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
Sunday, January 31
Sunday, January 24
Week 238 - Let’s Revisit The “Stockpicker’s Secret Fishing Hole”
Situation: Stock-picking is a good way to build a retirement portfolio, if you have enough time and enthusiasm. It requires that you delve into fundamental company practices far enough to select and follow a dozen or more stocks. But how do you start, and where should you focus your efforts? For sure, you’re not going to analyze all 500 stocks in the S&P 500 Index (^GSPC). But you can become familiar with the 65 stocks in the Dow Jones Composite Index (^DJA). We call it the Stockpicker’s Secret Fishing Hole because it often outperforms the S&P 500 Index. For example, price appreciation over the past two market cycles for ^DJA has been twice as great as for ^GSPC (see Column C at Lines 52 & 54 in the Table). ^DJA also benefits from being a “managed” index: its stocks are picked by a Wall Street Journal committee chaired by the Managing Editor.
Mission: Produce our standard spreadsheet for all ^DJA stocks that have revenues high enough to warrant inclusion in the Barron’s 500 List. Exclude any that have an S&P stock rating lower than B+/M, or an S&P bond rating lower than BBB+, and determine which of the remainder have a Durable Competitive Advantage (DCA).
Execution: Of the 38 companies that meet mission criteria, 18 are suitable for long-term investment because much of their book value is in real (“tangible”) assets that track earnings growth. Warren Buffett says this confers a “Durable Competitive Advantage” if tangible assets have been growing at least 9% per year over the most recent decade, and if there have been no more than two down years (see The Warren Buffett Stock Portfolio by Mary Buffett and David Clark, Scribner, New York, 2011). Given that the Great Recession sharply reduced economic growth over the past decade, I’ve loosened that standard to 7%/yr with no more than 3 down years.
The 18 companies listed below meet our requirements. All have a Price/Tangible Book Value ratio that is less than 10. In other words, real assets (as opposed to brand value or “goodwill”) represent at least 10% of the share price (see Columns T-V in the Table). I use this system, and dollar-average into the 7 stocks with bold typeface:
Apple
Nike
NiSource
Public Service Enterprise Group
NextEra Energy
Microsoft
JB Hunt Transport Services
Wal-Mart Stores
American Express
Union Pacific
Chevron
ExxonMobil
Travelers
Expeditors International of Washington
CSX
Cisco Systems
JP Morgan Chase
Goldman Sachs
Bottom Line: “High quality megacaps are the name of the game.” You’ll need a system for recognizing value and sustainability among those large capitalization companies. S&P charts for individual companies list the Tangible Book Value (TBV) for each of the past 10 yrs and are available through most brokerages, as well as S&P. By using a calculator for Compound Annual Growth Rate, you can arrive at each company’s Durable Competitive Advantage (growth in TBV). If the company has no TBV, its liabilities exceed the value of its real assets; you’ll need to delve into its Balance Sheet before deciding to assume that much risk. We’ve filtered through the 65-stock Dow Jones Composite Index and come up with 18 companies that look worthwhile, using our standard spreadsheet supplemented with calculations of their Durable Competitive Advantage.
Risk rating: 5
Full Disclosure: In addition to the 7 stocks above that I dollar-average into, I own shares of UTX, DD, MMM, INTC, KO, IBM, JNJ and MCD.
Note: Metrics in the Table are current for the Sunday of publication; those highlighted in red denote underperformance vs. our key benchmark (VBINX at Line 45 in the Table). Total returns/yr (in Column C of the Table) date to the penultimate S&P 500 Index peak that occurred on 9/1/2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Produce our standard spreadsheet for all ^DJA stocks that have revenues high enough to warrant inclusion in the Barron’s 500 List. Exclude any that have an S&P stock rating lower than B+/M, or an S&P bond rating lower than BBB+, and determine which of the remainder have a Durable Competitive Advantage (DCA).
Execution: Of the 38 companies that meet mission criteria, 18 are suitable for long-term investment because much of their book value is in real (“tangible”) assets that track earnings growth. Warren Buffett says this confers a “Durable Competitive Advantage” if tangible assets have been growing at least 9% per year over the most recent decade, and if there have been no more than two down years (see The Warren Buffett Stock Portfolio by Mary Buffett and David Clark, Scribner, New York, 2011). Given that the Great Recession sharply reduced economic growth over the past decade, I’ve loosened that standard to 7%/yr with no more than 3 down years.
The 18 companies listed below meet our requirements. All have a Price/Tangible Book Value ratio that is less than 10. In other words, real assets (as opposed to brand value or “goodwill”) represent at least 10% of the share price (see Columns T-V in the Table). I use this system, and dollar-average into the 7 stocks with bold typeface:
Apple
Nike
NiSource
Public Service Enterprise Group
NextEra Energy
Microsoft
JB Hunt Transport Services
Wal-Mart Stores
American Express
Union Pacific
Chevron
ExxonMobil
Travelers
Expeditors International of Washington
CSX
Cisco Systems
JP Morgan Chase
Goldman Sachs
Bottom Line: “High quality megacaps are the name of the game.” You’ll need a system for recognizing value and sustainability among those large capitalization companies. S&P charts for individual companies list the Tangible Book Value (TBV) for each of the past 10 yrs and are available through most brokerages, as well as S&P. By using a calculator for Compound Annual Growth Rate, you can arrive at each company’s Durable Competitive Advantage (growth in TBV). If the company has no TBV, its liabilities exceed the value of its real assets; you’ll need to delve into its Balance Sheet before deciding to assume that much risk. We’ve filtered through the 65-stock Dow Jones Composite Index and come up with 18 companies that look worthwhile, using our standard spreadsheet supplemented with calculations of their Durable Competitive Advantage.
Risk rating: 5
Full Disclosure: In addition to the 7 stocks above that I dollar-average into, I own shares of UTX, DD, MMM, INTC, KO, IBM, JNJ and MCD.
Note: Metrics in the Table are current for the Sunday of publication; those highlighted in red denote underperformance vs. our key benchmark (VBINX at Line 45 in the Table). Total returns/yr (in Column C of the Table) date to the penultimate S&P 500 Index peak that occurred on 9/1/2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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