Friday, February 26, 2016

Weekly Market Review 2/26/16

It appears February might be the month that goes nowhere. The S&P started the month in the 1940 area, and it appears as of this writing that it will end somewhere close to that number. I'm sure for most people who check their portfolio regularly it wouldn't have seemed like it went nowhere all month. Either way we are putting another month behind us only to find that our companies are still doing business and the world isn't ending yet! Things could be a lot worse though. You could own shares of Fitbit. The shares reached another 52 week low. We received a lot of earnings reports the last 10 days and I'll highlight a few in a bit.

The talk all week has been about THE BREXIT. While the vote isn't until June there is a lot of posturing going on politically. Listen, no one wants to admit mistakes on this one. Whether it be on the British or EU side. The fact of the matter is Britain is going to be better off without them.  They should be just fine. The real issue is when a power like Britain leaves it swings the door wide open for Greece and the rest of the PIGS. That would be a fatal blow to the EU and the Euro. I really think it's only a matter of time before the whole thing falls apart.  The whole system is just flawed. It just isn't working to have a monetary union with laws that allow sovereign debt issuance from countries with varying economic capacity under a single currency to function properly. Also I think the decline in Sterling is just showing risk off by many parties. It's not an endorsement of either side. People with real money on the line want out until they know what the future holds. Yet the media spins it in totally idiotic ways. We should all apply for those jobs. We'd never have to worry about being wrong!

The bond market has continued to see safe haven seeking, and gold has finally perked up.  I'm still not sure why you'd want to lend the USA money for 10 years at 1.75% when you could buy a solid company like CMI, MO, MKC, or EMR in our portfolio. All yielding more than a T-Bill I might add. Gold I think is still a bit of short covering here, and some initial fear/government hedging. I think the metal moves lower before it works out a base for a sustained uptrend. How long this all takes is beyond me though.

Lastly the weekly MBA report was kind of a dud. It was not good overall showing YoY declines for January and falling home prices in many areas. While there are plenty of areas that still show strength it appears there are some cracks in the armor despite record low rates again. I'm a personal investor in real estate and I'd like to start talking about this area more since it affects all of us directly. Either way it bodes watching to see how the area plays out the next 2 years. To see how resilient the sector will be we need to see how it acts in the next recession.

Recently we received earnings reports from BUD, BTI, SAM, and WAB.

BUD reported FY 2015 results that rose from 2014 by 6.3%, and basic EPS came in at 5.05(USD) for the year.  However the final dividend was raised 20% to 3.60EUR per share. That's a generous increase. Although for US investors the increase will fluctuate depending on the prevailing exchange rate. Volumes declined in North America. It's a competitive landscape here and a lot of smaller players are nipping around the edges. No worries though as they will not put BUD out of business.

BTI reported FY15 adjusted diluted EPS of 2.08(GPB) per share which is basically flat from the prior year. The final dividend was raised too which represented a 4% increase from 2014 to 1.54(GBP) per share. Make no mistake here with the tobacco companies. They've been dealing with declining volumes for years, but still find ways to increase the dividend. Margins are still very attractive at these companies.

SAM  reported FY 2015 results of $7.25 per share which was up 8% from 2014. The company guided 2016 between 7.60-8.00. That's a  4.8%-10.3% increase from 2015. My guess is they come in around $7.80.  This is going to be a bumpy year according to management, but I think the company is trading at a reasonable level under $200. Plus they have one of the industries best balance sheets.

WAB  had quite the reaction after it's earnings release. The stock was up as much as 7% but has since settled back down to the mid 60's. FY15 diluted EPS came in at 4.10. The company guided 2016 at 4.30-4.50. I think they are being conservative and will hit the high end of that range. This is a real good company and at this price I should buy more shares, but I already have a level in my personal portfolio that I'm comfortable with. I'll have to keep on eye on this one.

I also want to quickly mention CHD earnings at the beginning of the month. The results were solid for this type of company, and what you can expect from a consumer staple. What I'd really like to note is the 6% dividend increase. CHD has been paying a dividend for over 100 years, and this year is the 20th increase in a row. This is an often overlooked company.

Have a good weekend everyone!




Monday, February 15, 2016

Portfolio Tracking Change

I was having some thoughts about how I track the portfolio and even discussed it with a few people I know. They seemed to think it would be more transparent if I used the actual buy prices I made during the day instead of the closing price.

Considering at times I might buy a stock during the day to only have it rally towards the close would make my performance look worse. Also when I make a buy and the stock heads lower into the close I'd get credit for buying at a lower price when in fact I bought the security at a higher price.  In hindsight I should have used this approach first, but at the time I thought it would be more straightforward. Either way I hope everyone can appreciate the changes and new insights. Also I do try to put a buy up on Twitter when it happens. However sometimes I have a limit order execute that I set weeks or even months in advance, and I might not be at the computer during that specific time. It's the whole reason why I have the order open in the first place. Which is to catch a security at a good price when I might not be there watching and potentially miss out.

I'll be working on making the changes in the portfolio for 2015 and 2016 this week. Including updated performance calculations which will be interesting to see the changes.  Thanks for the patience as I still work through beginners kinks.

Sunday, February 14, 2016

Weekly Recap

Been a real busy week so posting has been light. The market took everyone for a wild ride though that's for sure. I'll recap some economic news.

The Japanese decided to resort to short term interest rates. Surprisingly the Yen strengthened against many currencies especially the US dollar. In all reality there were many positions closed as the weak Yen has been a profitable trade for awhile. Also the Yen serves as a safe haven. I think a lot of global cash is heading there as it flees the mess in Europe and debt laden emerging markets. Even the Fed has talked about negative interest rates behind closed doors as it included the scenario into its latest stress test scenario.  So while the move is counter intuitive to economic theory we need to keep an eye on global capital movements.  If people are willing to lend to Japan and take a loss, they must really think another central bank will deliver them a bigger loss.

Government bonds which I monitor have reached levels not seen in quite awhile. I'm not sure who else besides banks is willing to lend the government money for 30 years at less than 2.5%, but clearly there are takers. I think many of these people will be left holding the bag. Remember bubbles in bonds do happen, and its entirely possible we have reached the limits of government borrowing.  It's a false economic theory that you can just keep raising taxes to cover the shortfall.  Eventually people just stop working as there is no incentive, or they take their assets and themselves to more tax friendly areas. 2016 is shaping up to be an extremely interesting year and government debt will surely have its place. As history has shown time will tell and I believe we are getting closer to that time with government. But if governments start defaulting then banks will go down with them. I'd stay away from bank names right now and I have none in the portfolio.

Gold had a strong move up the last couple weeks. Although I think this is more short covering than anything right now.  Silver hasn't kept pace which is noteworthy. Remember gold is the hedge against fear and government. It has nothing to do with inflation or increases in money supply. Clearly the concerns have been heightened by some players. GLD had monster volume this week so big money was making moves. We should all take note and keep an eye on the development.

Our portfolio had a few reports this week.  I'll mention WhiteWave, Cognizant, and HCP briefly.

WWAV reported what I thought were good results. Growth has been slowing a bit, but is still showing solid growth when compared to other food companies.  Obviously investors are not willing to pay up for the same multiple of the company as they were before. I always thought anything under $40 would be a great price for this company. Once again I should have been more patient than I was in October. I might consider making another buy of WWAV, but I really want to stick to dividend payers right now as the markets get more volatile.

Which brings us to HCP. I added the stock at the end of January for a solid dividend and what I thought would be more stability. Especially considering the dividend was raised the day after I made the add(although it was a meager 1.8%). Well once again just waiting would have been better. The stock did not get walloped from concerns over the dividend, but because of large write downs in the value of real estate portfolio holdings. The majority of the issues are with ManorCare operations which took a $1.3 billion dollar write down. This is one of the best managed REIT's out there and I still have faith in management long term. In reality this is a great price for the company. I might make one more add as I have no doubt the payout will remain stable, but investors should be ready for a dividend pause at this point next year. I'm not expecting a payout reduction yet it could very well happen if things deteriorate in the economy more rapidly than we anticipate.

Cognizant reported earnings that I thought were great. The company reported 2015 EPS of $3.07 which beat their own guidance. Also the company guided 2016 at 3.32-3.44. I think those numbers will be beat as they company has a history of being conservative. At the high end of the range the company is going at an attractive price for the type of growth they are experiencing. Yet as the trend has shown I should have been more patient in my buys. Even in the mid 60's the company was going for a good price. Now it's an even better price. It will be really difficult for me to pass up adding here. I'm going to think long and hard about all three next week before making an add in any.

This remains a good time for traders, and trying times for long term investors. Yet we must remember this is when we buy good companies at better prices. Take a look at MKC. It's been rising all week.  I wish I could gather a group of investors to buy the whole company with me. That's how a real solid company acts under these conditions.

Monday, February 8, 2016

Earnings & Adds - Super Bowl Edition

I thought that was a decent overall game yesterday. I know a lot of people love shootouts, but that to me isn't football. There was a lot of excitement on defense, offense, and special teams to make it a noteworthy game. I would have liked if the players refrained from the early celebration. That to me shows a lack of respect to the other team. On a side note Lady Gaga nailed the National Anthem.

Here are a couple updates from names that reported earnings in the portfolio and some adds made today.

Cummins Inc (CMI) reported results that beat views. The company guided 2016 for Revenue to decline 5-9%, so we can expect 17.3-18.1 billion for 2016. EBIT margins are expected to stay around 11.6-12.2% of sales which is very respectable and I think reflects the companies aggressive cost cutting measures. So we can expect around 2-2.1 billion in earnings before interest and taxes. The shares rallied all the way up to $100 and I think that reflects how oversold the stock was. I thought real hard about adding at $80, but I think the industry is not out of the woods yet. After I thought about it I think a few companies will delay upgrading older equipment as low energy prices give them some breathing room as they face their own headwinds.  Long term you still can't beat this company.  If the shares get to $75-80 I'm going to add.

Cognizant Technology Solutions(CTSH) reported earnings today and the shares are getting hit. The company guided 2016 non-GAAP EPS at 3.32-3.44.  I think that's low.  I want to add more shares, but I'm going to wait to see if I can get them at $50. My buy in the upper 60's is looking like a big mistake, but the company had reported what I thought was a solid quarter and continues to do so. I still expect big things from them in 2016, but it might not get reflected in the share price immediately. No worries though as this is a solid company.

I added to the PayPal position today. After the company reported earnings the stock blew up to $38. I was patient enough to wait for a pullback. I might not catch the low again here, but I think I've given myself some breathing room under $35. PayPal is growing very strongly and generating a lot of free cash.  I still would not be surprised if someone picked up this company. I could see a buyout firm taking them over first, but there are plenty of other players looking to consolidate a market share position in this field.

Visa was also added to the portfolio. I'll admit this was more of a fluke. I had set an old limit order set under $68 thinking it would get there on a flash crash or other panic. Especially since the company was just trading at $80 in December. Either way the last earnings report showed the underlying fundamentals are still intact. I'm going to look to add to MA also, but I'll wait until its under $80.  That's another one I should have been more patient on originally. More amazing is that after their earnings pop I didn't think the shares would come back down to this level. But given the way the market is acting I'm not sure why I'm surprised by anything right now.

On another note I've been working on the portfolio tracking spreadsheet.  I updated the portfolio to separate it by years. I think this approach will be best. I'm also working on getting the earnings tab completely up to date. I am going to use EPS figures from NASDAQ instead of Yahoo Finance as I originally planned. I'm still working on getting EPS for the ADR's of the foreign companies.

Thursday, February 4, 2016

Does Facebook Have a Moat?

I read an article by fellow blogger Dividend Growth Investor mentioning towards the end that Facebook did not have a moat. The topic is a good one as Facebook hits 12 years of age today. Facebook has already become one of the largest companies in the world by market cap. Definitely no small feat. So today I'll go over some basic reasons why Facebook does have a moat, and why it took such a short time to build it.

A moat was popularized by Warren Buffet in his discussions about companies with a competitive advantage. A moat, or competitive advantage, is found in two basic business models. You either sell a unique product or service, or you are a low cost buyer and seller of a product the public consistently needs(necessitating brand power). Examples of each would be Precision Castparts,Visa, Procter & Gamble, and Budweiser.  Precision Castpart's can skillfully make complex aerospace components while enjoying the advantage of high barriers to entry.  Visa has a unique service that allows it to process transactions anywhere in the world within seconds along with the arduous task of identifying fraud. Procter & Gamble has brand name advantages built up over decades to sell consumers products they need everyday. Budweiser is a mix of being a low cost producer/seller and brand name owner of beer people drink everyday.

So where does that leave us with Facebook?

Let's start with their product/service being unique.  Facebook offers a service in a relatively new field. Social Networking.  It's a unique area not invented by FB, but revolutionized the way it was done. Their product offering allows you to seamlessly connect with people worldwide.  You can share your own information, posts updates, share info from people within your network, and interact with anyone you choose.  This can be done with multiple platforms. Facebook Messenger allows you to chat and even call anyone worldwide. Whats-App allows you to call and text anyone else on the service worldwide. This service is especially useful if you have a WiFi connection as you can avoid any network charges or fees. Instagram is an app that lets people quickly take professional quality photos and share it via their social networks. This app actually allows you to create your own photo sharing brand by virtue of the way its designed to let you have followers. Oculus is in a young virtual reality field. At this point in time its to hard to tell if the company retains a competitive technology, price, or brand advantage. Additionally Facebook has recently ventured into an area that allows users to purchase within the platform goods from companies they choose to interact with. While still a growing area this has the potential to be very large and valuable to many companies.

Facebook is also a low cost buyer and seller of products and services.Their service is actually free across almost all their platforms(Oculus will charge for it's products). It's free because advertisers actually pay the bill for the right to advertise to you. Even for the advertisers the amount they spend on advertising to reach the same amount of people is considerably lower than traditional media outlets. Also Facebook needs to spend zero dollars to gather the information it sells to advertisers. You actually give your information away for free in order to use their services. This is a huge cost advantage over traditional media/information/advertising companies. It's the main reason operating margins are over 80%. They have minimal costs for acquiring what they sell.

What about the Facebook brand?  Well according to Forbes Facebook comes in as the worlds 10th most valuable brand. This means it's easily recognizable by people all over the world and right up there with companies that have been around for 100 years or more. All this in under 12 years. I'd be interested to see if Coca Cola or Budweiser achieved the same status in less time. Although I'm inclined to think they did not.

I'd still love to buy more shares of FB when the valuation is better. But as far as the company being around for awhile I have zero concerns.  It seems their advantage will not recede anytime soon and can possibly become even stronger.

Cheers,
The Long Haul Investor

Monday, February 1, 2016

Earnings Recap Week Ending Jan 29

It's was a busy week for many of the companies in the portfolio as companies report the final portions of 2015 and for some their 2016 Q1. I've included the CEO statement, FY2016 guidance if applicable, and comments on any developments. I figured with everything being so volatile it would be nice to get a quick summary on the holdings and this week is a good one for that.

Altria (MO) -

“In 2015, Altria delivered yet another year of excellent business results and outstanding shareholder returns,” said Marty Barrington, Altria’s Chairman, Chief Executive Officer and President. “We grew full-year adjusted diluted EPS by 8.9%, in line with our long-term EPS growth objective. Altria paid nearly $4.2 billion in dividends to shareholders, consistent with our goal of paying out approximately 80% of adjusted diluted EPS. And Altria’s total return to shareholders of 23.1% far outpaced the S&P 500 and the S&P Food, Beverage and Tobacco Index, marking the third consecutive year that total shareholder return has exceeded 20%.”

The company guided 2016 EPS at $3-$3.05. Also the company will get 10.5% equity in the new SAB Miller/ABInbev company(previously announced). Volumes declined but that's been an industry trend for so long it doesn't matter. Interestingly the company has found ways to increase its productivity in house and as a result will be announcing some layoffs the next 2 years. Usually unnoticed is the companies wine operations. Volumes grew by 6.2% and sales by 7.7% from 2014, not bad.

Procter & Gamble (PG) -

We are encouraged by our return to organic sales growth in the quarter,” said President and Chief Executive Officer David Taylor. “With the top-line improvement and continued cost reduction, we delivered solid core operating income and EPS growth in the face of significant macro-economic and geopolitical headwinds.”

The company doesn't give exactly clear cut guidance but we can expect between $3.60-3.80 for FY2016. I expect the company to continue figuring out ways to deliver more dividends and buybacks this year.

Facebook (FB) -

"2015 was a great year for Facebook. Our community continued to grow and our business is thriving," said Mark Zuckerberg, Facebook founder and CEO. "We continue to invest in better serving our community, building our business, and connecting the world."

The company does not give specific EPS guidance, but guides on other aspects of the company.  I must say their results were impressive evident by the massive jump in the stock price. The company continues to execute well. My only issue is valuation(especially GAAP) as its the most expensive in the portfolio. I'd like to add more, but I'm hesitant based on that alone as I've been burned in the past. I think if an individual wanted to buy 100 shares I'd put maybe 20-30% of the funds in as long as shares could be bought for under $110. Before earnings it would have been much better to buy as I even felt the shares offered a somewhat decent opportunity around $95. I'm still waiting for a better long term price, sigh. I read an article over at www.dividendgrowthinvestor.com and the author stated he felt FB did not have a wide moat. I stated my disagreement and I think I'll put up a post regarding the issue. This is a powerful company and it should be recognized.

Paypal (PYPL) -

"We exited 2015 with great momentum, said Dan Schulman, President and CEO of PayPal. Our strong results reflect PayPals progress in delivering on our strategy to drive the digital payments revolution. In the face of a slow global economy and foreign exchange headwinds, PayPal exceeded its full year revenue, earnings, and free cash flow commitments to shareholders. As money becomes digital and the world goes mobile, we see tremendous opportunity ahead to expand our leadership, transform the way people move and manage their money and deliver increased value to shareholders."

The company guided 2016 GAAP earnings at 1.09-1.14 and non GAAP at 1.45-1.50. The company executed well and really saw spectacular results across the entire board. Additionally the company will buy back approximately 5% of shares for $2 billion. I wish they could have found a better way to use the cash, but these are the times we live in right now.  I'm going to try and buy more shares of this company.

Diageo (DEO) -
 “Diageo has become a stronger, more competitive business. We have delivered volume growth, a stronger top line, improved the performance of our key brands, driven cost productivity and continued to generate strong cash flow. While trading conditions remain challenging in some markets, Diageo’s brands, capabilities in marketing and innovation and our route to consumer have proved resilient. I am confident that Diageo can deliver improved, sustained performance.

The company did not offer any additional interim 2016 guidance, although the dividend was raised 5%. Management is expecting to focus on margins and cash conversion while trying to navigate the currency headwinds.


McCormick (MKC) -

"Our 2015 results demonstrated the effectiveness of our strategies and the engagement and efforts of McCormick employees around the world.  McCormick's products are on-trend with today's consumer and their increased interest in bolder flavors, focus on wellness and fresh ingredients, and demand for convenience."

The company provided guidance for FY 2016 at 3.62-3.69. Another strong note was the 17% increase in operating cash generation to $590 million with expected big gains for next year too. Overall solid results. Judging by the response to earnings everyone forgot that downgrade earlier by JPM. I still think it was so JPM could buy shares cheaper, and it looks like I might not get another change to buy below $75 which is upsetting. This is a well run company.  

Visa (V) -

We continue to be pleased with our financial performance given the uneven global economy and the ongoing negative effects of the strong U.S. dollar. While we continue to see relatively strong payments volume growth, these factors have meaningfully reduced our cross-border volume and revenue growth. While these headwinds do not appear to be abating in the short-term as we had hoped, the fundamentals of our business remain strong and our long-term growth trajectory remains intact as we navigate through this uncertain environment, said Charlie Scharf, Chief Executive Officer of Visa Inc.



The company did provide adjusted EPS guidance previously but with Visa Europe closing this year it's not applicable in my opinion. Although I'm expecting at a bare minimum 9% EPS growth and another dividend raise for 2016. The stock had sold off originally and I was hoping it would go lower to buy more shares. Instead it reversed and ended up 7% higher. I'll look to add shares if the price comes back a bit.

MasterCard (MA) -

“Despite a challenging economy, we were able to deliver solid results for the quarter and the full year in 2015,” said Ajay Banga, president and CEO, MasterCard. “Entering 2016, while uncertainty in the global economy persists, the fundamentals of our business and our approach remain unchanged. We continue to be laser focused on our strategy to lead payment innovation in an increasingly digital world with solutions such as MasterPass, while growing the use of electronic payments through our products, partnerships and increased acceptance at the point-of-sale.”

The company did provide EPS guidance on a non-GAAP basis for approximately 13-15% increase. I'm going to expect rougly the same as Visa for about 10% minimum(GAAP) and a dividend raise next December. Same as Visa the shares had opened lower and then headed higher all day. I really should have bought both, but it is what it is. Both companies are running well and from what I see a lot of big money moved back into the payment space this week.  

I'm expecting the picks to do better than the indexes this year(of course!). Hopefully I can be disciplined in my buying too. I was a little early on a couple of buys so far. CMI, SAM, and HAIN come to mind. And maybe just a little late on others. PYPL, V, MA come to mind here. I think PM and EMR buys were at good prices. Also I did add to HCP during the week. I'm not going to post an analysis or anything else. Simply put the dividend I believe is safe, and it provides some extra defensive security for the rest of the year. I think the portfolio has a decent mix of defensive oriented, tech, and growth. Something you don't always find in a long term conservative, or DGI portfolios. 


For the short term I expect we bounce a bit as evident Friday. Not sure how much upside is in the tank, but I'm not fully convinced we are out of the woods yet. I still think it's possible for the S&P to hit 1700. 


Enjoy the weekend!