In this issue of Investment Advisor Ideas, our subscribers will gain access to a list of the most attractive and unattractive companies in the S&P 500 that currently have a dividend yield higher than the 5 Year U.S. Treasury Note (1.17%). As you will see, the format of our newsletter will be similar to that of our general posts; however, Investment Advisor Ideas will be much more extensive. Each week's newsletter is based on AFG's proven research process and valuation techniques, making it a great starting point for portfolio managers in search of new Buy and Sell ideas.
Also In This Issue:
Two Stocks Hotter Than Apple, But Avoid Them Now - Netflix, Inc. , Chipotle Mexican Grill, Inc.
S&P 500 Economic Margin Leaders
Our Take On The Most Actively Traded Stocks In The S&P 500
Preview: Toreador Buy Index
In our next issue we will be highlighting attractive and unattractive global stocks as well as ADR's to provide our subscribers a list of stocks that will be a good starting point for investors looking to add some global exposure to their portfolio.
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Sincerely,Value Expectations
Attractive & Unattractive Companies that Pay A Dividend - S&P 500
After the market experienced the kinds of losses that occurred over the last 2 years, investors experiencing the "snake bit" (risk aversion) effect are less likely to gamble or exhibit risky behavior. As a result, investors tend to flee to the safety of fixed income investments during this period of economic uncertainty. However, bond yield rates have fallen to the lowest level in decades, from 6.5% in year 2000 to the current yield of 1.7%, and the economy is showing no signs of a surging recovery any time soon. As such, it seems unlikely that the Federal Reserve will raise rates in the near term, further dampening the prospect that cash yields for bonds will improve.As an alternative approach to treasury notes, dividend-paying companies can provide a steady flow of income in dividend payments, as well as an exposure to a potential market rally. In the last two years, investors looking to offset their losses due to large fluctuations in stock prices, or bears searching for a steady stream of income to hedge against the current market volatility, have gained renewed interests in stable companies that pay strong dividends. Therefore, it is no surprise that dividend-paying stocks have gained increased popularity amongst the investment community.The first issue of our newsletter focuses on a select group of companies that are attractive based on valuation and economic profitability (Economic Margins), and have dividend yield greater than the 5 year US Treasury yield of 1.17%. Companies that meet AFG criteria to be considered an attractive investment opportunity have proven through backtests to be more likely to outperform sector peers and index benchmarks than those companies we label as unattractive based on the same criteria. By focusing on high quality companies that are more likely to outperform that also provide the added benefit of paying solid dividends can be an effective way to develop a defensive stock strategy rather than buying and holding a treasury note for 5 years.So how have dividend paying stocks fared against non-dividend payers in the past?In 2009, many companies cut or did away with their dividends, prompting some investors to sell their holdings in those companies, making it the worst year ever for dividend stocks. However when looking at the comparison of dividend payers vs. non dividend payers over a longer time frame , a study done by Standard and Poor's shows that a $10,000 portfolio of S&P 500 dividend payers held from January 1985 to December 2009 outperformed a portfolio of non-dividend payers by more than 30% over the same time-period. The chart below from Standard & Poor's also reinforces the fact that stocks that pay dividends have done better than their non-dividend paying brethren since 2000. After the market experienced the kinds of losses that occurred over the last 2 years, investors experiencing the "snake bit" (risk aversion) effect are less likely to gamble or exhibit risky behavior. As a result, investors tend to flee to the safety of fixed income investments during this period of economic uncertainty. However, bond yield rates have fallen to the lowest level in decades, from 6.5% in year 2000 to the current yield of 1.7%, and the economy is showing no signs of a surging recovery any time soon. As such, it seems unlikely that the Federal Reserve will raise rates in the near term, further dampening the prospect that cash yields for bonds will improve.As an alternative approach to treasury notes, dividend-paying companies can provide a steady flow of income in dividend payments, as well as an exposure to a potential market rally. In the last two years, investors looking to offset their losses due to large fluctuations in stock prices, or bears searching for a steady stream of income to hedge against the current market volatility, have gained renewed interests in stable companies that pay strong dividends. Therefore, it is no surprise that dividend-paying stocks have gained increased popularity amongst the investment community.The first issue of our newsletter focuses on a select group of companies that are attractive based on valuation and economic profitability (Economic Margins), and have dividend yield greater than the 5 year US Treasury yield of 1.17%. Companies that meet AFG criteria to be considered an attractive investment opportunity have proven through backtests to be more likely to outperform sector peers and index benchmarks than those companies we label as unattractive based on the same criteria. By focusing on high quality companies that are more likely to outperform that also provide the added benefit of paying solid dividends can be an effective way to develop a defensive stock strategy rather than buying and holding a treasury note for 5 years.So how have dividend paying stocks fared against non-dividend payers in the past?In 2009, many companies cut or did away with their dividends, prompting some investors to sell their holdings in those companies, making it the worst year ever for dividend stocks. However when looking at the comparison of dividend payers vs. non dividend payers over a longer time frame , a study done by Standard and Poor's shows that a $10,000 portfolio of S&P 500 dividend payers held from January 1985 to December 2009 outperformed a portfolio of non-dividend payers by more than 30% over the same time-period. The chart below from Standard & Poor's also reinforces the fact that stocks that pay dividends have done better than their non-dividend paying brethren since 2000.
Today we will provide our newsletter subscribers a list of safe, stable dividend-paying companies that also look attractive according to key criteria developed by The Applied Finance Group (AFG). First we start with the S&P 500, as the index contains larger companies that tend to be more stable and are more able to sustain dividend payments for a longer timeframe. We then removed all non-dividend payers and companies with dividend payouts less than what can be earned by purchasing a 5 year US Treasury Note (1.17%), and ranked the remaining dividend paying companies from most attractive to least attractive based on economic profitability and valuation, among other criteria, to give our readers a solid list of companies to do some further due diligence with.
Also contained in the list are the companies that look the most unattractive based on the same valuation and economic profitability criteria as possible short recommendations. These companies look likely to underperform and are companies that you may want to take a closer look at when looking to cut names from your portfolio.
Be on the lookout for next week's newsletter issue that will contain an extensive list of globally traded companies from all over the globe as well as some ADR's that we find attractive to assist our subscribers who are looking to gain some exposure to global economies in their stock portfolios.
Two Stocks Hotter Than Apple, But Avoid Them Now - Netflix, Inc. , Chipotle Mexican Grill, Inc.
Who would have thought that Burrito Bowls and Red Envelopes would be hotter than the I-pad in 2010? Sounds crazy but it's true. By looking at the YTD performance chart from Yahoo! Finance you can see that the stocks for Chipotle Mexican Grill and Netflix have significantly outpaced Apple Inc.'s stock price so far this year.
All 3 companies have tremendously successful business models and management teams who understand how to create wealth for their shareholders.
There is no question that Chipotle has a great product at a great value for their customers, our firm frequents Chipotle on a weekly basis. Positioned between casual dining and quick service restaurants, Chipotle offers better quality food than quick-service chains, at lower price points than casual dining chains. Likewise Netflix's movie rental service, which charges a low monthly fee for unlimited rentals and downloads, provides a compelling value proposition. Netflix's broad selection of content and its convenience factor is virtually unmatched by any existing competitors. And who doesn't know someone who owns an i-Phone, i-Pod or i-Pad these days?
From an investor's standpoint, it is no doubt that these firms are doing a great job of rewarding shareholders so far this year by following what we call a wealth creating strategy of growing a profitable business. However, not all good businesses make good investments, a principal starting point for conversations with many of our institutional clients. Often times these high quality companies gain momentum and their expectations become high and their stock becomes overvalued.To view companies that we believe are attractive and unattractive signup for our Advisor Ideas newsletter. Fresh buy/sell ideas will be delivered to your inbox on a weekly basis free.Think of it from this perspective, if you were offered your choice of a new car between a 2011 Mercedes Benz SL600 or a 2011 Chevrolet (GM) Impala, the obvious choice would be the Mercedes as it is the more luxurious of the two and the all around superior vehicle. As investors we understand the importance of value, so what if you were offered the same two vehicles except the Mercedes price tag is $1 million and the Chevy retailed for $100? The Mercedes is still the superior vehicle no doubt, but which is the better investment? Note: Despite unpopular perception if you value your Chevy at $100, call me, I am a buyer!Under the same principals of understanding value, we will now take a look at the valuation of these 3 companies to see if they are good investments. By looking at the following Intrinsic Value charts from The Applied Finance Group (AFG) we can see that AFG's model has done a good job tracking these firms by their high accuracy scores (accuracy score calculated by measuring how far AFG's Intrinsic Value (Red Line) deviates from the company's trading range(Blue Bar)). Also by looking at these charts you can see that CMG and NFLX while they have enjoyed great performance YTD we believe that both companies are beginning to look expensive according to our valuation model.
Now that we have pointed out that we believe these firms are overvalued, we will provide our readers a list of 4 companies from the consumer services sector that look more attractive from a valuation standpoint and present attractive investment opportunities going forward.
S&P 500 Economic Margin Leaders
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