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You Need Dividends During Inflation

Friday, October 8th, 2021

Intro

Earlier in the Summer, I wrote about inflation and why I thought it was likely less transitory than the Federal Reserve was stating. I think we are now seeing even the Federal Reserve acknowledge that inflation will be around for awhile as we see energy, housing, and food costs all heading materially higher.

Because of this, I thought I’d show you the benefit of dividend stocks over bonds that pay interest during times of inflation.

Dividends Grow Annually – Interest Stays the Same

When inflation is rising, that fixed interest payment that you receive on a bond stays the same, yielding you reduced purchasing power from the returns on your investment.

Dividends, on the other hand, generally grow each year as corporate earnings grow. In times of inflation, corporate earnings generally grow faster than previously as companies raise their prices to compensate for the rising costs of production. Managements work hard to keep their profit margins the same or increasing, so if they are successful – and most tend to be – their profits on the increased prices provides increased net income from which increased dividends are paid.

At BankChampaign, we have two primary dividend portfolios – Blue Chip Portfolio which focuses on an equity income strategy and Dividend Income Portfolio which focuses on yield, growth and consistency of dividend payments. The purpose of today’s blog is to discuss the Dividend Income Portfolio.

Below is a grid of the companies that are eligible to be included in the portfolio. The companies either have to have:

  • Dividend Income Consistency – a long history of paying dividends; some have a greater than 100 year history of paying and increasing the dividends paid to their shareholders
  • Dividend Income Growth – a history of raising their dividends by at least 9% per year
  • Dividend Income Yield – a history of paying well above average dividends to their shareholders, with a yield greater than 3%, many with yields above 5%
TickerCompanyDividend HistoryYieldDiv Growth Rate
Dividend Income Consistency Holdings  
CATCaterpillar Inc S&P Dividend Aristocrat (25yrs+) 2.19%9%
GDGeneral Dynamics Corp S&P Dividend Aristocrat (25yrs+) 2.34%8%
GISGeneral Mills Inc Dividend Payor King (100+ yrs) 3.41%3%
HIGThe Hartford Financial Services  Dividend Contender (10-24yrs) 1.96%8%
MCDMcDonald’s Corp S&P Dividend Aristocrat (25yrs+) 2.14%7%
MCYMercury General Corp Dividend Champion (25yrs+) 4.54%0%
MMM3M Co Dividend Growth King (50+ Years) 3.37%2%
MOAltria Group Inc Dividend Growth King (50+ Years) 7.64%4%
NFGNational Fuel Gas Co Dividend Champion (25yrs+) 3.43%2%
PEPPepsiCo Inc S&P Dividend Aristocrat (25yrs+) 2.79%6%
PGProcter & Gamble Co Dividend Payor King (100+ yrs) 2.38%7%
PMPhilip Morris International Inc Dividend Contender (10-24yrs) 5.12%3%
QCOMQualcomm Inc Dividend Contender (10-24yrs) 2.06%2%
RSGRepublic Services Inc Dividend Contender (10-24yrs) 1.45%6%
UNPUnion Pacific Corp Dividend Payor King (100+ yrs) 2.08%5%
VZVerizon Communications Inc Dividend Contender (10-24yrs) 4.65%2%
XOMExxon Mobil Corp Dividend Payor King (100+ yrs) 5.92%1%
Dividend Income Growth  Holdings
AAgilent Technologies Inc Dividend Contender (10-24yrs) 0.48%10%
AAPLApple Inc Dividend Challenger (5-9yrs) 0.60%6%
ABTAbbott Laboratories S&P Dividend Aristocrat (25yrs+) 1.45%13%
ACNAccenture PLC Class A Dividend Contender (10-24yrs) 1.10%10%
AMGNAmgen Inc Dividend Contender (10-24yrs) 3.24%10%
AMTAmerican Tower Corp Dividend Contender (10-24yrs) 1.90%20%
ATVIActivision Blizzard Inc Dividend Contender (10-24yrs) 0.61%11%
AVGOBroadcom Inc Dividend Contender (10-24yrs) 2.97%23%
AWKAmerican Water Works Co Inc Dividend Contender (10-24yrs) 1.36%10%
BACBank of America Corp Dividend Challenger (5-9yrs) 1.77%9%
BMYBristol-Myers Squibb Co Dividend Contender (10-24yrs) 3.31%10%
COPConocoPhillips Dividend Challenger (5-9yrs) 2.54%27%
COSTCostco Wholesale Corp Dividend Contender (10-24yrs) 0.66%11%
CTASCintas Corp S&P Dividend Aristocrat (25yrs+) 1.57%96%
DGDollar General Corp Dividend Challenger (5-9yrs) 0.74%13%
FITBFifth Third Bancorp Dividend Contender (10-24yrs) 2.62%15%
HDThe Home Depot Inc Dividend Contender (10-24yrs) 1.96%10%
LMTLockheed Martin Corp Dividend Contender (10-24yrs) 3.01%9%
VLOValero Energy Corp Dividend Contender (10-24yrs) 5.55%9%
Dividend Income Yield  Holdings
ABBVAbbVie Inc S&P Dividend Aristocrat (25yrs+) 4.71%10%
ADMArcher-Daniels Midland Co S&P Dividend Aristocrat (25yrs+) 2.45%3%
AFLAflac Inc S&P Dividend Aristocrat (25yrs+) 2.44%4%
BXBlackstone Inc Dividend Challenger (5-9yrs) 2.60%-21%
CMICummins Inc Dividend Contender (10-24yrs) 2.45%8%
GILDGilead Sciences Inc Dividend Challenger (5-9yrs) 4.02%8%
GMREGlobal Medical REIT Inc Dividend Challenger (5-9yrs) 5.54%0%
HRBH&R Block Inc Dividend Challenger (5-9yrs) 4.24%0%
JHGJanus Henderson Group PLC Dividend Challenger (5-9yrs) 3.58%0%
KKellogg Co Dividend Contender (10-24yrs) 3.60%1%
KEYKeyCorp Dividend Contender (10-24yrs) 3.42%4%
NEMNewmont Corp Dividend Newbie (<5yrs) 3.78%86%
NTRNutrien Ltd Dividend Challenger (5-9yrs) 2.82%2%
OKEONEOK Inc Dividend Contender (10-24yrs) 6.45%6%
PFEPfizer Inc Dividend Contender (10-24yrs) 3.60%6%
SOSouthern Co Dividend Contender (10-24yrs) 4.20%3%
TAT&T Inc S&P Dividend Aristocrat (25yrs+) 7.70%1%
TFCTruist Financial Corp Dividend Contender (10-24yrs) 3.12%5%
TXTernium SA ADR Dividend Challenger (5-9yrs) 4.96%0%

Not all clients own each of these companies, but as we are constructing portfolios these are generally the companies that are included based upon their relative value and prospects at the time.

Dividends and the Power of Compound Growth

If you happened to own all of these companies in relatively equal dollar amounts, for the first year you would get an average yield of 3.14%. If you wanted to invest up to $2,000 in each company at today’s prices, you would have a portfolio worth just shy of $107,000 and have income that first year of $3,556. Definitely better than owning a bond that is paying you less than 1%, maybe way less.

However, what happens when you get to Year Five of owning this portfolio? Because of the income growth rate (see the last column on the grid above) your income would have grown to $4,484, a 4.20% yield. Definitely better than investing $107,000 in a 1% yielding bond that paid you $1,070 in year one and still pays you $1,070 in year five.

That’s nice, but we really get to see the power of compounding when we get to Year Ten. In year ten, you income would have grown to $6,409, a 6.01% yield. Now we’re talking!

To do an apples to apples comparison, today you can buy a ten year Treasury Bond yielding 1.55%. On your $107,000 investment you would receive $1,658 each year, or a total of $16,580 in income over the ten year life of the bond.

But let’s compare that to our Dividend Income Portfolio: due to the dividend growth rate that compounds our annual dividends, we receive a growing income each year. Over the course of the same ten years that you receive $16,580 from your treasury bond, you would receive $47,701 in dividend income from this same $107,000 stock portfolio. Roughly triple the income for investing the money in stocks instead of bonds.

But There Is More…

Additionally, each of the companies in the portfolio grows over time. For example, the Average Annual Return from Caterpillar stock has been 11% annually over the past ten years. This is comprised of the dividend and the increase in the price of the stock.

On October 11, 2011, the price of a share of Caterpillar stock was $60.91 compared to $195.10 today. The share price of caterpillar stock has tripled in those ten years plus you received $695 in dividends on your $2,000 initial investment.

If you take this and extend it to the entire portfolio, and project the future value based upon the growth rate it has experienced the past ten years, you would not get a realistic number. The fact is we have been in a major bull market the past ten years like we haven’t seen since the 80’s. That is not likely to be repeated.

But why don’t we project that future value based upon 1/2 of the growth rate of the stock and see what the portfolio might theoretically show for a total value at the end of ten years. So, looking at caterpillar, since it had an average total return of 11% per year, if we reduce that by the 2.19% yield and further reduce it by 50%, we still show a value of $2,952, or almost doubling our original $2,000 investment. Still not bad.

In Total

So at the end of ten years, you would have collected $47,701 in dividends and you would have a $107,000 portfolio of stocks that theoretically would grow (based upon the same formula used for Caterpillar above) to $193,665, or almost doubling our original investment.

This gives you total value plus income received on your Dividend Income Portfolio of $241,336 compared to your Treasury Bond of $123,580 ($107,000 Bond return of principal at maturity plus total interest payments of $16,580).

Final Thoughts And Caveats

As you looks at the dividend growth rates in the chart above, you will see some that are unreasonably high and not likely to repeat. Because of this I capped the growth rate in dividends just as I reduced the growth rate in stock price to come up with the projected values above. If the dividend growth rate was between 10% and 20%, I capped it at 10% in the calculation; if the dividend growth rate was greater than 20%, I capped it at 20% in the calculation; if it was below 10%, I used the dividend growth rate as shown in the grid above. For the growth rates that are shown as zero, the companies generally raised their dividends fractionally so they were not mathematically more significant than zero, so zero is what was used in the calculation.

In order to give me some confidence that the companies in the portfolio will continue to pay dividends, you can see that most have been paying and raising their dividends between 10 and 24 years, 25 and 49 years, 50 and 99 years, and over 100 years. This means that during such economic calamities as the Great Depression, the 1929 Stock Market Crash, World Wars One and Two, the 1970’s hyper inflation, Black Monday when the stock market dropped 27% in a single day, 911, the DotCom stock market crash, the SubPrime Loan stock market crash, and the Covid stock market crash, these companies continued to pay and raise their dividends because they were committed to their shareholders and their financial performance allowed them to do so.

That’s not to say those economic calamities were not painful as the value of stock portfolios fell significantly during many of them. But over a long enough time horizon, through sound portfolio management and avoiding panic selling, stocks outperform other classes of marketable investments.

As we are moving into an inflationary economy, don’t fall victim to negative real rates of return (e.g., 1.55% bond yield minus 4% inflation = negative 2.45% real rate of return for a ten year treasury bond) when you can get a nicely positive real rate of return from stocks as long as you hold them long enough, manage them appropriately, and don’t panic during market crashes (e.g., the 14% Average Annual Return over the past ten years for the companies in the Dividend Income Portfolio minus 4% inflation = positive 10% real rate of return – however adjusting that down using the math above, the 14% becomes roughly 8.5% projected Average Annual Return yielding a 4.5% real rate of return).

If you need help navigating an inflationary economy while managing your savings and investments, you can contact me at mballard@bankchampaign.com and we can discuss it.

Thanks for reading,

–Mark

Investment Metrics

Wednesday, September 29th, 2021

Important Indicators Of Company Performance

I like metrics. They give me a quick way to both monitor the performance of a company I own and to indicate whether further due diligence is warranted on a company I currently do not own.

I use several metrics that give me a feel for how a company is performing as that performance translates into stock price performance (or at least it should subject to valuation levels and sentiment).

One of my top metrics is one I call the High Performer 15’s. This is a set of ratios that all must exceed 15%:

  • Earnings Per Share Growth > 15%
  • Revenue Per Share Growth > 15%
  • Return on Equity > 15%
  • Operating Margin > 15%
  • Book Value Growth > 15%
  • Return on Invested Capital > 15%

This set of six ratios tells me whether a company is growing, whether it is operating efficiently and effectively, whether they are building value and providing top level returns for its shareholders. This is a tough hurdle for most companies to pass; in my database of 1200 companies that I follow, only 45 meet or exceed all six of these ratios. Here is that list:

TickerCompanyStock
Sector
Style3yr Avg Return10yr Avg ReturnValuation
ADBEAdobe IncTechnologyLarge Growth35%39%Fairly Valued
ALGNAlign Technology IncHealthcareLarge Growth23%45%Materially Overvalued
AMATApplied Materials IncTechnologyLarge Growth43%29%Fairly Valued
AMDAdvanced Micro Devices IncTechnologyLarge Growth78%33%Fairly Valued
APPSDigital Turbine IncTechnologySmall Growth255%35%Materially Overvalued
APTAlpha Pro Tech LtdIndustrialsSmall Core39%21%Fairly Valued
ATVIActivision Blizzard IncCommunication ServicesLarge Core5%22%Fairly Valued
COWNCowen Inc Class AFinancial ServicesSmall Value39%11%Fairly Valued
CTLTCatalent IncHealthcareMid-Cap Growth45%Materially Overvalued
DGXQuest Diagnostics IncHealthcareMid-Cap Value13%13%Overvalued
DHRDanaher CorpHealthcareLarge Growth45%26%Materially Overvalued
DISHDISH Network Corp Class ACommunication ServicesMid-Cap Value5%7%Fairly Valued
DXCMDexCom IncHealthcareLarge Growth61%47%Materially Overvalued
EBAYeBay IncConsumer CyclicalLarge Core25%20%Overvalued
EBSEmergent BioSolutions IncHealthcareSmall Core3%15%Fairly Valued
ETSYEtsy IncConsumer CyclicalMid-Cap Growth61%Overvalued
EXPEagle Materials IncBasic MaterialsSmall Core14%24%Overvalued
FBFacebook Inc Class ACommunication ServicesLarge Growth25%Fairly Valued
GMABGenmab A/S ADRHealthcareLarge Growth41%54%Materially Overvalued
HRBH&R Block IncConsumer CyclicalSmall Value3%10%Fairly Valued
KLACKLA CorpTechnologyLarge Core46%27%Fairly Valued
LHLaboratory Corp of America HoldingsHealthcareMid-Cap Value19%14%Overvalued
LOGILogitech International SATechnologyLarge Growth34%26%Fairly Valued
MASIMasimo CorpHealthcareMid-Cap Core36%28%Overvalued
MKSIMKS Instruments IncTechnologyMid-Cap Core19%21%Fairly Valued
MKTXMarketAxess Holdings IncFinancial ServicesMid-Cap Growth38%33%Materially Overvalued
MSFTMicrosoft CorpTechnologyLarge Core39%28%Undervalued
NBIXNeurocrine Biosciences IncHealthcareMid-Cap Growth-9%32%Fairly Valued
NFLXNetflix IncCommunication ServicesLarge Growth14%34%Materially Overvalued
NKENike Inc Class BConsumer CyclicalLarge Growth29%23%Overvalued
NVDANVIDIA CorpTechnologyLarge Growth47%53%Overvalued
NXSTNexstar Media Group Inc Class ACommunication ServicesSmall Value27%39%Fairly Valued
PKIPerkinElmer IncHealthcareMid-Cap Core30%24%Materially Overvalued
PYPLPayPal Holdings IncFinancial ServicesLarge Growth47%Materially Overvalued
QDELQuidel CorpHealthcareSmall Core24%26%Fairly Valued
RILYB. Riley Financial IncFinancial ServicesSmall Core51%41%Fairly Valued
TERTeradyne IncTechnologyMid-Cap Growth44%27%Fairly Valued
TGNATegna IncCommunication ServicesSmall Value19%16%Fairly Valued
TMOThermo Fisher Scientific IncHealthcareLarge Growth33%27%Overvalued
TTDThe Trade Desk Inc ATechnologyMid-Cap Growth106%Materially Overvalued
VEEVVeeva Systems Inc Class AHealthcareLarge Growth59%Fairly Valued
VRTXVertex Pharmaceuticals IncHealthcareLarge Core5%16%Undervalued
WSMWilliams-Sonoma IncConsumer CyclicalMid-Cap Core39%20%Fairly Valued
YETIYETI Holdings IncConsumer CyclicalMid-Cap GrowthMaterially Overvalued
ZMZoom Video Communications IncTechnologyLarge GrowthOvervalued

This list does not provide a template for a fully diversified portfolio – it is heavily weighted toward technology and communications companies, with limited to no exposure to large sectors of the market like Industrials, Financials, Real Estate, Energy or Utilities.

Many of these companies do show up in client portfolios – others do not as they may be too overvalued to purchase at this time, we may have full allocations to their sector without them, they may not meet our financial strength requirements, the projected outlook for them is not as solid as their past performance, they may have just recently joined this list and are candidates for purchase, or one of many other reasons.

There are other metrics that I follow that will give me other lists of companies, some of which we own and some of which we do not. The point is that there is not one way to know whether you want to buy or sell a company – but it all comes down to fundamental analysis of their financial statements, their industries, their competition, and their prospects. However, if you look at the 3yr and 10yr average returns of the companies on this list, they predominantly have been companies that you want to own and that have provided you with well above average returns.

So why wouldn’t we just own all of them and call it a day? It goes back to the fundamental analysis. If we look at a company like Quidel Corp you can see that it is fairly valued (an important factor if you want to be a buyer – remember in a previous blog post we discussed forward returns and how they are impacted by the price at which you buy a stock) and has had mid-20% average returns over three and ten years. But when you look at their forward prospects you have to stop and wonder if they will continue – I write that because Quidel Corp is one of the primary providers of the Covid-19 tests that have been so prominent in our lives for most of the past two years. Check out their stock price chart below:

This is a three-year price chart and you can see how their stock price skyrocketed higher in the Spring of last year coincident with the start of Covid-19, how it fell back in the Spring of this year but has moved back up roughly 30% higher since the Delta variant has been prevalent. When we get past the Delta variant, will QDEL still be on this list? Will its stock price continue to return mid-20% on average over the next three or ten years?

My best guess is that Covid-19 will be with us for longer than any of us would like – there will likely be new variants that will hit us generating the need for more tests, and that their performance will keep QDEL on this list. Given that, I want to own this company and have slowly been adding shares to client accounts where they were below target equity allocations – but I added partial positions so that if we get a pull back in price I can build a full position at an improved basis.

You can develop your own set of metrics to manage your investment portfolio – it just takes time and research to find a set that will give you a list of stocks upon which you can do your own due diligence before investing. The metric is not the final answer as to whether you should own a specific company, as we saw with QDEL above. However, they can provide you with a good place to start.

If you don’t want to do the work and want to be a client so that I do the work for you, you can call or email me at the contact information on this website and we can discuss next steps.

I will be back with other metrics and the lists of companies they generate in coming posts, so watch for those in the near future.

–Mark

Ranking Stocks for Investment – Sixth in Series

Tuesday, July 20th, 2021

Our Ranking

Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.

Companies Ranked as Candidates For Investment

In the first four entries in this series, we looked at Quality Ranked companies , Earnings Growth Ranked companies, Financial Strength Ranked companies, and Fundamental Ranked companies. Today, we are going to look at companies to see if they are Candidates For Investment based upon aggregating the four ranking systems.

Over the years, I have found that when a company ranks highly on all four of the ranking systems, they are a strong candidate for further due diligence to see if they make the cut to be included in client portfolios.

Below are a selection of companies from our database with a rank above 90 on each of the four ranking systems and a history of above average bear market performance plus those with a rank below 60 on each of the ranking systems and a history of very weak bear market performance.

Company NameQuality RankEarnings Growth RankFinancial Strength RankFundamental Rank10-yr Avg Return
Avery Dennison Corp98.496.393.892.319.55%
Cabot Oil & Gas Corp97.895.299.495.10.93%
Jazz Pharmaceuticals PLC98.695.191.195.618.91%
Mercury General Corp92.994.698.798.18.37%
NVR Inc99.998.297.793.621.08%
Rio Tinto PLC96.59594.199.94.98%
Southern Copper Corp91.598.393.695.69.39%
The Toro Co92.49392.694.722.59%
Werner Enterprises Inc90.296.194.3977.84%
Winnebago Industries Inc98.399.69894.222.40%
Altisource Portfolio Solutions SA314.713.127.2-6.74%
FuelCell Energy Inc24.725.621.127.2-26.28%
Fluor Corp49.230.449.159.9-9.00%
The Howard Hughes Corp40.837.820.943.84.53%
Ocean Power Technologies Inc5929.411.810.8-42.96%
Spirit AeroSystems Holdings Inc40.213.114.838.59.08%
Triumph Group Inc34.843.145.244.3-7.61%
Tata Motors Ltd2241.734.4460.93%
AgEagle Aerial Systems Inc9.430.111.515.3-32.32%
Wynn Resorts Ltd32.916.31333.21.64%

A review of the chart above will indicate that the companies highly ranked ranked performed better on average over the past ten years than those ranked low. So, lets look at the scatter graph for a visual analysis:

Looking at the graph, it is easy to conclude that the companies ranked highly on all four ranking systems have materially out-performed those with low ranks on all four ranking systems on average over the past ten years.

Why Is This Important Now?

In the first entry in this series, I mentioned that the Federal Reserve had begun to discuss tightening monetary policy, an event that has in the past led to stock market corrections and sometimes full bear markets. Given their recent statements, it is prudent to know how companies will perform when there is not a significant stimulus pushing their stock prices higher.

Investment Strategy

In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.

Summary

In the six posts in this blog series, we looked at four of our Ranking Systems and compared them to the 3-year Average Return for companies ranked both high and low by the systems. We then looked at how the combining the systems compared to both 3-year and 10-year Average returns. The analysis showed that by relying on the results of the analytical ranking systems provides a start for further due diligence on those that appear to be strong candidates for investment to see if they should in fact be included in client portfolios.

–Mark

Ranking Stocks for Investment – Fifth in Series

Friday, July 16th, 2021

Our Ranking

Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.

Companies Ranked as Candidates For Investment

In the first four entries in this series, we looked at Quality Ranked companies , Earnings Growth Ranked companies, Financial Strength Ranked companies, and Fundamental Ranked companies. Today, we are going to look at companies to see if they are Candidates For Investment based upon aggregating the four ranking systems.

Over the years, I have found that when a company ranks highly on all four of the ranking systems, they are a strong candidate for further due diligence to see if they make the cut to be included in client portfolios.

Below are a selection of companies from our database with a rank above 90 on each of the four ranking systems and a history of above average bear market performance plus those with a rank below 60 on each of the ranking systems and a history of very weak bear market performance.

Company NameQuality RankEarnings Growth RankFinancial Strength RankFundamental Rank3-yr Avg Return
Avery Dennison Corp98.496.393.892.329%
Cabot Oil & Gas Corp97.895.299.495.1-9%
Jazz Pharmaceuticals PLC98.695.191.195.61%
Mercury General Corp92.994.698.798.114%
NVR Inc99.998.297.793.617%
Rio Tinto PLC96.59594.199.923%
Southern Copper Corp91.598.393.695.616%
The Toro Co92.49392.694.725%
Werner Enterprises Inc90.296.194.39710%
Winnebago Industries Inc98.399.69894.228%
Aurora Cannabis Inc41.7109.622.3-50%
Altisource Portfolio Solutions SA314.713.127.2-38%
Coty Inc2050.232.132.8-9%
FuelCell Energy Inc24.725.621.127.2-24%
Fluor Corp49.230.449.159.9-25%
The Howard Hughes Corp40.837.820.943.8-6%
Norwegian Cruise Line Holdings Ltd010.23.117.1-15%
Ocean Power Technologies Inc5929.411.810.8-52%
PBF Energy Inc30.259.236.249.8-27%
Spirit AeroSystems Holdings Inc40.213.114.838.5-16%
Triumph Group Inc34.843.145.244.3-2%
Tata Motors Ltd2241.734.4461%
T2 Biosystems Inc2248356.8-46%
AgEagle Aerial Systems Inc9.430.111.515.331%
Alkaline Water Co Inc26.429.113.717-7%
Wynn Resorts Ltd32.916.31333.2-10%

A review of the chart above will indicate that the companies highly ranked performed better on average over the past three years than those ranked low. So, lets look at the scatter graph for a visual analysis:

Looking at the graph, it is easy to conclude that the companies ranked highly on all four ranking systems have materially out-performed those with low ranks on all four ranking systems on average over the past three years.

Why Is This Important Now?

In the first entry in this series, I mentioned that the Federal Reserve had begun to discuss tightening monetary policy, an event that has in the past led to stock market corrections and sometimes full bear markets. Given their recent statements, it is prudent to know how companies will perform when there is not a significant stimulus pushing their stock prices higher.

Investment Strategy

In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.

What’s Next?

We have looked at the combined ranks on a 3-year average return comparison so lets look at it on a 10-year average return comparison to make sure the correlation between high ranks and high returns holds true.

–Mark

Ranking Stocks for Investment – Fourth in Series

Wednesday, July 14th, 2021

Our Ranking

Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.

Fundamental Ranked Companies

In the first three entries in this series, we looked at Quality Ranked companies , Earnings Growth Ranked companies, and Financial Strength Ranked companies. Today, we are going to look at another of our concept-based ranks: Fundamental.

Our Fundamental Rank is the most complex of the ranking systems and encompasses 87 financial ratios related to the Balance Sheet, Income Statement, Statement of Cash Flows and the Effectiveness of Company Management. The ratios rank the companies against their industry as well as the S&P 1500.

Based upon this, below are a selection of companies from our database that are ranked Fundamentally Strong with a rank above 90 and a history of strong bear market performance plus those ranked Fundamentally Weak with a rank below 60 and a history of weak bear market performance.

FundamentalsCompany NameFundamental Rank3-yr Avg Return
Fundamentally StrongDollar General Corp99.332%
Fundamentally StrongIntel Corp96.82%
Fundamentally StrongKirkland Lake Gold Ltd92.433%
Fundamentally StrongEli Lilly and Co90.135%
Fundamentally StrongMercury General Corp98.714%
Fundamentally StrongProgressive Corp95.520%
Fundamentally StrongQuinStreet Inc91.810%
Fundamentally StrongRoss Stores Inc98.716%
Fundamentally StrongBoston Beer Co Inc94.761%
Fundamentally StrongUnitedHealth Group Inc98.920%
Fundamentally WeakApogee Enterprises Inc59.5-2%
Fundamentally WeakDevon Energy Corp58.6-8%
Fundamentally WeakGeneral Electric Co42.51%
Fundamentally WeakThe St. Joe Co36.339%
Fundamentally WeakLimoneira Co33.1-7%
Fundamentally WeakPhillips 6659.8-6%
Fundamentally WeakRaytheon Technologies Corp54.62%
Fundamentally WeakSplunk Inc48.92%
Fundamentally WeakValero Energy Corp53.2-9%

A review of the chart above will indicate that the companies ranked as Fundamentally Strong performed better on average over the past three years than those ranked as Fundamentally Weak. So, lets look at the scatter graph for a visual analysis:

Looking at the graph, it is easy to conclude that the companies ranked Fundamentally Strong have out-performed those ranked Fundamentally Weak on average over the past three years.

Why Is This Important Now?

In the first entry in this series, I mentioned that the Federal Reserve had begun to discuss tightening monetary policy, an event that has in the past led to stock market corrections and sometimes full bear markets. Given their recent statements, it is prudent to know how companies will perform when there is not a significant stimulus pushing their stock prices higher.

Investment Strategy

In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.

What’s Next?

In Part Five of this series, we will look at what happens when we combine the ranks discussed in the first four parts of this series.

–Mark

Ranking Stocks for Investment – Third in Series

Friday, July 9th, 2021

Our Ranking

Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.

Financial Strength Ranked Companies

In the first two entries in this series, we looked at Quality Ranked companies and Earnings Growth Ranked companies. Today, we are going to look at another of our concept-based ranks: Financial Strength.

Our Financial Strength Rank combines our Quality Rank with several Value related ratios that help rank the company based upon earnings valuation (e.g., Price/Earnings), sales valuation (e.g., Price/Sales), free cash flow (e.g., FCF/Enterprise Value), and asset valuation (e.g., Price/Book), among others.

Based upon this, below are a selection of companies from our database that are ranked Financially Strong with a rank above 90 and a history of strong bear market performance plus those ranked Financially Weak with a rank below 60 and a history of weak bear market performance.

FinancialsCompany NameFinancial Strength Rating3-yr Avg Return
Strong FinancialsDollar General Corp90.432%
Strong FinancialsBarrick Gold Corp98.524%
Strong FinancialsIntel Corp91.52%
Strong FinancialsKirkland Lake Gold Ltd97.633%
Strong FinancialsMercury General Corp98.114%
Strong FinancialsNewmont Corp98.226%
Strong FinancialsProgressive Corp95.920%
Strong FinancialsSouthern Copper Corp95.616%
Strong FinancialsUnitedHealth Group Inc93.520%
Weak FinancialsAlaska Air Group Inc48.26%
Weak FinancialsBank of America Corp42.315%
Weak FinancialsChevron Corp40.8-1%
Weak FinancialsGeneral Electric Co41.31%
Weak FinancialsIntuitive Surgical Inc54.820%
Weak FinancialsPalo Alto Networks Inc35.220%
Weak FinancialsPhillips 6658.2-6%
Weak FinancialsRaytheon Technologies Corp56.32%
Weak FinancialsSplunk Inc30.72%
Weak FinancialsTruist Financial Corp58.48%
Weak FinancialsWells Fargo & Co58.2-2%
Weak FinancialsExxon Mobil Corp58.3-5%

A review of the chart above will indicate that the companies ranked as having Strong Financials performed better on average over the past three years than those ranked as having Weak Financials. So, lets look at the scatter graph for a visual analysis:

Looking at the graph, it is easy to conclude that the companies ranked with Strong Financials have out-performed those with Weak Financials on average over the past three years.

Why Is This Important Now?

In the first entry in this series, I mentioned that the Federal Reserve had begun to discuss tightening monetary policy, an event that has in the past led to stock market corrections and sometimes full bear markets. Given their recent statements, it is prudent to know how companies will perform when there is not a significant stimulus pushing their stock prices higher.

Investment Strategy

In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.

What’s Next?

In Part Four of this series, we will look at our Fundamental Rank to see what it tells us that will be useful in managing portfolios to prepare for a correction or bear market at some point in the future.

–Mark

Ranking Stocks for Investment – Second in Series

Tuesday, July 6th, 2021

Our Ranking

Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.

Earnings Growth Ranked Companies

Our Earnings Growth Rank is the original analytical system whose nexus started with my Masters Thesis. The thesis set out to disprove the Efficient Market Hypothesis (yes, that is how long ago it was – it has graduated to a Theory and is no longer a Hypothesis). The synopsis of the thesis was that in spite of the strong support for the Hypothesis, there really are certain financial ratios in the public realm that when viewed as a whole can provide index beating returns over the long run. And given our track record of beating the index over the long run, the Earnings Growth Rank is a very important part of our investment process.

There are several financial ratios that comprise the Earnings Growth Rank, but they can categorized into four main groupings: Earnings Per Share Growth; Sales Growth; Operating Income Growth; and Cash Flow. There are nineteen ratios that are distributed between these four primary groupings, but when taken as a complete package, provide a good look into which companies are investable based upon their income statement.

Below is a non-exhaustive list of companies from our database that are designated either High Growth or Low Growth based upon, among other factors, their Earnings Growth Rank.

DesignationCompany NameEarnings Growth Rank3-yr Avg Return
High GrowthBroadcom Inc9825%
High GrowthBerkshire Hathaway Inc95.115%
High GrowthEtsy Inc94.173%
High GrowthGenmab A/S94.937%
High GrowthMercury General Corp94.614%
High GrowthNational Fuel Gas Co943%
High GrowthOracle Corp92.820%
High GrowthPayPal Holdings Inc95.746%
High GrowthQorvo Inc98.931%
High GrowthRoss Stores Inc97.816%
High GrowthSouthern Copper Corp98.316%
High GrowthSkyworks Solutions Inc98.620%
High GrowthTexas Instruments Inc95.420%
Low GrowthAlaska Air Group Inc42.96%
Low GrowthApogee Enterprises Inc49.7-2%
Low GrowthBank of America Corp57.515%
Low GrowthCompass Minerals International Inc59.86%
Low GrowthChevron Corp54.5-1%
Low GrowthGeneral Electric Co34.71%
Low GrowthLimoneira Co32.2-7%
Low GrowthPalo Alto Networks Inc54.720%
Low GrowthPhillips 6633.1-6%
Low GrowthRaytheon Technologies Corp47.32%
Low GrowthSplunk Inc11.92%
Low GrowthValero Energy Corp43.7-9%

A quick look at the table gives you a good feel for the fact that the High Growth companies have performed much better over the last three years than the Low Growth companies. This may not always be the case as their are certain times when companies with low earnings growth scores will out-perform those with high earnings growth scores.

Below is a scatter plot that shows you visually the results of the above analysis – it is pretty apparent that the high growth companies performed better over the past three years than the low growth companies., even when taking into consideration the impact of the significant covid correction:

However, I specifically chose the last three years average return because it included the covid correction in the spring of 2020 for the stock market. I wanted to specifically know which designation performed better during a major correction.

Why Is This Important Now?

In the first entry in this series, I mentioned that the Federal Reserve had begun to discuss tightening monetary policy, an event that has in the past led to stock market corrections and sometimes full bear markets. Given their recent statements, it is prudent to know how companies will perform when their is not a significant stimulus pushing their stock prices higher.

Investment Strategy

In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.

What’s Next?

In Part Three of this series, we will look at our Financial Strength Rank to see what it tells us that will be useful in managing portfolios to prepare for a correction or bear market at some point in the future.

–Mark

Ranking Stocks for Investment – First in Series

Thursday, July 1st, 2021

Our Ranking

Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.

Quality Ranked Companies

Today, I thought we would look at our Quality Rank – one of the factors that lead to their being designated as High Quality or Low Quality. The other factors include having 9 of past 10 years as profitable, a Return on Invested Capital > Weighted Average Cost of Capital, Growing Book Value, growing earnings, bear market stock price performance, etc.

However, being either high or low quality in and of itself is not a reason to buy or sell a company – there are times in the market that High Quality companies under-perform Low Quality companies,and visa versa. No one set of ratios can tell you everything you need to know to buy or sell a company, but it gives you a place to start due diligence that gets you to the buy or sell decision.

Starting with our Quality Rank, this set of ratios gives me a feel for the soundness of a company’s financial position. The ratios I use are centered around four major items that comprise quality: Gross and Operating Margins; Asset Turnover; ROE and ROI; and Debt Management.

Below is a non-exhaustive list of companies from our database that are categorized as either High Quality or Low Quality.

QualityCompany NameBCNA Quality Rank3yr Avg Return
Low QualityAlaska Air Group Inc50.66%
Low QualityBank of America Corp17.115%
Low QualityCornerstone Building Brand42.8-1%
Low QualityChevron Corp18.4-1%
Low QualityFord Motor Co22.211%
Low QualityFifth Third Bancorp61.514%
Low QualityGeneral Electric Co18.71%
Low QualityJPMorgan Chase & Co49.818%
Low QualityTruist Financial Corp51.48%
Low QualityValero Energy Corp63.3-9%
Low QualityWESCO International Inc44.122%
Low QualityWells Fargo & Co26-2%
Low QualityExxon Mobil Corp38.4-5%
High QualityDollar General Corp91.432%
High QualityGenmab A/S99.737%
High QualityBarrick Gold Corp98.624%
High QualityKirkland Lake Gold Ltd99.933%
High QualityMercury General Corp92.914%
High QualityBoston Beer Co Inc59.561%
High QualitySouthern Copper Corp91.516%
High QualitySkyworks Solutions Inc79.820%
High QualityTaiwan Semiconductor86.947%
High QualityUnitedHealth Group Inc95.220%
High QualityVeeva Systems Inc71.453%
High QualityVertex Pharmaceuticals Inc99.811%

To get a feel for whether High Quality companies are a better investment than Low Quality companies, we can scan the list above and see that, by and large, the 3-year Average Return for High Quality Companies is much better than Low Quality Companies. But I thought we should be a bit more rigorous and look at a linear regression of each quality designation to see the magnitude of the difference.

This scatter plot makes it easy to see that the Blue Dots representing the High Quality companies are well above (i.e., higher three year average return) the Red Dots representing Low Quality companies. Again, let me restate this: Low Quality does not mean they are bad, it just mean that in the three most recent years the ratios that define them as Low Quality were not as high as other companies in their industry or in the S&P 1500.

Why Is This Important Now?

At some point, we will have a market correction that exceeds a simple 10% 0r 20% move down in price. With the Federal Reserve now beginning to talk about tightening money supply due to above target inflation, that could be a catalyst for such a correction (or even a bear market). As such, we want to have the best companies in client portfolios that can withstand a major draw down when the inevitable happens down the road.

The Investment Strategy

In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.

What’s Next?

Our next discussion will be on our Earnings Growth Rank – the original analytical system whose nexus started with my Masters Thesis that set out to disprove the Efficient Market Hypothesis (yes, that is how long ago it was – it has graduated to a Theory and is no longer a Hypothesis). The synopsis of the thesis was that in spite of the strong support for the Hypothesis, there really are certain financial ratios in the public realm that when viewed as a whole can provide index beating returns over the long run. And given our track record of beating the index over the long run, the Earnings Growth Rank is a very important part of our investment process.

–Mark