Situation: Business people seeking to predict outcomes often quote Wayne Gretzky quote: “I skate to where the puck is going to be, not where it has been.” This highlights a problem: All of the metrics and technical charts that we use are retrospective. We’re driving forward by looking in the rear view mirror! Warren Buffett has tried to estimate outcomes by making calculations of the growth in “core earnings’ in companies that have a “Durable Competitive Advantage”. DCA companies have had a growth rate for Tangible Book Value over the most recent 10 years that exceeds 7%/yr, with no more than three down years. (c.f. The Warren Buffett Stock Portfolio, Scribner, NY, 2011 by Mary Buffett and David Clark) You can read more about such estimates of “true” Shareholder Equity by Googling Net Tangible Asset Investing.
We agree with Mr. Buffett, and have learned to envision the future prospects of a company by first assessing its ability to grow Tangible Book Value. But since the Great Recession, few S&P 500 companies have even a dollar of Net Tangible Assets. Why? Because the Federal Reserve’s policy (to accelerate recovery from the Great Recession) has been to make money more freely available than ever before. Accordingly, companies favor debt financing over equity financing. Debt becomes a larger dollar amount on the Balance Sheet than equity. (Equity for most companies represents the initial cost of property, plant and equipment, which equals Tangible Book Value.)
Mission: Use our Standard Spreadsheet to arrive at an estimate of a company’s position in its sector of the economy 10 years from now. Start by analyzing S&P 500 companies in the Food, Beverage and Restaurant sector that are Dividend Achievers, i.e., have increased their dividend annually for at least the past 10 years.
Execution: see Table.
Administration: For almost any business, the name of the game for making money is not losing money. If a stock falls 50% in price, that price must rise 200% just to get back to where it started. So, let’s start our analysis by excluding Dividend Achievers that have a 16 year record of price appreciation showing volatility which exceeds that for the S&P 500 Index (see Column M in the Table). Then, we’ll look for companies having a clean Balance Sheet (Columns P-S in the Table) and a strong Global Brand (Columns AC-AD in the Table). None of the 11 companies have a clean Balance Sheet, but Coca-Cola (KO), Costco Wholesale (COST), Target (TGT), and Walmart (WMT) come close. Those four are also the only companies that have any Tangible Book Value (see Column R in the Table) but none have grown TBV fast enough to meet Warren Buffett’s requirements for DCA (see Column AF in the Table), although Walmart (WMT) comes close. Those 4 companies are also among the 7 that have a strong Global Brand.
Bottom Line: Walmart (WMT) is the winner of this contest.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10). As a group, these 11 companies had remarkably buoyant total returns during the recent commodity recession (see Column D in the Table), which saw a 24.2%/yr drop in commodity prices (see Line 21 in the Table). Of course, raw food commodities were less expensive during that period but the outperformance of the food sector is strong enough to suggest that investors tend to move money there in deflationary times.
Full Disclosure: I dollar-cost average into Coca-Cola (KO), and also own shares of Costco Wholesale (COST), Target (TGT), Walmart (WMT), McCormick (MKC) and McDonald’s (MCD).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Sunday, February 25
Sunday, February 18
Week 346 - Dogs of the Dow
Situation: It’s that time of year again. You need to think about placing a bet or two on the Dogs of the Dow at the start of each new year. Why? Because that group contains the 10 highest-yielding stocks in the 30-stock Dow Jones Industrial Average (DJIA) and is likely to outperform the DJIA over the next year. The Dogs of the Dow have had a total return of 8.6%/yr since 2000 vs. 6.9% for the DJIA.
SPOILER ALERT: The 10 highest-yielding DJIA stocks at the end of 2017 includes General Electric (GE), which is likely to be removed from the DJIA before the end of 2018. So, I’ve substituted the next highest-yielding stock, which is Intel (INTC).
Mission: Run our Standard Spreadsheet for the 10 highest-yielding DJIA stocks. Highlight the two members of “The 2 and 8 Club” (CSCO, IBM), as well as the two that would be members if their dividend growth rates were slightly higher, to meet the dividend growth requirement of 8.0%/yr over the past 5 years: Coca-Cola(KO) and Pfizer (PFE).
Execution: see Table.
Administration: Four of the 10 are gambles (see Column M), likely to lose more than the S&P 500 Index in a future Bear Market: CSCO, INTC, PFE, MRK. Four are worth your attention because of being in (or nearly in) “The 2 and 8 Club”: CSCO, KO, IBM, PFE. It is also important to consider the two integrated oil companies (CVX, XOM) because their stocks are the most rational way for you to gain exposure to the Energy Industry.
Bottom Line: The Dogs of the Dow strategy calls for buying equal dollar amounts of stock in all 10 companies on the first trading day of the new year. I’m not of that mind, but do know that these 10 companies are “blue chips.” Their valuations haven’t been impressive lately, which accounts for their high dividend yields. DJIA companies are called Blue Chips because they’re thought to be large enough and diversified enough to weather any downturn. Some of the Dogs will outperform the 30-stock DJIA in any given year, but not all of them. My plan is to bet on any Dog in “The 2 and 8 Club” that meets my criteria for brand value and balance sheet stability, which would be Cisco Systems (CSCO).
GOOD NEWS: All 10 of these companies are projected to beat the DJIA ETF (DIA) over the next decade (see Column Y in the Table), assuming that growth rates for dividends and stock prices hold steady.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into PG, XOM and KO, and also own shares of CSCO, INTC, IBM and PFE.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
SPOILER ALERT: The 10 highest-yielding DJIA stocks at the end of 2017 includes General Electric (GE), which is likely to be removed from the DJIA before the end of 2018. So, I’ve substituted the next highest-yielding stock, which is Intel (INTC).
Mission: Run our Standard Spreadsheet for the 10 highest-yielding DJIA stocks. Highlight the two members of “The 2 and 8 Club” (CSCO, IBM), as well as the two that would be members if their dividend growth rates were slightly higher, to meet the dividend growth requirement of 8.0%/yr over the past 5 years: Coca-Cola(KO) and Pfizer (PFE).
Execution: see Table.
Administration: Four of the 10 are gambles (see Column M), likely to lose more than the S&P 500 Index in a future Bear Market: CSCO, INTC, PFE, MRK. Four are worth your attention because of being in (or nearly in) “The 2 and 8 Club”: CSCO, KO, IBM, PFE. It is also important to consider the two integrated oil companies (CVX, XOM) because their stocks are the most rational way for you to gain exposure to the Energy Industry.
Bottom Line: The Dogs of the Dow strategy calls for buying equal dollar amounts of stock in all 10 companies on the first trading day of the new year. I’m not of that mind, but do know that these 10 companies are “blue chips.” Their valuations haven’t been impressive lately, which accounts for their high dividend yields. DJIA companies are called Blue Chips because they’re thought to be large enough and diversified enough to weather any downturn. Some of the Dogs will outperform the 30-stock DJIA in any given year, but not all of them. My plan is to bet on any Dog in “The 2 and 8 Club” that meets my criteria for brand value and balance sheet stability, which would be Cisco Systems (CSCO).
GOOD NEWS: All 10 of these companies are projected to beat the DJIA ETF (DIA) over the next decade (see Column Y in the Table), assuming that growth rates for dividends and stock prices hold steady.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into PG, XOM and KO, and also own shares of CSCO, INTC, IBM and PFE.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 11
Week 345 - Natural Resource Companies in the Vanguard High Dividend Yield ETF
Situation: All natural resource companies have been affected by the 2014-2016 commodities crash. That event was largely driven by the rapid upgrade in commodities production and transportation that was needed to meet demand in China. That supply chain collapsed with the rapid defervescence in Chinese demand, and has only now returned to being in balance worldwide.
You have to look to the dominant commodity (oil) to understand why the crash was so sudden and deep. Just as Chinese demand was tapering off, new production (from unconventional sources like oil sands and shale) was coming online in North America. Those expensive projects had seemed worthwhile in a world where a barrel of oil was often worth over $100. Oil prices then collapsed when increased production met falling demand. The largest producer (Saudi Arabia) normally would have cut production to keep prices high. But this time the Saudis chose to increase production, hoping to force shale drillers in the United States to give up their costly projects. It didn’t work. American drillers adopted new technology (e.g. horizontal drilling), cut costs, and borrowed heavily to stay in business (even though the price of oil fell to $30/bbl).
Mission: Survey the damage done to strong commodity producers, equipment suppliers, and railroads (which often invest in their main shippers). Stick to companies listed in the US version of the FTSE High Dividend Yield Index, i.e., those in VYM (Vanguard High Dividend Yield ETF).
Execution: see Table.
Administration: We find only 3 Natural Resource-related companies in the Extended Version of “The 2 and 8 Club” (see Week 329): Caterpillar (CAT), Occidental Petroleum (OXY), and Archer Daniels Midland (ADM). We have added 3 more that are in the Vanguard High Dividend Yield Index (VYM) and meet all other requirements for membership in “The 2 and 8 Club” except the requirement that dividend growth be 8%/yr (see Column H in the Table): Norfolk Southern (NSC), Deere (DE), and Exxon Mobil (XOM).
Bottom Line: No matter how you choose to invest in commodities, you’ll be buying into a high-risk asset. You need to monitor positions daily, and have cash available to fund margin calls and attractive developments. Column D summarizes the risks you’ll face (see Table): Even the best companies lose a lot of capital in a commodities crash. And the crash always starts suddenly and goes to unanticipated extremes, leaving all players affected.
Risk Rating: 9 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into XOM and own shares of CAT.
You have to look to the dominant commodity (oil) to understand why the crash was so sudden and deep. Just as Chinese demand was tapering off, new production (from unconventional sources like oil sands and shale) was coming online in North America. Those expensive projects had seemed worthwhile in a world where a barrel of oil was often worth over $100. Oil prices then collapsed when increased production met falling demand. The largest producer (Saudi Arabia) normally would have cut production to keep prices high. But this time the Saudis chose to increase production, hoping to force shale drillers in the United States to give up their costly projects. It didn’t work. American drillers adopted new technology (e.g. horizontal drilling), cut costs, and borrowed heavily to stay in business (even though the price of oil fell to $30/bbl).
Mission: Survey the damage done to strong commodity producers, equipment suppliers, and railroads (which often invest in their main shippers). Stick to companies listed in the US version of the FTSE High Dividend Yield Index, i.e., those in VYM (Vanguard High Dividend Yield ETF).
Execution: see Table.
Administration: We find only 3 Natural Resource-related companies in the Extended Version of “The 2 and 8 Club” (see Week 329): Caterpillar (CAT), Occidental Petroleum (OXY), and Archer Daniels Midland (ADM). We have added 3 more that are in the Vanguard High Dividend Yield Index (VYM) and meet all other requirements for membership in “The 2 and 8 Club” except the requirement that dividend growth be 8%/yr (see Column H in the Table): Norfolk Southern (NSC), Deere (DE), and Exxon Mobil (XOM).
Bottom Line: No matter how you choose to invest in commodities, you’ll be buying into a high-risk asset. You need to monitor positions daily, and have cash available to fund margin calls and attractive developments. Column D summarizes the risks you’ll face (see Table): Even the best companies lose a lot of capital in a commodities crash. And the crash always starts suddenly and goes to unanticipated extremes, leaving all players affected.
Risk Rating: 9 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into XOM and own shares of CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 4
Week 344 - “The 2 and 8 Club” Updated
Situation: Stock-pickers need a Watch List of companies to pick from, one that is short enough to allow buyers to make a timely decision to buy or sell. “The 2 and 8 Club” (see Week 327) currently has 21 members that we’ve picked from the S&P 100 Index. Although our Tables are filled with data, those numbers are necessary but not sufficient for investors to take action. There needs to be a story that explains why this or that company in “The 2 and 8 Club” is likely to outperform, given that the S&P 100 Index ETF (OEF) is even harder to beat than the S&P 500 Index ETF (SPY). For example, compare Line 29 in the Table to Line 31.
“The story” will change as circumstances dictate. Each company’s Board of Directors will have to assess inevitable challenges to The Business Plan, then decide to either endorse the changes recommended by the CEO or replace the CEO. It isn’t easy. Looking at the past 35 yrs of statistical data, only 4 stocks in “The 2 and 8 Club” have outperformed the S&P 500 Index with no greater volatility:
Caterpillar (CAT),
CVS Health (CVS),
3M (MMM),
NextEra Energy (NEE).
This suggests that the biggest and best companies are unlikely to grow their dividends faster than 8%/yr for more than two market cycles. Many will drop out of “The 2 and 8 Club” and be replaced by upstarts. To use “The 2 and 8 Club” as a Watch List, you need to be an active trader. That means tracking the performance of all S&P 100 companies that are found in the Vanguard High Dividend Yield Fund VYM, which is managed by Morningstar to represent all of the American companies listed in the FTSE All-World High Dividend Yield Index. Think of VYM as the ~400 companies in the Russell 1000 Index that a) pay an above-market dividend, and b) are unlikely to cut their dividend during a recession.
Mission: Update “The 2 and 8 Club” (see Week 327).
Execution: see Table.
Administration: Over a market cycle, you can expect to make more money at less risk by investing in VYM than by investing in the largest S&P 500 Index ETF (SPY), i.e., compare Lines 28 and 31 in the Table. To create “The 2 and 8 Club”, we simply take the S&P 100 companies from VYM that a) have grown their dividend at least 8%/yr over the past 5 yrs, b) have a 16+ year trading record for statistical purposes, c) have an S&P bond rating of at least BBB+ (this is a change from our initial requirement of at least an A- rating), and d) have an S&P stock rating of at least B+/M.
Bottom Line: Successful stock-pickers are a tad compulsive, happy to toil alone at their hobby. (Warren Buffett couldn’t understand why his wife left him to become an artist living in San Francisco.) It helps to have a workable Watch List, one that has a high signal-to-noise ratio. We like the companies in the S&P 100 Index because they have a) multiple product lines, and b) efficient price discovery, i.e., are required to have active put and call options on the CBOE (Chicago Board Options Exchange). We also look for companies in the S&P 100 Index that have a high Net Present Value, which is difficult to achieve for companies that don’t pay a good and growing dividend. So, we require at least a 2% dividend and an 8% dividend growth rate for membership in our Watch List, accordingly named “The 2 and 8 Club”.
Caveat Emptor: If you choose to pick stocks by using this algorithm, you’re a gambler (see red highlights in Columns I and M in the Table). In other words, you’re taking on more risk than you would by owning an S&P 500 Index fund like SPY. Yes, you’ll likely have higher returns but that will be accompanied by higher volatility. As a frequent trader, you’ll also be paying higher taxes and absorbing higher transaction costs.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MSFT, JPM, MMM, IBM and NEE, and also own shares of CSCO, PEP, AMGN, MO, TXN, CAT and TGT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
“The story” will change as circumstances dictate. Each company’s Board of Directors will have to assess inevitable challenges to The Business Plan, then decide to either endorse the changes recommended by the CEO or replace the CEO. It isn’t easy. Looking at the past 35 yrs of statistical data, only 4 stocks in “The 2 and 8 Club” have outperformed the S&P 500 Index with no greater volatility:
Caterpillar (CAT),
CVS Health (CVS),
3M (MMM),
NextEra Energy (NEE).
This suggests that the biggest and best companies are unlikely to grow their dividends faster than 8%/yr for more than two market cycles. Many will drop out of “The 2 and 8 Club” and be replaced by upstarts. To use “The 2 and 8 Club” as a Watch List, you need to be an active trader. That means tracking the performance of all S&P 100 companies that are found in the Vanguard High Dividend Yield Fund VYM, which is managed by Morningstar to represent all of the American companies listed in the FTSE All-World High Dividend Yield Index. Think of VYM as the ~400 companies in the Russell 1000 Index that a) pay an above-market dividend, and b) are unlikely to cut their dividend during a recession.
Mission: Update “The 2 and 8 Club” (see Week 327).
Execution: see Table.
Administration: Over a market cycle, you can expect to make more money at less risk by investing in VYM than by investing in the largest S&P 500 Index ETF (SPY), i.e., compare Lines 28 and 31 in the Table. To create “The 2 and 8 Club”, we simply take the S&P 100 companies from VYM that a) have grown their dividend at least 8%/yr over the past 5 yrs, b) have a 16+ year trading record for statistical purposes, c) have an S&P bond rating of at least BBB+ (this is a change from our initial requirement of at least an A- rating), and d) have an S&P stock rating of at least B+/M.
Bottom Line: Successful stock-pickers are a tad compulsive, happy to toil alone at their hobby. (Warren Buffett couldn’t understand why his wife left him to become an artist living in San Francisco.) It helps to have a workable Watch List, one that has a high signal-to-noise ratio. We like the companies in the S&P 100 Index because they have a) multiple product lines, and b) efficient price discovery, i.e., are required to have active put and call options on the CBOE (Chicago Board Options Exchange). We also look for companies in the S&P 100 Index that have a high Net Present Value, which is difficult to achieve for companies that don’t pay a good and growing dividend. So, we require at least a 2% dividend and an 8% dividend growth rate for membership in our Watch List, accordingly named “The 2 and 8 Club”.
Caveat Emptor: If you choose to pick stocks by using this algorithm, you’re a gambler (see red highlights in Columns I and M in the Table). In other words, you’re taking on more risk than you would by owning an S&P 500 Index fund like SPY. Yes, you’ll likely have higher returns but that will be accompanied by higher volatility. As a frequent trader, you’ll also be paying higher taxes and absorbing higher transaction costs.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MSFT, JPM, MMM, IBM and NEE, and also own shares of CSCO, PEP, AMGN, MO, TXN, CAT and TGT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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