Archive for the 'portfolio' Category



Portfolio Changes

Last week market sentiment was decidedly negative. While the news has focused on turmoil in emerging markets (not a factor), the real question is economic growth in the U. S. As I have said many times, corporate earnings have to be strong in 2014 to justify current market values. Last week’s sell off centered around a PMI report that came in much weaker than expected. My feeling was that the market did not fully consider December’s bad weather, and the affect of mid-week Christmas and New Year’s holidays. This week we have seen some stabilizing technical indicators that imply the market is holding at these levels and is due a rebound.

In response, for our Dividend and Growth Strategies we have sold off a fixed income position and purchased Ford (F), Altria Group (MO), and GE (GE). I have avoided owning tobacco stocks for 27 years, but at current valuation and a 5.65% yield I had to jump on MO. GE is one of my favorite stocks, and looks better now after an 11% decline and a 3.59% dividend yield. While Ford is more cyclical than I like, it has suffered an 18% decline and is cheap with a 2.72% yield. I am very bullish on the outlook for the aluminum bodied Ford F-150 pickup truck.

While these purchases over allocate us to equities, I expect to re-balance in a couple of months if not weeks. I’m comfortable that we can ride through a correction due to our relatively high dividend yields and low valuations across the portfolios. If we see the short term rally I expect, we’ll take profits and reallocate back into our 20% fixed income position.

Stocks today

I just wanted to post a quick note that the stock market is giving us a very bullish signal – so far today. First, yesterday’s low did not drop below a level of support that would be consistent with this bull market trend that started in March of last year. Second, today’s price history on the S&P 500 is creating what we call a “Spinning Top” candle formation. This is a very bullish turnaround formation. We saw a similar formation in both June and October of last year when the market bottomed at the support line as well. While one day does not make a (new) trend, I would not sell holdings today. Aggressive investors might be buyers if you have cash on the sideline. More prudent action would be to give the market a couple more days to discern its direction.

 For more information feel free to give me a call – 937-434-1790, or drop me an email  – bill@401advisor.com.

A Look Ahead

It’s been a busy year already planning for the year ahead. While 2013 saw a rotation in the stock market from the less risky sectors like utilities and into growth sectors like technology, with the likelihood of slow economic growth ahead I expect 2014 to reverse that trend.

Here is the link to where I discuss in more detail my outlook for the year ahead.

I was also interviewed for an article at wealthmanagement.com entitled “Advisors’ Top 10 Investment Ideas for 2014.” My ideas were picked for two of the “top ten ideas.”

For those of you that actually like my charts, below is a copy of an article that I wrote for horsesmouth.com

2014 Outlook

(Originally published at horsemouth.com on December 27, 2013)

The biggest worry heading into a New Year is that with the market at record highs, it certainly must be overvalued and due a correction.

While a correction might actually be welcome (the pause the refreshes), worrying about whether the market is too high is quite a relief compared to recent worries of the past – financial meltdown, Europe/Euro implosion, China hard landing, U.S. recession/depression… So while anything could happen in the short run, let’s look into the crystal ball and see what we can see.

Technically Speaking

Below is a Graph of SPY, the SPDR S&P 500 Index ETF since October of 2012. Highlighted by the vertical lines are the three recent time frames marked by our seasonal strategy – better known as the Halloween Effect. In short, global market history shows that most of a stock markets’ gains come from the period of November first ( the day after Halloween) through the end of April (when you will hear the phrase “Sell in May and go Away…”). While 2013 proved to be a good year to be in the market – for the entire year, you can see a marked difference in market performance. While the market went up during the entire period, between the second and third vertical lines, you can also see that it did so with more volatility than the period prior, and so far in the period after.

Figure 1 SPY October 2012 – December 2013

chart1
Source: freestockcharts.com

Bottom Line

Technically the market is in a solid uptrend, and until it breaks out of this trend by going up through the top line of resistance, or down through the bottom line of support, we are in a bull market and investors should be taking advantage of it.

Looking at the bigger picture, Figure 2 looks at SPY using monthly returns since 1998. One of the debates about the market is whether we are still in a secular bear market that started in 2000. A secular bear is defined as a market that has reached a peak, declined and failed to rise above and stay above that peak. So in 2007 we breached the 2000 peak, but failed to stay above it. Today we are working on nine months of being above the 2000 and 2007 peaks. The question is can we stay there?

Figure 2 Spy 1998 – December 2013, Monthly Data

chart2

Source: freestockcharts.com

Bottom line – it will take a 17% decline to bring us down to the 2000 high. Given that we are in a seasonally strong period, it’s likely that it will take a full blown official correction of 20% or more to breach the 2000 high.  While 20% corrections aren’t uncommon, more than that is, so barring a macro event as of yet unknown origin (the proverbial Black Swan) I believe we have exited the 2000 – 2013 secular bear and have entered into a new secular bull market.

What about the nearly “new daily highs?”

Below in Figure 3 is the classic secular Bull/Bear Markets graph from Crestmont Research (crestmontresearch.com/docs/Stock-Secular-Explained.pdf). Quite simply in a secular bull market, the market is supposed to record news highs! Note: the folks at Crestmont believe we are still in the middle of a secular bear market.

chart3

Fundamental Data

Is the market too high?

The common mistake our clients make is to think that price alone has any relevancy to whether the market, or a security is priced too high, or too low for that matter. While maybe not the best, the better and most common metric is Price to Earnings Ratio. While there are many variations on the “proper” P/E to use, I like to look at the earnings for the most recent quarter, annualize and use the current market price. Based on information from zacks.com third quarter earnings for 2013 should beat year ago earnings by about 4.9%, putting  third quarter earnings at about $22.25 per share.  Annualized that would be $89.00 a share. Based on the S&P 500 at 1842 we have a current P/E of 20.7. The good news is that the third quarter solidly beat expectations of only 1.10% earnings growth. Bad news is that earnings estimates for fourth quarter are coming down. Based on current estimates of 6.8% YoY growth, actual earnings will decline from third to fourth quarter 2013 – meaning P/E ratio goes up, not down.

Bottom Line

This market really is getting expensive. Not to the eminent crash level, but to a level where it is hard to see huge market gains in 2014. Earnings absolutely have to catch up to current market prices and keep the current P/E at or under 20. Secular bear markets historically start with P/E’s in the mid 20’s so we could see a solid 25% gain from current market levels – and then seriously talk about bubble territory.

The Economy

One of the best data series for predicting economic conditions is the St. Louis Financial Stress Index and the Chicago Fed National Activity Index. Below in figure 4 you can see that financial stress is negative and heading lower (good) and the activity index is positive and moving higher (good). So not only is economic activity healthy and improving, the financial conditions exist to bolster continued improvement.

chart4

Don’t Fight the Fed

While many interpret this as a warning sign with the Fed announcing a tapering of QE III, I see it as a positive. While the U.S. Fed has announced a very modest reduction to QE III, new hire Janet Yellen does not have the history to indicate she will be hesitant to reapply the stimulus at the first sign of economic softness. Plus, the Fed has made a point to reiterate ZIRP policy, well into 2015. Remember that pre-crisis interest rate policy was monetary policy. So we are simply transitioning from extraordinary monetary policy to “normal’ monetary policy. In other words the Fed remains accommodative. And that’s not just in the U.S.

From the Daily Pfennig put out by Ever Bank, “…markets were focused on China and Japan.  Japanese data showed inflation continues to move higher and manufacturing is recovering, but the yen still sold off to 5 year lows.  The cash crunch in China ended as the government injected cash into the banking system.  And commodity prices moved higher helping to boost the commodity currencies. “

Bottom Line

The world is awash in cash, and continuing to get more. The financial crisis led to six years of belt tightening by consumers and businesses, and maybe, just maybe the world is ready to spend again. And just to confirm, Figure 7 shows total outstanding consumer credit – actually looks like we stopped pausing back in 2011.

chart5

What’s it All Mean?

One of the hardest things about market predictions is that there is really only a very loose correlation between economic growth and the stock market in the short run. In 2013 we had very anemic economic growth but an extremely strong stock market. 2014 is looking to be another year of steady if not spectacular economic growth. However the stock market looks to face two strong headwinds. First is the current valuation. To break a 20 P/E ratio there needs to be some feeling of “irrational exuberance” to ignore valuations and move higher. In 2013 the market was driven by some of the big technology names and IPO’s. But I don’t see much room for a sector rotation to undervalued companies too drive the averages in 2014. I did a simple stock screen on finviz.com. The only search criteria I used was NYSE listed stocks (3311 total) and screened for P/E under 15 (long term historic average) and positive earnings expectations for 2014 – not exactly a big hurdle. The results were a list of only 263 stocks. The market is broadly expensive.

Bottom Line

This is not the time to fight the technicals which are very strong. But I would be very wary as we move forward. Any hiccup to the goldilocks scenario that is being priced into the market could lead to a very quick 20% correction. But there aren’t any obvious reasons to return to the secular bear levels (below 2000 highs) and stay there for any length of time. The world is simply awash with cash, and nobody is likely to do much monetary tightening for at least another year.

Quoted in Wall Street Journal

Below is a copy of a Wall St. Journal article where I was asked about our usage of online investing site CoVestor.com
To view the original article requires a subscription, so the article is reproduced below.

You can also follow our investment model performance at CoVestor Ltd. here

Learning to Embrace Online-Advisory Providers

Some advisers see online rivals as friends, not enemies

By Murray Coleman

Growing competition from discount brokers and fund companies is leading many financial advisers to embrace developers of online-advisory sites, often considered a threat to their existence.

“If you don’t take advantage of some of the more innovative advisory services online, you’re basically burying your head in the sand,” says Ross Almlie, president of startup TCI Financial Advisors in West Fargo, N.D., with $37 million in assets.

As more players such as Fidelity Investments and Charles Schwab Corp. push into offering financial advice, traditional full-service planners need to look for better ways to get word out about their skills, says Bill DeShurko, president at 401 Advisor in Centerville, Ohio, with $50 million in assets.

“People appreciate the fact that we’ve learned to work alongside online service providers to create a better investing experience,” he says.

Mr. DeShurko, who says he has been in the business for 26 years and has watched closely the advance by online advisers, is partnering with Covestor Ltd. The Boston-based firm offers online portfolios run by professional money managers that individual investors can follow and invest alongside with.

It’s a service that allows advisers with strong track records of running private accounts to bring their portfolio strategies to a larger audience, Mr. DeShurko says. He has blended a few of his existing account strategies to develop portfolios at Covestor that require minimum investments of between $10,000 and $20,000 each.

“Instead of turning away business from people with smaller accounts, we can put them into our Covestor managed accounts,” he says.

Since starting to charge for its asset-management services in 2010, Covestor says about 80 of its 139 portfolios are managed by registered investment advisers. The others are hedge-fund managers and professional traders. All are screened by Covestor, says Asheesh Advani, the firm’s chief executive. On the company’s board is James Cornell, a former president of Fidelity’s private wealth-management unit and John Sinclair, ex-research director at Fidelity.

Mr. Advani says Covestor tracks hundreds of different portfolio managers and invites the top performers to be a part of its online marketplace. It splits fees with managers, who charge anywhere from 0.25% to 2% a year to run their portfolios.

Ex-mutual-fund manager Barry Randall has decided to use Covestor as his main avenue to market a technology stock-focused investment strategy. Now, he serves as the chief investment officer at Crabtree Asset Management in St. Paul, Minn., which manages about $800,000 in assets.

“I had experience managing portfolios, but no real background in marketing,” Mr. Randall says. “So this is a perfect match. It lets me focus on what I do best.”

Instead of setting up client accounts through larger players such as Schwab or Fidelity, Mr. Almlie of TCI Financial Advisors has decided to take much of his business to another new company, Motif Investing.

The online advisory service has built some 120 different baskets of stocks and exchange-traded funds that focus on different themes–from companies that can profit from health-care reforms to stocks trading with less beta, a measure of volatility.

Such bundles of securities can be molded to almost any investors’ personal preference. For example, Mr. Almlie says he has a client who is passionate about investing in drug companies that helped her to overcome breast cancer.

“She wanted a broad-based portfolio with a slice of cancer-fighting biotech stocks, but we couldn’t find the right combination through a traditional mutual fund or ETF,” Mr. Almlie says.

Each motif comes without management fees. Instead, those using its portal can buy a basket of securities for a flat $9.95. They can also add or delete individual stocks or ETFs inside each portfolio for $4.95 a transaction.

“We act as an online broker and provide the technology to let investors build their own portfolios around any theme they’d like to target,” says Hardeep Walia, the firm’s chief executive and founder.

Starting early next year, Motif Investing plans to offer a service that will let advisers build securities baskets for clients using their own existing trading and back-office systems.

“They’ll be able to use their own software to custom design portfolios and to control whether their motifs are made public or not,” Mr. Walia says.

Write to Murray Coleman at murray.coleman@wsj.com

“What…Me Worry?”

wheres-the-beef

Thought I’d show my age by recalling two iconic figures from the past; Clara Peller’s “Where’s the beef?” Wendy’s ads and Alfred E Neuman’s catch phrase from the cold war days “What, Me Worry?” But they both sum up our current political standoff better and more succinctly than I am able to. But I will spend some time explaining.

First, I apologize for being late to address our current state of affairs. From the calls and emails we’ve received I know that many of you are concerned, as you should be, by current events. However, I am not a believer in saying or writing something just for the sake of talking or writing. It’s taken a bit of time to digest the insanity and determine the best approach. Of course hindsight will be the determinant of the “best” approach, but I think we are taking a rational and prudent approach.

The background. As we are all aware Congressional Republicans and the President are locked into a game of chicken. The impending collision officially comes at after October 22 – when the U.S. government must borrow more money than is currently appropriated to pay our bills. With Congress refusing to up the limit it raises the specter of the government: 1. Shutting down various departments en masse, and 2. Not being able to pay interest on our debt – thus officially defaulting.

Queue here Mr. Neuman, “What…me worry?” Seriously, we will not default on paying the interest on government debt. Period. The consequences are severe. The Chinese, American banks, credit unions, entire European Countries and their banks technically could go bankrupt if the U. S. defaults. Now I could go into details here as to how that works, but that would be a long post and detailed post. Please drop me an email, (bill@401advisor.com) or give me a call (937.434.1790) if you want to discuss details. Seriously. I really do enjoy those conversations!

Now to the real reason we won’t breach the debt limit…Ms. Peller. Representing senior citizens throughout the country, asking “Where’s the beef?” (aka social security check) come November 1. Remember amongst the insanity, our government leaders are elected. And if Ms. Peller and her legions of AARP following social security recipients miss one check, you can be assured that those responsible will never see government office again post their next election. Our Congressmen are well aware of this. The Chinese we can deal with, but don’t mess with a Ms. Peller’s social security check!

Portfolio Strategy
Despite my confidence that we see a pre-November 1 solution, I will never risk client assets based on my personal outlook. I will always try and have a Plan B in place. In this case we have raised our cash positions to about 20% of our portfolios. While I don’t see permanent portfolio damage due to the wrangling, we could certainly see a temporary drop. Cash is available to limit volatility and to be in position for an opportunity buy, if I see such an opportunity. The Plan B, is that the 20% in cash can be deployed quickly to buy a “short” ETF – simply a stock that goes up when the market goes down. A 20% position won’t eliminate a loss, but it will soften the blow. That would be a quick adjustment. We will just have to see what happens to determine where we go to from there. As you should be aware, if things get that dicey, I am perfectly willing to move all portfolios to 100% cash if we have a storm that we need to ride out.

My bigger concern, which I will address next week, is the short term trend in corporate earnings – which hasn’t been good. As we get into the heart of reporting for third quarter earnings we absolutely have to start seeing some optimism from businesses regarding the outlook for future growth and profits. The stock market simply cannot continue its upward trend without earnings growth. That is a very real and more certain trend that will have longer term repercussions for the market.

Is now the moment to invest in the stock market?

You are invited to an exclusive online presentation by a diverse team of Portfolio Managers on Covestor. They will share with you their current market concerns, provide important new insights, and explain how it’s possible to play both offense and defense amid the recent increase in market uncertainty.

Wednesday, September 25, 2013

12:00 PM EDT

The Portfolio Managers presenting at the webinar will be:
Martin Leclerc of Barrack Yard Advisors – a 30-year investment management veteran
Bill DeShurko of 401 Advisor – author of “The Naked Truth about Your Money” and a 20-year financial services veteran
David Fried of Fried Asset Management – publisher and editor of The Buyback Letter

RESERVE your spot today! Register Here!

After registering, you will receive a confirmation email containing information about joining the webinar.

Brought to you by GoToWebinar®
Webinars Made Easy®

Investment Update

Our largest investment strategy based on assets under management is our Dividend and Growth Plus strategy. I combine for our clients stocks that pay a modest but increasing dividend with stocks that have a high dividend yield, but less likely prospects to raise the dividend consistently over time. The combination provides our clients with a relatively high, and rising dividend stream that can be used for income, or reinvested for growth. I like the idea of stocks that pay us to hold them; it’s a way to add a “company match” to an IRA account.

Below is one of our more popular holdings, Prospect Capital Corporation (PSEC). Shown is a price chart for the past twelve months. You can see that PSEC had a sudden drop in November of 2012. This turned out to be more frustrating than troubling, as the following month, (indicated by the yellow arrows) PSEC actually increased its dividend by 7.8%. Not the actions of a company in trouble as might have been indicated by the November price drop. Since that time the stock has apparently meandered along, while the stock market has risen over 10%.

Chart 1 Prospect Capital Corporation 12 Month Return

chart-aug

However, what the chart doesn’t show is that PSEC’s current dividend amounts to a 12.03% yield. Pretty healthy by today’s paltry interest rate standards. The stock also sports a lower than market Price to Earnings ratio (P/E) of only 8.49 based on projected 12 month earnings. These are the stocks we love, high yields and low valuations! The only question is, will earnings be stable enough to continue paying that high dividend? If recent results are any indication, the answer is a solid “yes”. The company just announced that their net investment income increased by 43%, year over year for the period ending June 30,2013.

What does this mean to our clients? Not only is the current dividend “safe”, but PSEC also announced that they plan on increasing their dividend payout beginning in March of 2014. When our “high yielders” raise their dividends, we consider that a double bonus.

For more information on how to derive high yields in a rising rate environment, please call the office for a free consultation.

All opinions included in this material are as of August 22, 2013, and are subject to change. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance does not guarantee future results. 401 Advisor, LLC currently holds shares of PSEC in client accounts and is likely to add to those positions over the next 30 days.

Don’t Rule Out Bonds for Income

I recently posted an column at: MarketWatch.com titled: “Why Individual Bonds Remain Very Attractive” While investors are bailing from bond mutual funds – a wise move,  individual bonds do offer protections against rising interest rates not found in bond mutual funds.

 My overall prediction is that rates cannot go up dramatically. With every 1% increase in interest rates, the added amount the government must pay to just pay the added interest cost on the Federal debt, increases by about $180 billion. For perspective, the “sequestration”, the mandated cuts put into place that get the blame for everything bad in the economy, only cut spending by $42 billion (and prevented another $43 billion of spending increases). Simply put, the government and the Federal Reserve have a lot at stake to keep interest rates relatively low for a very long time. That said, a ½% increase across the board seems likely – but only if the economy continues in a positive direction. I think this is a big “if”.

The short version of the MarketWatch article is that many investors think that a bond’s value is fixed, and that they are stuck holding a bond to maturity. The reality is that a bond’s value will naturally increase in value through the first half of its life. This allows a bond investor to sell their bonds at a profit after a short holding period. If rates don’t increase. But even if rates rise, a bond will likely return to its par value several years before its actual maturity date.

 For example I was recently quoted an Ohio municipal 10 year bond, Aa2 rated and insured, a ten year maturity, and a 3.655% yield to maturity. That is a federal and state tax free interest rate. If interest rates do go up ½%, the face value of the bond will drop below purchase price for the first 3 ½ years or so. But by year 5 the bond should be back to what an investor would pay for it today. So in effect, your 10 year bond has come a 5 year bond – paying 3.655% tax free. That is a pretty good deal.

If you own bonds and want to know when an optimum time would be to sell them, contact my office and we will run the analysis for you. If you need more income, or just want to diversify but don’t know where to go, give us a call and we can explain what bonds can do for you, even at a time when everyone is cashing in on their bond funds.

What to Make of the Current Market High

Much is being said about the S&P 500 breaking through its former daily high set in 2007. The question seems to be whether this is the end of a bull market or the start of a new one?

First, let’s put this into perspective. Below is a chart of SPY – the SPDR’s S&P 500 Index tracking ETF showing monthly returns since 1997. Many pundits like to point out that we have been in a four year bull market, and therefore, this rally is extended and due to come to an end. This is simply false.

What we have been in for four years is a bear market recovery, as anyone who invested prior to 2008 can tell you, we have simply had a long 4 year slog to recovery from the financial crisis induced crash.

Figure 1 SPY 1997 – Present, monthly returns.

chart1

Source: www.freestockcharts.com

Second, from a longer term secular reference, we have really been in a 13 year bear market and recovery cycle dating back to the 2000-2002 tech wreck market crash. Since the market peak in March of 2000, we have not gone above, and stayed above that level for 13 years now. This is the definition of a secular bear market.

The good news is that secular bear markets do end.

Below is a chart from Crestmont Research showing the history of secular markets in the U. S. since 1900. As you can see the market’s history consists of long periods of rising markets (green bars) followed by relatively flat periods (red bars). However, “flat” describes the period from beginning to end of the period. Flat periods, or secular bear markets, can be filled with large declines and recoveries.

Chart 2. History of Secular Markets

chart2

Source: http://www.crestmontresearch.com/docs/Stock-Secular-Explained.pdf

So are we going higher? Hard to say.

 I know you want an answer.

My point is not that we are at the beginning or end of a bull market. My point is simply that just because we have re-attained prior market highs, does not in and of itself mean much of anything as to which way this market goes from here. It is simply not that simple. But it makes for good headlines.

What I will say is this: The overall stock market is not “cheap” at these levels – in terms of corporate earnings. However, it is extremely hard to factor in just how much of an effect the Federal Reserve’s series of Quantitative Easings have had on valuations. In English – low interest rates make stocks more attractive. We have extremely low interest rates, albeit artificially low due to the Fed.

If the Fed can successfully keep interest rates low this year, and without a major “event” the market could finally breech its former highs, and stay above them before the next bear market rears its ugly head.

That said, in practice we remain cautiously optimistic. We continue to look primarily for undervalued dividend opportunities in our Dividend Growth portfolios. We are fully invested in our seasonal ETF growth strategies.

Top Dividend Picks for Retirees – 2013

I am of the firm belief that the only way for a retiree to invest with an anticipation of receiving a life-time income from their investments is to buy dividend paying stocks. Ideally, big blue chip stocks with not only a history of paying dividends, but of increasing their payouts as well. We know the names; IBM, P&G, Coke a Cola (KO), Exxon… Unfortunately, many retirees having seen incomes frozen for a decade and portfolios ravaged by two bear markets, find that the 2%-3% dividend yields offered by these companies is just too little to pay today’s bills and enjoy even a modest retirement. To accommodate retirees with higher income needs I try and mix in a combination of the tried and true blue chips with a few “high yielders” to bring up the overall portfolio yield. I define “High Yielders” in today’s market place as stocks with a minimum of a 5% yield (more than double the S&P 500) and still hope to stretch that into the 7%+ range without adding too much risk.
So with that in mind here are two of my top picks, one in each category for 2013.

McDonald’s (MCD)
When looking for sustainable and increasing future dividends stodgy and boring, and needed is a very good thing. While food in general is a need, some might question the “need” behind a Big Mac. But ask any working single mom, and “Kid’s Meals” is on the need list. While third quarter 2012 saw an uncharacteristic slow down in earnings, for retirees we are looking at cash flow. Even with a drop in share price over 17% at its lowest, MCD announced an increase in their quarterly dividend in November from $.70/share to $.77/share. This marked the 36th consecutive year of increasing their payout.
Fundamentally MCD is an all weather stock. In poor economic times harried workers “downsize” their eating out bills by going from the mid-tier Applebee’s and Olive Gardens to McDonalds. Also expect more competition for Starbucks as MCD develops their “Café” identity. MCD has a strong international presence for growth in developing markets, and offers a currency hedge to the dollar.
Their payout ratio is modest at 52%, P/E at the market level at 15.35 for 2013, and modest growth expectations in the high single digits for 2013. MCD is a solid 3.47% yielder providing income stability and a likely raise well into the future.

SeaDrill Limited
While SeaDrill Limited (SDRL) provides a wild ride (Beta 1.97) it can be worth it for the investor needing a little extra juice in their dividend payouts as SDRL has a current yield of 9.21%.
SDRL is in a solid and growing business. They provide deep water and submersible rig platforms for oil and gas drilling and exploration. Their largest division “Floaters” are fully leased for 2013.
Of course no company sports a (%+ yield without their being question marks. For SDRL there are two major market concerns. The first is debt. Simply put SDRL is considered a “highly leveraged” company.
This is fine as long as cash flow can support the debt. Recently SDRL’s stock took a tumble when they agreed to sell their tender rigs division. While accounting for a small portion of cash flow, any disruption is seen as a concern. However, SDRL also announced that they plan on using the proceeds to invest in more floaters – a higher revenue source per rig, and as mentioned above, their current inventory is fully leased. Bottom line, by the end of 2013 revenues should be up, not down without an increase in debt.
Market concern two is that SDRL paid two dividends in December 2012. Their normal December dividend and a prepayment of the March 2013 dividend. For new investors, if SDRL maintains their 2012 payouts, this would mean a yield of about 6.14% vs. the reported yield of 9.21%. However with a projected P/E of 11.61 for 2013, and earnings growth potential, I see SDRL as a way to boost income in a very solid industry and a very solid capital gain potential as new rig development and leasing accrues revenue to their earnings.


bill@401advisor.com • 937.434.1790

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