Proprietary investment strategy
401 Advisor, LLC specializes in building client portfolios using dividend paying stocks due to their long term history of providing superior returns over non dividend payers. I recently contributed to an article posted by U S News on their web site. The article highlights warning signs that a stock may be cutting their dividend in the future.
One of our more popular holdings, McDonald’s (MCD) has come under a bit of pressure lately – both in the media and on Wall Street. After reaching a high near $102 a share in May of this year the stock price has dropped to below $90 a share in October. The media has pounded their menu saying that the younger millennials are avoiding MCD for healthier alternatives. And yet I’ve doggedly held their stock in many client accounts.
While the jury is still out, we are starting to see the reasons for holding and our continued purchase of MCD. First, MCD is held in our Dividend and Growth strategy accounts. Their dividend has been above 3% even at its peak price. More importantly the dividend has been increased for 38 consecutive years and in this area MCD did not disappoint – they announced a 5% dividend increase payable to shareholders at the end of November. This brings their current yield to 3.59% as of market price on 11/6/2014 and annualizing the dividend.
Part II of my thesis is that McDonalds is still a cherry job for anyone in advertising. Their contract has to be one of the largest in the advertising world. Money buys the best and the brightest. MCD will find a way to come back into the good graces of the fast food consuming public. Survey’s are already showing some in roads from campaigns such as this social media campaign that coincides with the relaunch of the McRib sandwich.
MCD is a great example of an investing concept I will come back to in future posts: the difference between buying a company and buying a stock. Stock buyers look for price appreciation in the near term. The media is created for stock traders. Investors like the Warren Buffets of the world buy companies. Companies generate cash flow that is unaffected by stock price that allows them toraise dividends by 5% even when their stock price slides by 12%.
While I’m not happy with the stock, I am happy owning the company, mainly because they pay my clients a 3.59% dividend while we wait for their stock to turn around. And next year we will likely get another raise.
The stock market has had a five week “correction” followed by a one week recovery – that recouped 70% of the corrections losses. While sentiment has seemingly shifted from an extreme doom and gloom outlook over the past few weeks, statistically the stock market retests its lows about 67% of the time. Meaning we will likely give up this week’s gains.
aWhile I remain cautious, we did buy a couple of holdings for our portfolios this week. Notably P&G for our dividend strategies. P&G is THE dividend aristocrat based on its history of paying a dividend every year since the mid 1890’s (that’s not a typo!). P&G just hasn’t been cheap enough to meet my criteria. Yesterday I gave in and took a position across our dividend portfolios. P&G released earnings this morning and we were rewarded with a 3% gain in early morning trading.
Our growth portfolios are also seeing changes. We will focus more on individual stocks as we rotate into the “Buy in October” seasonal strategy.
I’ve also added an article on the bond market that was published yesterday at horsesmouth.com. The main takeaways are 1. While the stock market can’t decide if the economy is too strong (meaning the Fed will start raising interest rates) or too cool (economy drops to recessionary levels) the bond market seems pretty convinced that the economy will continue in the “just about right” pace. And 2. Even if the Fed raises short term rates, longer term rates aren’t likely to keep pace. While the economy is growing it is too soft to support a sharp rise in long term interest rates. While Fed action could spark a recession it is likey 4- 5 years out. My caveat to that is Europe. Major European bank failures will roil our market and economy. PDF: Horsesmouth _ Bonds
The take away is this. Many advisors are recommending clients move into short term bonds as a defensive move against rising rates. However, the bond market is telling us that intermediate bonds – in the 8 – 10 year maturity range may actually be affected less if the Fed starts to raise short term rates.
Here is an article that posted on www.horsesmouth.com today.
One advantage technical analysis has over fundamental analysis is that it should take the emotion out of investment decisions. Graphs and charts don’t lie, they are what they are. And what they are now is pretty darn ugly. For a full review read the entire article can be downloaded: Spooked Markets.
The short summary is that we have been selling our more aggressive holdings for a month now. We will be moving all 401(k)’s 50% into a cash position, raising another 20% cash in our Growth” strategy and will likely look to hedge our Dividend strategies with a “short” ETF.
In the real world study of schizophrenia known as the stock market some of you (ok probably about all of you with a life) may have missed this news over the weekend:
“This past weekend, China printed their September Import and Export data, and brother did it surprise everyone with how strong these two components were. September Exports rose 15.3% VS a year ago, and Imports rose 7% for the same time frame. The consensus was for 12% and -2 respectively, so not only did Exports and Imports kick some tail and take names later, they beat the forecasts! I think that this data is good proof in the pudding that China will show a recovery in the economy in the 3rd QTR, and really improve in the 4th QTR.” The Daily Pfennig
Why is this important enough to warrant a blog post? Because the “market” can’t decide whether to panic over the economy being too good – and the Fed raising interest rates soon, or whether to panic because the global economy is so bad that a slowdown will cross onto our shores and deflate our record high corporate earnings that have kept this market rally alive.
While Europe is still the big question, the prospect of a further slowdown of the Chinese economy has also spooked commodities and the industrial sectors. Maybe with some optimism that Chinese growth has bottomed we can put a floor on the market and end the current selloff.
As I have mentioned many times, it’s best to make your investment plans before events happen, taking the emotions away from decision making. I noted earlier that we began building our “arc” months ago. We have raised substantial amounts of cash in our Dividend and Growth managed portfolios – in the 35% range. And have about 20% cash in our Growth portfolios. Even if the markets turnaround from here, many stocks have seen fairly large selloffs and I have a shopping list of discounted equities that I am ready to buy.
On a side note, OPEC led by the Saudi’s, has continued to produce oil at their previous pace despite a global slowdown in demand. Normally you can count on the Saudi’s to cut production to prop up prices. This time however they have chosen to keep the pedal to the metal so to speak and maintain production. Why the change in strategy? Because they feel that by lowering the cost of a barrel of oil they will slow down the growth of U S and Canadian production which they see as a threat to their economy. What goes around…comes around…
Even more ironically, with gas prices dropping by about $.50 a gallon over the last year, the average driver is saving about $100 a month at the pump. By giving the U S consumer a little extra spending money, the Saudi’s have done what our own politicians are incapable of – creating a policy to help out us poor working stiffs in the middle class!
Building equity portfolios in a bull market is hard. Clients get caught up in the exuberance and reckon the more stocks they own, the better diversified they are. Protect your stock enthusiasts with a diversified portfolio built on low correlation, low-beta equities, and the appropriate number of asset classes. Your clients will thank you when their mania wanes.
Article posted on Horsesmouth.com July 10, 2014.
On Thursday HorsesMouth.com published an article I wrote on the market’s mixed signals. Despite most predictions to the contrary, interest rates have declined fairly substantially this year. Falling interest rates are usually a sign of (fear) of a slowing economy. The stock market however, despite a short pause in March, has pretty much marched upward in a surprisingly consistent fashion. The stock market is considered a leading indicator for the economy. Therefore a rising stock market portends an improving economy. So which is right?
In the article I reviewed the economic data for May and other indicators. There is no question the economy continues to show improvement, albeit at an unsatisfying slow pace. I believe the bond market sell off is anticipating a rise in short term interest rates IF the Fed were to put an end to their zero interest rate policy (ZIRP). Although the economy shows modest growth, the growth is seen (by the bond market) as too modest to continue if interest rates were to rise.
For investors we continue with our theme of market seasonality. While our portfolios are fully invested, we are in conservative stock holdings pretty much across the board. Focusing on large U.S. stocks and especially dividend payers. It is a strategy that is working well so for this year.
As a side note, I recently talked to a prospect who said the “competition” criticized my recommendations because I did not recommend being “diversified” by holding foreign stocks and bonds (via a mutual fund). After 28 years of doing this, I still don’t get while some people insist on putting money at risk just to be “diversified.” Europe just went to a NEGATIVE interest rate policy. This is extreme, panic type policy. China is in the midst of a slow down as the government cracks down on corruption and lending practices. My suggestion is to keep your money at home, in the U.S. for now. There will be a time to invest overseas, but I will only do so when the risks are much lower.
Past performance is no guarantee of future results. This article contains forward looking statements based solely on the author’s opinions.
I don’t usually post stock advice, but Apple, Inc. (AAPL) is not the usual stock. Their products have a cult-like following and owners will soon have an opportunity to buy shares of Apple’s stock at a somewhat reasonable price. But does that mean AAPL is a good investment?
Apple, Inc has announced that they will split their stock on June 9 for shareholders of record on June 2. For each share of AAPL owned, investors will receive 7 shares of new AAPL stock. Many times I hear novice investors naively celebrate splits, because of course, “more is good.” But the reality is that in a, strictly financial sense, a stock split is completely neutral. If the split were to happen at AAPL’s current price of about $620 a share, each share will become 7 shares but at a new lower value of $88.57 per share, or a total value of $620.
So why the excitement? In stock investing it is easier (meaning more cost effective) to transact stocks in what we call even lots of 100 shares. At the current price of $620 a share, 100 shares would be a $62,000 investment. More than most individual investors wrap up in a single stock. So in theory many investors will use the new lower price to “round up” their holdings to round lots of 100 shares, or new investors will buy into AAPL at the new lower, more affordable price. Such buying action would drive up the price of the stock.
The question is then, “Should you buy or sell AAPL now before the split”? Regardless of the price of a share of stock its value is determined by such things as revenues, sales, profits, assets, etc. Remember the value of each share of stock is relative to its financials and is identical before and after the split. So you should only make an investment decision based on those financials, not on whether or not the stock splits. In the case of AAPL, we have a fair value of about $700 a share pre-split, which would be $100 post split. In other words AAPL has room to move up about 12% to be fairly valued. Too me that is a good reason to hold onto AAPL if you are long or own the stock now. A trader can probably make a quick profit, as I do think the stock will benefit from increased demand. A long term investor can get off to a good start with a quick gain, pocket a 2.14% dividend and wait for Apple’s new products to boost long term earnings. But a better strategy might be to avoid the hype, be patient and see if AAPL settles back down in price after an initial run, post split.
410 Advisor, LLC does own shares of Apple, Inc. in our clients’ portfolios. There is no guarantee of future results. Comments made are forward looking and as such opinions can change on a daily basis based on new material facts as they are presented.