Tuesday, February 20, 2018

GONE FISHING

I will be on vacation through the end of the month.

M* MoneyMadam

Sunday, February 11, 2018

Reversal to the Mean - Stick with Dividends - A Message from TheMoneyMadam

If you are trying to make sense of this market, consider that it is different this time. 

  • Internet and technology stocks with no earnings only hyped up hopes fueled the "Dot Com" bust in 2000
  • Major credit market disruptions caused the real estate and stock market crash in 2008
  • Over valued dividend stocks are fueling the market fluctuations of 2018 as robots that are programmed to preempt risk are trading stocks rather than rational income investors

Let's look at these three major market disruptions:


In 1999 the dot com bubble helped a lot of investor who took profit and ruined many who did not.  More than one of my clients said "I want to get into this market."  Some did get into the high flying dot com stocks but their real money was in income producing stocks, bonds (they were paying over 7% back then) and real estate.  The point is the dot com debacle did not bring down everything.  It was isolated and only those who failed to follow the investing rules of thumb were devastated.  Dividend growth investing still worked back then.

I remember October 2007 vividly.  It seemed the only asset class that didn't get hurt was real estate.  No more than a few minutes after that thought crossed my mind, I got a call from the general partner who ran a private placement investment of multi family apartment buildings in Texas.  The message:  those properties have failed and were going into bankruptcy.   None of my clients was in these investments, I was the client in this one.

My husband was retired and I was still working but we lost about 25% of our investment income when those properties failed.

Not long after that we watched Lehman Brothers fail and saw the value of our portfolio cascade down with the credit crises.   Even money market funds were in trouble. We lost about 30% of the value of the stocks and bonds in our retirement portfolio but we did not lose any additional retirement income.

This second major disruption affected asset values, but dividend growth stocks survived, continued to pay their dividends and some even continued to raise dividends.  We were not able to save as much money with the loss of the apartment income.   It took a lot of patient counseling to get investors to stick with their dividend growth strategies

The market volatility we are experiencing right now has totally different dynamics than any of the previous occurrences noted above.  While we have over valued stocks in some areas, we are not looking at the kind of hyped up value from dot coms and our credit markets are solid.

Today, we have reversal to the mean. 


You cannot fight the law of nature.  Too much money chasing too few dividend, dividend growth, and generally solid companies and it was bound to correct.

Interest rates are not yet competitive enough for me to make a change back to bonds.  They're just high enough that I can pay closer attention to cash management but I am not pulling my money out of dividend growth stocks to invest in bonds.

Yet, it is this threat that makes the programmers enact algorithms to protect against this interest rate risk.  Without a doubt, the 30 year bond bull market is finished.  We will be facing inflation and interest rate risks.  These will affect equity asset prices.

Enter the algorithmic traders, and you have significant volatility.  The "bots" may be the vehicle for volatility but regression to the mean is the fundamental reason that over priced, quality stocks are suffering.

I am sticking with my program.  I use covered calls to force me to sell at a profit.  It does restrict upside potential but it also enforces portfolio rebalancing.  When I have a quality stock called away, I certainly am not going to put those funds in a stock like Caterpillar (CAT) with a P/E (price earnings ratio) of more than 100.

Equally, when I see a stock that I fundamentally like and it takes a hit during these times of volatility, I add.  I make a list of all the stocks I own that pay 4% or more and when they correct I add.

Stock prices move quickly and I do not expect this to stop soon.  We are back to an extended period of volatility.  You have two choices, don't look, or keep your wish list active, put in limit orders, never market orders, and pick up some bargains.

This will not be the last time you are concerned about the market, but it does not need to ruin you.  We are just reverting to the mean.  Each stock is different.  Do your research, decide what price you want to use to add, and be brave.

M* MoneyMadam

P.S.  One half of those Texas properties did emerge from bankruptcy and paid back our principle plus some of the principle we lost in the half did totally fail.    

Monday, February 5, 2018

PKG Packaging Corp a new name for 2018


Company Description (as filed with the SEC)

Packaging Corporation of America ("we," "us," "our," "PCA," or the "Company") is the fourth largest producer of containerboard products and the third largest producer of uncoated freesheet in the United States, based on production capacity.

How much packaging stuff do you throw away every day?  

I owned this stock quite a while ago and I am going to revisit it in this post.

  • Free Cash Flow is good.
  • PKG should growth as the online orders go up
  • Dividend Machine fundamentals are very good
  • D/E ratio is a bit high 

Grow with the online trend


How much packaging material do you recycle or throw away every day?  It just makes sense that online purchases will continue to grow and we all know that means more packing materials  I like that kind of catalyst.  Take a look at free cash flow and you can see it for yourself.

PKG Free Cash Flow Chart

Dividend Machine Fundamentals


I still have to use my basic screening criteria when I am adding a new stock to a portfolio.  Although I owned PKG between November 2013 and January 2015, PKG never made it into one of my model portfolios.  This is about to change and that is because this stock has good fundamentals.

I require a solid dividend yield, earnings per share that are greater than the dividend, dividend growth, and a good balance sheet.  Take a look at PKG from that perspective.



In the past I required a minimal dividend yield of at least 2.75% and during some years 3.5%.   This is why PKG did not make the grade in previous years.  In 2018 I am writing about investments I make and have relaxed the dividend yield criteria.  But I must say this 2.15% yield is a minimum.  Only because of this market correction is PKG's dividend yield adequate for me.

Debt to Equity Ratio potential headwinds


One weakness in PKG's fundamentals is a debt to equity ratio that is greater than 1.  During these turbulent times, we don't want to add a stock with a dangerous balance sheet.  I am less concerned about the actual amount of debt that PKG has than I am about the headwinds of rising interest rates.

As interest rates rise, PKG may incur higher borrowing costs which could negatively effect their cash available for dividends.  On the positive side, PKG earns over $7 per share and pays out only $2.50 of that in dividends.  For a conservative income investor, I like that payout ratio.



VALUE

















I am interested in PKG at $120 or under.   I think we will have some interesting opportunities to
buy quality stocks over the next few weeks.  One of the stocks I will go after tomorrow is PKG.  I would love to get it at $115.  I prefer to pay no more than $117 and would back off completely if $120 is the ask.

M* MoneyMadam

Disclosure:  No position but hope to add.

2/6/2018
I am putting in a limit order of $106 which is a dividend yield of over 2.3%.  Afterhours bid is $107 and change.

Previous Posts on PKG

http://www.themoneymadam.com/2014/08/a-lesson-on-how-to-make-money-on-break.html
http://www.themoneymadam.com/2014/11/packaging-company-of-america-pkg.html



A Panicked Market

What are you going to buy today or tomorrow?   I am nibbling.  This is no time to panic.  This is why we keep cash around.

Looking at my portfolios, I see a few opportunities.   I prefer adding to CVX and XOM than CAT.  CAT still is too expensive to me.

I am looking at all my fundamentals plus a good P/E ratio.

M* MoneyMadam

Let's get out of this market and into a dry martini!

XOM I will add on weakness

Exxon Mobil has gotten slammed on every level.  I added XOM to the 2018 portfolio (see table below) at $86.78.   Today XOM is trading in the $82 range.   A 10% correction would mean a stock price of $78.10.    If XOM does trade down that low, I will most likely add.


To some, it may seem I am trying to catch a falling knife.  Yet, I still believe XOM has the ability to their business around and just have not had quite enough time to see it on the bottom line.   I like the yield and I am one very patient investor.   This is not the first stock I bought that sunk after I got in only to rebound significantly.

On the other hand, I also have picked some real stinkers and XOM could be one of the those.  I will give it a few years, yes a few years to get improve.  If after that it is still dead money, I will re - evaluate for my own portfolio.  However, in my published portfolios, I am long only.






M* MoneyMadam
Disclosure:  Long XOM and T

Friday, February 2, 2018

Putting Short Term Cash to Work

As all readers of my blog know, I am an advocate of keeping cash around to sleep well at night.  It also allows me to buy into corrections.   Today I am nibbling a little bit ... see previous post ... but I am also taking advantage of some nice yields on cash in the form of a Certificate of Deposit.

The concept of a nice yield is relative.  I come from a generation of investors who buy C.D.'s with an 18% yield.   Buying a CD with a 1.5% yield is only nice in this environment.

I fully expect interest rates to increase, which means I keep my maturities very short.  Here is a CD worth looking at.

Citibank 1.5% CD matures 5/9/2018
Buy at par
Cusip 17312QG94

M* MoneyMadam

Fishing for a few bargains

Corrections test you and if you did not know why you got into a stock, you are highly likely to panic.  If on the other hand you like the fundamentals of your income stocks, you have two choices:
  • DON'T LOOK
  • BUY MORE

I am looking for AAPL at $159 or better
WMT which I lost to a call buyer at $99 or better

I am adding a little to XOM and CVX.   And, I added a little to WSO at $177.   If these continue to slide I will add at 5-10% correction intervals.

I would add to CVS rather than add CAH but I am fully weighted in health care.  If I have calls assigned in two weeks, I will reconsider both CVS and CAH.   

M* MoneyMadam

Disclosure:  Long AAPL, XOM, CVX, and WSO