Author: Manuel Jesus

Economy

Now Is the Time to Prepare for the Fed’s Next Move

Posted on by Manuel Jesus

Traders are pricing in a dramatic shift in Federal Reserve policy. Market expectations of Fed policy can be easily determined and are available to traders free on line. The CME maintains a site showing what current expectations are for each of the Fed’s meetings over the next year.

The CME FedWatch Tool “analyzes the probability of FOMC rate moves for upcoming meetings.

Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date.

The tool also shows the Fed’s “Dot Plot,” which reflects FOMC members’ expectations for the Fed target rate over time.”

Changes in expectations for the Fed’s next meeting are shown in the chart below.

Changes in expectations for the Fed’s next meeting

Source: CME

Barron’s recently addressed this,

“The betting in the financial markets has shifted from further interest-rate hikes by the Federal Reserve to a possible cut by early 2020. That’s the message from the futures and options markets for short-term interest rates, where wagers on lower rates have increased recently.

The monetary authorities’ pivot, initially articulated in early January by Fed Chairman Jerome Powell and confirmed after the Jan. 29-30 meeting of the Federal Open Market Committee, touched off a steep rebound in stocks and other risky assets.

But some observers in the credit market worry that about rising recession risks. Traders in interest-rate instruments appear to be anticipating that the Fed will be actively easing policy early in 2020 to counter a downturn.”

Trading the New Environment

The news site also addressed potential trading opportunities based on this change in probabilities.

“The high-yield bond market, for now, appears rather blasé about the prospects for a downturn in the economy, as our colleague Alexandra Scaggs wrote [recently].

According to longtime junk market maven Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, speculative-grade debt’s yield premium over comparable Treasuries ought to be two full percentage points higher to provide adequate compensation for their risk.

By contrast, at the other end of the lending market, bankers are tightening their credit standards, according to Steven Blitz, chief U.S. economist at TS Lombard.

This is a response to the Fed’s previous rate hikes, which have boosted the central bank’s target range for federal funds to 2.25%-2.50%, as well as narrowing the spread versus the two-year Treasury note, which yielded 2.533% [recently].

TUX weekly chart

The Fed sets the overnight fed-funds rate, while two-year note yield reflects expected future rates.

When the gap between these rates narrows, bankers slow credit extensions or even throw them into reverse, Blitz writes a client note.

That was apparent in the Fed’s Senior Loan Officer Survey, which also showed a slackening in the demand for loans across virtually all categories—commercial and industrial, mortgages, commercial real estate, consumer loans—adds David Rosenberg, chief economist at Gluskin Sheff.

The tightening of credit always affects the real economy with a lag, which Blitz explains is behind the Fed’s recent shift in rhetoric.

He thinks the central bank next will slow the pace of the reduction in its balance sheet as an initial step. (When the Fed sells assets, it effectively extinguishes cash from the banking system.) The earliest Blitz looks for a rate cut would be in the third quarter.

According to the CME Group’s FedWatch, the odds favor the Fed standing pat with its current fed-funds rate with outside chances of either a hike or a cut of one-quarter percentage point at each FOMC meeting in 2019.

But by next January, the probability of a cut of at least a quarter-point was a nontrivial 14.5%, as of Wednesday’s close. By contrast, the probability of a hike of a quarter point or more was 9.0%.

At the same time, traders in options on Eurodollar futures also have been ramping up bets on a Fed easing move later in 2019, according to a note to clients of R.J. O’Brien & Associates, a Chicago futures broker. (Eurodollar futures are based on the three-month Libor, or London interbank offered rate. Options on Eurodollar futures provide another derivative bet on anticipated short-term rates.)

An easier way for most Barron’s readers to benefit from an anticipated Fed ease would be in a class of real estate investment trusts that invest in mortgages and related investments rather than the typical malls, office buildings, or apartment buildings. That’s the view of Harley Bassman, a former head Wall Street derivatives pro who pens the Convexity Maven blog.”

Mortgage REITs borrow short-term and invest longer-term to earn a spread. That spread has been compressed as the Fed has hiked the funds rate nine times in the past three years, hurting the mREITs earnings and dividends.

Bassman opines this is the bottom of the cycle and the yield curve should steepen, benefiting their income and dividends. “I suspect I am a tad early, but I have never been a ‘bottom picker,’” he writes. That said, he advises investors to be careful with the size of the bet in order to survive a few bumps.

Bassman doesn’t name any mREITs, but the iShares Mortgage Real Estate Capped exchange-traded fund (NYSE: REM) provides broad exposure to the group. The ETF yields about 9%.

REM weekly stock chart

From here, however, how the stock market fares will depend on more than interest rates, notably other factors such as trade and tariffs as well as growth in the U.S. and abroad. That makes betting on interest rates seem almost simple by comparison.”

Investors could consider bond funds or ETFs also since prices of bonds rise when interest rates fall. The largest changes in price occur for bonds with longer maturities so longer term bond funds could be the most aggressive strategy and offer the greatest potential gains. However, longer term funds also carry the largest amount of risk.

However, traders cannot ignore the possibility of a shift in Fed policy and should make plans for lower rates now.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market

This Billionaire Likes Garbage

Posted on by Manuel Jesus

Billionaire investors can provide useful information to individual investors. As an example of that, we can consider a recent news story from Barron’s:

“Bill Gates has signaled that he may be in Waste Management (NYSE: WM) stock for the long haul.

His investment vehicle Cascade Investment LLC bought 1.22 million more shares of the trash and recycling firm in 2018. The disclosure was made in a form Cascade filed to the Securities and Exchange Commission Wednesday night. As of Dec. 31, Gates’s firm owned 14.5 million Waste Management shares, up from 13.3 million shares at the end of 2015.

Cascade didn’t respond to a request for comment on the transaction.

When, exactly, Cascade bought the additional Waste Management shares is unclear. Apparently, Cascade could have bought the stock at any point in 2018, as SEC guidelines only provide for an amended filing within 45 days after the end of a calendar year to report changes in holdings.

Waste Management stock had a lackluster 2018, only bagging a 3% gain. But shares have gone through a renewal this year. Waste Management stock has surged 12.4% year to date to $100 in intraday trading Thursday, helped by strong earnings. That is a new high for the stock price.

Gates, a co-founder of Microsoft (Nasdaq: MSFT), along with his wife Melinda Gates, also own Waste Management stock through the Bill & Melinda Gates Foundation Trust, which they serve as co-trustees.

At Dec. 31, the trust owned 18.6 million Waste Management shares, a figure unchanged from the end of 2015. Overall, Bill Gates owns 33.1 million shares, a stake of 7.8% in Waste Management.”

WM has been a solid performer in a persistent up trend for some time as the chart below shows.

WM weekly chart

Why Gates Matters

Bill Gates is one of the richest individuals in the world. Forbes recently noted that he was the second richest individual in the world with a fortune estimated to be worth almost $97 billion.

Bill Gates Photo

Source: Forbes

Although the Microsoft founder made his fortune in the software industry, he certainly has a wealth of knowledge and his wealth also gives him access to the best investment research. Gates manages much of his fortune through Cascade Investment, L.L.C.

The Financial Times notes that Cascade is managed by Michael Larson, its chief investment officer. The article added, “Bill Gates hired Larson 22 years ago to take over the investment of his personal wealth, which was about $5bn at the time.

 Since then Gates’s fortune has grown to around $90bn (of which he has given away around half) after Larson diversified the funds out of Microsoft, Gates’s software company, and into a broad range of investments.

Cascade does not publicly disclose its performance results but it has been reported that because of Larson’s relatively conservative strategy, Cascade’s losses in the 2008 financial crisis were smaller than the industry average for the full year.

Since 1995, Larson has delivered a compound annual return of around 11 per cent.”

Cascade’s investment portfolio, according to Wikipedia, includes:

Cascade investment portfolio

Source: Wikipedia

Wikipedia is, perhaps, not the best source of this information. There are a number of other sites that show the portfolio of Gates and other rich individual investors. These sites all gather information from the Securities and Exchange Commission and the raw data is available to anyone, for free.

How We Can Follow Great Investors

Among the filings large investors must make is SEC Form 13F, more formally called the Information Required of Institutional Investment Managers Form. 13Fs must be filed once a quarter by any investment manager with at least $100 million in assets under management.

By law, 13Fs must be filed with the SEC within 45 days of the end of a quarter. For example, forms must be filed by February 15 for the quarter which ends December 31 each year.

By itself, the 13F filing can be confusing. An extract of one of Cascade’s filings is shown below:

Cascade filing

Source: SEC

In order to be useful, the information from the 13F needs to be collected and analyzed in some way. When the information is moved into a sortable database, we can determine what the filer is buying and selling.

We can even combine the filings to see which stocks are favored by hedge fund managers as a group. This information can be used to develop a trading strategy that follows the funds, but without the steep fees.

These forms can be used to find the best ideas of the world’s greatest investors. In addition to Gates and other individuals, large hedge funds are also required to file these forms.

As a group, hedge funds tend to underperform the market. But the fifty largest funds, for example, are successful in the long run, a fact proven by the large amount of assets they control.

On the other hand, smaller funds are often struggling to deliver performance so they can earn rich fees but the established funds are generally proven top performers which is why they control billions of dollars.

This could be a useful insight into how 13fs could be used. For example, an investor could follow the filings of just a few large and successful investors. Or, an individual investor could develop a group of funds that they want to follow.

As changes to the forms are made, the investor could see what the funds are buying and selling. This could lead to an investment strategy. The strategy could be as simple buying the companies that represent the largest recent purchases of funds and selling when the funds sell.

It could be important to keep in mind that a sell rule should not be violated. If an investor decides to buy when funds buy a company, they should close the position when the funds close their positions. The funds might be relying on important information they uncovered in their research.

However, the funds could simply be selling because they need to raise cash for some reason or because they see other opportunities and are reallocating limited capital. Although there is no way to know, the strategy of following funds would include selling even when the reason isn’t well understood.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Economy

What’s the Fed Put and Does It Mean the Stock Market Will Rally?

Posted on by Manuel Jesus

Traders and analysts are once again wondering if the Federal Reserve will provide the “Fed put” that can potentially limit the down side of a stock market sell off.

In this case, the term “put” refers to a put option, which is an option that increases in value when prices fall. The idea of a Fed put dates back to the chairmanship of Alan Greenspan who sat at the top of the Fed from 1987 to 2000.

“During Greenspan’s chairmanship, when a crisis arose and the stock market fell more than about 20%, the Fed would lower the Fed Funds rate, often resulting in a negative real yield.

In essence, the Fed added monetary liquidity and encouraged risk-taking in the financial markets to avert further deterioration.

The Fed did so after the 1987 stock market crash, which prompted traders to coin the term Greenspan Put, later termed moral hazard. In 2000, Greenspan raised interest rates several times. These actions were believed by some to have caused the bursting of the dot-com bubble.

The Fed also injected funds to avert further market declines associated with the savings and loan crisis and Gulf War, the Mexican crisis, the Asian financial crisis, the LTCM crisis, Y2K, the burst of the internet bubble, the 9/11 attacks, and repeatedly from the early stages of the Global Financial Crisis to the present.

The Fed’s pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that in a crisis or downturn, the Fed would step in and inject liquidity until the problem got better.

Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking.

[Nobel Prize winning economist] Joseph Stiglitz criticized the put as privatizing profits and socializing losses and implicates it in inflating a speculative bubble in the lead-up to the 2008 financial crisis.

In 2007 and early 2008, the financial press had begun discussing the Bernanke Put as new Federal Reserve Board chairman, Ben Bernanke continued the practice of reducing interest rates to fight market falls.

The decision by the Fed to lower short-term interest rates to 50 basis points (0.5%) on October 8, 2008, and thereafter a range from 0.00-0.25% rate in December 2008 suggests attempts to create a Bernanke put similar to the Greenspan put.”

Proof of a Fed Put

Economists at the University of California considered the question of whether or not the put exists or simply a legend created by Wall street traders. In a paper called “The Economics of the Fed Put,”

Anna Cieslak and Annette Vissing-Jorgensen noted:

“We document that low stock market returns predict accommodating monetary policy by the Federal Reserve. Negative stock returns realized between FOMC meetings are a more powerful predictor of subsequent federal funds target rate changes than almost all macroeconomic news releases.

Using textual analysis of FOMC minutes and transcripts, we argue that stock returns cause Fed policy and document the mechanism underlying the relation.

Consistent with a causal effect of stock returns on policy, FOMC participants are more likely to mention the stock market after market declines—a pattern that arises from the mid-1990s—and the frequency of negative stock market mentions in FOMC documents predicts target rate cuts.

The FOMC discusses the stock market mostly as a driver of consumption and, to a lesser extent, investment and broader financial conditions. Less attention is focused on the stock market simply predicting (as opposed to driving) the economy.

In a Taylor rule framework, about 80% of the Fed’s reaction to the stock market can be explained by the Fed revising its expectations of economic activity down following stock market declines.

The Fed’s expectations updating is roughly in line with that of private sector forecasters and with the stock market’s predictive power for growth and unemployment.”

The stock market does appear to be a popular topic of discussion at Fed meetings.

economics of the Fed put

Source: The Economics of the Fed Put

“Over the 1994–2016 period, there are 983 references to stock market conditions in FOMC minutes. This number represents 14% of times that minutes mention inflation, and 31% of times they mention (un)employment.”

The authors also looked at other factors to determine what seemed to be the largest influence on the Fed. The stock market is among the most important influences.

estimates of regressions chart

Source: The Economics of the Fed Put

Is There a Powell Put?

MarketWatch recently noted that the current Fed Chair, Jerome Powell, seems to be following a similar policy.

“The Federal Reserve’s decision last week to signal a pause in the rate-hike cycle, adopting a wait-and-see approach just six weeks after delivering its fourth rate increase of 2018, took investors by surprise.

For one analyst, the move has echoes of the late 1990s, when a nimble Fed led by Alan Greenspan arguably set the table for a final stock-market “meltup” ahead of the bursting of the tech bubble in 2000.

Dario Perkins, managing director for global macro at TS Lombard, finds himself in the middle. The Fed could cut rates by the second half of 2019 as exports weaken and the economy begins to feel the delayed, full effects of the previous tightening in financial conditions, he said, in a [recent] note.”

But he doesn’t expect the U.S. economy to fall into a recession, which means that the Fed could resume hiking rates as the global economy strengthens into 2020.

He believes the Fed followed this pattern before:

Fed pattern chart

Source: MarketWatch.com

The first time was in 1995, a year after the Fed caused a lot of carnage in the bond market — that reverberated unpleasantly in emerging markets and elsewhere — with an aggressive round of rate increases that ultimately took interest rates above the level at which they neither boost nor slow the economy.

That year, the impact of all that Fed tightening was being felt at home. That led policy makers to reverse course and cut rates three times, in 25 basis-point increments, between July 1995 and January 1996 — a move that simply got rates back to neutral. In March 1997, the Fed shifted back into tightening mode with a quarter-point rate rise.

He’s certain that another round of market turbulence would lead the Fed to cut rates even before any tangible impact on the U.S. economy materializes.

Given the market’s bullish reaction to the Fed’s about-face last week, it is apparent that investors “realize the importance of the ‘Powell put,’” Perkins said, referring to the notion that the Fed will respond by loosening policy and providing liquidity in the wake of market turmoil.

“It even raises the possibility of a late-90s-style ‘meltup,” he said. “The only question is whether we need another December-style meltdown and Fed rate cuts before markets get bubbly, or whether the policy shift announced so far is already sufficient.”

Investors need to keep an eye on the Fed since that could provide a source of gains in the coming months.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market

Stocks Under $15 With Growth and Income

Posted on by Manuel Jesus

Low priced stocks can deliver large gains, if the company can be successful. When considering what makes a company successful, many investors turn to earnings. They might believe that increases in earnings per share (EPS) are the key to success.

But, for low priced stocks, that might not be true. EPS would, of course, be nice. But, there are many items that come before earnings on the income statement, a summary of a company’s financial operations.

At the top of the income statement is sales. This could be the most important factor to success for a low priced stock. Sales are necessary to produce earnings. Sales are needed to generate cash flow from operations. In short, sales are a critical component of success for a company.

This week, we focused on sales, requiring companies to have reported sales growth of at least 25% over the past five years.

Then, we limited our search to low priced stocks.

Individual investors understand that low priced stocks could be appealing for two reasons. One reason is that the low price means they have little down side risk in dollar terms. The second reason is that low priced stocks are generally the ones that deliver the largest short term gains.

One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.

That’s why we limited our search for potential bargains by focusing on stocks priced at less than $15 per share. While we would like to see stocks at even lower prices, there just weren’t many that passed our stringent screening criteria so we had to use a cut off value of $15 to ensure some degree of diversification in this screen.

Finally, we required the stock to offer a dividend that is higher than the risk free rate of return of less than 3% available on Treasury notes maturing in ten years.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.

FINVIZ stock screening tool

Source: FinViz.com

Five Stocks Meet Our Strict Requirements

Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.

Ellington Residential Mortgage REIT (NYSE: EARN) is a real estate investment trust. It specializes in acquiring, investing in and managing residential mortgage and real estate related assets.

It constructs and managing a portfolio consisting of residential mortgage-backed securities (RMBS) for which the principal and interest payments are guaranteed by the United States Government agency or the United States Government-sponsored entity (Agency RMBS) and, to a lesser extent, RMBS backed by prime jumbo, Alternative A-paper manufactured housing, and subprime residential mortgage loans (non-Agency RMBS).

Its Agency RMBS include residential mortgage pass-through certificates, collateralized mortgage obligations (CMOs) and to-be-announced mortgage pass-through certificates (TBAs). Its non-agency RMBS include investment grade and non-investment grade classes.

EARN weekly stock chart

Infosys Limited (NYSE: INFY) provides business information technology services comprising application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management.

It also performs consulting and systems integration services comprising consulting, enterprise solutions, systems integration and advanced technologies; products, business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking solution, and offerings in the areas of Analytics, Cloud and Digital Transformation.

Its segments are Financial Services and Insurance, Manufacturing and Hi-tech, Energy & utilities, Communication and Services, Retail, Consumer packaged goods and Logistics, and Life Sciences and Healthcare.

INFY stock chart

Jupai Holdings Limited (NYSE: JP) is a third-party wealth management service provider. The company focuses on distributing wealth management products and providing advisory services to individuals in People’s Republic of China (PRC).

JP serves as a one-stop wealth management product aggregator and is engaged in developing and managing in-house and third party products. It provides asset management services in the management and advisory of real estate or related funds, other fund products and funds of funds.

It offers its services to entrepreneurs, corporate executives, professionals and other investors through a network of 72 client centers in 46 cities of China.

JP stock chart

Orchid Island Capital, Inc. (NYSE: ORC) is a specialty finance company that invests in residential mortgage-backed securities.

The company’s business objective is to provide attractive risk-adjusted total returns to its investors over the long term through a combination of capital appreciation and the payment of regular monthly distributions. Its portfolio consists of two categories of Agency RMBS: pass-through Agency RMBS and structured Agency RMBS.

ORC invests in pass-through securities, which are securities secured by residential real property in which payments of both interest and principal on the securities are generally made monthly. The mortgage loans underlying pass-through certificates include fixed-rate mortgages, adjustable-rate mortgages (ARMs) and Hybrid ARMs.

ORC stock chart

Tarena International, Inc. (Nasdaq: TEDU) provides professional education services, including professional information technology (IT) training courses and non-IT training courses across the People’s Republic of China.

TEDU offers courses in various IT subjects and several non-IT subjects. It also operates two children education programs. It offers an education platform that combines live distance instruction, classroom-based tutoring and online learning modules.

The company complements the live instruction and tutoring with its learning management system, Tarena Teaching System (TTS). TTS has over five core functions, featuring course content, self-assessment exams, student and teaching staff interaction tools, student management tools and an online student community.

TEDU weekly stock chart

Any of these stocks could be a potential winner and all worth further research. However, each of these stocks also carries a degree of risk and that should also be considered. Based on the charts, momentum investors may find EARN and INFY most appealing.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

Stock market

Potential Stock Market Winners Under the Green New Deal

Posted on by Manuel Jesus

Recently, New York Democratic Rep. Alexandria Ocasio-Cortez and Massachusetts Democratic Sen. Ed Markey introduced a nonbinding resolution that calls for the U.S. to generate 100% of its electricity from zero-emission sources in 10 years.

According to MarketWatch, “The wide-ranging measure also backs investment in “smart” power grids and zero-emission vehicles, along with the elimination of greenhouse gases and the cleanup of hazardous-waste sites.

There is not a lot of detail on particular technologies or how to pay for the proposed changes, but long-term investors nonetheless may want to pay attention to the Green New Deal,” said Josh Price, an energy analyst at Height Capital Markets.

“If you start to see some more of these ground shifts in politics — veering toward renewables, veering toward addressing climate change — it’s definitely bullish for these renewable energy companies and power providers,” Price told MarketWatch.

“This isn’t a near-term catalyst for us by any means, but for some of those slow-money, long-time-horizon guys, the biofuels space and the renewables space are definitely interesting places to look,” he also said.

Specific Trades to Consider

NRG Energy, AES, Xcel Energy and other “more-forward-looking utilities” that are shifting away from fossil fuels could be winners if there is a continued focus on limiting climate change, according to the Height analyst.

NRG Energy, Inc. (NYSE: NRG) is an integrated power company. The company is engaged in producing, selling and delivering electricity and related products and services in various markets in the United States.

The stock has been in an uptrend for some time and this news could push the stock to even more gains.

NRG weekly stock chart

The AES Corporation (NYSE: AES) is a holding company that, through its subsidiaries and affiliates, operates a diversified portfolio of electricity generation and distribution businesses.

It is organized into six strategic business units (SBUs): the United States; Andes; Brazil; Mexico, Central America and the Caribbean (MCAC); Europe, and Asia. According to recent regulatory filings, its United States SBU had 18 generation facilities and two integrated utilities in the United States.

The Andes SBU had generation facilities in three countries. Its Brazil SBU has generation and distribution businesses, Eletropaulo and Tiete. The MCAC SBU had a portfolio of distribution businesses and generation facilities, including renewable energy, in five countries.

The Europe SBU also had generation facilities in five countries and the Asia SBU had generation facilities in three countries.

The stock has been in an up trend for most of the past year.

AES weekly stock chart

Xcel Energy Inc. (Nasdaq: XEL) is a public utility holding company whose operations include the activity of four utility subsidiaries that serve electric and natural gas customers in eight states.

The company’s segments include regulated electric utility, regulated natural gas utility and other activities. Its utility subsidiaries include NSP-Minnesota, NSP-Wisconsin, Public Service Company of Colorado (PSCo) and Southwestern Public Service Co. (SPS), which serve customers in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin.

Other operations include WYCO Development LLC (WYCO), a joint venture formed with Colorado Interstate Gas Company, LLC (CIG) to develop and lease natural gas pipelines storage and compression facilities, and WestGas InterState, Inc. (WGI), an interstate natural gas pipeline company.

This stock has been in a consolidation after a rapid up move.

XEL weekly stock chart

Additional Opportunities

Action at the state level is key, Price told MarketWatch. The Green New Deal is likely to influence California, New York and other blue states, especially those that already have aggressive targets for their use of renewable energy.

California, for example, aims to get 60% of its electricity from renewable sources by 2030. So investors in companies tied to renewable energy could feel increasingly bullish because it could help ensure state action and then eventually lead to future nationwide legislation.

The resolution’s backers want to ensure that climate-change issues remain a priority as Democratic presidential candidates ramp up their 2020 campaigns, Price also said.

Contenders for the Democratic nomination who are co-sponsors include Cory Booker, Kamala Harris, Elizabeth Warren and Kirsten Gillibrand. Investors should be aware that there could be a political imperative to act on climate change if a Democrat wins the White House race next year, Price said.

While the resolution didn’t mention biofuels specifically, companies focused on these alternative fuels for cars appear set to benefit from the Green New Deal and related efforts, according to the Height analyst. Players in this area include Renewable Energy Group (REGI), Darling Ingredients (DAR), and Finland-based Neste.

“Between full electrification and what we have now, there’s space for these biofuels with low-carbon intensities to gain ground,” Price said.

Nuclear power initially looked like a Green New Deal loser, as a fact sheet for the plan that was circulated by Ocasio-Cortez’s office reportedly called for transitioning away from such plants.

Among those expressing concerns was Matthew Wald, a senior communications adviser for the Nuclear Energy Institute, an industry group whose board includes executives from American Electric Power (AEP), Duke Energy (DUK) and other companies with nuclear power plants.

“Is the #GreenNewDeal meant to stop #climatechange, or simply support natural gas and renewables?” Wald said in a tweet. “We need to use every tool that works, including #nuclear, our largest source of #carbon-free energy.”

But unlike the fact sheet, the Green New Deal resolution didn’t single out nuclear power. “The resolution is silent on any individual technology,” Markey said at a press conference, when asked about that particular industry.

The Green New Deal is far from legislation, but it could provide traders with opportunities. If it does nothing else, it could increase the attention of analysts and investors in the utility sector. That could be bullish for a conservative sector that, at times, garners little attention.

While there will be opportunities related to this news, there will also be risks.

This news could also add to the boom and bust tendency of emerging companies in the alternative energy space. This could mean biofuel stocks, for example, could become momentum trades and quickly lose their luster if news becomes less promising.

Whether investors agree or disagree with the politics of the Green New Deal, they should consider the investment implications of the news.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market strategies

Trade the Dogs of the Dow Strategy for 2019

Posted on by Manuel Jesus

You might be familiar with the Dogs of the Dow, a popular investment strategy that identifies stocks in the Dow Jones Industrial Average offering the best value. The strategy was first detailed in a 1991 book, Beating the Dow by Michael B. O’Higgins.

The strategy buys the ten highest yielding stocks from the thirty stocks that are included in the DJIA and trades just once a year. These ten stocks are known as the Dogs of the Dow.

Theoretically, high dividend yields are a sign of value in stocks as long as the dividend is safe. Large caps stocks included in the Dow are most likely safe and the committee that selects stocks for the index would almost certainly remove stocks before they fell into severe financial distress.

Dividend yields are usually viewed as providing information about income and most investors view them as an income screening tool. But in this strategy, dividend yields are identifying value just like the price-to-earnings (P/E) ratio or other popular ratios would.

When yields are used for valuation, the idea of relative valuation is being applied. We are not concerned with whether the yield is 1% or 10%. We are looking for the highest yields in a group of stocks that all pay a dividend.

Since each of the Dow stocks is an income stock, the dividend yield is a way to sort them and identify the most undervalued or overvalued stocks. This approach only works when applied to groups of stocks that all pay a dividend that is reasonably safe so yields have limited use in valuation screens.

Under the Dogs of the Dow strategy, in any given year some of the stocks should deliver market-beating gains, some will provide an average return and some will experience losses. Big winners are expected to significantly outweigh the losses. In the long run, the Dogs of the Dow strategy is expected to outperform the index.

The Data Supports the Theory

Results presented in the book showed simply buying ten stocks and trading once a year did in fact significantly outperform the market. Following the strategy from 1973 to June 1991 when the book was published would have resulted in a total return of 1,753%, more than three times better than the gains of the Dow which returned 559% over that same time.

That’s an annualized rate of return of 16.61% for the Dogs and 10.43% for the index. In the years since publication, the strategy has remained popular even though it has not really delivered the same types of gains.

In some years, the strategy outperforms and in other years the average does better than the Dogs. Since 2000, the Dogs have slightly outperformed the Dow, gaining an average of 8.6% a year while the Dow is up an average of 6.9% a year. Over other time periods, the track record is mixed.

Dogs of the Dow strategy chart

Source: DogsOfTheDow.com

Given the fact that the performance is so similar to the index in many years, some investors have looked for variations on the idea. Their thinking seems to be that the Dogs did so well in the original test there must be a way to succeed in the future.

One popular variation of the strategy is to buy only the five lowest priced stocks from the list of the ten high yielding stocks. This variation is sometimes called the Small Dogs of the Dow and after delivering great returns in the initial test period, it has also delivered mixed returns since publication, beating the Dow in some years and lagging in others.

Following the basic strategy involves investing an equal amount of money in each of these 10 stocks, or 5 stocks in the case of the Small Dogs, once a year and holding them for one year.

You can buy the Dogs or the Small Dogs anytime during the year and hold for one year before rebalancing or you can even rebalance two or four times a year.

In the long run, the results are about the same no matter when in the year when you start or how many times you rebalance the portfolio.

It is also possible to use options with the strategy to lower the costs. Long term call options could be used to implement the strategy.

Dogs for 2019

Barron’s recently updated the strategy performance. “Last year, the Dogs of the Dow beat the market. If you bought the 10 highest-yielding stocks in the Dow at the beginning of 2018, then your total return for the year was just over zero. Not great, but better than the Dow overall, which returned minus 3.5%.

Zero is also better than the S&P 500 which returned minus 4.4%, including dividends.

What’s more, if you kicked out General Electric (GE) when it was removed from the Dow in June, then your return improved, to 3.5%. GE was unfortunately the worst-performing stock (that started out) in the Dow last year, losing about 55% of its value.

In 2018, the stocks (or the dogs) in this strategy were: Verizon, IBM, Pfizer, Exxon Mobil (XOM), Chevron (CVX), Merck (MRK), Coca-Cola (KO), Cisco Systems (CSCO), Procter & Gamble (PG) and GE.”

For 2019, Barron’s noted, “This year nine of the 10 remain. GE is out and JPMorgan Chase (JPM) is in. That is the only change to the portfolio.”

2019 Dogs of the Dow

Source: Barron’s

As noted, call options could also be used. The advantage of call options is that they would require less capital. The disadvantage of call options is that the investor will not receive any income and could face losses of up to 100% on each individual investment and for the total investment.

However, buying call options on the stocks, whether the investor is buying 5 or 10 call options, is likely to use 10% or less of the capital needed to buy the stocks. This means limited trading capital is not committed to a single strategy in a smaller account.

The capital not used for the strategy could then be applied to other strategies and potentially enhance returns of the overall account.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Economy

Now Could Be the Time for Gold

Posted on by Manuel Jesus

The headlines are a cause for concern. This is honestly true at any news site. It can be market news, global headlines or even local news. It is true that news services have always focused on bad news but there certainly seems to be more bad news than ever right now.

Many investors believe gold performs well when uncertainty rises. The chart below shows that could be true right now.

Gold weekly stock chart

Analysts point to a number of reasons to consider gold right now.

The Fundamental Explanation for Investing in Gold

TradeStops.com recently explained why gold stocks could be an investment opportunity:

“Why are gold and gold stocks doing well in the midst of market turmoil?

In historic terms, it’s no surprise to see the yellow metal zig when everything else zags. Gold stocks performed quite well in the 1930s, for example, due to rising profit margins as operating costs declined and the price of gold stayed fixed.

Heading into 2019, gold and gold stocks are channeling investor worries around slowdown, debt, and inflation. These things are all connected: In the event of global slowdown, debt levels are likely to rise as governments borrow and central banks stimulate.

But with debt levels already high, more borrowing and stimulus could spark inflation and a loss of faith in paper currencies — which benefits both gold and gold stocks.

There are multiple flashing red lights warning of global slowdown right now. One of them is the price of crude oil, the world’s most important commodity. The price for the two major crude oil benchmarks, Brent and West Texas Intermediate, has declined roughly 40 percent since the beginning of October — a historic collapse in such a short space of time. This suggests global oil demand is in trouble.

Then too, bellwether companies like FedEx, who have a finger on the pulse of global business, are talking slowdown. In its latest earnings report — a disappointment — Alan Graf, FedEx’s executive vice president and chief financial officer, said the following: “Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term.”

This is a worry because the typical response to slowdown is piling on more debt. Governments step up spending to help the economies, and central banks revert to easy money policies and stimulus.

But the world is already awash in debt, and the debt hangover from the last round of central bank stimulus hasn’t yet passed. According to IMF data, global debt levels are more than $180 trillion. And central banks already have trillions of dollars on their balance sheets, with interest rates at historic lows.

So, it’s not clear governments can borrow more trillions to fight yet another slowdown, or whether central banks can add trillions more in stimulus to their balance sheets, without leading to a pick-up of inflation and a loss of faith in paper currencies.

If that happens, it will benefit gold and gold stocks — possibly in a major way.

The positive trend in gold and gold stocks, even as global stock markets see red, shows investors are giving more weight to this possibility now.

That makes gold stocks increasingly attractive, but it might not be what the rest of the market hopes to find in its stocking.”

Uncertainty Is Also Rising

Along with gold, uncertainty is increasing. This can be seen in the next chart.

Economic Policy Uncertainty Index Chart

Source: PolicyUncertainty.com

This is the World Uncertainty Index (WUI). The WUI is an index calculated “for 143 individual countries on a quarterly basis from 1996 onwards. This is defined using the frequency of the word “uncertainty” in the quarterly Economist Intelligence Unit country reports.

Globally, the Index spikes near the 9/11 attack, SARS outbreak, Gulf War II, Euro debt crisis, El Niño, European border crisis, UK Brexit vote and the 2016 US election. Uncertainty spikes tend to be more synchronized within advanced economies and between economies with tighter trade and financial linkages.

The level of uncertainty is significantly higher in developing countries and is positively associated with economic policy uncertainty and stock market volatility, and negatively with GDP growth. In a panel vector autoregressive setting, we find that innovations in the WUI foreshadow significant declines in output.”

Notice that the authors call attention to previous spikes which were associated with identifiable crises. Then, you can notice in the chart that the index is at an all time high, even without a single identifiable event to explain. That indicates we could expect increased market volatility and decreased GDP growth now.

Gold Could Be a Hedge Against Uncertainty

It’s possible to directly trade gold. This can be done with coins, ETFs or futures. Coins are collectibles and can have tax consequences that are different than investments in stocks.

Many investors are surprised to learn popular ETFs that back their shares with physical holdings of precious metals face taxes at the higher rate for collectibles. This includes SPDR Gold Shares (NYSE: GLD).

Futures carry their own tax consequences and risks and many individual investors avoid these markets.

Publicly- traded stocks of gold miners offer an indirect way to invest in gold. Mining companies are taxed at the same rate as stocks which can be lower than the rate for gains in GLD or other ETFs.

In addition to offering tax benefits, gold miners also offer the benefit of leverage. An example might be the best way to explain the leverage miners offer.

Let’s assume it costs a miner about $800 an ounce to produce gold and they mine 1 million ounces a year. If gold is at $1,000 an ounce, the company should generate a profit of about $200 an ounce or $200 million.

This is a simplified example so we will assume the company has no other costs and no additional revenue.

If the price of gold increase by 30%, to $1,300 an ounce, assuming the costs of production stayed the same, the miner’s profits would increase to $500 an ounce or $500 million for the company, an increase of 150%.

The miner is leveraged, in this example, 5 to 1, and benefits immensely from higher gold prices. Even smaller gains in the price of gold have a large impact on earnings. A 1% increase in gold prices (to $1,010 an ounce) results in a 5% jump in the earnings of this hypothetical mining company.

Remember, leverage can help increase investment returns on the upside but can cause significant losses on the downside.

A 1% decline in the price of gold could result in a 5% drop in earnings for this gold miner and we would expect the stock price to reflect the diminished earnings potential of the company. A 20% decline in gold would push the miner from a profit to a loss.

This leverage makes gold miners an excellent way to invest in gold. Buying miners while uncertainty is high could lead to gains in the short run and in the long term.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

LP Blogs

7 High Yield Dividend Stocks to Buy Now

Posted on by Manuel Jesus

Many investors seek out dividends as a means of providing a return that isn’t based on a company’s share price. There are several factors to consider when buying a company for dividends. Some of those factors are dividend yield, consistency of historically paying the dividend, the dividend growth rate and the type of corporate structure (equity, equity REIT, Mortgage REIT, MLP, etc.). In this list we’re including traditional equities and equity REITs that pay over a 5% dividend yield.

The approach to evaluating equity and equity REITs is a little different. In both of these types of investments it’s important to consider the cash flow the company is generating and the valuation, but the way the companies are analyzed is different. For example, free cash flow (FCF) would be important for equities and funds from operations (FFO) would be important for REITs. In the case of valuation, measure like price-to-FFO (P/FFO) would be a means of evaluating REITs as compared to price-to-earnings (P/E) for equities. This is a result of the fact that REITs are pass-through entities and are required to pay out 90% of their net income in dividends. This allows them to avoid paying taxes and is why they retain very little earnings.

In our list of 7 high yielding stocks, there are four traditional equities and three Equity REITs to consider buying now. The approach to analyzing them will be consistent with the type of equity investment being considered.

1. AT&T Inc (T)
Price: $29.56
Market Cap: $215.25 billion

Business Summary

AT&T Inc. is a holding company that provides communications and digital entertainment services in the United States and the world. The Company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility and International. The company was formerly known as SBC Communications Inc. and changed its name to AT&T Inc. in November 2005. AT&T Inc. was founded in 1983 and is based in Dallas, Texas.

Dividends

Forward Annual Dividend Yield: 6.88%
Dividend Payout Ratio: 71%
5-Year Average Dividend Yield: 5.36%
3-Year Dividend Growth Rate: 2.1%
Years of Consecutive Increases: 34

T is considered a Dividend Aristocrat for a reason since it’s had a long history of paying a dividend and posting annual increases to the dividend. Currently, T pays out 71% of its income in dividends. That is below the 13-year median value of 81%. The current yield is higher than the 5-year average yield of 5.36% and is above the 13-year median yield of 5.41%. The current yield is only slightly below the highest trailing annual yield over that period of 7.17%.

Valuation

Price-to-Earnings (P/E): 5.60
Price-to-Book (P/B): 1.17
Enterprise Value to EBITDA (EV/EBITDA): 6.47

T is trading near its 10-year low P/E value of 5.51 and below its current industry median P/E of 19.33. Over the past 13 years it has had a median P/E of 14.41. The P/B value ratio of 1.17 is close to its 10-yrar low of 1.12, is below the 13-year median value of 1.75 and below its current industry median value of 2.07. Its current EV/EBITDA of 6.47 is slightly below its 13-year median value of 7.00 and is below the current industry median of 8.29. From a valuation perspective, T is trading near historic lows in several measures.

Price History

52-Week High: $37.81
52-Week Low: $26.80
52-Week Change: -16.70%
200-Day Moving Average: $31.36

The price of T is trading about 10% off of its 52-week low and just below its 200-day moving average. While it has underperformed the S&P 500 over that period, the low price is contributing to the relatively high historic yield and the low valuation.

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2. Invesco Ltd. (IVZ)

Price:$18.58
Market Cap:$7.64 billion

Business Summary

Invesco Ltd. (Invesco) is an independent investment management company. The Company provides a range of investment capabilities and outcomes, which are delivered through a set of investment vehicles, to help clients achieve their investment objectives. It has a presence in the retail and institutional markets within the investment management industry in North America; Europe, Middle East and Africa (EMEA), and Asia-Pacific. Invesco Ltd. was founded in December 1935 and is based in Atlanta, Georgia with an additional office in Hamilton, Bermuda.

Dividends

Forward Annual Dividend Yield: 6.40%
Dividend Payout Ratio: 56%
5-Year Average Dividend Yield: 3.47%
3-Year Dividend Growth Rate: 5.7%
Years of Consecutive Increases: 10

The current dividend yield of 6.40% is well above the 13-year median of 2.48% and its 5-year average yield of 3.47%. The payout ratio of 56% is above the 13-year median value of 43% but is in line with its current industry median value of 56%. The 3-year dividend growth rate of 5.7% is close to its 13-year average of 6.00% and is above its industry median value of 5.20%. IVZ is currently paying a historically high dividend and based on its payout ratio it appears like they should be able to sustain the dividend and its historical growth rate.

Valuation

Price-to-Earnings (P/E): 8.68
Price-to-Book (P/B): 0.85
Enterprise Value to EBITDA (EV/EBITDA): 9.43

IVZ is trading near its 13-year low P/E of 5.61 and considerably below its median value over that period of 15.79. The current industry median P/E is 14.21. It is also currently trading below book value at 0.85, which isn’t abnormal for financial stocks. The 13-year low P/B is 0.56 and the median value over that period is 1.48. IVZ has a current P/B ratio that is below the industry median of 1.04 as well. The 13-year median value for EV/EBITDA is 12.3, which is higher than its current value of 9.43. Its current EV/EBITDA is also below the industry median value of 11.05. From a valuation perspective, IVZ is trading at a value both compared to its own history but also compared to its industry.

Price History

52-Week High: $35.03
52-Week Low: $15.38
52-Week Change: -41.35%
200-Day Moving Average: $21.32

IVZ is down considerably over the past year and is currently trading below its 200-day moving average. This has contributed to its historically high dividend yield that it’s currently paying and valuation. The relatively low payout ratio and free cash flows indicate that, despite the price weakness, they are capable of maintaining their dividend.

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3. The Buckle Inc (BKE)

Price: $17.3
Market Cap: $836.9 million

Business Summary

The Buckle, Inc. is a retailer of casual apparel, footwear and accessories for young men and women. As of January 28, 2017, the Company operated 467 retail stores in 44 states throughout the United States under the names Buckle and The Buckle. The Company markets a selection of brand name casual apparel, including denims, other casual bottoms, tops, sportswear, outerwear, accessories and footwear. The company was formerly known as Mills Clothing, Inc. and changed its name to The Buckle, Inc. in April 1991. The Buckle, Inc. was founded in 1948 and is headquartered in Kearney, Nebraska.

Dividends

Forward Annual Dividend Yield: 5.61%
Dividend Payout Ratio: 51%
5-Year Average Dividend Yield: 3.61%
3-Year Dividend Growth Rate: 4%
Years of Consecutive Increases: 0

The current dividend yield for BKE is well above its 5-year average yield of 3.61% and its 13-year median yield of 2.3%. It’s also considerably higher than its industry median value of 2.29%. The payout ratio is relatively high historically for BKE as its 13-year median value of 29%, but by itself wouldn’t be considered high. BKE also pays a special dividend every January, which has ranged between $0.75 to $1.75 over the past three years. Since beginning to pay a regular dividend in 2016, BKE hasn’t raised its dividend and may be using the special dividend as a means of passing on a portion of the company’s profits each year to investors.

Valuation

Price-to-Earnings (P/E): 8.74
Price-to-Book (P/B): 2.05
Enterprise Value to EBITDA (EV/EBITDA): 3.93

The 13-year median value for the P/E of BKE is 12.86. That is considerably higher than the current value of 8.74, which is near its 13-year low of 7.57. The P/E is also below the industry median of 19.95. The current P/B ratio of 2.05 is well below the 13-year median value of 4.29 but is a little higher than the industry median of 1.63. The current EV/EBITDA is below its 13-year median of 6.5 and lower than the industry median of 11.82. For most of these measures, BKE is a little above its 13-year low and represents a compelling valuation.

Price History

52-Week High: $29.65
52-Week Low: $17.03
52-Week Change: -15.10%
200-Day Moving Average: $21.42

The price of BKE is trading near its 1-year low and is below its 200-day moving average. Since mid-October the price has stabilized and the large $1.25 dividend in January contributed to the large decline as the price was adjusted lower to account for the dividend.

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4. B&G Foods (BGS)

Price: $25.72
Market Cap: $1.7 billion

Business Summary

B&G Foods, Inc. (B&G Foods) is a holding company. The Company manufactures, sells and distributes a portfolio of shelf-stable and frozen foods across the United States, Canada and Puerto Rico. The company was formerly known as B&G Foods Holdings Corp. and changed its name to B&G Foods, Inc. in October 2004. B&G Foods, Inc. was founded in 1996 and is headquartered in Parsippany, New Jersey.

Dividends

Forward Annual Dividend Yield: 7.31%
Dividend Payout Ratio: 66%
5-Year Average Dividend Yield: 4.81%
3-Year Dividend Growth Rate: 11%
Years of Consecutive Increases: 8

The median yield for BGS over the past 13-years is 4.46%, which is considerably lower than the current yield of 7.31%. BGS is higher than its 5-year average yield and its current median yield for the industry of 2.06%. Over the past 13 years the Payout ratio has been at 107%, which means that the company has historically paid out more in dividends than they generated in net income. The current payout ratio of 66% is much more respectable and near the 13-year low of 57%. In the last 10 years, BGS has gotten more consistent about raising its dividend and has a high 3-year growth rate of 11%. That is in line with its 10-year average growth rate.

Valuation

Price-to-Earnings (P/E): 8.97
Price-to-Book (P/B): 2.01
Enterprise Value to EBITDA (EV/EBITDA): 14.56

The current P/E of 8.97 is just off of its 13-year low of 7.39 and considerably lower than its median value of 25.60 over that period. It’s also significantly lower than its industry median of 19.86. The current P/B ratio is slightly higher than the industry median but is below its 13-year median value of 3.70. The current EV/EBITDA is in line with its 13-year average of 14.00 and has remained near this level since early 2012. The valuation ratios for BGS are in line with historical averages and below the industry in some categories. The fact that it’s not comaparatively over valued and pays a historically high yield adds to the value of owning this stock.

Price History

52-Week High: $37.81
52-Week Low: $26.80
52-Week Change: -16.70%
200-Day Moving Average: $31.36

The 52-week low was established on BGS in May of last year and showed some resilience during the sell-off in late 2018. It recently slipped below its 200-day moving average and is trading near its October 2018 low.

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5. Kimco Realty Corp (KIM)

Price: $17.10
Market Cap: $7.34 billion

Business Summary

Kimco Realty Corporation is a self-administered real estate investment trust. The Company is engaged in the ownership, management, development and operation of open-air shopping centers, which are anchored generally by discount department stores, grocery stores or drugstores. Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, the company has specialized in shopping center acquisitions, development and management for more than 60 years.

Dividends & Valuation

Forward Annual Dividend Yield: 6.43%
FFO Payout Ratio: 82.35%
5-Year Average Dividend Yield: 4.73%
3-Year Dividend Growth Rate: 6%
Years of Consecutive Increases: 9

Price-to-FFO (P/FFO): 11.59
Price-to-AFFO (P/AFFO): 11.66

The current yield for KIM is above the 13-year median yield of 4.01% and above the 5-year average yield of 4.73%. For REITs, funds from operations (FFO) and adjusted funds from operations (AFFO) are better measures when looking at the payout ratio. For KIM the FFO payout ratio is 82.35%, which is an indication that they are generating sufficient cash from their operations to pay their dividend. They have raised their dividend for the past 9 years and has generated a solid dividend growth rate of 6%.

From a valuation standpoint, the P/FFO and P/AFFO are at reasonable levels with values of 11.59 and 11.66 respectively. Those values indicate that is will take the company 11 years to make the current market price of its shares. Comparatively, this is at one of the lowest points for these valuation ratios in the past 7years. The combination of a stable and rising dividend and low valuations makes this stock fairly attractively priced while generating a high amount of income.

Price History

52-Week High: $17.96
52-Week Low: $13.16
52-Week Change: 24.41%
200-Day Moving Average: $16.21

The price is just off of its 52-week high of $17.96 and has traded in a fairly stable range for the past year. Recently the price has risen from a December low of $14.29 and is trading above the 200-day moving average which has also begun to turn higher.

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6. One Liberty Properties (OLP)

Price: $27.83
Market Cap: $539.56 million

Business Summary

One Liberty Properties, Inc. is a self-administered and self-managed real estate investment trust (REIT). The Company acquires, owns and manages a geographically diversified portfolio consisting of retail, industrial, flex, and health and fitness properties. One Liberty is a self-administered and self-managed real estate investment trust incorporated in Maryland in 1982.

Dividends & Valuation

Forward Annual Dividend Yield: 6.47%
FFO Payout Ratio: 93.75%
5-Year Average Dividend Yield: 6.9%
3-Year Dividend Growth Rate: 5.1%
Years of Consecutive Increases: 6

Price-to-FFO (P/FFO): 13.98
Price-to-AFFO (P/AFFO): 13.07

The 13-year median yield is 7.04%, which is slightly higher than the current dividend yield. This is representative of a company that has continued to perform relatively well since 2009 and is near its 52-week high in mid-August. The high annual growth rate of the dividend at 5.1% has allowed the yield to remain historically competitive. The FFO payout ratio is indicative of a company that is generating sufficient cash to pay its dividend.

The P/FFO and P/AFFO has remained relatively stable since 2013 as the price has been range-bound and the cash from operations has increased. Similar to KIM, the combination of a stable and rising dividend and stable valuations makes this stock fairly attractively priced while generating a high amount of income.

Price History

52-Week High: $29.44
52-Week Low: $21.70
52-Week Change: 24.24 %
200-Day Moving Average: $26.73

The current price has rallied strongly in the last month as is has once again crossed the 200-day moving average. The price is less than 10% off of its 52-week high and up over 205 in the last year. The long-term trend has continued to rise as indicated by the rising 200-day moving average.

7. Macerich Co. (MAC)

Price: $42.83
Market Cap: $6.49 billion

Business Summary

The Macerich Company is a self-administered and self-managed real estate investment trust (REIT). The Company is involved in the acquisition, ownership, development, redevelopment, management, and leasing of regional shopping centers located throughout the United States.

Dividends & Valuation

Forward Annual Dividend Yield: 7.01%
FFO Payout Ratio: 74.75%
5-Year Average Dividend Yield: 4.11%
3-Year Dividend Growth Rate: 4.6%
Years of Consecutive Increases: 8
Price-to-FFO (P/FFO): 13.98

The current dividend yield for MAC is considerably higher than the 5-year average and the 13-year median yield of 4.11% and 4.08% respectively. The FFO payout ratio of 74.75% shows that they are only paying out that amount of the cash they’re generating from operations. That is attractive since it shows the ability to pay their dividend and still have room to increase it. MAC has consistently raised their dividend over the past 8 consecutive years with a solid growth rate of 4.6%.

As the price has come down the past couple years, the P/FFO is becoming increasingly more compelling. The current value of 13.98 is near the lowest point it has traded since 2010 and the high relative dividend yield reflects that point. The combination of lower valuation, historically high yield and consistent growth rate makes this an attractive candidate for dividend income.

Price History

52-Week High: $61.91
52-Week Low: $40.90
52-Week Change: -25.45 %
200-Day Moving Average: $51.64

The price has come down significantly over the past year and is near its 52-week low and well below its 200-day moving average. As the price comes down, the dividend yield increases and is allowing the dividend yield to attain historically high levels. The price has yet to fully stabilize and has gapped lower on its most recent earnings announcement.

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Stock market strategies

The Future Looks Scary for Investors

Posted on by Manuel Jesus

Investors might be disappointed in the future. At least that is likely to be the case if Dr. Phil is correct. The popular psychologist is fond of noting “The best predictor of future behavior is relevant past behavior.”

For investors, this does mean that there are reasons to expect patterns seen in the past to at least hold partly true in the future. Many analysts apply this philosophy to develop long term forecasts of stock market returns.

Many long term models apply mathematical models based on mean reversion.

In finance, according to Wikipedia, “mean reversion is the assumption that a stock’s price will tend to move to the average price over time.

Using mean reversion in stock price analysis involves both identifying the trading range for a stock and computing the average price using analytical techniques taking into account considerations such as earnings, etc.

When the current market price is less than the average price, the stock is considered attractive for purchase, with the expectation that the price will rise. When the current market price is above the average price, the market price is expected to fall.

In other words, deviations from the average price are expected to revert to the average.

Stock reporting services commonly offer moving averages for periods such as 50 and 100 days. While reporting services provide the averages, identifying the high and low prices for the study period is still necessary.”

This method can also be applied to fundamental data including price to earnings (P/E) ratios.

One Model Suggests Lower Than Average Gains Ahead

One research firm that takes that approach is Crestmont Research, a firm that “develops provocative insights on the financial markets, including the stock market, interest rates, and investment philosophy.

The research focuses on the drivers and characteristics of secular stock market cycles, the impact of the inflation rate and interest rates on the stock and bond markets, and a conceptual approach toward investment strategy that is applicable to the current market environment.”

One study is called “Gazing at the Future” and notes,

“The starting valuation matters! When P/Es start at relatively lower levels, higher returns follow — paying less yields more. When investors have P/Es that start higher, subsequent returns are lower.

This graphical analysis presets the compounded returns that follow over the subsequent ten years based upon the starting P/E ratio. It’s compelling, primarily because it’s fundamental — starting valuations directly impact subsequent returns. From the current above-average valuations, below-average returns are likely to follow for the next decade or longer.”

The current state of this model is shown in the chart below.

Gazing at the future: Why stocks will be underperforming

Source: Crestmont Research

This chart tells us the past ten years were good for investors but the next ten might not be as favorable. P/E ratios at this level have generally been associated with lower than average long term returns.

Another Model Quantifies How Bad It Could Get

Another firm that provides forecasts is GMO, a global investment management firm committed to providing sophisticated clients with superior asset management solutions. This firm manages billions of dollars and follows a value based approach to the markets.

GMO regularly publishes a seven year asset class real return forecast from GMO. It was fairly accurate and useful from 2000–2007. Looking back from 2010, the GMO forecast was not as accurate or useful about future potential returns. This could be due to changes in central bank policies.

The GMO model assumes some mean reversion. Looking ahead, the model expects negative returns large cap stocks in the U. S., an average annual loss of about 2.5% is expected over the next seven years. Small caps are expected to do a little better with an average annualized gain of about 1.3% in the forecast.

GMO expects value stocks in emerging markets to be the best performing asset class with the potential to deliver an average annual return of about 8.2%.

A Look at Broad Asset Classes

Research Affiliates, LLC, is a global leader in smart beta and asset allocation. The firm’s investment strategies are built on a strong research base and are led by Rob Arnott and Chris Brightman. As of December 31, 2018, $170 billion in assets are managed worldwide.

RA also prepares models that show expected long term returns of asset classes. The full model is shown below.

expected returns charts

Source: Research Affiliates

The next chart highlights stocks and gives investors cause for concern.

portfolio and asset class expected returns

Source: Research Affiliates

The firm explains, “Equity expected returns are based on the Gordon Growth Model which focuses on dividend yield and price appreciation earned from a growth in cash flows such that yield remains constant over time. This return perspective can be seen by switching the ‘Model’ to Yield + Growth.

As a default, our return model is valuation aware and also includes modeling of time varying discount rates based on the CAPE ratio measuring prices versus 10-year average real earnings. The level of the CAPE when compared to fair value, or in our case a blended historical average across countries, can inform if markets are overvalued, fair valued or undervalued.”

Overall, there is reason to be concerned. Crestmont, GMO and RA all agree that below average returns are likely. GMO is the most pessimistic and RA’s research suggests that gains of less than 4% are likely.

GMO and RA agree that emerging market stocks are likely to be the strongest performers, and this could be useful information for investors to consider. Now could be an ideal time to consider investing in emerging markets or increasing exposure to those markets.

The outlook for bonds is also below average and investors should not count on a diversified model to help them escape the expected low returns of the next few years. It is also important to remember that these models suggest average returns, and there will be some stocks that deliver returns that are well above average.

Of course, these models could all be wrong. That is possible but investors should not hope that they are. They should accept that what worked in the past ten years may not work as well in the next ten years and they should consider other strategies.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

LP Blogs

5 Monster Dividend Plays to Kickstart Your Second Salary

Posted on by Manuel Jesus

Dividend stocks are a great way to earn passive income.

So much so, they can actually help you secure a second monthly salary, by boosting your returns.

In fact, we’ve uncovered five stocks that have sustainable dividends of more than 10%.

By investing in a basket these stocks for the long term, you get to participate in the growth of those businesses, while being handsomely paid just to hold each of them.

Dividend Trade No. 1 — GameStop Corporation (NYSE:GME)

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer. It operates in five segments: United States, Canada, Australia, Europe, and Technology Brands. The company sells new and pre-owned video game hardware; video game software; pre-owned and value video games; video game accessories, including controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, such as downloadable content, network points cards, prepaid digital and prepaid subscription cards, and digitally downloadable software.

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Many investors are quite intrigued by the company’s yield of 11.7%.

Granted, the company is struggling at the moment.

In fact, Interim CEO Shane Kim has even noted that:

“We are obviously facing some interesting challenges. Our goal is to find the best person to provide the best leadership and energy for the company.”

And while comparable sales are in decline after a 5.3% drop in its latest earnings, the company is stills seeing strength in sales of the Xbox One and PlayStation 4 consoles. There retailer is also seeing health in its accessory business, including headsets and controllers for PCs and consoles.

Better still, GameStop believes most of its 2018 earnings will be generated in the latter part of the year especially around the holiday shopping season. The company has also made it clear that the dividend of nearly 12% remains a stop priority.

Dividend Trade No. 2 — New Residential Investment Corporation (NYSE:NRZ)

New Residential Investment Corp. is a real estate investment trust, focuses on investing in and managing residential mortgage related assets in the United States. It operates through Servicing Related Assets, Residential Securities and Loans, and Other Investments segments. The company invests in excess mortgage servicing rights (MSRs) on residential mortgage loans; and in servicer advances, including the basic fee component of the related MSRs. It also invests in real estate securities, residential mortgage loans, investments in consumer loans, and corporate. In addition, the company has an interest in a portfolio of consumer loans, including unsecured and homeowner loans.

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What’s nice about REITs 1s that they can be very profitable investments. Many times, they have to pay at least 90% of their taxable income in dividends to shareholders, making them a great option for income investors.

It’s part of the reason we like NRZ, which hasa dividend yield of 11.12%.

Dividend Trade No. 3 — Buckeye Partners LP (NYSE:BPL)

Buckeye Partners, L.P. owns and operates liquid petroleum products pipelines in the United States and internationally. The company operates through three segments: Domestic Pipelines & Terminals, Global Marine Terminals, and Merchant Services.

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At the moment, it carries a dividend yield of 12.09%.

What’s nice about BPL is that despite headwinds, it continues to pay out a distribution every quarter and has never reduced its distribution during its more than 30-year history, says CEO Clark Smith.

“2018 is a transitional year for Buckeye, as market conditions for segregated storage remain challenged and meaningful contributions from capital projects will not be realized until 2019 and 2020,” he says.

Plus, the company is quite confident in its future.

In fact, it just created a partnership with Phillips 66 Partners and And eavor (25% interest each, with Buckeye holding the remaining 50%) to build a new crude oil export terminal in Ingleside,

Texas. Buckeye is also working on a pipeline that can change flow direction that will allow it to expand its Michigan/Ohio business. That project is expected to be complete by the end of 2018.

Dividend Trade No. 4 —- DDR Corporation (NYSE:DDR)

DDR is an owner and manager of 258 value-oriented shopping centers representing 89 million square feet in 32 states and Puerto Rico. The Company owns a high-quality portfolio of open-air shopping centers in major metropolitan areas that provide a highly compelling shopping experience and merchandise mix for retail partners and consumers. The Company actively manages its assets with a focus on creating long-term shareholder value. DDR 1s a self- administered and self-managed REIT operating as a fully integrated real estate company.

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DDR carries a current dividend yield of 10.2%.

After announcing a 1:2 reverse stock split effective May 21, 2018, we’re seeing signs of confidence in the stock with insider buying. In fact, a director has been buying shares of the shopping center-focused real estate investment trust since February, including this past week’s more than 816,000 shares. At prices that ranged from $7.21 to $7.51 apiece, that cost them approximately $6 million.

In its most recent quarterly report, the company not edit had $97.8 million in funds from operation, or 26 cents a share, which was better than estimates of 23 cents. Funds from operations are a closely watched measure in the REIT industry. It takes net income and adds back items such as depreciation and amortization.

Revenue was $207 million, beating estimates for $199.3 million.

Dividend Trade No. 5 — Energy Transfer Partners LP (NYSE:ETP)

Energy Transfer Partners, L.P. engages in the natural gas midstream, and intrastate transportation and storage businesses in the United States. The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas through connections with other pipeline systems, as well as through its ET Fuel System and HPL System.

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ETP carries a current dividend yield of 11.7%.
Better yet, it’s part of the explosive Permian Basin.
According to RigZone.com:

It “plans to build a crude pipeline from the Permian basin in Texas to the Houston Ship Channel and Nederland, Texas, which will have an initial capacity of up to 600,000 barrels per day (bpd). The pipeline will be “easily expandable” to 1 million bpd, in order to serve growing a export markets at coastal ports, the company said during first quarter earnings conference call. It is likely to come online by 2020. Surging crude output from the Permian basin, the biggest oilfield in the United States and the source of most of the country’s shale crude, is straining the region’s infrastructure. Pipelines are running full, sending crude prices there to the weakest level against benchmark futures in three and a half years.”

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