Invest. Tune. Retire.: 2021

Wednesday, December 1

Month 125 - 22 A-rated Value Stocks in the S&P 500 Index - November 2021

Situation: The market’s overpriced, so let’s see what’s in the bargain basement. There we’ll find value stocks, namely those that sell for no more than twice the rational price (Graham Number), are valued at no more than 25 times 7-yr P/E, and have a market capitalization of no more than 6 times Book Value. An A-rated company must: 1) be listed in Vanguard’s High Dividend Yield Index ETF (VYM), 2) have a 20+ year trading history on a US stock exchange, 3) issue bonds rated A- or better and 4) a stock rated B+/M or better by S&P, 5) a positive Book Value for the most recent quarter (mrq), and 6) positive earnings for the Trailing Twelve Months (TTM).

Mission: Use our Standard Spreadsheet to analyze companies that meet criteria.

Execution: see Table of 22 companies.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. Intel (INTC) is the only company meeting that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which managers capitalize the company by issuing long-term bonds rather than common stock (see Column W). Four companies (ATO, AEP, INTC, ED) have a BUY rating from Morningstar; 17 companies have Long-Term Debt to Equity ratios (Column W) less than 1.0 (PGR, ATO, AFL, ADM, SNA, INTC, BK, TFC, USB, CB, NTRS, TRV, RTX, PNC, CMI, GD, STT). Mr. Buffett has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 17 companies (PGR, AFL, SNA, JPM, MET, INTC, BK, CMCSA, TFC, USB, CB, NTRS, TRV, PNC, CMI, GD, STT) have Retained Earnings after dividend payouts. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 6 companies have PEG ratios under 2.0 at both time points (BK, CMCSA, CB, RTX, CMI, STT). Managers are also respected for conserving cash, meaning operating expenses do not exceed 45% of net sales (Column Z). 9 companies meet this Operating Ratio standard (JPM, INTC, BK, CMCSA, TFC, USB, NTRS, PNC, STT). 12 companies are members of The 2 and 8 Club (bolded in Column J): ATO, AFL, SNA, JPM, BK, CMCSA, TFC, USB, NTRS, PNC, GD, STT. Sustainability is also important (see Column Q). Only 7 companies are likely to avoid steeper losses than the S&P 500 ETF (SPY) in the next market crash (ATO, AEP, AFL, ED, CB, TRV, RTX). INTC, BK, STT are each cited 5 times.

Bottom Line: Most of these companies are in the Financial Services industry, including 7 banks. Over the past 5 years, stock prices for all 7 banks have been more volatile than those for SPY. Intel (INTC) is the only company that shines in our analysis and also has low volatility (see Column K). All 22 companies raise concerns among investors, which is why their stocks are in the bargain basement in the first place. So, you’ll have to sort through those concerns before buying. Morningstar is a good place to start.

Risk Rating: 7 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into AEP, JPM, INTC, USB and RTX, and also own shares of CMCSA, CMI, GD and STT.

Monday, November 1

Month 124 - 13 Berkshire Hathaway Large-Cap Stocks - October 2021

Situation: The “Oracle of Omaha” continues to bring undervalued companies to light. Last July, Warren Buffett began building a new position in Verizon Communications (VZ) now worth over $9 Billion, making it the 7th largest holding in Berkshire Hathaway portfolio. So, why did he buy a stock that has lost 5% in value over the past 12 months and is given a BUY recommendation by only 25% of analysts? Let’s find out, starting with our yearly analysis of Berkshire Hathaway’s stock holdings. Our last look (Month 103), in January of 2020, was confined to the 8 A-rated stocks in that portfolio. This month, we’ll look at 13 major holdings that represent 84% of a portfolio containing 46 holdings.

Mission: Analyze companies that represent at least 0.2% of the portfolio’s value, excluding any that don’t fit our scheme of analysis: Companies must have a 20+ year trading record, an S&P Bond Rating of BBB or better, an S&P Stock Rating of B/M or better, positive Earnings Per Share (TTM), and positive Book Value (mrq)

Execution: see Table of 13 companies.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. Four companies (MRK, AAPL, MCO, MMC) meet that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which directors choose to capitalize their company by issuing long-term bonds rather than common stock (see Column V). One company (MRK) has a BUY rating from Morningstar, and 3 companies have Long-Term Debt to Equity ratios that are less than 1.0 (AMZN, BK, USB). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Eleven companies (AMZN, AON, AAPL, MCO, MMC, AXP, BAC, VZ, KR, BK, USB) have Retained Earnings after dividends have been paid. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Two companies have PEG ratios under 2.0 at both time points (MRK, BK). Managers are also respected for conserving cash, meaning operating expenses do not exceed 40% of net sales (Column Z). Five companies meet this Operating Ratio standard (MRK, MCO, AXP, VZ, KO). NOTE: only one company (MRK) has been cited 4 times.

Bottom Line: In terms of quantitative analysis of the 20 year trading record (Columns O, P and Q in the Table), 5 companies have high price appreciation (Column O) relative to their risk of loss (Column Q): AMZN, AON, AAPL, VZ, KO. Warren Buffett likes companies with intrinsic value, and such outperformance is indicative of long-standing intrinsic value. He looks for a wide “moat” of competitive advantages, especially barriers to entry. Seen through that lens, VZ has assembled a superior set of assets (microwave spectrum) vs. AT&T (T) and T-Mobile (TMUS).

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 MRK, VZ, KO and USB, and also own shares of AMZ.

Monday, October 4

Month 123 - 14 Food and Agriculture Companies - September 2021

Situation: Food and water are essential goods. Growth of the Food & Agriculture industry should merely reflect population growth. But the availability of clean water and a 55 gram/day protein diet actually reflects Middle Class population growth. So decrease in poverty is the true measure of growth. Given that global poverty has decreased almost 4+%/yr over the last 30 years, Food & Agriculture is a recession-resistant growth industry that demands investor attention.

Mission: Analyze 14 Food & Agriculture companies that I think you might want to consider.

Execution: See Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. Three companies (HSY, PEP, GIS) meet that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AL) and is negatively impacted by the degree to which managers and directors choose to capitalize their company by issuing long-term bonds rather than common stock (see Column T). No company has a BUY rating from Morningstar but one is considered undervalued (GIS), Six companies have a Long-Term Debt to Equity ratio that is less than 1.0 (HRL, COST, TGT, ADM, MDLZ, WMT). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Six companies (COST, UNP, DE, TGT, KR, WMT) have Retained Earnings, meaning some Free Cash Flow is left after dividends have been paid. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-year and 3-5 year Forward PEG ratios (see Columns M and N): Three companies have estimated PEG ratios at both time points that are no higher than 2.0 (UNP, DE, CAT). I favor companies in The 2 and 8 Club, meaning A-rated companies that have grown their dividend at least 8%/yr for the past 5 years (see Column J). Seven companies meet that standard (HRL, COST, UNP, DE, TGT, KR, MDLZ). Five stocks are A-rated (HRL, TGT, ADM, HSY, PEP). Note in this analysis that I’ve cited 5 companies at least 3 times: HRL, COST, UNP, DE, TGT.

Bottom Line: Companies that depend on the production of raw commodities are inherently risky. Half of those on this list have a greater risk of loss than SPY, the S&P Index ETF (see red highlights in Column Q). Only two of the remaining 7 are A-rated (HRL and PEP) and only PEP is less risky than the SPDR Dow Jones Industrial Average ETF (DIA), an A-rated ETF.

Risk Rating: 7 (10-yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).

Full Disclosure: I dollar-average into COST, UNP, WMT and CAT, and also own shares of KO and DE.

Sunday, September 5

Month 122: 8 Companies with Sustainable High Dividend Yields (August 2021)

Situation: When you’re an income investor, your primary focus is generating consistent cash flow from each of your liquid investments. The basic question, then, is whether to buy bonds or high-yielding stocks. Which companies can we expect to sustain dividend yields that are high and stable enough to compete with the iShares 20+ Year Treasury Bond ETF (TLT) in terms of safety and efficacy? Individual stocks lack the safety of US government bonds. But the Vanguard High Dividend Yield ETF (VYM), which is composed of the ~400 companies in the Russell 1000 Index that reliably pay an above-market dividend yield, is almost as safe as TLT and even more effective: VYM currently yields 2.8%, has a dividend growth rate of 6.0%/yr and a valuation (P/E) of 20.

In this month’s blog, I’ll argue that some stocks in VYM consistently outperform (provide less risk of bankruptcy and faster dividend growth than VYM). Their combined dividend yield and dividend growth rate is ~10%/yr. That would give you dividend income (quarterly checks in your mailbox) that will likely grow ~4%/yr faster than inflation.

Mission: Identify companies in VYM that appear to have a sustainable dividend yield.

Execution: see Table.

Administration: We have to confine our attention to A-rated companies. To be A-rated means that a company a) is in VYM, b) issues common stock that has been traded on a public exchange for at least 20 years, c) is rated B+/M or higher by S&P, d) issues bonds that are rated A- or higher by S&P, e) has a ratio of Price to Book Value for the most recent quarter (mrq) that is a positive number, and f) has positive Earnings Per Share (EPS) for the Trailing Twelve Months (TTM). The hard part is choosing which A-rated companies are strong enough to sustain their policy of paying a good and growing dividend. To find those, I’ve added 4 requirements: 1) that the company be in the iShares Top 200 Value ETF (IWX), 2) that the company have an S&P stock rating of A-/M or higher, 3) that the company’s stock remains reasonably priced in an overheated market, meaning Price/Book is no higher than 6.0, and 4) that current dividend yield is at least 2.2%/yr.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. One company (INTC) meets that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AL) and is negatively impacted by the degree to which managers and directors choose to capitalize their company by issuing long-term bonds rather than common stock (see Column T). Two companies (APD and INTC) have a BUY rating from Morningstar, and 6 companies have a Long-Term Debt to Equity ratio that is less than 1.0 (APD, INTC, BK, USB, PNC, GD). Mr. Buffett has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Six companies (INTC, JPM, BK, USB, PNC, GD) have Retained Earnings, meaning some Free Cash Flow is left after dividends have been paid. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-year and 3-5 year Forward PEG ratios (see Columns M and N): Two companies have estimated PEG ratios at both time points that are no higher than 2.0 (APD and BK). I favor companies in The 2 and 8 Club, meaning A-rated companies that have grown their dividend at least 8%/yr for the past 5 years (see Column J). Six companies meet that standard (APD, JPM, BK, USB, PNC, GD). Note in this analysis that I’ve cited 3 companies 4 times: INTC, APD, BK.

Bottom Line: Even though these 8 companies have twice the dividend yield, twice the dividend growth, and half the P/E of SPY (the S&P 500 ETF), only two have had a higher total return over the past 10 years (JPM and PNC). But total returns aren’t the point-of-main-interest here. We’re trying to answer a different valuation question: Is there a group of individual stocks that will likely give you a safer and more rewarding stream of income than you’d get from US government bonds? Those bonds yield only half as much as our 8 almost-as-safe stocks. But which are the most safe and most effective sources of retirement income? I’d say the 5 Dividend Achievers in Column AQ of the Table (APD, JPM, BK, PNC, GD).

Risk Rating: 5 (where 10-yr US Treasury Notes = 1, SPY = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into AEP, INTC, JPM and USB, and also own shares of APD and GD.

Sunday, August 1

Month 121 - 22 Companies in 5 Government-regulated Industries - July 2021

Situation: Investors tend to shy away from companies that have limited pricing power, namely companies in government-regulated industries: electric utilities, railroads, 5G wireless communications, systemically important financial institutions or SIFIs, and defense contractors. Those underpin the national economy and national security. To ensure safe and effective operations, regulators may allow companies to function as quasi-monopolies. For example, railroads and electric utilities face little competition in their dedicated catchment areas.

State and national government agencies perform the regulatory functions, making sure that consumers are billed enough to allow timely and effective maintenance of the underlying infrastructure. Profits at these vital companies are capped. In most states, the Public Utility Commission historically set annual ROIC (Returns on Invested Capital) at ~10%, and the billing rate for customers is set high enough to ensure that ROIC. Investors need to think of the shares they hold in an A-rated regulated public utility as akin to an investment-grade bond that pays 10% interest.

Mission: Using our Standard Spreadsheet, analyze all 22 companies in the Russell Top 200 Index (IWL) that are in these 5 government-regulated industries. Use Berkshire Hathaway (BRK-B) for reference because that company owns both the largest US utility company (Berkshire Hathaway Energy) and largest US railroad (BNSF Railway), and a major defense contractor (Precision CastParts); it also has billions of dollars worth of shares in both the largest 5G wireless company (VZ) and the largest SIFI (BAC).

Execution: see 22 Companies in the Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% is a good number. Only one company (LMT) meets that standard. His second point -- that the company is to be “run by able and honest managers” -- is addressed in Morningstar reports (see Column AM) and is negatively impacted by the degree to which managers and directors choose to capitalize their company with long-term bonds rather than common stock (see Column V). Two companies (LMT, D) have a BUY rating from Morningstar, and 3 companies have “gearing” (the ratio of Long-Term Debt to Equity) of less than 1.0 (NSC, RTX, GD). He has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Twelve companies (CSX, TMUS, UNP, NSC, VZ, JPM, CMCSA, LMT, NOC, BAC, GD, C) have Retained Earnings (meaning that Free Cash Flow more than covers dividend payments). Warren’s third point -- that the stock be available “at a sensible price” -- is addressed by the 1-year and 3-5 year Forward PEG ratios (see Columns M and N): Five companies have estimated PEG ratios at both time points of 2.0 or less (CSX, TMUS, NSC, CMCSA, RTX).

I like to invest in "The 2 and 8 Club." That is, A-rated companies that reliably pay an above-market dividend and have grown that dividend at least 8%/yr for the past 5 years (see Column J). Six companies meet that standard (NEE, UNP, JPM, CMCSA, LMT, GD).

Bottom Line: Uncertainty about future downside risks are a chief concern of investors. Given the lack of pricing power that CEOs of these companies face, as well as having profits capped by government officials, investors can be forgiven for questioning the future prospects of these companies. But remember: government regulation of your Return on Investment comes with government insurance of your Return on Investment.

Risk Rating: 7 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, UNP, JPM, RTX and T, and also own shares of TMUS, BA, LMT, GD and C.

Thursday, July 29

Month 120 - 5 S&P 100 companies with a low PEG in the iShares Russell Top 200 Growth ETF - June 2021

“The line between gambling and investing is artificial and thin”

Michael Lewis (The Big Short, 2011)

Situation: This month’s blog is about buying and selling “growth” stocks. Some of the best ones don’t pay a dividend, and most of the rest have a dividend yield lower than the S&P 500’s. Stocks yielding more than the S&P 500, and stocks issued by companies that increase their dividend every year, are “value” stocks, as long as those shares are priced much higher than the Book Value per share. Most retirement portfolios have several such “value” stocks (see Month 119).

To analyze “growth” stocks, we’ll have set aside that idea of picking a stock that reliably pays a “good and growing dividend” and instead pick a stock that is likely to have a high rate of earnings growth over the next 3-5 years. In his 1969 book, Mario Farina (A beginner’s guide to successful investing) explained that growth stocks often have a high P/E ratio because their earnings are expected to grow rapidly. Peter Lynch, in his 1989 book (One up on Wall Street) put a fine point on this idea when he wrote that “The P/E ratio of any company that’s fairly priced will equal its growth rate”. We’ll need to have an estimate of Forward P/E, then divide that by the Forward rate of growth in Earnings Per Share (EPS). Usually that “PEG ratio” will be greater than Peter Lynch’s ideal of 1, but basically he was correct. The idea of examining a company closely enough to arrive at that number has finally become accepted. Yahoo Finance will show you the 3-5 year expected PEG ratio for any public company by clicking on the Statistics link at the top of the company’s entry.

Mission: Screen the list of companies in IWY (the iShares Russell Top 200 Growth ETF for highest quality companies, namely S&P 100 companies that have a) S&P Bond Ratings of A- or higher, b) S&P Stock Ratings of B+/M or higher, c) a 20-year history of the stock being publicly traded on a US exchange, d) a positive Book Value for the most recent quarter (mrq), and e) positive EPS for the Trailing Twelve Months (TTM). Analyze those companies by using our Standard Spreadsheet.

Execution: see the 5 S&P 100 companies in the Table.

Administration: As DIY (Do It Yourself) investors, we need to know where investing stops and gambling begins. Growth companies are usually overpriced by the standards of this blog, which means that the typical price is more than 2.5 times the rational price (Graham Number) and is also more than 30 times the 7-yr P/E (see Columns AI and AK in the Table). You’ll note that 3 of the 5 stocks in this month’s Table are overpriced (see Column AN in the Table). And, at the bottom of this page, you’ll note that I own shares in all three (NKE, UNH, JNJ).

Bottom Line: These 5 companies score well on metrics that Warren Buffett holds in high regard, such as Returns on Net Tangible Capital Employed (see Column U in the Table). To calculate that metric, divide Earnings Before Interest and Taxes (see Income Statement) by Total Assets (see Balance Sheet) that have been reduced by removing Intangible Assets and removing Short-Term Debt and Current Portion of Long-Term Debt (see Liabilities section at bottom of Balance Sheet). In his 2020 Annual Report for Berkshire Hathaway, Mr. Buffett wrote that “we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.” When evaluating a company that grows earnings rapidly, the only metric that will help you arrive at a “sensible price” is Forward PEG (see Columns O and Q in the Table): All 5 companies have a Forward 1-yr PEG and a Forward 3-5 yr PEG, that is under 2.0.

Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into NKE and JNJ, and also own shares in UNH and AMGN. Morningstar considers all 4 of these stocks to be overvalued, rating each a HOLD (see Column AO in the Table).

Saturday, July 17

Month 119 - 16 High Quality S&P 100 Value Stocks - May 2021

Situation: You need an easy way to pick value stocks for your retirement portfolio. Start with 4 websites:

1) S&P 100 Index;

2) Vanguard High Dividend Yield ETF;

3) Vanguard Dividend Appreciation ETF;

4) Yahoo Finance.

Mission: Show how to use these websites to build a working list of value stocks.

Execution: see Table.

Administration: Confine your attention to large companies, meaning those in the S&P 100 Index. Put any S&P 100 company that is named under Portfolio Holdings at the bottom of either Vanguard fund webpage. Go to the Yahoo Finance web page for each such company and click on Statistics. Under “Valuation Measures” find Price/Book (mrq). Remove companies on your working list that have a Price/Book higher than 6.0.

All that remains is a safety check on each company. Make sure that

a) the S&P Bond Rating is A- or better;

b) the S&P Stock Rating is B+/M or better;

c) the stock has been traded on a public exchange for 20+ years;

d) Earnings Per Share (EPS) for the Trailing Twelve Months (TTM) is positive.

Bottom Line: What you get from investing equal dollar amounts in each of these 16 companies is a 50% higher dividend yield than you would get from investing in the iShares Russell Top 200 Value ETF, as well as quarterly dividends that have grown 4 times faster over the trailing 5-year period. Price volatility (5-Yr Beta) is also lower; perceived value (P/E) is higher because P/E is lower. Using Warren Buffett’s favorite metrics (net return on tangible capital employed, free cash flow yield, and Long-term debt to equity), 9 of these companies look good (UNH, PFE, CSCO, MDT, INTC, BLK, MET, GD). Seven companies have forward PEG ratios under 2 (UNH, PFE, CMCSA, BK, USB, RTX, IBM). None have a BUY rating from Morningstar, and only INTC is considered to be undervalued.

Risk Rating: 7

Full Disclosure: I dollar-average into NEE, PFE, CSCO, INTC, JPM, RTX, and also own shares of UNH, BLK, USB, GD, IBM.

Thursday, June 17

Month 118 - 10 Bedrock DRIPs - April 2021.

Situation: You want to be sure that at least 25% of the companies in your stock portfolio are well-immunized against the risk of losing their “investment grade” credit rating. Start by shopping for shares of companies in the most “defensive” industries (pharmaceuticals and consumer staples). Select 10 companies in the S&P 100 Index that issue bonds with an S&P rating of A- or better. Invest by dollar-averaging the same fixed monthly payment into each company’s stock through an online Dividend ReInvestment Plan (DRIP).

I’ve chosen 3 companies in the Food and Beverage industry: Costco Wholesale (COST), Walmart (WMT), Coca-Cola (KO), plus one in the Pharmaceutical industry: Merck (MRK). Move on to choosing one company from each of the 4 industries that are largely protected against bankruptcy because of government regulation that sets prices and limits competition: Systemically Important Financial Institutions, Defense Contractors, Electric Utilities, and Railroads. I’ve chosen JPMorgan Chase (JPM), Raytheon Technologies (RTX), NextEra Energy (NEE), and Union Pacific (UNP). Complete your “Bedrock DRIP” by adding the two companies that carry a AAA rating on their bonds from Standard and Poor’s: Microsoft (MSFT) and Johnson & Johnson (JNJ).

Mission: Analyze those 10 companies using our Standard Spreadsheet.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is a good number. Three companies (MRK, MSFT, JNJ) passed that test. His second point (that the company is being “run by able and honest managers) is addressed in Morningstar reports (see Column AM in the Table) and by the way operations are funded. The degree to which managers capitalize their company by issuing long-term bonds, as opposed to issuing common stock, is obvious from the ratio of Long-Term Debt to Equity (see Column V in the Table). The degree to which Retained Earnings can be used for expansion is determined by Free Cash Flow Yield (see Column I in the Table). Only one company (MRK) has a BUY rating from Morningstar. Five companies have a ratio of Long-Term Debt to Equity) that is less than 1.0 (MSFT, COST, WMT, JNJ, RTX). Five companies have a Free Cash Flow Yield (in Column I) that exceeds their Dividend Yield (in Column H), i.e., Retained Earnings (MSFT, COST, UNP, JPM, WMT). Warren’s third point (that the stock be available “at a sensible price”) is addressed by the 3-5 year estimated PEG Ratio (see Column N in the Table): Three companies have a PEG ratio of 2.0 or less (MRK, JNJ, RTX). NOTE: JNJ, MSFT and MRK are each mentioned 3 times out of a possible 5.

Bottom Line: Safe and effective investing isn’t hard. Just add a little each month to carefully selected “buy and forget” companies.

Risk Rating: 5 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and Gold Bullion = 10)

Full Disclosure: I dollar-average into all 10.

Thursday, June 10

Month 117 - STARTER STOCKS: Choose from the 10 Largest A-rated Companies - March 2021

Situation: Retail investors are in the news! It’s been almost 50 years since Merrill Lynch launched its “Thundering Herd” advertisement for the 1971 World Series. Now, every broker-dealer knows there’s serious money to be made servicing the “small” investor but none focused on them until RobinHood came riding to the rescue: They'll sell you a miniscule amount of shares free of charge, the only requirement being that you download their app and link it to your bank account. But the app offers no tutorial on how to avoid risk. Warren Buffett isn’t even mentioned. Maybe that's because his message is that neophytes should buy shares in a cheap S&P 500 ETF (e.g. SPY) and stay away from picking stocks, unless they’re willing to learn basic financial accounting and have time to analyze companies.

My take on this is that you can do almost as well picking stocks as you can by owning shares in an S&P 500 ETF, and sleep better. How’s that done? By crafting a portfolio that is unlikely to suffer as much in a market crash as an S&P 500 ETF (see Columns D and AP in the Table). The trick is to confine yourself to owning stock in A-rated companies. Plenty of those bond-like stocks are available. I’ve found 32 in the iShares Russell Top 200 ETF (IWL). The anchor for your research should be the Vanguard High Dividend Yield Index ETF (VYM) because it lists the ~400 such companies found in the Russell 1000 Large-cap Index. Seven other requirements have to be met before I’d call a company A-rated: a) issue bonds rated A- or higher by S&P, b) issue a common stock rated B+/M or higher by S&P, c) have a 20+ year trading history analyzed by the BMW Method, d) have positive earnings per share (EPS) for the Trailing Twelve Month (TTM) period, e) have positive Book Value for the most recent quarter (mrq), and (f) not be a “Potentially Over Priced Stock” per the BMW Method.

Plan to focus on the largest A-rated companies by market capitalization (megacaps). Those have the most varied line of products (or services), as well as a backup line-of-credit that is both generous and cheap. There are three main reasons why companies get to be very large: They a) consistently make a LOT of money, b) manage expenses well, and c) have learned to meet competitive challenges well and survive periods of economic peril. To put a fine point on their success, Warren Buffett explained (at the 2007 Annual Meeting of Berkshire Hathaway) how he and Charlie Munger go about picking companies for investment. “We are best at evaluating businesses where we can come to a judgment that they will look a lot like they do now in five years.”

Mission: Analyze the 10 largest A-rated companies by market capitalization by using our Standard Spreadsheet.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is a good number. Six companies (CSCO, HD, INTC, PG, JNJ, PEP) pass that test. His second point (that the company is being “run by able and honest managers”) is addressed in Morningstar reports (see Column AM in the Table) and by the propensity managers have to capitalize their company by selling long-term bonds as opposed to common stock (see Column V in the Table). Two companies (PFE and PEP) have BUY ratings from Morningstar, and 5 companies have a ratio of Long-Term Debt to Equity (“gearing”) that is less than 1.0 (PFE, CSCO, INTC, PG, JNJ). Managers also get graded by the extent to which the company can spend retained earnings for expansion in place of loans. In other words, Free Cash Flow Yield (Column I) becomes an important metric if it exceeds Dividend Yield. Five companies meet that criterion (CSCO, HD, INTC, JPM, CMCSA). Warren’s third point (that the stock be available “at a sensible price”) is addressed by the Expected 3-5 year PEG Ratio (see Column N in the Table). Four companies have PEG ratios of 2.0 or less (LLY, PFE, JNJ and CMCSA). In this analysis, CSCO, INTC, JNJ, PFE are each mentioned 3 out of a possible 5 times.

Bottom Line: Your success will depend on how you see the future unfolding for each company in your portfolio. Start by looking at a small number of large, well established, and easily understood companies. Then narrow your focus to shareholder friendly companies that can be counted on to return much of your original investment within 10 years (through buying back shares and reliably paying a good and growing dividend). Buy more shares in each of your choices as disposable income becomes available. Being a big company is a competitive advantage, so build positions in the largest companies that satisfy reasonable markers of profitability, risk, and sustainability.

An investor who is new to stock-picking should avoid overpriced stocks (see Columns AL and AM in the Table). Accordingly, I do not recommend that you buy shares of LLY, HD and PG in the current market environment, unless you plan to dollar-cost average automatic monthly purchases by using an online Dividend Re-Investment Plan (DRIP).

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 PFE, HD, CSCO, INTC, PG, JPM and JNJ, and also own shares of PEP.

Sunday, February 28

Month 116 - BUY LOW: Dogs of the S&P 100 for 2021 - February 2021

Situation: Building on last month’s blog about 6 A-rated “Dogs of the Dow”, I’ve widened the search to encompass 14 A-rated “Dogs of the S&P 100” by using the same methodology.

Mission: Analyze all 14 4-rated “Dogs of the S&P 100.”

Execution: see Table.

Administration: All 10 “Dogs of the Dow’ for 2021 had dividend yields higher than 2.5% in early January. Six of those met our requirements for being A-rated: 1) reliable dividend yields that are consistently higher than the S&P 500 Index dividend yield, as evidenced by inclusion in the Vanguard High Dividend Yield Index ETF (VYM); 2) S&P Bond Rating of A- or higher; 3) S&P Stock Rating of B+/M or higher; 4) 20+ year trading history on public US exchanges; 5) positive earnings over the Trailing Twelve Months (TTM); 6) positive Book Value for the most recent quarter (mrq). Those 6 A-rated Dogs (MRK, AMGN, CSCO, KO, MMM, IBM) were analyzed in last month’s blog (Month 115). NOTE: MRK and KO are no longer A-rated due to recent S&P downgrades to their Stock Rating. To uncover A-rated “Dogs of the S&P 100”, I’ve analyzed all 27 A-rated S&P 100 companies--including the 11 found in the Dow Jones Industrial Average (DJIA). 14 of those 27 had dividend yields higher than 2.5% in early January (PFE, AMGN, CSCO, DUK, PEP, LMT, UPS, USB, BK, EMR, MMM, MET, GD, IBM).

Analysis: Warren Buffett’s favorite metric is addressed in Column Q of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is a good number. 9 companies (PFE, AMGN, CSCO, PEP, LMT, EMR, MMM) pass that test. His second point (that the company is being “run by able and honest managers”) is addressed in Morningstar reports (see Column AK in the Table) and by the propensity that managers have to capitalize the company with long-term bonds as opposed to common stock (see Column U in the Table). Four companies (PFE, LMT, BK, GD) have BUY ratings from Morningstar, and 7 companies have a ratio of Long-Term Debt to Equity (“gearing”) that is less than 1.0 (PFE, CSCO, USB, BK, EMR, MET, GD). Warren’s third point (that the stock be available “at a sensible price”) is addressed by the 3-5 year estimated PEG Ratio (see Column M in the Table): 5 companies have PEG ratios of 2.5 or less (AMGN, UPS, BK, GD, IBM).

Bottom Line: PFE is a BUY because of satisfying at least 3 of the 4 requirements. One of the most important activities for a stock picker is to keep a file on companies of interest whose stocks are selling below trendline. This month’s blog has 5 (see Column O in the Table): LMT, USB, MMM, GD, IBM. Any of those 5 that have good profitability and sustainability are worth close study, since their prices are certain to return to trendline. That is, prices will exhibit “reversion to the mean”.

Risk Rating: 7 (where 10-yr US Treasury Notes =1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into PFE and CSCO, and also own shares of AMGN, DUK, LMT, USB, MMM, GD and IBM.

Sunday, January 31

Month 115 - BUY LOW: Dogs of the Dow for 2021 - January 2021

Situation: Buying low is what separates an investor from a saver. A stock picker has only a few ways to do that. The qualities of a company, including its future prospects, need to be considered beyond the quantities in its Balance Sheet. But those Balance Sheet numbers do help to reveal the quality of management. For example, Return on Tangible Capital Employed can be impressive (even over 40%) when the long-term bonds that a company issues account for 3 times more of its capital than common equity. But if long-term bonds provide less capital than equity, even a 20% return is evidence of a high quality management team.

I start looking for opportunities to BUY LOW by screening for metrics favored by great stock pickers. GARP (Growth At a Reasonable Price) is what Peter Lynch favored. Graham Numbers (which normalize a stock’s price to 1.5 times Book Value and 15 times earnings) and a 7-yr P/E are what Benjamin Graham favored. Warren Buffett (in the 2020 Annual Report of Berkshire Hathaway) writes that “we constantly seek to buy new businesses that meet three criteria. First they must earn good returns on the net tangible capital required for their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”

Bargain-priced companies typically are facing challenges that have caused their Return on Investment (TTM) to decline, which of course lowers their stock price while raising their dividend yield. Hopefully the challenges will be surmounted and the stock will go up in price. You, the buyer, hope to profit from that turnaround. Very large companies typically make a turnaround within 2-3 years because they have considerable advantages: 1) multiple product lines that can be repurposed efficiently, 2) Credit Lines that can be tapped at low interest rates, 3) a dominant market position, and 4) customers want to avoid the Switching Costs they’d face finding a new supplier.

To BUY LOW successfully you need to pick stocks at the right time and wait patiently for its price to rebound. Dogs of the Dow is the only time-proven system for doing that: Buy equal dollar amounts of stock in the 10 highest yielding DJIA companies at the beginning of the year and sell those shares at the end of the year. For the retail investor, the transaction costs would likely be too high. Results are better anyway if stocks are given more time to recover. So, check out the new list every January and decide which companies have the qualities needed to get on the path to recovery.

Mission: The 10 Dogs for 2021 are DOW, CVX, WBA, VZ, MRK, IBM, MMM, AMGN, KO, CSCO. The last 6 are A-rated companies. Decide which of those 6 are likely to rebound.

Bottom Line: Warren’s first point is addressed in Column Q of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is a good number. MRK, CSCO, KO, AMGN, MMM pass that test. The second point is a bit harder to parse but Morningstar reports do address management (see Column AK in the Table). MRK and MMM have BUY ratings from Morningstar. The ratio of Long-Term Debt to Equity (gearing) tells you the degree to which management boosts tangible assets by issuing long-term bonds (Column U). MRK and CSCO have gearing ratios under 1.0. Warren’s third point is addressed by the 3-5 year estimated PEG Ratio (see Column M in the Table): MRK and AMGN have PEG Ratios under 2.0. Conclusion: MRK is a BUY.

All six companies (MRK, CSCO, KO, AMGN, MMM, IBM) are A-rated, meaning that S&P gives their stocks and bonds good grades, Book Value (mrq) and earnings (TTM) are positive numbers, each has a 20+ year trading history on public exchanges, and their dividend yields are stable at above-market rates. Two (CSCO and IBM) meet my definition of a Value Stock: Price (50d Moving Average) is no more than twice the Graham Number and 7-yr P/E is no more than 25.

Risk Rating: 7 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into MRK, CSCO and KO, and also own shares of MMM, AMGN and IBM.

Pages

Wednesday, December 1

Monday, November 1

Monday, October 4

Sunday, September 5

Sunday, August 1

Thursday, July 29

Saturday, July 17

Thursday, June 17

Thursday, June 10

Sunday, February 28

Sunday, January 31