Situation: You don’t want to lose money but you’re starting to. That comes with having your savings in an overbought stock market. It’s time for a cautionary warning light to click on in your head. That would mean moving some money into cash equivalents and making sure that at least a third of your stock portfolio is in defensive stocks, i.e., utility, healthcare, consumer staples, and telecommunication services companies. And, review the stocks you’re dollar-averaging into. Be comfortable with the prospect of building up your share-count in those stocks throughout a market crash.
Mission: Run our Standard Spreadsheet on defensive companies in “The 2 and 8 Club” (Extended Version).
Execution: see Table.
Administration: If their dividend growth rates continue to fall, Coca-Cola (KO) and Pfizer (PFE) will no longer be members of “The 2 and 8 Club.” Conversely, Hormel Foods (HRL at Line 13 in the Table) recently raised its dividend and now has a yield that is well above the yield for the S&P 500 Index. That means it will soon be included in the US version of the FTSE High Dividend Yield Index. HRL already meets the other requirements for membership in “The 2 and 8 Club.” So, it will become a member upon being listed in that Index. The ETF for that Index is VYM (the Vanguard High Dividend Yield ETF at Line 18 in the Table).
Bottom Line: There aren’t a lot of great defensive stocks, but the 8 included in “The 2 and 8 Club” are worth your close attention. Why? Because a set of trade policies are being promulgated by several countries that restrict the cross-border flow of goods and services. If those policies blossom into a tit-for-tat Trade War, Robert Shiller (Nobel Prize winning economist) thinks a recession would be triggered: “It’s just chaos,” he said on CNBC. “It will slow down development in the future if people think that this kind of thing is likely.”
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into NextEra Energy (NEE) and PepsiCo (PEP), and also own shares of Coca-Cola (KO) and Hormel Foods (HRL).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 22
Week 355 - Companies in “The 2 and 8 Club” with a Durable Competitive Advantage
Situation: It is now 10 years since The Great Recession began with the collapse of Bear Stearns. Trust in markets was broken and has barely begun to recover. The Securities and Exchange Commission (SEC) grew out of The Great Depression because investors lost trust in markets. One of the ways it tried to rebuild trust was to require private companies to still have a strong balance sheet after a successful Initial Public Offering (IPO). If the SEC wasn’t convinced this would happen at the proposed price for the IPO, then the IPO wouldn’t be permitted.
Before the Great Recession of 2008, fewer than a third of companies in the S&P 500 Index had steadily growing Tangible Book Value (TBV), i.e., property, plant, equipment, and software priced at original cost (see Week 54, Week 94, Week 158, Week 241, Week 251, Week 271). After 2008, Balance Sheets were in need of repair, and that was facilitated by low interest rates. Now, perhaps a quarter of S&P 500 companies again have steady TBV growth.
Mission: Apply our Standard Spreadsheet to companies in the Extended Version of “The 2 and 8 Club” that have shown steady TBV growth (with no more than 3 down years) since 2008. Warren Buffett suggests that such companies have a Durable Competitive Advantage (see blogs listed above), as long as TBV meets the Business Case of doubling after 10 years (i.e., a growth rate of at least 7%/yr).
Execution: see Table.
Administration: Risk works both ways for stock investors, i.e., you’ll either lose or gain +20% every few years. Our investing behavior isn’t governed by numbers, so we don’t act appropriately when warning signs of a market crash emerge. Why? Because we can’t know for certain when and whether a market crash will indeed happen. Many of us will remain sitting at the table even after it has clearly become a gambling table. You know when that occurs because the risk-off investors have already cashed out. Those of us who remain are governed by a desire to have. After a few market cycles, we come to realize that having more is going to be either boring or exciting, based on one’s appetite for risk. To have more, and have it be exciting, involves good study habits and an ability to live with chronic anxiety. Simply being human will matter less and less.
The trick is to maintain discipline 24/7/365, by using a system for monitoring and researching your investments. This has to be combined with a weird ability to stick with your system through good times and bad. Numbers won’t save you when the market is turning. Instead, you have to know whether or not the “story” that underpins the reason for each of your holdings has retained its agency. Truth be told, the moves you make (or don’t make) at turning points will come down to a gut feeling as to whether your holdings are overbought or oversold. Any decision you make at a turning point is a risk-on decision. Caveat emptor: This is not a formula for marital bliss. (Warren Buffett was mystified when his wife left to become an artist in San Francisco.)
Bottom Line: Now is a good time to have a boring investment posture, which means choosing to dollar-average into companies that have bullet-proof Balance Sheets and strong Global Brands. This week we look at the bedrock of strong Balance Sheets, which is steady growth in Tangible Book Value. Five of these 9 companies are part of S&P’s Finance Industry. Their strong Balance Sheets reflect the regulatory requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. If Dodd-Frank becomes eroded by a Risk-on Congress, you’ll have to dig deeper into Annual Reports when investing in a Financial Services company. REMEMBER: common stocks issued by Financial Services and Real Estate companies are the most risky places to park your money, aside from commodity futures.
Risk Rating: 7 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE and JPM, and also own shares of CSCO and TRV.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Before the Great Recession of 2008, fewer than a third of companies in the S&P 500 Index had steadily growing Tangible Book Value (TBV), i.e., property, plant, equipment, and software priced at original cost (see Week 54, Week 94, Week 158, Week 241, Week 251, Week 271). After 2008, Balance Sheets were in need of repair, and that was facilitated by low interest rates. Now, perhaps a quarter of S&P 500 companies again have steady TBV growth.
Mission: Apply our Standard Spreadsheet to companies in the Extended Version of “The 2 and 8 Club” that have shown steady TBV growth (with no more than 3 down years) since 2008. Warren Buffett suggests that such companies have a Durable Competitive Advantage (see blogs listed above), as long as TBV meets the Business Case of doubling after 10 years (i.e., a growth rate of at least 7%/yr).
Execution: see Table.
Administration: Risk works both ways for stock investors, i.e., you’ll either lose or gain +20% every few years. Our investing behavior isn’t governed by numbers, so we don’t act appropriately when warning signs of a market crash emerge. Why? Because we can’t know for certain when and whether a market crash will indeed happen. Many of us will remain sitting at the table even after it has clearly become a gambling table. You know when that occurs because the risk-off investors have already cashed out. Those of us who remain are governed by a desire to have. After a few market cycles, we come to realize that having more is going to be either boring or exciting, based on one’s appetite for risk. To have more, and have it be exciting, involves good study habits and an ability to live with chronic anxiety. Simply being human will matter less and less.
The trick is to maintain discipline 24/7/365, by using a system for monitoring and researching your investments. This has to be combined with a weird ability to stick with your system through good times and bad. Numbers won’t save you when the market is turning. Instead, you have to know whether or not the “story” that underpins the reason for each of your holdings has retained its agency. Truth be told, the moves you make (or don’t make) at turning points will come down to a gut feeling as to whether your holdings are overbought or oversold. Any decision you make at a turning point is a risk-on decision. Caveat emptor: This is not a formula for marital bliss. (Warren Buffett was mystified when his wife left to become an artist in San Francisco.)
Bottom Line: Now is a good time to have a boring investment posture, which means choosing to dollar-average into companies that have bullet-proof Balance Sheets and strong Global Brands. This week we look at the bedrock of strong Balance Sheets, which is steady growth in Tangible Book Value. Five of these 9 companies are part of S&P’s Finance Industry. Their strong Balance Sheets reflect the regulatory requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. If Dodd-Frank becomes eroded by a Risk-on Congress, you’ll have to dig deeper into Annual Reports when investing in a Financial Services company. REMEMBER: common stocks issued by Financial Services and Real Estate companies are the most risky places to park your money, aside from commodity futures.
Risk Rating: 7 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE and JPM, and also own shares of CSCO and TRV.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 15
Week 354 - Production Agriculture
Situation: Commodity production is quietly starting its next ~20-Yr supercycle. The last one was strong, due to the epic buildout of the Chinese economy. The coming supercycle also will be based in China, which is emerging as a superpower. For a capsule view of what’s happening, look at US soybean exports in 2016. Soybeans mainly become animal feed, and pork is the favorite source of protein for China’s burgeoning middle class. However, raw commodities in general and grains in particular remain underpriced. Why? Because advances in technology and logistics almost guarantee that supplies will outstrip demand:
“In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest.”
Farmers worldwide see that their average income tends to fall, as prices paid for their average harvest tends to fall. In most years, they can’t afford to pay as much for inputs to next year’s harvest as the prior year. We’re seeing a wave of consolidation among companies that supply farmers with seeds, insecticides, herbicides, fungicides and fertilizer chemicals. Famous companies like Agrium, duPont, Dow Chemical, Syngenta, Potash Corporation of Saskatchewan, and Smithfield Foods have either merged with a competitor or been acquired.
Mission: Use our Standard Spreadsheet to analyze the few long-established companies that remain active supporters of farm production.
Execution: see Table.
Bottom Line: Production agriculture has become commoditized. (No surprise there.) But investors can still make money in that financial space from vertically integrated meat producers, i.e., the top 4 companies listed the Table. Why do they stand out? Because China is a big country and has gone far toward eliminating poverty. A long-standing love of pork products in particular will continue to track growth of the middle class. That appetite for animal protein resulted in a 8-26% increase in beef, pork and chicken products from the US in 2017 alone, compared to an increase of only 5-6% for confectionary items, fruit, and nuts.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MON, and own stock in Hormel Foods (HRL) and Union Pacific (UNP).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
“In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest.”
Farmers worldwide see that their average income tends to fall, as prices paid for their average harvest tends to fall. In most years, they can’t afford to pay as much for inputs to next year’s harvest as the prior year. We’re seeing a wave of consolidation among companies that supply farmers with seeds, insecticides, herbicides, fungicides and fertilizer chemicals. Famous companies like Agrium, duPont, Dow Chemical, Syngenta, Potash Corporation of Saskatchewan, and Smithfield Foods have either merged with a competitor or been acquired.
Mission: Use our Standard Spreadsheet to analyze the few long-established companies that remain active supporters of farm production.
Execution: see Table.
Bottom Line: Production agriculture has become commoditized. (No surprise there.) But investors can still make money in that financial space from vertically integrated meat producers, i.e., the top 4 companies listed the Table. Why do they stand out? Because China is a big country and has gone far toward eliminating poverty. A long-standing love of pork products in particular will continue to track growth of the middle class. That appetite for animal protein resulted in a 8-26% increase in beef, pork and chicken products from the US in 2017 alone, compared to an increase of only 5-6% for confectionary items, fruit, and nuts.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MON, and own stock in Hormel Foods (HRL) and Union Pacific (UNP).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 8
Week 353 - Dow Jones Companies in “The 2 and 8 Club”
Situation: “The 2 and 8 Club” is based on mathematics. Specifically, William Bernstein has shown that two factors largely determine your returns from buying a dividend-paying stock. Those are: 1) Dividend Yield; 2) Dividend Growth Rate (see The Four Pillars of Investing by William Bernstein (McGraw Hill, New York, 2002, ISBN 0-07-138529-0). Add those numbers together and you arrive at a working estimate of your long-term total return. Given that you can invest in the Dow Jones Industrial Average (DIA) or the S&P 500 Index (SPY) with negligible transaction costs and expect a 7%/yr long-term total return, you’d have to shoot for 9%/yr if you were to become a stock-picker. Why? Because you’ll do a lot of research and become a trader, which means you’ll have to pay transaction costs and capital gains taxes. Accordingly, we look for stocks that have an above-market dividend yield (i.e., more than ~2%/yr) and a 5-yr dividend growth rate greater than ~8%/yr, hence our designation as “The 2 and 8 Club.”
Mission: “The 2 and 8 Club” has ~20 companies (see Week 348). Compare that to the 65-stock Dow Jones Composite Index selected by the Managing Editor of The Wall Street Journal. Apply our Standard Spreadsheet to companies that appear on both lists.
Execution: see Table showing metrics for all 9 such companies.
Administration: Our starting point is the US version of the FTSE High Dividend Yield Index, which is composed of the ~400 highest-yielding companies in the Russell 1000 Index. The Vanguard High Dividend Yield Fund ETF (VYM) clones that list and updates it monthly. After winnowing that list down to companies that have grown their dividend 8%/yr or faster, we eliminate any that do not have the 16 year trading record needed for quantitative analysis and S&P stock and bond ratings indicative of high quality (at least B+/M and BBB+, respectively). To further aid analysis, we only include companies that are on the latest annual Barron’s 500 List.
Bottom Line: Aside from NextEra Energy (NEE), these are risky stocks to own (see Column M in the Table). As a group, they’ll go up or down in price more than the market. Even if you own shares of all nine, you need to be watchful. You’ll need to learn how to spot trouble (or opportunity) well enough to sell (or buy) shares in a timely manner. But the rewards are substantial (see Columns C, F and K in the Table).
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, NEE, MMM, JPM and IBM, and also own shares of CSCO, BA and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: “The 2 and 8 Club” has ~20 companies (see Week 348). Compare that to the 65-stock Dow Jones Composite Index selected by the Managing Editor of The Wall Street Journal. Apply our Standard Spreadsheet to companies that appear on both lists.
Execution: see Table showing metrics for all 9 such companies.
Administration: Our starting point is the US version of the FTSE High Dividend Yield Index, which is composed of the ~400 highest-yielding companies in the Russell 1000 Index. The Vanguard High Dividend Yield Fund ETF (VYM) clones that list and updates it monthly. After winnowing that list down to companies that have grown their dividend 8%/yr or faster, we eliminate any that do not have the 16 year trading record needed for quantitative analysis and S&P stock and bond ratings indicative of high quality (at least B+/M and BBB+, respectively). To further aid analysis, we only include companies that are on the latest annual Barron’s 500 List.
Bottom Line: Aside from NextEra Energy (NEE), these are risky stocks to own (see Column M in the Table). As a group, they’ll go up or down in price more than the market. Even if you own shares of all nine, you need to be watchful. You’ll need to learn how to spot trouble (or opportunity) well enough to sell (or buy) shares in a timely manner. But the rewards are substantial (see Columns C, F and K in the Table).
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, NEE, MMM, JPM and IBM, and also own shares of CSCO, BA and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 1
Week 352 - Gimme Shelter
Situation: You need to think about aligning your portfolio to “shelter in place.” A storm is coming. We just don’t know what will trigger the next market crash. A number of political, cultural, and economic factors are in play. But you do need to make lists:
1) Which stocks that you now dollar-average into are worth continuing to dollar-average into when a market crash happens on short notice?
2) Which stocks do you want to hold onto throughout a market crash, so that you can reinvest or spend the dividends?
3) Which stocks would you sell, so as to park that money in relatively safe assets like the Vanguard High Dividend Yield Fund (VYM) and the iShares 20+ Year Treasury Bond ETF (TLT).
Mission: Use our Standard Spreadsheet to analyze companies that appear to be able to weather a market crash. In other words, which have a) less risk of loss in a crash than the S&P 500 Index (see Column M in our spreadsheets), b) low Long-Term debt (Column P), and c) positive Tangible Book Value (Column R).
Execution: see Table.
Administration: All of the companies in this week’s Table have S&P bond ratings that are A- or higher, and S&P stock ratings that are B+/M or higher (see Columns T and U). And all have at least the 16 years of weekly price points needed for quantitative data per the BMW Method. Only 9 companies meet the criteria.
Bottom Line: Stocks crash from time to time; bonds don’t. Stock market corrections and crashes are difficult to predict, and recessions even more so. As Paul Samuelson said in 1966, “The stock market has forecast nine of the past 5 recessions.” Economies around the world are currently doing well: “Every major economy on earth is expanding at once”. This is a good time to remember that the biggest crash, which occurred on 10/19/87, did not precipitate a recession. But it did wipe out a lot of investors as $500 Billion of market value disappeared in a few hours without warning. Of course, the trick is to bulletproof part of your portfolio at all times.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion)
Full Disclosure: I dollar-average into NKE, WMT and NEE, and also own shares of TRV, KO, ATO and WEC.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
1) Which stocks that you now dollar-average into are worth continuing to dollar-average into when a market crash happens on short notice?
2) Which stocks do you want to hold onto throughout a market crash, so that you can reinvest or spend the dividends?
3) Which stocks would you sell, so as to park that money in relatively safe assets like the Vanguard High Dividend Yield Fund (VYM) and the iShares 20+ Year Treasury Bond ETF (TLT).
Mission: Use our Standard Spreadsheet to analyze companies that appear to be able to weather a market crash. In other words, which have a) less risk of loss in a crash than the S&P 500 Index (see Column M in our spreadsheets), b) low Long-Term debt (Column P), and c) positive Tangible Book Value (Column R).
Execution: see Table.
Administration: All of the companies in this week’s Table have S&P bond ratings that are A- or higher, and S&P stock ratings that are B+/M or higher (see Columns T and U). And all have at least the 16 years of weekly price points needed for quantitative data per the BMW Method. Only 9 companies meet the criteria.
Bottom Line: Stocks crash from time to time; bonds don’t. Stock market corrections and crashes are difficult to predict, and recessions even more so. As Paul Samuelson said in 1966, “The stock market has forecast nine of the past 5 recessions.” Economies around the world are currently doing well: “Every major economy on earth is expanding at once”. This is a good time to remember that the biggest crash, which occurred on 10/19/87, did not precipitate a recession. But it did wipe out a lot of investors as $500 Billion of market value disappeared in a few hours without warning. Of course, the trick is to bulletproof part of your portfolio at all times.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion)
Full Disclosure: I dollar-average into NKE, WMT and NEE, and also own shares of TRV, KO, ATO and WEC.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Subscribe to:
Posts (Atom)