Tuesday, December 8, 2009
Time to Cycle Into Quality (Not that we ever left)
We saw this article on the web. It reinforced what we are seeing, high quality stocks are much more reasonably valued than lower quality names.
Monday, December 7, 2009
Thomas White International Fund
Last week we spoke with Douglas Jackman CFA, an Executive Vice President at Thomas White, about the Thomas White International Fund (TWWDX). Thomas White started his eponymous firm in 1992 when he left Morgan Stanley. His initial investors were Sir John Templeton and John Galbraith, partners in the extremely successful Templeton Galbraith investment firm and pioneers in international investing. The firm manages mostly international assets.
The fund remains fully invested throughout market cycles. Its twin objectives are outperforming its benchmark (MSCI All-Country ex US) with lower volatility. A key way it achieves those twin objectives is by attempting to preserve capital during declining markets. They have been successful at this, outperforming in 19 out of 24 down quarters (79% of the time).
Thomas White’s proprietary research has broken down the its roughly 2,000 international stock universe (it only buys stocks with a market capitalization great than $1 billion) into 97 distinct regional industries (European banks, Japanese autos, for example). The key factors in this breakdown are that Thomas White believes that it has identified the most important valuation metrics in each of these 97 industry groups and the firm also believes that local market factors have a bigger impact on the stocks than global factors. Given the firm’s valuation-driven investment style, it ranks the companies in their respective industry groups to determine the most undervalued in each. After they have that ranking, the analysts at Thomas White then group all the stocks into deciles based on their expected returns. The most compelling 200-300 names are subject to additional qualitative analysis focusing on the quality of their accounting, management and products. From this group, the fund will select the most attractive 100 to 150 names for its portfolio (currently 141 names).
To manage risk, the fund monitors the valuations of each stock in its universe every month, has individual position size limits and also limits as to how far it will allow the fund to deviate from the index.
The fund does not hedge its currency exposure. While allowed to by prospectus, it never has hedged. The firm pointed out to us that its benchmark, the MSCI all-Country ex US contains both Emerging Markets and Canada unlike the more usual MSCI EAFE index.
Mr Jackman commented that the managers are concerned about the effects on the global economy as the massive amount of excess government liquidity is unwound. The fund has been cutting back its exposure to health care and retail. The managers also have 24% of the fund’s assets in emerging markets, its highest level ever.
The Thomas White International Fund’s uses more quantitative tools and owns more stocks than other funds we typically use. Importantly, they apply their approach in a consistent and disciplined manner with results that are impressive. They are good stewards of their fund holder’s capital. We continue to like this fund as a way for ourselves and our clients to get broad exposure to all international stocks whether in developed or emerging markets. We also think the fund’s focus on volatility reduction and relative valuation make this fund a core holding for many investors.
Disclosure: Harvest Financial Partner owns the Thomas White International Fund in its client portfolios. The authors own the Thomas White International Fund. Positions can change at any time.
Posted by Harvest Financial Partners at 1:52 PM
The fund remains fully invested throughout market cycles. Its twin objectives are outperforming its benchmark (MSCI All-Country ex US) with lower volatility. A key way it achieves those twin objectives is by attempting to preserve capital during declining markets. They have been successful at this, outperforming in 19 out of 24 down quarters (79% of the time).
Thomas White’s proprietary research has broken down the its roughly 2,000 international stock universe (it only buys stocks with a market capitalization great than $1 billion) into 97 distinct regional industries (European banks, Japanese autos, for example). The key factors in this breakdown are that Thomas White believes that it has identified the most important valuation metrics in each of these 97 industry groups and the firm also believes that local market factors have a bigger impact on the stocks than global factors. Given the firm’s valuation-driven investment style, it ranks the companies in their respective industry groups to determine the most undervalued in each. After they have that ranking, the analysts at Thomas White then group all the stocks into deciles based on their expected returns. The most compelling 200-300 names are subject to additional qualitative analysis focusing on the quality of their accounting, management and products. From this group, the fund will select the most attractive 100 to 150 names for its portfolio (currently 141 names).
To manage risk, the fund monitors the valuations of each stock in its universe every month, has individual position size limits and also limits as to how far it will allow the fund to deviate from the index.
The fund does not hedge its currency exposure. While allowed to by prospectus, it never has hedged. The firm pointed out to us that its benchmark, the MSCI all-Country ex US contains both Emerging Markets and Canada unlike the more usual MSCI EAFE index.
Mr Jackman commented that the managers are concerned about the effects on the global economy as the massive amount of excess government liquidity is unwound. The fund has been cutting back its exposure to health care and retail. The managers also have 24% of the fund’s assets in emerging markets, its highest level ever.
The Thomas White International Fund’s uses more quantitative tools and owns more stocks than other funds we typically use. Importantly, they apply their approach in a consistent and disciplined manner with results that are impressive. They are good stewards of their fund holder’s capital. We continue to like this fund as a way for ourselves and our clients to get broad exposure to all international stocks whether in developed or emerging markets. We also think the fund’s focus on volatility reduction and relative valuation make this fund a core holding for many investors.
Disclosure: Harvest Financial Partner owns the Thomas White International Fund in its client portfolios. The authors own the Thomas White International Fund. Positions can change at any time.
Posted by Harvest Financial Partners at 1:52 PM
Friday, November 20, 2009
Extension of time to redeposit RMDs
Required Minimum Distributions (RMDs) were suspended for 2009. If you took an RMD in 2009 (and you do not need the funds), the IRS has allowed you until November 30 to roll it back into your IRA, an extension from the typical 60 days one has to roll over funds. Here’s a link to Ed Slott’s blog where he goes into the details.
If you have any questions, give us a call.
If you have any questions, give us a call.
Monday, November 2, 2009
Recent Article
We recently wrote this article for our local paper, The Main Line Suburban. It contains a few ideas on how to manage in the current market environment.
Tuesday, October 6, 2009
Don't Invest Your Emergency Reserves
We recently read this article and felt it was worthy of comment. We think the author is quite simply providing BAD ADVICE! Emergency reserves are just that, money that should be available in case of emergency and not tied up in a relatively risky investment like stocks. Now we like dividend stocks as well (if not better) than the next guy, but they should only should be used for your investment portfolio, not for money that you could require in case of emergency. If you had followed the author’s advice last year, your reserve could have declined by 20-30%, at a time when you may have really needed the money.
Bottom line, keep your emergency funds in a very low risk and easily accessible place like a bank account, money market fund or very short term CDs. The interest you earn will be very low, but the money will be there when you need it. Emergency funds are about return of principal, not return on principal.
Bottom line, keep your emergency funds in a very low risk and easily accessible place like a bank account, money market fund or very short term CDs. The interest you earn will be very low, but the money will be there when you need it. Emergency funds are about return of principal, not return on principal.
Friday, September 25, 2009
“We are analysts.”
On 9/23/09 we talked with Vincent Sellecchia, co-manager of the Delafield Fund (and author of the quote above) about the fund, markets and some of the business issues of running an investment management firm. Here are some of the highlights:
Delafield is moving from Reich & Tang, a subsidiary of Natixis Global Asset Management to Tocqueville. Natixis made a corporate decision to only retain money market and deposit business at Reich & Tang (interestingly, they requested that the Delafield Fund remain available to their employees through the company’s retirement plan). The principals of Delafield are confident that the move to Tocqueville should prove a good fit. While there is not extensive overlap between the existing Tocqueville funds and Delafield, they will still sit in on research meetings and meet with the “one company per day” that goes through Tocqueville’s offices.
We spent a little time reviewing the company’s investment process. As they come up with ideas for the fund, they take historical financial information and Wall Street projections to complete a template they have developed. From that template they derive an Enterprise Value to EBITDA ratio. If the company appears interesting, they will then typically schedule a call with the company. If at that point they are still interested, they will meet with senior management in person and visit some of the company’s facilities. After a meeting, the Delafield team will re-evaluate and recast the projections with their financial estimates to see what Enterprise Value to EBITDA ratio comes out and determine if the stock appears attractive for purchase
In buying stocks for the portfolio, Delafield attempts to be very price sensitive. If the price declines after an initial purchase and they are confident in their analytical work they will average down. Typically they accumulate positions over time.
During periods when the fund’s share price is rising and performing well (like now) turnover also starts to increase as they peel off portions of their positions and hopefully recycle the proceeds into new names.
The sell discipline is a primarily a function of valuation. As a stock approaches fair value, the managers will begin to sell. Other reasons they may sell a stock include the business results are not what Delafield had anticipated through a mistake in their analytical work or assessment of management. They will also sell if management changes direction on them.
The fund had a difficult fourth quarter last year primarily due to the credit market freeze causing investors to view what had previously been considered reasonably capitalized companies as bankruptcy candidates. This has led the fund to be much more focused on credit issues on a firm’s balance sheets (debt maturities, debt covenants, etc.) as they go through their investment analysis. Many of those same companies that were driven down last year have surged up in price leading to Delafield’s 38.41% year-to-date return through August31 (vs. the S&P 500’s 14.97% return).
At August 31, Morningstar reported the firm held over 18% of its assets in cash, but Vince noted that the cash position is currently higher. Given lower cash yields, the fund has taken about 4.5% of its assets and invested in bonds maturing in 1-5 years.
The managers are not finding values in the market today, hence the even higher cash position. Their outlook is that the US economy (this being a domestic fund) has bottomed and the credit crisis is over but the recovery will be muted. They believe consumers will want to save more and so companies will have a tougher time growing their top lines. And after the recent market run up, Vince believes you need to look to 2011 to start justifying some of the valuations they are seeing in the market. Their thoughts on the markets are greatly influenced by the frequent conversations they have with company managements.
The fund currently owns 60 stocks in the portfolio, which is closer to the upper end of their range. The large number of stocks also reflects the fact the managers have fewer higher conviction ideas. Vince noted they are very conscious of risk and given their concerns about valuation and the consumer, the high cash position makes a lot of sense.
After our conversation with Vince, we both felt very comfortable with our holdings in the Delafield Fund. The fund managers (who have been with the company since inception) continue to remain very disciplined in their allocation of their fund holder’s capital. We share their belief that the market has moved up rapidly and there are not that many good purchase candidates available. We are very comfortable with their decision to raise some cash to be used later when more attractive ideas appear. We also found his honesty in discussing the 4th quarter of 2008 and the lessons they learned to be refreshing.
We continue to find the mangers at Delafield to be great stewards of ours and our client’s capital. We conclude with one of our favorite lines, “Our best risk management is knowing our companies as well as we can.” We couldn’t agree more.
Disclosure: Harvest Financial Partner owns the Delafield Fund in its client portfolios. The authors own the Delafield Fund. Positions can change at any time.
Delafield is moving from Reich & Tang, a subsidiary of Natixis Global Asset Management to Tocqueville. Natixis made a corporate decision to only retain money market and deposit business at Reich & Tang (interestingly, they requested that the Delafield Fund remain available to their employees through the company’s retirement plan). The principals of Delafield are confident that the move to Tocqueville should prove a good fit. While there is not extensive overlap between the existing Tocqueville funds and Delafield, they will still sit in on research meetings and meet with the “one company per day” that goes through Tocqueville’s offices.
We spent a little time reviewing the company’s investment process. As they come up with ideas for the fund, they take historical financial information and Wall Street projections to complete a template they have developed. From that template they derive an Enterprise Value to EBITDA ratio. If the company appears interesting, they will then typically schedule a call with the company. If at that point they are still interested, they will meet with senior management in person and visit some of the company’s facilities. After a meeting, the Delafield team will re-evaluate and recast the projections with their financial estimates to see what Enterprise Value to EBITDA ratio comes out and determine if the stock appears attractive for purchase
In buying stocks for the portfolio, Delafield attempts to be very price sensitive. If the price declines after an initial purchase and they are confident in their analytical work they will average down. Typically they accumulate positions over time.
During periods when the fund’s share price is rising and performing well (like now) turnover also starts to increase as they peel off portions of their positions and hopefully recycle the proceeds into new names.
The sell discipline is a primarily a function of valuation. As a stock approaches fair value, the managers will begin to sell. Other reasons they may sell a stock include the business results are not what Delafield had anticipated through a mistake in their analytical work or assessment of management. They will also sell if management changes direction on them.
The fund had a difficult fourth quarter last year primarily due to the credit market freeze causing investors to view what had previously been considered reasonably capitalized companies as bankruptcy candidates. This has led the fund to be much more focused on credit issues on a firm’s balance sheets (debt maturities, debt covenants, etc.) as they go through their investment analysis. Many of those same companies that were driven down last year have surged up in price leading to Delafield’s 38.41% year-to-date return through August31 (vs. the S&P 500’s 14.97% return).
At August 31, Morningstar reported the firm held over 18% of its assets in cash, but Vince noted that the cash position is currently higher. Given lower cash yields, the fund has taken about 4.5% of its assets and invested in bonds maturing in 1-5 years.
The managers are not finding values in the market today, hence the even higher cash position. Their outlook is that the US economy (this being a domestic fund) has bottomed and the credit crisis is over but the recovery will be muted. They believe consumers will want to save more and so companies will have a tougher time growing their top lines. And after the recent market run up, Vince believes you need to look to 2011 to start justifying some of the valuations they are seeing in the market. Their thoughts on the markets are greatly influenced by the frequent conversations they have with company managements.
The fund currently owns 60 stocks in the portfolio, which is closer to the upper end of their range. The large number of stocks also reflects the fact the managers have fewer higher conviction ideas. Vince noted they are very conscious of risk and given their concerns about valuation and the consumer, the high cash position makes a lot of sense.
After our conversation with Vince, we both felt very comfortable with our holdings in the Delafield Fund. The fund managers (who have been with the company since inception) continue to remain very disciplined in their allocation of their fund holder’s capital. We share their belief that the market has moved up rapidly and there are not that many good purchase candidates available. We are very comfortable with their decision to raise some cash to be used later when more attractive ideas appear. We also found his honesty in discussing the 4th quarter of 2008 and the lessons they learned to be refreshing.
We continue to find the mangers at Delafield to be great stewards of ours and our client’s capital. We conclude with one of our favorite lines, “Our best risk management is knowing our companies as well as we can.” We couldn’t agree more.
Disclosure: Harvest Financial Partner owns the Delafield Fund in its client portfolios. The authors own the Delafield Fund. Positions can change at any time.
Wednesday, September 23, 2009
Chasing Yields Revisited
We thought this article in yesterday's Wall Street Journal provides additional support for our recent warning to avoid chasing high yields. While it is certainly tempting given the low yields available in money market funds and high quality bonds, we think that in the long run it will be better for your personal net worth to avoid the temptation.
The article also provides a little more clarity on why we prefer purchasing individual bonds or CDs for our clients’ portfolios as opposed to using a bond fund. We like the certainty of getting our principal back when a bond matures. We also like being able to use individual bonds to meet specific future liabilities, and to provide a steady stream of cash to rebalance the portfolio or simply to reinvest in another bond. At times, bond funds are the only alternative, but just remember, like all investments, they come with risks.
The article also provides a little more clarity on why we prefer purchasing individual bonds or CDs for our clients’ portfolios as opposed to using a bond fund. We like the certainty of getting our principal back when a bond matures. We also like being able to use individual bonds to meet specific future liabilities, and to provide a steady stream of cash to rebalance the portfolio or simply to reinvest in another bond. At times, bond funds are the only alternative, but just remember, like all investments, they come with risks.
Wednesday, September 16, 2009
Roth Conversions
Next year opens up the possibility of converting traditional IRA balances to Roth IRAs for many more people. Prior to 2010, people who had an adjusted gross income (AGI) above $100,000 were not eligible to convert, but that income limit goes away in 2010. (Converting technically means taking a taxable distribution from your traditional IRA, paying income tax on the distribution and depositing the distribution into a Roth IRA account.) Another benefit to converting in 2010 is that income taxes due on the conversion can be deferred until 2011 and 2012.
Given that qualified withdrawals from a Roth IRA are tax-exempt and Roth IRAs are not subject to required minimum distributions (RMDs), a Roth presents some very unique advantages.
Is it right for you?
What are the mechanics of converting to a Roth IRA?
Unfortunately there is no one answer to either of these questions. Give us a call or send us an email and we can discuss your situation.
Given that qualified withdrawals from a Roth IRA are tax-exempt and Roth IRAs are not subject to required minimum distributions (RMDs), a Roth presents some very unique advantages.
Is it right for you?
What are the mechanics of converting to a Roth IRA?
Unfortunately there is no one answer to either of these questions. Give us a call or send us an email and we can discuss your situation.
Thursday, August 27, 2009
What Now?
The market has had a tremendous run with the S&P 500 Index is up 50% from its March lows. I am not sure that anyone expected us to reach these levels so quickly—certainly not me. I was not surprised when the market bounced off its bottom, but the size of the move was surprising. While we are happy to have seen stocks recover so dramatically, it does beg the question, what to do now?
Rather than holding and hoping, we have sharpened our valuation pencils to see if at today’s prices we still want to own these stocks in our portfolios. We are finding some of our stocks look ripe for a sale. Given the market move, that should not be surprising. We do not view ourselves as traders, but instead are taking a much more pragmatic view of what we own. While we technically may be climbing out of a recession, things are still very weak, unemployment is high and spending is soft. Earnings for the quarter generally looked good, but most of the upside surprises came from cost cutting and that may or may not be sustainable. It is going to take awhile to get things back to “normal.” So that means, we need to consider that in our valuation of the companies we own. And right now valuations are starting to look a little too rich for some of our companies.
Don’t take this as a broad market call, it isn’t. Take it for what it is, the view of someone who believes some of his stocks are fully priced. And as opposed to getting too greedy, I am deciding to take some money off the table, in the belief that I can re-deploy it back into stocks at lower levels or into some stocks that have not participated in this rally.
While I don’t think there is anything wrong with this approach, there is the possibility that these sales could turn out to be too early. One way would be if the economy improves much more rapidly than I expect and rising earnings continue to drive stock prices up. While that is a possibility, we are going to need to see revenues rise and it just does not appear that is likely right away. Spending still appears soft.
Another way we could be viewed as early, is if we see the investors who have been on the sidelines for this advance start to aggressively buy stocks for fear of missing an even bigger move. This influx of cash could force stocks up further. This may occur, but if so, we are not be selling all of our stocks, so we will participate in any advance.
Rather than holding and hoping, we have sharpened our valuation pencils to see if at today’s prices we still want to own these stocks in our portfolios. We are finding some of our stocks look ripe for a sale. Given the market move, that should not be surprising. We do not view ourselves as traders, but instead are taking a much more pragmatic view of what we own. While we technically may be climbing out of a recession, things are still very weak, unemployment is high and spending is soft. Earnings for the quarter generally looked good, but most of the upside surprises came from cost cutting and that may or may not be sustainable. It is going to take awhile to get things back to “normal.” So that means, we need to consider that in our valuation of the companies we own. And right now valuations are starting to look a little too rich for some of our companies.
Don’t take this as a broad market call, it isn’t. Take it for what it is, the view of someone who believes some of his stocks are fully priced. And as opposed to getting too greedy, I am deciding to take some money off the table, in the belief that I can re-deploy it back into stocks at lower levels or into some stocks that have not participated in this rally.
While I don’t think there is anything wrong with this approach, there is the possibility that these sales could turn out to be too early. One way would be if the economy improves much more rapidly than I expect and rising earnings continue to drive stock prices up. While that is a possibility, we are going to need to see revenues rise and it just does not appear that is likely right away. Spending still appears soft.
Another way we could be viewed as early, is if we see the investors who have been on the sidelines for this advance start to aggressively buy stocks for fear of missing an even bigger move. This influx of cash could force stocks up further. This may occur, but if so, we are not be selling all of our stocks, so we will participate in any advance.
Friday, July 17, 2009
Chasing Yield
"More money has been lost reaching for yield than at the point of a gun"
I first came across this quote years ago in a piece written by Ray DeVoe. Ray was a wonderful writer whose financial newsletter was one of my favorites. I think about his quote whenever I hear someone tell me about a safe, secure investment with a huge yield or large promised return. I think about it because I know that if the yield or promised return sounds too good to be true, it is too good to be true. I have passed on this advice many times in my career, and it has usually proven accurate.
Unfortunately, I am hearing about these “great” investments way too often. It is not surprising, given the very low yields on bank deposits, money market funds, CD’s and high quality bonds. People are seeking higher and higher yields and their search will likely lead to disappointment.
Now, we are investors who seek out attractive yields on stocks that we buy. We are very comfortable with the academic research that shows that investing in dividend paying stocks, particularly ones that grow their dividends, has led to above market returns over time. But we are also aware that there is research that shows if you seek out the very highest yielding stocks, you are very likely to set yourself up for poor performance. Why is that? Because strong, well run companies do not have to offer extraordinary yields to attract investors. Low quality companies do, and while investing in them may pay off, the odds are not stacked in your favor.
When we pick investments for ourselves and our clients, we would prefer to have the odds in our favor. As we mentioned above, stocks that pay dividends, and grow, their yields tend to outperform the market. So. If we can find those dividend paying companies with solid businesses, good balance sheets, predictable cash flows and trustworthy management teams, we feel pretty good. If we can find those companies and patiently wait until they are selling at low valuations, than we are pretty confident that we will obtain attractive returns over time. We don’t feel the need to chase super high yields from stocks or bonds, because we recognize we are putting our capital at risk.
Some examples today of companies that meet our criteria include:
|
|
|
|
| PAYOUT |
|
|
| PRICE | P/E | YIELD | RATIO | ROE |
ABBOTT LABS | $44.94 | 12.2 | 3.6% | 45% | 29.7 |
GENERAL DYNAMICS CORP | $54.76 | 8.9 | 2.8% | 23% | 24.7 |
JOHNSON & JOHNSON | $59.25 | 13.1 | 3.3% | 41% | 30.4 |
KIMBERLY CLARK CORP | $54.38 | 13.2 | 4.4% | 59% | 35.5 |
NIKE INC | $53.19 | 15.0 | 1.9% | 32% | 21.5 |
PAYCHEX INC | $25.35 | 19.2 | 4.9% | 84% | 39.8 |
PROCTER & GAMBLE CO | $55.21 | 13.1 | 3.2% | 45% | 17.4 |
SYSCO CORPORATION | $22.90 | 13.2 | 4.2% | 53% | 32.5 |
UNITED TECHNOLOGIES CP | $53.97 | 13.2 | 2.9% | 33% | 27.7 |
Disclosure: As of this date the authors and clients of Harvest Financial Partners own ABT, GD, JNJ, KMB, NKE, PAYX, PG, SYY and UTX. Positions may change at any time. These are NOT recommendations. This blog is for informational purposes only.
Tuesday, July 14, 2009
Our 2nd Quarter Client Letter
Writing this letter is much more pleasant than some of our previous ones. If you just look at the indices, you would think that it has been an uneventful year so far, with the S&P 500 up 3% and the Dow up Jones down 2%. Of course the minor changes in the averages masks an incredibly volatile (and at times frightening) six months. We saw 2009 start with such promise after the painful declines of 2008. A new president was inaugurated with many bold ideas for change, but then the markets started spiraling downward. The bottom was on March 9th and the fear and anxiety levels were at levels that many have never before seen (and hopefully will never again see). The markets then began moving up and by June 12th we had reached our high for the year. The S&P 500 had moved a stunning 38% in 3 months.
Given the unease we saw in late February and early March, we have come a long, long way. But we still have a ways to go. The journey did not end for you on June 30th, and we are very cognizant of that fact. So, while we are pleased to see improvement in the markets and investor psychology, we know that there will continue to be many bumps along the way. We are still waiting to see if the stimulus leads to improvement in the economy, if some kind of health care reform is enacted, what type of financial and environmental regulations may be passed, what will happen to our taxes…There are many questions and few clear answers.
So what does this mean for you? It means that we will continue to focus on finding the best investments for your portfolio-whether they be reasonably valued equities, high quality fixed income instruments or mutual funds that are run by talented managers. We continue to feel this approach provides some level of consistency in very turbulent times. It should also allow us to avoid disasters, while also taking advantage of opportunities in the market. Because we have generally been maintaining high cash levels in our portfolios, it gives us liquidity to take advantage of opportunities that will present themselves in the market. Over the next month, many companies will be announcing earnings and unless managements are overly optimistic, we should find a bargain or two.
In regards to mutual funds, we have been making an effort to be more pro-active by setting up conference calls with the firm’s managing the funds. We use these calls in an effort to provide a high level of due diligence in these uncertain times. We have shared our thoughts on the Blog, which you can find in the Newsroom section of our website.
As always, we like to remind ourselves how lucky we are to have you as a client. We appreciate your trust and look forward to rewarding your confidence. Please let us know if there is anything that we can do to help you out during the summer. We also would be pleased to assist a friend or family member who may be in need of some financial advice or a fresh perspective on their investments. Feel free to pass on our names.
Given the unease we saw in late February and early March, we have come a long, long way. But we still have a ways to go. The journey did not end for you on June 30th, and we are very cognizant of that fact. So, while we are pleased to see improvement in the markets and investor psychology, we know that there will continue to be many bumps along the way. We are still waiting to see if the stimulus leads to improvement in the economy, if some kind of health care reform is enacted, what type of financial and environmental regulations may be passed, what will happen to our taxes…There are many questions and few clear answers.
So what does this mean for you? It means that we will continue to focus on finding the best investments for your portfolio-whether they be reasonably valued equities, high quality fixed income instruments or mutual funds that are run by talented managers. We continue to feel this approach provides some level of consistency in very turbulent times. It should also allow us to avoid disasters, while also taking advantage of opportunities in the market. Because we have generally been maintaining high cash levels in our portfolios, it gives us liquidity to take advantage of opportunities that will present themselves in the market. Over the next month, many companies will be announcing earnings and unless managements are overly optimistic, we should find a bargain or two.
In regards to mutual funds, we have been making an effort to be more pro-active by setting up conference calls with the firm’s managing the funds. We use these calls in an effort to provide a high level of due diligence in these uncertain times. We have shared our thoughts on the Blog, which you can find in the Newsroom section of our website.
As always, we like to remind ourselves how lucky we are to have you as a client. We appreciate your trust and look forward to rewarding your confidence. Please let us know if there is anything that we can do to help you out during the summer. We also would be pleased to assist a friend or family member who may be in need of some financial advice or a fresh perspective on their investments. Feel free to pass on our names.
Monday, July 6, 2009
Fiscal Health Day
I read this article in the NY Times (subscription or registration may be required) this past weekend. It discusses the importance of taking a fiscal health day to ensure that your financial life is in order. Ron Lieber provides some very interesting issues to focus on during this day. We might add a few more areas to focus on:
1) Review your investment portfolio and ensure it is invested in a manner that will help in meeting your goals, but also make sure it provides sufficient reserves to protect you in these uncertain times.
2) Evaluate the quality of your fund, stock and bond holdings. Are they still investments that you are comfortable holding?
3) Determine what kind of debt you may have. Are there ways to reduce or eliminate the debt and strengthen your balance sheet or to lock in today’s relatively low rates?
4) Ask the phone company or cable company to review your current plan and determine if there are cheaper alternatives for you.
5) Review your 401k and make sure that it is still invested in a way you are comfortable with and see if there any way you can contribute, say, another 1% of your salary?
This may sound a little daunting, but if you spend a day making an effort to improve your fiscal health, you will likely find many ways to save money and provide a little extra piece of mind. We are certain it will be time well spent.
If you could use some help, just email Jim (jim@harvestfp.com) or John (john@harvestfp.com) and we would be happy to assist.
1) Review your investment portfolio and ensure it is invested in a manner that will help in meeting your goals, but also make sure it provides sufficient reserves to protect you in these uncertain times.
2) Evaluate the quality of your fund, stock and bond holdings. Are they still investments that you are comfortable holding?
3) Determine what kind of debt you may have. Are there ways to reduce or eliminate the debt and strengthen your balance sheet or to lock in today’s relatively low rates?
4) Ask the phone company or cable company to review your current plan and determine if there are cheaper alternatives for you.
5) Review your 401k and make sure that it is still invested in a way you are comfortable with and see if there any way you can contribute, say, another 1% of your salary?
This may sound a little daunting, but if you spend a day making an effort to improve your fiscal health, you will likely find many ways to save money and provide a little extra piece of mind. We are certain it will be time well spent.
If you could use some help, just email Jim (jim@harvestfp.com) or John (john@harvestfp.com) and we would be happy to assist.
Thursday, June 25, 2009
Manager Change
We came in this morning to be greeted by this press release from the Oakmark Funds informing us that Chad Clark, the co-portfolio manager of the Oakmark International Small Cap Fund, has left the fund and firm. We take manager changes very seriously and prefer the managers of funds we use to stay around for a long, long time. At times, manager changes cause us to leave a fund, but we won’t be doing that in this case for two reasons. First, David Herro, who is the lead portfolio manager on this fund, is still in place. Second, Oakmark has a very clear philosophy of purchasing high quality companies trading at discounts to their intrinsic value that drives the investment process of all their funds. So we do not believe that Mr. Clark’s departure will lead to a fundamental change in the approach and performance of the Oakmark International Small Cap Fund. Still, while we monitor all the funds we use for client portfolios, we will be watching this one a little more closely.
Tuesday, June 2, 2009
The Delafield Fund
Barron's recently interviewed the managers of one of our favorite mutual funds, the Delafield Fund. While they are not flashy, they have done a nice job of compounding their fundholder's capital over an extended period of time. I think after you read the article, you will understand why we are big fans of these disciplined investors.
Tuesday, May 19, 2009
Update
It has been awhile since one of us wrote. That is the curse of running a small business, you get pulled in many different directions. We will do our best to write more often.
Back in early March, when the market was down and the anxiety levels were at an extreme, we sent out a letter to clients suggesting that the market was due for a bounce. We certainly had a bounce, and it has greatly reduced the fear levels. Now, I’m not going to make additional predictions about where they market is going, because frankly that’s not what we do. More importantly, we think our time is much better spent reviewing the stocks that we already own and finding some additional highly quality names to add to our portfolios. We have a long list of stocks that we are very interested in buying, but we remain very price sensitive. There is nothing that we have to buy, we only want to commit our clients' capital (and our own) when we are comfortable that the quality of a stock remains high and its valuation is low. This does not change whether the Dow Jones is at 6500 or 8500, it just means it takes longer.
As long as we are patient and disciplined, we are confident that we will add some attractive names to the portfolio, at what will prove to be attractive prices.
Back in early March, when the market was down and the anxiety levels were at an extreme, we sent out a letter to clients suggesting that the market was due for a bounce. We certainly had a bounce, and it has greatly reduced the fear levels. Now, I’m not going to make additional predictions about where they market is going, because frankly that’s not what we do. More importantly, we think our time is much better spent reviewing the stocks that we already own and finding some additional highly quality names to add to our portfolios. We have a long list of stocks that we are very interested in buying, but we remain very price sensitive. There is nothing that we have to buy, we only want to commit our clients' capital (and our own) when we are comfortable that the quality of a stock remains high and its valuation is low. This does not change whether the Dow Jones is at 6500 or 8500, it just means it takes longer.
As long as we are patient and disciplined, we are confident that we will add some attractive names to the portfolio, at what will prove to be attractive prices.
Monday, May 4, 2009
Royce Premier Fund
We had a conference call with a principal from Royce, Francis Gannon, on April 30th to discuss the Premier Fund. Following are some notes from the call:
• The Premier fund focuses on firms with strong balance sheets, low debt, high returns on invested capital and strong growth prospects. Of those attributes, a strong balance sheet is the first among equals. They measure strong balance sheets initially by looking for an assets/equity ratio below two (for nonbanks). As we look for similar attributes from the companies that we purchase, we are very comfortable with this approach to quality.
• Most of Premier’s portfolio has a market cap between $500 million and $2.5 billion; there are some holdings with smaller market caps and some with larger ones. If a holding grows above a $2.5 billion market cap they can hold it but can’t add to it.
• Royce reopened fund in January 2009 because they were, and are, seeing some very attractive opportunities in market place. Since the fund has been reopened inflows have been modestly positive. The fund size is about $3 billion, which we feel is a little large for a small cap fund and certainly bears watching.
• Royce develops a cap rate for each company they own or consider buying. This cap rate is defined as earnings before interest and taxes (EBIT) divided by enterprise value (market capitalization plus debt minus any cash). They would like to buy companies with a cap rate greater than 15% and they look to sell companies when they have a cap rate at or below 5-7%. They are currently finding companies with cap rates over 20%. When purchasing stocks we believe valuation is essential. While Royce looks at a different metric than we do when valuing a company, we are comfortable that they apply it consistently and prudently.
• Royce buys stocks with the idea that they will hold them for 3 to 5 years. The portfolio is currently underweight financials. The managers are still are not buying banks, but they are buying exchanges, brokers and insurance companies as well as investment managers.
• Another theme was buying the shares of companies the portfolio managers know well and where the stock price dropped well below Royce’s assessment of their business value. Schnitzer Steel Industries is an example where Royce had been reducing its position earlier in 2008 at prices over $100/ share. The stock plunged into the teens in the fourth quarter and so the fund rebuilt a position. Wabtec (old Westinghouse Air brake) and Ralph Lauren were other high quality companies that the fund bought as stock prices declined.
• The portfolio is currently 6-7% international. By prospectus Premier can go up to 25%, but the highest it has ever reached is 10%. The largest foreign holding is Sims which is headquartered in Australia. The firm bought Metals Management last year and is currently is in the process of relocating its headquarters to the US. We have no concerns about the Premier Fund’s ability to buy stocks outside the US. One of our beliefs when picking funds, is that giving good managers more freedom to find attractive opportunities benefits the fund holders.
• The fund attempts to manage risk primarily by its focus on high quality, low debt companies. Another risk management tool is that no more than 25% of the fund can be invested in any industry.
Overall Royce Premier continues to meet our requirements for ownership. It has an impressive track record and was down 10.70% over the quarter and up 0.91% annualized over the last 5 years (periods ending March 31, 2009). The individuals (Chuck Royce and Whitney George) responsible for that track record are still in charge of the fund. The investment philosophy is clearly articulated and appears to be consistently applied. And the managers have strength in their convictions as evidenced by the fund holding 68 stocks, a reasonable number for a smaller cap fund. We continue to think it is a worthwhile holding for our funds and our clients who need small company exposure in their portfolios.
Disclosure: Harvest Financial Partner owns the Royce Premier Fund in its client portfolios. The authors own the Royce Premier Fund. Positions can change at any time.
• The Premier fund focuses on firms with strong balance sheets, low debt, high returns on invested capital and strong growth prospects. Of those attributes, a strong balance sheet is the first among equals. They measure strong balance sheets initially by looking for an assets/equity ratio below two (for nonbanks). As we look for similar attributes from the companies that we purchase, we are very comfortable with this approach to quality.
• Most of Premier’s portfolio has a market cap between $500 million and $2.5 billion; there are some holdings with smaller market caps and some with larger ones. If a holding grows above a $2.5 billion market cap they can hold it but can’t add to it.
• Royce reopened fund in January 2009 because they were, and are, seeing some very attractive opportunities in market place. Since the fund has been reopened inflows have been modestly positive. The fund size is about $3 billion, which we feel is a little large for a small cap fund and certainly bears watching.
• Royce develops a cap rate for each company they own or consider buying. This cap rate is defined as earnings before interest and taxes (EBIT) divided by enterprise value (market capitalization plus debt minus any cash). They would like to buy companies with a cap rate greater than 15% and they look to sell companies when they have a cap rate at or below 5-7%. They are currently finding companies with cap rates over 20%. When purchasing stocks we believe valuation is essential. While Royce looks at a different metric than we do when valuing a company, we are comfortable that they apply it consistently and prudently.
• Royce buys stocks with the idea that they will hold them for 3 to 5 years. The portfolio is currently underweight financials. The managers are still are not buying banks, but they are buying exchanges, brokers and insurance companies as well as investment managers.
• Another theme was buying the shares of companies the portfolio managers know well and where the stock price dropped well below Royce’s assessment of their business value. Schnitzer Steel Industries is an example where Royce had been reducing its position earlier in 2008 at prices over $100/ share. The stock plunged into the teens in the fourth quarter and so the fund rebuilt a position. Wabtec (old Westinghouse Air brake) and Ralph Lauren were other high quality companies that the fund bought as stock prices declined.
• The portfolio is currently 6-7% international. By prospectus Premier can go up to 25%, but the highest it has ever reached is 10%. The largest foreign holding is Sims which is headquartered in Australia. The firm bought Metals Management last year and is currently is in the process of relocating its headquarters to the US. We have no concerns about the Premier Fund’s ability to buy stocks outside the US. One of our beliefs when picking funds, is that giving good managers more freedom to find attractive opportunities benefits the fund holders.
• The fund attempts to manage risk primarily by its focus on high quality, low debt companies. Another risk management tool is that no more than 25% of the fund can be invested in any industry.
Overall Royce Premier continues to meet our requirements for ownership. It has an impressive track record and was down 10.70% over the quarter and up 0.91% annualized over the last 5 years (periods ending March 31, 2009). The individuals (Chuck Royce and Whitney George) responsible for that track record are still in charge of the fund. The investment philosophy is clearly articulated and appears to be consistently applied. And the managers have strength in their convictions as evidenced by the fund holding 68 stocks, a reasonable number for a smaller cap fund. We continue to think it is a worthwhile holding for our funds and our clients who need small company exposure in their portfolios.
Disclosure: Harvest Financial Partner owns the Royce Premier Fund in its client portfolios. The authors own the Royce Premier Fund. Positions can change at any time.
Friday, May 1, 2009
Fairholme
We have been owners of Bruce Berkowitz’s Fairholme Fund for some time now. Here is a link to a Morningstar article comparing Bruce to another pretty good investor – Warren Buffett. Have a read to get an idea how Bruce is allocating his investors' capital.
Disclosure: Harvest Financial Partners owns the Fairholme Fund in client portfolios. The author owns the Fairholme Fund in his personal portfolio. Positions can change at any time.
Disclosure: Harvest Financial Partners owns the Fairholme Fund in client portfolios. The author owns the Fairholme Fund in his personal portfolio. Positions can change at any time.
Tuesday, April 14, 2009
Our 1st Quarter Client Letter
“May you live in interesting times.”
- Chinese proverb…and curse
As we complete our first year as Harvest Financial Partners we have thought about that proverb a lot. We have seen largest financial market and home price declines since the 1930s, government intervention in the economy on an unprecedented scale, and the demise or near demise of such financial behemoths as Fannie Mae, AIG, Citigroup, Bear Stearns and Lehman Brothers. Even GE has had to go hat-in-hand to Warren Buffett and use government debt guarantee programs to sell its bonds. Unemployment is fast approaching early 1980s levels, and world trade is declining for the first time in decades. Very interesting times!
A few weeks ago, when we last wrote you, the pessimism and anxiety were at an extreme. People were really nervous and scared. Today, the market is up over 1500 points, and all seems fine. We believe that the reality is somewhere in the middle. There are still many problems with the economy, but the unprecedented level of fiscal and monetary intervention should soon start to have an impact. This will not necessarily put an end to the recession, but it should improve the financial system and benefit other parts of the economy.
So where do we go from here? Well, we are not economic forecasters; rather we are analysts of companies. To our way of thinking, owning stock in a company at a price of $25/share has less risk than owning stock in the same company at $40/share, assuming the fundamentals have not markedly changed. We are finding many more of these “sales” in the market and, as investors that gets us very excited. We have talked often about the need to upgrade quality and focus on dividends, and we continue to believe that makes sense for investors. We have talked often about patience, and while it has been seriously tested, we still believe this is the correct course of action. So we will continue to proceed with your investment plan. We still are comfortable that this approach will yield you attractive returns over time.
To see how we are implementing our investment approach, we suggest you periodically visit our blog (there is a link on the website or you can visit it directly at www.plantingforyourfuture.blogspot.com). It contains our thoughts on the markets, investing and some of our favorite stocks.
In closing, another quote, “It was the best of times; it was the worst of times”. Even with the worst financial markets in decades we have loved every moment of building Harvest Financial Partners. Most importantly we have enjoyed getting to know you and the rest of our clients. Working with you is why we started the business and what keeps us energized every day. Of course, there are growing pains along the way, so if you have any suggestions or concerns, please let us know.
- Chinese proverb…and curse
As we complete our first year as Harvest Financial Partners we have thought about that proverb a lot. We have seen largest financial market and home price declines since the 1930s, government intervention in the economy on an unprecedented scale, and the demise or near demise of such financial behemoths as Fannie Mae, AIG, Citigroup, Bear Stearns and Lehman Brothers. Even GE has had to go hat-in-hand to Warren Buffett and use government debt guarantee programs to sell its bonds. Unemployment is fast approaching early 1980s levels, and world trade is declining for the first time in decades. Very interesting times!
A few weeks ago, when we last wrote you, the pessimism and anxiety were at an extreme. People were really nervous and scared. Today, the market is up over 1500 points, and all seems fine. We believe that the reality is somewhere in the middle. There are still many problems with the economy, but the unprecedented level of fiscal and monetary intervention should soon start to have an impact. This will not necessarily put an end to the recession, but it should improve the financial system and benefit other parts of the economy.
So where do we go from here? Well, we are not economic forecasters; rather we are analysts of companies. To our way of thinking, owning stock in a company at a price of $25/share has less risk than owning stock in the same company at $40/share, assuming the fundamentals have not markedly changed. We are finding many more of these “sales” in the market and, as investors that gets us very excited. We have talked often about the need to upgrade quality and focus on dividends, and we continue to believe that makes sense for investors. We have talked often about patience, and while it has been seriously tested, we still believe this is the correct course of action. So we will continue to proceed with your investment plan. We still are comfortable that this approach will yield you attractive returns over time.
To see how we are implementing our investment approach, we suggest you periodically visit our blog (there is a link on the website or you can visit it directly at www.plantingforyourfuture.blogspot.com). It contains our thoughts on the markets, investing and some of our favorite stocks.
In closing, another quote, “It was the best of times; it was the worst of times”. Even with the worst financial markets in decades we have loved every moment of building Harvest Financial Partners. Most importantly we have enjoyed getting to know you and the rest of our clients. Working with you is why we started the business and what keeps us energized every day. Of course, there are growing pains along the way, so if you have any suggestions or concerns, please let us know.
Friday, March 27, 2009
Harvest in the Media
We were a resource for this article in the April 2009 issue of Main Line Today dealing with the current market environment. (You will find us quoted starting on page three.) We hope it provides you food for thought.
Saturday, March 21, 2009
Sysco
Sysco (SYY) is a company we really like now, and for the long run. We find the stock very compelling at its current price ($22). It is the dominant food distributor to the restaurant industry with sales over $37 Billion. It also sells to customers in the healthcare, educational and lodging industries.
Sysco also has a very large private label business (with over $12 Billion in sales) that makes it one of the largest food companies. In tough economic times, restaurants may find that shifting to the Sysco brand makes a great deal of economic sense.
Sysco’s size gives it a cost advantage over its competitors that can be used to benefit its customers and its shareholders. The company has been embarking on a huge redistribution plan that should allow it to lower costs, improve productivity and reduce inventory. Sysco is also focused on doing more centralized purchasing (in the past it let its individual operating companies purchase items separately). And Sysco is focused on making its transportation system even more efficient. Sysco has the largest private fleet of trucks in North America. So far this fiscal year, it has been able to reduce its miles driven by 10 million. Given the cost of fuel, that translates into real savings. These initiatives will lead to a significant improvement in margins at Sysco.
Of course, during tough economic times, people may eat out less and restaurants will close at a more rapid pace. These are certainly factors that could hurt sales. But we think it could benefit Sysco, as restaurant owners consolidate their suppliers. Sysco also has a Business Review program, where it works closely with its customers to help them operate more effectively. This program has led to Sysco becoming a more valued supplier and increasing its sales.
While the company has about $2B in debt (compared to $300 million in cash), they issued $500m in new notes this month, so liquidity is not a concern. The company indicated that it has no immediate needs for the funds, but was taking advantage of attractive rates in the marketplace. Sysco carries an AA- rating from S&P. Only $7.5Million of Sysco’s debt is due in the next 12 months.
The company is committed to returning money to its shareholders. Sysco is a Dividend Aristocrat, meaning it has increased its dividend annually for at least 25 years. At the end of last year, it raised its dividend by 9% and the yield is now 4.4%. The dividend payout ratio is 53%. Sysco has also repurchased at least $500 million in stock in each of the last 5 years and has reduced its shares outstanding by over 50 million shares during that period.
Bottom line, Sysco is expected to earn around $1.80 in FY2009 ending in June. Assuming they earn a similar amount the following year, Sysco is trading at just over 12x forward earnings. This is a pretty reasonable price to pay for such a dominant company. The valuation coupled with a 4.4% dividend yield makes this a very interesting stock.
(Disclosure: Harvest Financial Partners owns Sysco in its client portfolios. The author owns Sysco in his personal portfolio. Positions may change at any time.)
Sysco also has a very large private label business (with over $12 Billion in sales) that makes it one of the largest food companies. In tough economic times, restaurants may find that shifting to the Sysco brand makes a great deal of economic sense.
Sysco’s size gives it a cost advantage over its competitors that can be used to benefit its customers and its shareholders. The company has been embarking on a huge redistribution plan that should allow it to lower costs, improve productivity and reduce inventory. Sysco is also focused on doing more centralized purchasing (in the past it let its individual operating companies purchase items separately). And Sysco is focused on making its transportation system even more efficient. Sysco has the largest private fleet of trucks in North America. So far this fiscal year, it has been able to reduce its miles driven by 10 million. Given the cost of fuel, that translates into real savings. These initiatives will lead to a significant improvement in margins at Sysco.
Of course, during tough economic times, people may eat out less and restaurants will close at a more rapid pace. These are certainly factors that could hurt sales. But we think it could benefit Sysco, as restaurant owners consolidate their suppliers. Sysco also has a Business Review program, where it works closely with its customers to help them operate more effectively. This program has led to Sysco becoming a more valued supplier and increasing its sales.
While the company has about $2B in debt (compared to $300 million in cash), they issued $500m in new notes this month, so liquidity is not a concern. The company indicated that it has no immediate needs for the funds, but was taking advantage of attractive rates in the marketplace. Sysco carries an AA- rating from S&P. Only $7.5Million of Sysco’s debt is due in the next 12 months.
The company is committed to returning money to its shareholders. Sysco is a Dividend Aristocrat, meaning it has increased its dividend annually for at least 25 years. At the end of last year, it raised its dividend by 9% and the yield is now 4.4%. The dividend payout ratio is 53%. Sysco has also repurchased at least $500 million in stock in each of the last 5 years and has reduced its shares outstanding by over 50 million shares during that period.
Bottom line, Sysco is expected to earn around $1.80 in FY2009 ending in June. Assuming they earn a similar amount the following year, Sysco is trading at just over 12x forward earnings. This is a pretty reasonable price to pay for such a dominant company. The valuation coupled with a 4.4% dividend yield makes this a very interesting stock.
(Disclosure: Harvest Financial Partners owns Sysco in its client portfolios. The author owns Sysco in his personal portfolio. Positions may change at any time.)
Friday, March 20, 2009
Procter & Gamble
The Procter & Gamble Company (P&G) provides branded consumer products worldwide. The company operates in three global business units: Beauty, Health and Well-Being, and Household Care. P&G was founded in 1837 and is a Dividend Aristocrat meaning it has raised its dividend for at least 25 years.
At a share price of $45, P&G has a market cap of about $132 billion. The stock currently pays a quarterly dividend of $0.40/share, yielding over 3.5%. Analysts estimate that P&G will earn $4.25 in FY09 and $4.11 in FY10. Using the FY10 estimates, P&G’s forward PE ratio is 11 and its dividend payout ratio under 40%.
P&G generates a tremendous amount of free cash flow (cash flow after capital expenditures). In FY2008 (ending 6/08) the company had free cash of $12.2B in 2008 and that was up from $8.7B in FY2006. We expect free cash flow to be over $13B this fiscal year, so P&G is selling for a little more than 10x free cash.
At 12/31/2008 P&G had total debt of $41.7B. P&G is rated AA- by S&P and Aa3 by Moody’s. (One bond issue, the 4.85% notes due 12/15/2015, trades at about 1% over a comparable Treasury. By way of comparison, GE Capital’s nearest bond issue trades at about 4.6% over a comparable Treasury and Medtronic's nearest bond is trading at 1.8% over Treasuries.) P&G has a defined benefit pension plan and other post retirement benefits that were underfunded by $3 billion as of 6/30/08.
Management is well-regarded, deservedly so, in our opinion. The company’s portfolio is full of great consumer brands like Pampers, Tide, Crest and Gillette and is in many defensive product areas (you have to buy laundry detergent). P&G is also geographically diverse with significant sales in both developed and emerging markets. We believe that P&G is well positioned to manage through a difficult 2009 business environment. Even assuming that business is tougher than currently anticipated, we view P&G stock acquired in the mid $40’s as very attractive.
(Disclosure: Harvest Financial Partners owns Procter & Gamble in its client portfolios. The author owns Procter & Gamble in his personal account. Positions may change at any time.)
At a share price of $45, P&G has a market cap of about $132 billion. The stock currently pays a quarterly dividend of $0.40/share, yielding over 3.5%. Analysts estimate that P&G will earn $4.25 in FY09 and $4.11 in FY10. Using the FY10 estimates, P&G’s forward PE ratio is 11 and its dividend payout ratio under 40%.
P&G generates a tremendous amount of free cash flow (cash flow after capital expenditures). In FY2008 (ending 6/08) the company had free cash of $12.2B in 2008 and that was up from $8.7B in FY2006. We expect free cash flow to be over $13B this fiscal year, so P&G is selling for a little more than 10x free cash.
At 12/31/2008 P&G had total debt of $41.7B. P&G is rated AA- by S&P and Aa3 by Moody’s. (One bond issue, the 4.85% notes due 12/15/2015, trades at about 1% over a comparable Treasury. By way of comparison, GE Capital’s nearest bond issue trades at about 4.6% over a comparable Treasury and Medtronic's nearest bond is trading at 1.8% over Treasuries.) P&G has a defined benefit pension plan and other post retirement benefits that were underfunded by $3 billion as of 6/30/08.
Management is well-regarded, deservedly so, in our opinion. The company’s portfolio is full of great consumer brands like Pampers, Tide, Crest and Gillette and is in many defensive product areas (you have to buy laundry detergent). P&G is also geographically diverse with significant sales in both developed and emerging markets. We believe that P&G is well positioned to manage through a difficult 2009 business environment. Even assuming that business is tougher than currently anticipated, we view P&G stock acquired in the mid $40’s as very attractive.
(Disclosure: Harvest Financial Partners owns Procter & Gamble in its client portfolios. The author owns Procter & Gamble in his personal account. Positions may change at any time.)
Thursday, March 12, 2009
Client Letter
Below is a copy of a letter we sent our clients earlier this week:
We debated calling this note a Downdate what with the S&P 500 down over 53% from its high, residential real estate down over 25% from its peak, the unemployment rate over 8%, questions about bank solvency persisting and lingering problems in the credit markets. It is really tough out there. So what do we do now?
We could move out of stocks and into cash. When the market is declining daily, cash allows us to sleep better. While that sounds appealing, we don’t think it is the right course. If the stock market turns around soon, those holding only cash will miss out on what could be some pretty attractive gains. Their only return will be the low interest rate being paid by money market funds or short term bonds or CDs.
With funds not needed for several years we plan to stick with stocks. Why? Because you run the risk of missing some attractive gains when stocks do turn up; and they will turn up. We cannot tell you when that will happen or how much further stocks may decline before they turn up. Our instincts do tell us we are near some kind of bottom. The pessimism and negativity coming from writers, television personalities and virtually anyone we talk to is at extreme levels. And valuations appear attractive, with many stocks selling at low multiples on earnings and cash flow, while offering nice dividend yields. This is true even for companies that are not impacted by the disruption in the credit markets like Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker with little or no debt. Of course, there is risk, but the potential returns can be quite appealing.
The other question we asked ourselves is what did we learn? Looking back over the past year, we significantly underestimated the degree of disruption in the credit markets and its impact on financial institutions. We also were too slow in seeing the impact the credit crisis would have on the rest of the economy. We are disappointed in ourselves and are confident that we can do better. For example, we have sharpened our focus on the types of companies that we purchase, weeding out any that have more than minimal balance sheet risk.
We are sure that during this period you, your family, friends and neighbors have felt the impact of the weak economy in some way. It is a very disconcerting time. But we are confident that better days are ahead. Patience has become an overused term lately, but it is still valid. Things will improve.
If you would like to talk about your investments or our thoughts on what is taking place in the markets, please give us a call.
(Disclosure: Harvest Financial Partners owns Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker in its client portfolios. The authors own Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker in their personal portfolio. Positions may change at any time.)
We debated calling this note a Downdate what with the S&P 500 down over 53% from its high, residential real estate down over 25% from its peak, the unemployment rate over 8%, questions about bank solvency persisting and lingering problems in the credit markets. It is really tough out there. So what do we do now?
We could move out of stocks and into cash. When the market is declining daily, cash allows us to sleep better. While that sounds appealing, we don’t think it is the right course. If the stock market turns around soon, those holding only cash will miss out on what could be some pretty attractive gains. Their only return will be the low interest rate being paid by money market funds or short term bonds or CDs.
With funds not needed for several years we plan to stick with stocks. Why? Because you run the risk of missing some attractive gains when stocks do turn up; and they will turn up. We cannot tell you when that will happen or how much further stocks may decline before they turn up. Our instincts do tell us we are near some kind of bottom. The pessimism and negativity coming from writers, television personalities and virtually anyone we talk to is at extreme levels. And valuations appear attractive, with many stocks selling at low multiples on earnings and cash flow, while offering nice dividend yields. This is true even for companies that are not impacted by the disruption in the credit markets like Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker with little or no debt. Of course, there is risk, but the potential returns can be quite appealing.
The other question we asked ourselves is what did we learn? Looking back over the past year, we significantly underestimated the degree of disruption in the credit markets and its impact on financial institutions. We also were too slow in seeing the impact the credit crisis would have on the rest of the economy. We are disappointed in ourselves and are confident that we can do better. For example, we have sharpened our focus on the types of companies that we purchase, weeding out any that have more than minimal balance sheet risk.
We are sure that during this period you, your family, friends and neighbors have felt the impact of the weak economy in some way. It is a very disconcerting time. But we are confident that better days are ahead. Patience has become an overused term lately, but it is still valid. Things will improve.
If you would like to talk about your investments or our thoughts on what is taking place in the markets, please give us a call.
(Disclosure: Harvest Financial Partners owns Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker in its client portfolios. The authors own Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker in their personal portfolio. Positions may change at any time.)
Tuesday, March 3, 2009
Paychex
Paychex (PAYX) provides payroll, and related human resource and employee benefits outsourcing for small- to medium-sized businesses in the United States. As of May 31, 2008, the company served approximately 572,000 clients in the United States. Paychex was founded in 1971 and is headquartered in Rochester, New York.
Payroll is probably the oldest outsourced function. There are several good reasons for this: all the different withholdings make it complicated, penalties for making mistakes are severe, the cost of outsourcing is low (dare I say cheap) and payroll is not close to a core function for most businesses. So Paychex’s core business is well established and doesn’t seem to be at any risk of being supplanted by either new technology or tax simplification. The company has used payroll as an entry point to offer a variety of additional services from 401(k) plans to insurance to HR functions. So the company has two ways to grow – find new customers and sell additional services to existing customers.
At a price of $21/share, Paychex trades at 14x expected earnings and yields over 5.9%. The company has no debt. The business is not capital intensive. If Paychex generates $600 million of free cash flow this fiscal year (less than FY08) it has a free cash flow yield of 8%, most of which investors receive through dividends.
Paychex is also an interesting play on short-term interest rates. The company collects money from clients every payroll period but holds cash for payroll taxes until the taxes are due. Rising short-term interest rates benefit Paychex as it earns more on this float. Float was over $3.5 billion at 11/30/08. So a 1% increase in short term interest rates increases earnings and free cash flow by approximately 3.5%.
We think Paychex represents an attractive business offered at an attractive price.
(Disclosure: Harvest Financial Partners owns Paychex in its client portfolios. The author owns Paychex in his personal portfolio. Positions may change at any time.)
Payroll is probably the oldest outsourced function. There are several good reasons for this: all the different withholdings make it complicated, penalties for making mistakes are severe, the cost of outsourcing is low (dare I say cheap) and payroll is not close to a core function for most businesses. So Paychex’s core business is well established and doesn’t seem to be at any risk of being supplanted by either new technology or tax simplification. The company has used payroll as an entry point to offer a variety of additional services from 401(k) plans to insurance to HR functions. So the company has two ways to grow – find new customers and sell additional services to existing customers.
At a price of $21/share, Paychex trades at 14x expected earnings and yields over 5.9%. The company has no debt. The business is not capital intensive. If Paychex generates $600 million of free cash flow this fiscal year (less than FY08) it has a free cash flow yield of 8%, most of which investors receive through dividends.
Paychex is also an interesting play on short-term interest rates. The company collects money from clients every payroll period but holds cash for payroll taxes until the taxes are due. Rising short-term interest rates benefit Paychex as it earns more on this float. Float was over $3.5 billion at 11/30/08. So a 1% increase in short term interest rates increases earnings and free cash flow by approximately 3.5%.
We think Paychex represents an attractive business offered at an attractive price.
(Disclosure: Harvest Financial Partners owns Paychex in its client portfolios. The author owns Paychex in his personal portfolio. Positions may change at any time.)
Friday, February 13, 2009
Other Voices
We thought this entry from the Dividend Growth Investor provides more evidence on the advantages of investing in dividend paying stocks. We continue to believe our dividend approach to investing makes a great deal of sense for all investors during these uncertain times. (We like it during certain times too.)
Friday, February 6, 2009
Nike
We have written in general terms about the kinds of companies that we like. Now might be a good time to discuss an example of a specific stock that we have recently purchased.
Nike is one of the great global brands in the world today. They are the world’s largest manufacturer of athletic footwear under the Nike, Converse, Umbro, Cole-Haan and Hurley brand names. They also produce athletic clothing and equipment.
At $44, we can purchase this great company for under 12x FY2009 earnings (May year end). The company has over $4 in net cash on the balance sheet, so when you strip that away, you are buying Nike for around 10x earnings. That is not a bad price to pay for a one of the strongest brands in the world.
Analyst estimates of $4.15 for FY2010 are reasonable, but given the economy I would not want to bank on it. Still, Nike has some flexibility on its income statement. It spends 32 cents of every sales dollar on Selling, General and Administrative expenses. Much of that is spending related to building the brand. Now Nike would not (and should not) starve the brand, but it has the ability to modestly reduce its spending as a percent of sales. Over the last 5 years, SG&A spending has grown by almost $2 Billion and from 30% of sales to 32%. On the last conference call management highlighted better SG&A management as one of its objectives.
The company is focused on improving its gross margin. Management continues to work on a supply chain initiative that will shorten the lead time on products. This will help to lower costs, reduce Nike's inventory and improve its on-time performance with its retailers. The company also is implementing lean manufacturing to lower its product costs.
Nike had FY2008 sales of almost $19B and has a goal of reaching $23B in sales by 2011. While that goal may be more difficult given the economic headwinds, it is certainly not unreasonable. The company will benefit from its continued innovation (like its lightweight Flywire technology and its Lunar Foam cushioning system) and growth in its “other” businesses (like equipment, golf and Umbro). The company is also expanding its apparel business and has a very focused initiative directed toward woman.
It is also very important to remember that Nike is a global company. Just over 1/3rd of its revenue comes from the US. China now makes up $1B and is growing rapidly. The company is seeing attractive growth in other markets like Russia and Brazil.
Management of the company is very strong. Mark Parker has been CEO for the last 3 years and has been with the company since 1979. The president is Charlie Denson, another long time Nike employer. Don Blair is the CFO. He has been with Nike since 1999, and previously worked for Pepsi. Co-founder, Phil Knight, is the Chairman of Board and the company’s largest shareholder. All of these men are immersed in the Nike culture and understand the importance of building the brand.
Nike has shown a commitment to returning money to shareholders. Over the last 5 years, the company has quadrupled its dividend. The yield of 2.3% is not overly attractive, but I believe the company will continue to grow the dividend by a low double digit rate in the coming years. The company also is committed to buying back its stock. In FY2008, the company repurchased over $1.2 B of its own stock. This year, it has already spent $650 million. Based on the current authorization, the company can buy back over $5B in stock over the next 4 years (20% of its outstanding shares). The reason Nike can be so generous returning money to shareholders, is because the business is a cash machine. In FY2009, I expect Nike’s free cash flow will be at least $1.6B, or almost $3.50/share.
A company that sells a discretionary item like athletic apparel may see some modest near term weakness, but with the continued growth opportunities in many markets throughout the world, that weakness will be mitigated. In the meantime, I am quite happy to own a company with such a strong brand, excellent management team, innovative culture and pristine balance sheet at a very reasonable valuation.
(Disclosure: Harvest Financial Partners owns Nike in its client portfolios. The author owns Nike in his personal portfolio. Positions may change at any time.)
Nike is one of the great global brands in the world today. They are the world’s largest manufacturer of athletic footwear under the Nike, Converse, Umbro, Cole-Haan and Hurley brand names. They also produce athletic clothing and equipment.
At $44, we can purchase this great company for under 12x FY2009 earnings (May year end). The company has over $4 in net cash on the balance sheet, so when you strip that away, you are buying Nike for around 10x earnings. That is not a bad price to pay for a one of the strongest brands in the world.
Analyst estimates of $4.15 for FY2010 are reasonable, but given the economy I would not want to bank on it. Still, Nike has some flexibility on its income statement. It spends 32 cents of every sales dollar on Selling, General and Administrative expenses. Much of that is spending related to building the brand. Now Nike would not (and should not) starve the brand, but it has the ability to modestly reduce its spending as a percent of sales. Over the last 5 years, SG&A spending has grown by almost $2 Billion and from 30% of sales to 32%. On the last conference call management highlighted better SG&A management as one of its objectives.
The company is focused on improving its gross margin. Management continues to work on a supply chain initiative that will shorten the lead time on products. This will help to lower costs, reduce Nike's inventory and improve its on-time performance with its retailers. The company also is implementing lean manufacturing to lower its product costs.
Nike had FY2008 sales of almost $19B and has a goal of reaching $23B in sales by 2011. While that goal may be more difficult given the economic headwinds, it is certainly not unreasonable. The company will benefit from its continued innovation (like its lightweight Flywire technology and its Lunar Foam cushioning system) and growth in its “other” businesses (like equipment, golf and Umbro). The company is also expanding its apparel business and has a very focused initiative directed toward woman.
It is also very important to remember that Nike is a global company. Just over 1/3rd of its revenue comes from the US. China now makes up $1B and is growing rapidly. The company is seeing attractive growth in other markets like Russia and Brazil.
Management of the company is very strong. Mark Parker has been CEO for the last 3 years and has been with the company since 1979. The president is Charlie Denson, another long time Nike employer. Don Blair is the CFO. He has been with Nike since 1999, and previously worked for Pepsi. Co-founder, Phil Knight, is the Chairman of Board and the company’s largest shareholder. All of these men are immersed in the Nike culture and understand the importance of building the brand.
Nike has shown a commitment to returning money to shareholders. Over the last 5 years, the company has quadrupled its dividend. The yield of 2.3% is not overly attractive, but I believe the company will continue to grow the dividend by a low double digit rate in the coming years. The company also is committed to buying back its stock. In FY2008, the company repurchased over $1.2 B of its own stock. This year, it has already spent $650 million. Based on the current authorization, the company can buy back over $5B in stock over the next 4 years (20% of its outstanding shares). The reason Nike can be so generous returning money to shareholders, is because the business is a cash machine. In FY2009, I expect Nike’s free cash flow will be at least $1.6B, or almost $3.50/share.
A company that sells a discretionary item like athletic apparel may see some modest near term weakness, but with the continued growth opportunities in many markets throughout the world, that weakness will be mitigated. In the meantime, I am quite happy to own a company with such a strong brand, excellent management team, innovative culture and pristine balance sheet at a very reasonable valuation.
(Disclosure: Harvest Financial Partners owns Nike in its client portfolios. The author owns Nike in his personal portfolio. Positions may change at any time.)
Thursday, February 5, 2009
Why I Am Disappointed In Pfizer
At Harvest we have been very happy shareholders of Pfizer since we started (and even before). We saw a company with a pristine balance sheet and a very attractive dividend yield (most recently at over 8%). We recognized that the company faced a likely earnings shortfall in a few years when the Lipitor patent expires. But, we felt the company had time and the financial ability to address the problem through its own pipeline, the strategic purchases of drug compounds still in trials or the acquisition of small companies that could benefit from Pfizer’s size. We also were very pleased to see management, under Jeff Kindler, work hard to right size the cost structure of the company.
But our happiness gave way to disillusionment last week when Pfizer announced its plan to purchase Wyeth. We see no great growth benefits from the combination, only large cost reductions. While cost reductions are valuable, the price Pfizer is paying for them is too high in our estimation. Pfizer is significantly weakening its balance sheet, paying a high interest rate to borrow money from the banks (while gambling that the credit markets will thaw in the next year as this debt matures in 12 months) and cutting its dividend in half.
As shareholders, the dividend was one of the reasons we liked the company and we felt that it was safe. It has been the one reward for shareholders who have suffered while the stock price dropped by over 50%. Instead, management reduced the dividend to make an acquisition that shareholders were clearly not thrilled about (note how the stock has dropped over 10% while the S&P is flat).
We thought Kindler and his management team saw the value of cash and a strong balance sheet in such tough economic times. Instead, he appears to be like so many other CEOs, only concerned about the size of his empire and not at all concerned about his shareholders. We thought shareholders were in better hands. We were wrong!
(Disclosure: Harvest Financial Partners owns Pfizer in it client portfolios. The author owns Pfizer in his porfolio. Positions may change at any time.)
But our happiness gave way to disillusionment last week when Pfizer announced its plan to purchase Wyeth. We see no great growth benefits from the combination, only large cost reductions. While cost reductions are valuable, the price Pfizer is paying for them is too high in our estimation. Pfizer is significantly weakening its balance sheet, paying a high interest rate to borrow money from the banks (while gambling that the credit markets will thaw in the next year as this debt matures in 12 months) and cutting its dividend in half.
As shareholders, the dividend was one of the reasons we liked the company and we felt that it was safe. It has been the one reward for shareholders who have suffered while the stock price dropped by over 50%. Instead, management reduced the dividend to make an acquisition that shareholders were clearly not thrilled about (note how the stock has dropped over 10% while the S&P is flat).
We thought Kindler and his management team saw the value of cash and a strong balance sheet in such tough economic times. Instead, he appears to be like so many other CEOs, only concerned about the size of his empire and not at all concerned about his shareholders. We thought shareholders were in better hands. We were wrong!
(Disclosure: Harvest Financial Partners owns Pfizer in it client portfolios. The author owns Pfizer in his porfolio. Positions may change at any time.)
Wednesday, February 4, 2009
Price vs. Value
Have you ever heard the story of the six blind men who come upon an elephant for the first time? (If not, you can read a version here) I ask because deciding whether the stock of a company trading at a certain price represents value has something in common with that fable. The more ways we look at that question, the more informed our opinion is. So, I was just writing this post about one way we look at that price/value question.
We look at how much each dollar of a stock’s price gets us in earnings and how that compares to other investment alternatives using an earnings yield. Earnings yield equals earnings per share divided by the share price (the reciprocal of the P/E ratio). It is quoted as a percentage, allowing an easy comparison to going bond rates. And that is usually how it is applied, as a tool to compare the earnings of a stock, sector or the whole market against bond yields. (The earnings yields of stocks should be higher than the yield of risk-free treasury bonds because they are riskier.)
As of 12/31/2008 Morningstar calculates the following P/E ratios for some popular indexes and from that we calculate the earnings yield:
Based on these values, stocks seem undervalued relative to corporate bonds since the earnings yield for all these indices are higher than the yield on the corporate bond index. To put it another way, investing $100 in corporate bonds gets us $5.98 in interest over 2009 but $9.35 of earnings if we had invested in the stocks of companies in the S&P 500.
As we mentioned above, this is just one of many metrics we use when evaluating stocks and bonds. Given the economic weakness, it is very likely that we will see the estimates for corporate earnings decline markedly throughout the year and therefore the forward earnings yield will also decline. We also recognize that as shareholders, we will not receive every dollar that a company earns. A portion of those earning dollars may go to debt repayment, capital investments or acquisitions.
Still, this is an interesting metric to monitor. It would clearly indicate that investors should not be moving out of equities. It also would suggest that international stocks could be a very attractive investment in the future. But it is not foolproof, as this would have flashed a signal to by equities last year, and we all know how that turned out.
Back to the fable, the earnings yield may tells us what the ear or the trunk looks like, but we still do not have the complete picture of the elephant.
We look at how much each dollar of a stock’s price gets us in earnings and how that compares to other investment alternatives using an earnings yield. Earnings yield equals earnings per share divided by the share price (the reciprocal of the P/E ratio). It is quoted as a percentage, allowing an easy comparison to going bond rates. And that is usually how it is applied, as a tool to compare the earnings of a stock, sector or the whole market against bond yields. (The earnings yields of stocks should be higher than the yield of risk-free treasury bonds because they are riskier.)
As of 12/31/2008 Morningstar calculates the following P/E ratios for some popular indexes and from that we calculate the earnings yield:
| | Forward P/E | Forward Earnings Yield |
| S&P 500 | 10.7 | 9.35% |
| NASDAQ | 12.7 | 7.87% |
| MSCI EAFE | 6.5 | 15.38% |
Based on these values, stocks seem undervalued relative to corporate bonds since the earnings yield for all these indices are higher than the yield on the corporate bond index. To put it another way, investing $100 in corporate bonds gets us $5.98 in interest over 2009 but $9.35 of earnings if we had invested in the stocks of companies in the S&P 500.
As we mentioned above, this is just one of many metrics we use when evaluating stocks and bonds. Given the economic weakness, it is very likely that we will see the estimates for corporate earnings decline markedly throughout the year and therefore the forward earnings yield will also decline. We also recognize that as shareholders, we will not receive every dollar that a company earns. A portion of those earning dollars may go to debt repayment, capital investments or acquisitions.
Still, this is an interesting metric to monitor. It would clearly indicate that investors should not be moving out of equities. It also would suggest that international stocks could be a very attractive investment in the future. But it is not foolproof, as this would have flashed a signal to by equities last year, and we all know how that turned out.
Back to the fable, the earnings yield may tells us what the ear or the trunk looks like, but we still do not have the complete picture of the elephant.
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