5 Stocks for a See-Saw Market March 31, 2009
Posted by Jack Hough in : Uncategorized , comments closedThe best way to invest money in stocks or stock mutual funds, financial advisors like to say, is “dollar cost averaging.” That means adding money a little at a time in equal amounts.
Mathematically, the advisors are wrong. Averaging will probably cost you more money than you save. Yes, your equal payments will buy more shares when prices are low and fewer when prices are high, thereby ensuring you pay a below-average price. But that is more than offset by two tendencies. First, stocks rise twice as often as they fall, and second, over long time periods they tend to produce powerful returns. The cost of waiting with the bulk of your money is likely to eclipse the lower price you get with the rest.
Still, I’d recommend averaging to just about anyone. It makes people feel safer, which is easily as important as tweaking their odds. And as with insurance, which is also a poor deal by the numbers (hence, the insurer’s profit), averaging will once in a while protect an investor from an unlikely but catastrophic event--like the one the stock market has recently produced.
Now is an especially good time for averaging, which works its magic at price extremes and so is just the thing for volatility. Last year there were 18 days on which the market closed up or down more than 5%. That’s as many as occurred between 1955 and 2007. This year seems as spastic. Mutual fund investors should by all means dribble new money in rather than dump it. Stock investors aren’t as flexible. If they add $500 a week, trading commissions can eat up half a year’s return. But stocks that pay generous dividends, when left to reinvest them, accomplish cost averaging on their own. In volatile markets, they can gradually shrink the holder’s average price.
The companies below are good candidates for cost averaging. Emerson Electric (EMR) raised its dividend in December, its 52nd consecutive increase. The company sells a broad range of automation, precision control, power and climate-control equipment. About 40% of income comes from emerging-market customers that management says are still growing, albeit slower than in recent years. Sales are expected to decline 11% this fiscal year ended September, but Emerson is solidly profitable and only modestly indebted, and trades at an inexpensive 11 times earnings.
Waste Management (WMI) controls just over a quarter of North America’s trash hauling. Most of its business is insulated from the economic slowdown, but some—removing waste for homebuilders and manufacturers, for example—has slipped. Earnings per share are expected to decline 8% this year. Shares are modestly priced at 12 times earnings, and a 4.5% dividend yield is more than covered by a free cash flow yield that’s expected to top 11% this year.
On the table are details on these and three more companies.
| Ticker | Company | Industry | Share Price | Forward P/E (Current Year) | Yield (%) |
|---|---|---|---|---|---|
| VZ | Verizon Communications | Telecom | $30.22 | 12 | 6.01 |
| MRK | Merck & Co. | Drugs | 26.55 | 8 | 5.60 |
| EMR | Emerson Electric | Industrial Equipment | 27.93 | 11 | 4.56 |
| WMI | Waste Management | Trash Disposal | 25.32 | 12 | 4.48 |
| HNZ | H.J. Heinz | Food | 33.19 | 11 | 4.93 |
SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.
13 Funds on Marathon Winning Streaks March 27, 2009
Posted by Jack Hough in : Uncategorized , comments closedIf investors weren't already queasy from months of wild swings in the market, then they're most likely grabbing for the Pepto-Bismol now. A 500-point surge Monday was quickly followed by three topsy-turvy sessions that saw double- and triple-digit dips and climbs. And while there's a chance that the Dow Jones Industrial Average may close its third straight week on an upswing, it's not much consolation for mutual fund managers who will still be left with massive losses.
Yet, there is a select group of funds pulling off quite a feat: Not only are they beating the return of the S&P 500 in 2009, but they have done so every year since 2002. Keep in mind that those years include both bull and bear markets, corporate scandals, a real estate bubble and its subsequent bursting and one of the worst financial downturns of the last century. Nevertheless, these funds managed to come out on top.
We call this week's screen the Bill Miller screen in honor of the legendary Legg Mason fund manager who beat the annual returns of the S&P 500 for 15 straight years. In order to construct it, we used Morningstar's fund screener tool to find equity funds that had beaten the S&P each year between 2002 and 2008 -- a period long enough to encapsulate both bull and bear markets -- and were on track to keep their streaks going this year, too. In addition, these funds had to charge below-average fees, carry good ratings, and be open to new money. Thirteen funds made our list.
In some ways, we are wary of highlighting this screen. Investing in a fund purely because of its "streak" can be a big mistake. After all, streaks inevitably come to an end and investors who jump in right before that time lose money. Just ask shareholders of Miller's Legg Mason Value Trust (LMVTX). The fund hasn't beaten the broad market on an annual basis since his streak came to a close in 2005. Likewise, Quaker Strategic Growth (QUAGX) beat the S&P 500 between 1999 and 2005, but has had an inconsistent record since then.
Our other concern is that there is more than one way to construct this screen. For example, what's more important for a fund: to beat the S&P 500 (as we have focused on) or its individual benchmark? We argue that any time a person veers part of their equity portfolio away from low-cost, ultraconservative index funds they're taking on risk. The success or failure of that gamble should be measured against the returns of that index fund. But weighing international or small-cap funds against the S&P 500 is also an apple to oranges comparison. There are some mutual fund experts who think small caps should be judged according to the returns of an applicable benchmark, like the Russell 2000. To be fair, we ran the screen that way -- and, of course, got completely different results. Click here to see a spreadsheet of a screen that features Permanent Portfolio (PRPFX), First Eagle Global (SGENX) and James Balanced: Golden Rainbow (GLRBX).
Using our method, one fund popped up that consistently makes our screens: Wasatch 1st Source Income Equity (FMIEX). Regular readers of this column may not be used to seeing the Wasatch name in front of this fund, but even though it has a new parent company the strategy hasn't changed. Manager Ralph Shive avoided the financial crisis by avoiding bank stocks and increasing the fund's cash position. "I was defensive before defensive was cool," he says.
Shive isn't sure the market is ready for a recovery, despite a decent March for stocks and government plans to kick-start the credit markets. "There is still too much structural damage," he says. However, he's gradually spending some cash and slowly building positions in the fund. Top holdings include Johnson & Johnson (JNJ), AllState (ALL), Microsoft (MSFT), General Electric (GE) and Pepsi (PEP). The fund is Morningstar's top large-cap value offering of the last decade.
As for the future, Shive says he expects more. "I'm still watching and waiting," he says. "We will have an uptick off the low, but whether that is sustainable is something we are still debating."
The Criteria: The equity funds on our list have beaten the annual returns of the S&P 500 in each of the 12-month periods between 2002 and 2008. They are also ahead of that benchmark in 2009, too. In addition, they are open to new money, charge an annual expense ratio under 1.5% and require a minimum investment less than $5,000.
| Ticker | Fund | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) | Assets (In Millions) |
|---|---|---|---|---|---|
| Source: Morningstar, Lipper Note: Data as of March 27, 2009 |
|||||
| AFBAX | AFBA 5 Star Balanced | -3.5 | 2.2 | 1.08 | 63 |
| AMANX | Amana Income | -2.5 | 6.7 | 1.32 | 512 |
| GABEX | Gabelli Equity Income | -9.3 | -1.2 | 1.43 | 737 |
| GABSX | Gabelli Small Cap Growth | -8.8 | 0.8 | 1.43 | 719 |
| EXHAX | Manning & Napier Pro-Blend Maximum Term | -9.1 | -0.5 | 1.10 | 288 |
| MDISX | Mutual Discovery | -2.8 | 6.2 | 1.02 | 11,303 |
| MQIFX | Mutual Qualified | -3.8 | 4.0 | 0.81 | 4,053 |
| JMCVX | Janus Perkins Mid Cap Value | -6.1 | 2.0 | 1.06 | 4,927 |
| PORTX | Portfolio 21 | -9.0 | -0.2 | 1.49 | 171 |
| PMBPX | Principal Mid Cap Blend | -9.0 | -0.4 | 0.91 | 479 |
| SMVTX | Ridgeworth Mid Cap Value Equity | -9 | 0.8 | 1.06 | 215 |
| CCEVX | Touchstone Value Opportunities | -10.1 | -0.6 | 1.14 | 116 |
| FMIEX | Wasatch 1st Source Income Equity | -7.0 | 2.5 | 1.04 | 828 |
SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.
5 Stocks for the Dollar-Confused March 27, 2009
Posted by Jack Hough in : Uncategorized , comments closedThe dollar is going to lose value. We know that for sure, just as we know stocks will go up. What we don’t know is how much value the dollar will lose and how soon, and whether it will gain briefly before it loses long term.
Scarce things become expensive and plentiful things become cheap. The dollar is valuable only because the U.S. government guarantees it can be used for things like paying debt and buying goods. The number of dollars America creates each year is limited only by policy makers’ desire for them. All things equal, most economists would prefer to create new dollars at a slightly faster rate than the economy’s growth rate, resulting in a gradual but controlled loss of buying power, called inflation.
Economists like to keep a little inflation brewing for more or less the same reason a fisherman likes to keep a little slack in the line: so that a sharp downward yank won’t break anything. The one thing a central banker doesn’t want is deflation -- for prices to fall. That sounds like it might be desirable because life would become cheaper, but if we all believed prices were going to fall we’d delay buying just about everything, putting more people out of jobs. As a nation, we’d grow poorer even as we saved. (John Maynard Keynes, a prominent British economist who died in 1946, called that the Paradox of Thrift.) By maintaining a few percentage points of inflation each year, central bankers hope to keep a cushion so that if demand for goods suddenly shrinks, prices will only rise less quickly, or perhaps flatten, but not fall.
So we know the dollar will lose value, at least gradually over long time periods, because we make it so. The best way to protect against that is to own things that rise in value faster than the rate of inflation. Businesses are ideal for that job, since if they sell things people want, people will keep exchanging labor for those things, no matter what currency serves as a go-between for labor and goods, and no matter what it’s worth. Shares of businesses protect investors from inflation. Savings accounts do not. Savings account holders are guaranteed not to lose dollars, but they can easily lose wealth. Because of the typically gradual nature of inflation, the risk is small over short time periods but grows larger over long ones.
There’s a hot debate at the moment over whether inflation is about to spike. Those who say it will point out that the government is spending trillions of dollars it doesn’t have to shore up banks, create jobs, boost lending and more. Much of it will be borrowed from other governments. It will have to be paid back, either through a dramatic reversal in the government’s recent tendency to far overspend its revenues, or by the creation of new dollars, which would make existing ones less valuable. The Federal Reserve, which is empowered to create dollars, has so far this year bought or announced the purchase of $1.25 trillion in agency-backed mortgage securities (“agency” meaning Fannie Mae and Freddie Mac), $200 billion in agency debt and, notably, $300 billion in long-term Treasurys. It can buy these things with a simple electronic credit and create money later to pay for them. Those who argue severe inflation is coming also say foreign governments who hold dollars -- China has an estimated two-thirds of its $2 trillion in currency reserves in dollars -- might lose confidence in its ability to hold value, and seek to put money elsewhere, thereby making the dollar even weaker.
Those who remain confident in the dollar say the threat of money being created is eclipsed by the drop in consumer demand and that deflation is the bigger risk. Inflation has recently fallen to zero. They say peer nations have it worse. Europe and Japan have aggressively borrowed, too, and Europe has more inflation. They say that the dollar still holds the bulk of the world’s currency reserves, even a decade after the introduction of the now-16-nation euro, because of its unmatchable depth and liquidity, and that foreign dollar holders who threaten to dump them and drive the value lower do so at their own loss.
My guess -- and it is just a guess -- is that we’ll leave this recession with inflation that is greater than what government economists would like but not nearly as great as doomsayers predict, and that the dollar will wobble against the euro and yen in the short term but not lose value to them in the long term. The thing to hold through all of it is stocks, and certainly not gold, which is called by many a good hedge against inflation but is in fact a poor one, for reasons I’ll explain here in coming days. If you’re uncertain about the near-term direction of the dollar, like me, own shares of companies that sell goods in many countries. I’ve listed a few below that have strong balance sheets, modest price/earnings ratios and decent dividend yields.
| Company | Ticker | Industry | Share Price | P/E | Yield (%) |
|---|---|---|---|---|---|
| Coca-Cola | KO | Soft drinks | $44.85 | 14 | 3.7 |
| Exxon Mobil | XOM | Oil and gas | 71.23 | 16 | 2.3 |
| Sanofi-Aventis | SNY | Drugs | 28.70 | 7 | 5.8 |
| Kimberly Clark | KMB | Personal products | 47.17 | 11 | 5.2 |
| Yum Brands | YUM | Restaurants | 29.86 | 14 | 2.7 |
SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.
7 Stocks for 10-Year Holders March 25, 2009
Posted by Jack Hough in : Uncategorized , comments closedStock screening software is handy for sorting cheap shares from pricey ones and determining which are recently rising. But it can’t tell which companies are neatly aligned with long-term societal trends. That means a search for stocks to hold for the next 10 years strays necessarily from the comfort of cold calculus to the gray of human judgment.
Still, I hope you’ll find the following points noncontroversial. For each, the computer has helped find some promising stocks—modestly priced ones attached to prosperous companies.
1. We’re getting old.
About 13% of Americans are 65 or older. By 2030, more than 20% will be, reckons the Census Bureau. The old spend less than the middle-aged on lots of things, but healthcare isn’t one of them. Four in five seniors have a chronic health condition like high blood pressure and diabetes, and half have two or more such conditions. Pills and prescription plans seem like good bets, but a greater role for government in coming years might crimp the profitability of either or both.
Companies that put paper medical records on computer networks, thereby saving money and improving results, seem more assured of growth. San Francisco-based McKesson (MCK) is North America’s largest drug distributor and a leading provider of information technology to hospitals, insurers and government health-care agencies. Its sales are growing nicely through the current recession, and its shares fetch less than nine times forecast earnings for the company’s fiscal year ending March 31.
2. We’re still fat.
Beyond fat, really: The obese, at 34% of the population, now outnumber the merely overweight, at 33%, according to the National Center for Health Statistics. I suppose that favors purchases of plenty of ordinary things in larger sizes, like pants and airplane seats, but the companies mostly likely to gain from these — Wal-Mart (WMT) and BE Aerospace (BEAV) — are more affected by other trends. Kinetic Concepts (KCI), based in San Antonio, makes vacuum-assisted systems for healing difficult wounds, like skin ulcers associated with diabetes, which is itself associated with obesity. It also makes specialty hospital beds, including ones that accommodate oversized patients.
Optimists might prefer to invest in diet plans and exercise. Companies that offer both are cheap right now; shares of gym chain Life Time Fitness (LTM) and diet programs Weight Watchers (WTW) and NutriSystem (NTRI) trade at 8 to 9 times earnings. Weight Watchers is the best diet plan, according to ConsumerSearch.com, which amalgamated opinions from a variety of sources, including Consumer Reports and The Journal of the American Medical Association. With budgets tight, sales for Weight Watchers are seen declining 9% this year, and those for NutriSystem are seen falling 14%. Life Time is growing sales, mostly because it is opening new clubs, not expanding sales at longstanding ones. NutriSystem, unlike the others, is debt-free, and it offers the plumpest dividend yield: 5.3%.
3. A house bubble has popped, but has left plenty of houses.
Prices are down 27% from their mid-2006 peak, according to S&P’s Case/Shiller index, last reported in February for December. But houses built during the frothy years — from 2000 to 2007 the number of housing units swelled 10% while the population increased less than 7% — remain. Not all are cared for; a record one in nine are vacant. Assuming prices will eventually find a level where buyers will move in, our huge housing stock will need plenty of paint and lawn care in years to come. Sherwin-Williams (SHW) leads the nation in paint sales, makes most of its money from touch-ups on existing houses, and has increased its dividend each year since 1979. Current yield: 3.2%. Shares are 14 times earnings. The Scotts Miracle-Gro Company (SMG), true to its name, is increasing sales in what seems like an unlikely setting. Shares sell for just under 15 times earnings, but those earnings are expected to grow by double-digit percentages this year and next. The dividend yield seems in need of a spritz or two of growth spray, at just 1.5%.
| Company | Ticker | Price | P/E | Yield |
|---|---|---|---|---|
| McKesson | MCK | 36.27 | 9 | 1.4 |
| Kinetic Concepts | KCI | 19.78 | 6 | n/a |
| Lifetime Fitness | LTM | 11.28 | 7 | n/a |
| NutriSystem | NTRI | 14.14 | 9 | 5.3 |
| Weight Watchers | WTW | 19.35 | 8 | 3.7 |
| Sherwin-Williams | SHW | 50.2 | 14 | 3.2 |
| The Scotts Miracle-Gro Company | SMG | 33.97 | 15 | 1.5 |
SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.
5 Small Caps to Lead a Recovery March 24, 2009
Posted by Jack Hough in : Uncategorized , comments closedI’ve no idea whether small companies will lead America’s stock market recovery, just as I’ve no special insight into whether that recovery has already started. But now nonetheless seems a fine time to buy small-company stocks. Here’s why, with a few names to consider.
Small-company stocks have led the way out of recent recessions. They beat large-company stocks over the three-year periods following economic potholes in 1981-82, 1990-91 and 2001. That’s noteworthy, but it’s not proof. After all, value stocks outperformed in past recessions. Before this downturn, most of us thought of that as a rule; stocks that are cheap relative to earnings have less to lose when earnings decline. But value stocks have done much worse than growth stocks during this downturn. Cheap stocks are usually attached to flawed businesses, and under severe enough conditions, it’s now apparent, those flaws can sink companies.
Perhaps the small-company assumption will prove wrong, too, in coming months. So far this year, in fact, small-company stocks have fallen about seven percentage points more than large-company ones.
Consider a longer view. In a recent note to clients, asset manager James O’Shaughnessy pointed out that stocks returned 3.9% a year after inflation over 40 years ended February. That’s their worst 40-year performance since they returned 3.8% a year through December 1941, a stretch that covered the stock panic of 1907, World War I, the Great Depression and the bombing of Pearl Harbor. After December 1941, stocks went on to beat inflation by 10% a year over the next five years, 11% a year over a decade and 13% a year over two decades. Small-company stocks returned twice as much over five and 10 years and a few percentage points more over 20. Again, it’s a promising sign, if not a promise, for small-company investors.
Small companies have shallower financial resources than large ones, and they’re more susceptible to stock declines brought on by short-selling. Both might have played a part in their recent underperformance, but short-sellers might now be feeling less bold with stocks up 20% in two weeks, and a move detailed Monday by the Treasury Department to free banks to lend (albeit at a cost to dollar stability) is likely of greatest relief to small companies.
Again, though, that’s speculation. All I’m truly confident about is that small-company stocks tend to beat large ones over long time periods, and that they’re fairly priced now. The small-company effect, as it’s known, was first documented in 1981 by researcher Rolf Banz and has been substantiated in hundreds of studies since. Over long time periods, small-company stocks tend to beat large ones by about two percentage points a year. So accepted is this phenomenon that researchers looking for other performance predictors usually mute the small-company effect by adjusting their results for company size. Investors ought to pay more for a performance edge, but right now small companies and large companies carry identical price/sales ratios of 0.6.
The six companies listed below have stock market values between $200 million and $1 billion, grew their sales and profit in their most recent quarter and have manageable debt loads.
Hittite Microwave (HITT) is down 16%, half as much as the broad market, since I recommended the stock in August 2006. The “fabless” chip maker — one that designs chips but doesn’t fabricate them — has maintained high profitability, and while its recent sales growth might be difficult to sustain, the company looks likely to take share from struggling, capital-intensive peers.
Jos. A Bank (JOSB) sells its own brand of suits and casual dress clothes. I’ve recommended the stock several times starting six years ago at $10 and change. It’s $27 now, but it topped $40 three years ago. Bank is a rare example of a clothing chain whose sales are growing at the moment, and its shares at less than nine times earnings seem plenty cheap.
Warnaco (WRC) was just barely large enough to make a September 2005 search for promising companies worth $1 billion or more. I singled out the underpants maker’s stock as looking likely to ride up. Instead, it has sagged 11%, but the broad market has dropped 34%. The company remains profitable and generates ample cash, which should allow it to pick up business as struggling textile firms close shop.
| Company | Ticker | Industry | Share Price | Market Value ($mil.) | Forward P/E |
|---|---|---|---|---|---|
| Data as of March 23, 2009 | |||||
| Cal Dave International | DVR | oil & gas services | $6.78 | 640 | 9 |
| Hittite Microwave | HITT | semiconductors | 31.98 | 960 | 24 |
| Jos A Bank Clothiers | JOSB | clothing stores | 27.71 | 506 | 9 |
| Middleby | MIDD | diversified machinery | 31.05 | 575 | 10 |
| Warnaco Group | WRC | clothing manufacturers | 22.75 | 1040 | 9 |
SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.