The largest Alternative Asset or Private Equity group in the US is the Blackstone Group led by Stephen Schwarzman. You can watch some of his interviews on You Tube and given his success over the past 40 years, lessons are easily learned. His company typically invests in companies or real estate under the method: (1) buy a company with $ 3 of debt to $ 1 of equity; (2) improve the company and accelerate the growth rate of the company (3) sell some or all of the new company. Repeat. For the past number of years his company has a internal rate of return (IRR) of 20 to 30% after fees. The task is try to buy at low prices and allow the rise the normal cycle of economy to greatly help your investment.

Mr. Schwarzman credits a number of elements for success:

1. Private Equity is a risk minimization business. For all the great rewards, the deals you choose to go into, you understand as many risks as possible and they are scrutinized. Mr. Schwarzman credits his company’s second deal where they lost money, the investors were not happy, this changed his process to failure. The process was changed to every deal that comes up, before being accepted, the deal has input from everyone at the table not just the senior partners. In this fashion as many risks as possible are seen beforehand and understood. The trick is to ensure all deals are examined and the intention is not personal but to minimize the risks or ensure the devil’s advocate voice is heard.
2. Starting a business means you need to be adaptable because whatever you do you need to understand what you do before you do it. why do people need you? what strategies will you employ? but you must have a passion to do or go forward.
3. The early years, you need to be adaptable and keep going. You will need a thick skin because people will lie to you, before they start doing a business with you. The world will not see you as valuable as you see yourself and your company are. If you become overconfident or lose your will, your company will likely fail and many do.
4. Private Equity is an amazing investment; need to attract great people and essentially a manufacturing intellectual business. You will need a vision and make it happen through excellence in execution.

Linking to dividend paying stocks, the rule with private equity is to buy a company when it is slumped or down from its heights and restructure it. Part of the success will be the restructuring, success also comes from riding the economic cycle wave up to the top. An example if the company has too much debt and is in the commodity business; the finances can be restructured but the commodity price must increase as well. If both happen, capital gains are to made. The system requires patience, an understanding of risks, and it is possible. If you buy dividend paying companies, the dividend will give you patience and if there is a commodity price move, the capital gain allows you to sell and buy other dividend companies, in the meantime the risk is maintained at a low level.

There are more questions than answers, till the next time – to raising questions.

 

The big pharm companies are an interesting long term consideration because every year the Baby Boom generation ages and the reality is as people age more things begin to not be perfect with their health. People tend to want relatively quick fixes and will turn to a pill or a drug to achieve it, if you have a healthy balanced lifestyle that may be the better answer, but for many it is too late to change. Since baby boomers are retiring, the long term growth of the health sector is going to be assured for at least the next 40 years. On the stock market the sector has declined in price, what are the good companies? Scott Barlow in a column A prescription for stable growth examined the sector:

1. He ranked all companies in the S&P 500 health care index by 10 year volatility of cash flow. The reason was to identify the most consistent money making companies. This narrowed his search to 12 companies.
2. Next he checked for valuation levels by comparing the current price to cash flow ratio with the 5 year average. The good news all 12 are trading above their historical averages or no bad choices.
3. He examined the 5 year average annual earnings a share increases
4. He looked at average analyst estimate looking at the long term profit
5. the dividend yield is included.

 

Company                 P/CF         5 yr       5 Yr Avg EPS      Est LT EPS     3 Yr         Dividend

P/CF         Growth %          Growth %     Ann Tr       Yield %

J & J                           17.81         14.13          9.59                    6.55              10.35             2.77

Medtronic              19.23          13.79       -0.79                   7.76              14.38             2.11

Quest Diagnos     11.14            10.71        43.24                   7.28             12.10              1.95

Eli Lily                    21.95          15.11            0.19                   11.45             16.51             2.78

Pfizer                      12.65           11.35          -13.17                  5.53               3.38             3.91

Lab Corp                11.56           10.96             5.72                11.17               6.97             n/a

Becton Dickinson 14.10        11.94            87.13                 11.28             18.56            1.57

Dentsply Sirona     21.23        14.98             1.85                    9.76             7.96            0.51

Patterson Cos          53.88        18.14            3.19                    7.69              2.93            2.12

Agilent Tech             17.95       17.39           -15.35               10.43              7.04              1.06

Stryker                       23.69        20.01             63.29              9.21               17.43            1.31

Baxter Internatl      19.94          11.72           n/a                   12.36              11.91            1.10

Source: Bloomberg

Linking to dividend paying stocks, in the column Mr. Barlow did not come up with a clear winner as all the companies have good things about them and few relative concerns. For example J&J long term EPS growth is the lowest, but its ability to generate cash flow is the best. If you start with the best companies, there is often no bad choice – as you look through the annual reports you can see whether the company fits your values or not. The companies are in the broad sector of health care but all do something different. If you want to double and triple your stock price, maybe look elsewhere, but if you want to participate in the health care sector with low risk and high returns – these are good stocks to own.

There are more questions than answers, till the next time – to raising questions.

 

 

 

One of the reason for watching the Milken Institute You Tube video is what do the long established big players in Private Equity think? In this segment 4 major funds were represented David Rubenstein from Caryle, Robert Smith from Vista Equity, Jonathon Nelson from Providence Equity and Leon Black from Apollo Global.

They were asked about biggest risk, keep in mind their funds are active on worldwide basis but based in the US.

1. potential recession – in the US there is a recession every 7 years the last one was in 2007.
2. fed gets it wrong when hiking interest rates. Everyone expects rates to go up but how much is the big question and when.
3. China growth is slower than expectations.
4. Commodity prices do not go up and stabilize
5. who is the next President – the street expects Clinton but it is democracy
6. digitalization of information – as we go into the connection of things – what is the cyber security of the company?
7. price to perfection – but a number of metrics most prices are high. It is harder to buy companies and make them more profitable.
8. stick to your model and have patience for the economy to cycle onwards
9. buying companies in fast growing industries should do better than the overall country’s GDP.

Having said all the above all agreed the Alternative Asset class has huge opportunities going forward and investors expectations are changing. A number of years ago people were expecting a IRR (internal rate of return) of at least 25% now they are expecting 15% and some of the sovereign funds have expectations of investments for 20 years. The traditional cycle is buy, maximize profitability and begin to exit the investment to go on to something else.

Senior leaders look at the risk-return ratio and the return of equity as they examine deals or potential deals for them and their firms.

Linking to dividend paying stocks, the world of private equity is for those with greater than $1 million to begin to invest, one day those with less money may find vehicles to invest in. Each of the leaders suggested while there is always many opportunities in the marketplace, sticking to what they know or there knitting has served them the best. Everyone knows something – either through their jobs, interests, contacts and that is where they should focus the bulk of their investing because you can easily track it. If you have patience, investing in long term dividend paying stocks is a good thing in any economic cycle.

There are more questions than answers, till the next time – to raising questions.

 

Most of us use the internet for entertainment, it can also be used for learning. The Milken Institute has a number of you tube videos and one can learn as nuggets of information are given. In one of the videos, the theme of the event was talk about managing people in the hedge fund industry. The people tend to be under 35 and if the fund is successful have accumulated wealth greater than the average person, why are they still doing their job? how do you motivate them to continue? what does it take to bring someone into your firm and be successful?

The four participants were from a variety of size of firms – Kenneth Griffin at Citadel, Gideon Berger from Blackstone Alternative Asset, Alexander Klabin from Senator Investor Group and Jason Karp of Tourbillion Capital Partners.

They discussed many topics including what does it take to be successful? Mr. Griffin said there are two parts: one is the science which is the process and hard work – gathering the information, studying companies and management and coming to a conclusion. The art of the work is what does your conclusion mean to the rest of the street ( who have similar intelligent people doing the same thing as you)? The method you beat the index is to have ideas which are different that the prevailing view on the street and when the knowledge is known to other investors they agree with your assessment which moves the stock or investment vehicle.

Mr. Klabin believes one of the methods to success is not only to generate ideas and see patterns, but you communicate to tell others. Use analogies. The example is an acre of land is 43,560 sq. ft. or the analogy is a football field with the ends cut off. Which one will you remember? Can you distill your idea down to make an analogy which allows others to understand?

Mr. Berger allocates Blackstone money to different fund managers based on a wide variety of metrics but at the end when the metrics seem to be very close to each other, the method he uses are: Blackstone tries to understand the hedge funds strategy or has an investment thesis why are these people better? what is there edge? and as important why are the people in the industry? what are they trying to build? or looking at the character of the firm. The reality is hedge funds have a success ratio of 52% or 48% are wrong – how do people act and how do the act when faced with adversity?

In discussing who they hire, Mr. Karp says he uses tests to determine how open are people to change when they are confronted with new information. The reality is no one will ever have complete information – they can and will have ideas that should work. What happens when something comes up that changes? are they open to it? do they continue to dig in? can they learn from failure and will try not to repeat it?

Mr. Griffin had a slightly different take – you coach your stars because if you can get 15% more from them you will have a great year. The bottom 50% you allow them to swim or sink and bring in new people. At Citadel they do have turnover for a variety of reasons, but those that stay will be extraordinary in the narrow range of work they do.

He also believed the reasons people stay at Citadel are 3 fold: (1) there are a wide variety of platforms to manage so there is plenty of opportunity to do great things; (2) the most important aspect is the Teamwork or working with great people and there is a Culture of Learning which means everyday you come to work you are learning something new; and (3) they hustle – they do what they need to do to stay ahead of others.

One of the reasons why the emphasis on teamwork is Mr. Citadel willing to delegate. Early in his career he started on the American and Japanese bond desk. They added Europe to his duties which meant a 24 hour clock and at some point he needed to sleep. He had to learn to delegate which meant to trust others and work together to get the tasks done.

Mr. Klabin also discussed culture within his firm. There are the values which every firm has and the daily rituals which enforce the culture. In this fashion the process means more than the outcomes. An example he used was Dean Smith of North Carolina Tar Heels basketball coach had a process of rating players in practice. They were given points for high probability shots; they were given points for passing so a person can take the easy shot; if they shot the basketball and it went in when a defender was in their face they lost points. Why? it has a long shot or in baseball terms hitting for the fences when a single or double brings in the run. The point of the exercise was to emphasis teamwork.

One of the other hallmarks of his firm is start with the why? If you define your purpose why you are doing something rather than how? and what? people can relate to the why and will stand by you longer. If you start with the how? or the what? people will find other alternatives. The example he gave was Dell and Apple computers. Dell gives you the what they do – build computers to your specifications. When they tried to go into other devices besides laptops people did not buy. Apple start with the why? challenge the status quo which allowed them to be a disrupter and introduce ipad, iTunes, iPhone, etc.

Linking to dividend paying companies, in service companies the most important asset goes home each day from their office. People are important and how you treat them and how they feel they are being treated. The opposite of this discussion is a movie called Office Space. Part of your job as an investor is determine do people come for the best of reasons and stay for those same reasons.

There are more questions than answers, till the next time – to raising questions.

 

 

 

 

 

If you look at the country of Venezuela you will see a country in economic crisis, for a lot of reasons and one of them is the oil market. Venezuela’s biggest exports is oil and when prices were high, political ambition was even greater. When oil prices fell the economy fell to where it badly needs higher world oil prices. With the high prices, the government of the day used its oil wealth to influence other countries as it fought in words the US government influence. The politics are different. The oil giant Petroleos de Venezuela was one part oil producer and one part fulfilled government ambitions. Now days the government still has ambitions but the oil company does not generate the amount of money to pay for everything under the sun including its own bills. In an article written by Marianna Parraga of Reuters the other countries in the Caribbean that Venezuela has relationships with still want to be paid for services rendered. In Venezuela can not pay, then other partners including Chinese will. Alternatives are being found.

The wealth of Venezuela oil paid for many pet projects of politicians as well as providing a good living standard for the average citizen until the oil price collapsed. Venezuela did not create a oil fund similar to Norway; but spent the money, expecting the price never to fall. The fracking process in the US; the more efficient automobiles, a global economy which took a few extra years to recover and other factors play a role in the decline of the price of oil.

Linking to dividend paying stocks, when prices are high and the company is rolling in money, they can do whatever they wish as long as it is legal. However times will change and prices fall and then cash is king. When you are buying shares in a company ensure the company can pay its bills (what is the cash flow) and it can temper its expectations for the long term future.

There are more questions than answers, till the next time – to raising questions.

A very easy method to buy stocks is to use the cycles of the stock market which means when stocks decline in value you begin to look at them to determine if you will buy them and watch as they begin to rise in value on the upside of the cycle. You will hear or read – a buying opportunity, but since most of us do not have unlimited funds we pass on the overwhelming majority of buying opportunities. For the simple reason – it takes research to determine if something is a buying opportunity or not. Jennifer Dowty in an article called Price weakness: to buy or not to buy? outlines the research you typically need to do before you decide to buy.

If you have limited funds, one thing you can do is something like a foundation the writer sits on – it generally does nothing for 6 months or more unless a stock reduces its dividend. Use time for yourself – there are always buying opportunities.

Back to Jennifer’s comments – if and when a stock falls on a day to day basis – first you need to research and assess. Why is the stock falling? is it the entire group? the market? or the stock? If it is the stock – go to the company’s website and read their press releases. Company’s investor relations group needs to write something to explain why the fall in prices. Sometimes it is related to management changes; sometimes to negative reports; sometimes it is related to consumer perceptions or a new government policy but there tends to be something.

Having researched the company, now you can see what the market thinks – is the volume of shares increased? if the company is tied to a commodity – what does is the commodity price doing or not doing?

Eventually you come up with a reason for the decline, then you need to determine is this a long-term reason or short-term. If you determine it is long-term look at other alternatives. If the weakness is short-term and you are very interested in the stock consider nibbling or buying some shares to watch carefully. if you have determined the decline is only connected to the quarter, as the price begins to increase you can buy more and still make heathy profits.

Linking to dividend paying stocks, there are enough dividend paying companies that some will go through cycles, but even if you are wrong and the price declines you are still receiving a dividend. The dividend protects you because one of the rules of investing is not to lose money, try to make it. Staying with dividend paying companies limits the risk.

There are more questions than answers, till the next time – to raising questions.

 

 

The stock market has cycles and sometimes the stocks go up and sometimes they go down but there is typically a floor on the downturn. When the stocks go down and if they are worthy to be bought, there are buying opportunities for the stocks will eventually go back up. Peter Ashton of Recognia Inc. looked at which opportunities are there in US Utilities.

He started with a market capitalization of $ 10 billion – this will focus on larger, more established utility stocks.

He then wanted companies over 4 weeks have lost some value.

Earnings-per-share growth is also a key aspect of our strategy, look for stocks with EPS growth rates of 5% or more.

To ensure you do not overpay, the expected forward price earnings ratio needs to be less than 20.

Dividend yield needs to be 3% or more.

Company                                                      Mkt Cap      4 Wk             EPS         P/E         Div

($ Bil)            price perf      Gr Rate                 Yield

Entergy Corp                                        13.0                  -8.9                  14.8         14.1          4.7

PPL                                                         22.9                  -4.4                     5.8        14.4          4.5

PG&E                                                     30.6                   -3.3                   19.2        16.4          3.2

Dominion Resources                       46.1                     -3.1                    9.9         19.5           3.8

DTE Energy                                          16.9                    -1.1                  7.4        19.0           3.2

Avangrid                                               11.9                     -10.1                 22.4       17.9            4.3

Eversource Energy                             17.2                    – 2.0                   5.7        18.2            3.2

SCANA Corp                                         10.2                     -3.8                  5.1         18.1            3.2

Linking to dividend paying stocks, while all these utility stocks pay dividends most of us can not buy all the stocks – unless you buy an index fund. If you want to buy one of them the trick is narrow the field to the best of the best. You will need to do further research to determine what really defines the utilities company as a constant provider of dividends.

There are more questions than answers, till the next time – to raising questions.

 

 

Yesterday was the US election and today begins a new chapter under new management, part of the election was what management style do you want to be governed under? Since there is no perfect method to do management, but there is a result if you do it well. If you do leadership well the key is after making decisions are made by the leader do you trust the leader? will you follow him/her? will you risk your job to do the things the leader wants done? If the answer is yes, then you have a good leader. If you the answer is no, then you are looking for some other type of management style. In a recent article by Hugh Latif – a management consultant and author of book Maverick Leadership. Mr. Latif examined a 5 topics of leadership which all leaders need to be evaluated:

Leadership, Management Style, Decision-Making, Negotiation and Communication Skills

Leadership

Clinton – A strong, leader who is tough and resilient but with lots of planning and research. A bureaucrat with extensive contracts, a huge network of influencers and scratch-my-back-and-I-will-reciprocate attitude.

Trump – A strong, tough leader, demanding, who looks at the bottom line with show-me-your-results attitude. He is focused, direct and decisive and favors action over planning. He use whatever means are available to achieve the goal.

Management Style

Clinton – Demanding of her staff, wants to know details and delegates execution but not strategy. Ms. Clinton surrounds herself with influential, experienced people who come highly recommended. When she gives trust she demands loyalty and dedication in return.

Trump – The big-picture manager. “This is what we want to achieve and here are the resources, now do it.” He delegates both execution and strategy and waits for results. Mr. Trump surrounds himself with people hand-picked for their qualifications, but who are there mostly for their performance record and ability to get results. He gives trust but you earn it or are replaced.

Decision-Making

Clinton – The research-and-planning manager who uses her advisers and network to help decide the best route. She decides by consensus, but reserves the right to do it her way.

Trump- Decision making is done by Mr. Trump. He often goes with his gut feeling.

Negotiation Skills

Clinton – Negotiates based on facts and figures and with the help of aides and assistants. The staff are there to help her along the way from A to Z. The team closes the deal – stability, previous decisions and going forward are key ingredients. Focus is long term.

Trump – Staff prepare him and open the door so he closes the deal. The focus is winning and moving on, the short term is priority.

Communication Skills

Clinton- Diplomatic and careful with her vocabulary and speech. The priority is looking professional and showing she in command. Emotions and stress are shown in private.

Trump- Direct, say it like it is and focus on the heart of the matter rather than the packaging. He alienates some his style and choice of words, but behind the closed doors, he is respected and will compromise to achieve objectives. Emotions are not hidden.

Linking to dividend paying stocks, in all companies there are pluses and minuses with each style. Both styles are better for organizations at different times in the organization, although generally if the company is reasonably stable and profitable – the Clinton style works better because of the emphasis on the long term. In a large government some departments need Mr. Trump’s style and some departments need Ms. Clinton’s style which means whatever way the vote was taken both were right and both were wrong. Maybe there is hope after all.

There are more questions than answers, till the next time – to raising questions.

 

 

 

 

Today is election day in the US and hopefully you know who is running for President and the down ballot positions. Ideally everyone knows about Clinton versus Trump and each have their own management style and solutions to the problems. In relationship to the problems, a few years ago Michael Moore wrote the book Downsize This published by HarperPerennial, NY, 1996. In rereading the book, it was odd to see many of the same issues dominate the political landscape. What the solutions are to the problems seem to be night and day and the problems remain. The economy has moved from many companies in the manufacturing business to manufacturing somewhere else and when a plants are closed down they effect the community. The more diversified the local economy the less effect, but many manufacturers originally located near other manufacturers and the effect is overwhelming to those communities. What should the people do? where should they go? In a democracy, it is impossible to tell people to move to another community or state because someone in the support system is making some money and they have investments (homes) in the area. While the old jobs are never coming back, others possibly could for there are millions of dollars in infrastructure that are invested and need to be maintained. Even if the manufacturing plant came back, most of it would be automated which translates to the bulk of the jobs would not come back. It seems the problems will be around for many years to come.  What should the government do?

Linking to dividend paying stocks, in some ways dividend buyers are part of the problem and part of the solution. The company originally moves production and blames the shareholders who want to be paid their dividend. Although in reality, the competition for jobs means some states offer way too much not to take advantage of. It is a complicated problem and solution, but it is what it is.  Hopefully if you have a vote, you have voted or will vote today for that is how democracy works and whoever wins both sides will find common ground to offer semi-solutions which will not effect dividend payments.

There are more questions than answers, till the next time – to raising questions.