After people have earned some money, they traditionally spent money on housing, food, transportation and then what’s left savings, investments, vacations, and all sorts of other things. In the housing and food category, there are companies which should sell a given amount of goods and services no matter the economy. As the economy improves, there are more options to buy, as the economy slows it is back to the normal things because we all need to have someone to stay and eat something. Companies operating in these areas are known as defensive, they fight for market share but the pie is not necessarily continuing growing.

Ian Tam of Morningstar examined the sector with the following criteria:

market capitalization – greater than $ 3 billion

three month or quarterly estimate revision ( today’s consensus estimate vs what it was 3 months ago)

industry relative dividend yield ( an example is 3.3 which means it is yielding 3.3% higher than the median stock in the same sector)

forward return on equity

return on total assets

Company                   Mkt Cap         Industry Rel      Forward     Forward Return   3 Mon Est  Div

($ Bil)              Div Yield %         ROE   %      on Total Assets     Revis  %  Yield

Philip Morris            135.479           3.3                         49,850          21.7                        -0.3            4.8

Altria Group             119.337            2.5                                222          19.9                         0.5             4.0

McDonalds                  97.876          2.2                        62,000           15.9                         1.3               3.2

Colgate-Palm            59.179            0.9                       31,000             21.8                        0.0             2.3

L Brands                      20.115           2.4                         40,100            15.2                        -0.4           3.4

Pepsi Co                     145,411           1.5                                  59            10.1                           0.4           3.0

Hershey                       21.088         1.0                                 120           17.8                          1.0            2.5

B A Tobacco                98.893         2.2                                  91            13.1                          -8.2          3.7

Unilever                      111.848        1.9                                  45             10.6                          0.0          3.4

Kellogg                           25.404      1.4                                   66             9.0                          -0.1         2.9

Mr. Tam’s list goes to the top 20  with the following companies GM, Packaging Corp of America, Clorox, Diageo, Nordstrom, Sysco, Target, P&G, Mead Johnson Nutrition and Regal Entertainment

Linking to dividend paying stocks, there is many choices for which is the best company for your investment dollars. Some of them with depend on your ethics, some of it depends on where you live, but the key is there are alternatives. For the ones you buy and use the products you can see if others are continuing to buy the products and if this is reflected in the quarterly results. If you have a basket of these stocks the total return over the past 20 years would be about 12% which is a little higher than buying and holding an index fund.

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

 

 

 

 

In 2011, the hottest stock on the markets was a company called Valeant Pharmaceutical International. The stock price was rising, the President was on his way to becoming a billionaire, and all was well. Then it fell apart, and since 2011 the stock is down by 90%, charges have been laid against some executives; new management has come in and the debt still remains high and now trades at about $24 for it still holds a sizable portfolio. When companies decline from being a high flyer to still existing, we can learn lessons and Ian McGugan offers 3 lessons:

1. Do not assume smart money is really all that smart.

Two of the biggest stock holders of Valeant were Bill Ackman of Pershing Square Capital and Ruane, Cunniff & Goldfarm who run the Sequoia Fund (one of the investors is Bill Gates and likely more Microsoft people). The investment managers were seduced by the idea Valeant could supercharge the standard drug maker business by buying innovation rather than doing R&D. The company bought other drug companies cut the R&D and increased prices to the insurance companies and federal government.

2. Be very suspicious of companies that use aggressive acquisition strategies to generate growth far in excess of their underlying industry.

Profitable growth usually comes from inventing a fundamentally better product or service, not through financial engineering or simply buying other companies.

3. Realize that the adjusted accounting figures produced by many companies are designed to present the best possible picture of reality.

Treat them accordingly and focus on standard figures.

Linking to dividend paying stocks, it was very hard to ignore Valeant as it share price went from the 20’s to 200 and change, most mutual funds and index funds had a piece of it. However, the signs were there and people try to raise them concerning their above average growth rates; their increasing debt (was up to $ 20 billion) and the strategy to pay for the next company the stock price has to go higher, but it was not making much money. There are warning signs, that are easier to see after the affect (similarly parking in a no parking zone and not seeing the sign). Rules of thumbs or comparison to other companies helps bring up the question why? and when to get out.

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

A number of years ago, the world of baseball was changed when the Oakland A’s more of necessity than anything else started using baseball statistics differently than the other clubs and began to have success. (there is a book and movie called Moneyball) Baseball is a game where everyone kept statistics but when they were drafting a player, it was more by gut feel or rule of thumb. Now every team uses analytics to find those diamond in the rough. In hockey, where in the northeast there is beginning to be crispness to the air, some hedge fund traders are doing the same thing. As people make lots of money, they want to own a big league team and usually are able to buy those teams that are losing money. In an article by James Mirtle titled Army guys help former basket case Florida franchise be all it can be, a former officer in the 101st Airborne Division who became a hedge fund billionaire is Vinnie Viola, he bought the Florida Panthers. It was thought the team based in the Miami area would attract the snowbirds from the north east who flocked to the warmer weather in the winter.

It was not surprising under old ownership the club was not making money, for most professional teams make money from TV contracts – the cable company promotes the team as a loss leader for people to subscribe to the cable channel. After taking care of the people who go the game, there was not an eager base to buy the cable channels. The new hedge fund owner has brought non traditional hockey executives. In this case, some of them were in the Army and they have brought their knowledge of analytics to the team. They draft differently, because although the people are hockey fans, they look at the statistics differently and begin to relate which statistics are most important in what they are looking for in a hockey player. This year, their puck possession time is up and they are winning games. The team has done other things, more money is being spent on the team, the executives are examining why are the top teams successful. How does a team remain successful in the leagues salary cap area?

Linking to dividend paying stocks, it is always fun and interesting to read about companies or teams coming back from the road of bankruptcy to being a profitable operation. It is better to understand why a company can be consistently successful through the years including having years of dividend payments. If you understand they why? then as times change, you can measure if they will still be successful. If the company is, then the stock can be a long term hold.

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

 

 

During the campaign, at President-elect Trump campaign rallies a pledge to tear up NAFTA and renegotiate it was held often. He also talked about a 35% tariff on cars made in the Mexico. As a candidate he can say whatever policy he wishes and since he won he likely has to make some inroads into the proposals. One policy is NAFTA or the North America Free Trade Agreement to change will take a long time because similar to all trade agreements there are winners and losers on both sides. No country can be a winner on all sides. In terms of 35% tariff, the auto manufacturers are beginning to speak out against the idea. Mark Fields the CEO of Ford Motor Co said if a tariff of 35% is placed on manufacturers the US economy will suffer. Mr. Fields was speaking before the LA Auto Show, expect more comments as other auto shows around the country are held. Large manufacturers such as Ford often switch jobs between plants and invest factories which the law allows in places which maximums their profits. In the case of small cars where the profit margin is less than trucks, they are made in Mexico. In the case of the trucks such as the F150, the profit margins are much higher and they are made in the US.

The issue is change, the free trade agreements have been in place since the 1980’s which means for the past 30 plus years investments have been made in plants and distribution systems to reflect the agreements. When the President elect Trump suggests everything can be made in the US, the world has passed him by and all those companies which have made investments will want some sort of compensation if the tariff was to be imposed. The plan has been complicated, and more Fortune 500 companies will begin the lobbying not to change or have a long lead time before the change happens. One of the favorite methods to deal with legislation which one does like is to delay it, until people that better understand the issue allow it to die.

Linking to dividend paying stocks, with all new governments senior executives of large and medium sized businesses know some policies are positive, some are negative to the method which they have and expect to deploy their investments. If Ms. Clinton was President, there would have been change at the margin; with President-elect Trump change has to be lobbied to become a non significant method of operations. For the next little while, the senior executives will worry about Washington and what it may or may not do. before worrying about their competitors.

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

 

In January President elect Donald Trump becomes President and will set policies – in terms of economic policies two of his ideas are: to create jobs he will spend $ 275 billion on infrastructure at the same time to cut taxes – seemingly across the board or at all levels. If the government wants to spend more, collect less leading to wondering what will make up the difference, given the US economy is heavily based on consumer spending?  Charles Stein of Bloomberg News asked Bill Gross of the Janus Global Fund (formerly he ran the biggest bond fund – Pimco) for he is one of the best bond traders in America, what does he think? Mr. Gross believes higher deficits will raise interest rates and inflation which can lower earnings and price to earnings ratios or lower stock prices. Mr. Gross questions the need for corporate tax cuts because the rates are among the world’s lowest and the idea that companies such as Apple will bring back the money they have lodged in overseas accounts will not lead to more investment in the US.

If the President does stimulate the economy to gain the 5 to 6% growth he discussed in the campaign, interest rates will tend to rise which means the era for cheap money will be gone. If rates rise it will cost more to repay the government debts, maybe the next President will only tackle debt payments. Since a large percentage of debt is held by countries around the world including China, what does that do for foreign policy?

Linking to dividend paying stocks, for many years US companies have diversified their holdings outside the US and that has been successful. As the President tries to stimulate the economy as well as seemingly not get along with existing trade partners or turn inward, perhaps investing in companies that do most of their businesses in the US is the best alternative. As Mr. Trump appoints the rest of his cabinet including those whose responsibility is the economy -they will bear careful examination for where and how the economy could perform.

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

In the markets there are many players but the ones who move the markets are the institutional players, which means you need to pay attention to them to understand what they do great and where their constraints are. Similar to any other grouping, some are more nibble, some are better but the most important aspect is every payday, money is flowing into their accounts on a very regular basis. In one of the Milken Institute’s conferences 5 of the largest funds were talking about their industry and the room was full.

The five were from Harvard Mgmt, China Investment Co, City of NY Pension Plans, Texas Teachers, and the Caisse in Quebec with the chair of California Teachers moderating the session. Together the group manages over $1.5 trillion.

Jane Mendillo from Harvard manages $33 billion with 30% of the funds managed in-house, big constraint is the fund provides 35% of the budget of Harvard University.

Seema Hingorani from NY City Pension Plans – part of it is 5 different plans with their boards and advisors which leads to many opinions. They have $150 billion under assets all the funds are run externally. Partly due to the governance issue, the fund is still run closer to the old style with large amount in bonds. Each year the withdrawls are about $7 billion.

Li Kaping of China Investment Company, the sovereign wealth fund of the China, has about $600 billion with $400 in shares; $ 200 billion in global investments. As it is essentially a reserve fund it can have a 20 year focus or on the long term.

Jerry Albright of Texas Teachers has about $135 billion is one of the more innovative funds and does 60% of the funds internally managed. Their goal is annual return of 8% and they think in 1 year, 3 years, 5 years and 25 years terms.

Michael Sabia of the Caisse in Quebec manages $200 billion in assets with 80-90% of internally managed. Their target is a 6.5% return and they try not to focus on the short term but the long term because not many firms are in that space. At the moment, one of the theories they are working on is the operations of the company creates value, as opposed to financial assets.

In terms of alternative assets:

Harvard University is 400 years old, they expect to be around for another 400 years and this allows 50 year time horizon including investment in trees.

CIC believes in having many partners to learn and grow.

City of NY before 2010 they were almost 100% in public markets, not it is 75% or 25% alternative including real estate. Working in NY, they are civil servants which means the pay is not as high as Wall Street – finding and keeping talent is an issue.

Caisse when investing are trying to tap into a knowledge network which is more than the deal flows (when you have a steady cash inflow, everyone pitches you) so the task is partner with relationships which are complimentary to the skills you have.

Private equity focuses on achieving 20% plus on their investments; the Caisse and others would be happy if achieving 11 to 15% on their equity. The most important lesson is you have to know what you do not know or you will get into trouble (lose money).

Harvard University – there are over 5,000 Private Equity firms, could we know more than they do? Their tule of thumb is if you have not achieve double digits return by year 4 or 5 you will not likely achieve it.

Looking at in the future and what keeps you up at night?

Caisse – the future – we are always recruiting people. They are looking at the energy, real estate, the food chain and upper income consumers.

concern – $ 70 billion in fixed income – what happens to interest rates?

Harvard – the future – food and agriculture, biotech and technologies,

China Investment – contrarian investments, selective real estate and looking long term

City of New York – they have $45 billion in fixed income for every 1% rise, they lose $ 2 billion.

Texas – they also have a large fixed income portfolio. Energy is good place to invest.

Linking to dividend paying stocks, the large players have or should have an advantage because the deal makers go there first, they have the money. However as it was said you have to know what you do not know, you can learn or partner, but thinking you know can easily lose money and the first rule of investing is try not to lose money. As small investor, you know and see many things which can help you make decisions on whether to hold or seek alternatives. While gaining 20% is great, the risk is also high or try to think similar to the institutions and be happy with the 8% to 15% on a long tem basis. One method to this is buy dividend stocks for the dividend and over time for the capital gain.

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

 

 

 

 

One of the President elect campaign slogans was to redo the trade agreements, how will that affect existing practices? In a recent article James Bradshaw examined the busiest port in the US – Los Angeles. Goods going through the port is over $270 billion of goods and the top 5 imports are: furniture, auto parts, apparel, electronics, and plastics.  On the face of those imports – walk around the average Wal-mart store where America shops for low prices. Many of the items for sale came from outside the US, not all, but many of them; if the President changes trade prices or products have to be sourced from the US at Wal-mart prices. There is a reason why they moved outside the US.

The top five exports are paper/waste paper, pet/animal feed, scrap metal, fabrics, and soybeans  On the face of it, the paper what we recycle is going offshore to come back as packaging for the things we import. The scrap steel is going to make steel to compete against US Steel. How will this change?

It is relatively easy to say exports and import trade should be change, we should make and sell more of what we consume from within the borders, every leader of every country says it! They have been saying it since there were governments and will continue to say it until the end of the world. Changing the infrastructure which allows the top 5 imports to be made elsewhere and then shipped to the store to the eventual consumer is going to be a big challenge. Some of the biggest investors in the infrastructure are pension funds, because of the continual fees the infrastructure companies make. Think about the railroads moving the goods, the ships, the ports, the roads. If the President wants to dramatically change trade agreements, there will be many companies and areas highly affected which means both Democrats and Republicans will be against the changes but for the principle of the change. Will the consumer want to pay more?

Linking to dividend paying stocks, every year things change in the world and companies try to adapt to the changes. In the case of trade, a President of a large company who does embrace the changes is likely not to have a long tenure as President for a competitor who does will begin to buy assets the company has to sell to remain competitive or pay the bills. If you ever watch a show like Shark Tank – one of the suggestions is to decrease the cost of the manufacturing (send it to China) to retain and increase margins. It is possible for politicians to change the rules, but in will take extraordinary discipline and getting through many competing sides to pass the new changes. In the meantime the status quo will remain which is good for those companies which invest in infrastructure.

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

With the election over, people use the winning slogans to mean whatever you want them to mean and in this case John Heinzl (jheinzl@globeandmail.com) use the slogan to talk about your portfolio in the article Make your portfolio great again.

The assumption is the average investor started with the best of intentions and over time has parts of the portfolio which could be fixed. If you were to adjust your portfolio you would need to take the following into consideration:

1. Sell those pooches – if your shares which are at best speculative or are in broken companies whose prices are closer to bottom, it is time to sell. Some of the reasons to sell included using your money for a better alternative or be in cash; the rules allow capital losses to offset capital gains (save money on taxes); the best stock pickers are only 50% correct, but they know when to sell; selling is not a bad thing.

2. Stop trying to break even – sometimes you buy shares and the price goes down, but you bought for a reason and the events pass. You still you hold onto the stock  because the stock could go up. If the outlook is still not promising, take your lumps and move to alternatives.

3. Focus on Quality – listen to Ford job one is quality. If you start with the best, even if the best have a bad year, it is still a great year for a stock of a lower quality. The stock will have cycles but for it to go dramatically down, the entire market has to go down. Eventually the best stocks rise first. If you add the added attraction of a rising dividend every year, there are plenty of quality stocks which make the grade. Using ETFs because of the their low cost is a good option.

4. Rebalance if necessary – when you bought your portfolio you bought a couple of stocks in different industries or added diversification to your portfolio. If one of the stocks has become a winner and that is great news, it maybe a good time to sell a portion to take profits and rebalance your portfolio to reflect risk reward levels.

5. Consider your costs – if you own mutual funds and there are billions of dollars in funds, try to have the lowest expense ratio, in that fashion if your fund is up most of the gains find a way into your pocket.

6. Consider cash – all the best portfolio managers use cash as an asset allocation. Warren Buffett is famous for generating cash and when the markets go down, he buys large numbers of shares of quality companies. The quality companies move up in the next cycle and he continues to do very well. That took patience, having the resources – cash and faith the cycle will continue so he can benefit. This is the classic buy low, sell high , it usually takes time measured in years to do.

Linking to dividend paying stocks, owning stocks is a good way to grow your wealth and over the long term the best stocks to own are those that pay dividends and can grow them. If you have a reasonably long time frame, the risk reward equation can be very low and that is good for you.

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

 

 

There is three ways to make money on the markets buy a stock to make a capital gain as the stock increases in price; buy a stock for its dividends and hold the stock and over time the price will increase as long as it continue to increase its dividend and make a capital gain by selling the stock short or expecting the price to fall and buying it at a lower price. The third one for 95% of investors should be avoided unless you follow commodity markets and link them to individual stocks. The reason the overwhelming majority should avoid is the leverage needed to do it and if you are wrong it will cost you. If you really believe a stock is going short look at the options market to buy puts. For dividend stock buyers, short selling is on the list because once the stock is paying no dividend (it has to conserve its cash)  its is time to seek alternatives.

Having said the above, there are lessons to learn from short sellers – how they look to find the stocks and what they are looking for. If you see anything like it in your mature company, it is time to find alternatives and exit quickly. Fabrice Taylor wrote a column called why I’m not buying this short selling argument concerning a company called Badger Daylighting. The company is in the service industry to the oil and gas drilling. The price of oil fell and a slowdown in drilling resulted, how good is the company’s future?

The first piece is a newspaper article – if the article is in the Wall Street Journal, Barron’s, a trade industry or the financial paper of a country the general public will read it. If you are a short seller, you need an article in the newspaper to sow doubt that maybe all is not right with the company. In this case, an article in Barron’s questioned the company’s valuation and accounting.

In terms of valuation or the price earnings (P/E) ratio, it is used as a comparison to the broad market and other companies doing similar things. One should not use valuation as a good reason to short a company. There are often reasons why valuation is higher or lower – in the case of Badger – it beat its expectations on the quarter and increased its dividend, two good reasons to having a higher valuation.

Accounting is what everyone focuses on in particular how is revenue collected and how much many days are bills outstanding? what is the write off policy? Naturally at every company, no one wants to write off debts but it is a normal course of doing business. One method of comparison is to see what the competition is doing? In this case when oil prices fell and companies cut back on their programs all companies must have felt the pain both in terms of growth and maintaining their position. In turns out Badger as the industry leader had a more diversified base than the competition and may not have to write off as much as the competition.

Besides voting for Board of Directors, you vote for auditors. Most companies keep the same auditors but if the company moves from one brand name auditor to another brand name to save fees, then it is a little concern. If the move is from a top brand audit firm to local one with a couple of partners who mainly do small business, as a shareholder you have to wonder why? This was a Bernie Madoff red flag.

Costs – if you short stock you will need to borrow the stock, in Badger’s case you also have to pay the dividend. The cost is about 13%, ideally if you short stock you will be sell in a reasonably short period otherwise the cost of holding begins to build up and the greater the price has to fall in order for you to make money. In the case of Badger, about 66% of the shares are owned by institutions which means they have been sold a story for them to hold the stock. Just because they are big, does not make them correct but the reasons why you are shorting the stock has to be even better. In the movie The Big Short it took months before people saw what the shorts saw. In the case of the oil industry and with the new President elect – he would be happy with more drilling.

Linking to dividend paying stocks, there are many theories on how to make money on the market and many will be right for a short period of time. For a longer period of time – buying companies which pay dividends and can continue to increase the payments will push up the P/E Ratio and translate into capital gains. The system has worked but trying to see what others see is always a good idea.

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