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.
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.
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
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
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.
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
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.
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.
The Fed-inspired rally continues, however caution is warranted.
This might be a time to recall the Wall St. adage, “It’s not what you make, but what you keep”. For some time now the only real economic positive (to the stock market) has been the continued monetary policy (QE III) of the Federal Reserve. Low rates have forced many investors out of the safety of CD’s and bonds and into riskier stocks in search of return. Trouble is that policy has only ½ worked.
According to an article at buinessinsider.com, the smart money has been net sellers this year, while the retail (individual investor) has been the buyer. In other words, what Bank of America Merrill Lynch’s (BAML) big clients have been selling, their brokers have been finding buyers among their individual clients. Anyone a client of BAML and gotten a call this year about what a great deal stocks are? Next time you might want to ask why all the big guys are selling if stocks are such a great buy!
Here’s a piece of the story. And a link to more:
So far in 2013, BAML’s retail clients have put $7.37 billion into equities, while big institutions have taken $10.69 billion out of the stock market, and hedge fund clients have reduced their holdings of the asset class by $423 million.
My Take
I’ve felt for some time that we are just along for the ride. There just aren’t solid fundamentals to justify this year’s gains, let alone a continued rally. However, all year, the “story” has been that the economy and corporate earnings will accelerate into the end of the year and continue through 2014. We have just started 2nd Quarter earnings reports, and along with actual earnings we will hear about outlooks for 3rd Quarter and beyond. This “guidance” hasn’t been great, but we are still early.
The question will be, if the earnings outlook is gloomy, can the Fed’s reassurances that ZIRP (zero interest rate policy) and a continuation of QE III be enough to keep the market afloat and bring back some of the “big” money?
My advice is to have a plan, and stay nimble.
At 401 Advisor, LLC one of our three investment strategies for our client assets is a model that primarily uses dividend paying stocks to produce cash flow. Dividends can be paid out to clients for income, or reinvested to provide portfolio growth through the purchase of additional shares.
The one disadvantage of choosing a strategy that narrows the investment options (only stocks that pay dividends in this case), is that different subsets of the overall market will both outperform and underperform the entire market for different periods. From the beginning of May through the end of June was one of those periods of underperformance for dividend paying stocks. Not only did we see underperformance, but we also saw uncharacteristic volatility. I wrote about this on my post on June 21, “Market Comment“.
This is when having a strategy that fits your investment goal is important. Matching strategy to objective allows us to focus on what is most important to our clients. In this case, income and preferably rising income.
I looked at 17 of our portfolios’ top holdings. While this would not necessarily represent any individual’s portfolio, every one of our Dividend and Growth Opportunity strategy investors will hold several of these stocks. For the averages I just used a simple average and looked at stocks only, none of the ETF holdings.
I first looked at each holding’s price performance from May 1, 2013 open through the close on June 21st. I then looked at the first dividend paid in 2013 and the most recent and annualized the two to look at the difference.
Taking a simple average the “portfolio” has a year to date price gain of 4.17%, but a loss of 4.67% from May 1 through June 21. For an investor on January 2nd, the portfolio yield would have annualized to 4.57% for the year based on first quarter dividend payments. But based on the most recent dividend payments, the annualized yield would be 4.69%, a raise of 2.56% (annualized to 5.12%). Plus dividend stalwarts McDonalds and Verizon typically raise dividends in the third quarter. With official inflation running at about 1.5% our income investors have received a nice raise in return for the volatility we’ve seen this year. In fact our largest loser in the portfolio, UHT has actually increased its dividend from $0.62 per share to $0.625 per share. Relatively small, but showing that a yield increase is not dependant on price appreciation.
For a retiree especially, income and income growth are their typical primary investment objectives. Well chosen stocks, based on free cash flow analysis, will continue to pay, and as we’ve seen actually increase dividend payouts, even in declining markets.
Despite recent weakness and some continuing uncertainty over rising interest rates, a focus on dividends is a long term profitable strategy. Below is a graph from Ned Davis research that shows that dividend paying stocks, and specifically stocks that increase their dividends outperform the overall market.
The attached article was published at horsesmouth.com on 5/2/2013. While the market continues to show technical strength, key economic data is deteriorating. While we remain fully invested, we are rotating portfolios to lower risk holdings.
The data looked good until the last half of April. Now the five factors needed for a continued rally have taken a decided downturn, prompting one advisor to move into a low-beta strategy and collect dividends over the summer. His advice? Watch SPLV and JNK very closely.
Recently we’ve seen a turn in economic data that may be showing a soft patch ahead for our economy. But with a plethora of data to choose from, which data really matters?
In the past I’ve used a study by Citi equity strategist Robert Buckland that suggests that after a significant increase in the market, there are five factors that determine whether an existing rally can continue.
But before we look at that data, let’s first take a quick technical look at where we are according to three indicators: SPY (SPDR’s S&P 500 Index tracking ETF), SPLV (PowerShare’s S&P Low Volatility Index tracking ETF), and SPHB (PowerShare’s S&P 500 High Beta Index tracking ETF).
Below is a year-to-date candlestick chart of SPY, with the 200-day simple moving average (SMA) in yellow. SPY is clearly trading well within its uptrend—as indicated by the white lines—which started in November of 2012.
Despite the media’s Chicken Little reaction on every down day, the candle chart provides a quick visualization showing that volatility also appears to be well within a “normal” range. And, finally, SPY is trading well above its 200 SMA, a common indicator of the strength and future direction of the market, as long as the 200 SMA also continues to show an upward trend.
Figure 1:SPY 12 Months
Source: http://www.freestockcharts.com
In Figure 2, below, I’ve added SPLV (yellow line) and SPHB (blue line) to the graph of SPY (green and red line). I’ve also changed the time frame to a year-to-date view. The white trend line shows that SPHB has turned negative since about mid-March, while SPLV has continued to show gains.
The result has been a relatively flat SPY. This shows a definite rotation from riskier high-beta stocks to lower-risk, lower-volatility stocks. While this is a “risk-averse” move, it is significant that SPLV is still showing a positive trend. Investors to do not appear to be concerned about a broad market sell-off but are apparently (and logically) looking for the lowest-risk securities—probably as an alternative to near-zero-interest-rate bonds. More dividend-paying securities will be in the SPLV index than the SPHB index.
Figure 2: SPY vs. SPHB vs. SPLV Year-to-Date
Source: freestockcharts.com
This is a graph I look at on a weekly, if not daily, basis. We moved out of SPHB and into SPLV for our Seasonal ETF strategy at the beginning of April. I will get very defensive if SPLV starts showing a downtrend along with a continuation of SPHB’s down trend.
Back to the fundamentals
While a rotation from SPHB to SPLV could just be an indication of investors looking for yield, it could also be an early warning sign of bad things to come. Do the fundamentals warrant a continued rally or a sell-off?
Let’s use Citi strategist Robert Buckland’s five criteria for a continued rally to help us determine whether this upturn might continue. We rank each criterion as a positive, negative, or neutral development:
Assessment
When I looked at this data in February, all five criteria were positive. Looking back at the economic report tables, I’d say this data has been fairly positive until just the last half of April.
And that’s the problem with economic forecasting. At inflection points, it is impossible to know whether or not a turn in data is an aberration, a temporary blip, or the beginning of a trend reversal. The one point that keeps me mildly optimistic is that virtually every forecaster predicted a soft first quarter for 2013. So this has not been a surprise.
Investment strategy
I follow the “sell in May” strategy supported by The Stock Trader’s Almanac and their research. However, we use a low beta strategy instead of cash for the “go away” period. As I noted earlier, we replaced SPHB with SPLV a month ago. I would expect that we will have completely rotated into our summer low-beta holdings by the end of the week.
For our dividend portfolios, we have already adopted a low P/E screen to our holdings. I hope that a relatively low valuation and high dividend yield combination will prove to be a solid defensive strategy as well as providing reasonable gains over the next several months.
What I’ll be watching
For our seasonal strategy, we simply will not get more aggressive until the October/November time frame. We’ll collect dividends over the summer. However, we can—and will—get more defensive if conditions warrant. At this point, I am watching SPLV very closely. If it establishes a negative trend along with SPY and SPHB, I will be very concerned. I would look at the equity fund flow data to confirm that interest in stocks has waned to dangerous levels. In our dividend strategies, I hold JNK (SPDR Barclays Capital High Yield Bond ETF) for a combination of yield and as a tactical position. JNK continues to provide a slow but steady appreciation in its NAV. However, I am very nervous when high-yield debt is only paying a 6.01% yield (JNK yield from MarketWatch.com as of 4/28/2013). If JNK stalls or turns negative, we will move this holding to cash very quickly.
In my last post I said that we were growing increasingly concerned over the deteriorating market since last week’s election.
A key area of support historically has been the 200 day moving average (DMA). The DMA is just the average price of a stock or an index for the past 200 market days, or approximately one year. When the current price drops below the average price of the past year, it has been common to see a much deeper decline. While it is always tempting to say, “This time is different” things rarely really are different. The reasons the market may go down, or up, will always be different, but the actual market cycles are really fairly consistent.
As of the market close on Thursday the 15th, SPY – the S&P 500 tracking ETF, has closed below the 200 DMA for 4 of the last 5 days. We consider this to be a very bearish sign. So far, we have sold 20% of our most volatile holdings in our ETF Seasonal Growth strategies leaving us with a 25% cash position. In our income strategies we have sold up to a 20% position and have also kept that in cash. Our smaller growth accounts that only trade one security are all in cash. Our 401(k)’s are still fully invested. Due to the trading restrictions in 401(k) plans we do delay our buys and sells to try and avoid “whipsaws.” That is getting a signal to get right back into the market after a sell signal. This can result in trading restrictions from the 401(k) plan.
Looking forward, we will continue to sell holdings in our growth strategies, and buy a “short ETF.” A security that goes up, when the market goes down, to further hedge our accounts. Our dividend portfolios will go short with 20% of their holdings. I’ll also look at holdings and focus on defensive industries. Currently we are over weighted in energy and I plan on continuing that overweighting. I would expect the 401(k) accounts to go to cash in the next couple of trading days, unless we see a dramatic improvement in the market.
Look for future posts as we do make portfolio adjustments.
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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.
Bill DeShurko 