Every time the economy improves the outlook for financial companies is better because they write off less loans or as long as people can repay their debts, the better for the financial sector. The better the economy, the more loans that are offered by the banks which is good for small and medium sized businesses who consistently bear the restraint when a bank is under pressure. Ryan Gottschalk of Thomson Reuters examined the financial sector to see if there were potential bargains.

we used the Thomson Reuters Eikon database to find companies trading less than book value. Book value is determined by dividing the total market capitalization by the net assets of the company. Anything less than 1.0 is worth looking at.

price of the shares in early November.

companies need to have a long-term EPS growth consensus estimate of 5% over the next 3 years.

the dividend increase must be at least 5% over the past year.

Company                      Recent Mkt          Mkt Cap    Book Value    P/BV  Est EPS   Div Per   Div

Close                        ($bil)                                            Growth  Sh Grow  Yield

Bank of America       17.01                     171.886        256,176        0.67       8.0      24.9           1.47

American Intl           59.28                     60.888          89,658       0.68      17.9     51.9            2.11

CNO Financial          16.06                         2,812             4,138        0.68      7.7      14.8            1.93

Legg Mason               29.25                          2,954             4,213        0.70    13.6    10.7            3.02

Citizens Financial    27.35                        13,999            19,646     0.71       9.9    12.5             1.67

Capital One Fin          74.84                      36.095            47,284    0.76      5.7       6.7             2.14

Metlife                           47.97                    52,725              67,949   0.76       8.3      7.7              3.32

Regions Financial       10.96                     13.491              16,844    0.80      5.4    13.3               2.38

XL Group                        35.30                       9,497             11,677    0.81      16.0   11.7               2.27

Morgan Stanley            34.0                      63.675            75,182      0.85       9.5   26.7              2.09

Linking to dividend paying stocks, Mr. Gottschalk list has a few more entries but the closer to 1.o they are, the greater they are fully valued. The opportunity of the above is to see why for example Bank of America is trading at a rate which looks like a bargain. If the company goes to fully valued or 1.0 the stock price will rise and you will be paid a dividend with relatively low risk. Similar to the Presidential election your research why tell you why this is great stock and why it is not performing as well as can be expected.

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

 

 

 

South Africa makes for an interesting case study because of the effect of its politics according to Xola Potelwa of Bloomberg News. Generally the rating of the currency is based on economic performance of the country and what it exports to the world. South Africa has always been one of the stronger countries in Africa because of its valuable resources including diamonds, gold, great farm lands, etc. Another factor in the value of the currency is what does the central bank do? are they stimulating the economy? At the moment, the South Africa central bank is trying to pull back which leads to politics. The present President who has lead the country for a number of years is seen as corrupt or the very least unethical and is fighting with the Finance Minister for control of South Africa’s finances. Anytime politicians fight for control means there is instability in the currency.  Will South Africa slow spending and lessen debt or will there be more spending?

Linking to dividend paying stocks, fortunately companies making profits tend to have stable management because people can wait; companies that lose money will have control issues over how can the company be restructured to make money again. When you read the annual report and look at the senior management team, the first concern is do these people like each other to work together to build the company? who is power hungry or wants power? they will either be encouraged to leave or internally will push their divisions to be more profitable to ensure their star rises higher. While companies are about the sales and continuing of the sales to make profits, the rest of the story is people.

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

Similar to many people this blogger was expecting a Clinton victory not because of political party, but to send a signal to anyone who wants to run for public office they need to be prepared and offer a reasonable idea of what they would do with power. President-elect Trump is all over the map on his solutions, although he has identified many problems. This is why markets like consistency and some form of clear direction, with Mr. Trump we do not know what he will do and consequently what the effects will be. In all policies, some sectors benefit more than others, at the moment all you can do is try an educated guess, but it is a guess.

In expecting Mrs. Clinton to win, a book about the journeys to go west was read. In the 1800’s most Americans came to American from Europe and many of them settled on farms, but if you look around your place of living not all lands make great farming. In 1840’s to 1855, prior to the railroads, there was talk about better and less expensive farmland (free) on the Pacific Coast – California, Oregon and Washington and it was true. At a time when there was no railroads, to get to the Pacific Coast there were two methods – ship (6 month journey) or wagon across the west. There are many books written about the westward journey but few from the woman’s perspective. One such book was written by Lillian Schlissel called Women’s Diaries of the Westward Journey published by Schocken Books, NY, 1982.

Ms. Schlissel read diaries from women who travelled the trail. From the diaries one clear message comes forth, most of the women did not want to move, their husbands did. Their husbands after a few years of farming were looking for new opportunities for themselves and their families. They sold the farm, packed the things in the wagon and started the journey. Most of the people brought their kids and normal sexual activity prevailed as women became pregnant and were expected to deal with life on the wagon train trail. The journey across the plains was relatively easy for there was plenty of food for people and animals. Once in the mountain ranges, things change. There are more problems with carts, animals, weather, food and people and normal things in life. If you can imagine a road trip that took a couple days you took with your family and the kids asking are we there yet? what if the trip took 6 months to a year? It was the responsibility of the women to manage the household – cooking, looking after the kids, it is credit to the women that when many made it to the west new homes were created.

Linking to dividend paying stocks, as a society we often undervalue the work of women, but without their work and doing all the things men do not do well, would new homes be created? Ideally a woman President would have started the process to value women better, however democracy picks the right winner. Many dividend stocks, need women who traditionally buy items for the household to continue buying similar goods. If they do and the companies appeal to the value of the woman, sales will go up. If they appeal to men, sales go down. Who does your investments appeal to?

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

 

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. In all businesses the objective is to fill the bus with the right people, have the wrong people get off the bus and ensure the people are in the right spots. To do this Blackstone strives to have those they rate 9 of 10 and 10 of 10, the company will spend more money and mentoring on them because if you can raise their productivity, the firm greatly benefits. If a person is rate a 7 of 10, the person will have less opportunity and there is a reason why there is a revolving door in the lobby.
2. The hiring is down through interviews to see how people handle stress. The business is stressful, it changes, to be on a cutting edge people will need to have a high learning curve, and be inventive. The stress factor helps answer the question when they are under stress will they be honest? The person also needs the ability to work with teams, have communication skills and fit into the culture of the firm.
3. Part of the culture is to get everything perfect, make no mistakes. All deals are examined from multiple points to ensure the risk factors are agreed and can be lived with. If the risk factors change, how does the firm react.
4. If you are interviewing people over 40, their reputations are set. You will not change them.
5. People all over the world do not like change, but change happens. It is up to the firm to ensure that people are comfortable with the changes.
6. Similar to most people, they like some form of control over their lives even though they like working for the firm. One method to do this is start new business where they can use their abilities and the firm benefits.
7. People needed to be treated so they tell the truth about deals which come before them as well as day to day business. To do this, the senior people must live and breathe the core values.
8. There is a difference between founding and CEO and one of them is people listen to the CEO way more than you think and amplify what you say and how you say it. People respond to you. Say your words carefully.
9. Human beings are your most important asset, to accomplish you goals you may have to strategize the goal while keeping confidence levels high.

Linking to dividend paying stocks, one of the lessons of Blackstone is how they do risk minimization and the expectation of the people in the firm. Fortunately Blackstone has been very profitable so compensation is good. Now why do wealthy people continue to stay and work? If they like solving problems, like new things, learn find the work inventive, interesting and fascinating with some fun along the way – people will stay a long time. In all your investments you can ask how is risk minimization done there and who has input on the decisions.

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

 

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.