Situation: Commodity producers have a dismal record. Spot prices fall whenever mining (or drilling or harvesting) becomes more efficient. To make matters worse, supply-chain management and investment has become increasingly global and professionalized. Nonetheless, copper sales remain the best barometer of fixed-asset investment, particularly the ongoing proliferation of industrial plants and equipment in China. Silver has a growing role, thanks to the buildout of solar power. And gold remains a check on the propensity of government leaders everywhere to finance their dreams with debt, as opposed to revenue from taxes.
Mission: Use our Standard Spreadsheet to highlight the largest companies producing gold, silver, and copper.
Execution: see Table.
Administration: Gold and silver prices remain stuck where they were 35 years ago but are characterized by high volatility. Commodity prices (in the aggregate) trace supercycles that last approximately 20 years. The most recent came from a 1999 low and fell back to that level in 2016; since then it has ever so slowly risen from that low.
Bottom Line: The basic rule for commodity producers is that 3 years out of 30 will be good years, and you’ll make a lot of money. But over any 20-30 year period, you’ll lose money (measured by inflation-adjusted dollars). Our Table for this week confirms these points but does show that copper (SCCO) is worth an investor’s attention. But beware! That company’s share price is falling because of a falloff in trade with China and could fall further if a trade war takes hold.
Risk Rating: 10 (where 10-Yr US Treasury Notes = 1, S&P 500 = 5, and gold bullion = 10).
Full Disclosure: I do not have positions in any commodity producers aside from Exxon Mobil (XOM), but do dollar-average into the main provider of mining equipment: Caterpillar (CAT).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Showing posts with label transportation. Show all posts
Showing posts with label transportation. Show all posts
Sunday, September 9
Sunday, June 12
Week 258 - Barron’s 500 Multimodal Transportation Companies
Situation: If you want to feel the pulse of an economy, look at trends in transportation. Those trends won’t tell you where the economy is headed next but they will show you where it’s been, and where the pressure points are. Right now, one pressure point for the US economy is the inefficiency of off-loading cargo from ships to drayage trucks, and transferring containers to warehouses or railroads. Another pressure point is the “final mile,” or how to get goods into the hands of consumers with a minimum of inconvenience. “Vertical integration” appears to be the answer for both problems, meaning companies like FedEx and UPS (and increasingly Amazon) will try to perform as many integrated services in-house as is possible. Finally, there are environmental considerations, namely, how do we move cargo around without leaving such a large carbon footprint. One solution that is off to a good start is replacing diesel truck engines with compressed natural gas (CNG) engines. The largest US truck fleet (JB Hunt Transport Services; JBHT) is an early adopter. Given the centrality of these above-mentioned companies, it would be a good idea for you to hold shares in one, or shares in an Exchange Traded Fund (ETF) for the transportation sector such as the iShares Transportation Average ETF ( IYT at Line 21 in the Table).
Mission: Provide a capsule summary for investors in Air Freight & Logistics companies, as well as multimodal trucking companies and railroads. Examine only those companies with revenues sufficient to be included in the recently published 2016 Barron’s 500 List. Assess current value by calculating Net Present Value (see Week 256) and providing the Graham Number. That number tells you what the stock price would be if it were to reflect 15 times earnings/share and 1.5 times book value/share. Finally, we’ll take a peek at future valuation by comparing the Weighted Average Cost of Capital (WACC) to the Return on Invested Capital (ROIC).
Execution: see Table.
Bottom Line: Dow Theory is the oldest method to assess current and future value in the stock market. The critical variable is the Dow Jones Transportation Average (DJTA), a running index of stock prices for 20 transportation companies. A “primary uptrend” ( Bull Market) is not declared when the Dow Jones Industrial Average (DJIA) hits new highs, but instead is declared when the DJTA confirms that event by also hitting a new high. We saw a confirmation most recently in November of 2014. The opposite also holds: a “primary downtrend” (Bear Market) must see a new low in the DJIA being confirmed by a new low in the DJTA.
The linchpin that holds transportation together is the Surface Transportation Board (STB), which has “wide discretion...to meet the nation’s changing transportation needs.” The STB is the most powerful Federal regulatory agency that transportation companies (even pipeline carriers) must face. Its power and reach is a boon to investors, since they won’t be permitted to lose much money: There will be volatility but there will be no bankruptcies, or strategic end-runs such as trucking companies underpricing railroads. In this week’s Table, we drill down on the 11 largest companies in the transportation space. Many of you may consider Amazon (AMZN) to be an outlier here, but Amazon is both the largest warehousing operation and the largest logistics company. And there will soon be thousands of Amazon-branded tractor-trailers on the highways. Time is money.
Risk Rating = 7 (where Treasuries = 1 and gold = 10).
Full Disclosure: I dollar-average into UNP and also own shares of CNI.
NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red indicate underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX, at Line 17 in the Table). Metrics highlighted in green at Columns P and Q in the Table indicate improving performance trends for fundamental metrics (per analysis by Barron’s 500 editors). Metrics highlighted in purple at Columns Z and AA in the Table indicate a company in current difficulty, ROIC being lower than WACC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Provide a capsule summary for investors in Air Freight & Logistics companies, as well as multimodal trucking companies and railroads. Examine only those companies with revenues sufficient to be included in the recently published 2016 Barron’s 500 List. Assess current value by calculating Net Present Value (see Week 256) and providing the Graham Number. That number tells you what the stock price would be if it were to reflect 15 times earnings/share and 1.5 times book value/share. Finally, we’ll take a peek at future valuation by comparing the Weighted Average Cost of Capital (WACC) to the Return on Invested Capital (ROIC).
Execution: see Table.
Bottom Line: Dow Theory is the oldest method to assess current and future value in the stock market. The critical variable is the Dow Jones Transportation Average (DJTA), a running index of stock prices for 20 transportation companies. A “primary uptrend” ( Bull Market) is not declared when the Dow Jones Industrial Average (DJIA) hits new highs, but instead is declared when the DJTA confirms that event by also hitting a new high. We saw a confirmation most recently in November of 2014. The opposite also holds: a “primary downtrend” (Bear Market) must see a new low in the DJIA being confirmed by a new low in the DJTA.
The linchpin that holds transportation together is the Surface Transportation Board (STB), which has “wide discretion...to meet the nation’s changing transportation needs.” The STB is the most powerful Federal regulatory agency that transportation companies (even pipeline carriers) must face. Its power and reach is a boon to investors, since they won’t be permitted to lose much money: There will be volatility but there will be no bankruptcies, or strategic end-runs such as trucking companies underpricing railroads. In this week’s Table, we drill down on the 11 largest companies in the transportation space. Many of you may consider Amazon (AMZN) to be an outlier here, but Amazon is both the largest warehousing operation and the largest logistics company. And there will soon be thousands of Amazon-branded tractor-trailers on the highways. Time is money.
Risk Rating = 7 (where Treasuries = 1 and gold = 10).
Full Disclosure: I dollar-average into UNP and also own shares of CNI.
NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red indicate underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX, at Line 17 in the Table). Metrics highlighted in green at Columns P and Q in the Table indicate improving performance trends for fundamental metrics (per analysis by Barron’s 500 editors). Metrics highlighted in purple at Columns Z and AA in the Table indicate a company in current difficulty, ROIC being lower than WACC.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 29
Week 230 - Bet with the House
Situation: Government regulation now limits pricing power in 3 sub-industries: electric utilities, long-distance railroad and truck transportation, and money-center banks. First it was electric utilities, then railroads and trucking. The purpose of this regulation was to ensure that these companies with high fixed costs would be able to maintain their networks. That meant customers had to be charged enough to keep Return on Equity at around 10%. Railroads and electric utilities are essentially monopolies, so regulators also prevent them from overcharging. Then the Great Recession came along, and the few investment banking firms that had existed prior to the Lehman Panic couldn’t remain solvent. To gain access to Federal protection, they applied to become commercial banks. That had the down-side of welcoming Federal auditors into their offices on a full-time basis. When the “other shoe dropped” (The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), legislation imposed additional regulation on the riskier (and more lucrative) financial products that money center banks prefer to promote. The danger is that these interconnected megabanks would simultaneously lose a great deal of money, i.e., precipitate a global economic crisis. Dodd-Frank calls those banks “SIFIs” or “Systemically Important Financial Institutions." The point is that most of the levers controlling finance are no longer located near Wall Street. They’re in Washington. So, there may be more safety in investing with companies in those 3 sub-industries that fall under Federal protection. Think of them as government protected companies.
Mission: We take the gambler’s saying seriously, i.e., “when possible, bet with the house.” The House is now the US Treasury, which has controlled short-term interest rates through the Federal Open Market Committee since the Banking Act of 1933. That’s one key variable that controls stock prices. The other key variable is earnings growth, which is supposed to be a function of the private economy. But, pricing power of 3 sub-industries is now under oversight of the US Treasury or government agencies answerable to the US Treasury. To “bet with the house” we need to assess a sample of companies in those 3 sub-industries.
Execution: We look at the 65-stock Dow Jones Composite Index (^DJA) to find a representative sample of companies. This week’s Table has every company in those 3 sub-industries that is large enough to appear in the 2015 Barron’s 500 List, as long as it has an S&P bond rating of BBB+ or better and an S&P stock rating of B+/M.
Bottom Line: These 11 companies operate under close government regulation. As a group, they have done well compared to the lowest-cost S&P 500 Index fund (compare Lines 13, 22 and 26 under Columns C, E and N in the Table). This outperformance apparently comes with no additional risk (see the same Lines under Columns D, I and O in the Table), So, betting with the House looks like a good idea. Specifically, this 11-stock sample performs better than the 65-stock Dow Jones Composite Index (compare Lines 13, 20 and 25 in Columns C through F of the Table) which, in turn, performs better than VFINX (the lowest-cost S&P 500 Index fund at Line 22 of the Table).
Risk Rating: 6
Full Disclosure: I dollar-average into NEE, UNP and JPM.
Note: Metrics are current for the Sunday of publication; metrics in red denote underperformance relative to 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: We take the gambler’s saying seriously, i.e., “when possible, bet with the house.” The House is now the US Treasury, which has controlled short-term interest rates through the Federal Open Market Committee since the Banking Act of 1933. That’s one key variable that controls stock prices. The other key variable is earnings growth, which is supposed to be a function of the private economy. But, pricing power of 3 sub-industries is now under oversight of the US Treasury or government agencies answerable to the US Treasury. To “bet with the house” we need to assess a sample of companies in those 3 sub-industries.
Execution: We look at the 65-stock Dow Jones Composite Index (^DJA) to find a representative sample of companies. This week’s Table has every company in those 3 sub-industries that is large enough to appear in the 2015 Barron’s 500 List, as long as it has an S&P bond rating of BBB+ or better and an S&P stock rating of B+/M.
Bottom Line: These 11 companies operate under close government regulation. As a group, they have done well compared to the lowest-cost S&P 500 Index fund (compare Lines 13, 22 and 26 under Columns C, E and N in the Table). This outperformance apparently comes with no additional risk (see the same Lines under Columns D, I and O in the Table), So, betting with the House looks like a good idea. Specifically, this 11-stock sample performs better than the 65-stock Dow Jones Composite Index (compare Lines 13, 20 and 25 in Columns C through F of the Table) which, in turn, performs better than VFINX (the lowest-cost S&P 500 Index fund at Line 22 of the Table).
Risk Rating: 6
Full Disclosure: I dollar-average into NEE, UNP and JPM.
Note: Metrics are current for the Sunday of publication; metrics in red denote underperformance relative to 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, June 28
Week 208 - Stockpickers Secret Fishing Hole: Dividend Achievers with Improving Fundamentals
Situation: The 65-stock Dow Jones Composite Average (DJCA) typically outperforms the S&P 500 Index by about 1%/yr. It is composed of 30 Blue Chips, 20 Transports and 15 Utilities picked by the Managing Editor of the Wall Street Journal. The DJCA is a haven for "value" investors because the companies are long-standing members of mature industries and typically have predictable earnings. We call it the Stockpickers Secret Fishing Hole because total returns over 20 yrs are 1% greater than for the S&P 500 Index while bear market losses are 5% lower (see Table). Of the 65 companies, 29 are S&P Dividend Achievers (i.e., companies that have raised their dividend annually for at least the past 10 yrs, see Week 205). Now that the 2015 Barron’s 500 List has come out, we can check on Dividend Achievers and see which have improved their operations over the last 3 yrs.
Mission: Review the 2015 Barron's 500 List of the largest companies on the New York and Toronto stock exchanges to determine which of the 29 Dividend Achievers have moved up in rank compared to 2014.
Execution: Barron’s uses 3 equally-weighted metrics to determine a company’s rank:
1) median 3-yr return on investment (ROIC),
2) the most recent year’s ROIC relative to the 3-yr median, and
3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank, and the highest rank is given a “1.” All 29 Dividend Achievers have high enough revenues to be included in the 2015 Barron’s 500 List. However, only 9 have a higher rank than in 2014 and only 5 of those have an S&P bond rating of BBB+ or higher and an S&P stock rating of B+/M or higher (see Table). One is a Blue Chip, Nike (NKE), meaning it is in the Dow Jones Industrial Average. Two companies are in the Dow Jones Utility Average, namely, Southern Company (SO) and NextEra Energy (NEE). Two companies are in the Dow Jones Transportation Average: Norfolk Southern Railroad (NSC) and Expeditors International of Washington (EXPD).
Bottom Line: We occasionally revisit the Stockpickers Secret Fishing Hole to see if there’s a stock worth catching. Currently there are 5 but only two of those (NKE and NEE) look like “better bets” than the bond-hedged S&P 500 Index, i.e., the Vanguard Balanced Index Fund (VBINX).
Risk Rating: 5
NOTE: metrics highlighted in red indicate underperformance vs. VBINX. Metrics are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Review the 2015 Barron's 500 List of the largest companies on the New York and Toronto stock exchanges to determine which of the 29 Dividend Achievers have moved up in rank compared to 2014.
Execution: Barron’s uses 3 equally-weighted metrics to determine a company’s rank:
1) median 3-yr return on investment (ROIC),
2) the most recent year’s ROIC relative to the 3-yr median, and
3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank, and the highest rank is given a “1.” All 29 Dividend Achievers have high enough revenues to be included in the 2015 Barron’s 500 List. However, only 9 have a higher rank than in 2014 and only 5 of those have an S&P bond rating of BBB+ or higher and an S&P stock rating of B+/M or higher (see Table). One is a Blue Chip, Nike (NKE), meaning it is in the Dow Jones Industrial Average. Two companies are in the Dow Jones Utility Average, namely, Southern Company (SO) and NextEra Energy (NEE). Two companies are in the Dow Jones Transportation Average: Norfolk Southern Railroad (NSC) and Expeditors International of Washington (EXPD).
Bottom Line: We occasionally revisit the Stockpickers Secret Fishing Hole to see if there’s a stock worth catching. Currently there are 5 but only two of those (NKE and NEE) look like “better bets” than the bond-hedged S&P 500 Index, i.e., the Vanguard Balanced Index Fund (VBINX).
Risk Rating: 5
Full Disclosure: I dollar-average into NKE and NEE.
NOTE: metrics highlighted in red indicate underperformance vs. VBINX. Metrics are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 31
Week 204 - 2015 Barron’s 500 List: Commodity Producers with Improving Fundamentals
Situation: Commodities are priced in dollars but those prices reflect worldwide supply and demand, not US economic forces. To further complicate matters, agricultural commodities are priced to reflect regional climate events. The 2012 US drought was so severe that China decided to decrease its reliance on the US for corn and instead ramp up domestic production and source more corn from Argentina and Ukraine. This highlights how population growth is the main driver for commodity production, whether it is basic materials needed to expand infrastructure, energy for electricity production and transportation, or meat and grain for grocery stores. The problem for commodity producers is the necessity for a large up-front investment, whether for oil and gas exploration, mining operations, or the web of technology and infrastructure that brings the “green revolution” to farming. Such investments typically involve large expenditures for property, plant, equipment, powerplants, internet access, storage facilities, paved roads, pipelines, and railroads. In turn, those high initial costs drive research and development into innovations that promise to reduce up-front costs. The result is affordable food, construction methods, fuel, and electricity. Once in place, production efficiencies tend to overshoot; supplies exceed demand for a period, as we see happening now with oil and natural gas production.
Investors in commodity-related companies always face a roller-coaster ride, one that is often out-of-phase with regional economic cycles. As a result, commodity-linked investments tend to follow supercycles. Their “non-correlation” with GDP serves to benefit investors. This week’s blog is occasioned by the just-published Barron’s 500 List for 2015. That list gives a grade to the 500 largest companies in the US and Canada by using 3 equally-weighted metrics:
1) median 3-yr return on investment (ROIC),
2) change in the most recent year’s ROIC relative to the 3-yr median, and
3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank. There are 60 commodity producers; half were up in rank, half were down. We’re interested only in the companies that were up, since there’s no easy way to know why a company was down or when its rank will stop falling. And, since most of our readers are looking for retirement investments, we’re not interested in companies that have an S&P bond rating lower than BBB+ or an S&P stock rating lower than B+/M. Taken together, those restrictions remove all but 7 of the 60 companies from consideration (see Table).
These 7 stocks are different from those we usually think of as prudent for retirees. Notably, the average 5-yr Beta is high, and most are down one Standard Deviation from their 16-yr trendline in price appreciation (see Column M), whereas, recent pricing for the S&P 500 Index (^GSPC) is up two Standard Deviations. While we do like to invest in commodity-related stocks because of their out-of-sync behavior, extremes are a little un-nerving.
It gets worse. In Column N of the Table, the downside risk comes into sharp focus. That’s where the BMW Method (see Week 193, Week 199 and Week 201) is used to predict your loss by incorporating 16 yrs of weekly variance in price trends. For example, a 47% loss is predicted for our group of 7 stocks in the next Bear Market, whereas, the S&P 500 Index is predicted to sustain a 32% loss. You’ll find this information in the BMW Method Log Chart for each stock. Start by using the S&P 500 Index as an example. Find ^GSPC at the bottom of the 16-yr series, click on it, and look for “*2RMS” in the upper left-hand corner. Subtract that RF number (0.68) from 100 to get the predicted 32% loss at 2 Standard Deviations below the price trendline. That degree of price variance is projected to occur every 19-20 yrs.
This price variance is important to be aware of because a high degree of price variance over time means the party can end quickly. When a commodity-producing company’s Tangible Book Value for the past decade gives it a Durable Competitive Advantage (see Column R and Week 158), there’s little likelihood that its earnings will grow more than 7%/yr over the next decade (see Column S), which we estimate by using the Buffett Buy Analysis (see Week 189). Only one stock passed that test, National Oilwell Varco (NOV). In other words, the very impressive returns achieved by this select group of 7 stocks (see Columns C, F and L in the Table) come with a very impressive risk of loss.
Several academic studies have shown that the only way to legally “beat the market” is to take on a commensurately greater risk of loss. One example analyzed Jim Cramer’s success at picking stocks for CNBC’s “Mad Money” TV show. To make a long story short, you need to understand that over a 20-yr period you’ll probably be further ahead (on a risk-adjusted basis) by investing in a low-cost S&P 500 Index Fund (VFINX at Line 16 in the Table) than by investing in any combination of commodity-related companies.
Think about it. Commodity-related companies depend on the infrastructure and sustainability needs of fast growing countries like China, Brazil, India, Nigeria and Russia. Such a heavy reliance on commodities in countries with such large populations will be reflected in the success of mutual funds that focus on international stocks or natural resource stocks. The Vanguard Total International Stock Index fund (VGTSX at Line 18 in the Table) and T Rowe Price New Era Fund (PRNEX at Line 17 in the Table), respectively, are good low-cost examples. Are either of those mutual funds a better (i.e., risk-adjusted) place to put your retirement savings than VFINX? No. The reason is that investing in commodities is a hedging strategy. Any effort to smooth out (hedge) returns does exactly that. It protects you from Bear Market losses while reducing your Bull Market gains. Stocks go up 55% of the time, so over the long term a hedging strategy will underperform the market.
Bottom Line: Here at ITR, we like to call attention to investments that don’t track the S&P 500 Index. By having a few investments that are out-of-sync with the economic cycle, you may be able to limit the damage to your portfolio from a market crash. Our favorite non-correlated asset is the 10-yr US Treasury Note (when held to maturity), which you can obtain for zero cost. Our next favorite is stock in one or two commodity production companies, especially those where revenues reflect changes in the weather cycle. In particular, companies that supply farmers with tractors, center-pivot irrigation systems, diesel engines to power such equipment, fertilizer, herbicides, fungicides and ways to efficiently get crops and cattle to markets.
Risk Rating: 7
Full Disclosure: I own stock in CMI.
Note: metrics highlighted in red denote underperformance vs. 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
Investors in commodity-related companies always face a roller-coaster ride, one that is often out-of-phase with regional economic cycles. As a result, commodity-linked investments tend to follow supercycles. Their “non-correlation” with GDP serves to benefit investors. This week’s blog is occasioned by the just-published Barron’s 500 List for 2015. That list gives a grade to the 500 largest companies in the US and Canada by using 3 equally-weighted metrics:
1) median 3-yr return on investment (ROIC),
2) change in the most recent year’s ROIC relative to the 3-yr median, and
3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank. There are 60 commodity producers; half were up in rank, half were down. We’re interested only in the companies that were up, since there’s no easy way to know why a company was down or when its rank will stop falling. And, since most of our readers are looking for retirement investments, we’re not interested in companies that have an S&P bond rating lower than BBB+ or an S&P stock rating lower than B+/M. Taken together, those restrictions remove all but 7 of the 60 companies from consideration (see Table).
These 7 stocks are different from those we usually think of as prudent for retirees. Notably, the average 5-yr Beta is high, and most are down one Standard Deviation from their 16-yr trendline in price appreciation (see Column M), whereas, recent pricing for the S&P 500 Index (^GSPC) is up two Standard Deviations. While we do like to invest in commodity-related stocks because of their out-of-sync behavior, extremes are a little un-nerving.
It gets worse. In Column N of the Table, the downside risk comes into sharp focus. That’s where the BMW Method (see Week 193, Week 199 and Week 201) is used to predict your loss by incorporating 16 yrs of weekly variance in price trends. For example, a 47% loss is predicted for our group of 7 stocks in the next Bear Market, whereas, the S&P 500 Index is predicted to sustain a 32% loss. You’ll find this information in the BMW Method Log Chart for each stock. Start by using the S&P 500 Index as an example. Find ^GSPC at the bottom of the 16-yr series, click on it, and look for “*2RMS” in the upper left-hand corner. Subtract that RF number (0.68) from 100 to get the predicted 32% loss at 2 Standard Deviations below the price trendline. That degree of price variance is projected to occur every 19-20 yrs.
This price variance is important to be aware of because a high degree of price variance over time means the party can end quickly. When a commodity-producing company’s Tangible Book Value for the past decade gives it a Durable Competitive Advantage (see Column R and Week 158), there’s little likelihood that its earnings will grow more than 7%/yr over the next decade (see Column S), which we estimate by using the Buffett Buy Analysis (see Week 189). Only one stock passed that test, National Oilwell Varco (NOV). In other words, the very impressive returns achieved by this select group of 7 stocks (see Columns C, F and L in the Table) come with a very impressive risk of loss.
Several academic studies have shown that the only way to legally “beat the market” is to take on a commensurately greater risk of loss. One example analyzed Jim Cramer’s success at picking stocks for CNBC’s “Mad Money” TV show. To make a long story short, you need to understand that over a 20-yr period you’ll probably be further ahead (on a risk-adjusted basis) by investing in a low-cost S&P 500 Index Fund (VFINX at Line 16 in the Table) than by investing in any combination of commodity-related companies.
Think about it. Commodity-related companies depend on the infrastructure and sustainability needs of fast growing countries like China, Brazil, India, Nigeria and Russia. Such a heavy reliance on commodities in countries with such large populations will be reflected in the success of mutual funds that focus on international stocks or natural resource stocks. The Vanguard Total International Stock Index fund (VGTSX at Line 18 in the Table) and T Rowe Price New Era Fund (PRNEX at Line 17 in the Table), respectively, are good low-cost examples. Are either of those mutual funds a better (i.e., risk-adjusted) place to put your retirement savings than VFINX? No. The reason is that investing in commodities is a hedging strategy. Any effort to smooth out (hedge) returns does exactly that. It protects you from Bear Market losses while reducing your Bull Market gains. Stocks go up 55% of the time, so over the long term a hedging strategy will underperform the market.
Bottom Line: Here at ITR, we like to call attention to investments that don’t track the S&P 500 Index. By having a few investments that are out-of-sync with the economic cycle, you may be able to limit the damage to your portfolio from a market crash. Our favorite non-correlated asset is the 10-yr US Treasury Note (when held to maturity), which you can obtain for zero cost. Our next favorite is stock in one or two commodity production companies, especially those where revenues reflect changes in the weather cycle. In particular, companies that supply farmers with tractors, center-pivot irrigation systems, diesel engines to power such equipment, fertilizer, herbicides, fungicides and ways to efficiently get crops and cattle to markets.
Risk Rating: 7
Full Disclosure: I own stock in CMI.
Note: metrics highlighted in red denote underperformance vs. 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, April 5
Week 196 - Stockpicker's Secret Fishing Hole: 20-yr Returns
Situation: We started this blog 4 years ago because we saw an inconsistency in the way people plan for retirement. The same inconsistency affects the way most investors buy stocks. They’re looking for exotic investments, often in foreign and small-cap companies (or mutual funds that target such companies). Why? Because the S&P 500 Index has imploded twice on them since 2000. So, they choose to ignore the 800 pound gorilla in the room (large, well-established US companies), particularly the boring companies like utilities and transports. In other words, they ignore the very companies that make up the 65-stock Dow Jones Composite Average (DJCA). This makes no sense, given that the DJCA outperforms the S&P 500 Index long-term, and does so with less volatility. So, we started our blog with the Growing Perpetuity Index (stocks in the DJCA that are Dividend Achievers) and have highlighted the DJCA by calling it the Stockpicker’s Secret Fishing Hole (see Week 68).
But we’ve never made a comprehensive assessment of all 65 companies. This week’s blog tries to do that. Eight of the companies have been excluded because they are either too small to be in the Barron’s 500 List or don’t have total return records extending out to 20 yrs; 21 more were excluded because of being unsuitable for retirement portfolios (i.e., they had an S&P credit rating less than BBB+ and/or an S&P stock rating less than B+/M). Three of the remaining 36 were excluded because of having greater price volatility (variance) than the S&P 500 Index over the past 20 yrs.
Not surprisingly, the 33 companies in this week’s Table have outperformed the DJCA over the past 20 yrs (compare Line 35 to Line 44 in the Table under Column C). And, the DJCA had a 20-yr total return that beat the S&P 500 Index by more than 10% (compare Line 44 to Line 45). The problem is that you’ve heard of many of those 33 companies and often use their products. So, there’s nothing mysterious or exotic about investing in those companies; none are the “diamond in the rough” you can talk up at cocktail parties. Your stockbroker understands human nature, so she won’t be talking up those names either.
Let’s go down the list and see which stocks have outperformed the S&P 500 Index over both the past 5 and 20 yr periods. There’s JB Hunt Transport Services (the most commonly encountered trucks on the interstate), NextEra Energy (you know wind and solar power are growth industries but maybe you didn’t know NextEra is the leader), Nike (no one can be surprised by its continuing outperformance), and Travelers (any insurance company that knows how to price risk is a good investment). There’s 3M and the 3 railroads (Union Pacific, Norfolk Southern, and CSX), as well as Walt Disney and Home Depot. (You probably aren’t surprised to learn that all 6 of those are perennial money-makers.) UnitedHealth Group is the leading purveyor of health insurance (maybe you didn’t know that). Boeing and American Express round out the list of companies you already expected to continue raking in the cash. I had a stockbroker who didn’t mention any of those companies to me in over 30 years, although he did recommend others on the list: United Technologies, Cisco Systems, Intel, Caterpillar, ExxonMobil and Johnson & Johnson.
Bottom Line: You have little time to research stocks, so focus your attention on a shorter list than the S&P 500. Try the 65-stock Dow Jones Composite Average (DJCA), which also happens to outperform the S&P 500 over the long term. All 65 stocks are picked by a committee headed by the Managing Editor of the Wall Street Journal. We’ve trimmed the list down to 33 that can fit into a retirement portfolio. Take particular note of the 19 that are S&P Dividend Achievers (i.e., companies that have increased their dividends annually for at least the past 10 yrs). Eleven of those have a Finance Value (see Column E in the Table) that beats the Finance Value for our key benchmark, VBINX, which is the Vanguard Balanced Index Fund: WMT, MCD, ED, SO, NEE, NKE, IBM, JNJ, KO, XOM, CVX. Inflation has been 2.1%/yr over the past 20 years, and the average 20-yr dividend growth rate of those 11 stocks has been 11.6%/yr (see Column H in the Table). If your retirement portfolio were to contain equal dollar amounts in each of those 11 stocks, your dividend checks would be growing 9-10% faster than inflation, every year. Think about it.
Risk Rating: 5
Full Disclosure: I dollar-average into WMT, XOM, MSFT, NEE, NKE, and JPM.
NOTE: Red highlights in the table denote underperformance vs. our key benchmark, VBINX. Values in the table are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
But we’ve never made a comprehensive assessment of all 65 companies. This week’s blog tries to do that. Eight of the companies have been excluded because they are either too small to be in the Barron’s 500 List or don’t have total return records extending out to 20 yrs; 21 more were excluded because of being unsuitable for retirement portfolios (i.e., they had an S&P credit rating less than BBB+ and/or an S&P stock rating less than B+/M). Three of the remaining 36 were excluded because of having greater price volatility (variance) than the S&P 500 Index over the past 20 yrs.
Not surprisingly, the 33 companies in this week’s Table have outperformed the DJCA over the past 20 yrs (compare Line 35 to Line 44 in the Table under Column C). And, the DJCA had a 20-yr total return that beat the S&P 500 Index by more than 10% (compare Line 44 to Line 45). The problem is that you’ve heard of many of those 33 companies and often use their products. So, there’s nothing mysterious or exotic about investing in those companies; none are the “diamond in the rough” you can talk up at cocktail parties. Your stockbroker understands human nature, so she won’t be talking up those names either.
Let’s go down the list and see which stocks have outperformed the S&P 500 Index over both the past 5 and 20 yr periods. There’s JB Hunt Transport Services (the most commonly encountered trucks on the interstate), NextEra Energy (you know wind and solar power are growth industries but maybe you didn’t know NextEra is the leader), Nike (no one can be surprised by its continuing outperformance), and Travelers (any insurance company that knows how to price risk is a good investment). There’s 3M and the 3 railroads (Union Pacific, Norfolk Southern, and CSX), as well as Walt Disney and Home Depot. (You probably aren’t surprised to learn that all 6 of those are perennial money-makers.) UnitedHealth Group is the leading purveyor of health insurance (maybe you didn’t know that). Boeing and American Express round out the list of companies you already expected to continue raking in the cash. I had a stockbroker who didn’t mention any of those companies to me in over 30 years, although he did recommend others on the list: United Technologies, Cisco Systems, Intel, Caterpillar, ExxonMobil and Johnson & Johnson.
Bottom Line: You have little time to research stocks, so focus your attention on a shorter list than the S&P 500. Try the 65-stock Dow Jones Composite Average (DJCA), which also happens to outperform the S&P 500 over the long term. All 65 stocks are picked by a committee headed by the Managing Editor of the Wall Street Journal. We’ve trimmed the list down to 33 that can fit into a retirement portfolio. Take particular note of the 19 that are S&P Dividend Achievers (i.e., companies that have increased their dividends annually for at least the past 10 yrs). Eleven of those have a Finance Value (see Column E in the Table) that beats the Finance Value for our key benchmark, VBINX, which is the Vanguard Balanced Index Fund: WMT, MCD, ED, SO, NEE, NKE, IBM, JNJ, KO, XOM, CVX. Inflation has been 2.1%/yr over the past 20 years, and the average 20-yr dividend growth rate of those 11 stocks has been 11.6%/yr (see Column H in the Table). If your retirement portfolio were to contain equal dollar amounts in each of those 11 stocks, your dividend checks would be growing 9-10% faster than inflation, every year. Think about it.
Risk Rating: 5
Full Disclosure: I dollar-average into WMT, XOM, MSFT, NEE, NKE, and JPM.
NOTE: Red highlights in the table denote underperformance vs. our key benchmark, VBINX. Values in the table are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 25
Week 186 - Stock-pickers Secret Fishing Hole Revisited
Situation: Every so often we go back to our comfort zone, the Dow Jones Composite Average (DJCA) of 65 tried-and-true companies. We call it the Stock-pickers Secret Fishing Hole (see Week 29). Why? Because the DJCA tends to outperform the S&P 500 Index and it has lots of the “old” companies that Warren Buffett likes, i.e., boring but stable moneymakers. Fifteen of the companies are regulated electric utilities (Dow Jones Utility Average or DJUA) and 20 are transportation firms (Dow Jones Transportation Average or DJTA), i.e., railroads, trucking outfits, freight forwarders, airlines, and ocean shippers. The remaining 30 are the so-called “blue chip” companies that make up the Dow Jones Industrial Average (DJIA). We like to periodically revisit the 65 company list because it includes many steady performers that don’t generate much excitement and may even be underpriced. And that’s exactly the kind of company we love to feature.
The annual fixed costs of railroads and electric utilities are so high that they’re organized as “legal monopolies” and require government regulation, which allows them to attract investors but still protect customers from being overcharged. Return on Equity is generally in the 10-12% range, and the effect that price changes have on demand (elasticity) is minimal. Warren Buffett likes that combination, so Berkshire Hathaway’s most prominent moneymakers are Berkshire Hathaway Energy (the largest electric utility in the US), and Burlington Northern Santa Fe (the second-largest railroad). Berkshire Hathaway also owns large blocks of stock in 8 DJIA companies: American Express (AXP), Coca-Cola (KO), ExxonMobil (XOM), General Electric (GE), Goldman Sachs (GS), International Business Machines (IBM), Johnson & Johnson (JNJ), and Wal-Mart Stores (WMT).
To drill down to those companies with exceptional value (see Table), we start with the Barron’s 500 List because it a) contains information on revenues and ROIC (Return on Invested Capital), b) uses that information to rank-order the largest US and Canadian companies, and c) lists the year-over-year change in rank. We then eliminate companies that don’t have S&P bond ratings of at least BBB+ and S&P stock ratings of at least B+/M. Finally, the 37 companies that remain are winnowed down to 20 by excluding those with a Finance Value (Column E in the Table) that doesn’t beat VBINX (Vanguard Balanced Index Fund). In other words, the excluded companies had losses during the 18-month Lehman Panic that were not mitigated by long-term gains. That leaves us with 11 DJIA, 4 DJTA, and 5 DJUA companies (see Table). As a group, these are safe stocks to own because they had losses during the 18-month Lehman Panic of only 18.4% vs. 46.5% for the lowest-cost S&P 500 Index fund, VFINX, and their 5-yr Beta is ~0.65 vs. 1.00 for VFINX.
Bottom Line: Embrace Sutton’s Law (i.e., go where the money is). It’s easier to cull a list of 65 for winners than a list of 500, and even more rewarding if the shorter list outperforms the longer one. For the past 34 yrs, the 65-stock Dow Jones Composite Index has returned 8.7%/yr (without dividends reinvested) vs. 8.3%/yr for the S&P 500 Index. As a typical stock-picker, i.e., someone who has a day job and a family, you have little time to research stocks. We’re here to help, and that means highlighting stocks worth holding in a retirement account. This week there are 20 for you to consider and 5 happen to be Warren Buffett favorites: Wal-Mart Stores (WMT), Johnson & Johnson (JNJ), ExxonMobil (XOM), International Business Machines (IBM), and Coca-Cola (KO). Fourteen are Dividend Achievers (see Column P in the Table) with 10+ yrs of annual dividend increases. Start your hunt by taking a closer look at those but be aware that 4 of the 14 appear to be overpriced (see Column K in the Table): Procter & Gamble (PG), Coca-Cola (KO), Dominion Resources (D), and Nike (NKE).
Risk Rating: 5
Full Disclosure: I dollar-average into WMT, NKE, XOM, and NEE, and also hold shares of MCD, D, IBM, JNJ, and CVX for dividend re-investment.
Note: metrics are current as of the Sunday of publication; red highlights denote underperformance vs. VBINX.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
The annual fixed costs of railroads and electric utilities are so high that they’re organized as “legal monopolies” and require government regulation, which allows them to attract investors but still protect customers from being overcharged. Return on Equity is generally in the 10-12% range, and the effect that price changes have on demand (elasticity) is minimal. Warren Buffett likes that combination, so Berkshire Hathaway’s most prominent moneymakers are Berkshire Hathaway Energy (the largest electric utility in the US), and Burlington Northern Santa Fe (the second-largest railroad). Berkshire Hathaway also owns large blocks of stock in 8 DJIA companies: American Express (AXP), Coca-Cola (KO), ExxonMobil (XOM), General Electric (GE), Goldman Sachs (GS), International Business Machines (IBM), Johnson & Johnson (JNJ), and Wal-Mart Stores (WMT).
To drill down to those companies with exceptional value (see Table), we start with the Barron’s 500 List because it a) contains information on revenues and ROIC (Return on Invested Capital), b) uses that information to rank-order the largest US and Canadian companies, and c) lists the year-over-year change in rank. We then eliminate companies that don’t have S&P bond ratings of at least BBB+ and S&P stock ratings of at least B+/M. Finally, the 37 companies that remain are winnowed down to 20 by excluding those with a Finance Value (Column E in the Table) that doesn’t beat VBINX (Vanguard Balanced Index Fund). In other words, the excluded companies had losses during the 18-month Lehman Panic that were not mitigated by long-term gains. That leaves us with 11 DJIA, 4 DJTA, and 5 DJUA companies (see Table). As a group, these are safe stocks to own because they had losses during the 18-month Lehman Panic of only 18.4% vs. 46.5% for the lowest-cost S&P 500 Index fund, VFINX, and their 5-yr Beta is ~0.65 vs. 1.00 for VFINX.
Bottom Line: Embrace Sutton’s Law (i.e., go where the money is). It’s easier to cull a list of 65 for winners than a list of 500, and even more rewarding if the shorter list outperforms the longer one. For the past 34 yrs, the 65-stock Dow Jones Composite Index has returned 8.7%/yr (without dividends reinvested) vs. 8.3%/yr for the S&P 500 Index. As a typical stock-picker, i.e., someone who has a day job and a family, you have little time to research stocks. We’re here to help, and that means highlighting stocks worth holding in a retirement account. This week there are 20 for you to consider and 5 happen to be Warren Buffett favorites: Wal-Mart Stores (WMT), Johnson & Johnson (JNJ), ExxonMobil (XOM), International Business Machines (IBM), and Coca-Cola (KO). Fourteen are Dividend Achievers (see Column P in the Table) with 10+ yrs of annual dividend increases. Start your hunt by taking a closer look at those but be aware that 4 of the 14 appear to be overpriced (see Column K in the Table): Procter & Gamble (PG), Coca-Cola (KO), Dominion Resources (D), and Nike (NKE).
Risk Rating: 5
Full Disclosure: I dollar-average into WMT, NKE, XOM, and NEE, and also hold shares of MCD, D, IBM, JNJ, and CVX for dividend re-investment.
Note: metrics are current as of the Sunday of publication; red highlights denote underperformance vs. VBINX.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 18
Week 185 - Transportation-related Companies with Good Credit
Situation: Dow Theory predicts that a bull market will continue if the primary trend is upward, i.e., both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) are making new highs. The idea is that the movement of goods to satisfy demand is every bit as important as producing the goods. As of this writing, the DJTA continues to “confirm” the bull market denoted by the DJIA’s current all-time highs. The problem is that very few companies in that important Transportation Average are investment-grade quality. Only 5 of the 20 companies have 1) a long-term S&P credit rating of BBB+ or better; 2) an S&P stock rating of B+/M or better; and 3) enough revenue to appear on the Barron’s 500 List of the largest public companies on the New York and Toronto Stock Exchanges.
Those 5 are:
CSX Railroad (CSX),
Norfolk Southern Railroad (NSC),
Union Pacific Railroad (UNP),
Expeditors International of Washington (EXPD), and
JB Hunt Transportation Services (JBHT),
We’ve come up with 9 more companies that meet all 3 requirements and derive much (but not all) of their revenue from transportation-related activities. Three of the 9 happen to be among the 30 companies on the DJIA list:
United Technologies (UTX),
Caterpillar (CAT), and
Boeing (BA).
The remaining 6 are:
Canadian National Railway (CNI),
Sysco (SYY),
Canadian Pacific Railway (CP),
PACCAR (PCAR),
Cummins (CMI), and
Honeywell (HON).
How does our newfangled list of these 14 companies help? For starters, the quality is there. You can invest in any of the stocks issued by those companies at any time, as long as you only invest a small and fixed amount over regular intervals (dollar-cost averaging). Second, fundamental information is readily available because all 14 appear on the Barron’s 500 List published annually (in May). There you can find the most recent year’s sales, and the cash-flow related ROIC (Return on Invested Capital) vs. its 3-yr average. Then you can see how those data rank each company and how that ranking compares to the previous year. Third, we show whether the company was a small loser or a big loser during the Lehman Panic (see Column D in all the Table), and whether the company’s long-term total return (Column C in the Table) mitigated that risk (see Column E in the Table). If the Finance Value in Column E beats our benchmark’s (VBINX), you’re likely to benefit from owning the company’s stock instead of shares in VBINX.
Bottom Line: These stocks are the pulse of the economy, meaning they're high-risk high-reward. Only 5 of the 14 are Dividend Achievers, and only one of those (NSC) has a Finance Value that beat’s our key benchmark, the Vanguard Balanced Index Fund (see Table). But there is one other reasonable approach to investing in this sector, and that is to gradually build a position in iShares Transportation Average (IYT), which is an exchange-traded fund (ETF) that tracks the performance of stocks in the Dow Jones Transportation Average. When the earnings of transportation company stocks are growing at a nice clip, you can be confident that the economy is doing well. And vice versa. So own a few of these stocks and learn from their price movements. Then you won’t be mystified by the next lurch upward or downward in the stock market, and you won’t panic (sell) when others do. Except for the railroads (which are government-regulated to protect both customers and investors), the stocks in this week’s Table are not the “buy-and-hold” variety.
Risk Rating: 7
Full Disclosure: I own shares of CNI, UTX, and CMI.
NOTE: Metrics in the Table are current as of the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Those 5 are:
CSX Railroad (CSX),
Norfolk Southern Railroad (NSC),
Union Pacific Railroad (UNP),
Expeditors International of Washington (EXPD), and
JB Hunt Transportation Services (JBHT),
We’ve come up with 9 more companies that meet all 3 requirements and derive much (but not all) of their revenue from transportation-related activities. Three of the 9 happen to be among the 30 companies on the DJIA list:
United Technologies (UTX),
Caterpillar (CAT), and
Boeing (BA).
The remaining 6 are:
Canadian National Railway (CNI),
Sysco (SYY),
Canadian Pacific Railway (CP),
PACCAR (PCAR),
Cummins (CMI), and
Honeywell (HON).
How does our newfangled list of these 14 companies help? For starters, the quality is there. You can invest in any of the stocks issued by those companies at any time, as long as you only invest a small and fixed amount over regular intervals (dollar-cost averaging). Second, fundamental information is readily available because all 14 appear on the Barron’s 500 List published annually (in May). There you can find the most recent year’s sales, and the cash-flow related ROIC (Return on Invested Capital) vs. its 3-yr average. Then you can see how those data rank each company and how that ranking compares to the previous year. Third, we show whether the company was a small loser or a big loser during the Lehman Panic (see Column D in all the Table), and whether the company’s long-term total return (Column C in the Table) mitigated that risk (see Column E in the Table). If the Finance Value in Column E beats our benchmark’s (VBINX), you’re likely to benefit from owning the company’s stock instead of shares in VBINX.
Bottom Line: These stocks are the pulse of the economy, meaning they're high-risk high-reward. Only 5 of the 14 are Dividend Achievers, and only one of those (NSC) has a Finance Value that beat’s our key benchmark, the Vanguard Balanced Index Fund (see Table). But there is one other reasonable approach to investing in this sector, and that is to gradually build a position in iShares Transportation Average (IYT), which is an exchange-traded fund (ETF) that tracks the performance of stocks in the Dow Jones Transportation Average. When the earnings of transportation company stocks are growing at a nice clip, you can be confident that the economy is doing well. And vice versa. So own a few of these stocks and learn from their price movements. Then you won’t be mystified by the next lurch upward or downward in the stock market, and you won’t panic (sell) when others do. Except for the railroads (which are government-regulated to protect both customers and investors), the stocks in this week’s Table are not the “buy-and-hold” variety.
Risk Rating: 7
Full Disclosure: I own shares of CNI, UTX, and CMI.
NOTE: Metrics in the Table are current as of the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, September 7
Week 166 - “Risk-On/Risk-Off” Investing in Response to Global Economic Patterns
Situation: Most of us take more risks with our investments when the world looks to be in good shape economically, and fewer risks when it doesn’t. For example, throughout 2008 investors were risk-averse and tended to sell their losing positions. It was a “Risk-Off” year by all accounts, and that selling did great damage to the retirement savings of roughly a billion people worldwide. The freed-up funds mostly went into US Treasury Bonds and German Bunds, lowering interest rates enough to leave investors in those bonds with no inflation-adjusted income for years. You see the problem, don’t you? Investors should have continued trading stocks in 2008 instead of holding a “fire sale.” The result of all this selling was that stocks became increasingly underpriced relative to their value, as assessed by time-tested methods of fundamental analysis. But where were the buyers? They showed up two years later.
We all need to take a deep breath and agree that our “animal spirits” sometimes lead us to take unreasonable risks when global economic patterns look rosey. I’ve done it, you’ve done it. The cure? Develop a consistent “Risk-Off” investment regimen, and stick with it through good times and bad. The only alternative is to panic when things look bad, and that means selling stocks at a loss. Remember, Warren Buffett's #1 Rule is to "never lose money."
What, exactly, is a consistent Risk-Off investment regimen? Warren Buffett has often said he looks for established companies in boring industries, companies that have built their brand through generations of managers. He likes Procter & Gamble, Coca-Cola, Wal-Mart Stores, Johnson & Johnson, IBM, Heinz, Mars, Wells Fargo, American Express, and Exxon Mobil. In 2008, he sold Johnson & Johnson stock only because he wanted to help out some floundering companies like General Electric and Goldman Sachs, but he otherwise continued to invest in a disciplined manner (e.g. moving to buy the Burlington Northern Santa Fe railroad). Once he buys a stock or company, he does so with the intention of never selling it. Exceptions are rare: 1) To free up money for younger associates to invest, he has done some selective selling; and, 2) he’s done some trading while learning to invest in the energy industry. The point is that he’s the quintessential “Risk Off” investor, and a model for us all to follow.
Where do we go to find a tidy list of old and mostly boring companies that stock analysts tend to yawn at (or just plain overlook)? Here at ITR, we go our “stockpickers secret fishing hole” (see Week 68 and Week 105), which is my name for the Dow Jones Composite Index of 65 companies (30 industrials, 15 utilities, and 20 transportation companies). Railroads and electrical utilities are highlighted there, for example, and have been among the best-performing sub-industries over the last few years (see Week 148). But few, if any, stock brokers are going to try and interest you in buying those. Why? Because they’re government-regulated “and regulators might get it wrong.” Regulation in these stocks is necessary for two reasons: 1) the companies are monopolies; 2) prices for their services need to be set high enough for the companies to afford massive fixed costs and still make a profit. In this week’s Table, you’ll find 11 electric utilities and 3 railroads because those companies prosper in good times and bad.
We’ve screened the 65 companies in the Dow Jones Composite Index, excluding those that a) don’t have long-term trading data, or b) have insufficient revenues to make it onto the Barron’s 500 List. We came up with 37 companies that either showed a higher rank by Barron’s criteria in 2014 than in 2013, or were ranked in the top 2/3rds for both years. The benchmark we use for “Risk Off” investing is the Vanguard Wellesley Income Fund (VWINX), which is 60% bonds/40% stocks. The benchmark we use for “Risk On” investing is the Vanguard Balanced Index Fund (VBINX), which is 40% bonds/60% stocks. VWINX has a low 5-yr Beta of 0.5, whereas, VBINX has a 5-yr Beta of 0.92, which is almost as high as the S&P 500 Index’s 5-yr Beta that is set at 1.0. This wide discrepancy is mainly because bonds have 70-80% less risk than stocks. Red highlights in the Table denote underperformance vs. VBINX.
NOTE: Our screening starts with the Barron’s 500 List of the largest companies (by revenue) on the New York and Toronto stock exchanges. That list is published each year in May and gives letter grades to each company in 3 areas: median three-year cash-flow-based return on investment (ROIC); the one-year change in that measure relative to the three-year median; and adjusted sales growth in the latest fiscal year. Those letter grades are equal-weighted and the combined grade determines the company’s rank for the year.
If you look at total returns for those 37 companies (Table), 20 outperformed VWINX in all 3 time periods (past 22, 10, and 5 yrs) but only 4 of those stocks lost less money for investors than VWINX did during the Lehman Panic: MCD, JBHT, SO, NEE. This was in spite of the fact that aggregate returns of the 37 companies not only beat VWINX at all 3 time periods but also beat the lowest-cost S&P 500 Index fund (VFINX) in all 3 time periods! So, picking safe stocks is trickier than picking a mutual fund that has built-in safety features. The only reason to pick stocks is to have a source of retirement income that outgrows inflation: Note that Dividend Growth values in Column I of the Table are typically 3-4 times greater than the rate of inflation. You have to “pick and track”. No mutual fund will do that for you.
When we look across the 3 market cycles since the 7/90-4/91 recession, we find that a bond-heavy balanced fund (VWINX) protects its investors from most of the stock market losses incurred during each recession. VWINX lost money in only 3 of the last 22 yrs: 1994 (-6.2%), 1999 (-3.6%), and 2008 (-9.1%), whereas, the S&P 500 Index lost money in 6 yrs, including a 33% loss in 2008. The protection that comes from high-quality bonds is what allows VWINX to grow from a point of preserved value at the beginning of recovery from each recession, instead of wasting months (or years) to make up for lost value.
Bottom Line: Stock-picking is the best way to have some retirement income that beats inflation (see Week 159), but it’s not the best way for a “retail investor” to accumulate wealth. We’ve found 37 stocks that (as a group) handily outperformed the S&P 500 Index after holding periods of 22, 10, and 5 yrs. But only 4 of those stocks could beat a bond-heavy balanced fund (VWINX) in all 3 time periods while losing less than the 16% that VWINX lost during the 18-month Lehman Panic. Two are regulated utilities (SO and NEE), the third is a trucking company (JBHT), and the fourth is a downscale restaurant chain (MCD) that thrives on recessions. So, if you didn’t start investing in those 4 companies 22 yrs ago, and kept adding money along the way, you’d have been better off investing in VWINX. Our standard stock-heavy benchmark, the Vanguard Balanced Index Fund (VBINX), only beat VWINX in the most recent 5-yr period because a severe recession has led to a strong bull market in stocks. Conclusion: We all need to learn how to become “Risk Off” investors by making a plan for investing a certain amount each month, then sticking to it through thick and thin.
Risk Ranking for the aggregate of 37 stocks: 6
Full Disclosure: I dollar-average each month into DRIPs for JNJ, NKE, PG, NEE, WMT, and MSFT, and also own shares of IBM, KO, UTX, MMM, MCD, and DD.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
We all need to take a deep breath and agree that our “animal spirits” sometimes lead us to take unreasonable risks when global economic patterns look rosey. I’ve done it, you’ve done it. The cure? Develop a consistent “Risk-Off” investment regimen, and stick with it through good times and bad. The only alternative is to panic when things look bad, and that means selling stocks at a loss. Remember, Warren Buffett's #1 Rule is to "never lose money."
What, exactly, is a consistent Risk-Off investment regimen? Warren Buffett has often said he looks for established companies in boring industries, companies that have built their brand through generations of managers. He likes Procter & Gamble, Coca-Cola, Wal-Mart Stores, Johnson & Johnson, IBM, Heinz, Mars, Wells Fargo, American Express, and Exxon Mobil. In 2008, he sold Johnson & Johnson stock only because he wanted to help out some floundering companies like General Electric and Goldman Sachs, but he otherwise continued to invest in a disciplined manner (e.g. moving to buy the Burlington Northern Santa Fe railroad). Once he buys a stock or company, he does so with the intention of never selling it. Exceptions are rare: 1) To free up money for younger associates to invest, he has done some selective selling; and, 2) he’s done some trading while learning to invest in the energy industry. The point is that he’s the quintessential “Risk Off” investor, and a model for us all to follow.
Where do we go to find a tidy list of old and mostly boring companies that stock analysts tend to yawn at (or just plain overlook)? Here at ITR, we go our “stockpickers secret fishing hole” (see Week 68 and Week 105), which is my name for the Dow Jones Composite Index of 65 companies (30 industrials, 15 utilities, and 20 transportation companies). Railroads and electrical utilities are highlighted there, for example, and have been among the best-performing sub-industries over the last few years (see Week 148). But few, if any, stock brokers are going to try and interest you in buying those. Why? Because they’re government-regulated “and regulators might get it wrong.” Regulation in these stocks is necessary for two reasons: 1) the companies are monopolies; 2) prices for their services need to be set high enough for the companies to afford massive fixed costs and still make a profit. In this week’s Table, you’ll find 11 electric utilities and 3 railroads because those companies prosper in good times and bad.
We’ve screened the 65 companies in the Dow Jones Composite Index, excluding those that a) don’t have long-term trading data, or b) have insufficient revenues to make it onto the Barron’s 500 List. We came up with 37 companies that either showed a higher rank by Barron’s criteria in 2014 than in 2013, or were ranked in the top 2/3rds for both years. The benchmark we use for “Risk Off” investing is the Vanguard Wellesley Income Fund (VWINX), which is 60% bonds/40% stocks. The benchmark we use for “Risk On” investing is the Vanguard Balanced Index Fund (VBINX), which is 40% bonds/60% stocks. VWINX has a low 5-yr Beta of 0.5, whereas, VBINX has a 5-yr Beta of 0.92, which is almost as high as the S&P 500 Index’s 5-yr Beta that is set at 1.0. This wide discrepancy is mainly because bonds have 70-80% less risk than stocks. Red highlights in the Table denote underperformance vs. VBINX.
NOTE: Our screening starts with the Barron’s 500 List of the largest companies (by revenue) on the New York and Toronto stock exchanges. That list is published each year in May and gives letter grades to each company in 3 areas: median three-year cash-flow-based return on investment (ROIC); the one-year change in that measure relative to the three-year median; and adjusted sales growth in the latest fiscal year. Those letter grades are equal-weighted and the combined grade determines the company’s rank for the year.
If you look at total returns for those 37 companies (Table), 20 outperformed VWINX in all 3 time periods (past 22, 10, and 5 yrs) but only 4 of those stocks lost less money for investors than VWINX did during the Lehman Panic: MCD, JBHT, SO, NEE. This was in spite of the fact that aggregate returns of the 37 companies not only beat VWINX at all 3 time periods but also beat the lowest-cost S&P 500 Index fund (VFINX) in all 3 time periods! So, picking safe stocks is trickier than picking a mutual fund that has built-in safety features. The only reason to pick stocks is to have a source of retirement income that outgrows inflation: Note that Dividend Growth values in Column I of the Table are typically 3-4 times greater than the rate of inflation. You have to “pick and track”. No mutual fund will do that for you.
When we look across the 3 market cycles since the 7/90-4/91 recession, we find that a bond-heavy balanced fund (VWINX) protects its investors from most of the stock market losses incurred during each recession. VWINX lost money in only 3 of the last 22 yrs: 1994 (-6.2%), 1999 (-3.6%), and 2008 (-9.1%), whereas, the S&P 500 Index lost money in 6 yrs, including a 33% loss in 2008. The protection that comes from high-quality bonds is what allows VWINX to grow from a point of preserved value at the beginning of recovery from each recession, instead of wasting months (or years) to make up for lost value.
Bottom Line: Stock-picking is the best way to have some retirement income that beats inflation (see Week 159), but it’s not the best way for a “retail investor” to accumulate wealth. We’ve found 37 stocks that (as a group) handily outperformed the S&P 500 Index after holding periods of 22, 10, and 5 yrs. But only 4 of those stocks could beat a bond-heavy balanced fund (VWINX) in all 3 time periods while losing less than the 16% that VWINX lost during the 18-month Lehman Panic. Two are regulated utilities (SO and NEE), the third is a trucking company (JBHT), and the fourth is a downscale restaurant chain (MCD) that thrives on recessions. So, if you didn’t start investing in those 4 companies 22 yrs ago, and kept adding money along the way, you’d have been better off investing in VWINX. Our standard stock-heavy benchmark, the Vanguard Balanced Index Fund (VBINX), only beat VWINX in the most recent 5-yr period because a severe recession has led to a strong bull market in stocks. Conclusion: We all need to learn how to become “Risk Off” investors by making a plan for investing a certain amount each month, then sticking to it through thick and thin.
Risk Ranking for the aggregate of 37 stocks: 6
Full Disclosure: I dollar-average each month into DRIPs for JNJ, NKE, PG, NEE, WMT, and MSFT, and also own shares of IBM, KO, UTX, MMM, MCD, and DD.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 20
Week 146 - Spring 2014 Master List
Situation: You’d like to have a list of solid stocks to consult for your “personal” retirement plan. That’s the investment plan you're keeping outside of your “workplace” plan. We think you should focus on dividend-paying stocks issued by companies with a long history of increasing their dividend annually. Why? Because the rate those dividends increase at will exceed the rate of inflation (see Column H in the Table). That means the “personal” part of your retirement income will mainly consist of quarterly dividend checks that arrive in the mail, which differs from the “workplace” part of your income because it doesn’t get eaten up by inflation.
Mission: Come up with a list of stocks that are safe multi-decade investments.
Execution: We’ll start with the list of 54 companies in our “universe” (see Week 122). That list initially held 51 companies but we’ve found 3 more. There are 3 criteria that stocks must meet to be included in the list: 1) be a Dividend Achiever (see buyupside.com) with 10 or more consecutive years of dividend increases; 2) be cited in the Barron’s 500 List for outstanding growth in cash-flow based return on invested capital over the past 3 yrs and growth in revenues over the past year; 3) have an S&P credit rating of “A-” or better (see Standard and Poors).
We’ve improved on that list by removing companies that aren’t Dividend Aristocrats (see buyupside.com), i.e., those with 25 or more years of dividend increases, and companies that don’t perform as well as Warren Buffett’s newly-released savings plan for retail investors (see line 45 in the Table): "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers." What’s that? He writes a letter each year to investors in Berkshire Hathaway as though it were a letter to "non-financially literate" friends who have Berkshire Hathaway stock in their “trusts.” In this year’s letter (part of which is quoted above), he advises readers to simply invest in two of the Vanguard mutual funds, allocating 90% to the Vanguard 500 Index Fund (VFINX in the Table) and 10% to a short-intermediate term bond index fund. (We use IEF in the Table because he subsequently indicated that the bond fund should exclusively invest in US Treasury issues). He also likes Berkshire Hathaway stock (BRK-A in the Table) but that doesn’t pay dividends, meaning that you’d have to periodically sell some shares to help meet your retirement expenses.
We have 28 companies left (see Table). Fourteen are in “defensive” industries (utilities, telecommunications, consumer staples, and healthcare); we call those “Lifeboat Stocks” because they don’t sink in bad weather. Five are in the two highest risk industries (Energy and Materials), and the remaining 9 are in “growth” industries (finance, information technology, consumer discretionary, and industrial products). As always, red highlights denote metrics that underperform our favorite benchmark, the Vanguard Balanced Index fund (VBINX), which is essentially a well-hedged (40% bonds) S&P 500 Index fund. Like Warren Buffett, we think you can dispense with investment advisors and simply pick from Vanguard’s index funds. We differ in thinking you should be 40% invested in a general bond index rather than 10% invested in a short-term bond index. But there’s a very high likelihood you’ll make more money in the long run by taking his advice over ours. If, however, you start your retirement during a recession you might find that the 10% you’ve invested in a short-intermediate term bond index (IEF) doesn’t last very long, and you might have to sell some of your stock index fund (VFINX) at a loss to get by.
Bottom Line: Which of the 28 companies should you pick for your personal retirement plan? Well, 3 are what we call “hedge stocks” (see Week 140): MCD, KO and JNJ. Those are good choices because they don’t need to be backed by an equivalent investment in 10-yr US Treasury Notes or Savings Bonds (treasurydirect.gov), both being available in inflation-protected versions. (You can also use the IEF index fund noted above but that doesn’t guarantee return of your initial investment.) We suggest, along with most investment advisers, that you strive for broad diversification. That means start with one stock from each of the 10 S&P industries. Aside from the 3 industries already represented by MCD (consumer discretionary), KO (consumer staples) and JNJ (healthcare), you’ll want to consider ED (utilities), T (telecommunications), CB (financials), GWW (industrials), ADP (information technology), XOM (energy) and NUE (materials).
Risk Rating: 4.
Full Disclosure of current investment activity relative to stocks in the Table: I dollar-average into Dividend Reinvestment Plans at computershare.com for XOM, KO, JNJ, ABT, WMT and PG.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Come up with a list of stocks that are safe multi-decade investments.
Execution: We’ll start with the list of 54 companies in our “universe” (see Week 122). That list initially held 51 companies but we’ve found 3 more. There are 3 criteria that stocks must meet to be included in the list: 1) be a Dividend Achiever (see buyupside.com) with 10 or more consecutive years of dividend increases; 2) be cited in the Barron’s 500 List for outstanding growth in cash-flow based return on invested capital over the past 3 yrs and growth in revenues over the past year; 3) have an S&P credit rating of “A-” or better (see Standard and Poors).
We’ve improved on that list by removing companies that aren’t Dividend Aristocrats (see buyupside.com), i.e., those with 25 or more years of dividend increases, and companies that don’t perform as well as Warren Buffett’s newly-released savings plan for retail investors (see line 45 in the Table): "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers." What’s that? He writes a letter each year to investors in Berkshire Hathaway as though it were a letter to "non-financially literate" friends who have Berkshire Hathaway stock in their “trusts.” In this year’s letter (part of which is quoted above), he advises readers to simply invest in two of the Vanguard mutual funds, allocating 90% to the Vanguard 500 Index Fund (VFINX in the Table) and 10% to a short-intermediate term bond index fund. (We use IEF in the Table because he subsequently indicated that the bond fund should exclusively invest in US Treasury issues). He also likes Berkshire Hathaway stock (BRK-A in the Table) but that doesn’t pay dividends, meaning that you’d have to periodically sell some shares to help meet your retirement expenses.
We have 28 companies left (see Table). Fourteen are in “defensive” industries (utilities, telecommunications, consumer staples, and healthcare); we call those “Lifeboat Stocks” because they don’t sink in bad weather. Five are in the two highest risk industries (Energy and Materials), and the remaining 9 are in “growth” industries (finance, information technology, consumer discretionary, and industrial products). As always, red highlights denote metrics that underperform our favorite benchmark, the Vanguard Balanced Index fund (VBINX), which is essentially a well-hedged (40% bonds) S&P 500 Index fund. Like Warren Buffett, we think you can dispense with investment advisors and simply pick from Vanguard’s index funds. We differ in thinking you should be 40% invested in a general bond index rather than 10% invested in a short-term bond index. But there’s a very high likelihood you’ll make more money in the long run by taking his advice over ours. If, however, you start your retirement during a recession you might find that the 10% you’ve invested in a short-intermediate term bond index (IEF) doesn’t last very long, and you might have to sell some of your stock index fund (VFINX) at a loss to get by.
Bottom Line: Which of the 28 companies should you pick for your personal retirement plan? Well, 3 are what we call “hedge stocks” (see Week 140): MCD, KO and JNJ. Those are good choices because they don’t need to be backed by an equivalent investment in 10-yr US Treasury Notes or Savings Bonds (treasurydirect.gov), both being available in inflation-protected versions. (You can also use the IEF index fund noted above but that doesn’t guarantee return of your initial investment.) We suggest, along with most investment advisers, that you strive for broad diversification. That means start with one stock from each of the 10 S&P industries. Aside from the 3 industries already represented by MCD (consumer discretionary), KO (consumer staples) and JNJ (healthcare), you’ll want to consider ED (utilities), T (telecommunications), CB (financials), GWW (industrials), ADP (information technology), XOM (energy) and NUE (materials).
Risk Rating: 4.
Full Disclosure of current investment activity relative to stocks in the Table: I dollar-average into Dividend Reinvestment Plans at computershare.com for XOM, KO, JNJ, ABT, WMT and PG.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 12
Week 58 - Dow Jones Transportation Index: Taking the Pulse of the US Economy
Situation: Every economist has a favorite series of data points that s/he uses to measure whether the economy is heading up or down. Usually these “metrics” track activity that is related to the transportation sector. This was part of the reason Warren Buffett bought a railroad, i.e. to know how many freight cars were loaded yesterday compared to last week and last month. An economist I enjoy following will even phone toll booth operators working on the turnpike. News reports frequently mention the Dow Jones Industrial Average (DJIA) as being “up” or “down” but those reports don’t tell you that stock traders put little store in that movement unless it is further confirmed by a similar move in the Dow Jones Transportation Average (DJTA) and a corresponding increase or decrease in trading volume. Our key point here is that the movement of goods is the fulcrum of the US economy. Inventory drawdowns can herald a strengthening economy, or imply that manufacturers don’t see much of a market for their goods. However, when inventory drawdowns happen because trucks are pulling up to warehouses and distribution centers, then leaving with deliverables, it’s an early sign the economy is growing again and manufacturers will soon need to replenish inventories.
Let’s take a closer look at the stocks in the DJTA (Table). As always, we use blue highlight in the Table to denote companies that outperform the S&P 500 Index (e.g. fall less than 2/3rds as far in a bear market) and red to denote companies that underperform the S&P 500 Index. Only 18 of the 20 DJTA companies are tracked by S&P; those have S&P data that we summarize in the Table. The transportation sector is deeply cyclical because the only thing that transportation companies do is move goods from point A to point B, which is exactly why we’re interested. In a deep recession, only essential goods are being moved: fuel for electrical powerplants, basic foodstuffs, medicine, laundry detergent, toothpaste. You get the picture.
A sound long-term investment strategy is to have a solid idea of when the economy is seriously flirting with recession or is about to recover from recession. At those times, the DJTA may start to change direction even before the DJIA. If the DJTA heads down, that suggests the economy is slowing and becomes a tip-off to shore up our holdings of Lifeboat Stocks (Week 50) and bond funds. If the DJTA heads up during a recession, you’d better think about owning stock in more cyclical companies, or what we like to call Core Holdings (Week 22). There are even a few companies in the DJTA that have learned how to make at least a little money during the depths of a recession: CH Robinson Worldwide (CHRW), Norfolk & Southern (NSC), and Union Pacific (UNP).
Bottom Line: We think the game to watch is the Dow Jones Transportation Average vis-a-vis the Dow Jones Industrial Average and the volume of trading. And think about buying stock in one of these transportation-related companies too, even though the ride is certain to be bumpy.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Let’s take a closer look at the stocks in the DJTA (Table). As always, we use blue highlight in the Table to denote companies that outperform the S&P 500 Index (e.g. fall less than 2/3rds as far in a bear market) and red to denote companies that underperform the S&P 500 Index. Only 18 of the 20 DJTA companies are tracked by S&P; those have S&P data that we summarize in the Table. The transportation sector is deeply cyclical because the only thing that transportation companies do is move goods from point A to point B, which is exactly why we’re interested. In a deep recession, only essential goods are being moved: fuel for electrical powerplants, basic foodstuffs, medicine, laundry detergent, toothpaste. You get the picture.
A sound long-term investment strategy is to have a solid idea of when the economy is seriously flirting with recession or is about to recover from recession. At those times, the DJTA may start to change direction even before the DJIA. If the DJTA heads down, that suggests the economy is slowing and becomes a tip-off to shore up our holdings of Lifeboat Stocks (Week 50) and bond funds. If the DJTA heads up during a recession, you’d better think about owning stock in more cyclical companies, or what we like to call Core Holdings (Week 22). There are even a few companies in the DJTA that have learned how to make at least a little money during the depths of a recession: CH Robinson Worldwide (CHRW), Norfolk & Southern (NSC), and Union Pacific (UNP).
Bottom Line: We think the game to watch is the Dow Jones Transportation Average vis-a-vis the Dow Jones Industrial Average and the volume of trading. And think about buying stock in one of these transportation-related companies too, even though the ride is certain to be bumpy.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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