Posts Tagged 'investing'

Time to Short the Fangs?

Most investors know popular indexes like the S&P 500 and Nasdaq Composite are usually capitalization weighted. The biggest companies by market value have more influence on the index change. The Nasdaq leaders are commonly referred to as the FAANG stocks – Facebook, Apple, Amazon, Netflix, and Google. It’s easy to forget just how much influence these five stocks have, along with Microsoft.  This graphic shows the Nasdaq Composite’s component companies as bubbles whose size denotes their share of the index.

We see how a handful of companies dominates the index. More interestingly, those whose names are big enough to read are almost entirely tech-related. Even Amazon, a giant online retailer, is also a key technology provider through its Amazon Web Services unit. Many pundits are saying that a market so dominated by a few companies from one or two sectors is not historically normal and that this represents a bubble, similar to 2000, that is about to burst.

Let’s put rhetoric aside a take a quick closer look at the FAANGS.Stocks are evaluated on their earnings, specifically their future earnings over the next five years. Not their earnings from the past or even the most recent quarter. Yes most stocks look terribly overvalued based on this year’s earnings. But let’s look at the P/E ratio for the FAANGS based on next years earnings estimates.

For comparison, the S&P 500 forward earnings, from www.ycharts.com is 21.94

Facebook – 24.60

Apple – 26.06

Amazon – 82.72

Netflix – 56.24

Google (now Alphabet) – 28.41

At first glance 2 of the 5 FAANGs seem relatively well valued. I’d certainly pay more for both Apple and Google than for the “average” stock on the S&P 500. Neither, it would seem have been overly affected by the COVID pandemic. That cannot be said about Amazon and Netflix. Both companies have seen growth and earnings increase dramatically from the shelter in place COVID lifestyle. The question is whether we will continue to binge watch Netflix and order everything from Hershey bars to new TV’s from Amazon once we feel safe to venture out again? They seem very overpriced in a post COVID world. Facebook is a tough one. While I think their valuation is reasonable, I do not think they will fare well through the election process. They are certain to be criticized by both sides for what they do and what they do not publish on their site. If advertisers continue to leave, Facebook could be in for a tough remaining 2020. Question is whether that will carry further into the future.

Back to the point, is it time to “Short” the FAANGs? Shorting is simply a way to sell stocks now but benefitting from a future price drop. Most of us would not actually “short” the FAANGs. But we do have the option to buy a mutual fund or ETF that does (not advisable) or just not own them now to avoid potential problems later. In fact we may be seeing a rotation from the Nasdaq leading the market to either the DOW or S&P 500 taking over leadership.

This is an example of the problem with Index investing. If you own a fund or ETF that invests in the Nasdaq index your fate is tied to he FAANG stocks. Period. And there are certainly stocks to avoid in the Nasdaq beyond a couple of FAANG stocks. But there are many really good companies too. And even if these company’s stocks outperform, that performance could be wiped out by a few percentage point losses in the largest FAANG stocks. Make no mistake, the FAANGs move the Nasdaq.

Investment Outlook

At 401 Advisor, LLC we believe in proactive asset management. Too many people seem to think the only options to an investor are to hold stocks or sell them. We prefer a more subtle approach of finding areas of opportunity and selling areas the present a higher risk. We will be watching the three major indexes and if we see this rotation away from the FAANGs we are prepared to rotate our client holdings as well.

We currently hold QQQ in our client portfolio’s and may hold QQQE. Please feel free to contact Jim or myself if you have questions or would like to discuss your investment portfolio and stratgy.

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore CFP ® is an Investment Advisor Representative of 401 Advisor, LLC. They are also registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees, or affiliates.

Past performance is no guarantee of future results. All investing involves risk. Investments mentioned are not meant to be specific buy or sell recommendations without being taken in the context of an investors’ entire portfolio or investment objectives. Consult an investment professional before investing. 

And be sure to check out Jim’s new podcast:https://podcasts.apple.com/us/podcast/401-advisor/id1511923745

Market rally market crash

And the Dam Bursts…

Like an Orc being washed away by the waters behind the dam after its destruction, markets shorts are finding it equally hard to find their footing.

While many market pundits keep talking down the economy and scream that the market is “overvalued” leading to crash comparisons to (you choose) 2000-2002 Tech Wreck or the 2008-2009 Financial crisis, the market continues its upward trend.

Should investors be fearful? We think not. This has the makings to the start of a truly historic bull run. It may end ugly when it ends, but that could be a long way off.

Let’s look first at the economy. Readers should be familiar with the work done at www.econpi.com as I referenced it many times in the past. Quick refresher, http://www.econpi.com does a nice graphic for where the economy is, and by looking at past graphs you can clearly see where the economy came from.

“It’s the Economy, Stupid”James Carville

First, here is where the economy was prior to the Covid 19 outbreak:

The Red MOC – Mean of all the data coordinates and the Green LD – Leading Indicator plots are in the economic expansion quad.

The average for June:

Clearly in recession for both May and June.

And here is the first week of July:

We have moved into the recovery quad. This is a big incremental change in a week. While there is concern about the closing of the economy, most seem to agree that with masks and social distancing most businesses other than bars and fitness clubs will be opening, even if on a limited basis. Many pundits claim that business will take years to return to normal. I strongly disagree. The flood of consumers to beaches, restaurants and bars indicates to me a consumer that is desperate to return to their normal lives. The biggest exception I see is the airline and cruise industries.

“Don’t Fight the Fed”

Probably the one universal piece of advice to follow as an investor. This is from Fed Chair Powell,

“The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy… The Fed will continue to use these powers forcefully, proactively, and aggressively until we’re confident that the nation is solidly on the road to recovery.” (Congressional Testimony on 6/30/20)

How forceful? The Fed has already announced the creation of facilities to buy corporate bonds, asset backed securities, ETFs and now they have directed Blackrock to buy individual securities for the Federal Reserve account. None of which is allowed by Fed charter. And thus the above reference to the dam breaking. The Fed has literally unlimited resources to print money with the apparent adoption by this administrations of Modern Monetary Theory. There is no theoretical limit to money printing until the economy reaches full employment again. The dam has literally broken.

But let’s hear it from someone else, hedge fund billionaire and owner of the Milwaukee Bucks Marc Lasry in a Market Watch interview,

‘I know you’re not supposed to say this, but it’s a once-in-a-lifetime opportunity. You’re not going to see this again: Where you’ve actually got an economy that’s fine, and you’ve got a Fed pumping trillions of dollars in.’

Negatives? As always there are concerns, and the prudent investor needs to remain wary. Expect volatility especially over the next couple of weeks as earnings are announced for the second quarter.

The market is building up fuel like a California Forest waiting on a lightning strike to set it off. The lightning for the market? Hopefully a treatment or vaccine for Covid 19 that is actually available to the public.

Warning

How volatile the market is over the next six months is anyone’s guess. Between constant Covid 19 news, the election, riots, and protests daily gyrations could be severe. I personally think the biggest test will be if schools open and remain open in the fall. No schools and no football will be a huge psychological blow. If you have cash on hand now we strongly suggest picking and choosing several entry points over the next few months. No one can predict the short term, but the longer term outlook is looking very bullish.

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore CFP ® is an Investment Advisor Representative of 401 Advisor, LLC. They are also registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees, or affiliates.

Past performance is no guarantee of future results. All investing involves risk. Investments mentioned are not meant to be specific buy or sell recommendations without being taken in the context of an investors’ entire portfolio or investment objectives. Consult an investment professional before investing. 

And be sure to check out Jim’s new podcast: https://podcasts.apple.com/us/podcast/401-advisor/id1511923745

 Please email either of us with your questions and we will address them on future podcasts.

Dividend Investing

US News Logo

 

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.

Stock Report

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.

Covestor and MarketWatch Articles

The following article was just posted at CoVestor.com: Don’t Fight the Bank of Japan: DeShurko and Lessons for Investing in Bond Funds was just posted at MarketWatch.

 

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

Update on one of our Dividend and Growth Plus Strategy Holdings

DuPont beats by $0.04, misses on revenues. DuPont’s (DD) Q3 EPS came in at $0.45 and beat consensus by $0.04, while revenue climbed 5% to $7.73B but missed expectations by $50M. “Third-quarter sales volumes and operating earnings were stronger across most businesses compared to a soft quarter last year,” said DuPont Chairperson and CEO Ellen Kullman. “Fourth-quarter operating earnings will be up substantially from last year. For the full year, we are on track to deliver modest earnings growth.”

Comment: Earnings news is good for maintaining DuPont’s current 3.03% yield. With a modest 13.8 P/E ratio there should be positive momentum behind the stock price moving into the fourth quarter based on guidance for earnings to be up substantially in the fourth quarter.

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.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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