planting for your future

Don't be a fan when investing

2011-12-10T14:00:00.001-05:00

My favorite team, the Green Bay Packers, have started selling shares of the team to the public to raise funds for a stadium expansion. Given the year the Philadelphia Eagles are having, it may seem like piling on to talk about the Packers, but as a long time fan, I have suffered through many barren years. I bring this up not to talk about the Packers, although I am always happy to talk about them, but to offer a few thoughts on the investment merits of buying stocks.

When you think of the Green Bay Packers, the team might seem like a pretty attractive investment. They have a rabid fan base with a decades’ long waiting list for tickets. They also are the reigning Super Bowl champions, are currently undefeated and have the top quarterback and likely league MVP in Aaron Rodgers. And, like other teams, they benefit from the billions of dollars the NFL gets for broadcast rights which increase with every new contract.

So, buying stock in the Packers may seem like a no-brainer but the Packer’s stock offering is very unique. For $250/share you can own a piece of the team but that ownership is very limited. You can only transfer your shares to immediate family members and you can only sell your shares back to the team for just $0.025. There are no dividends payable on the stock and in the event of liquidation, the money goes to “community programs, charitable causes and other similar causes,” not to the shareholders. Shareholders (and let me add that I am a shareholder, having bought stock the last time they issued shares in the late 90’s) are permitted to vote on certain items and attend the annual meeting in Green Bay. So stock in the Packers offers no real control, no hope of future capital gains and no hope of current income. All in all, not a great investment unless you are a fan and can proudly display your stock certificate on the wall in your home or office — then, as they say in the MasterCard commercials, it is “Priceless.”

If buying stock in the Packers does not qualify as a good investment in the traditional sense what then does make a good investment? I ask this because a lot of people I talk to are nervous about the markets today and rightly so given the state of the economy and the wild swings in stock prices. I suggest you start by looking at investments in stocks as investments in the underlying business, not as pieces of paper. You should only invest in a business in the belief that it will be worth more in future than it is today because its sales and profits will grow. You also may hope that the business will pay you a portion of its profits each year in dividends. The appreciation in the value of the business (which will eventually impact the underlying stock price) and the ongoing dividends you receive, represent the return on your investment. If it is positive, you will make money, if it is not you will lose money.

The risk associated with that business doing better or worse in the future is also a consideration in whether to invest in its stock or not. This is relevant in today’s roller coaster market. If you cannot handle the short term, wild swings in the underlying share price then perhaps individual stocks are not a good investment for you. You may be better off using mutual funds or hiring an advisor to manage your money for you.

Finally, what you pay for the stock is paramount. You can lose a lot of money buying a good business at a very high valuation. Instead, be patient and wait until the stock price is low and the valuation is attractive. You are not compelled to purchase a stock, so buy only when it reaches a price that you like.

We certainly think that if you take a long term approach to investing, this market will present you with lots of chances to buy excellent companies at even better prices. The key to remember is that stock ownership makes you an owner of a business, so be patient and only look to buy stock in those companies that you like and believe are undervalued.

If you want to buy shares of the Green Bay Packers, only do so if you are a fan--it is not a good investment. But when you look to make other investments, take the opposite approach. Don’t be a fan, but, instead, take a long, hard look at the company and make an unemotional decision on whether to invest.

Power of Dividends

2011-10-07T09:54:00.000-04:00

Yesterday, Corning announced it was raising its dividend by 50% and would buy back up to $1.5 billion in stock. The stock was up over 7% on the day. We are quite pleased by the announcement as we have felt for some time the company has the capacity to return more money to shareholders. We also think a higher dividend forces more discipline on the company management.

Importantly, we think that investors view dividend increases as meaningful signals by management of how they view the company’s prospects, given that companies are loath to cut dividends. When we talked with Corning’s Investor Relations department several years ago about the dividend, they pointed to that very issue as why they were unlikely to raise the dividend--they did not want to be in a position where they may have to cut the dividend in a difficult business environment. We hope this indicates Corning is more positive with its outlook.

We look forward to additional signals from other company managements.

Disclosure: As of this date, the authors and clients of Harvest Financial Partners own Corning. Positions may change at any time. This is not a recommendation. This blog is for informational purposes only.

Retirement Planning

2011-08-25T11:18:00.000-04:00

Jim on retirement planning from the Bankrate website.

The Debt Ceiling Debate in Washington

2011-07-30T17:25:00.000-04:00

Below is an email we sent out to our clients earlier in the week:

We have had a few questions recently about the debt ceiling debate in Washington. The most frequently asked question concerns what impact the failure to raise the debt limit might have on portfolios we manage. Our expectation is that it would have a minor impact on the investments we hold. We should emphasize that we expect a debt ceiling deal to be made and a delay of a week or so past the August 2 “deadline” does not equate to a default. A delay could lead to a partial government shutdown as outgoing payments must equal the $200 billion the government collects in monthly tax revenues, rather than the approximately $280 billion the federal government spends per month now.

Turning to the investments, the stocks we own either directly or through mutual funds are almost exclusively high quality companies with strong balance sheets. We would expect that they would ride out this period with relatively limited impact on their operations. Some of the companies do a substantial amount of work with the federal government and so might see a short-term revenue hit. We believe that even these companies have the financial wherewithal to manage through that period and ultimately would collect any money owed to them. It is also worth noting, we have had a number of stocks we own directly, hit our target sale prices so we have been selling and allowing cash to build up in our portfolios. This gives us flexibility going forward.

As far as fixed income goes, we primarily own high quality corporate bonds of similarly well managed, conservatively financed companies. We expect no issues in collecting our interest and principal payments from them. Another area of the fixed income market we have invested in, more as a cash management tool, has been callable agency bonds. Again, we think ultimate collection of interest and principal due is not at risk. Our worst case scenario would be, in an effort to conserve cash, these agencies of the federal government might not call their securities (meaning buy back their bonds prior to the maturity date) even though it would make financial sense. This would lead to a modest increase in the average maturity of our bond portfolios.

While the future is unknowable, we believe we are well positioned to ride out this period. Overall, we have cash available for opportunities that a market dislocation might provide and we feel good about what we own.

Interview

2011-06-22T15:56:00.000-04:00

We were interviewed by the Wall Street Transcript this month. Here it is for your review.Harvest Financial Partners June 2011 Interview

Best Buy

2011-05-31T13:16:00.003-04:00

We run a model portfolio for a service called Covestor. They asked us to discuss a recent purchase in the portfolio, so we described why we bought Best Buy. Below is the post with a few minor alterations.

Jim Wright and John Fattibene of Harvest Financial Partners manage Covestor’s Domestic Dividend model, which seeks to invest in high-quality, well-managed companies that pay a dividend. They recently added Best Buy (NYSE: BBY) to the model, so we asked them to share their reasons for the transaction. Their response follows.

We bought BBY because it met our 3 criteria:
1) The company pays and has been growing its dividend. With a very low payout ratio, we think the dividend should be stable and will continue to be increased.
2) Best Buy is the largest electronics retailer in the country. While there has been some shift from buying electronics in stores to buying online, we still believe there is a significant part of the population that needs help and wants to see the product before purchasing. Best Buy also has an internet presence. We also like the fact that since electronics continue to shrink, BBY is looking at shrinking its store size.
3) We bought BBY when it was selling at a low multiple against forward earnings. The company also generates a lot of free cash (cash available after expenses and capital expenditures).
Finally, we felt the company was washed out as it has dramatically underperformed the market over the last year. We think it represents a terrific value and assess its fair value to be considerably above its trading price.

(Disclosure: As of this date the authors and clients of Harvest Financial Partners own Best Buy. Positions may change at any time. These are NOT recommendations. This blog is for informational purposes only)

Jim on Bankrate's website

2011-05-17T15:52:00.000-04:00

Jim was interviewed for a series where real advisors give real advice to fictitious characters. Jim helped out Sam Merlotte from the series True Blood. Check it out here.

We Have Been a Fan of Abbott for Some Time Now

2011-04-05T10:06:00.000-04:00

Barron's wrote about Abbott Labs in this weekend's edition. We agree that it's undervalued and while love might be too strong a word, we have liked it for some time for many of the same reasons pointed out in the article.

Principals and clients of Harvest Financial Partners own ABT. Positions may change at any time.

We Think He is Excellent Too

2011-03-29T08:42:00.000-04:00

A hearty congratulations to Clyde McGregor of Harris Associates. He manages the Oakmark Global and Equity Income funds, two funds that we have invested in ourselves and owned for clients for quite some time. Lipper named him the inaugural recipient of their Award for Excellence in Fund Management. (Here is the Press Release from Oakmark's website.) Based on our experience, Clyde has a talent for company valuation and portfolio construction and has been very good at compounding investor's capital over time. We think the award is well deserved.

(Principals and clients of Harvest Financial Partners are long Oakmark Global and Oakmark Equity Income. Positions may change at any time.)

Jensen Fund

2011-03-23T17:47:00.000-04:00

From this article you might be able to tell why Jensen is one of our favorite funds. Robert Zagunis at Jensen highlights a couple of stocks we own broadly at the firm, one we just sold and one we are looking at.

(Harvest clients and principals own Abbott and Stryker. Positions may change at any time.)

Dodge & Cox International Stock Fund

2010-09-23T16:42:00.000-04:00

We talked with a Dodge & Cox representative on 9/22/2010 about their International Stock Fund. This is one of the “core” funds we typically use in client portfolios (and our own). Dodge & Cox is employee owned; you cannot own shares if you are not currently an employee. There are a significant number of long-tenured employees, and Dodge & Cox has low employee turnover. Everyone is compensated based on firm performance. They feel that is appropriate because it encourages idea and information sharing and because the analysts work on multiple funds

The International Stock Fund has assets under management (AUM) of about $33 billion. It is a low cost fund with an annual management fee of 0.65%. Morningstar calculates that the average fund in the category has an expense ratio of 1.44%. The Fund typically holds from 70-100 names. At the end of the second quarter it had 92 names.

Like all Dodge & Cox funds (they only have five), the International Stock Fund is value oriented. The portfolio is built stock by stock from the universe of companies domiciled outside the U.S. with a minimum market cap of $2 billion. The responsibility for finding the stocks for the portfolio is placed on the firm’s analysts. The analysts typically have global responsibility for multiple industries. They look at a variety of valuation metrics:--price to book, price to cash flow and price to earnings--but there is not one that is dominant. They also look across a company’s entire capital structure given that Dodge & Cox has a bond and a balanced fund.

Analysts develop financial models with 3-5 year forecasts that look at downside, base case and upside surprises as part of a comprehensive assessment of the investment merits of a particular company. Beginning in 2008 Dodge & Cox started formally assigning a devil’s advocate to every investment idea to try to poke holes in the investment thesis. Investment ideas are presented first to a sector committee to vet the analyst’s research and then it is presented to the Policy Committee. This committee not only discusses the investment idea, it also sets the target weights. (Typically an initial position is ½% of AUM, emerging markets positions might start smaller.) The Policy Committee also has responsibility for monitoring regional, industry and sector weightings. Still, the portfolio is built stock by stock with the best ideas from its analysts.

There are very few prospectus restrictions on what the fund can own, how many countries it needs to be in and how many sectors need to be represented. However, the portfolio has been invested in almost all sectors (as defined by Dodge & Cox) almost all the time and has been invested in a minimum of 18 different countries since the fund was started. So, in practice, the fund has been much more diversified than required by prospectus.

The fund currently has a weighting of over 20% in emerging markets. Again there is no prospectus limit but that is the highest it has ever been and seems to be near an informal limit. While the fund continues to have no investments in China because of concern over governance issues, it does own a number of stocks with exposure to China.

Currently, the firm is very excited about equities across the globe. Given the global focus of their analysts, it is interesting to note they are finding, more ideas in the U.S., on the margin, than they have at other times.

We really like the Dodge & Cox International Stock Fund. The research driven, consistent pursuit of the best ideas outside of the United States has led to excellent long term results. While the fund can be volatile (as seen during the 2008-2009 period), we think it is a great way to get exposure to international stocks. We respect the firm’s decision to avoid China, but recognize that will keep the fund out of one of the faster growing, more important countries in the world. We do view it as a core fund for many of our clients.

Returns through 8/31/2010

	YTD	1 Year	3 Years	5 Years	Since Inception*
Int’l Stock Fund	-5.02%	2.68%	-8.35%	2.89%	7.66%
MSCI EAFE	-7.97%	-2.36%	-10.76%	0.95%	2.90%

Source is Dodge & Cox
* Inception is 5/1/2001

(Harvest Financial Partners owns the Dodge & Cox International Stock fund in client portfolios. The authors own it and the Dodge & Cox Stock Fund in their personal portfolios. Positions may change at any time)

The Fairholme Fund

2010-09-08T13:19:00.004-04:00

On her August 27, 2010 show, Wealthtrack, Consuelo Mack interviewed Bruce Berkowitz of the Fairholme Fund. (Here is a link to the transcript and to the video.) We like Fairholme and have used the fund for our clients since we started Harvest (and have personally invested in the fund for much longer). The fund and its managers have rewarded that decision, having a fantastic relative and absolute 10 year track record, so fantastic that Morningstar named Mr. Berkowitz its domestic stock fund manager of the decade.

While we are comfortable with the people, the investment philosophy and the implementation of that philosophy, we are watching two developments with the fund. First is size, not surprisingly Fairholme has attracted a lot of new investors, pushing the fund size to $15 billion. Historically, as the size of a fund has increased, relative outperformance has declined. No less an investor than Warren Buffett made that same point. He wrote in his latest Berkshire Hathaway shareholder’s letter (as he has previously):

The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue..But huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge.

Mr. Berkowitz, in the interview, claims that the large size of his fund is an advantage and that it gives him an opportunity to make investments he could not have made in the past.

The second area we are watching is Fairholme’s large position in financials such as AIG, MBIA, Citigroup, CIT, Bank of America and Goldman Sachs. According to the interview these stocks represent about 60% of the fund’s stock holdings. (Fairholme has one third of the fund in cash and fixed income.) Our issue with financials, particularly banks, is that it is difficult to know what the assets are really worth even after looking at the companies’ financial statements. In the interview, Mr. Berkowitz discusses why he thinks financial stocks are good values with limited downside.

Now if any manager has earned the benefit of the doubt, it’s Bruce Berkowitz and his team at Fairholme. And while we would not call ourselves doubters, we will be watching to see how the fund manages the size issue and how the large investment in financials plays out.

(Harvest Financial Partners holds this fund in some of its clients' portfolios. The principals of Harvest also own the Fairholme Fund. Holdings may change over time.)

Why We Love Dividend Growth

2010-04-01T13:03:00.002-04:00

As this column from the Financial Times shows, owning stocks that grow their dividends often provides many happy and profitable returns. That's one of the reasons we are willing to own a stock that might not be paying a high dividend currently but shows the capacity to grow its dividend in the future.

(If you cannot read the article on FT's website, email us.)

The Jensen Portfolio

2010-02-24T09:25:00.001-05:00

We had a call with the Jensen Portfolio (JENSX) on February 19th 2010. We spoke with Richard Clark Director of Sales and Marketing and Bob Millen, the Chairman and Portfolio Manager. Here is what we found out:

Jensen wants to own 25-30 quality growth companies in the fund. In order to find those names it looks for companies with a minimum market capitalization of $1 billion. It narrows this universe of stocks by looking for those companies that have generated a minimum of a 15% return on equity (ROE) for at least ten consecutive years. The 15% ROE for ten years is based on academic research from a Harvard professor who studied firms with these two characteristics over the period 1965-75. The research indicated that ten years of 15% ROEs was long enough and sufficiently difficult to achieve to demonstrate that the business had a sustainable competitive advantage. Jensen has continued to examine this conclusion over its 21 years in existence and finds the 15% ROE continues to be a good proxy for a return greater than the cost of capital. Ten years also seems to show a good time period for a sustainable completive advantage.

Quality for Jensen means:
• Good financial strength
• Consistency in business performance
• Sustainable competitive advantage
• Shareholder friendly management and

The 15% ROE for 10 consecutive years hurdle limits their universe to about 200 stocks. The fund only buys US based companies as they find them easier to analyze. Jensen feels they can obtain foreign exposure through foreign sales of these companies.

Finalists for inclusion in the portfolio have a 40-50 page business report prepared with detailed models. The reports contain the information you would want “if you were considering buying the whole company.” They then visit management and determine a target price.

Jensen values companies based on a discounted cash flow (DCF) analysis and only will buy those companies that trade at a significant discount to this value. Jensen’s DCF analysis has grown more sophisticated over time by incorporating year-by-year cash flows and alternative DCF models, some using industry and others company specific discount rates. Jensen also enhanced its analytical capabilities by adding three experienced analysts.

In constructing the portfolio, Jensen does not pay a lot of attention to a company’s or a sector’s weight in the S&P 500 (the index against which it measures itself) but is certainly aware how it compares to the index. Decisions are made by 8 member investment committee. And turnover has averaged 15-20% (implying a holding period of 5 years).

Some recent buys in the fund include:
• C.R. Bard – manufactures catheters and is ranked #1 or 2 in 80% of its sales. The company has strong R&D and its products are relatively low cost and often part of a procedure so they fly under the reimbursement/cost containment radar.
• Oracle – management team has depth. Millen also believes that M&A has become a core competence, so now Oracle can offer the whole “stack” of products from database to middleware to applications unlike IBM or SAP.

They believe the portfolio is well positioned with an historically low price to value ratio, though not as low as in 2008. Typically, the Jensen portfolio has traded at a 25% premium to the S&P 500 price/earnings ratio, but now it is on a par with the index. This made Millen quite optimistic about the prospects for the portfolio.

Jensen has become a bit more active in its portfolio management, for example they will “tweak” portfolio weightings based on business performance and price/value so own more of its highest conviction names.

Jensen has three elements to its sell discipline:
• Company breaches the 15% ROE threshold – indicates a fundamental change in business prospects. This results in an immediate sale.
• Price exceeds intrinsic value – Jensen will sell the remainder of its position.
• lf they can replace a stock with one that represents better value

Some examples of recent stocks they have sold include:
• Wells Fargo – it breached the 15% ROE
• GE – they lost confidence in its ability to be a growth company

At this point the Jensen Fund is the firm’s the only mutual fund but in the near future Jensen will be offering a new fund based on some research they did into their universe. The new fund may place more emphasis on valuation than the current Jensen Fund. Currently they are in a quiet period so they could not discuss the new offering.

Overall, while their approach modestly differs from ours (for example Jensen does not require stocks they own to pay a dividend), Jensen has a number of high quality names in common with our portfolios. We like the disciplined approach that the company uses to construct its portfolio, but also are pleased to see that they are constantly looking for ways to improve their process. We continue to believe the Jensen Portfolio is a very worthwhile holding for investors.

(Harvest Financial Partner holds this fund in some of it client portfolios. Holdings may change over time)

4th Quarter 2009 Quarterly Letter to Clients

2010-02-01T15:19:00.002-05:00

2009 was quite a year. We had one of the best years for the stock market in the last decade, but who would have guessed that last March? Back then, we wrote that stocks were due for a bounce, and boy what a bounce we got. We never expected a move of the magnitude we experienced, so we will chalk that up as a pleasant surprise—our favorite kind!

But as we look back over the year, we were generally cautious (and we still are). While we never moved out of the market, we also were not aggressive enough buyers last winter and spring. In retrospect, we held onto too much cash. Our goal is to protect our clients’ capital, and as stocks rapidly rose last year, we expected a pullback that never came. Our caution left us holding cash waiting for cheaper prices. We still are!

What has been interesting is that we are finding more intriguing ideas today than we have in several months. It is not because we have lowered our standards, but because there are quite a few companies that missed out on most of the market run up or who have seen a large improvement in operating performance. Our caution on the market and economy has not diminished, but we build stock portfolios one company at a time and there are still opportunities out there.

In the case of the mutual funds we use, we have faith that the managers will also remain disciplined. And we have to point out that a number of the mutual fund managers we invest with had stellar 2009 performance.

In addition, two of our managers – David Herro at Oakmark International Small Cap and Bruce Berkowitz at Fairholme won Morningstar’s Manager of the Decade awards for Foreign and Domestic equities, respectively. Mr. Berkowitz also was named the Domestic Equity manager of the year. We would also point out that over ten years ending 12/31/2009 the S&P 500 index returned negative 1% per year--the lost decade that so much has been written about. However, every one of the funds we use generated a positive ten year return (if they had been around for the entire decade).

As impressive as this past performance has been, we know it guarantees nothing. It does, however, reinforce a portion of our mutual fund selection process: we look for managers that utilize an understandable process which has successfully grown their investors’ capital over time. We plan to keep selecting mutual fund managers the same way and sincerely hope it continues to produce similar results.

The bottom line is that there are good investments available, but you just need to be careful and disciplined. We think that is true in any market environment. Our cash holdings have us ready for opportunities presented by the market. To quote Bruce Berkowitz: "cash becomes quite valuable under adverse conditions.”

We wish all of you a happy and healthy 2010. We intend to work hard on your behalf and remain available to help you with any financial matters. Please feel to contact us anytime with questions or concerns.

Time to Cycle Into Quality (Not that we ever left)

2009-12-08T09:18:00.001-05:00

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.

Thomas White International Fund

2009-12-07T14:20:00.003-05:00

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

Extension of time to redeposit RMDs

2009-11-20T09:24:00.001-05:00

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.

Recent Article

2009-11-02T20:32:00.004-05:00

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.

Don't Invest Your Emergency Reserves

2009-10-06T08:25:00.002-04:00

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.

“We are analysts.”

2009-09-25T10:42:00.003-04:00

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.

Chasing Yields Revisited

2009-09-23T08:36:00.004-04:00

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.

Roth Conversions

2009-09-16T10:33:00.003-04:00

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.

What Now?

2009-08-27T09:39:00.001-04:00

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.

Chasing Yield

2009-07-17T09:17:00.009-04:00

"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.

Our 2nd Quarter Client Letter

2009-07-14T14:45:00.002-04:00

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.

Fiscal Health Day

2009-07-06T09:08:00.004-04:00

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.

Manager Change

2009-06-25T09:26:00.003-04:00

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.

The Delafield Fund

2009-06-02T17:00:00.005-04:00

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.

Update

2009-05-19T22:35:00.002-04:00

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.

Royce Premier Fund

2009-05-04T13:52:00.002-04:00

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.

Fairholme

2009-05-01T14:32:00.001-04:00

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.

Our 1st Quarter Client Letter

2009-04-14T15:17:00.003-04:00

“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.

Harvest in the Media

2009-03-27T09:59:00.004-04:00

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.

Sysco

2009-03-21T21:28:00.003-04:00

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.)

Procter & Gamble

2009-03-20T13:37:00.001-04:00

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.)

Client Letter

2009-03-12T09:55:00.002-04:00

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.)

Paychex

2009-03-03T10:17:00.001-05:00

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.)

Other Voices

2009-02-13T08:49:00.001-05:00

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.)

Nike

2009-02-06T10:33:00.003-05:00

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.)

Why I Am Disappointed In Pfizer

2009-02-05T10:04:00.003-05:00

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.)

Price vs. Value

2009-02-04T17:00:00.005-05:00

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:

	Forward P/E	Forward Earnings Yield
S&P 500	10.7	9.35%
NASDAQ	12.7	7.87%
MSCI EAFE	6.5	15.38%

Morningstar also calculates that the effective yield on the Lehman Brothers Credit (corporate bonds) Index is about 5.98%.

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.

Pension Plans vs 401(k)s

2009-01-21T08:31:00.001-05:00

Last week, I read this article about how an employee is more “protected” by a pension plan compared to a 401(k) plan. It reminded me of one of Ben Graham’s closing lines in the Intelligent Investor – Investment is most intelligent when it is most businesslike. When you think about it, those companies offering a pension plan treat it in a very businesslike manner. The company has accountants, lawyers, investment managers, custodians, administrators and actuaries; in short a whole team with different roles, responsibilities and skills. They think about things like are they saving enough money, how much will have to be withdrawn at various times, what might their investments reasonable earn over time. They even have insurance form the Pension Benefit Guarantee Corp that ensures at least some level of the benefits for employees if the company goes bust. Of course, all that does not guarantee success but I think it makes success more likely.

Compare that businesslike approach to how you are managing your 401(k), which may be one of your most valuable assets. Are you spending enough time thinking about those questions, about your investments, savings rates and withdrawal needs? If not, you may want to get some help too!

Check-up

2008-12-29T13:40:00.002-05:00

2008 has been a horrendous year for investors. However, turning the page on the calendar does not ensure things will get better; so what can an investor do? We recommend a portfolio check-up.
A thorough check up includes:
1) Upgrading the quality of investments in your portfolio. A very obvious question would be how you can tell the difference between high quality and low quality stocks. We look at several key aspects:

• Low levels of debt: In this tough environment, we would prefer to own companies with little or no debt.
• The ability to generate lots of cash. We want to own companies that can take more of a sales dollar and turn it into cash that can be used to benefit shareholders. That cash can be used to pay dividends, reduce debt, buy back stock (which makes a lot of sense when the stock is really cheap) or make strategic acquisitions.
• Consistency of earnings: We favor companies that do not have large cyclical swings in earrings. In today’s weak economy we would not be surprised to see growth slow down or plateau for even the best companies, but, for now, we try and avoid areas where the swings can be large.

Both high quality and lower quality stocks are down dramatically this year. Chances are you own a few of the lower quality ones, so now is a good time to sell them. Don’t get hung up on what you paid for the stock, the market does not care. If you sell a low quality name, you can very likely reinvest the proceeds in a high quality company whose stock is also off considerably. When the market does improve, the better name will participate, but more importantly the higher quality company will ride out any lingering difficult times much better.

2) Rebalance. When you first structured your portfolio, you most likely made some decisions about what percentage to invest in stocks, bonds and cash. Given the large declines in most stocks, your portfolio is out of balance. For example, if you started 2008 with a 70% allocation to stocks and the remainder in bonds and cash, you probably only have about 60% of your (smaller) portfolio in stocks today. If you really believe in your original allocation, then now is the time to take some of your cash and bonds, buy some stocks and bring your portfolio back into balance.

3) Add dividend paying stocks. We love dividends. They provide a steady (and hopefully) growing stream of cash flow to holders. That cash can be used to meet current expenses and therefore lessen the need to sell beaten-up stocks. If you do not need the cash for current expenses, then reinvest it into some of the many cheap stocks available to you.

4) Review your fund holdings. Many mutual funds have not performed well this year. Now is a good time to re-evaluate your holdings. Is the same manager still running the fund? Has its performance lagged the averages? If a fund has lagged for one year, we do not necessarily view that as a problem, but if a fund lags for several years, it may be time to make a change.

Just like getting a routine physical from a doctor, there may be nothing wrong with your portfolio, but it is important to check. It is also important because you will no longer feel like you letting the markets control you. Instead you will feel empowered as you have taken back some control. Don’t let fears of the market prevent you from making changes!

If you are not comfortable giving your portfolio a check-up, you should talk to a professional advisor. If you do not know of one, give us a call. We would be pleased to help!

Best wishes for a happy and healthy New Year!

Safety First

2008-12-17T17:50:00.002-05:00

The Bernard Madoff saga has emphasized a central tenet of successful investment – keeping your money safe. For those of you not following the story, Mr. Madoff has been a presence on Wall Street since the 1960’s. He operated a brokerage firm and an “investment management” arm. The quotation marks around investment management qualify the term as Mr. Madoff was found to have been running a giant Ponzi scheme. Investors will be lucky to see ten cents for every dollar invested once the firm’s holdings are sold by the receiver.

Besides relief at not being one of the investors, what can one take from this latest incarnation of Charles Ponzi’s brainchild? I see a few lessons:

Putting money in a common private pool raises risk. Pooling money for investment purposes is, of course, a description of the mutual fund industry. But mutual funds are regulated by the SEC, have required disclosures and safeguards. Private pools (like hedge funds) have no SEC-mandated disclosures and they give the managers substantial control over the assets. Pooling into a common fund lessens the oversight an investor might bring when reviewing his or her account.

If it looks too good it probably is. Mr. Madoff reported consistent profits in up markets, in down markets and in sideways markets. No investment strategy works all the time in every type of market, never has never will.

Homework is very important. Some potential investors reviewed Mr. Madoff’s claims and found them dubious. For example, Mr. Madoff said he bought and sold specific options as part of his strategy. However the amount of money he was managing meant that he would have had to buy and sell options well in excess of the actual amount they traded. The Wall Street Journal cites one example where he would have had to have bought 22,000 contracts and only 400 traded. There were some early warning signals like this article from in an industry newsletter back in 2001 where other investment professionals raised issues about Madoff’s reported results http://nakedshorts.typepad.com/files/madoff.pdf. Barron’s had concerns, as well http://online.barrons.com/article/SB989019667829349012.html (subscription required).

So Harvest will continue to offer only separately managed accounts, where client money is held at an unaffiliated brokerage firm (we currently are using Charles Schwab) in the client’s name and set off from all other accounts. We will continue to accept the inevitable ups and downs the market will bestow on our investment approach and we will continue to do our own work because we believe sleeping well at night is a worthwhile investment objective.

Media Mention

2008-12-09T09:35:00.001-05:00

Here is a link to a story in one of our local papers where Jim is quoted. He highlights a number of attractively valued businesses we see in today's market.

http://www.dailylocal.com/articles/2008/12/08/business/srv0000004231644.txt

Recoveries

2008-12-03T17:29:00.004-05:00

I saw this interesting blog from Disciplined Investing. It explains that much of the positive returns following a bear market, come in the first year. This helps to reinforce our point that it is important to stick with your asset allocation and keep money in the equity markets. In order to participate in the next uptrend in stocks, you need to be there. If you wait too long to get back in, your returns will diminish. This study is very timely given that we have come off a sizable upward move in the stock market. We are not sure whether the bear market is over, but we do know that we want to be there when the next bull market begins.

http://disciplinedinvesting.blogspot.com/2008/11/bear-market-recoveries-returns-occur.html

The Obama Economic Team

2008-12-01T08:58:00.001-05:00

President-elect Obama announced his economic team last week. While it is too early to assess the strength of the team (like a football team, let’s see what they do on the field), we can make a few observations:

1) It is a mix of old and new faces:
A. Tim Geithner is a relatively new name on the national scene. He has been the head of the New York Federal Reserve and has been actively involved in the current financial crisis. That experience should be helpful as it provides some continuity. It also gives the Obama team a seat at the table prior to his taking officer on January 20th.
B. Larry Summers will head the National Economic Council. He was Treasury Secretary during the Clinton administration and he may well become Obama’s closest economic advisor. There was some belief that he would be given a second term at Treasury, but given his ill-conceived remarks made about woman while President of Harvard, a confirmation hearing in front of the senate may have been difficult.
C. Paul Volker will head the newly formed President’s Economic Recovery Advisory Board . I like this choice. Volker is experienced (having been the head of the Federal Reserve during the Carter and Reagan administrations) and seems willing to do the right thing, not always the politically expedient thing. His decision to raise interest rates in the late 70s and put the country through a tough recession was crucial in reducing inflation. At the press conference announcing the appointment, Obama said of Volker “He pulls no punches. He seems to be fairly opinionated.” I am confident that Volker will provide Obama with his uncensored opinion.
D. Christina Romer will head the Council of Economic Advisors. She is a well regarded economist, who has some supply side economic beliefs.

2) The new team does not appear to be full of ideologues and even Karl Rove generally liked the choices. It strikes me as a centrist group who will seek to combat the current financial crisis and deal with the recession. They will eventually deal with making broader changes to the tax code, but that is not the primary concern today.

3) While a tremendous amount has been spent and will be spent on “bailouts”, it does not appear that there will be a blank check. The Big 3 auto executives, which represent one of the most populist of groups to ask for money, were sent back to Detroit to craft a plan that will show how the companies can remain solvent if they receive government help. It was clear that Obama was disappointed with the auto executives.

One other thing that is important to note is that investors do not like uncertainty. Now that we know the group who will be overseeing economic policy (and it seems like a solid team), it is not a surprise that the markets have been stronger.

Roth Idea

2008-11-20T15:19:00.005-05:00

For those of you who are married, actively participating in a company sponsored retirement plan and making over $169,000 in adjusted gross income in 2008 ( $116,000 if you are a single filer), consider making non-deductible IRA contributions in 2008 and 2009. The goal would be to convert the balance to a Roth IRA in 2010. In 2010, the income limit for Roth conversions (currently $100,000 in adjusted gross income) goes away and you can pay the tax due on the conversion over two years. Given the expectation that marginal tax rates will be going up, it may be a way to give higher earners an opportunity to get some money into Roth accounts.

There are several other aspects to consider such as will the income limit really go away in 2010, how much you can set aside and where the dollars will come from to pay the tax due. So send us an email at planting@harvestfinancialpartners.com for more information and to discuss your specific situation.

Dividend Aristocrats

2008-11-13T12:14:00.009-05:00

I was doing some research this morning and came across this chart on the Dividend Growth Investor website (http://www.dividendgrowthinvestor.com/). It shows the performance of the S&P 500 versus the S&P Dividend Aristocrats index. It also makes pretty clear why we like companies that pay dividends.

Dividend Aristocrats are companies which have paid and increased their dividends for the last 25 years. These are the types of companies that we look at when researching stock ideas. Some examples of Dividend Aristocrats are General Electric, Johnson & Johnson, Pfizer and Procter & Gamble.

This chart may not mean much today given the turbulent market environment, but it should help to provide some comfort that buying quality dividend paying companies is an attractive long term strategy.

Gift of Knowledge

2008-11-11T17:25:00.002-05:00

I saw this story about mothers talking to daughters about financial matters on NBC News last night. The basic premise was that a subset of moms consider themselves the CFOs of their households and make it a point to discuss finances with their daughters. That is great, but the story does point out another very important reason why women in particular should be financially literate. You live longer than us men do and given that difference in life expectancy, as the piece says, 90% of women will be alone at some point in their lives. So by all means teach away about the timeless tenets of personal finance – how to make money, spend less than you make and put the difference someplace safe – but include sons too. It’s knowledge they won’t get at school so you are the only, or at least the best source. And it’s knowledge that will pay dividends over their lifetime. If you know it's important to discuss but don't know where to begin send Jim or I an email; we have some ideas about how to get the conversation started.

President-elect Obama

2008-11-06T14:19:00.006-05:00

So we now have settled on who will be the next president. Congratulations Mr. Obama! He certainly will have a full plate when he assumes the presidency on January 20th.

But what does this mean for our clients. In two words, not much. Please don’t take this to imply that we are oblivious to the fact there will be changes under an Obama administration. Of course we know there will be winners and losers. What we do mean is that we will continue to search for high quality companies that pay a dividend and are inexpensively valued.

Some investors may respond to the election of Barack Obama and sell off certain stocks or sectors. We hope to take advantage of some of these overreactions and add new names to the portfolio. We believe the type of companies that we like and the managements we want to partner with can operate effectively in any political environment. We also are confident that strong balance sheets have no political allegiance. The new president and his policies may have some impact on how we value a company, but even that will be relatively minor.

Bottom line, the agenda of President Obama will be one of many factors that may have a modest influence on how we construct a portfolio, but it will not lead to a fundamental change in our approach.

Trick or Treat

2008-10-31T14:58:00.001-04:00

Tonight is Halloween and kids will be out trick or treating. It is a fun time and it is great to see the many creative costumes that come to our door.

I remember when I was younger, how much I loved Halloween. As someone with a serious sweet tooth, this is my time of year. My favorite part after a long night of trick or treating was searching through my bag of candy for something special and unique amid all the M&Ms, Hershey or Snickers Bars. Back then, special was Dots or Bit of Honey or Sugar Babies.

October has certainly given us a whole lot of tricks. But today the market is a lot like Halloween and we are out trick or treating. But instead of Dots, we , we are looking to find a special stock or two for our portfolios. They are out there as the recent market decline has created lots of treats. We may have to go to a few more houses to find them, but we will find them! And when we do it will feel just as good as when we munched on our Halloween candy. The biggest difference between now and when I was younger is I don’t have to wear a costume and I am a lot more patient.

Happy Halloween!

The Three Most Important Things To Do Now

2008-10-30T10:46:00.001-04:00

With apologies to the real estate industry, the three most important pieces of advice an investment advisor can give his or her clients right now are – rebalance, rebalance and rebalance. You and your advisor initially set an asset allocation – the percentage of your portfolio invested in stocks, bonds, cash, maybe real estate and commodities as well – for your investment portfolio. (If your investment advisor did not do this with you, make them your former investment advisor immediately.) The asset allocation was set based on your personal circumstances and risk tolerance. Even with Tuesday's monster rally, the stock market, as measured by the S&P 500, is down over 30% this year. So your portfolio is most likely out of balance. By rebalancing now, selling some bonds to buy stocks, you are increasing your odds of actually buying low and selling high. And the discomfort you feel in contemplating buying stocks right now shows why buying low and selling high is so difficult in practice while so obvious in theory. While past performance is no guarantee of future results, if you rebalance now, I think you will be very pleased you did in a year or two.

Earnings Season

2008-10-24T17:49:00.001-04:00

Right now we are in the midst of earnings season and investors are reacting to news from individual companies, and in general it has not been good. This reflects the fact that we are in a very weak economic period. But it also reflects the lack of visibility by company managements and so they are keeping expectations low. I think it is the appropriate strategy. Expectations need to be lowered. It may make investors nervous, but eventually we will see positive surprises. That may not happen next quarter, but it could be sooner than most think. Recessions (and let us agree that we are in one now) tend to last on average 11 months, but stocks bottom about half way through and then begin to move up. We may not be in an “average” recession, but the point is stocks begin moving up before we see an improvement in GDP.

Of course, this morning all the talk was about how the overseas markets were down big and the futures in the US were at their limit lows. It looked like today could be really bad, and for awhile it was. But as the day progressed, investors began to buy. The market seemed to be acting more rationally. Still we ended up down over 300 points, but it appeared like it could have been much worse.

I am certain we are still seeing some panic selling. I also know that we are still feeling the effects of hedge funds liquidating their positions. This will all take some time to work through, but we will. And when it does, we will once again return our focus to company fundamentals. I said to many people during the tech bubble of the late 90s that valuation matters and it still does today. There are some incredibly cheap stocks available for purchase. Do your homework during earnings season and be prepared to buy.

Old Friends

2008-10-20T16:04:00.001-04:00

I spent this past weekend with some old friends. We played some golf, caught up and reminisced about the past. As we get older, the weekends become more sedate but the stories about our past exploits become more impressive. It is always a good time and something I look forward to every year.

There is a lot going on in the markets, some of it is important, but much of it is noise. That made this weekend especially refreshing as it was a great way to clear my head. I still feel very comfortable with our approach to dealing with this crisis. Look for good businesses, with good balance sheets operated by excellent managers and buy them at the right price. I am confident if we stick with this discipline our clients will come through this a great shape. It is not really complicated, but executing it requires patience. After a nice weekend, I feel rejuvenated and ready to go.

Great Minds...

2008-10-20T14:04:00.003-04:00

We are glad to see our thinking about the attractiveness of US stocks is shared by another successful investor.

http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&oref=slogin

Panic Is Not An Investment Strategy

2008-10-15T11:32:00.001-04:00

The title of this piece came from a quote I heard while listening to NPR last week. I cannot think of a more apt name given the state of affairs in the markets recently. The carnage has been terrible and equity investors have seen portfolio values decline markedly over the past few weeks. It is really scary!

But, it is not the time to panic. The Treasury and the Federal Reserve have been doing everything possible to help alleviate the problems in the market today. There is some question whether they were late to act, but the point now is they are acting and they are acting in unison with many other countries. We are witnessing a global intervention on a scale rarely seen. We believe that it will ultimately prove effective, but we are unable to say when. We just know we want to be there when stocks turn.

Now we are not just sitting idly by watching the markets. We are taking action. First, we are looking to upgrade the quality of our portfolios. Stocks have sold off dramatically, good and bad companies. We are using this time to sell the weaker names and buy the companies we expect to be the long term winners. We are also focused primarily (but not exclusively) on buying those companies that are self financing. By that, we mean that we want to own companies who are not at the whim of the banks or the bond market to finance growth. These companies can use their financial strength to prosper in these tougher times. Some examples would include Johnson & Johnson and Paychex.

We also continue to focus on dividends. We have always been a big fan of dividends, but today they provide some downside protection and a stream of cash flow that can be used to buy additional stock. We like to see companies with the confidence to increase its dividend during these times. It sends a message that management has comfort in the future. United Technologies just raised its dividend 20% last week. It may not have caught the eye of many investors given what was taking place in the stock market, but it caught our eye.

There are tremendous opportunities today. There are many great companies with solid balance sheets available at attractive valuations. Our shopping list is very long and we are buying. That said, we are moving money in at a deliberate pace. This turmoil may not be over, but we do believe that we are close to a bottom. We are also confident that the companies that we are buying today will serve us and our clients well into the future.

(Disclosure: We own Johnson & Johnson, Paychex and United Technologies in our clients’ portfolios as well as our portfolios. Please write our offices for a complete list of securities transactions.)

Client Letter

2008-10-09T16:01:00.001-04:00

The following is a letter we recently sent to our clients:

This has certainly been a volatile time in our markets! We have seen enormous price swings throughout the quarter, and some huge swings intraday. These market moves have been the result of some historic changes on Wall Street. Starting with the collapse and sale of Bear Stearns to JP Morgan Chase, we have seen Lehman Brothers go bankrupt, Fannie Mae and Freddie Mac bought by the government, and AIG effectively get taken over by the government. We have also seen the largest bank failure in history (Washington Mutual) while other smaller banks have faced a similar fate. Finally, as the 4th quarter begins, we have the White House and congress agreeing to a $700 billion bank rescue plan. There is much angst whether bailing out the banks and Wall Street is a good idea, but ultimately the biggest beneficiary may be those on Main Street who could benefit from looser credit and stronger bank balance sheets.

This is the economic and financial backdrop that we have faced as we focus on the management of your, and our, portfolios. While these events are tremendously important, we have tried not to lose sight of our objective: to manage your money for the long term growth of income and principal. Note the emphasis on long term. While we would like to buy something and see it go up in price immediately, we recognize that is not realistic. Rather, we expect the stocks and mutual funds we purchase to go up in price significantly over a time frame we measure in years, not in days or in hours. To accomplish this, we look for companies that we want to own well into the future. The prices of these good businesses have been subject to a great deal of fluctuation in the short term (for the reasons we described above) but we view that as an advantage for long term investors. It occasionally provides the opportunity to buy very good businesses at very fair to downright cheap prices. Since inaction carries no penalty, we can afford to wait for the stocks that we want to own to reach the prices we want to pay. If not, we will find something else.

We do not have a crystal ball to tell us when the economy will perk up and stocks will rise again. But we will continue to build our portfolios with high quality, well managed companies that we will be pleased to own for many years.

We want you to know that we have been working on updating our website. In the next few days, you should see the results. While the look of the site similar, we have added a section called the Harvest Newsroom. Here you can find a link to our blog that will provide you some of our thoughts on stocks and the markets. Also, in the Newsroom you will find a section highlighting some of our favorite websites and a list of books that may help to provide some perspective on what is taking place in the markets today. We plan to regularly update all of these sections. We also hope to include some articles and maybe even videos on important financial topics. Suggested improvements and topics are always welcome.

We also want to take a moment to thank you all for choosing to work with us. We both love what we do and are hesitant to call it work. We are fortunate to work with you and are always available. Please feel free to call us (610-240-4740) or email us (jim@harvestfp.com or john@harvestfp.com).

Best wishes!

Jim Wright
John Fattibene

Our Principles in Action

2008-09-15T12:53:00.006-04:00

Lot of news this weekend: big banks meeting with Treasury and the Fed, Lehman Brothers having to file for bankruptcy, Merrill Lynch agreeing to sell itself to Bank of America, AIG looking for cash.

Fortunately major media outlets were calming influences:

“Street of Fear” – Fox News website
“Crisis on Wall Street…” – Wall Street Journal
“A Hellacious Hurricane Hits Lehman Brothers” - Barron’s

Okay, a little sarcasm.

So what do Jim and I think? Well first we remember two of our principles (we actually remember them all, but two of them are particularly appropriate):

· Strive to be patient investors in an impatient world.
· Never look for validation in conventional wisdom.

We thought of these two principles because today will be a tumultuous day in financial markets; it has started out that way as I type this. And in tumult we believe we can find opportunity. We will be looking for companies that have little or nothing to do with some of the financial assets causing the current problems – subprime mortgages, CDOs, etc – where selling has caused the price to decline well below our estimate of the company’s business value. Or, as I like to say, we will be looking for really easy decisions. Here is hoping that we will find some.

-John

Volatility may create opportunity

2008-09-05T11:16:00.000-04:00

Goldman Sachs released a report recently called “potential 2-3 year doubles” The report discusses how the market volatility over the past year has created tremendous opportunities in the equity markets. It goes on the discuss 10 stocks the firm believes could double in value over the next 2-3 years.

This report got us thinking about the stocks that we own. Typically, when we purchase a stock, we are not expecting to see the stock double over a 2-3 year period. Instead, we are seeking an attractive and growing level of dividend income coupled with some stock price appreciation. This combination should lead an attractive total return. That said, we believe there are some names in our portfolio that appear so cheap, we would not be surprised if the stock doubled in price over the next 2-3 years. Keep in mind, this is more of a thought exercise than a prediction or recommendation, but it helps to illustrate the attractiveness of the stocks that we own:

Corning ($16.50): With businesses that are involved in fiber optics, LCD screens, diesel fuel and solar power, we think this company is well positioned in some very attractive areas. Of course, recently, Corning has seen some weakness in its LCD business due to slower consumer demand for televisions. We believe this will be short lived and expect demand to pick up again next year. Expectations are that the company will earn $1.80 this year. We think that with this mix of businesses, it is not impossible to see 10% average earnings growth over the next 3-5 years. So, if one looks out to 2011, this company could be earning around $2.40. If you apply a multiple of 15 to those earnings, you get a stock price of $36.

Legg Mason ($42): This investment management firm has seen its share price crushed over the last couple of years. Certainly, the company has caused its share of problems, but investors have punished the stock mercilessly. We think a company with $900 billion in assets under management (AUM) should be valued at least at 1% of its AUM. If we use that amount, the stock is worth over $60 today. But, if you assume some growth in the AUM over the coming years, it is not hard to see a stock worth $80 in 3 years.

We own many stocks with very attractive upside, but it might be hard to expect a double in a short period of time. Still, we are very excited about the names we own today, and fully expect to be purchasing some additional stocks with great potential upside in the coming days.

Harvest Financial Partners

2008-07-28T13:15:00.003-04:00

I thought I might take a moment and update you on our firm, Harvest Financial Partners. The firm was formed by John Fattibene and me because we love the investment business and want to help clients with their investment and financial goals. We began discussing forming a partnership about 18 months ago. At first, the conversations were preliminary and vague. But as the months passed, we both began to get more excited about the opportunity. To make matters easier, John and I have known each other for over 25 years (we were roommates together at Vassar College), we both have a “value” bias in our investment approach and we both understand the importance of dividends to an investor’s total return. We also felt (and still feel) that many investors are overlooked by the vast majority of investment firms and are often forced to go it alone. For some people, that is not a problem, but for many it may be beyond their interest level or expertise. Harvest was formed to help those people.

One of the most frequent comments that I hear when I tell people I have started a firm, is that I picked a tough market to start. I respectfully disagree because I believe at times like this, quality advice from a quality advisor can make a world of difference. In a great bull market, it is pretty easy to make money in stocks. But in times like these, it is difficult and investors need someone who has managed through some tough markets and can offer re-assurance and perspective. We certainly do not have all the answers and are as surprised as others by how far down some stocks have dropped. But we also know that if you have patience and discipline, you can survive just fine or even thrive. The worst thing to do is to sell indiscriminately, which is a natural reaction for many people. We can help them see the value of patience.

While helping investors with their investment needs, we can also assist them with the myriad of questions that come up on a daily, monthly, annual or generational basis:

Can I afford to retire?
Can I purchase a second home?
Should I refinance my first home?
How should I provide for spouse, children and grandchildren after I am gone?
Do I have enough life insurance?
Should I purchase long term care insurance?
Am I allocating my 401(k) investments properly?

These are not easy issues for anyone, but our experience can help our clients understand and answer these questions and the many others that will arise.

So far John and I have been working hard and having a great time. It is really very exciting to attempt to build something from scratch. We both have a lot of passion for what we are doing and enjoy working together. We are also fortunate to have some wonderful clients!

We will keep you updated on our progress. We know there will be some short term obstacles, but we are certain we can persevere. We are in this for the long run!

What a week!

2008-07-24T09:36:00.000-04:00

I guess things must be a lot better in the world this week. I was just reviewing some numbers and see that many of the financial stocks are up over 35% or more (in Bank of America’s case it’s a staggering 81%) since July 15th. Are the companies really worth that much more a week later, or was the extreme and indiscriminate selling prior to the 15th completely divorced from underlying business value? I will leave that as a rhetorical question. One thing we did learn was that while the earnings for these financial stocks were not good, the expectations were so low that even ugly numbers looked attractive. I guess beauty really is in the eye of the beholder!

I am not going to tell you the volatility is over. We still have high food and energy prices, a weak dollar, a slowing consumer, weak housing, an unpopular war... We also have a presidential election taking place and all the uncertainty which it entails. So I am not sure we are out of the woods, yet. But as I have been saying, there are good opportunities out there, you just have to look and have some patience.

I wish I could tell you that we were smart enough to buy all our financial stocks last Tuesday, but we were not. But we owned some of these stocks that did very well, and will likely buy more. We think the worst may be over for the financials, but caution is still necessary. But for investors with a longer time horizon, there is money to be made in this market.

Making a list

2008-07-17T12:39:00.000-04:00

What an ugly market! That may be the most obvious statement I have made today. That said, what may not be so obvious is that if you have some cash and patience, times like these can be very interesting. We are witnessing excellent companies, with strong fundamentals, being sold as if they have some kind terminal disease. There are numerous purchase opportunities developing and we are doing our homework. We have a list that we refer to as our “Farm Team” consisting of stocks we are considering owning, and this list of prospects is getting quite long.

I will emphasize that we are not going to deviate from our discipline of focusing on quality, value and dividends. This discipline has served us well in the past and will again in the future.

Keeping with our baseball analogy, I think we will be promoting several stocks from the Farm Team into the big leagues shortly. I am also pretty sure that we may have a future hall of famer or two on that list!

(Written on 7/11/08)

Planting for your future

2008-07-16T11:58:00.000-04:00

This is the inaugural post in our blog. We have titled it “Planting for Your Future”, because we believe that investors can get too caught up in the short term noise and forget what is most important, their long term goals. Most of us invest today with some purpose. That purpose could be a comfortable retirement, to send their kids to college, to buy a house (or a 2^nd house) or to leave money for the next generation. In almost all cases, if you invest in the stock market, you need to have a long term time horizon. Stocks are great investments, when viewed over an extended time frame, but can be quite volatile in shorter periods. At Harvest, we only utilize equities for that portion of a client’s assets that are not needed in the next 3-5 years.

With these opening thoughts in minds, it was wonderful to receive this email from one of our first clients:

Jim, just to let you know that this market doesn't bother me at all and I'm not bothered by negatives on my performance reports. . When I see stocks like GM hitting 53-year lows, it brings back memories of Chrysler at $2 per share. As far as I'm concerned you can be as aggressive in buying equities as you see opportunities.

Why was I so happy? Simply, because this client gets it. He clearly understands that markets can be very volatile. But, if you have a long time horizon, we should be utilizing the weakness in the markets to be buying. If we purchase solid companies at today’s lower valuations and sprinkle in a little patience, we can make a lot of money for our clients. I am not calling a bottom, but I am looking at companies and asking whether they represent compelling values today. The answer I am giving far more often is “yes”.