Buy the Bank

 Last year I sold some stock holdings and invested the proceeds in a basket of laddered CDs. The rate I got wasn't great but it was a lot better than it is now. Some of these instruments have matured and some brokerage CDs were called. Now it looks like any new purchases of CDs would result in a negative real rate of return. I say this because the rate paid by banks is much lower than the inflation rate, which results in a net loss. To make matters worse, the puny yield on the CD is taxable. So what is an investor to do? When looking at the issuers of the CDs, I can't help but notice that the stocks of these large money center banks are paying a dividend yield of 3-6%. They are also trading at an attractive multiple (PE ratio) that is lower than the overall market. The XLF which is an Exchange Traded Fund that tracks the Financial Industry has lost over 20% of its value so far this year while the S&P index has gained about 10% so far this year. A decent dividend yield and a beaten down stock price is just the kind of thing that interests me. Throughout this troubled year of pandemic, job losses, business shut downs, wildfires, hurricanes, political turmoil and 250,000 deaths, most banks managed to stay profitable. The stimulus package earlier this year helped because it allowed the unemployed make payments on their loans. Another stimulus package will also benefit banks and people who owe money to them. Banks also benefited from the PPP program because they made money on each loan application. I haven't forgotten that we are in a recession and the banks will most likely have record charge-offs on loans in the future, however, most banks are beefing up their allowance for loan losses in real time. There are many risks banks will face in the future but they are in the business of risk taking and will deal with anything that develops. The banking system is the backbone of our economy and I am confident that our government will not let it fail. In summary, if you don't like the rates banks are offering to depositors, buy the stock instead. Over time the dividend and the stock appreciation may produce out-sized returns.

Belated Mid-Year Forcast

      My mid-year review is a little late this year due to several things: first, the covid 19 is a wild card that changes everything; second, family medical issues has taken-up much of my time; third, my garden harvest was in full swing when I actually jotted down my review. As I write this, the second wave of covid 19 is in full bloom, yesterday marked the highest number of deaths so far in the pandemic. However, every day we inch closer to a vaccine and therapeutics, both which lessen the impact on our economy. We are also getting closer to an additional stimulus package because the election is just 2 weeks away and the holdup has been purely political. I still feel like stocks are the only logical place to invest now because interest rates are so low and likely to stay that way for a long time. If we do see a market correction, there is over 3 trillion dollars sitting in money market funds waiting for a chance to buy stocks at a discount. This compares to 673 billion dollars just one year ago. Therefore, I think pent-up demand will propel stocks higher in the near and intermediate term. As I mentioned in my last post, I am buying a few growth names like Zoom Video (ZM) and Snap (SNAP) and adding to some long-held positions like Intel (INTC), IBM (IBM), and Pfizer (PFE). This strategy combines growth with value and income from dividends. I have come to realize that there are some publicly traded companies who will change the way we work, travel, shop, and play. The key is to recognize them and jump aboard before the big run-up in price. I think Snap will be a game changer because it will allow consumers to "try on" products like make-up, glasses, and clothes virtually. What was once just an annoying playful app will become a useful tool in the future. The lesson here is that just because a technology hasn't been monetized yet, it probably will be at some point just because of its popularity. I can remember when Facebook, Google, and Amazon were not recognized as money printing machines. Finally, a lesson on why every family and individual should have a healthy nest-egg in a non-retirement account. Even though I consider my family well insured against any medical issues, my wife has entered into a course of treatments that are not currently covered by any of my three carriers of health insurance. Fortunately, we have saved and invested for this unexpected event so that she can get the care she needs without any financial hardship.

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Partly Cloudy With a Chance of Profit

    T'he weather reporters in this area of southern Indiana are good at telling us what the weather was like on any given day but not so good at predicting what the weather will be in the future. Usually, today's weather in St. Louis is what we get tomorrow but that is not always the case. The stock market this year has me feeling like one of our weather forecasters. Things are just not like they used to be. This year, stocks have consistently gone up on almost a daily basis. The up and down volatility that I'm used to just hasn't been there for me to get my limit orders executed. Therefore the stocks I wanted to own have moved dramatically higher without me. In short, the market has been so predictable, it has fooled many investors who like to trade on dips due to normal market volatility. The reason for this upward action is fairly simple, interest rates are so low that investors can only find a return in stocks. Many people are waiting for a chance to deploy money into stocks, hoping for a 10% or more correction. That just has not happened (yet). Fundamentals simply do not support the rapid rise in some of the growth stocks like Tesla, Apple, Facebook and other tech stocks. Anyone wanting to own one of these highflyers in this market must just buy at market and hope for the best. Since March, that has been a winning strategy. I have recently cleaned up many of my buy orders because they are not even relevant anymore. If I would have just bought at market, I would have made a bundle. I can't argue with the success some investors have had by just picking an overvalued highflyer and jumping on board but I find this behavior reckless. How long can this go on? Probably longer than I think because interest rates will not increase anytime in the near future as stated by Jay Powell, the chairman of the FOMC. In summary, my old school method of placing limit orders to buy stocks just does not work in a market like this one and it has cost me dearly. Even though my existing holdings have appreciated with the averages, very little new money has been deployed. I have now recognized that the market has changed (for now) and so must I.

 

The If-Then Conditional Statement

     In mathematics, a conditional statement is a form of logic that forms a hypothesis followed by a conclusion. Over my years of investing I have developed several if-then statements that could have yield big gains in one or more stocks. An example from long ago was that a particular tech company was experiencing large losses in a division outside of their main product line. My conditional statement read like this; "If company X sells off their PC division, then their earning and stock price will rocket up". I owned the stock but could have made lots of money by loading up on company X. I bring this up because at this time an opportunity may exist that could make some astute investors very wealthy. The U.S. economy is in the worst shape in its entire history by almost any measure, and some experts are saying that it is going to get worse before it gets better. We are experiencing the worst health crisis in over 100 years and the economic fallout may be even more damaging because of the corona virus. In this modern age of technology and medicine, we have become helplessly victimized in the space of just a couple of months. So what is this opportunity? What will return us to a more normal way of life where we can assemble in large crowds, board airlines, take cruises, and enjoy eating and drinking in restaurants again? In my opinion the answer lies in a safe and effective vaccine. I am looking at some of the hardest hit industries and setting a price that I am willing to pay for their stock. Before the latest earnings reports, some of the cruise lines, airlines, and gaming stocks were selling for bargain prices. Therefore my conditional statement looks like this; "If a vaccine is available this fall, then these companies will return to their previous valuations". I have counted over 10 large companies racing to develop this vaccine, with some in late stage large scale trials. I am betting that one or more will emerge with an effective vaccine. While any one of the pharma companies that develops the vaccine will be hailed as a champion, I have doubts about the financial gains such a cure will bestow on them. Holding all of humanity hostage for financial gain would be a reputational risk too large for most any company. Therefore the real beneficiaries will be those companies within industries hardest hit by this pandemic.

Light My Fire

     "Light my Fire" was recorded by the Doors and sung by Jim Morrison in 1966. It was released as an Album in 1967 and the single soon turned gold in Sept of 1967. The song was rerecorded by Jose' Feliciano in 1968 and it too rose to #3 on the Billboard Hot 100 chart. I've been thinking about this song because there are some stocks I own that need to have a fire lit under them. They just can't seem to get any traction in this hot market. One of these is Cisco Systems (CSCO). I have owned this stock for a long time but I will not give up on it. It is a core holding for many large mutual funds and ETFs. CSCO currently sells for about $46.5 and trades at a reasonable multiple of about 17X. It pays a decent dividend which yields over 3%. Cisco produces switching equipment for the communication industry and is recognized as a supplier of quality and reliable goods. They also are into cyber security software and video conferencing technology which is in great demand during this pandemic. One competitor in this space is Zoom Video  (ZM) which pays no dividend, sells for $276/share and trades at an astronomical 1525X earnings. Many people are using the free version of Zoom which from what I am hearing is a very good product. The hope is that at some point businesses will convert to the paid version and Zoom will increase profits  which should lower the PE ratio. The market cap for ZM is about 78 billion while CSCO's is 197 billion dollars. Remember, the market cap is the total number of shares times the share price. Cisco's market cap is supported by many years experience in telecommunications, software, hardware and security software. while Zoom's market cap is supported by a very bloated stock price. Who will win this video conferencing war? I wish I knew but I intend to hedge my bet on Cisco by picking up some ZM at a lower price in the future. This same scenario is playing out in other industries such as pharma, food, fitness, and many others where young upstarts threaten older, established companies. In my effort to concentrate my holdings to some low risk investments that pay rich dividends, I want the companies I pick to stay relevant even when this pandemic ends. Therefore, I will be adding to my position in Cisco in the hopes that some of the heat from the competition will ignite Cisco's stock.

ON THE HUNT

     My wife has a nephew named Tony and his hobby is hunting snakes. He recently posted pictures  on facebook showing him holding a copperhead that he caught and released. I've been hunting recently myself, but not for snakes. I avoid any contact with snakes because they scare the hell out of me. My hunt is for stocks that may be undervalued in this pricey market. Tony has to work hard to find his quarry who hide under dead logs in the forest, then he pounces on them when the time is right. I am working equally hard to find my quarry, but I don't even have to leave the house for my hunt. The first method I employ is to review my existing portfolio to see if any positions should be enlarged. Sometimes the best opportunities are right under your nose. When that job was done, I copied a list of 5 star rated stocks from CFRA and began to research each one for valuation, dividend yield, dividend payout ratio, beta, earnings and debt load. Any stock that met my qualifications must also fit the theme that I have for the future. My theme is developed twice each year. In it I postulate what the economic conditions will be for the next 6 months and longer. I try to select stocks that will benefit from the trends that I forecast. Even if my forecast is not completely accurate, and it seldom is, my stocks have a decent chance to do well because they pay dividends and are trading at less than the rest of the market. This year's mid-year forecast has been delayed due to the unusual events that have taken place since  January. The Corona virus has completely wrecked my forecast for 2020 but that is why I have a reforecast in June. It gives me a chance to get it right after some unexpected events. Unlike Tony, I haven't caught anything yet, but I have a long list of stock orders set to be executed at the right price. In the end we both want to avoid getting bit.

Don't Fear the Reaper

     In 1976 Blue Oyster Cult recorded this song as part of the album " Agents of Fortune". The guitar riffs and harmonies are some of the best of that era. Some people mistakenly took the lyrics as an invitation to suicide but they were actually written by guitarist Donald Roeser after a health scare and his desire to be reunited with his wife in the afterlife. His reference to 40,000 lives lost everyday was a rough guess and was off by about 100,000 for that time. The fact is that we ALL are going to die at some point and this song just recognizes that. The current pandemic has taken many more vulnerable people from us than normal but the fear of the virus has paralyzed most economies in the world. After 10 weeks of isolation, many people are willing to risk contracting the virus just to resume a normal life. As our economy slowly reopens, going to a restaurant, movie, or barber shop is enticing. What will take longer to recover is businesses where many people are crowded into confined spaces like airlines, casinos, cruise ships, sports events, and concerts. What will give people confidence to partake in these activities again?  My guess is that an effective vaccine given to everyone possible will allow these industries to thrive again. Many very smart people are hard at work right now trying to make it happen-and they will. The only question is when it will happen. My hope is that by the end of 2020, a vaccine will be available for covid 19 which will get the world back on track. It does not matter to me who develops the vaccine as long as it is safe and effective. The money will be made on the previously mentioned industries most damaged by this disease. Maybe I'm crazy but getting a 75% discount on Carnival Cruise Lines right now is starting to look like the kind of opportunity that interests me. My thinking is that when most of the world's people get innoculated, the young and fearless will return to all that is normal for them.

RESPECT

     Aretha Franklin recorded the song "RESPECT" in 1967. It soon became her signature song. Anyone with a pulse can't help from grooving to this tune when it comes on the radio. Originally recorded by Otis Redding in 1965, the song lyrics demand respect from the singer's lover. Somebody else who made a fortune complaining that "I don't get no respect" was my favorite comic, Rodney Dangerfield. Just like Rodney, I have a stock in my portfolio that just can't seem to get any respect from the investment community. That company is Gilead Sciences (GILD). Even though GILD pays a 3.5% dividend yield, sports a reasonable valuation of 18.7X earnings, has a lower than market beta at .7, has developed a drug that cured Hepatitis C, and now has proven to have an effective therapy against covid 19, the stock just can't seem to get traction. I first wrote about Gilead in a post called "Handyman Investing" on April 27, 2017.  In that blog, I complained about how Gilead had cured Hep C but the stock was not rewarded because of the loss of revenue from cured patients. Today, the stock market is in rally mode largely due to the good news that Gilead has a drug called Remdesivir that has shown to be effective against corona virus. At the time of this writing, the Dow is up about 500 points or about 2% mainly on news of the positive clinical trials. Remdesivir is not a new drug, it was developed to treat the Ebola virus but was not proven effective. Remdesivir has been used to treat coronaviris since the outbreak began in China through goverment regulated clinical trials with anecdotal positive results. When the pandemic reached the US, sick patients needed to be enrolled in FDA trials to be treated. It takes time for the trials to produce reliable results and that is why the good news has been delayed. People who contracted corona virus and live in smaller communities were not eligible to receive the drug because they were not part of the study which typically is performed in major medical centers.  I believe that people all over the world are desperate for good news after 2 months of isolation and depressing news. That is why the news from Gilead Sciences has lifted spirits and markets. It also doesn't hurt that interest rates are virtually zero or lower in real terms. Anyone looking for a return on their money MUST be in stocks. That being said I expect investors will experience additional pain this year when stock markets test their recent lows. As for Gilead, even though they are riding high on todays news, don't look for huge gains for them because sales of Remdesivir are nonexistent-they are currently giving the drug away for free. Aretha and Rodney, who both have passed are surely smiling on the company knowing that R-E-S-P-E-C-T is more valuable than anything.

Route A138

     About 55 years ago, at the age of 12, I owned my first business. I bought the local newspaper, The Evansville Press, wholesale and sold the papers to my retail customers. This involved picking-up the papers at a gas station about 3 miles from my house every day after school and folding, packing and delivering them to each house on my route. I had 100 customers during the week and about 65 on Sunday. Some days the papers were so heavy that I couldn't get off my Huffy bike because the bike would flip over. At the time (about 1964) every bank would pay 5 1/4% interest on your money. Inflation was running about 1 1/4% so your real rate of return on safe money was about 4%. Back then, people expected to get a decent return on their money. So what happened?  It all started with gold. In 1933 FDR effectively took the US off the gold standard by ordering all gold coin and bullion to be turned in to the US Treasury for $20.67 per oz. Then he raised the price of his hoard to $35 per oz, effectively inflating the dollar. Then in 1971 Richard Nixon totally removed the US from the gold standard. Now our government was free to print money without any constraints. At the same time our Federal Reserve was free to manipulate short term interest rates to promote full employment and control inflation. So here we are with a fiat currency and nearly full employment and very little inflation but interest rates are nearly zero. Treasury bonds are in such high demand from investors across the  world that they have pushed the yields to historic lows. So what should I do to get a decent yield today? In a word: stocks. It's about the only place where you can find dividend yields approaching that 5 1/4% of yesteryear. With a wild and volatile market like this, a little more due diligence is required. Buy large US companies with lots of cash and little debt. Avoid sectors that have been heavily damaged by the Corona virus such as travel, cruise lines, energy, and retailers. Above all do not panic and sell stocks for distressed prices. Like many crises before, this too shall pass. Long term holders of quality stocks that pay dividends almost always win in the end.

What? Me Worry?

     Remember Mad magazine and Alfred E Newman? That was his catch phrase. He must have hedged his bets somehow to give him peace of mind in times of turmoil. While I am not particularly happy about the stock market action of the last couple of weeks, I am not about to panic and sell out. What keeps me on an even keel is the amount of  federally insured certificates of deposit that I have bought over the last few years. Even though I may have forgone some potential stock gains by socking money into my local credit union, those funds are insulated from this volatile stock market. When a stock market becomes expensive, it is only prudent to take a more conservative stance. Remember that the long term price-earnings ratio for the S&P 500 index is closer to 15X than the recent 19X. Last year's 3% yield looks pretty good compared to the 1% offered for any new CD term today. With a correction in this market of about 20% or more, I am looking to direct any CD maturities into stocks with low debt, low multiples (12X or less), high dividend yield (5% or more), and large market caps. I  am placing limit orders for some of these stocks that may be executed on the next leg down. While I don't expect to buy at the bottom I feel like over the long term,what I buy at these lower levels will make money. Another reason not to worry is that with such low interest rates, investors almost have to risk money in dividend paying stocks to get a return. This is the TINA theory (There Is No Alternative) to stocks. While the corona virus will change some consumer behaviors for years to come, stocks that will benefit from these changes should be on your radar screen. Technologies that allow people to work from home, enjoy movies without leaving the house, order groceries and drugs online, enjoy home delivered meals, and shop and bank from home should recover quickly.  At the same time that the corona virus is wrecking portfolios, the price of oil has collapsed which may cause many American oil companies to file bankruptcy. When this health emergency and financial crisis ends, and there will be an end, Americans will enjoy much lower fuel costs in the future. Talking about risk and then actually experiencing a gut wrenching market decline like we are experiencing now are two very different things. Five years from now I plan to see a stronger healthcare system, a stronger financial system, and a healthier personal portfolio.

Blood in the Streets

     Over one hundred years ago, Baron Rothschild is credited with saying that the time to buy is when blood is running in the streets. After the last three sessions in the stock market, it seems like blood (or red ink) is flowing freely. Almost every sector is being punished for having rich valuations and potential risks related to the corona virus that is spreading across the developed world. People are desperately seeking advice on what they should do with their money. My opinion is that even if this market continues to correct, the time to sell most positions has passed. Leisure and transportation stocks have been the most severely impacted and will continue to  endure pain for a long time going forward. People are cancelling vacations and business trips in record numbers. Some areas are locked-up due to quarantines, and airlines have cancelled flights to many of the impacted areas. Drug and technology companies have had supply chain disruptions because they sourced many needed materials from affected areas. At the time of this writing, the Dow Industrial Average has dropped nearly 3,000 points or about 10%. While I can't say that I expected this to happen, I have hedged my bets in this market by maintaining a portfolio of laddered CD's that are federally insured and safe and sound. This strategy protects me from ruin if the market continues it's decent and also protects my family's future if anything happens to me. Even though I am not thrilled with the yield on these products, I believe that later this year the interest rates paid by banks will go down even more. The Federal Reserve Bank will surely react to this financial crisis by lowering the fed funds rate even further to prop-up our economy. As far as this crisis being a buying opportunity, my buy list was already in place in the form of limit orders at my discount broker. Today two orders were executed at prices that I previously thought favorable. In summary, this too shall pass, just like every other crisis. Nobody knows when, but it will. It may take a long time for stocks to recover to their previous highs but for long term investors, this is a great time to buy some discounted stocks on your list.

HOW TO LOSE MONEY

     Every seasoned investor has experienced losses in their portfolio. Naturally, the object of investing is to make money but novice investors need to know how to handle the inevitable losing positions in their portfolio. The first rule is to not panic and sell just because of market gyrations that may temporarily affect a stock or whole sectors. Value investors who buy distressed securities will seldom buy at the bottom of a stock's range, therefore losses almost always occur when taking a new position. Owning stocks is not a "Buy and forget" proposition, one must stay apprised of a company's situation. Ask yourself if the reason you bought the stock is still valid. Has anything happened that could change your opinion about the company? If the market is simply not done punishing your stock you may consider adding to your position, all other things being equal. On the other hand, if after a reasonable amount of time the problems of your company start to look insurmountable, you may have to actually realize a loss. Even if that happens, all is not lost. The duds in your portfolio actually do have some value because they can be used to offset gains you have taken during the current year. Just be aware that any losses that exceed gains are limited to $3000 each year. If you have large losses, then you have to carry-over them into future years for tax purposes. Every year, I examine my losing positions to harvest offsetting losses but this year I could not force myself to sell because I still believe in all of them and there are many. I view these losers as the future of my portfolio. When I look back over the years, I have come to realize that underwater positions were not such a big mistake. The biggest mistake was not taking a chance on young struggling companies that have become the largest, most powerful companies the world has ever known.

Complimentary Investing Styles

     Anyone who has read my past posts knows that my investing style leans toward the value discipline. Unfortunately, this method of investing has under performed for the last 10 years. So how do I make money in this era of growth investing? The answer lies in a complementary blend of value and growth stocks held in my portfolio. If all I held was value stocks, I would get depressed every time I reviewed my brokerage statements In order to stay interested in the current market and not always hold a bag of losers, I try to buy some of the hottest stocks with unreasonable valuations. Hopefully, these companies will continue to be successful and their earnings will grow into their valuations. I have learned my lesson by missing out on the gains of Amazon, Netflix, Alphabet, and Priceline. It doesn't take a lot a shares of an expensive stock like Facebook or Tesla to rack-up a nice gain in these rapidly appreciating stocks. While.these investments are garnering all the headlines, I also like to bottomfish for the afflicted companies like Boeing and Kraft Heintz. Sometimes these hardship cases take years to find their way. Sometimes they never do, but like I mentioned in my previous post, large, well established companies usually survive. My main concern is to not pay too much for an ailing company. This is when the lessons about ratio analysis and charting come into play. Buying at or near the bottom can be as rewarding as owning high flyers, it just takes longer. In summary, diversification is not just about owning stocks in different sectors and market caps, a complementary blend of growth and value will produce returns in almost any market environment. 

The Blind Squirrel Takes A Random Walk

     What the hell am I talking about? The random walk refers to a book written by a Princeton professor named Burton Malkiel. He penned "A Random Walk Down Wall Street" in 1973 to argue that individual investors are foolish in trying to "beat" the market and should just invest in a passive mutual fund instead. This "Efficient Market Theory" postulates that every event or potential outcome is already baked into the stock prices of any company involved. After all, there are some very smart people who make a very good living just watching everything that goes on in the world and adjust their large portfolios accordingly. I'm sorry Burton, but this blind squirrel just didn't buy into this academic crap when I was in college and I don't now either. The only reason that I don't outperform the market averages is because I'm too lazy to do the research necessary. There's an old saying that "Even a Blind Squirrel Finds a Nut Eventually", well buying stocks of companies that are struggling today can  reward investors tomorrow. Not all companies will survive but a little research can tip the scales in your favor to identify the winners. The key to making money in stocks is to simply be invested and stay invested. When things are not working out, find out why. In my 47 years of investing in stocks there are only a few times when things were hopeless for a position that I held. In this day and age, there are usually remedies for companies that can't seem to right their ship. Often an activist investor gains board seats and demands corrective action. Companies like Kraft Heintz, Boeing, Johnson and Johnson, General Motors, Ford, Schlumberger, and many others have a good chance to turn around. I was advised many times not to buy Tesla stock but look what it is doing now. Not many investors believed in Amazon until it took off like a rocket. I can still remember when Apple was a basket case and looked like it would fail. I didn't understand how Google could make money from a search engine but they did. I wish I wouldn't have listened to the pundits that covered the stock.