In mid February, Amazon was not feeling the love from NY and decided not to go through with a new HQ2 in Queens. While individuals who bought condos to take advantage of possible increases will have to wait longer, Amazon has decided its HQ2 personnel of 700 people in 2019 and by 10 years 25,000 people, they will be working in another city. Perhaps, New Jersey which offered billions to come is back on the table. In the world of economic attraction, bringing in a profitable company to your home is very valuable,  a company that could easily take up more office space with jobs that were expected to start around the $100,000 area is even more valuable.

However, local politicians and neighbors were not keen on Amazon coming to Queens and Amazon felt a whole host of criticisms in the economic attraction game. Governments offer money to profitable companies in the form of tax breaks and incentives, should they be? If Amazon hired 25,000 workers who lived and paid tax in New York, there might be an argument it is worth having those workers in New York. The questions would remain why should not both the company and workers contribute to the tax role now? For a large city like New York, other companies could possibly evolve to the same size, but Amazon given their growth in the past seemed to be able to do exactly that and for New York or any other city it seems a lot to give up.

Linking to dividend paying stocks, companies do not exist in an isolated world, where they only do good. At times the company is the lighting rod for all the wrongs the existing system operates. The company itself may have little to do with it, but the people find local supporters and the issue becomes bigger than the announcement. Fortunately profitable companies can wait and have options. In the case of Amazon 238 proposals came forth, Washington DC accepted Amazon; that still leads 236 other very good choices.

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

When you listen to politicians speak about the economy, they will tend to highlight the positive and by many measures there has been growth in the economy, that is a good thing. The politicians speak about number of jobs created, while we must remember with the baby boom retiring, there was going to be a need for more people to replace the ones retiring. That said, on a individual basis creating jobs is a good thing.

In terms of the economy, debt is a red flag, whether it is corporate or personal because debt has to be repaid or some financial institution must take the lost of not receiving money – write downs. In the banking sector, the lower the write down or provision for loss, the higher the income for the bank. In early Feburary, in an article by Jonathan Spicer of Reuters reported on a the US household debt and credit report issued by the Federal Reserve Bank in New York. The report showed overall debt edged up to $13.5 trillion in the fourth quarter of 2018.

When looking at that number, mortgage debt makes the largest slice as it should as most people need to go into debt or have a mortgage to buy a house. Mortgage debt as an indicator is a good thing for the economy. Hopefully people qualify and have the ability to repay the debt.

Consumer spending accounts for 2/3’s of the growth of the world’s largest economy and it is expected to hold strong this year.Consumer debt is different – it is made up of credit card debt and car loans. Ideally those purchases on credit card are more toward the want rather than the need and for the most part they can be paid off. The reality is for more and more people, credit card debt is for normal daily spending. In good times, credit card companies (including banks) give credit cards with greater ease but good times are ending as serious dlinquency for credit cards rose 5% up for 4.8% or 1 out of 20 people.

Student debt remains high because many jobs require post secondary education and the fact that people go is a good thing. By most standards, the rewards for the majority are lessing but gaining a job afterwards on close to minimum wage tends to mean student debt delinquencies are rising. The issue is that if someone declares bankruptcy to write off their loans, student debt still has to be paid.

Car loans are the big issue in the report. A record 7 million Americans are 3 months or more behind in their car loans. There is a limited discretion with cars because people there are different prices for new and used cars. However most jobs still require people to have a car because of where they live and work and public transportation may not be that good or will take extra hours in the day to get to. The good thing for companies that give car loans is they can relatively easy tow the car and try to sell it again. On You Tube there is a gentleman name Dave Ramsey and he always says – do not buy the car you want, buy the car you can afford. By a beater car, then move up as your debt goes away. Most people do not do that, they buy the car they want.

Linking to dividend paying stocks, all companies have head wins or what keeps the President up at night. What does the executive team worry about? Listen for the good news, but ask about the red flags, so you can sleep at night.

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

Since December the stock market has been up and that is a good thing, particularly if you were invested in October and November, most of your losses should have been gained. But which companies have and are continuing to do well for shareholders? Noor Hussain of Inovestor Inc. came up with some answers with the Inovestor for Advisors software. No matter what software you use, the issue is always how do you narrow the field to have the best alternatives? Noor used the following criteria:

Market cap in the S&P 500 of more than $10 billion.

Positive 12 month change in economic value added (EVA) metric – the figure tells you the company’s profit is increasing at greater pace than the cost of capital. The EVA is economic profit generated by the company or net operating profit after tax – capital expenses.

Economic performance index (EPI) of more than 1 and a positive EPI 12 month change. For every dollar invested in the company, more than one dollar is generated in return.

Free cash flow to capital (FCF) is greater than 5%. The ratio gives you an idea of how efficiently the company converts it invested capital to free cash flow. This helps you determine if the company can continue to pay its dividends and reinvest in the company.

Company                Recent    Mkt Cap    FCF/     EPI      Div      1 Yr Price       EVA

Price        in $Bil       Cap                   Yield   Return %       12 Chg %

Church & Dwight    63.34      15.619      14.3      4.0       1.3        29.5               198.3

Union Pacific           161.74    117.256     11.5     3.3       2.2        19.9               392.9

CSX                              68.75       56.249     10.3     2.5       1.4        14.3               477.8

Republic Services      76.68      24.729       5.9    1.3        2.0        10.0               133.4

Norfolk Southern     171.46     45.968     6.4      2.4        2.0          9.4               518.2

Verizon Comm             53.95   222.921    6.6      2.9         4.2         3.1               628.5

Walt Disney                111.51    167.265   7.8     1.5          1.5         -1.0                53.5

Sherwin Williams       421.01     38.987   5.5     3.5          0.9         -7.3              168.9

Southwest Airlines     57.65         31.857  16.4   2.4          1.3         -9.6              205.4

The other companies in the list were Comcast, Microchip Tech, Lam Research, Paccar, Dover Inc and Applied Materials.

Linking to dividend paying stocks, the lists help you narrow the field to what you do not want to buy. The lists also help to put companies on your watch list to know whether they are good to buy now or wait. Whatever list you use, remember why you are buying the company which means you have a good idea when to sell. If you are buying for the dividend it implies a longer holding pattern and as long as the Free Cash Flow is very good, you can hold. If the Free Cash Flow then other investors will push up the stock as the company is profitable.

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

Occasionally in the financial press, various people both try to educate people and to offer their services and in one such piece Ian Tam of Morningstar Research offer advice on 15 stocks with reasonable and sustainable yields.

Mr. Tam used his company’s software to rank the companies through the S7P 500 total return index based on the following metrics:

5 year deviation of earnings – it shows how volatile a company’s earnings are, low is good.

Yield on expected dividends, based on dividends announced by not yet paid

Annual cash flow momentum  based on the last 4 quarters vs the previous 4 quarters

5 year historical beta – shows sensitivity of a stock versus the index, low is good

Payout ratio must pay out less than 80% of their trailing earnings or less than 60% of their trailing cash in the form of dividends.

The yield of the stock must be higher than the median of the S&P 500 index. When the report was published the median  was 2.3%

Company                  Mkt Cap     Div     5 Yr   5 Y EPS  Ann of   Payout          Recent

in $bil        Yield  Beta    Deviat   Mome    Ratio Earn    Close

Altria Group           92.279       6.5       0.41      4.6          67.3      75.1                 49.11

Duke Energy           62.604      4.2       0.04       2.5          27.7      74.9                 87.82

Western Union          8.152     4.1       0.95       2.6        135.1      40.6                18.41

Southern Co             50.014      4.9     0.18       3.8            13.4      70.9                48.61

Wells Fargo            230.937     3.7     1.10        1.7             54.0      37.8               49.06

Dominion Energy    46.805     5.1      0.20      3.3                0.2      82.7               71.45

AT&T                       215.501      6.9     0.56       3.9              10.8      56.8               29.61

Hershey                    22.183       2.7     0.11      2.8              14.3      51.4               105.73

Clorox                        20.217       2.4    0.29       2.4             13.5        61.5             158.38

AbbVie                     118.126      5.5    1.17       7.9              50.1        45.4              78.53

Other stocks on the list

Verizon Comm. Merck, H&R Block, Broadcom and Darden Restaurants

Linking to dividend paying stocks, the data from Morningside reveals a wide range of industries, but the important thing is what metrics besides the stock price going up is important to you. Every year there are more metrics, knowing why allows you to decided to keep or find other alternatives and there are always other alternatives or opportunities in the market.

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

 

 

Two of the largest regional banks in the south have set a process to merge and create a larger bank. BB&T offered 1.295 shares for each SunTrust Bank share according to the press release. BB&T is based in Winston-Salem, North Carolina while SunTrust is based in Atlanta, Georgia. The combined bank which is seen as a merger of equals will become the 6th largest bank in the US with over 10 million customers who have $442 billion in assets. $301 billion in loans and $324 billion in deposits.

The companies believe the larger scale will allow diversification and greater fees to create value for the combined entity. A new name will be chosen if the merger goes through by the close of the 4th quarter. At the moment the succession is equally split between the banks.

The merger is the biggest bank merger since 2008 bank crisis when the government would not allow mergers. One of President Trump’s platform is to change regulations from the previous administration and allowing mergers of banks is one of the changes.

In all industries, the government has regulations to protect or limit some of the losses which executives will try to do for the sake of greater profits and market share. All industries go through the cycle and at the low point, one wonders who was looking for the average depositor? Regulations are introduced, the number of merges fall and Wall Street looks to another industry to merge. The cycle moves and eventually possible regulations happen again.

Similar to other industries banking has changed and the lowest method to deliver services is through apps on your smartphone or laptop. They are less expensive that a building and having tellers do it, although most people still will go into a branch once in a while. The teller does the deposit and the money is in your account at the moment, at the ATM it is the next day.

Linking to dividend paying stocks, companies that consistently earn money are vulnerable to mergers, because management wish to scale up. Sometimes that is good, sometimes mergers do not work, we all know the answer afterwards. When mergers happen as an investor you have to revisit why you own the stock.

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

One of the most successful hedge funds in the US is Bridgewater Associates, most of the time you hear from the President Ray Dalio and he is worth listening to. At Davos, Switzerland, Bob Prince who is the co-chief investment officer of Bridgewater was interviewed.

One of the most important things he said was if you want to sleep well at night, be diversified. Good asset allocation is important.

When Mr. Prince looks at the world to invest in he sees what is priced is discounted. The markets relationship to what is discounted?

For example:

In the US, optimistic earnings are priced in the stocks, which means you need to ask what if earnings are lower? what if expenses are higher – how have executives cut expenses?

Mr. Prince there is always opportunity, if you understand how the system is suppose to work. What are the natural ebbs and flows?

Linking to dividend paying stocks, everyone looks at stocks a little differently which is why stocks go up and down. Generally there tends to be a reason because many people are using the same formulas to calculate the values to buy and sell. There is always some opportunity because some are right and some are wrong. If you buy, buy for a reason for example as long as the company pays a dividend and ideally can increase it, then you do not have to sell. You will earn money and allow others to push up the value of your shares and your total return will make you contented.

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

On You Tube there are many opportunities to learn and listening to interviews with proven winners in their respective industries is a good thing. Somewhere you will begin to understand how they see the world and if desired how you can train yourself to look in that direction. One of the people who have done a remarkably consistent returns as a portfolio manager is Bill Miller who now runs Miller Value Partners from Baltimore, Maryland.

As a Value Investor, Mr. Miller constantly does his homework to figure out how companies make money, can continue to make money and equally important why Wall Street is not valuing the companies the way the firm does.

Over the years, Bill Miller’s firm and him personally has owned Amazon and Facebook and the interviewer talked about Amazon.

The company bought Amazon at the IPO level and has bought and sold the shares. Mr. Miller likes Amazon and saw Amazon as having the same business model as Dell Computer did when it competed against IBM. If you really think about the first business they were in, the books, the business model of book selling is if the retailers do not sell books, they can send them back to the publishers or there is very little inventory risk. Amazon went into direct distribution with lower prices and evolved.

Now days, Amazon is very data driven and Mr. Miller believes the price could double in the next 3 years. The reason is Amazon can easily grow 25% a year for they are in markets with many players and Amazon has a higher return on capital than a competitor such as Wal-mart which has 14% return on capital.  If you look at the fields they are in they have $5 billion out of a $30 trillion market, that tends to mean there are growth possibilities.

Compare that to Facebook and Google – the market capital is close to a $1 trillion but the market is only $600 billion, which tends to mean growth is limited. Facebook has to monetarize its 2 billion plus users to continually to make money.

As a Value Investor you have to embrace complexity and controversies, because this is when stocks will be at their lowest as Wall Street tries to catch up to where you believe the companies will be in the future.

For years the airline companies did not make money, they all managed to lose money. It was a constant up and down investment. In the past 10 years or so, the consolidation of the airlines to 5 largest fleets with 90% of the traffic means airlines are actually making money. However, Wall Street is still valuing the airlines as they were, not as they are – when the multiples go up, the airline stocks should earn a good return.

Two other companies, Mr. Miller is looking at is Interxon Corp which is a biotech company however its high in 2015 was $60, now it is $ 8, but the possibilities are endless. As well as Valeant Pharm which went from a high of $300 to $27, the company has been reducing debt and reorganizing for a couple of years.

Linking to dividend paying companies, some dividend companies are value companies because Wall Street values different companies based on what they think the future will hold. The classic case is utilities which were done because interest rates were thought to be going up, when the fed said they are holding interest rates, utility prices went up and dividends were still paid. The key aspect of being a value investor is buying when stocks are out of favor or not in vogue at the moment, but the companies have to have a compelling reason to buy. Having patience allows the company’s multiple to go up over the years and capital gains are to be found. Similarly with dividend companies, with your dividends you can always buy companies that pay lower dividends and out of favor and you can be protected and have capital gains over the years.

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

 

 

 

On You Tube, there are plenty of ways to be entertained and have the hours float away, there are always many hours of education to be learnt or to reinforce what you know. In the case of information, the company Google has a practice of inviting people to talk about investing to their company, because most of their employees have extra disposable income to invest in. One such talk was Laura Templeton who runs a Hedge Fund in Chattanooga, Tennessee. Laura is the granddaughter of John Templeton of Templeton Funds run out of Bermuda. She has many lessons to impart to the viewers.

Laura similar to her grandfather tries to value invest, which is difficult because it means buy low, sell high. While most of love to do that, the average investor tends to do the opposite for many good reasons. In her talk Laura described how the brain and all our normal reactions makes buy high, sell low much easier to do. Laura had a number of quotes and you can do them if you tend to follow them:

Trouble is Opportunity   – after the people are safe, look at the companies how are they impacted. In a crisis, companies shares fall, which means if trouble is opportunity you need to have cash or ability to have cash to take advantage. Fortunately most of us will not know when there is a crisis, so you need to have Patience. The hardest part of a value investor is having patience. It means most of the time, you are not active. You nibble, stay engage and do your homework.

Homework implies when there is a downturn in the markets and you believe the bottom is near, which stocks will you buy? You can buy the index or indexes, but if you are a individual stock buyer, then which company is the best alternative? Why? What is a good price to pay. All of us shop or go to retail stores to buy the basics of life – you should know when something is on sale or is a good bargain. The similar aspect to buying stocks, nibble and when it is a good bargain, that is when you buy. The homework will tell you whether the stock price is a good bargain or not.

At the bottom of the market, the financial press and the general newspapers will give much pessimism, that is the time to buy for a value investor. When the financial press and general newspapers is of great optimism, that is the time to sell. Joseph Kennedy, the father of President John Kennedy, who made most of his money in the markets, said when the shoe shine person tells you about the stocks, it is the time to sell. That tends to mean the shoe shine person heard people talk and if everyone is talking about the markets having cash in your account is a good thing.

To value investors, the investor who has all the answers done not understand the question. The right question is Where is the outlook the most miserable? Then you begin to do your homework to find out the quality companies that are in business and the market is not valuing all their assets. When the miserable changes and the market values their assets, the stock prices will go up.

One of the stories  Laura told about her grandfather was at the height of the dot com bubble, John was shorting the companies. What he did was after companies go public there is a lockup for those owning the shares of up to 2 years. This lock up means the owners can not sell all their shares and retire wealthy until they have run and managed the company for up to 2 years. What John Templeton did was find out when the companies lock up date would happened, it is public information, a week before that date he would short the companies because the original shareholders would be allowed to sell their shares and often the share price would go down. There are many reasons to sell some shares – diversify their holdings, pay down loans and mortgages, spend money and more examples. In the stock market, the companies shares would typically fall and when the bubble broke the shorts made more money. John was short about $400 million it is told.

A question of when to sell, selling is a discipline. In your homework you have decided what the company is valued at or should be value at under normal conditions; when the price is reached, is the company fairly valued? Should you move to alternatives and what are they? The discipline is do you let the price ride knowing pigs get slaughtered or you when do you take profits or what should you do? The only correct answer is in hindsight, but being disciplined and having done your homework will get you possible answers.

Linking to dividend paying stocks, the great thing about these stocks which can be in your portfolio for a long time is they pay a dividend so the market can do what it will do. Part of your homework is will the stock continue to pay a dividend, if yes, will it raise its dividend, if yes you can have the patience to continue to hold. You have time to find alternatives as your dividends are paid, do you buy more? buy an alternative to diversify or whatever else you may wish to do. Having a cash flow is a very good thing in your portfolio. You can search for alternatives without necessary having a timeline. In Laura’s case she said she has 10 stocks in her core holdings and is not considering selling but the firm spends a great deal of time and patience trying to find alternatives and deciding when to buy and when not to.

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

If you go to a wedding or you know someone who is engaged, likely the lady received a diamond. The ring is a symbol and is pretty and many many people receive rings. Outside of being pretty, diamonds that go into the rings do not have many economic value. Do they increase in value over time? not really, for the average person buys through a retail outlook and anything retail has been marked up a number of times, but diamonds are pretty.

In the book Diamond – A Journey to the Heart of an Obsession by Matthew Hart, published by Penguin Books, Toronto and London, UK, 2001 the author reveals how the diamond industry has changed. For 100 years, the diamond industry was center on South Africa with Anglo American Corp or DeBeers run by the Oppenheimer family controlled the industry. Rough diamonds were sent to London and sold every 5 weeks which went to the Antwerp. Beligium and Tel Aviv, Israel to be sent to the jewellery retail companies of the world. The largest diamonds tended to go to New York to Tiffanys and Winstons and on the day of the Oscars – the stars wore diamonds that were lent to them by the companies. People watching the show would want what the stars were wearing. The world was good for the people who controlled the diamond markets.

In the 1980’s things begin to change, because diamonds are formed around the world and can be found in countries around the world. Between the metallic core of the earth and top of the earth is layer of rock about 2,000 miles deep, Every once in a while diamonds which are formed by layers of carbons, and once in a while a structure known as kimberlite pipe brings them to the surface under the correct conditions. What has generally happened is the pipe breaks the surface the softer kimberlite breaks down the minerals over millions of years are spread across a wide distance, but to find the diamonds took a long time to find the right signs. In 1970 a couple of researchers pubished a paper discribing tiny bits of farner included in diamonds. The colour was purple. Was it easier to look for the purple garnets than diamonds? If the sample contained the purple garnets, then diamonds were very close by.

It turned out it was true, and when independent prospectors learned what to look for they began to look again in South Africa, Australia, Canada and Russia. The more prospectors learnt about where to find diamonds and using technology, it was easier to find them

Linking to dividend paying stocks, investing in Anglo American for a long time was a very good investment for it controlled the supply and through marketing encouraged more demand than diamonds really should have. Over the years, knowledge has allowed for others to seek and try to find diamonds for there was no particular reason they should only be found in Southern Africa. Learning the signs allowed people to see the signposts and develop new supplies. It also allowed more people to benefit from diamonds as an stock investment. As you invest, what signs are you looking at?

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