REITs: How to Potentially Increase Portfolio Returns without more Risk

Dear Mr. Market

th-1Raise your hand if you would like the opportunity to increase the returns in your
portfolio without taking on more risk? There is indeed a way to help accomplish this and it’s not just by balancing between the two major asset classes of stocks and bonds; take a look at the third largest asset class there is: REITs (Real Estate Investment Trusts)

Most investors have little to zero exposure to REITs and they may be surprised to learn how important they can be to a healthy portfolio. This article will give you a better understanding of why adding REITs into your portfolio could improve your diversification, dividends, and ultimately your portfolio performance.

What are REITs and why use them? Continue reading

March Madness: Final Four Investing Bracket 2017

Unknown-2

Dear Mr. Market:

Is your bracket already busted? This year’s March Madness tournament opened up with very few upsets until this past weekend. Much like the stock market, we see a similar trend happening right now. What follows is how we see things panning out but first, here’s a little background on how one of the most famous sporting events in the United States correlates to the investing landscape.

Seven years ago we became the first Registered Investment Advisor to use the NCAA basketball tournament as a way to show our readers a forward-looking view on the stock market! We break down and assign each of the four “regions” with an asset class and then pick teams (companies) that we think have the best chance at doing well relative to others.

CLICK THE LINK TO VIEW OUR Final Four Investing Bracket Picks 2017

Large Cap

Last year started off much differently than 2017 and as we wrap up the first quarter …some trends are emerging while others continue. If you eyeball the overall theme of this years bracket it will become clear that we’re picking some stocks that should continue to do well under the Trump administration. Whether you love him or hate him, ever since Donald Trump assumed office, the stock market has risen. The proverbial “Trump bump” is real and while we personally believe he needs to stay away from Twitter, there is no question that the stock market and certain economic sectors are primed to perform.

In particular we focused on sectors that should benefit from his proposed vision; stocks in finance, defense, industrials, materials, and energy could benefit from additional tailwinds the rest of the year.

Key Match-up:

#9 Ford (F) vs. #6 Visa (V)

In the earlier rounds of the Large Cap region we see some interesting matchups that follow the theme of sectors and companies potentially benefiting from a Trump administration. United States Steel (X) is in the Basic Materials sector and should continue to do well but has already had a tremendous 12 months with a return of 121%! Conversely, Aecom (ACM) has lagged the broad market (+9% relative to the S&P 500 at +14%) but it’s a leader in the Industrials sector and could become a value play. Some aerospace and defense companies like Northrop Grumman (NOC), or our overall winner from last year, Lockheed Martin (LMT), will continue to be solid but eventually lose out to two companies affected in different ways by another factor; interest rates!

We believe that both Ford (F) and Visa (V) will enjoy tremendous years in 2017. Even though some speculate Ford could be adversely impacted due to increased interest rates, we believe this stock is an absolute steal at these levels. Ford trades at only around 10 times earnings and currently has an incredibly attractive dividend yield of 5.09%. This is a very well managed company trading under $12 per share and we realistically believe it could finish the year at our $14 price target.

Visa (V) is a stock that will almost certainly benefit from higher interest rates. Some may argue that Visa is a bit rich in its valuations after running higher almost 14% year to date. This may be true but the company is managed extremely well, has a tremendous business model and a market share that absolutely trounces all of its competitors.

Small and Mid Cap

The Small and Mid Cap region could be thought of as the area where an investor hopes to find a “Cinderella” team. If the way the NCAA tournament opened up is an indication of how the stock market may play out…tread carefully!

We actually are quite bullish for Small & Mid Caps in general but see some risks in trying to pick one stock over another. This is one of those years when playing the entire field is likely much more lucrative than trying to find the one stock that upsets all the favorites. In similar fashion, midnight came early for Cinderella in the tournament. For the third year in a row no mid-major colleges (in prior years it was George Mason, VCU, Davidson) survived to see the Sweet 16.

To follow-up on our analogy as it relates to picking stocks in this asset class, go with the field and take advantage of good odds that smaller sized companies should perform quite well in this business environment. From Election Day to the end of 2016 small caps jumped 14.6% relative to their larger peers (S&P 500) at 4.6%. With the hopes of corporate tax cuts and a focus on infrastructure spending we still believe that small and mid-sized companies will outperform. All that being said, you can expect a bit of a slow down as the group enters a consolidation phase and we see what policies Trump and the administration can actually implement.

Key Match-up:

#3 Masco Corporation (MAS) vs. #5 Vanguard Small–Cap Index Fund (VB)

As we noted earlier some companies could flourish with increased interest rates. In the first round we purposely match up #8 Zions Bancorp (ZION) versus #10 PacWest Bancorp (PACW) to showcase two smaller regional banks that were each recently dinged by about -6% but have had huge run-ups since the election. You can assure yourself that when interest rates rise, banks won’t necessarily increase the rates they give consumers. Banks will earn more on the loans they make and the interest they pay on deposits will increase at a slower rate which all leads to a net positive for profitability.

What stock might surprise them all in this region though? How about our #3 seeded Masco Corporation (MAS) which we actually have going right to the final. Granted, here’s a company that has trailed the broad market but we believe it’s in the right sector and positioned to benefit at the right time. Masco markets and distributes home improvement and building products and will do well with increased spending, new-home construction, and a stronger housing market. We see this company as having strong management and with some recent cost reduction initiatives, profitability will continue to improve.

International

We will never claim to have a crystal ball or break an arm patting ourselves on the back, but our winner in the International bracket should come as no surprise to our regular readers. In last year’s investing bracket we had Emerging Markets (VWO) seeded low as a #10 but they clawed their way to the Final Four. The premise there was a common theme for us in that everyone was sour on Emerging Markets and we saw an opportunity to pick up an investment that was cheap, out of favor, and one that could benefit from a reversion to the mean. What happened?

Although Emerging Markets was the worst performer in 2015 (-18%) it came back to gain over +9% in 2016 and currently leads all equity asset classes with a +12% YTD return!

Key Match-up:

#4 China Fund (CHN) vs. #1 Vanguard Emerging Markets Index (VWO)

Last year the Vanguard Emerging Markets Index (VWO) was the Cinderella of our investment bracket. It was the lowest seed in the Final Four and made us look like we could pick a winner! This year VWO comes in as the #1 seed and we see them going all the way to win the whole tournament. Are we attempting to ride this winning horse too long?

Before we touch on emerging markets, let’s not ignore some other companies that could surprise people this year. For example, a fantastic way to insulate a portfolio from potential worries in Europe is to buy Japan. On an absolute basis, Japan may not be appealing but #2 seeded Sony Corp (SNE) could truly benefit from a strong dollar. Also look to buy European equities on weakness once the French elections are past us. We not only include a French exchange traded fund with iShares MSCI France Index (EWQ) but some French companies playing in the right space. Total SA (TOT) is a France based oil and gas leader that sports a huge 5.33% dividend. Prepare yourself for some shocks, like a potential “Frexit”, and even though the French economy is beaten up, there are some tremendous multinational companies based there which could prove to be immense bargains.

Even though there are some interesting countries to watch, and a couple that are receiving plenty of press with Trump as President (Russia and Mexico), we believe it will be China and its emerging market peers that drive markets in the International region of our bracket.

China initially looks to be a loser under a Trump agenda. He has not been shy about taking an “America First” stance on everything and has blamed unfair trade practices and gained considerable support from people who believe we’ve lost too many U.S. jobs to them. Fixing everything overnight with our connection to China and its immense economy won’t be as easy as waving a magic wand.

Ironically enough, emerging markets were rattled more than any other asset class after Trump won the election. There was quite a bit of initial doom and gloom amplified with worries over protectionism. Even if emerging markets cool down we see this area attracting more inflows from investors who have sat out some of the rally. Lastly, even though emerging markets come with more volatility and some very real unknowns with Trump’s trade stances, they are still cheap relative to other equity asset classes.

Bonds and Alternatives

We view this area of the bracket much like basketball analysts may have looked at the Atlantic Coast Conference (ACC). For those not in the know…the ACC has traditionally been the best conference in basketball and this year looked like it would be no different with nine bids in the field of 68.

After another positive year in the stock market, there are plenty of experts who constantly expect the worst. With no shortage of worrisome news it’s natural to wait for the other shoe to drop and go to areas that are historically safer than stocks. Bonds in 2017, however, will most likely perform much like the ACC after the first week of the tournament. The ACC only has one team left with North Carolina still alive and we simply see a similar result potentially panning out within the Bonds & Alternative asset class.

Key Match-up:

#9 Powershares Commodity Index Tracking Fund (DBC) vs. #3 SPDR Capital Barclays High Yield Bond ETF (JNK)

While it’s wrong to completely negate any asset class…even if it’s predicted to be a loser, we couldn’t be more clear with our advice on being cautious with traditional bond weightings. This is not a “stay away” warning but what we’re driving at is that even if Bonds have an outstanding year, it’s highly unlikely that it will be anything north of 3% returns. Over a rolling 12 month period bonds have basically lost -2% and are flat year to date.

All that said, we suggest keeping your bond exposure at the lower end of your recommended allocation but do not abandon the entire asset class. For example: If your portfolio model dictates a 40% weighting towards bonds, our suggestion would be to tap the brakes down towards about 30%. You may now likely ask where should the proceeds get allocated to?

Our answer for this is towards solid dividend producing blue chips in the sectors we covered earlier and towards the one asset class almost every investor needs but has minimal exposure or idea on how to implement. We are still huge proponents of increasing exposure to Alternatives. We’ve touched on this numerous times and most recently in the last edition of our free newsletter, “the Guide”.

Commodities in particular have huge promise in 2017. After a terrible 2015 commodities just enjoyed their best year since 2010 and it shouldn’t surprise you that most of the “weak hands” (including professional advisors) were not able to enjoy those returns. We see gains extending into 2017 and would keep a particular eye on industrial metals and energy commodities outside of oil. Natural gas was the top performing commodity in this space last year and still looks to be one of the leaders.

Final Four Summary:

The fun part of producing this article each year is that it allows us to share some of our thoughts, strategies, and the investment themes we believe will likely play out in the months ahead. It’s all done with the caveat that we may only own a handful of the 48 investments listed on our bracket. Truth be told…most experts who pick stocks are no more successful than you would be doing the same job! The real winners are the ones who are able to pick enough stocks in the right areas and maintain the proper asset allocation relative to their investment goals.

Obviously every tournament (in the case of March Madness) only has one final winner. With this exercise, however, we are able to build an intelligent portfolio that will have a number of “winners” along with some stinkers. As an investor you actually have the opportunity every year to own multiple “teams” in different “regions” (asset classes).

Long story short, don’t fixate on the one stock that wins it all; take a look at the whole picture. Looking back at our bracket from last year we had the following in the 2016 Final Four:

(1) Lockheed Martin (LMT) +21.96%

(2) Merck Absolute Return Currency Fund (MABFX) +2.71%

(3) United States Cellular (USM) -13.61%

(4) Vanguard Emerging Markets Index (VWO) +16.51%

This is a small sample size but it serves our point perfectly; you end up with two winners, one loser, and one that was fairly flat.

Granted, investing intelligently is a bit more complex than this but the majority of people make it far more stressful and confusing than it ever needs to be. 2017 will bring you so many worrisome headlines that you will always be on edge. We inevitably will see at least one correction where the market dips more than -10% from its peak but by the time the ball drops in Times Square on New Years Eve…2017 will most likely end up positive again.

Always expect the unexpected but don’t be surprised if we end up with over +9% returns on the S&P 500 this year. Lastly, to be fair to our loyal clients and assure them that we don’t give away the “secret sauce” to all readers of “Dear Mr. Market”…there is one stock that didn’t make it to the Final Four but almost every one of our portfolios will own it in the next few weeks. There are never any guarantees on an investment but this is one where we’re putting our money where our mouth is!

If you’re curious to know which one it is and if it’s a fit for your portfolio…feel free to reach out to us! Otherwise…good luck in your own brackets and enjoy the rest of the Big Dance!

Dean Foods: What did Santa wash down his cookies with?

unknown-4Dear Mr. Market:

Normally we write you a series of letters about the stock market or the economy. As we wrap up 2016, however, we decided to share an article that was recently published on Seeking Alpha. The proverbial ‘Santa Claus rally’ seems to perhaps have taken place before Christmas this year but what opportunities might there be going into 2017?

This interview reviews questions around a stock we’re interested in adding to some portfolios; Dean Foods (DF). Enjoy!

Summary

  • Despite trading at 52-week highs (and ~30% gain over the last three months), DF is still undervalued relative to peers.
  • As the clear market leader in fluid dairy, DF enjoys significant economies of scale – a critical advantage in a commodity-related business.
  • “Skating to wear the puck is going” with leading position in healthy dairy products such as TruMoo.
  • Friendly’s ice cream acquisition was immediately accretive, highly complementary, and further cemented its growing position in branded ice cream.
  • Takeover rumors that surfaced in October provide a floor for the stock.

What is one of your highest conviction ideas right now?

As plain and simple as a glass of milk might sound, we really like Dean Foods (NYSE:DF) right now. With a new year upon us and investors scouring for names that might benefit with a new administration, sometimes the best answer is to look at leading companies that are not in the spotlight but right in your fridge!

Can you provide a brief overview of what the company does?

Dean Foods is a leading U.S. processor and distributor of milk and other dairy products. The company has been around since 1925 and is headquartered in Dallas, TX. DF is surprisingly much larger than its next closest competitor but if you ask most investors to name any companies in this space they may not have a grasp of the landscape. Several of DF’s products are sold under licensed brand names and they have over 50 private-label brands in grocery stores nationwide. DF delivers their products via one of the most extensive direct store delivery (DSD) systems in the U.S.

What led you to take a position?

We actually owned DF several years ago and then sold the position. The catalyst for the sale was the divestiture of WhiteWave Foods Co. (NYSE:WWAV) in July of 2013. From a fundamental standpoint some of the same pricing concerns, intense competition, and inflationary concerns were swirling around the company as they are now. Ironically enough, talks of another potential acquisition also recently surfaced with a report in October of Hongsheng Beverage being potentially interested in buying DF.

Your investment decision-making process involves being value or growth agnostic – what value and growth qualities does DF have?

In our opinion, the greatest advantage of being style agnostic is that it allows you to scan the entire universe for companies and also avoid any preconceived biases. Albeit possibly warranting an entire discussion on its own…the value versus growth debate will always remain, but in general we believe value stocks will outperform over longer periods of time. There is of course always a reversion to the mean but 2016 has clearly seen value trounce growth.

DF just released its third quarter earnings and from a growth perspective it continues to perform well. The company actually has a healthy long-term earnings growth rate of 12%. From a valuation perspective, we believe this is where DF should attract some attention. We believe the company was extremely undervalued in August and early September and even after about a 31% bump since then, we think the stock has much more upside. S&P Capital IQ currently has a fair value calculation of $26 for DF.

Continue reading

March Madness: Final Four Investing Bracket 2016

March MadnessDear Mr. Market:

The entertainment and shock value you provide us with the stock market might meet its match over the next few weeks. Are you ready for some surprises and wild finishes? That’s what March Madness brings each and every year! It’s also an opportunity to take a high level view of the current investment environment with what lies ahead.

Six years ago we became the first Registered Investment Advisor to use the NCAA basketball tournament as a way to show our readers a forward-looking view on the stock market. We break down and assign each of the four “regions” with an asset class and then pick teams (companies) that we think have the best chance at doing well relative to others.

This year we will dive right into our investing bracket looks and how we think the remainder of 2016 will play out.

Click here to see the entire bracket.

To set the table let’s take a quick moment to recall last year and the undefeated Kentucky team. They came into the Final Four 38-0 and were a virtual lock to win it all but as you may remember the Wisconsin Badgers shocked everyone and provided the surprise millions of fans tune in for every year! This type of “upset” is exactly how we think 2016 will pan out in the Large Cap asset class.

Large Cap

Five years from now people will look back at 2015 as a year that the stock market extended its bull market run for one more year. Investors will exhibit a short-term memory lapse and forget that it actually was a very rough year with heightened volatility, the first correction, and a market that actually turned in negative numbers if you looked “under the hood”. The problem is…most people will not remember this and only look to see the S&P 500 finished positive +1.38%.

Without the “FANG” stock phenomena, however, 2015 would have been very negative. In other words, Continue reading

MPG Core Tactical 60/40: May 2015 Performance Update

MW-BB798_sm6040_20130422180557_MD

Dear Mr. Market:

If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and accurate crystal balls. For a refresher, see our first article on the MPG Core Tactical 60/40 portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (June 5, 2015).

Click here to compare the portfolio against the benchmark

What adjustments did we make?

We didn’t make any portfolio moves in May. Aside from collecting nice dividends through BND, LQD, and Conoco Philips (COP), the market environment did not warrant making any adjustments.

Why? Continue reading

Dividend Investing … are you chasing yields?

Chasing DividendsDear Mr. Market:

With interest rates at rock bottom levels many investors have gravitated to dividend yielding stocks over the last several years. Money markets, certificates of deposit and bonds simply are not delivering the rates that investors are looking for or have come to expect. It has left investors looking for other options to generate the income that they are counting on but what are the long-term ramifications? Are investors chasing yields with the risk of digging themselves into a deeper hole? What should investors look for and how can they manage their portfolios effectively?

It doesn’t take much effort to find a laundry list of stocks with very attractive yields. In fact if you simply run a screener on Google it will return a list of nearly 100 stocks that offer a yield of 10% or more! With the stock market continuing its upward trend investors have been moving to these stocks chasing the yields with little attention being paid to the underlying stock and the associated risks.

Before we jump into specific companies and industries let’s make sure we are all on the same page and understand what dividends are. Continue reading