A number of years Warren Buffet wrote about the term equity bond and Larry Sarbit of Sarbit Advisory Services recently revisited the term in the article Hunting for the elusive equity bond in the face of economic uncertainity. What is an equity bond? Mr. Buffet points out bonds pay a predefined amount of money at specific times called coupons. On the maturity date of the bond, a predefined amount of money is returned to the investor. Equites has a maturity date of infinity with varying rates of return over time.

Mr. Buffet points out there is link between the two ideas – an investment is the purchase of assets that are not consumed today but will be used to create wealth. A successful investment is putting a dollar into ownership and receiving more than a dollar back at some time in the future. The important thing is the expectation of the return between a bond and an equity is same.

For an equity investment what is the coupon? In most cases it is nearly impossible to figure out what the coupon will be.

For commodity linked business, the individual company has no control over the price of the commodity which translates into earnings can and do vary year to year.

For retailing companies, there is a small barrier to entry which means you are only as smart as the dumbest competitor. Mr. Buffet says in this situation if a competitor sells at a loss to gain market share, what choice do you have but to match it?

Some industries are seeming more predictable for example cellphone networks, although there will be some churn, contracts will dictate the company’s revenue or there should be free surprises.

There are companies which tend to have a sustainable competitive edge, small required capital inputs over the long term, increasing free cash-flow and good people as managers of the companies. This allows for the investor to have a reasonable accurate estimate of what the range the coupon will be in.

To purchase companies such as this, you have to buy in when they have dips in their stock price for it you buy at the high end and hope, hope is a great thing to have but is not an investment strategy. Purchasing at the low end with reduce the risk of capital loss and you should be better off in the long run.

Linking to dividend paying companies, while the dividend can be seen as a coupon or it helps in holding the company for a long time all the other features of why it is a long term profitable company has to evaluated over the year to ensure you want to continue to hold or it is better to seek alternatives. Looking at the concept of equity bonds will help you

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

 

No matter where you live, eventually a mythical average American will visit a food or retail drug store which makes the sector a defensive industry for any part of the economic sector. To look at the sector, Jean-Didier Lapointe from Stock Pointer with the following criteria:

a minimum market capitalization of $ 1 billion

economic performance index or EPI (return on capital divided by cost of capital). An EPI ratio of 1.0 indicates a company’s capacity to create wealth for its shareholders.

return on capital

one year sales growth

dividend yield

one year and 5 year average annual dividend growth rates

Company                      Mkt Cap       EPI        R/C    1Yr Sales      Div Yield         1 Yr Avg     5 Yr Avg

($ Bil)                         %          Growth           %               Ann Div Growth Rate

Wal-Mart Stores         214.0            2.1        12.4         -0.60             2.9              2.0                 5.9

Caseys Gen Stores           4.4            1.9        13.1         -6.40             0.85            9.0                 9.0

Costco Wholesale         62.4             1.8        13.5           2.60            1.26             12.5               12.6

Kroger                               30.7            1.5         10.7          2.80             1.54              9.10             19.0

Sprouts Farmers Mkt     3.1             1.5         11.3          18.40             n/a               n/a              n/a

Whole Foods Mkt            9.3             1.4        10.4            1.9               1.84              7.7              19.7

CVS Health                      88.7            1.3         10.0          14.4              2.04             22.9            28.3

Sysco Corp                        28.6           1.3           9.3            3.5               2.37                3.3               3.5

Walgreens Boots              87.9         1.2           9.9          13.6               1.84               11.8              n/a

Source: StockPointer

Linking to dividend paying stocks, the great thing about these lists is you have choice and opportunity and if you shop at one of the stores you can see. If they impress you, if you go on what is their busy days to see how much people are buying you can be reasonable confident in your choice. If something is not right, you can look to alternatives. Right now is the lead up to Christmas and this has generally meant more consumer spending – where are those dollars going? When people gather there is generally a food component do you see the carts being filled?

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

 

 

One of the most exciting time to be with any company is the introduction of a new product, the others are when it sells better than expected and it is reported in the financials as outstanding for shareholders. In the commercial airlines there are really two companies that dominate the industry – Boeing and Airbus, if you have flown with more than one airline you likely have flown on one of the planes. Boeing is based out of Chicago but makes its planes near Seattle, Washington and Airbus is owned by a combination of European countries and makes its planes in Toulouse, France. Both companies have a wide variety of businesses but the general public knows them best for their commercial airplanes.

Similar to car makers, we all have our favorites and they make cars for different sizes. In airplanes – there are super jumbos, the mini jumbos, and the commuter aircraft and the Airline Companies want planes in all the categories to satisfy their customers or the general public. For a long time Boeing has a monopoly in the 350 seat planes and now Airbus has built a plane and it is final testing year of testing. Recently Reuters ran an article about the plane. Once a plane has passed its testing, then it can be delivered. Prior to testing the company went to the airlines and asked them what they wanted? and if Airbus produced would they preorder? and reorder? The airlines naturally said we love Boeing but its prices are a little high and we want all these options included less expensive to run, how about 25% less operating costs?. Airbus has come through and in a few years Boeing will offer the same options. In airlines, the developers talk years before something happens, so there is time for each to come up with different options and planes.

Linking to dividend paying stocks, politicians love airplanes because they represent all types of things – progress, engineering jobs, specialized services, well paying jobs so government money flows to aircraft companies, whether they need it or not (there is always a debate) The reality is there is a reason for the monopolies and as an investor you may like the government subsidies or not, but for the good of the country you accept it. Monopolies help keep the risk return ratio low and when investing there are a great thing to be involved with.

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

 

If you are a value investor and we all should be, you are looking for bargains however recently the stock market has gone up and prices are more expensive. Is this a time to continue buying or hold or sell? Only in the future will you know the answer but there is always a relative bargain somewhere. Of course, sometimes it is for a reason. Peter Ashton of Recognia Inc examined large cap companies to see if there were any bargains (given this was published in late November, things may have changed but the process remains the same.

a minimum market capitalization of $5 billion. The idea being the larger the company the less the risk.

price to earnings ratio (P/E) of less than 15

annualized earnings per share (EPS) growth rate of 5% or more

debt to equity of 1.5% or less

5 year historical annualized dividend growth of more than 10%.

Company                                 Mkt Cap       P/E        EPS Growth   Debt to Equity  Div Growth   Div

($ Bil)           est           5 yr his  %          Ratio              5 yr %           Yield

MetLife                                   60.2              11.8              51.9                  0.31                 15.8                2.9

Cisco Systems                      150.2             12.8             14.1                  0.45                 59.9               3.4

Lazard                                         5.3             14.3             65.9                 0.80                  23.4               3.8

Principal Financial               16.6              13.3            14.7                  0.31                   22.4              3.0

Amgen                                    107.4             12.7            15.5                   1.15                   61.7              2.8

Invesco                                       13.0            14.0            19.8                  0.77                  20.1              3.5

Ameriprise Financial             18.0            12.3            16.1                   0.86                  30.9             2.6

Xerox                                            9.4               8.2           10.3                   0.77                  11.2              3.3

Gap                                             10.3               13.9             6.5                   0.68                 18.8              3.6

Western Digital                      17.5               13.1           10.0                   1.22                  26.7             3.3

Source: Recognia

Linking to dividend paying stocks, all these companies are paying dividends and for various reasons are lagging behind their peers and still offer good value. In terms of the risk return ratio, you are protected, if you want to buy the hottest stocks it may not be these ones, however if you dig deeper and understand why these companies will still be profitable next year, then one or two of them might be worthwhile to buy. The cycle suggests as they stay profitable the price earnings ratio will rise to the rest of the market.

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

 

In the ideal investment portfolio part of your asset allocation model should include gold because we know two things will affect risk – growth and inflation; what we do not know is growth going to be higher or lower and is inflation going to be higher or lower. Gold for a long time has been the all weather risk protection and if you consider Syria where internal strife has been going on for years, what is there banking system like? what if you had Syrian Pound and had to flee the country? if you had gold, then it could be exchanged for higher currencies in whatever country you end up in. Hopefully we will have fewer Syrian examples. In terms of gold, because the world did not know what would happen to a Donald Trump Presidency, it was thought when he won gold would go up in price. It may still because of inflation – if President elect Trump cuts taxes and spends money on infrastructure, unless he achieves much higher growth there will be a shortfall in the government’s bank account leading to a need to raise funds. Maybe growth comes at a higher rate, maybe consumers rush to spend their money, maybe or what is your macro outlook. Ian McGugan asked since gold prices fell, is it a buying opportunity? The answer is it depends on your outlook for America under President elect Trump.

Gold tends to move in the opposite direction of the American dollar because the metal is denominated in US dollars which means a stronger dollar and anyone outside of America is more expensive. When the dollar strengthens, the price of gold falls.

Moody Investors Services believes gold will trade around $1,250 but can easily fluctuate between the range of $1,100 and $1,300. At the time this article was written gold was trading at $1,181.

Another fund manager Charlie Morris at Newscape Capital in London believes gold is trading for the first time since the credit crisis at fair value. He believes unless the stock market goes down, stocks are a better alternative to owning gold. However, you can look at some of the better gold stocks.

Linking to dividend paying stocks, the world is connected which means economies at connected. Years ago, politicians could react in a manner which best suits their internal borders but now the world reacts. Look for cause and effect and be prepared, sometimes you can wait it out if you have picked the best companies preferably paying a dividend. We do not know until the event has happened but we can make educated guesses.

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

One of best known investors in the world is Warren Buffett and there is very, very good reason for the recognition – his rates of return on his investments have been great. Mr. Buffett offers advice – it is worth listening to and everyone who has a long term success is offered goodwill. To invest in Berkshire Hathaway you have to give Warren Buffett the benefit of doubt and to question him has been fruitless. In an article by Tara Lachapelle of Bloomberg News titled Can investors still trust Berkshire after Buffett goes? is worth considering. Mr. Buffett is 86 years old and his best friend and partner Charlie Munger is in the same age group. What would happen to the company if one or both died or became increasingly less active in the company? No doubt there are very highly respected senior management within the organization, but Berkshire has always had Buffett and Munger as the prime decision makers. The reason the issue has come up is unlike most publicly traded companies, Berkshire does not release as much information as the average publicly traded company. From an accounting perspective the companies are grouped together so you have an idea of how things are but not the true picture. Mr. Buffett because of his long success, can get away with it because of the long success.

Linking to dividend paying stocks, when a company has a long term success they are often scrutinized less because of the goodwill we as investors give it and there maybe nothing wrong with that. When management changes, the same goodwill evaporates because we know and trust management less, even though they maybe continuing with the same good policies and principles as before. One day it will happen to Berkshire, but in the meantime learn from Mr. Buffett and be aware when management changes for there will be an effect.

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

 

 

For every industry there are rules and one of the rules of the stock market is to lower your taxes you can offset losses against gains. No one tries to have losses, but the reality of hedge fund managers is they get 50% right and 50% wrong (but they make a lot of money on the 50% right). This means anyone investing in the markets will have some losses (or they tell big fish stories) and for tax purposes these losses can be offset against their capital gains. Each year there is a last day because of settlement issues – it use to 5 days now can be less, but the tax rule does not change. Hopefully, you have made gains no matter what party you supported and to ensure the government does not tax you on all the gains, you can sell some stocks to offset the gains. This is a time when it is financially rewarding to dump your losers and pick up potential winners for the new year.  This year the last date is December 23.

Linking to dividend paying stocks, the investors tend to follow the rules and sometimes the rules leads to a potential gain. As the last days to sell before locking in gains happens, it can send prices down a bit and you can buy them at slightly depressed prices. After the days of tax losses, the prices go back to normal. In all likelihood you have buy a lot of shares but it is one of those freebees on the stock market which are available for all those who read and follow the rules.

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

Often in our lives we encounter long serving Presidents be that of the countries or companies, as a long serving President they had their fights to get to the top and stay there. As time goes by, if the President of the country is half decent, there were be many that believe he or she is the correct person for the job. In the case of Fidel Castro when he took leadership of Cuba, the country was ruled by a seemingly puppet administration and the question was for whom? It many ways it was for the American mob for Havana was the Las Vegas of the Caribbean. It is blessed with beautiful weather, a large island of resources and at the time a government very friendly to those with money. The mob controlled the casinos and other aspects of the night life and all was good. When Fidel Castro came to power, he changed that and shortly afterwards the US put an embargo on Cuba for besides closing down the casinos, it took over all the land holdings of the American companies including Hershey which owned 65,000 acres of sugar plantations and a railroad. There were other US companies with large holdings in Cuba and this is called protection of American interests. If Cuba has taken them over and set aside money – there would be a debate over what s fair value or not, but if Cuba had bought out the companies, there likely would have been a short embargo.

If you ever taken or considering taking a Disney cruise, the cruise ship travels around Cuba to Mexico, now that America is opening up Cuba for tourists it is conceivable Disney ships will be stopping at Havana as part of the cruise. If Disney stops then even more tourists will visit Havana. The country they find will not be the same as America for Cuba has nearly 100% free health care and near 100% literacy rate, hopefully in the knowledge base economy, a country similar to Cuba should be able to do well if they are connected to the outside world, if not the internet providers must be salivating to come to the market where everyone is a potential high user of the internet.

Linking to dividend paying stocks, when there is a long period of senior management we all have our reasons why that is so. For some it is because of the power grab they took to get the power; for some it is what they did when they took power and continue to do; the perspectives are both right and wrong. As dividend buyers we tend to like consistent long term management which keeps the company profitable and increasing dividends and not dwell on how they got there but what they do when they are in the driver’s seat.

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

 

Last December people were lining up to watch the latest Star Wars movie – Star Wars – The Force Awakens and it was a monster hit. The movie goers pushed up Disney’s stock price and lead the box office holiday season offerings. A year has passed, will it do the same? Next week a new movie will be released and a question is will history repeat itself or will the movie be successful but not the box office leader? Will a different movie released in the holiday season do better? We never know until people have bought tickets but it is something if you are a movie fan you can make an educated guesses. As you look to see what movie do you think will do well also stay for the credits to see who the movie is made for or is being distributed by. Is that company public? what does the share price look like – is it worth buying or worth following? In the Disney group, successful franchises translate into new additions to theme parks and more movies or shows for their TV channels. What can the movie studio do with the hit? Will the movie move the stock price?

Linking to dividend paying stocks, the entertainment industry is one which drives box offices and every once in while a movie appeals to all groups which makes it a big hit. Often it seems movies are made for teenagers or young adults (and they tend to be more regular movie goers and we were all teenagers at one time). Watch the show for its entertainment value, enjoy the company whom you go to the movie with and afterwards do some research on whether your tastes can be profitable on the stock market.

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