Balance Sheets and buy stocks with clean Balance Sheets.
Administration: Start by defining a clean Balance Sheet. Accountants do this by picking their favorite ratios. My favorite ratios are (see Columns Y thru AB in the Table):
1. Total Debt:Equity is under 200%. That means senior managers will still “call the shots” in a crisis, not the bankers.
2. Long-Term Debt:Total Assets is under 30%. Long-term debt has to either be renewed upon maturity or returned to the lender. In a crisis, the rate of interest that bankers charge for a renewal loan (called a “rollover”) will likely be higher than for the original loan. In the Lehman Panic, many companies found that rollovers were unavailable at any rate of interest. To avoid declaring bankruptcy, those companies had to either repay maturing loans by selling company assets at firesale prices or find a “White Knight,” such as another company willing to assume that obligation as part of an acquisition.
3. TBV:Px is a positive number. You want the stock’s price to include Tangible Book Value. Most S&P 500 companies don’t have TBV. Their book value lies in the perceived value of their brand.
4. Div:FCF is a positive number. Going into a Bear Market, you don’t want to own stock in companies that make a habit of borrowing money to pay their dividend. Always be suspicious of companies that don’t pay their dividend out of Free Cash Flow.
There are other ways to know a company is likely to come through a Bear Market or recession unharmed. S&P stock and bond ratings are worth taking seriously: try to hold stock in A-rated companies (see Columns P and Q in the Table). Stick to companies with multiple product lines, i.e., those large enough to warrant inclusion in the Barron’s 500 List (see Columns N and O in the Table). That list ranks companies by cash flow and revenue. You can tell how a company is doing by comparing this year’s rank to last year’s.
You’ll also want to restrict your choices to companies that pay growing dividends, even if the dividend is low. An S&P Dividend Achiever is a company that has raised its dividend annually for the past 10 yrs. With one exception, all of the companies in this week’s Table are Dividend Achievers. Union Pacific is the exception but UNP will become a Dividend Achiever next February with a scheduled dividend increase.
Bottom Line: You can’t hope to keep up with the lowest-cost S&P 500 Index fund (VFINX at Line 21 in the Table) unless you stay invested in growth stocks. So, learn to pick growth stocks with clean Balance Sheets. Those are the ones likely to hold value in a Bear Market. Invest small amounts at a time by dollar-averaging your stock purchases automatically online. Then you’re certain to buy more shares per dollar invested when the market’s down.
Risk Rating: 6 (Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into NKE, MSFT and UNP, and also own shares of ROST, TJX, MMM, and EMR.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Net Present Value inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for stock price over the past 50 days, corrected for transaction costs of 2.5% when buying ~$5000 worth of shares. Dividend Growth Rate is the dividend CAGR for the past 16 years. Price Growth Rate is mean Price CAGR for the past 16 years (http://invest.kleinnet.com/bmw1/). Price Return from selling all shares in the 10th year is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 3
Week 248 - A-rated S&P 500 Growth Companies That Are Dividend Achievers And Have A Durable Competitive Advantage
Situation: Stocks are tricky investments to own, particularly “growth” stocks. How should you get started? You know by now that we believe the investor with less than a million dollars in net worth should focus on owning stock in S&P 500 companies. We particularly like those in the annual Barron’s 500 List of US and Canadian companies with the highest revenues. Stock prices reflect expected earnings growth. An easy way to find companies with steady earnings growth is to look for S&P’s Dividend Achievers, i.e., companies that have been increasing their dividend annually for at least the past 10 yrs. S&P also helps us by assigning each company in the S&P 500 Index to one of 10 industries, 6 of which are “growth” industries: Energy, Basic Materials, Financials, Industrials, Consumer Discretionary, and Information Technology.
It helps to know how a company is capitalized. Does it mainly depend on selling common stock to attract investors, or does it prefer to float bond issues and sell preferred stock? If the answer is bonds and preferred stock, then the company’s book value will mainly reflect its brand value. (Accountants call that an “intangible” asset.) But if the answer is common stock, “tangible” assets may have more value than all the company’s liabilities. In other words, the company has what accountants call Tangible Book Value (TBV). If its stock price is no more than ~15 times TBV, it is undeniably solvent.
Mission: Develop a spreadsheet of growth companies in the Barron’s 500 List that are both Dividend Achievers and undeniably solvent. Focus on those with at least a 15 year trading history, taking care to exclude any with an S&P Bond Rating lower than A- or an S&P Stock Rating lower than A-/M. Then check to be sure TBV growth has at least doubled over the past decade and there haven’t been any more than 3 down years for TBV. In other words, the company meets Warren Buffett’s requirements for having a Durable Competitive Advantage (see Week 238).
Execution: There are only 5 companies that meet our criteria (see Table). In the aggregate, they’re no riskier than our key benchmark, VBINX at Line 12 in the Table. VBINX is essentially an S&P 500 Index fund that is 40% hedged with high quality bonds. Note in Column C of the Table that Total Returns over the past 2+ market cycles have been more than 3 times higher than the benchmark’s.
Bottom Line: If you’re new to stock picking, you’ve probably been confining your attention to “defensive” stocks, which are those issued by companies in the HealthCare, Utilities, Consumer Staples, and Communication Services industries. Your next step is to think about owning shares in “growth” stocks issued by companies in the Information Technology, Financial Services, Industrial, Consumer Discretionary, Basic Materials, and Energy industries. Those are riskier but have greater long-term returns. You can get help deciding which to own by screening for companies that a) grow their dividend reliably, b) have large revenues, c) have a Tangible Book Value (TBV), and d) meet Warren Buffett’s requirements for having a Durable Competitive Advantage (DCA): steady TBV growth that has at least doubled TBV over the past decade (i.e., growth of more than 7.1%/yr). We’ve run that screen and find that only 5 companies meet our requirements (see Table).
Risk Rating: 6
Full Disclosure: I dollar-average into NKE, MSFT and XOM, and also own shares of ROST and TJX.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX. Total Returns in Column C date to 9/1/2000, a peak of the S&P 500 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
It helps to know how a company is capitalized. Does it mainly depend on selling common stock to attract investors, or does it prefer to float bond issues and sell preferred stock? If the answer is bonds and preferred stock, then the company’s book value will mainly reflect its brand value. (Accountants call that an “intangible” asset.) But if the answer is common stock, “tangible” assets may have more value than all the company’s liabilities. In other words, the company has what accountants call Tangible Book Value (TBV). If its stock price is no more than ~15 times TBV, it is undeniably solvent.
Mission: Develop a spreadsheet of growth companies in the Barron’s 500 List that are both Dividend Achievers and undeniably solvent. Focus on those with at least a 15 year trading history, taking care to exclude any with an S&P Bond Rating lower than A- or an S&P Stock Rating lower than A-/M. Then check to be sure TBV growth has at least doubled over the past decade and there haven’t been any more than 3 down years for TBV. In other words, the company meets Warren Buffett’s requirements for having a Durable Competitive Advantage (see Week 238).
Execution: There are only 5 companies that meet our criteria (see Table). In the aggregate, they’re no riskier than our key benchmark, VBINX at Line 12 in the Table. VBINX is essentially an S&P 500 Index fund that is 40% hedged with high quality bonds. Note in Column C of the Table that Total Returns over the past 2+ market cycles have been more than 3 times higher than the benchmark’s.
Bottom Line: If you’re new to stock picking, you’ve probably been confining your attention to “defensive” stocks, which are those issued by companies in the HealthCare, Utilities, Consumer Staples, and Communication Services industries. Your next step is to think about owning shares in “growth” stocks issued by companies in the Information Technology, Financial Services, Industrial, Consumer Discretionary, Basic Materials, and Energy industries. Those are riskier but have greater long-term returns. You can get help deciding which to own by screening for companies that a) grow their dividend reliably, b) have large revenues, c) have a Tangible Book Value (TBV), and d) meet Warren Buffett’s requirements for having a Durable Competitive Advantage (DCA): steady TBV growth that has at least doubled TBV over the past decade (i.e., growth of more than 7.1%/yr). We’ve run that screen and find that only 5 companies meet our requirements (see Table).
Risk Rating: 6
Full Disclosure: I dollar-average into NKE, MSFT and XOM, and also own shares of ROST and TJX.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX. Total Returns in Column C date to 9/1/2000, a peak of the S&P 500 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 31
Week 239 - The “Big 6” Agronomy Companies Are Starting To Merge
Situation: For the past 10 years, companies in the “Basic Materials and Energy” industries have made massive investments to support China’s infrastructure buildout. More than 10 million people a year in China moved from rural poverty to cities during that time. But now China’s government sees little need for more construction projects and manufacturing capacity. Labor costs have increased and more emphasis is being placed on satisfying the need for consumer goods. China is no longer an emerging market. Other countries in Southeast Asia are able to produce goods more cheaply and compete with China for market share. The problem now is that the worldwide supply chain for energy, basic materials, and food commodities is twice the size it was 10 yrs ago but the market for all those goods is only a little larger. Production can’t suddenly be cut in half which means that excess goods have to go into storage. There has never been a commodity crash as big as this. To make matters worse, the world has yet to shake off lingering effects of the Lehman Panic. People got by with less for so long that they’ve unlearned the habit of casual shopping. But food? Who guessed that consumers would even cut back on that? Many families in North America are losing interest in foods that aren’t healthy, farm goods that aren’t produced in an environmentally sensitive manner, and meat that isn’t produced with due consideration to every farm animal’s well being. That means the grocery store bill is larger every week for those families but they’re seeking out grocery stores that offer those products. “Factory Farming” is going out of style.
Mission: Assemble growth-related metrics for the 6 largest companies that produce seeds, insecticides, herbicides and fungicides.
Execution: Dow Chemical (DOW) and duPont (DD) have decided to merge operations then spin off 3 companies. There will be one new company formed for agriculture, one for specialty chemicals, and and one for commodity chemicals. Syngenta (SYT) and Monsanto (MON) tried to merge, then broke off talks, and are now talking again. Bayer (BAYRY) and BASF (BASFY) have also held preliminary talks with potential partners. Let’s see what makes some of these 6 companies a target for purchase by other agronomy firms.
Administration: All of these companies are struggling. None of the US companies that S&P analyzes (MON, DD, DOW) has been able to grow Tangible Book Value (TBV) over the past 10 yrs, and stock prices average more than 20 times TBV (see Columns P-R in the Table). The main factor keeping these companies away from insolvency is the value of their strong brands. Risk metrics shown in the Table are very concerning, such as total return during the 2011 stock market correction (Column D), 5-yr Beta (Column I), and the BMW Method’s projection of price loss in a bear market compared to the 16-yr price trendline (Column O). On the other hand, the rewards to investors who bought any of these stocks at the market peak on September 1, 2000, have been quite satisfactory (see Columns C and M in the Table). Average dividend yield is ~3.4% and average dividend growth is 10.5% (see Columns G and H in the Table). The two weakest companies are duPont and Dow Chemical, so it is not surprising that those are the first to combine operations.
Bottom Line: Agronomy stocks aren’t for the faint of heart. You’d have to be a speculator who is able to weather volatility over at least two market cycles before reaping your reward. Now these stocks are on the bargain shelf, being forced to merge operations--which is just what an investor like Warren Buffett loves to see happening. Monsanto (MON) is the only one that might be a suitable stock to own for someone who is not a financial services professional.
Risk Rating: 7
Full Disclosure: I dollar-average into MON and also own shares of DD.
Note: Metrics are current for the Sunday of publication; metrics in red denote underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Assemble growth-related metrics for the 6 largest companies that produce seeds, insecticides, herbicides and fungicides.
Execution: Dow Chemical (DOW) and duPont (DD) have decided to merge operations then spin off 3 companies. There will be one new company formed for agriculture, one for specialty chemicals, and and one for commodity chemicals. Syngenta (SYT) and Monsanto (MON) tried to merge, then broke off talks, and are now talking again. Bayer (BAYRY) and BASF (BASFY) have also held preliminary talks with potential partners. Let’s see what makes some of these 6 companies a target for purchase by other agronomy firms.
Administration: All of these companies are struggling. None of the US companies that S&P analyzes (MON, DD, DOW) has been able to grow Tangible Book Value (TBV) over the past 10 yrs, and stock prices average more than 20 times TBV (see Columns P-R in the Table). The main factor keeping these companies away from insolvency is the value of their strong brands. Risk metrics shown in the Table are very concerning, such as total return during the 2011 stock market correction (Column D), 5-yr Beta (Column I), and the BMW Method’s projection of price loss in a bear market compared to the 16-yr price trendline (Column O). On the other hand, the rewards to investors who bought any of these stocks at the market peak on September 1, 2000, have been quite satisfactory (see Columns C and M in the Table). Average dividend yield is ~3.4% and average dividend growth is 10.5% (see Columns G and H in the Table). The two weakest companies are duPont and Dow Chemical, so it is not surprising that those are the first to combine operations.
Bottom Line: Agronomy stocks aren’t for the faint of heart. You’d have to be a speculator who is able to weather volatility over at least two market cycles before reaping your reward. Now these stocks are on the bargain shelf, being forced to merge operations--which is just what an investor like Warren Buffett loves to see happening. Monsanto (MON) is the only one that might be a suitable stock to own for someone who is not a financial services professional.
Risk Rating: 7
Full Disclosure: I dollar-average into MON and also own shares of DD.
Note: Metrics are current for the Sunday of publication; metrics in red denote underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 10
Week 236 - A 10-Stock Retirement Portfolio (One Stock For Each S&P Industry)
Situation: If you don’t want to depend entirely on index funds to fund your retirement, you’ll need a plan for buying stocks. One approach is to only choose stocks from defensive industries, i.e., Consumer Staples, HealthCare, Utilities and Communication Services (see Week 231). Another strategy would be to have all 10 S&P industries represented, which would make your portfolio more diversified. (Academic studies show that returns are higher from owning stocks that are diversified across industries.)
Mission: Pick one stock from each of the 10 S&P industries, meaning the 4 defensive industries listed above, plus Industrials, Financial Services, Consumer Discretionary, Information Technology, Basic Materials, and Energy.
Execution: To avoid “cherry-picking” from a list of currently impressive stocks, I’ll simply present the 10 stocks in the S&P 100 list that I dollar-average into (see Table). To be complete, 9 alternates from the S&P 100 Index are listed.
Administration: Five of the stocks can be purchased online and without additional fees by making pre-programed monthly additions with automatic dividend reinvestment using computershare: Exxon Mobil (XOM), NextEra Energy (NEE), Abbott Laboratories (ABT), IBM (IBM) and Union Pacific (UNP). One exception is that IBM levies a 2% fee for reinvesting dividends. The remaining 5 stocks are available at reasonable cost, also from computershare: Monsanto (MON), JP Morgan (JPM), PepsiCo (PEP), AT&T (T), and Nike (NKE). 10-yr US Treasury Notes can be purchased at no cost at treasurydirect but automatic purchase is not available and you’ll need to point-and-click each purchase, as well as reinvest interest payments. Total transaction costs per year come to ~$137 if you invest $1200 (or $19,200/yr) in each of the 10 stocks and 6 Treasury bonds. This results in an expense ratio of 0.71% (see Column U in the Table).
Bottom Line: We’ve shown that you can dollar-average $100/mo into one stock for each S&P industry, and back that up with $600/mo in 10-yr US Treasury Notes, to achieve a total return/yr of ~7.0% dating back to the S&P 500 Index peak on 9/1/2000 (after subtracting transaction costs of 0.71%/yr). This beats our key benchmark (the Vanguard Balanced Index Fund, VBINX) by approximately 2.0%/yr without incurring additional volatility, according to standard measures (see Columns D, I, and O in the Table). However, you are responsible for the considerable risk of sampling bias, since you’ll be selecting only one stock to represent each of the 10 S&P industries.
Risk Rating: 6
Note: Metrics in the Table that are highlighted in red indicate underperformance relative to our key benchmark (VBINX). Metrics are current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Pick one stock from each of the 10 S&P industries, meaning the 4 defensive industries listed above, plus Industrials, Financial Services, Consumer Discretionary, Information Technology, Basic Materials, and Energy.
Execution: To avoid “cherry-picking” from a list of currently impressive stocks, I’ll simply present the 10 stocks in the S&P 100 list that I dollar-average into (see Table). To be complete, 9 alternates from the S&P 100 Index are listed.
Administration: Five of the stocks can be purchased online and without additional fees by making pre-programed monthly additions with automatic dividend reinvestment using computershare: Exxon Mobil (XOM), NextEra Energy (NEE), Abbott Laboratories (ABT), IBM (IBM) and Union Pacific (UNP). One exception is that IBM levies a 2% fee for reinvesting dividends. The remaining 5 stocks are available at reasonable cost, also from computershare: Monsanto (MON), JP Morgan (JPM), PepsiCo (PEP), AT&T (T), and Nike (NKE). 10-yr US Treasury Notes can be purchased at no cost at treasurydirect but automatic purchase is not available and you’ll need to point-and-click each purchase, as well as reinvest interest payments. Total transaction costs per year come to ~$137 if you invest $1200 (or $19,200/yr) in each of the 10 stocks and 6 Treasury bonds. This results in an expense ratio of 0.71% (see Column U in the Table).
Bottom Line: We’ve shown that you can dollar-average $100/mo into one stock for each S&P industry, and back that up with $600/mo in 10-yr US Treasury Notes, to achieve a total return/yr of ~7.0% dating back to the S&P 500 Index peak on 9/1/2000 (after subtracting transaction costs of 0.71%/yr). This beats our key benchmark (the Vanguard Balanced Index Fund, VBINX) by approximately 2.0%/yr without incurring additional volatility, according to standard measures (see Columns D, I, and O in the Table). However, you are responsible for the considerable risk of sampling bias, since you’ll be selecting only one stock to represent each of the 10 S&P industries.
Risk Rating: 6
Note: Metrics in the Table that are highlighted in red indicate underperformance relative to our key benchmark (VBINX). Metrics are current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 21
Week 207 - Starter Stocks
Situation: The stock market is pricey and the bond market is becoming less pricey. This suggests that stock prices are going to plateau for a while because bonds will be paying higher interest. Dividends will no longer be the best way for you to get an income from your investments.
Mission: Find stocks that are suitable for a newcomer to stock-picking.
Execution: We can’t change our stripes, so we’ll fall back on the two most important considerations for a newcomer to stock-picking: (1) start with large companies and (2) confine your attention to those that are Dividend Achievers, which is S&P’s name for companies with 10 or more yrs of annual dividend increases. Risky stocks need to be excluded from the newcomer’s portfolio, so we eliminate any companies that either have a S&P bond rating lower than A- or an S&P stock rating lower than A+/M (see the Table). And, we exclude companies with a 3-yr history of declining operational metrics according to research done to produce the annual Barron’s 500 List with one exception. Any company that ranked in the top 250 on both the 2015 and 2014 lists is acceptable. Metrics from the BMW Method are also used to exclude companies with price trends that don’t track the market and companies that are predicted to lose 40% or more in the next Bear Market. Companies that lost more than the hedged S&P 500 Index (i.e., Vanguard’s Balanced Index Fund, VBINX) during the 18-month Lehman Panic are also excluded, as are companies in the most cyclical industries: Energy, Basic Materials, Finance, and Information Technology.
Bottom Line: We were able to come up with only 4 “starter stocks”: Nike (NKE), NextEra Energy (NEE), Johnson & Johnson (JNJ) and PepsiCo (PEP). You would need to dollar-average equal amounts of money into each stock every month online to achieve the best gain during bull markets and the least loss during bear markets. In other words, diversify your bets and make small bets often rather than big bets occasionally.
Risk Rating: 4
Full Disclosure: I dollar-average into all 4 of these stocks.
NOTE: metrics highlighted in red indicate underperformance vs. our key benchmark, which is the Vanguard Balanced Index Fund (VBINX). 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: Find stocks that are suitable for a newcomer to stock-picking.
Execution: We can’t change our stripes, so we’ll fall back on the two most important considerations for a newcomer to stock-picking: (1) start with large companies and (2) confine your attention to those that are Dividend Achievers, which is S&P’s name for companies with 10 or more yrs of annual dividend increases. Risky stocks need to be excluded from the newcomer’s portfolio, so we eliminate any companies that either have a S&P bond rating lower than A- or an S&P stock rating lower than A+/M (see the Table). And, we exclude companies with a 3-yr history of declining operational metrics according to research done to produce the annual Barron’s 500 List with one exception. Any company that ranked in the top 250 on both the 2015 and 2014 lists is acceptable. Metrics from the BMW Method are also used to exclude companies with price trends that don’t track the market and companies that are predicted to lose 40% or more in the next Bear Market. Companies that lost more than the hedged S&P 500 Index (i.e., Vanguard’s Balanced Index Fund, VBINX) during the 18-month Lehman Panic are also excluded, as are companies in the most cyclical industries: Energy, Basic Materials, Finance, and Information Technology.
Bottom Line: We were able to come up with only 4 “starter stocks”: Nike (NKE), NextEra Energy (NEE), Johnson & Johnson (JNJ) and PepsiCo (PEP). You would need to dollar-average equal amounts of money into each stock every month online to achieve the best gain during bull markets and the least loss during bear markets. In other words, diversify your bets and make small bets often rather than big bets occasionally.
Risk Rating: 4
Full Disclosure: I dollar-average into all 4 of these stocks.
NOTE: metrics highlighted in red indicate underperformance vs. our key benchmark, which is the Vanguard Balanced Index Fund (VBINX). 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, May 11
Week 149 - Stock Selection: Start with one for each S&P Industry
Situation: Investing looks like such a cool thing to do. It’s maybe even a way to make money without slacking at our day jobs, that is, by doing the necessary research on Sunday morning over coffee. I started that way 40 years ago, and then found out that the “fun stuff” doesn’t work. In other words, you can’t “guesstimate” where markets are headed. Why? Because the only way to build a base of investing knowledge is to study the past. Unfortunately, as Mark Twain said, “history never repeats itself.” In particular, you can’t estimate which of the 10 S&P industries is going to take the lead over the next few years. Sure, we’re sort of emerging from a recession by fits and starts. Typically, that would mean that the Consumer Discretionary industry would take the lead, followed by the Information Technology and Financial industries. But with the numbers for structural unemployment being up in the teens (when you include people who’ve given up looking for work), where will we get enough consumers to buy all that newly produced stuff? Structural unemployment takes a long time to wind down. Why? Because it is both expensive and time-consuming to retrain displaced workers to do the new types of jobs. It’s easier for companies to simply train workers in foreign countries, like India, where labor costs are lower.
But really, no one knows how the future will play out. Even something as straightforward as interest rates can’t be estimated going forward by examining historical data. In other words, the cost of money you will use to invest isn’t known: Will it go up or will it go down? What this means for the long-term investor is that we need to avoid speculation and simply place small but growing bets on all sectors of the economy. Here at ITR, we suggest that you start by building up positions in key stocks through small automatic monthly investments made online, using Dividend Re-Investment Plans (DRIPs).
In this week’s Table, we’ve chosen one company for each S&P industry, namely the company that is highest ranking by Finance Value in the Universe of 63 companies that we’ve found to be acceptable for long-term accumulation (see Table for Week 122). If the company chosen for a particular industry doesn’t have a projected rate of return (dividend yield + dividend growth) that exceeds the market rate (6.8%: VFINX), we chose the company with next highest Finance Value. Similarly, if a company’s 5-yr Beta (measuring volatility) is more than 20% higher than the market rate of 1.00, we chose the company with the next highest Finance Value. Remember: each of the companies in the Table for Week 122 has all 3 of the characteristics that we value most highly: 1) Inclusion in the Barron’s 500 Table of companies that show steady growth in cash flow from operations, as well as recent growth in sales; 2) Inclusion in the S&P list of Dividend Achievers--that have grown dividends for 10 or more yrs; 3) a long-term S&P credit rating of “A-” or higher.
And the winners are:
Consumer Staples: Wal-Mart Stores (WMT);
Healthcare: Abbott Laboratories (ABT);
Utilities: Southern Company (SO);
Telecommunication Services: AT&T (T);
Consumer Discretionary: Ross Stores (ROST);
Information Technology: International Business Machines (IBM);
Industrial: WW Grainger (GWW);
Financial: Chubb (CB);
Materials: Monsanto (MON);
Energy: Chevron (CVX).
Stock in most of those companies can be purchased online while starting a DRIP. However, to make an initial purchase in CB, ABT, ROST or GWW you’ll need an online broker such as TD Ameritrade or Merrill Edge, where trades cost $6.95, or a local discount broker such as Edward Jones, where a typical trade costs $54.90. Once you have accumulated a few shares, there are various online services like Computershare that allow you to use those shares to start a low-cost DRIP.
Remember that red highlights in the Table denote underperformance relative to our key benchmark, the Vanguard Balanced Fund (VBINX). For example, AT&T (Line 11 in the Table) has a rate of growth since the market peak on 9/1/00 (Column C) that is approximately the same as the market’s rate (VFINX in Line 24) but somewhat slower than our benchmark’s rate (VBINX in Line 22).
Bottom Line: Your investments need to be distributed across different sectors of the economy. If you live in the US, you can be well diversified without investing in foreign markets because US corporations are active in markets worldwide. What’s not to like about building a portfolio that reaches into every sector of the economy? Well, people at social gatherings will wander away if you start talking about investments. They’re seeking information about “hot stocks” and will soon realize that you’re an “old-stick-in-the-mud” who cares little about whether the stock market is up or down this month.
Risk Rating: 4.
Full Disclosure of my investing activity relative to stocks in the Table: I dollar-average into DRIPs for WMT, ABT, and IBM each month, and also own stock in Monsanto, Chevron, and Berkshire Hathaway.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
But really, no one knows how the future will play out. Even something as straightforward as interest rates can’t be estimated going forward by examining historical data. In other words, the cost of money you will use to invest isn’t known: Will it go up or will it go down? What this means for the long-term investor is that we need to avoid speculation and simply place small but growing bets on all sectors of the economy. Here at ITR, we suggest that you start by building up positions in key stocks through small automatic monthly investments made online, using Dividend Re-Investment Plans (DRIPs).
In this week’s Table, we’ve chosen one company for each S&P industry, namely the company that is highest ranking by Finance Value in the Universe of 63 companies that we’ve found to be acceptable for long-term accumulation (see Table for Week 122). If the company chosen for a particular industry doesn’t have a projected rate of return (dividend yield + dividend growth) that exceeds the market rate (6.8%: VFINX), we chose the company with next highest Finance Value. Similarly, if a company’s 5-yr Beta (measuring volatility) is more than 20% higher than the market rate of 1.00, we chose the company with the next highest Finance Value. Remember: each of the companies in the Table for Week 122 has all 3 of the characteristics that we value most highly: 1) Inclusion in the Barron’s 500 Table of companies that show steady growth in cash flow from operations, as well as recent growth in sales; 2) Inclusion in the S&P list of Dividend Achievers--that have grown dividends for 10 or more yrs; 3) a long-term S&P credit rating of “A-” or higher.
And the winners are:
Consumer Staples: Wal-Mart Stores (WMT);
Healthcare: Abbott Laboratories (ABT);
Utilities: Southern Company (SO);
Telecommunication Services: AT&T (T);
Consumer Discretionary: Ross Stores (ROST);
Information Technology: International Business Machines (IBM);
Industrial: WW Grainger (GWW);
Financial: Chubb (CB);
Materials: Monsanto (MON);
Energy: Chevron (CVX).
Stock in most of those companies can be purchased online while starting a DRIP. However, to make an initial purchase in CB, ABT, ROST or GWW you’ll need an online broker such as TD Ameritrade or Merrill Edge, where trades cost $6.95, or a local discount broker such as Edward Jones, where a typical trade costs $54.90. Once you have accumulated a few shares, there are various online services like Computershare that allow you to use those shares to start a low-cost DRIP.
Remember that red highlights in the Table denote underperformance relative to our key benchmark, the Vanguard Balanced Fund (VBINX). For example, AT&T (Line 11 in the Table) has a rate of growth since the market peak on 9/1/00 (Column C) that is approximately the same as the market’s rate (VFINX in Line 24) but somewhat slower than our benchmark’s rate (VBINX in Line 22).
Bottom Line: Your investments need to be distributed across different sectors of the economy. If you live in the US, you can be well diversified without investing in foreign markets because US corporations are active in markets worldwide. What’s not to like about building a portfolio that reaches into every sector of the economy? Well, people at social gatherings will wander away if you start talking about investments. They’re seeking information about “hot stocks” and will soon realize that you’re an “old-stick-in-the-mud” who cares little about whether the stock market is up or down this month.
Risk Rating: 4.
Full Disclosure of my investing activity relative to stocks in the Table: I dollar-average into DRIPs for WMT, ABT, and IBM each month, and also own stock in Monsanto, Chevron, and Berkshire Hathaway.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 13
Week 145 - Commodity Plays for Long-term Investment
Situation: You know that demographers expect the world’s population to reach 9 billion within 40 yrs. This will require a build-out of infrastructure that will severely tax commodity production in order to provide needed transportation fuels, electrical power, building materials, food, and water. Conservation of resources has to be a central theme, and will be achieved by taxation, cap & trade schemes, and oppressive regulations. Nonetheless, commodity producers will enjoy pricing power for their goods. As a savvy investor, you probably would like your investments to benefit in some small way from that bounty. But you also know better than to speculate in “futures” for raw commodities. The next best choice is to own stock in companies that produce and fabricate commodities for sale, or package such goods into products that are useful to consumers. Transportation companies sit right in the middle of all that, with railroads being the most consistently profitable.
Those of us who are “buy-and-hold investors” are hoping to ease retirement with quarterly dividend checks that grow faster than inflation. Here at ITR, our mission this week is to guide you into commodity-related stocks that have less volatility than commodity futures, AND are issued by investor-friendly companies. Such companies have a dividend history that combines a reasonable payout with annual increases.
In developing this week’s Table, we’ve only considered companies that are in both the S&P 500 Index and the 2013 Barron’s 500 list. You’ll recall that the Barron’s 500 list rank orders companies by a) recent sales growth, and b) 3-yr growth in cash-flow based return on invested capital. We’ve excluded companies with a dividend yield of less than 1.5%.
There are 20 commodity-related companies for you to consider (Table). Twelve are food-related, which should tell you something. Thirteen are Dividend Achievers (Column N); those have 10 or more consecutive years of dividend increases. We excluded any companies that have a Finance Value (Column E) less than our benchmark, which is a hedged S&P 500 Index fund: Vanguard Balanced Index Fund (VBINX). But some other company metrics also perform less well than VBINX; those metrics are highlighted in red.
Bottom Line: Raw commodities fluctuate widely in price, given the large investment and long lead times that companies face to supply the market during “good” years. Those companies will only invest in expansion if commodity reserves have fallen for years and demand is growing. That market signal prompts investment by a number of producers who are in close competition. So, pent-up demand followed by growing production eventually results in a “supply glut.” The fortunes of every company along the supply chain will rise and fall accordingly, with the exception of food companies. Why are food companies the exception? Because food is a necessity. Such companies are classified by S&P in the least-volatile industry (Consumer Staples), whereas, mining and drilling companies are in the most volatile industries (Energy; Materials).
Risk Rating: 5.
Full Disclosure of current investment activity relative to the Table: I dollar-average into XOM.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Those of us who are “buy-and-hold investors” are hoping to ease retirement with quarterly dividend checks that grow faster than inflation. Here at ITR, our mission this week is to guide you into commodity-related stocks that have less volatility than commodity futures, AND are issued by investor-friendly companies. Such companies have a dividend history that combines a reasonable payout with annual increases.
In developing this week’s Table, we’ve only considered companies that are in both the S&P 500 Index and the 2013 Barron’s 500 list. You’ll recall that the Barron’s 500 list rank orders companies by a) recent sales growth, and b) 3-yr growth in cash-flow based return on invested capital. We’ve excluded companies with a dividend yield of less than 1.5%.
There are 20 commodity-related companies for you to consider (Table). Twelve are food-related, which should tell you something. Thirteen are Dividend Achievers (Column N); those have 10 or more consecutive years of dividend increases. We excluded any companies that have a Finance Value (Column E) less than our benchmark, which is a hedged S&P 500 Index fund: Vanguard Balanced Index Fund (VBINX). But some other company metrics also perform less well than VBINX; those metrics are highlighted in red.
Bottom Line: Raw commodities fluctuate widely in price, given the large investment and long lead times that companies face to supply the market during “good” years. Those companies will only invest in expansion if commodity reserves have fallen for years and demand is growing. That market signal prompts investment by a number of producers who are in close competition. So, pent-up demand followed by growing production eventually results in a “supply glut.” The fortunes of every company along the supply chain will rise and fall accordingly, with the exception of food companies. Why are food companies the exception? Because food is a necessity. Such companies are classified by S&P in the least-volatile industry (Consumer Staples), whereas, mining and drilling companies are in the most volatile industries (Energy; Materials).
Risk Rating: 5.
Full Disclosure of current investment activity relative to the Table: I dollar-average into XOM.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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