Friday, September 30, 2016

Cognizant Drops on Payment Investigation

Of course we had great news this morning with earnings from COST & MKC, but we don't live in a perfect world. This morning it was announced by Cognizant(CTSH that it discovered possibly improper payments regarding facilities in India. President Gordon Coburn has resigned on the issue. Here is a write-up from Reuters. The company had voluntarily notified the DOJ and SEC.

Costco & McCormick Earnings

In the last 24 hours we received good earnings from two picks - Costco(COST) and McCormick(MKC).

Costco reported it's fiscal year 2016 Q4 and 52 week results last night. Diluted EPS came in at $1.77 on revenues of $36.5 billion. For the year the company reported EPS of $5.33 on revenues of $116 billion. The company is trading at a premium with a trailing PE of 28. Total sales for the year were up 2% while EPS was actually down $0.04 from $5.37 in 2015. The stock is currently up 4%

Thursday, September 29, 2016

Economic Data - GDP, Durable Goods, Consumer Confidence

There was a slew of economic data out this week that I haven't covered. Most recently we received the 3rd estimate of Q2 GDP, Durable Goods, and Consumer Confidence to name a few.

If you are not aware GDP estimates are routinely revised months later as new data comes in, and is re-analyzed. Today we received the third estimate of Q2 GDP.  It was reported instead of 1.1% growth, we actually had 1.4% growth from April-June 2016.

Equal Weight/Market Cap Comparison

Here is a chart depicting the S&P 500 Equal Weight Index versus the S&P 500. Since roughly 2003 the equal weight index(SPXEW) was outperforming it's market cap cousin the S&P 500. SPXEW's gains were outpacing SPX to the tune of 30% in 2010-2011. As recently as 2014 the gain was still close to 10%. Strangely though in 2015 that lead started to dissipate rapidly.



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Here is a closer look from the last 3 years. We can start to see the market cap weighted index started to take the lead in 2015.  They are really neck and neck for the most part, with just a slight edge towards the S&P 500(SPX). The only thing I can think of is this has to do with market participants gravitating towards larger constituents the last couple years as uncertainty persists. That would put the equal weight index at a disadvantage as bigger names have less pull.

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Wednesday, September 28, 2016

Kissing The Portfolio with Hersheys

I don't think this is a company that needs much mentioning.  Started by Milton S. Hershey over 122 years ago, the company has become one of the worlds premier confection and snack companies. Although technically Hershey as we know it today was formed in 1927. Located in Hershey, PA the company has been churning out sweet treats loved for generations by people all over the world.  Some of it's iconic brands include Hershey's Milk Chocolate, Hershey's Kisses, Almond Joy, Reese's, and Twizzlers. For more history on the company and Milton S. Hershey click here.


There is a lot to like about Hershey in this current environment. For one it is clearly a takeover target. In fact Nestle, Cadbury, and William Wrigley Jr. Co all have tried to purchase the the company before Mondelez's failed bid. Not that I'm buying the shares for that reason, but it's good to know any buyout is likely to come at $125 or higher which from my entry at $94.86 would be a 37% gain.  The solid dividend growth, and brand recognition is coming at a decent price when plenty of other high quality names are trading at even higher premiums.  I really wanted to wait until $90, and maybe I should have, but the stock looked oversold enough to me that I felt comfortable committing funds at this price level.  I didn't want to miss buying by a buck or less to only see the stock head higher(which recently happened to me with DEO).

There are concerns. Consumers are slowly cutting back on sugary foods.  But candy, which is what the company is known for, isn't under the same attack as their big soda counterparts. Candy is still considered a special treat. I highlighted that earlier this month when I first noted I had my eye on  Hershey(HSY). I think the company is aware of this problem, and is likely the catalyst behind it's expansion into China(which isn't going as planned), and it's move into the snack jerky category with it's Krave acquisition.  I do like how the company still gets around 85% of it's sales from North America. That will keep currency effects less of an issue, and I see it as a plus in this environment.

Revenues at the company have been flat the last 3 years. Yet the longer term view shows a much different picture. Since 2005 when revenues were $4.8 billion they have increased 53% over the last 10 years, or on average 4.36%/yr.  Not exactly blockbuster growth, but steady.  Net income has done pretty well too. The exception is 2015 when net income came in at $512 million. Much of the decline is due to non-cash impairment charges related to the goodwill write-down of it's Chinese operations, and cost cutting initiatives. Adding those two items back in would have net income back at $862 million. Still the numbers are the numbers, but I think these impairments are temporary and we should see net income rise back to it's normal path.  For the past 10 years the company has been sporting a profit margin of 9% on average which is really good for a food company.
The dividend growth has also been outstanding. The 5 and 10 year growth rate come in at 10.17% and 8.08% respectively.  based on the 10yr growth rate the company doubles it's dividend every 8 years. Also I like the trajectory of shares outstanding. Since 2005 shares have been reduced from 178 million to 155 million in 2015. The company continues to buyback shares to offset dilution, and then some.  That means each share is getting larger pieces of net income as years pass. The payout ratio is currently really high, but I see it as a transient issue. The 10 year historical payout ratio is 66%. So it's at the high end, and I don't see much growth coming from an increasing payout percentage.

The balance sheet is good, but I wouldn't call it great.  The current ratio is at a low 0.68, and when I back out goodwill and intangibles and divide it buy total liabilities I get 0.98. On the last one I prefer to see a higher number from my companies such as with MasterCard, Cummins, or Boston Beer. Still it's within an acceptable range and the company has a good track record of managing it's balance sheet.

The company has also managed to record an average ROA the last five years of 13.35%. The average ROI for the last 5 years comes in at 19.96%. Both are respectable numbers and what I'd expect from a blue-chip type company.

YearROAROI
201011.93%17.35%
201114.27%19.60%
201213.90%20.42%
201315.31%21.40%
201415.06%24.04%
20159.60%16.96%
Average13.35%19.96%

Overall I'm pleased with adding this pick to the portfolio. Adding Hershey's to the portfolio gives me 29 total picks. Since last October I've added CHD, COST, DEO, EMR, GPN, IBB, MA, PX, SAM, V, UVV, and now HSY. That's 12 total additions in about a year. I'd like no more than 30 stocks in The Long Haul Portfolio, and I feel comfortable with where it's at. Of course we are still on track to lose WWAV at the end of the year so we should start 2016 with 28 picks.

Thursday, September 22, 2016

Yellen Comment



I wanted to get this out yesterday, but I actually forgot to hit the "publish" button. Yeah I know embarrassing.

I was listening to Janet Yellen's press conference to see if she gave any additional clues to interest rates. The reason is some of the names I'm looking at are rate sensitive. Sorry I can't let you know about each pick I'm eyeing!! It would ruin the surprise! Either way remember a few weeks ago in a weekly review when I talked about the central bank having no clue?

Well, Yellen just reinforced the reason why you can't put to much faith or credibility in any central bank. Here is her actual comment.


“I can assure you that any specific projections I write down will turn out to be wrong, perhaps markedly so.” – Janet Yellen

Yep there it is clear as day. Central bankers actually have no clue just like most of us. They are playing a guessing game, and use the data the best they can to guide decisions. Furthermore while they are currently projecting the economy to grow mildly around 2%, in theory they could be way off. Growth could skyrocket to 5% or crash to -5%. Their response would be - "Well we did our best". That'd be it.

Just some food for thought on this first day of Autumn. Enjoy the change in seasons! 

Wednesday, September 21, 2016

No Rate Hike

Ok we can all breathe a sigh of relief now that this is behind us.  We focus on the long term here at The Long Haul so a small rate hike is really not a ton to worry about, although it must be monitored. Here is the Fed's policy statement.

Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Monday, September 19, 2016

Low Volatility vs High Beta

One of the things I love doing is comparing different sector performance against each other.  With the advent of ETF's this is so easy to do and interesting.  One of my favorite pairs is the S&P Low Volatility(SPLV) & High Beta(SPHB) ETF.

VGR Stock Dividend

If you own shares of Vector Group(VGR) don't be alarmed as the stock did not horrifically fall by a large amount. The company paid its annual 1:20 (5%) stock dividend today, plus it's $0.40/share quarterly dividend. That means the shares were adjusted by $1.55 to reflect payment.  Depending on your broker you should have received actual shares, and it's possible in some cases you were given cash in lieu of shares so check your account.

Saturday, September 17, 2016

The Long Haul Weekly Review 9/17/16

“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” - Peter Lynch

Couldn't agree more Peter.  For most people they don't bother looking at the actual financial performance of a company.  Most people are infatuated with the talking heads on CNBC or Bloomberg about the hottest and latest technology.  Don't get me wrong it can sound intoxicating and make you feel like the riches are right around the corner.  You have to resist the instinct to buy what's hot, and buy what's boring instead. 

This week I made a few buys,

Friday, September 16, 2016

Should I Have Gone Apple Picking?

Fall is just around the corner. With this time of year comes apple picking at the orchards, warm apple pies, and spiced(or spiked) apple cider.  Ah it's a great time to feel incoming arctic air, the fading strong sun still on your skin, and nature's beautiful color. I can almost feel it now.

It's no secret Apple(AAPL) is one of the most widely followed companies not only in the investment community, but worldwide by customers, competitors, and hater's alike. It only makes sense then that The Long Haul Investor also keeps an eye on the company too.

I was looking at Apple just before it was announced Warren Buffet's Berkshire Hathaway(BRK.A) took a position.  Of course that gave the shares a nice little pop.  It also made me feel kind of cool to think I was looking at the same company thinking it was a decent value just as some of the richest and smartest investors in the world were too.

When shares were in the $90's there was a lot to like. The stock had

Monday, September 12, 2016

Interest Rates Fuel Volatility

Last Friday I posted that rough tides might be ahead. I didn't realize how many people followed me and decided to hit the sell button based on that article! All kidding aside the S&P 500's 2.45% drop was the largest since Brexit. Also the VIX shot up to 20%. Things have calmed down a bit today as the market advances over 1%.

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One noteworthy item is without anyone really noticing Financial stocks(XLF) have started to outperform their rate sensitive cousin Utilities(XLU). It shows the market has slowly been factoring in a rate hike since August.  Lately the rhetoric from the Fed is only fueling the fire.

Friday, September 9, 2016

Rough Tides Ahead?

As we finish up this so far relatively calm shortened trading week I thought it'd be fun to bring up some history regarding the Dow Jones and volatility.

The 5 largest daily percentage losses in the Dow have all come over the next few months in October, November, and December. The largest point drop was the 22.6% drop during

Thursday, September 8, 2016

Will Cummins Rule The Road?

I tweeted the other day the announcement regarding a partnership between Volkswagen(VLKAY) and Navistar(NAV) joining forces.  The partnership involves VW making a $256 million equity investment in Navistar for a 16.6% stake and two board seats.

The idea of the partnership is to allow sharing of engine technology, part sourcing, and other forms of collaboration between the two companies. The move gives Volkswagen better access to the profitable North American market through it's two European brands(MAN & Scania) where it's weak.

This is a big hit to Cummin's

Saturday, September 3, 2016

TLH Weekly Review - September 3, 2016

I'll keep this weeks review quick. We did receive quite a bit of economic news, and I'll give a quick synopsis.

At the beginning of the week we received Personal Spending and Income data.  Incomes rose a bit more than expected, and spending was lower than expected. So if we put that together we should have seen in bump in the savings rate. That we did as savings were bumped up from 5.5% in June to 5.7% in July.  The trend of higher savings started since the recession is still intact, and nicely recovering from the downturn in 2013.

Pending home sales and Case-Shiller 20 City Composite also showed gains of 1.3% and 5.1% respectively. But on the downside construction spending came in weak with a 0% change while the market expected 0.9%.  Then all eyes turned towards the Non-Farm Payroll data on Friday.  Considering the Fed has sent out it's speakers to

Friday, September 2, 2016

The CEO's Letter

Each year just about every CEO sends out a letter to shareholders via their Annual Report. It cheer-leads all the best parts of the year a company had. John Lancaster wrote a good piece in The New Yorker that you can read here regarding letters to and from the Chairman.

It's loaded with quality information and stories. Including many from Warren Buffet and his mentor Benjamin Graham.  Here are a few excerpts.

Because Buffett ignores the short-term fluctuations of the stock market and doesn’t mind long stretches when the valuations of companies in his portfolio are depressed, he needs shareholders who see things the same way. His way of heading off this potential trouble is to practice what he calls “shareholder eugenics.”

Keeping My Eye on Hershey

I'll be the first to say I was pissed when Mondelez(MDLZ) made a bid to buy Hershey's. I had been keeping a loose eye on the company for bit, and I was upset that I'd have to buy MDLZ if I wanted exposure.

I didn't like that idea because in my opinion Mondelez was making the offer to counter their falling sales the last few years. Hershey has done much better in handling the move towards healthier foods in American diets.  Surprisingly the fact that Hershey's