5 Stocks Yielding 4% — or More June 30, 2009
Posted by Jack Hough in : Uncategorized , comments closedDividends are in the dumps. For 11 years ended 2007, the S&P 500 carried a yield of less than 2% compared with a historic average for stocks of closer to 5%. Share prices have plunged since 2007, so the index’s yield should have fattened to 3% or so. Instead, it's on its way to dipping below 2% thanks to financially distressed companies that have slashed payments. S&P reckons dividends this year will hit their lowest percentage of profits since 1938.
That said, hundreds of companies pay at least 4% at the moment. That’s about double the average rate offered by banks on one-year certificates of deposit. Of course, CDs offer a guarantee of principal protection, but they come with some unwanted guarantees, too. They are guaranteed not to increase in value beyond their interest payments. The payments themselves are guaranteed not to grow during the life of the CD. If inflation picks up, long-term CDs are almost guaranteed to fall behind in their ability to protect investors’ buying power.
A 4% dividend yield, by contrast, can grow over time, offers the potential of capital gains on the side and can help protect against inflation. Of course, all of this depends on the company paying the dividend, and its prospects for prosperity in coming years. Below are five financially strong companies paying more than 4%. Each has a modest valuation and relatively stable sales.
Philip Morris International (PM) sells Marlboro and other top cigarette brands in 160 countries outside the U.S. The stock is more expensive than its domestic sibling, Altria (MO), at 14 times forward earnings versus 9. The International company also comes with a smaller dividend: 5.1%, compared with 7.8% for the American company. But those numbers still compare favorably with the broad stock market, and Philip Morris International has limited exposure to lawsuits and better growth prospects than the U.S. tobacco industry.
ConocoPhilips (COP) stock trades at less than half its price of a year ago, when Warren Buffett was loading up on shares for his investment vehicle, Berkshire Hathaway (BRK.B). It’s by no means the top performer in the oil and gas industry. Analysts expect the company’s production to flatten for the next few years after an increase of 3% or so this year. To help make up for its weak production outlook, Conoco has been an aggressive acquirer. As a result its debt since 2005 has increased from 19% of capital to 34%. That’s a manageable sum, but it reduces the portion of the company’s cash flow that’s free to be put toward new drilling. All that said, Conoco sells for less than 13 times this year’s pitiful earnings forecast and less than 7 times what Wall Street figures the company might earn next year. Relative to the company’s profits, its 4.5% dividend yield looks plenty affordable.
Will Verizon (VZ) get the iPhone next year, once Apple’s exclusivity pact with AT&T (T) runs out? There’s a good chance, judging by Apple's recent announcement that long-awaited data features for its iPhone are now available through most carriers world-wide, but won't be available until later this year through AT&T. The real reason to like Verizon isn’t just that it provides the least-bad cellphone service of a sloppy bunch, but that its stock comes with one of the biggest, affordable dividend yields around: almost 6%. Sales are expected to increase 11% this year, as its flourishing wireless business more than makes up for withering landline accounts.
Have a look if you like at details on these and the other two high-yielders below.
| Company | Ticker | Industry | Share Price | Price Change YTD (%) | Forward P/E | Yield (%) |
|---|---|---|---|---|---|---|
| Verizon Communications | VZ | Telecom Services | $30.99 | -8.6 | 12.25 | 5.9 |
| Philip Morris International | PM | Cigarettes | 42.61 | -2.1 | 13.79 | 5.1 |
| Bristol-Myers Squibb | BMY | Drugs | 20.96 | -9.9 | 10.92 | 5.9 |
| H.J. Heinz | HNZ | Food | 35.72 | -5.0 | 13.38 | 4.7 |
| ConocoPhilips | COP | Oil & Gas | 41.62 | -19.0 | 13.00 | 4.5 |
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Funds Making Money in the World’s Riskiest Markets June 26, 2009
Posted by Jack Hough in : Uncategorized , comments closedRob Lutts, president of Cabot Money Management in Salem, Mass., routinely travels to Pacific Rim countries like Vietnam and Singapore — so-called emerging markets — in search of undervalued stocks. He’s become so comfortable with investing outside the U.S. that as much as 30% of his aggressive growth portfolios are exposed to overseas markets like these.
“I am not trying to replicate the returns of some index,” says Lutts. “I want to grow my clients’ money.”
Considering that the average emerging market fund lost 55.5% last year (the plain vanilla S&P 500 index fund lost 37.3%), Lutts' heavy weighting may sound surprising. To some, however, the move is prescient. As investors take their money off the sidelines they are investing in both U.S . equities and international ones. According to Lipper, the average emerging markets fund is up 33.3% this year. Such a performance is reminiscent of the category’s pre-2008 levels when investors flocked to investments in countries like China and India.
Of course, it's hard to tell if the latest run will continue. SmartMoney.com decided to focus on emerging market offerings this week to see which funds are pulling ahead of the pack. There are 464 funds and share classes in our database that focus on emerging markets like China, India, Russia or regions like Latin America. We disqualified 401 for charging a sales load. We then searched for funds that had low fees and above-average three- and five-year track records. In addition, the funds needed to have a year-to-date return that exceeded the average international offering. In the end, we were left with just two funds.
Investing in emerging markets come with risks — and rewards. In a good year, the typical emerging market fund can easily outpace their U.S.-based counterparts. That was certainly the case in 2006 and 2007 when China funds gained over 50% both years.
But there are plenty of stumbling blocks that can puncture that performance. Liquidity — the idea that investors can build a position and then sell it when they want — is often a problem especially in smaller emerging economies.
These markets can also be volatile as the hot money tends to exit as quickly as it enters. And investors must also consider geopolitical risks, like those playing out in Iran or North Korea.
All those concerns make picking the proper investment vehicle a difficult task. Lutts prefers to buy the shares of individual companies he comes across during his travels. Baidu.com (BIDU), the Google-like search engine company based in China, is one of his favorites.
But if individual stock-picking seems too risky, another way to play emerging markets is to invest in an ETF geared toward a particular country. The iShares exchange traded fund family has made it easy to either bet on regions or individual countries. For example, the iShares Turkey (TUR), South Africa (EZA), Brazil (EWZ) and Taiwan (EWT) funds each focus on those respective countries. Investors should just be mindful that ETFs such as these still come with a lot of volatility.
“We are allocating more money to emerging markets,” says Robert Phillips, managing partner of Spectrum Management Group in Indianapolis. But, he warns: “It doesn’t take a lot of money flows to influence prices.”
Another option is an index fund. Vanguard Emerging Markets Stock fund (VEIEX) owns stocks in about two dozen emerging markets. Its largest holding is China Mobile. An alternative to an index fund is to pay for a managed offering in order to gain access to a manager who knows the ins and outs of overseas investing. We’ve included both types of funds in the table below.
The Criteria: The funds that made our list this week are classified in Lipper’s emerging markets category. They are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio less than 1.5%. Their three- and five-year track records put them in the top 40% of that category. In addition, they also had to beat the year-to-date performance of the typical international fund, which, according to Lipper, stands at 14.2% through Thursday. As usual, we did not include load funds.
| Ticker | Name | Assets ($ Millions) | YTD Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) | Minimum Initial Investment |
|---|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of June 25, 2009 |
|||||||
| PRLAX | T. Rowe Price Latin America | 1955.2 | 47.43 | 10.41 | 27.01 | 1.22 | $2,500 |
| VEIEX | Vanguard Emerging Markets Stock Index | 5414.7 | 33.83 | 4.43 | 14.08 | 0.32 | $3,000 |
Fund Type = Emerging Markets *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 40
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) >= 14.2%
* The screen does not include emerging market fixed-income offerings.
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5 Companies With Understated Earnings June 24, 2009
Posted by SmartMoney.com - Screens in : Uncategorized , comments closedIn crime movies, investigators sometimes ask a suspect to tell the same story twice, and listen for discrepancies between the two versions. Stock investors can do something similar by comparing two measures of how much money companies make: earnings and free cash flow. The results aren’t likely to uncover foul play, but they might help predict stock returns.
Free cash flow is simply the money a company puts in the till each quarter. Earnings are how much it would have put in the till if not for, say, the purchase of a new factory. In earnings accounting, the factory’s cost gets broken into small quarterly charges to be deducted over the factory’s projected life. While that might seem complicated, investors tend to fixate on earnings because the measure smoothes the effects of big, sporadic investments and thus makes it easier to tell whether companies are making more money from one year to the next. Lenders prefer to watch free cash flow, since it gives a better sense of financial strength.
Over long time periods, the two measures tend to revert to each other because they track more or less the same thing using different timing. Therein lays a clue to stock performance. When a company’s paper earnings are puny but its free cash flow is strong, it could be a sign that earnings are temporarily depressed and due to rise. Since stock investors tend to shun companies with poor earnings but flock to ones with strong earnings, a company with understated earnings relative to its free cash flow might be poised to produce generous stock returns.
University of Michigan professor Richard Sloan published a landmark study of the matter in 1996. He found that companies whose earnings were understated relative to their free cash flow returned 10 percentage points a year more than those whose earnings were overstated. Dozens of follow-up studies published in recent years have continued to document this “accrual anomaly,” as it’s called. (“Accrual” is an accounting term for those earnings excuses that cause the measure to differ from free cash flow.)
Stock investors can use the accrual anomaly in two ways. The first is to pay attention to the difference between earnings and free cash flow for the companies they invest in. When a company consistently reports stellar earnings but weak free cash flow, investors ought to be wary. The second way is to run a stock screen for companies with more free cash flow than earnings. Such companies might be understating their prosperity at the moment, making their shares temporarily cheap.
Note that while earnings are listed on companies’ financial tables, free cash flow isn’t. Some finance web sites and stock-screening programs list the measure, including SmartMoney.com and its screener. Investors can also calculate free cash flow on their own with a bit of hunting through financial tables, but no tricky math. Start with earnings (found on the income statement), add depreciation and amortization (income statement), subtract capital expenditures (cash flow statement) and subtract any change in working capital (balance sheet—it’s the net of current assets and current liabilities).
Easier still, have a look at the five recent screen survivors below. All produced far more free cash than earnings over the past year, have low share prices relative to their free cash flow and pay decent dividends. Genuine Parts (GPC) and Pitney Bowes (PBI) are up 25% and 16%, respectively, since this column recommended them in March for their meaty dividends. Home Depot (HD) is perhaps an odd stock to embrace during a housing downturn, but a secure 3.8% yield adds appeal and some analysts believe even a muted housing recovery could double the company’s profits. Eli Lilly (LLY) boasts growing sales despite lax consumer spending, since drugs aren’t especially sensitive to the economy. Finally, Illinois Tool Works (ITW), a roll-up of more than 800 small industrial businesses that make everything from welding equipment to refrigerators, has reported soft sales of late but is using the downturn to buy struggling firms on the cheap.
| Company | Ticker | Industry | Share Price | Trailing Free Cash Flow ($ mil.) | Price / FCF | Yield (%) |
|---|---|---|---|---|---|---|
| Home Depot | HD | Home Improvement Stores | $23.25 | 3584.00 | 11.05 | 3.87 |
| Eli Lilly & Co. | LLY | Drugs | 33.22 | 4760.90 | 8.02 | 5.90 |
| Illinois Tool Works | ITW | Diversified Machinery | 34.46 | 1848.65 | 9.31 | 3.60 |
| Genuine Parts | GPC | Auto Parts | 32.57 | 487.48 | 10.65 | 4.91 |
| Pitney Bowes | PBI | Business Equipment | 20.76 | 790.42 | 5.42 | 6.94 |
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5 Soaring Stocks Analysts Have Overlooked June 23, 2009
Posted by Jack Hough in : Uncategorized , comments closedStock opinions are suddenly scarcer on Wall Street. With Bear Stearns and Lehman Brothers laid to rest and remaining investment banks withered, fewer analysts are left to forecast company earnings and issue recommendations on whether to buy shares. The Wall Street Journal reports an epidemic of dropped coverage since September. Since most analyst coverage is favorable — the number of “buy” calls consistently dwarfs the number of “sells” — corporate managers worry that dropped coverage could lessen investors’ enthusiasm for their shares.
For investors shopping for stocks, the news is mostly good. Screening software can help identify plenty of young companies that are growing nicely through the current recession, but which are largely being ignored by analysts -- at least, for now. Such companies might be among the first to benefit when investment banks replenish their research staffs and go hunting for new stocks to recommend.
The five companies listed below are covered by fewer than five analysts even though they have increased their sales and earnings per share by at least 10% apiece over the past year, and their shares are up nicely year to date.
Global Cash Access Holdings (GCA) earns generous fees helping casino gamblers get their hands on more cash after they've emptied their wallets. How generous are those fees? While casino partners like MGM Mirage (MGM) and Las Vegas Sands (LVS) are watching profits evaporate this year amid a travel downturn, Global Cash is expected to increase its sales by 8% and its profits by 11%. For now, the company makes most of its money operating its patented “3-in-1” cash machines. These prod customers who are denied bank withdrawals the opportunity to try their debit cards and then go for credit card advances, all in one seamless transaction (which, presumably, doesn’t feel the least bit like a Central Park mugging). Global Cash also earns smaller amounts by helping casinos determine which gamblers to lend house money to, and by telling casinos which rivals their customers have withdrawn cash from in the past. Eventually, the company hopes to replace cash machines and teller windows with a cashless system whereby gamblers simply enroll their bank accounts and credit cards. Its shares trade at just nine times earnings.
Retail has taken a beating over the past year and clothing stores are among the hardest hit. One relatively small chain that operates out of strip malls in low-income neighborhoods is prospering, though. Citi Trends (CTRN) has just over 350 stores in 22 states and explains in its financial filings that it competes against fellow discounters like TJX (TJX) and Ross Stores (ROST) by “appealing to African-American consumers and offering urban apparel products.” According to Oppenheimer & Company, its customers demonstrate a “high propensity to purchase apparel.” The chain enjoys one of the fastest payback periods in the industry — new stores earn back their upfront investment in about a year. Citi Trends’ growth potential isn’t lost on investors. Shares go for 18 times forward earnings. But the company has made a mockery of quarterly earnings estimates of late, topping them by double-digit percentages. It’s also debt-free with $3 a share in cash.
America’s Car-Mart (CRMT) sounds like just the sort of company for investors to avoid. However, it's benefitting from the dismal car sales seen at large dealerships over the past year. The company specializes in the low end of the used-car trade in states like Arkansas, Oklahoma and Kentucky. In the company’s most recent quarter, sales at longstanding dealerships improved nearly 3% and company profits rose 8%. Management used strong cash flow to pay down debt, which stands at a modest 24% of equity. In addition, stores are requiring higher down payments on car loans vs. a year ago, and late payments and defaults are down. Shares fetch 12 times earnings.
Have a look if you like at the details on these and the other two screen survivors below.
| Company | Ticker | Industry | Share Price | Price Change YTD (%) | Sales Growth Past Year (%) | Forward P/E |
|---|---|---|---|---|---|---|
| Citi Trends | CTRN | Clothing stores | $23.62 | 60 | 13 | 17.5 |
| AZZ | AZZ | Industrial equipment | 32.24 | 28 | 29 | 11.3 |
| America's Car-Mart | CRMT | Used car dealerships | 17.66 | 28 | 16 | 12.0 |
| Global Cash Access Holdings | GCA | Credit services | 6.71 | 202 | 20 | 9.0 |
| Milti-Fineline Electronix | MFLX | Citcuit board manufacturing | 19.94 | 71 | 25 | 13.0 |
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22 ‘Go Anywhere’ Funds That Are Thriving June 19, 2009
Posted by Jack Hough in : Uncategorized , comments closedWhen the stock market takes a prolonged tumble, there's an argument to be made that fund managers with the flexibility to invest across the market capitalization spectrum have an added edge over competitors that are confined to a certain niche. The rationale? That these managers can easily move out of trouble spots and into areas with more growth potential, while the others can't help but get caught in the turmoil.
That's a key selling point for so-called "go anywhere" funds or what Lipper tags as multicaps. These funds can invest in every corner of the stock market — and that agility seems to be paying off. According to Lipper, the average multicap fund is up 7.1% this year through Thursday. That's almost five percentage points better than the typical S&P 500 index fund and second only to midcaps when it comes to mainstream fund category performance.
This week the SmartMoney fund screen focuses on this sector, which includes 1,608 funds and share classes. We narrowed that group to 296 offerings by disqualifying load funds. In addition, we looked for funds that charged below-average fees and have top-tier three- and five-year performance track records. Their 2009 return also had to exceed that of the S&P 500. That left us with the 22 funds on the table below.
We have been keeping a close eye on this category all year for signs that it may be breaking away from the pack. When we last looked at multicaps in early March, the category as a whole was down an average 21.2%. The stock market bottomed out a few days later and has since gone on a remarkable run, gaining by more than a third. Midcaps — a category we advised you to watch two weeks ago — has been the biggest beneficiary of that rally. The average fund in that niche is up 9.2% this year. "We remain buyers of...midcaps," said Citigroup's small-cap and midcap equity strategist Lori Calvasina in a recent report. "We would use any near-term weakness as an opportunity to add to positions." Many of the managers of the top-performing funds in the table below have taken a similar position and have large exposure to that area in their portfolios.
Of course, there are some issues that arise when investing in multicap funds. Some advisors shy away from the category because they make asset allocation difficult. After all, an advisor can't accurately judge a client's exposure to, say, small caps, without knowing what the multicap fund owns (and that's only disclosed a few times a year). However, this can actually work in investors' favor, too. Many market watchers think stocks will soon experience a pullback before inevitably rebounding. Health care, technology, growth and small-cap stocks are all believed to be sectors that could outperform in that scenario. Instead of making a bet on each of those areas, investors can simply buy a multicap fund that has exposure to them all.
One interesting trend that emerged when we did our screen is that most of the funds in our table are managed by independent firms and several are family-run offerings. In honor of Father's Day, we recently spoke with several father-and-son investing teams including the men behind the Croft Value fund (CLVFX), which is run by Gordon Croft and his two sons, Kent and Russell. One secret they slipped us: Don't move with the pack. Says Russell Croft: "The search for inherent, hidden value with a contrarian nature — we got that from our father more than anything." The fund has returned an average annual 2.4% over the last decade, good enough for a top 10% spot in Morningstar's large blend category. Key holdings as of the fund's latest filing date include Weyerhaeuser (WY), Johnson & Johnson (JNJ), Deere (DE) and Cisco (CSCO). Year to date the fund is up 11%.
We would also suggest looking at Amana Growth (AMAGX), Auxier Focus (AUXFX), Becker Value Equity (BVEFX), Westport (WPFRX) and the Yacktman funds. The funds have seasoned managers, good track records and low fees — all the beginning hallmarks we look for in a mutual fund.
The Criteria: The multicap equity funds on our list are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio less than 1.5%. The funds have three- and five-year track records that put them in the top 25% of their category. In addition, they're beating the 2009 return of the typical S&P 500 index fund. Finally, we did not include funds that charge a sales load.
| Ticker | Name | Assets (In Millions) | Year-to-Date Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) |
|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of June 18, 2009 |
||||||
| AMAGX | Amana Growth | 1046.7 | 8.32 | -0.75 | 7.21 | 1.31 |
| AUXFX | Auxier Focus | 84.3 | 5.49 | -1.92 | 1.32 | 1.35 |
| BIOPX | Baron iOpportunity | 125.0 | 24.58 | -2.22 | 2.45 | 1.42 |
| BVEFX | Becker Value Equity | 68.2 | 3.56 | -5.66 | 0.15 | 0.99 |
| CSVFX | Columbia Strategic Investor | 521.8 | 8.59 | -6.18 | -0.12 | 1.01 |
| CLVFX | Croft Value | 79.9 | 11.00 | -5.48 | 1.76 | 1.48 |
| FOCPX | Fidelity OTC | 4079.0 | 26.05 | -0.17 | 2.13 | 1.06 |
| GABAX | Gabelli Asset | 1769.8 | 4.87 | -5.09 | 0.94 | 1.38 |
| HRSVX | Heartland:Select Value | 276.0 | 6.53 | -5.35 | 2.76 | 1.33 |
| JSVAX | Janus Contrarian | 3519.9 | 9.45 | -5.68 | 3.40 | 1.01 |
| JORNX | Janus Orion | 2752.6 | 18.08 | -3.10 | 4.44 | 0.93 |
| EXEYX | Manning & Napier Equity | 738.2 | 13.64 | -5.45 | 2.05 | 1.05 |
| OSTFX | Osterweis | 522.4 | 10.31 | -2.73 | 2.13 | 1.20 |
| PARNX | Parnassus | 251.7 | 15.52 | -3.14 | -0.30 | 0.99 |
| TOCQX | Tocqueville | 339.1 | 5.49 | -6.49 | 0.65 | 1.25 |
| TPVIX | Transamerica Premier Diversified Equity | 219.5 | 9.78 | -5.74 | 0.44 | 1.15 |
| TPAGX | Transamerica Premier Focus | 58.2 | 16.04 | -2.99 | 2.44 | 1.37 |
| SGROX | Wells Fargo Advantage Growth | 681.8 | 13.52 | -2.66 | 1.89 | 1.44 |
| WPFRX | Westport | 132.4 | 9.34 | -1.23 | 4.43 | 1.37 |
| WBGSX | William Blair Growth | 95.3 | 17.28 | -2.35 | 2.02 | 1.17 |
| YAFFX | Yacktman Focused | 154.3 | 29.09 | 4.94 | 5.03 | 1.25 |
| YACKX | Yacktman | 467.1 | 24.48 | 2.48 | 3.44 | 0.95 |
- Fund Type = Multicap
- Annualized 3-Year Return (%) = Display Only
- Rank in Classification (%) (3 year performance) <= 25
- Annualized 5-Year Return (%) = Display Only
- Rank in Classification (%) (5 year performance) <= 25
- Expense Ratio <= 1.5%
- Load Fund (type) = No Load
- Minimum Initial Investment <= $5,000
- Open to New Investors = Yes
- Total Net Assets ($ millions) >= 50
- Year to Date Return (%) >= 2.8
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5 Stocks Wall Street Is Right to Love June 18, 2009
Posted by Jack Hough in : Uncategorized , comments closedWhile researching a stock, you learn that eight Wall Street analysts publish opinions on it. Five of them recommend a purchase and three say hold. Is that good?
Maybe. A bit more information will make those recommendations more telling.
Finance researchers have devoted heaps of time over the past decade to judging the worth of analyst advice. That was motivated in part by scandal. The Internet stock bubble of the 1990s raised suspicions that large investment banks had published chipper research on companies to better their chances of selling financial services on the side. In April 2003, about three years after the bubble popped, 10 of America’s largest investment firms agreed to pay more than $1.3 billion to settle the matter with the Securities and Exchange Commission.
Here’s what studies have turned up so far: Buy recommendations are far more common then sells, especially in the U.S. Sell recommendations seem to hold more predictive power. One study showed that stocks with the most buys outperformed those with the most sells, but later studies found that some hidden factors explain the results better than the recommendations. Analysts tend to favor glamorous stocks -- those with rising share prices and fast-growing earnings -- just like most investors. Stocks that demonstrate that kind of momentum are more likely than not to outperform over the following year or so -- with or without analysts’ recommendations. That suggests that the level of analysts’ recommendations isn’t that useful as a predictor. (Also, it means we should pay careful attention to the study periods when reviewing analyst performance. Glamour stocks tend to outperform in bull markets, so analysts can be expected to look good then, too.)
One finding stands out as more useful, though. Upgrades tend to be followed by market-beating stock performance. In other words, what matters about the stock in my opening example isn’t that it has five buy recommendations, but whether any of them were recently changed from holds or sells. Most likely, that has to do with freshness. Some analysts revisit their recommendations only every six months or so. Standing recommendations might reflect stale opinions. Recent upgrades reflect new thinking.
Of course, investors shouldn’t blindly follow analysts without doing their own research. The five stocks below have attracted recommendation upgrades in recent weeks and have modest valuations, good dividends and strong balance sheets.
| Company | Ticker | Industry | Market Value ($mil.) | Share Price | Forward P/E | Yield (%) |
|---|---|---|---|---|---|---|
| Merck & Co. | MRK | Drugs | 51515 | $24.43 | 7.59 | 6.22 |
| Parker Hannifin | PH | Industrial Components | 6968 | 43.41 | 14.19 | 2.30 |
| PepsiCo | PEP | Packaged Goods | 81482 | 52.34 | 14.18 | 3.44 |
| Tyco International Ltd. | TYC | Diversified Electronics | 12535 | 26.48 | 12.32 | 3.02 |
| Verizon Communications | VZ | Telecom | 87663 | 29.54 | 11.68 | 6.23 |
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5 Safe Stocks to Swap Into June 17, 2009
Posted by Jack Hough in : Uncategorized , comments closedRisk, you might have heard, is directly related to stock returns. That is, you’re not supposed to be able to achieve greater stock returns without taking on more risk. Be skeptical.
The theory comes from a set of elegant mathematics first published in the Journal of Finance in 1952, then mostly ignored for a decade, then transformed in the early 1960s through more lovely math into a stock prediction machine called the Capital Asset Pricing Model. The formulas gave rise to the index mutual fund industry in the 1970s and earned two key contributors Nobel Prizes in economics in 1990.
One of the upshots of the math is that if you know something called “beta” for a stock, you can calculate the stock’s expected return. So what’s this remarkable beta? In theory it’s a measure of risk. In practice, risk is a tricky thing to measure, so beta is often based on a stock’s past trading volatility relative to other stocks. A stock that moved frantically in the past has a high beta today, which means it’s supposed to be risky, which means it’s supposed to earn high returns in the future. But no one wants the extra risk, so we’re all better off forgetting about stock picking and buying index mutual funds.
Indexing is probably the best thing to come out of the math. Those Vanguard funds are blessedly cheap, and since over long time periods mediocre stocks are better than no stocks, the funds are a good deal for investors who aren’t keen on stock-picking, which is most of them.
For stock pickers, the formulas don’t quite deliver as promised. Past volatility isn’t terribly accurate for predicting future returns. Other clues, when added to volatility, result in more accurate predictions. Among these are a company’s size, or what you’d pay to own all of its shares today, and its price/book value, which compares the purchase price to what accountants say the assets are worth. All else held equal, small companies and cheap companies tend to produce better stock returns. Mathematicians say this is because these clues are actually alternative measures of risk in disguise. That is, small companies are riskier than big ones, and what is cheapness if not a sign of flaws, and thus, risk? So the theorists worked these new clues into the pricing model to turn that volatility-based beta into a “three-factor” beta, but more good clues like recent share price momentum turned up soon after. They added those in, too.
I’ve lost track whether we’re up to five or six factors, but the process has become a bit circular. Every time researchers find a clue that reliably predicts good stock returns, other researchers redefine that clue as part of a new measure of risk. Do that for long enough and risk really will be inseparable from return, because the two will be different labels for the same things.
That’s a long lead-in to the subject of which stocks investors should swap into now if they feel the market has gotten expensive, and they suddenly care more about safety than returns. Risk, I’m convinced, isn’t something to be throttled back on at the expense of returns. The best way to reduce risk is to be greedy for return. That doesn’t mean placing wild bets. Sometimes it means holding cash. With regard to stocks, it means continually searching for modest valuations, big, reliable dividends, strong balance sheets and other good clues.
Below are listed five companies whose shares seem attractively priced — safe, you might say.
| Company | Ticker | Goods/Services | Market Value ($bil.) | Share Price | Forward P/E | Dividend Yield (%) |
|---|---|---|---|---|---|---|
| Flowers Foods | FLO | Bread, rolls | 1.9 | $20.86 | 14.6 | 3.3 |
| Hasbro | HAS | Toys | 3.4 | 24.28 | 11.4 | 3.3 |
| Hillenbrand | HI | Caskets, urns | 1.0 | 16.49 | 9.9 | 4.5 |
| Snap-On | SNA | Tools | 1.7 | 29.83 | 10.8 | 4 |
| Tupperware Brands | TUP | Containers, cosmetics | 1.6 | 24.97 | 11.1 | 3.5 |
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2 Energy Funds Being Fueled by Oil’s Rally June 12, 2009
Posted by Jack Hough in : Uncategorized , comments closedIt's just two weeks into summer and gas prices are already on the rise. The price of a barrel of oil surged to a recent $71, an almost 70% jump since bottoming out earlier this year, and rekindled talk that it could approach the $150 mark it flirted with mid-2008. No doubt, that will eventually translate into even higher prices at the gas pump just as Americans prepare to head out on vacation.
Blame oil's dramatic rise on inflation fears. Investors are worried that the trillions of dollars the government is spending in bailouts and other initiatives will weaken the U.S. dollar and boost inflation over the next few years. Dollar-denominated commodities like oil have historically been good hedges against inflation since their prices increase as the dollar weakens.
Oil is also being propped up by hopes that a global economic recovery is underway. On Thursday, the International Energy Agency revised upward its 2009 global demand forecast, the first time it had done so in 10 months. Of course, oil's increase can also be partly blamed on speculators who artificially move oil prices even when the fundamentals don't support the price.
"Oil may be overbought right now, but there is the potential to see heavy inflation," says Steven Stahler, president of financial advisory firm Stahler Group in Baton Rouge, La. Over the long term, he says, oil will be "somewhere between where we are now and $100."
Oil's rally is putting the energy sector back in the spotlight. Lipper's natural resources fund category is up 29.3% this year through Thursday vs. a 5.8% increase for the typical S&P 500 index fund. It's been a while since we turned our attention to energy, and it seems like a good time to revisit this sector as oil prices climb. There are just 48 funds in this category, one of the smallest groups we start with all year. We narrowed that universe to 11 funds after excluding funds that charge sales loads. We then searched for funds with top-tier long-term track records and low fees. Once that search was complete, we were left with just two funds, Columbia Energy & Natural Resources (UMESX) and ICON Energy (ICENX). Those are the same two funds that made our list the last time and they haven’t disappointed us since then.
Despite the narrow selection of funds that invest in the energy sector, the industry is incredibly diverse. It encompasses physical commodities such as oil, natural gas and gasoline, as well as the drillers and equipment makers that get those products out of the ground and the conglomerates that refine it and sell the end products to consumers and businesses. The sector also includes the emerging alternative energy industry, including solar and wind power.
The typical S&P 500 index fund allocates about 13% of its portfolio to energy, which is plenty for most investors. But those who want to make more calculated bets can always buy individual securities like Exxon Mobil (XOM), which recently hit $73 a share, an almost 20% gain from its March low, or invest in exchange-traded funds that track a particular group of stocks. Stahler likes high-yielding, tax-friendly master limited partnerships that focus on things like natural gas pipelines. (Claymore has a fund (FMO) that invests in a basket of MLPs.) State Street's SPDR ETF family has offerings that track equipment makers (XES), exploration & production companies (XOP) and the broad sector (XLE). Claymore and Market Vectors offer solar energy funds and the United States Oil ETF (USO) offers exposure to black gold.
Of course, typical investors don't have the time or expertise to understand the ins and outs of a master limited partnership or trading energy ETFs. If you are considering overweighting your portfolio toward energy it would pay to first see a financial advisor like Stahler. Another option is to use an actively-managed mutual fund like the ones listed below. A word of caution: The sector can be volatile and as we said before, most investors already have plenty of exposure through a plain-vanilla index fund.
The Criteria: The natural resources funds below are open to new money, require a minimum investment of under $5,000 and charge an annual expense ratio under 1.5%. They have track records that put them in the top 40% of their category over the trailing three- and five-year periods. They're also beating the S&P 500 on a year-to-date basis. As usual, we did not include load funds.
| Ticker | Name | Assets ($ millions) | YTD Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) |
|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of Jun 11, 2009 |
||||||
| UMESX | Columbia Energy & Natural Resources | 373.6 | 28.21 | 2.33 | 15.71 | 0.99 |
| ICENX | ICON Energy | 403.2 | 16.97 | 4.20 | 16.09 | 1.16 |
- Fund Type = Natural Resources
- Annualized 3-Year Return (%) = Display Only
- Rank in Classification (%) (3 year performance) <= 40
- Annualized 5-Year Return (%) = Display Only
- Rank in Classification (%) (5 year performance) <= 40
- Expense Ratio <= 1.5%
- Load Fund (type) = No Load
- Minimum Initial Investment <= $5,000
- Open to New Investors = Yes
- Total Net Assets ($ millions) >= 50
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3 Companies With Fast, Organic Growth June 12, 2009
Posted by Jack Hough in : Uncategorized , comments closedActivision-Blizzard (ATVI) and Thomson-Reuters (TRIN) posted huge sales increases last year, but only because of the mergers reflected in their hyphenated names. When one company buys another, it simply lumps the new sales in with its own for reporting purposes. Since no new business is created, the stock price is often unaffected by the “growth.”
Organic growth is different. When a company’s sales surge, not because of a merger, but because of heated demand for its products and services, its stock price can march higher. Whether it does depends on how expensive the stock is to start, and whether the growth is faster or slower than investors are counting on. Rosetta Stone (RST), which makes language course software, reported May 11 after the market’s close that first-quarter sales had shot 41% higher than a year earlier. But investors clearly wanted more: Over the next two days, the stock lost 25%.
In their most recent quarters, Netflix (NFLX), Green Mountain Coffee Roasters (GMCR) and SalesForce.com (CRM) grew sales by 21%, 60% and 23%, respectively. But you’ll pay dearly for a piece of that growth. Shares of the movie-rental outfit sell for 26 times this year’s earnings forecast, the office coffee specialist is 61 times earnings and the business-software firm is 69 times earnings. The broad market, for comparison, is 17 times forecast 2009 earnings.
I recently went hunting for companies producing fast, organic sales growth, and which also have reasonable price/earnings ratios.
Fluor (FLR) builds oil refineries, power plants and other complex structures. With financing tight, project cancellations earlier this year, including a $2.1 billion Kuwait refinery, rattled investors, but shares have now rallied 47% in three months. On May 11 the company announced first-quarter sales increased 21% and earnings jumped 50%. New project awards were about as strong as a year ago. Shares still seem reasonable priced at 14 times earnings. The company enjoys a giant cash surplus but pays only a meager dividend, yielding less than 1%.
Unemployment hurts plenty of businesses, but not for-profit schools, which suddenly find themselves with a rush of jobless applicants. The trouble is, the trend isn’t lost on investors, and the likes of DeVry (DV) and Strayer (STRA) go for 20 and 28 times earnings, respectively. ITT Educational Services (ESI), which operates more than 100 technical schools in 37 states, sells for 13 times earnings and is growing fiercely. In its first quarter, student enrollment increased 37%, sales swelled 23% and earnings rose 47%.
Finally, Buffalo Wild Wings (BWLD) managed to produce a saucy 35% sales gain in its first quarter, including a 6.4% improvement at longstanding stores. The latter figure would have been 2.5 percentage points higher if not for a shift of Easter into April this year, management figures. Shares are almost 20 times earnings, which is a bit pricier than what I set out to find. But if Wall Street’s growth projections are to be believed, the stock might be worth paying up for. Earnings are expected to climb 24% this year and 22% next year.
| Company | Ticker | Industry | Market Value ($bil.) | Share Price | Sales Growth Last Quarter (%) | P/E |
|---|---|---|---|---|---|---|
| Fluor | FLR | Heavy construction | 9.7 | $53.82 | 21 | 14 |
| ITT Educational Services | ESI | Schools | 3.6 | 93.74 | 23 | 13 |
| Buffalo Wild Wings | BWLD | Restaurants | 0.6 | 32.79 | 35 | 20 |
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5 Stocks With Single-Digit P/Es June 11, 2009
Posted by Jack Hough in : Uncategorized , comments closedLow price/earnings ratios are usually easy to find, even when the broad stock market seems expensive. For example, the S&P 500 index has climbed more than 30% in three months and now trades at 22 times trailing earnings, well above stocks’ 137-year average trailing P/E of 15. Still, one out of every eight index members has a P/E in single digits.
The task for investors, of course, is culling companies that seem under-appreciated from ones that deserve their piddling valuations. Often, a single-digit P/E means a company’s earnings are expected to decline. Not all declines are equal, though. Some suggest long-term decay. Others are a temporary product of swings in consumer spending or raw materials prices.
Shares of companies that trade cheaply because of expected, temporary earnings stumbles might be just the thing for investors who worry that the broad market is priced for disappointment. Earnings underlying the S&P 500 are expected to grow 9% this year, even though they shrank by 39% in the first quarter. The index’s price of about 17 times the 2009 forecasts suggests investors think reported growth will top the estimate, even though earnings last quarter fell short of forecasts by 24%. By contrast, for the humbly priced stocks to follow, a certain amount of anticipated disappointment is already priced in.
Chevron’s (CVX) earnings are expected to plunge this year but rebound sharply next year. My sympathies to the analysts who must try to assign precise numbers to such forecasts. Last summer crude peaked at more than $145 a barrel. Just before Christmastime it fell below $35. Now it’s over $70 again. Better, perhaps, to focus on the dividend yield, which stands at 3.7%, versus about 2.3% for the broad market.
Carnival (CCL), the cruise line, seems perfectly emblematic of the sort of pricey frolicking the middle class can do without during a recession. The stock is accordingly about half its price of two years ago. Profits are indeed expected to fall 27% in Carnival’s fiscal year ending Nov. 30, but in its past two quarterly reports the company topped estimates by double-digit percentages. Perhaps the outlook is gloomier than the reality. One downside: Management scrapped the dividend late last year.
Archer Daniels-Midland (ADM) buys, stores, processes and ships crops. Over the long term, its usefulness to a hungry planet seems assured. In the short term, its profits can swing with the frenzy of a futures pit. Last quarter the company missed earnings forecasts by 30%. The quarter before it beat by 33%. The stock is nine times forecast earnings for its current fiscal year ending June 30, but 12 times next year’s lower forecast. Still, the higher of the two numbers seems plenty reasonable compared with the broad stock market. Shares pay 2%.
Below are listed these and two other stocks with single-digit P/Es.
| Company | Ticker | Industry | Price | Price Change 52 Weeks (%) | P/E Trailing 12 Months* | Dividend Yield (%) |
|---|---|---|---|---|---|---|
| * Ex. extraordinary items Data as of June 9, 2009 Source: Reuters |
||||||
| Archer Daniels Midland | ADM | Food Processing | 28.25 | -24.77 | 9.03 | 1.98 |
| Carnival | CCL | Cruise Lines | 25.03 | -32.26 | 8.53 | n/a |
| Chevron | CVX | Oil & Gas | 70.19 | -30.64 | 6.95 | 3.70 |
| L-3 Communications Holdings | LLL | Aerospace & Defense | 74.20 | -23.36 | 9.67 | 1.89 |
| Merck & Co. | MRK | Drugs | 25.72 | -30.47 | 9.23 | 5.91 |
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