It`s Still a Bull Market for Financial Assets

PersonalFinance
39 YEARS OF PROFITS IN BULL & BEAR MARKETS
Roger Conrad, Chief Investment Strategist
Marketwatch
In 1986, I penned my first article for Personal Finance. After contributing advice for
27 years, and serving as the newsletter’s
chief investment strategist for the past year,
it’s time for me to move on. Rest assured, I
leave you in highly capable hands.
Taking the helm now is Philip Springer, a
well-regarded industry veteran with whom I
worked when I first broke into the business.
Phil discusses his investment philosophy,
which closely mirrors my own, and provides
his current market outlook in the article at
your right.
Elsewhere in this issue, you’ll find the views
of new and familiar faces carrying forward
PF’s mission of providing sound investment
advice. My old friend Soula Stefanopoulos
highlights the benefits and pitfalls of “socially
responsible” investing in an era of expanding regulation, and Igor Greenwald focuses
on real estate investment trusts.
My feature article headline last issue
read “Toward Dow 20,000.” My point was
stocks over time are a very reliable builder
of wealth—but only if investors pick quality
companies and recognize no bull market
moves in a straight line.
US stocks’ current run began in March
2009. Only recently, however, has the bull
market been getting real media attention,
and many investors are deciding it’s time to
jump in with both feet.
That’s clear from near-record low readings
on the market’s primary fear gauge—the
Chicago Board Options Exchange Volatility Index (VIX)—as well as rock-bottom bond
yields and the recent slide in gold prices.
New money may indeed keep pushing
stocks higher this year, particularly with
sluggish global growth and Federal Reserve
policies holding down returns on bonds and
other interest-bearing investments. But bargains are increasingly scarce, particularly in
the most popular sectors.
It’s absolutely critical to be discriminating
about what you buy. Don’t chase the high flyers, be skeptical of lofty claims and take an
occasional profit when you have a big one.
Rising prices reflect higher expectations.
If a stock, sector or the broad market fails
to measure up, the consequences can be severe to your wealth.
PFnewsletter.com
Vol. XL, No. 9 • May 8, 2013
It’s Still a Bull Market
for Financial Assets
We’re looking for a stock-market rotation that offers new opportunities in the US—and maybe overseas, too.
BY PHILIP SPRINGER
tocks in the US hit a new all-time peak a few weeks ago, a bull run that
SAfter
begs three questions.
an advance of four-plus years, are prices now too high, particularly in
light of the various challenges confronting the US and the rest of the world?
Is it too late to invest? Should you cash in and head to the sidelines?
No, no and no.
In a lifetime of investing and many valuable lessons learned, two guiding
principles currently stand out for me:
Rule #1: Bull markets die of excess, not old age.
This demise can take various forms, such as investor euphoria, wild spending, easy credit, soaring inflation, tight monetary conditions and so on. Two
recent examples that led to bear markets were the new era in technology of
the late 1990s and the real estate/subprime lending insanity that precipitated the 2008 financial crisis. No such excesses exist today.
Indeed, this may well be the least-believed, least-loved bull market ever.
The S&P 500 is up about 135 percent from its March 2009 low. Yet sharetrading volume on all US exchanges has declined for four straight years,
according to Bloomberg.
Do you hear much
The Big Picture
chatter from relatives,
friends and neighbors
about the bull market? I
SPY
don’t.
Many investors,
ACWX
individual and instituEEM
tional alike, remain overweighted in bonds and
cash amid a slow emoSource: Bloomberg
tional recovery from the
wounds of the financial
crisis. Even the high-priced hedge funds remain befuddled, notching a
dismal average return of 3.8 percent in this year’s first quarter, versus
10.6 percent for the S&P 500.
In dramatic contrast, our PF Growth and Income Portfolios during
the first quarter returned 8.7 percent and 10.4 percent, respectively.
30%
Comparative Total Returns of the SPDR S&P 500 (SPY) ETF,
iShares MSCI ACWI ex US Index ETF (ACWX) and the iShares MSCI Emerging
Markets ETF (EEM), 04/19/11 to 04/19/13.
20
10
0
-10
-20
-30
Inside This Issue
The REIT Stuff for Yield Seekers
The New Role of SRI Funds
Growth Track
Income Report
A M J
J
A
S O
N D
J F M A M J
‘12
J
A
S O
N D
J F M A
‘13
NEXT ISSUE AVAILABLE ONLINE: MAY 18, 2013
3
5
6-7
8-9
Fund Focus
Article Update
The Big IRA Grab?
Recession Radar
PORTFOLIO EMAIL ALERTS: Sign up at www.PFnewsletter.com/alerts
10
11
12
12
Moreover, while the US economy is
demographics (more younger workers)
ties until the labor market improves
sluggish, a new recession isn’t on the
than Europe, China and Japan. The US
“substantially.”
horizon. PF’s proprietary Recession
economy, while not robust, is doing
The Fed also says it will keep shortRadar projects only a 30 percent posbetter than most. The housing market is
term interest rates near zero until
sibility of a downturn. And although
strong and energy costs are down.
the unemployment rate drops to 6.5
corporate earnings growth has slowed,
percent or inflation rises above 2.5
Most importantly from an investment
it continues to generally exceed
percent.
standpoint, we have the world’s best and
reduced expectations, as recent
Unemployment and inflation
quarterly results show.
Less Risk, More Gain
rates in the US are 7.6 percent and
Comparative Total Returns of the SPDR S&P 500 ETF (SPY)
Stock valuations? As always, opin1.5 percent, respectively. Conseand the PowerShares S&P 500 Low Volatility ETF (SPLV), 05/05/11 to 04/19/13.
40%
ions vary as to whether they’re too
quently, the Fed’s policy is unlikely
SPLV
30
high, still at a bargain basement low
to be reversed in the near future,
SPY
or just right. The S&P 500 currently 20
despite recent pundit chatter to the
is trading at about 14 times projected 10
contrary.
2013 earnings before extraordinary
By the way, Fed chairman Ben
0
items. Not cheap, but hardly lofty,
Bernanke
may or may not continue
- 10
particularly considering two key facafter his current term ends in January
- 20
tors that are often ignored.
2014. But the favorite to succeed
M J J A S O N D J F M A M J J A S O N D J F M A
‘12
‘13
One is low inflation, which increasSource: Bloomberg
him, Janet Yellen, would be expected
es the value of earnings and dividend
to continue the current program.
biggest assortment of established, finanstreams. The second is the paucity of atPresident Obama is highly unlikely
cially strong companies with dominant
tractive investment alternatives to stocks
to appoint someone who advocates a
global business franchises.
in today’s investment world.
tighter monetary policy.
Equities generally fare well in any
Moreover, these companies as a group
Amid today’s backdrop of lingering
comparison. When investing, the reality
are hiking dividend payouts and buying
financial crises, political dysfunction
is that most values are relative and few
back stock in record dollar amounts. It’s
and sluggish growth in the world’s
are absolute. Those two factors easily
only logical that global investors seeking
developed economies, anxious investors
justify price-to-earnings (P/E) ratios that good returns would gravitate toward the
understandably are increasingly interalready aren’t out of line.
US.
ested in the most bond-like equities they
can find. Many stocks of good-quality
It’s also worth noting here that the
Rule #2: Get the investment
companies carry yields of 2 percent, 3
breadth of the latest rally remains imtheme right.
percent or more.
pressive, a sign of strength. Most of the
large-cap
and
small-cap
indexes
are
at
The rewards of investing in lowerThere have been two primary dynamor near their highs, as is the important
risk stocks that pay good income with
ics of this investment era since global
NYSE advance-decline line.
capital-appreciation potential have
financial markets bottomed in 2009.
been considerable. Our second chart,
Investment theme #2: the quest for
Theme #1: US over the rest of the
“Less Risk, More Gain,” compares the
income
in
a
yield-starved
world.
The
world. Our stock market now has
S&P 500 with the PowerShares S&P
uniquely aggressive monetary easing
climbed back to about where it was 5
500 Low Volatility exchange-traded
among the world’s developed economies
1/2 years ago. Meanwhile, almost all
fund (NYSE: SPLV), which holds the
in a sluggish global economy has led to
other large markets are still well below
100 least-volatile stocks in the S&P
return-free
savings
yields
and
puny
bond
their 2007 peaks.
500. These equities usually also carry
yields.
That outperformance has persisted
above-average dividend yields.
So extreme is this situation that the
even over just the last two years.
The dividend-stock trend didn’t take
current, depressed 1.7 percent yield
Check out our graph, “The Big
hold
early in the bull market. But over
on
US
Treasury
issues
maturing
in
10
Picture.” Using the leading exchangethe
last
two years, even this conservative
years
(a
negative
return
after
inflation
traded funds (ETFs) as a proxy, it
ETF has outpaced the more volatile, theand taxes) is higher than those of the
compares the 24-month performance
oretically growth-oriented benchmark
world’s other major-market, 10-year
of the S&P 500 (NYSE: SPY) with
index, and that outperformance has even
government
bonds.
the iShares MSCI ACWI ex US ETF
accelerated in the last 12 months.
For
instance,
how
would
you
like
(NYSE: ACWX), which covers the
to invest in Japan government bonds
world outside the US; and the iShares
What’s Next?
at 0.6 percent and leave your money
Emerging Markets Index (NYSE:
there for a decade?
At this point, virtually everybody seems
EEM).
to think that US stocks are overbought
At this point, the US is the world’s
The Federal Reserve’s current
and overdue for a pullback, in the wake
most attractive market. Unlike Europe,
stance is that it will maintain its policy
of their strong advance since November.
the US dealt forcefully and quickly
of buying $85 billion a month in govwith the financial crisis. We have better
ernment bonds and mortgage securiIt’s hard to disagree, which is why I
PERSONAL FINANCE (ISSN 0164-7768) is published semi-monthly. © 2013 by Investing Daily, a division of Capitol Information Group, Inc. Address editorial correspondence to Investing Daily, 7600A Leesburg Pike, West Building,
Suite 300, Falls Church, VA 22043-2004. CHIEF INVESTMENT STRATEGIST: Roger S. Conrad; MANAGING DIRECTOR: John Persinos; INVESTMENT ANALYSTS: Jason Burack, Ari Charney, David Dittman, Jim Fink, Igor
Greenwald, Khoa Nguyen, Robert Rapier, Benjamin Shepherd, Soula Stefanopoulos; DIRECTOR OF DESIGN AND PRODUCTION: Melanie Selmer; CUSTOMER SERVICE DIRECTOR: Andrea Prendergast; PUBLISHER: Phil
Ash. SUBSCRIPTIONS: 24 issues, $99; in Canada, US$123; International US$201. POSTMASTER: Send address changes to: PO Box 3808, McLean, VA 22103. Send subscription-related correspondence to above address; enclose mailing label from a recent issue and a new address. For customer service, call 800-832-2330 or 703-394-4931. The information contained in Personal Finance has been carefully compiled from sources believed to be reliable, but
its accuracy is not guaranteed. Investing Daily, a division of Capitol Information Group, Inc. its officers and owners, the editors of Personal Finance and their respective affiliates, or accounts managed by such persons, may from time to
time have a position in investments referred to in this newsletter. Periodicals postage paid at Falls Church, VA, and additional mailing offices. Printed in U.S.A. R136740115. For permission to photocopy or use material electronically
from Personal Finance, ISSN #0164-7768, please access www.copyright.com or contact Copyright Clearance Center, Inc. (CCC) 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400. CCC is a not-for-profit organization that provides licenses and registration for a variety of users.
2
May 8, 2013
PERSONAL FINANCE
advise staying invested, perhaps takare cheaper than ours. It would also be using some of this money now to pay
ing some profits, and approaching new
a big plus if they were to join chronibills or expect to do so within five years,
positions with caution, all while heeding
cally depressed Japan, now financially
then you need to minimize your risk
our PF Portfolio buy limits. Still, when
juiced by a monetary policy even more with that portion of your wealth.
“everybody” agrees, something else
aggressive than ours, in stepping up
Your risk tolerance—how you deal
often happens.
their relative performance (in dollar
with volatility, uncertainty and price
While a meaningful pullback may or
terms for US investors).
declines—is also important. And it’s
may not occur, what we’d really like to
essential that you adjust your asset alsee is a change in market leadership.
location to protect yourself when
Valuation Snapshots
2013 Forward Price-to-Earnings (P/E) Ratios of Major Sectors*
As our “Valuation Snapshots”
market conditions deteriorate.
S&P 500
graph shows, the slower-growth,
Risk control is vital.
Utilities
higher-yielding sectors (telecom
That said, we currently recomTelecommunication Services
Information Technology
services, consumer staples and utilimend
a general allocation of 60
Financials
Health Care
ties) currently are the S&P 500’s
percent stocks, 20 percent bonds
Consumer Staples
most expensive. In contrast, energy,
and 20 percent cash. We’ll bring our
Consumer Discretionary
Industrials
financials and technology, all more
Portfolios in line with my allocation
Materials
Energy
sensitive to the broad economy, are
parameters, in future issues.
0
5
10
15
20
25
relatively undervalued.
Keeping so much in cash, despite
Source: Bloomberg
*as of 04/19/13
Recent indications of economic
its miniscule returns, is appropriate
softness, here in the US, Europe
in light of weak economic growth,
and even China, backed by readings of Keep Your Balance
huge government debt and political
lower inflation and the sharp decline
uncertainty in much of the world.
A key component of successful longin yields of Treasury securities, all sup- term investing is to always keep your risk
So there you have it: the outline of a
port the case for the strength in the
program for growth and income that
in check, which in turn leads to emomarket-leading, economy-resistant sec- tional calm, an absolute essential when it
should help you maintain and strengthtors. But for the stock market to keep
en your financial security in a challengcomes to making financial decisions.
rising, it needs meaningful participaing world.
There’s no one allocation mix that’s
tion from those other groups.
right for everybody. Instead, ask yourself
Speaking of laggards, the world’s
when you’ll need to draw on your invest- Philip Springer is the incoming chief investment strategist of Personal Finance.
other major stock markets generally
ment assets for living expenses. If you’re
The REIT Stuff for Yield Seekers
These two real-estate investment trusts and a related ETF are advantageously leveraged to economic growth.
BY IGOR GREENWALD
eal estate in the US is one of the
R
most promising markets in anything, anywhere.
diverse as those from data centers, cell
towers, prisons, mortgage bonds and
casinos.
Prices for residential and commerStill, most REITs stick to the familcial properties alike have only just
iar business of converting ownership
begun recovering from the 2008-09
of land and buildings into a predictcrash, and the gains appear to be
able, and hopefully growing, rental
gathering pace, aided by low interest
income stream. For frustrated Amerirates that are not expected to budge
can income investors, this has been a
until the economy improves dramatigodsend.
cally.
REITs’ average dividend yield,
Although the trend over the past
although much diminished at just
year in prices and in rents has been
shy of 4 percent, still comfortably
clearly up, recently burned develexceeds the recent 1.71 percent
opers have been slow to add supfor 10-year US Treasuries, while
The REIT Way
Comparative Total Returns of the PowerShares KBW Premium Yield Equity REIT ETF (KBWY),
ply, preferring to let confirmed
offering much better protection
Vanguard REIT Index ETF (VNQ), and the S&P 500 Index (SPX), 04/23/12 to 04/22/13.
demand dictate the pace.
against inflation.
50%
It’s all accrued to the advanREIT income and returns
40
KBWY
tage of REITs, the tax-advanare tied to economic growth,
30
taged real estate investment
another positive given the slowly
trusts whose payouts and capital
improving job market and steady
VNQ
20
gains have significantly outpaced
consumer spending gains.
SPX
10
stocks and bonds in recent years.
As the scars from the Great
0
Financial fashions can be
Recession slowly heal, investors
fickle, but REITs have been clear
are venturing from the tradi-10
A
M
J
J
A
S
O
N
D
J
F
M
A
outperformers for four decades,
tional safe harbors of Treasuries,
‘13
Source: Bloomberg
with the FTSE NAREIT Index
gold, money-market funds and
www.P Fnewsletter.c o m
703-394-4931
delivering a compound annual return
of 12.46 percent over that span versus 10.09 percent for the S&P 500
(through February).
REITs are not subject to corporate
income tax on the dividends they pay
shareholders, provided such dividends
amount to at least 90 percent of taxable income. Enacted in 1960 to permit mutual investment in commercial
property, the rules have been broadly
interpreted in recent years to shield
from corporate taxes profit streams as
May 8, 2013
3
saving accounts into the stock marYield Equity REIT Portfolio below
Trust (NYSE: HPT), which is up 21
ket’s tempting but turbulent waters.
37.
percent in 2013 yet still yields 6.7
Many have been naturally drawn to
The yield chase has also turned
percent.
REITs for their regular payouts, high
health care, retail, and diversified REHospitality Properties owns nearly
historic returns and relative transparITs, with their above-average yields,
300 hotels in the US, Canada and
ency.
into some of this year’s biggest winPuerto Rico, managed by such leadIn the current economic environners. (See “How They Stack Up.”)
ing brands as Marriott, Intercontinenment, a steady 4 percent yield with
Freestanding retail REITs, which
tal, Hyatt, Sonesta and Wyndham.
the potential for growth as well capispecialize in leasing single-tenant
Hospitality Properties also owns
tal appreciation sounds awfully good
properties, have been on the move in
145 highway rest stops managed by
to a great many.
April, tacking on 8 percent to trade
TravelCenters of America (NYSE:
Detractors keep warning that when
nearly 25 percent higher on the year.
TA), a business that has gained nothe Federal Reserve finally starts raisRegional mall REITS gained more
table momentum in recent months.
ing rates one of these years, REITs
than 9 percent between March 28
Many of Hospitality Properties’
will get crushed. But the historical
and April 24.
agreements with hotel operators
record argues otherwise.
include rent guarantees in the
How They Stack Up
REITs saw big annual gains in
event the business sours, yet ofComparative Total Returns of REITs by Sector.
2000, 2004 and 2006, even as
fer incentives if revenue exceeds
Retail
interest rates climbed, and they
minimum thresholds. The latter
broke even during the 1994
will be more relevant than the
Residential
bond rout. The bad years in
former in the current environOffice
1990 and 2007-08 coincided
ment.
Industrial
with real estate slumps, while in
Revenue per available room
Hotel & Motel
1998 REITs also got clubbed
(RevPAR), a key hotel indus3-Year
while interest rates fell.
try metric, was up 8.4 percent
1-Year
Health Care
Nonetheless, REITs will clearly
year-over-year in the most recent
YTD*
Diversified
need to increase their distribuquarter, as occupancy rose to
0%
10%
20%
30%
40%
50%
tions to remain competitive
68.8 percent and average day
Year to Date: 01/02/13 to 04/19/13
when rates do rise. That will be
rates climbed 6.1 percent.
Source: Morningstar
easier for those in sectors leverRecently renovated hotels
aged to higher economic growth.
delivered RevPAR gains of more
And smaller, riskier REITs may also
The freestanding retail REIT
than 12 percent, and once Hospitality
grow faster than big, safe ones.
category includes perennial champ
Properties completes its extensive reThese are exactly the sorts of REITs National Retail Properties (NYSE:
modeling program in 2014, it should
that are winning the current chase for
NNN), a provider of triple-net singlehave more scope to increase distribuyield. They’re likely to continue winoccupant leases to retail chains that
tions.
ning it while rates stay low, as long
leave all maintenance expenses as the
In February, Hospitality Properties
the economy keeps healing.
tenant’s responsibility.
announced it would invest $375 milFor proof, look no further than the
National’s occupancy rate stood just lion in the Latin American, European
recent performance gap between a
shy of 98 percent at the end of last
and US holdings of a Spanish hotel
market-cap weighted US REITs proxy year, and though its units are up 26
group. In March, it completed an
such as the Vanguard REIT ETF
percent year-to-date, they still yield an equity offering raising much of that
(NYSE: VNQ) and a yield-attuned
enticing 4.1 percent.
contribution.
one such as the PowerShares KBW
The REIT grew funds from opThe discount on Hospitality ProperPremium Yield Equity REIT Porterations by more than 8 percent in
ties relative to other lodging REITs may
folio (NYSE: KBWY).
each of the last two years, and has
have to do with its management by Reit
Unlike the Vanguard fund, KBWY
increased annual distributions for 23
Management & Research (RMR), an
is weighted by yield from among 24
years in a row.
outside adviser owned by Barry Portnoy
to 40 small-cap and midcap REITs.
National’s leases run for 15 to
and his son Adam Portnoy.
(See “The REIT Way.”)
20 years, the sort of commitment
RMR is also the outside manKBWY’s monthly distributions in
palatable only to the strongest and
ager of the CommonWealth REIT
2013 work out to an annual yield
fastest growing retail chains. Only
(NYSE: CWH), and in that context
of 4.5 percent, while VNQ yields
7 percent of current leases are up
has been accused by hedge funds of
3.4 percent on a trailing basis. The
before 2016. Market cap leverage is
mismanaging CommonWealth to its
gap would have been wider still but
modest at 31 percent.
private benefit.
for the fact that KBWY has risen 20
National’s long, strong dividend
However, it would be hard to levy
percent so far this year, versus 12.5
record is matched only but its history
the same charge over RMR’s manpercent for VNQ and 11 percent for
of capital gains, which have averaged
agement of Hospitality Properties,
the S&P 500 (all figures as of April
more than 13 percent annually over
which has delivered strong returns
25.)
the last two decades. Buy National
that should only get stronger. Buy
With low interest rates and the
Retail Properties below 43.
Hospitality Properties Trust berecovery in real estate prices muting
Lodging and resort REITs also
low 33.
credit risk, buyers have clearly gravihave extensive leverage to economic
Igor Greenwald is an investment analyst at
tated toward the largest payouts. Buy
growth and have performed well this
Personal Finance and The Energy Strategist.
the PowerShares KBW Premium
year, led by Hospitality Properties
4
May 8, 2013
PERSONAL FINANCE
The New Role of SRI Funds
No longer just for “do-gooders,” socially responsible investing is increasingly used to minimize risk and enhance returns.
BY SOULA STEFANOPOULOS
ou probably think that socially reY
sponsible investing (SRI) is all about
avoiding “sin” stocks that benefit from
tobacco, alcohol, weapons, gambling,
and the like. Think again.
The focus now is on factors that are
much more related to stock performance: environmental, social and governance issues, collectively known as ESG.
The premise is that companies with
poor worker-safety records or absentee
Boards are more exposed to such risks
as costly litigation, fines, high employee
turnover, and bad public relations that
can hurt sales.
Recent case in point: The deadly
garment factory collapse in late April in
Bangladesh, and its adverse fallout for
clothing retailers based in the US and
Europe.
By contrast, the top ESG scorers are
likely to be innovators and market leaders.
Stock-performance data back up such
claims. From 2006 to 2010, investors
would have added 2 percentage points
annually to their returns by investing
only in US companies with above-average ESG ratings, says a study by RCM,
part of the giant investment firm Allianz
Global Investors.
In a 2005 to 2007 study, Goldman
Sachs (NYSE: GS) found that adding
ESG screening led to stock returns that
were 25 percent higher, on average.
Consequently, an increasing number
of institutional investors are incorporating ESG screening, using ratings
provided by a slew of third parties and
indexes.
This year, for example, California’s
two largest pension funds (CalPERs and
CalSTERs) both added an ESG component to their investment process.
The Parnassus Advantage
Unless you’re capable of doing your
own research, the only way to add an
ESG component to your portfolio is
through an actively managed Socially
Responsible Investing (SRI) fund.
However, the vast majority of SRI
funds are unlikely to provide any
monetary benefit to a stock portfolio.
They tend to be long-term underperformers with above-average fees and/
or overly concentrated in sectors such
as technology.
One of the exceptions is San Francisco-based Parnassus Equity Income
Fund (PRBLX), which has already been
discovered by institutional investors.
Assets were almost $6 billion recently,
making PRBLX the largest SRI fund.
Still, all the new money doesn’t seem to
have affected this fund’s performance or
investment approach.
Founded in 1984, Parnassus Investments is first and foremost a value-investing shop that uses ESG screening as
an added layer of downside protection.
On the firm’s 12-member research
team, to which all the fund managers
belong, three analysts focus exclusively
on ESG screening, using an in-house
rating system as well as information from
third parties.
The results have been impressive.
Of Parnassus’ five stock funds, three
garner Morningstar’s coveted five-star
rating, including PRBLX.
Launched in 1992, PRBLX has gained
about twice as much as the S&P 500
during the past 15 years. During 2008,
when the S&P 500 sank 37 percent, PRBLX was down much less—23 percent.
(See “Long-Term Winner”.)
In fact, longtime manager Todd
Ahlsten, who has most of his own net
worth in PRBLX, says he spends most of
his time figuring out how to avoid losing
money.
Therefore, most of PRBLX’s 40 or
so holdings are large, dividend-paying
companies, such as Procter & Gamble
(NYSE: PG), PepsiCo (NYSE: PEP)
and Waste Management (NYSE: WM),
which is expanding into recycling.
The fund also features wide sec-
tor diversification: 24 percent is in
industrials; 23 percent, consumer
staples; 14 percent, technology; and
12 percent, health care.
The stake in industrials is largely
positions in market-leading logistics
and infrastructure companies whose
massive distribution networks are
leveraged to a pick-up in economic
growth. Included here are Expeditors International (NSDQ: EXPD),
CH Robinson (NSDQ: CHRW) and
Praxair (NYSE: PX).
A major new position is in PF Growth
Portfolio pick Mondelez International
(NSDQ: MDLZ). Parnassus likes Mondelez’s competitive advantage in global
snack foods, also noting that it has been
a leader in nutrition labeling and education, low-calorie alternatives and has a
highly rated workplace.
Unlike many SRI funds, PRBLX
doesn’t avoid the energy sector, where
its focus now is on US natural gas storage, distribution and utilities.
Whistling While They Work
Two smaller Parnassus funds also
merit consideration, although they’re
not as diversified: Parnassus MidCap (PARMX), a smaller-stock version of Parnassus Equity Income, and
Parnassus Workplace Fund (PARWX), both launched in 2005.
The Workplace Fund seeks out
companies with stellar working environments, the idea being that happy
employees will work harder and be
more loyal. Recently, the top holding
was credit card company Capital One
Financial (NYSE: COF).
To the surprise of many, the Workplace Fund has been a top performer,
up more than 10 percent annually
the past five years versus just under 5
percent for the S&P 500.
Soula Stefanopoulos is an investment analyst at Personal Finance and Benjamin
Shepherd’s Wall Street.
Long-Term Winner
RecentTotal Return
Expense Assets
Fund
Symbol Yield
(Annualized) Ratio ($ Billions)
Year-to-Date 3 yr 5 yr 10 yr 15 yr
2008 Parnassus Equity Income
PRBLX
2.3%
11.7%
10.9% 7.6% 9.2% 8.8% -23.0%
0.9%
$5.9
S&P 500 n/a
2.1
9.7
11.4 4.6
7.9
4.1
-37.0
n/a
n/a
*Data as of 04/19/2013. Source: Morningstar.
www.P Fnewsletter.c o m
703-394-4931
May 8, 2013
5
GROWTH
TRACK
Through a Glass, Brightly
The latest earnings reports from our Growth holdings bring mixed tidings, but the companies still enjoy solid prospects.
BY JOHN PERSINOS
the glass half empty or half full?
Iing,sThat’s
the question analysts are askas they ponder mixed economic
indicators. As investors, we prefer to
pose the question differently: How
can we make the glass bigger?
Some of the latest first-quarter
earnings reports from our Growth
Portfolio are less than stellar, but all of
our holdings nonetheless face brighter
days ahead. Here are the highlights.
Baxter International (NYSE: BAX)
reported that first-quarter earnings fell
6.1 percent to $552 million, for $1.05
in earnings per share (EPS), stemming
from charges related to its acquisition
in December of medical equipment
maker Grambro AB for $2.8 billion.
Growth in emerging markets helped
drive revenue up 1.8 percent to $3.6
billion.
Baxter’s earnings guidance for
2013 is $4.60 to $4.70 in EPS, which
includes the impact of the Gambro
acquisition.
Baxter develops, manufactures and
markets treatments for hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other complex
medical conditions.
These diseases and ailments represent
a huge market in every country in the
world, providing Baxter with substantial
growth opportunities. Baxter International is a buy up to 73.
Honeywell International (NYSE:
HON) reported first-quarter earnings
reached $966 million, an increase of
17 percent compared to the previous
quarter. Revenue remained flat at $9.3
billion.
Honeywell’s bottom line was
enhanced by healthy gross margins
of 16.2 percent, an increase of 15.2
percent from the previous year. The
company’s $1.21 in EPS beat analysts’
estimates of $1.14 in EPS.
Honeywell will benefit from the upsurge in aerospace activity this year, in
both the civilian and military sectors.
The company produces cockpit
technology for airliners and jet fighters. Robust overseas demand for
these aircraft in Asia should offset any
6
May 8, 2013
Pentagon cutbacks or US
economic slowdown.
$30
Honeywell also makes
28
cybersecurity products that
26
are growing in popularity, as
corporations and government 24
agencies step-up efforts to
22
fight hacking.
Management raised its
20
full-year earnings guidance
18
to $4.80 to $4.95 in EPS,
A
M
up from $4.75 to $4.95.
Honeywell International is
a buy up to 70.
Johnson & Johnson’s (NYSE: JNJ)
first-quarter earnings reached $3.5 billion, a decline of 11 percent from the
same period a year ago, mostly due to a
$600 million one-time item associated
with the acquisition last June of Synthes.
Synthes offers programs and services
to help hospitals better manage the
purchasing process. The company’s
acquisition dovetails with Johnson &
Johnson’s product mix and also reflects
the growing trend toward third-party
administration of health care provision.
Johnson & Johnson’s first-quarter
revenue hit $17.5 billion, an increase
of 8.5 percent from the year-ago quarter and slightly beating Wall Street’s
estimate of $17.4 billion. Earnings
came in at $4.1 billion, up 8 percent
from the year-ago quarter.
The company’s first-quarter growth
was driven by strong sales of its
over-the-counter medicines, which
increased 2.2 percent quarter-overquarter to $3.7 billion, as well as a 10
percent jump in medical device sales
due to the addition of Synthes. Johnson & Johnson is a buy up to 75.
Philip Morris International’s
(NYSE: PM) first-quarter earnings fell
1.7 percent to $2.1 billion or $1.28
in EPS, missing analysts’ estimates
of $1.34 in EPS. The drop stemmed
from a 6.5 percent decline in cigarette
shipments to 205 billion units during
the quarter.
Sales in Europe dropped 10 percent
quarter over quarter, because of recessions throughout the Continent. Sales
in Asia also fell 10 percent, as lagging
volumes in the Philippines pulled
Intel Corp (NSDQ: INTC)
Stock price, 04/24/12 to 04/19/13
J
J
A
S
O
N
D
J
‘13
F
M
A
Source: Bloomberg
down the entire region.
The big surprise from Philip Morris
was the decline in popularity of the
company’s iconic Marlboro brand,
which experienced a 4.8 percent drop
in shipments during the quarter, as it
fell victim to aggressive price undercutting by competitors.
On March 13, the company announced that COO André Calantzopoulos will become its CEO immediately following its shareholder meeting
on May 8. Current Chairman and
CEO Louis Camilleri will remain as
chairman of the board.
Philip Morris lowered its full-year
guidance to $5.55 to $5.65 in EPS,
down from $5.68 to $5.78. Nonetheless, we think the Western tastes of an
expanding middle class overseas continue to bode well for the company.
Philip Morris International remains
a buy up to 95.
Union Pacific’s (NYSE: UNP) firstquarter earnings were lifted by higher
rates, despite a drop of 2 percent in
coal and agricultural shipments. Earnings were $957 million, or $2.03 in
EPS, up 11 percent from the same
year-ago quarter. Revenue was $5.3
billion, a year-over-year increase of 3.7
percent, beating analysts’ expectations.
Despite the decrease in coal demand
and concomitant shipments, the company expects overall shipping volumes
to rise in tandem with the improving
economy. Union Pacific is a buy up to
135.
John Persinos is managing director of Personal Finance and its parent website, Investing Daily.
PERSONAL FINANCE
Best Buy: Intel
Intel Corp (NSDQ: INTC), the
world’s largest semiconductor maker,
has been struggling over the past year
(see stock price graph, page 6). However, we think the company’s growth
prospects make its stock a rare bargain.
The company reported that firstquarter earnings fell 25 percent to $2
billion, due to lower sales of its PC
chips, as laptop sales continue to plummet in the face of competition from
smartphones, tablets and other mobile
devices.
Intel’s first-quarter revenue was
$12.6 billion, a fall of 3 percent from
the same year-ago quarter, largely
stemming from the company’s PC Client segment year-over-year drop of 6
percent to $8 billion.
Nonetheless, the company boosted
its sales of high-end chips for data
centers by 7 percent, to $2.6 billion for
the quarter.
Global PC shipments dropped 14
percent compared to the year-ago
quarter, their largest decline since
1994.
Intel has suffered greatly from its
tardiness in getting aboard the smartphone revolution, but it’s now making
up for lost time, plowing considerable
amounts of its huge research and
development (R&D) war chest into everfaster chips for ever-smaller devices.
Intel intends to spend $13 billion
on R&D in 2013, compared to $10.2
billion in 2012 and $8.4 billion in
2011. The company’s Mobility Group
manufactures and produces processors for notebook computers and all
other mobile devices and will continue
to represent a growing percentage of
total revenue.
The Mobility Group in the second
quarter plans to begin shipping
next-generation Haswell chips, which
are used in mobile devices such as
the company’s Ultrabooks. Based on
this shift in emphasis, the company
released a relatively positive outlook of
0.4 percent sales growth in 2013 to
$53.5 billion.
We haven’t lost faith in Intel’s ability
to reinvent itself and remain innovative.
In addition to resetting its course for
mobile devices, the company also is a
major player in the booming cybersecurity market and is poised to profit
from growing concerns over hacking.
According to a 2012 report
released by the Norton consultancy,
the global price tag for cybercrime is
$110 billion annually, in the form of
fraud, theft, repairs and loss.
Intel recently announced its leading
role in a research consortium tasked
with devising new security solutions for
organizations of all types. Intel Corp is
a buy up to 29.50.
www.P Fnewsletter.c o m
703-394-4931
GROWTH PORTFOLIO
The following advice is suitable for investors who seek long-term capital appreciation. The Growth Portfolio is a
top-down portfolio that tracks the 10 S&P 500 sectors. The Growth Portfolio’s allocation to each sector reflects
our outlook for the group. New subscribers should consider allocating funds to the top-listed names in the sectors with the heaviest weighting.
Security
(Exchange: Symbol)
Date
Added
Recent
Total
Price* Yield* Return+Advice#
Analyst
Consumer Staples (Growth Portfolio Allocation: 19.0%, S&P 500 Weighting: 11.4%*)
Diageo (NYSE: DEO)
09/14/11 $123.12 1.8% 64.3% Buy < 115
Nguyen
Hillshire Brands (NYSE: HSH)
06/28/12 35.62
1.4
5.0
Buy < 35
Dittman
Kimberly-Clark Corp (NYSE: KMB) 03/25/09 105.49
3.1 165.3
Buy < 95
Dittman
Kraft Foods (NSDQ: KRFT)
10/03/12 51.19
3.9 15.9
Buy < 45
Fink
Mondelez International (NSDQ: MDLZ)
03/28/12 31.86
1.6 31.4
Buy < 27
Fink
Philip Morris International (NYSE: PM)
06/27/12 93.60
3.6 13.5
Buy < 95
Nguyen
Energy (18.0%, 10.5%)
EOG Resources (NYSE: EOG)
12/10/08 117.00
0.6 63.7
Buy < 125
Linn Energy LLC (NSDQ: LINE)
12/13/06 38.95
7.4 129.8
Buy < 40
SeaDrill (NYSE: SDRL)
05/26/10 36.35
9.4 118.5
Buy < 45
Tortoise Energy Infrastructure (NYSE: TYG) 12/13/06
46.21
4.9 101.3
Buy < 44
Rapier
Rapier
Rapier
Rapier
Health Care (17.0%, 13.0%)
Allergan (NYSE: AGN)
03/28/12 114.09
0.2 21.6
Buy < 100
Baxter International (NYSE: BAX)
12/10/08 69.85
2.6 51.6
Buy < 73
Bayer (OTC: BAYZF, BAYRY)
09/10/03 101.55
2.4 483.8
Buy < 90
Johnson & Johnson (NYSE: JNJ)
10/12/11 85.45
2.9 40.1
Buy < 75
Novartis (NYSE: NVS)
12/10/08 73.23
2.8 95.9
Buy < 65
Shepherd
Shepherd
Shepherd
Shepherd
Shepherd
Information Technology (15.0%, 17.4%)
Apple (NSDQ: AAPL)
04/03/13 406.13
3.0 -6.0
Buy < 480
Persinos
Cisco Systems (NSDQ: CSCO)
02/24/10 20.91
3.3 -10.1
Buy < 23
Persinos
Intel (NSDQ: INTC)
04/11/12 23.38
3.9 -12.9
Buy < 29.50
Persinos
Qualcomm (NSDQ: QCOM)
01/12/11 65.35
2.1 29.3
Buy < 70
Persinos
Materials (10.0%, 3.3%)
BHP Billiton (NYSE: BHP)
08/25/10 64.50
3.5
7.0
Buy < 100
Bunge (NYSE: BG)
05/10/06 68.88
1.6 23.2
Buy < 75
Goldcorp (NYSE: GG)
12/24/08 27.75
2.2
0.4
Buy < 55
Monsanto (NYSE: MON)
11/12/08 103.75
1.4 41.6
Buy < 90
Dittman
Conrad
Conrad
Conrad
Industrials (9.0%, 9.8%)
ABB (NYSE: ABB)
03/10/10 21.72
Deere & Co (NYSE: DE)
03/23/11 84.78
Honeywell International (NYSE: HON)
05/11/11 74.76
Illinois Tool Works (NYSE: ITW)
05/12/10 62.76
Union Pacific (NYSE: UNP)
12/14/11 147.43
Conrad
Dittman
Persinos
Conrad
Shepherd
3.3
2.4
2.2
2.4
1.9
12.8
-2.7
28.5
32.2
53.5
Buy < 29
Buy < 100
Buy < 70
Buy < 65
Buy < 135
Financials (6.0%, 16.0%)
Discover Financial Services (NYSE: DFS) 11/24/10
HDFC Bank (NYSE: HDB)
08/26/09
44.33
41.39
1.8 144.2
0.5 115.1
Buy < 42
Buy < 37
Dittman
Dittman
Consumer Discretionary (4.0%, 11.8%)
Home Depot (NYSE: HD)
07/11/12 73.38
2.1 44.2
Buy < 60
Conrad
Scripps Networks Interactive (NYSE: SNI) 02/23/11
67.43
0.9 33.4
Buy < 60
Conrad
Telecom Services (2.0%, 3.2%)
China Mobile (NYSE: CHL)
02/11/09 53.17
3.9 31.0
Buy < 60
Conrad
Utilities (0.0%, 3.6%)
*As of 04/23/13, close. Estimated yields for the next 12 months can differ from actual dividends because of company policy. Estimated yields based on company filings because a full year’s dividends have not yet been paid. +Returns are calculated from the date added. Returns for sold stocks are the returns on the date they were sold. Sold
stocks will continue to appear in the Portfolio for two subsequent issues. #Buy at or below prices given. All buy prices
are in US dollars. Hold means we’re looking to convert the advice to a buy or a sell within the next two months. We
consider our Portfolio to consist of all stocks rated either buy or hold.
To buy all or part of the Growth Portfolio in one transaction, go to PFnewsletter.com/Folio.
To ask questions about Folio Investing, please call 1-888-973-7890.
Personal Finance and Folio Investing do not have a financial relationship.
May 8, 2013
7
INCOME
REPORT
Investing to Grow
Our Income picks boast strong businesses that are holding them in good stead amid challenging conditions.
BY ARI CHARNEY
ith the market trading just below
W
its all-time high, many of the stocks
in our Income Portfolio are priced near
or well above our buy targets. As such,
investors should patiently wait for stocks
to drop below these targets before building new positions or adding to existing
positions.
If you can avoid chasing our stocks
higher, you’ll eventually have the opportunity to buy shares at a discount to
our estimate of fair value, while locking
in yields at a higher rate. That’s the key
to producing solid gains in growth and
income over the long term.
Now that earnings season is underway,
the good news is that our stocks’ underlying companies are largely performing well in what remains a challenging
economy.
After enduring a difficult fourth
quarter in which expenses relating to
Superstorm Sandy as well as employee
pensions significantly eroded its bottom line, Verizon Communications
(NYSE: VZ) bounced back by growing
first-quarter earnings to $0.68 per share,
a 15.3 percent jump from a year ago.
The wireless segment’s historic
quarter resulted in record margins of
32.9 percent on $6.4 billion in operating income. Verizon’s investment in
broadening its 4G LTE (long-term
evolution) network successfully enticed
new customers, whose demand for dataintensive wireless broadband and video
continues expanding with each advance
in smartphone technology.
The company added 677,000 retail
postpaid customers to its rolls, the most
ever in any quarter, which increased its
postpaid base to 93.2 million.
Verizon’s average revenue per
account climbed 6.9 percent, to
$150.27 per month, thanks to its
Share Everything Plan, which allows
customers to add multiple devices to
each account and now represents 30
percent of all retail postpaid accounts.
Equally important, smartphone penetration rose to 61.4 percent of the
postpaid customer base, a significant
14.6 percentage point improvement
from a year ago.
By contrast, the wireline segment’s
margins thinned to 0.1 percent on
8
May 8, 2013
just $13 million in operating profits.
The one major bright spot was a 15.1
percent rise in revenue from its FiOS
business, which offers digital video,
telephone and Internet service via a
fiber-optic network.
Roughly 26.5 percent of the fixedline segment’s $9.8 billion in revenue
was derived from FiOS, and the service added 188,000 Internet connections and 169,000 video connections
during the quarter for growth of 12
percent and 12.5 percent, respectively.
The strength of the wireless unit
enabled Verizon to generate a substantial
$3.9 billion in free cash flow, up 64.3
percent year over year. The company
ended the quarter with $5.5 billion in
cash on its balance sheet.
Although Verizon’s shares still yield
an attractive 4 percent, income-hungry
investors have pushed the stock well
above our buy target of 45.
Project-Driven Growth
Atlanta, Ga.-based electric utility
Southern Co’s (NYSE: SO) shares suffered a modest decline after the company took a $333 million after-tax charge
($0.38 per share) against first-quarter
earnings due to higher projected costs
for constructing its new integrated gasification combined cycle (IGCC) facility in
Kemper County, Miss.
The company intends to fully
absorb the higher costs incurred by
the project, rather than petition state
regulators to further increase customers’ base rates.
Excluding after-tax charges, Southern’s earnings per share (EPS) grew
16.7 percent year over year, to $0.49.
Although winter was still warmer than
average, the season came closer to
normal temperatures than last year.
In fact, management attributes a
majority of the $0.07 increase in EPS to
cooler weather, as heating degree days,
a measurement that reflects demand for
heating energy, jumped 54 percent from
a year ago.
As a result, kilowatt-hour sales to
retail customers in Southern’s four-state
service area climbed 2.3 percent and
residential energy sales rose 8.3 percent.
In addition to its IGCC project,
Southern is also building two new
nuclear reactors at its Vogtle site in
Georgia. Management reports that
overall construction is now more than
40 percent complete.
Beyond Southern’s huge investment
in new projects, management also sees
a strengthening regional economy as
an important growth driver. During the quarter, the company added
13,000 new residential customers of
which about half were new connections resulting from a rebound in the
real estate market.
Southern’s steady performance
enabled management to increase its
quarterly payout by 3.6 percent, to an
annual rate of $2.03 per share.
Southern’s shares yield 4.1 percent,
but the stock currently trades almost 7
percent above our buy target of 45.
Italian super oil Eni’s (NYSE: E)
first-quarter profits fell 42.1 percent
from a year ago, to EUR1.4 billion,
due to lower crude oil prices as well
as disruptions to operations in Libya,
Nigeria and the UK. Consequently,
oil and natural gas production fell 4.9
percent to 1.6 million barrels of oil
equivalent (BOE) per day.
However, those issues have been
largely resolved—Libyan production is
back to around 260,000 BOE per day
and pipelines in Nigeria damaged during
last year’s floods have been repaired.
Given Eni’s robust investment in
growth projects in countries such as
Kazakhstan, Angola and Algeria, management has reiterated its guidance for
full-year 2013 production to rise to 1.7
million BOE per day.
In March, Eni agreed to sell a 28.6
percent stake in its East African operation to China National Petroleum
Corp in a USD4.2 billion deal. Eni’s
subsidiary holds a 70 percent interest
in a major natural gas field off Mozambique’s shore.
Eni’s shares are down almost 11
percent from their 52-week high
and currently yield 4.6 percent. Eni
remains a buy up to 50.
Ari Charney is an investment analyst at
Personal Finance.
PERSONAL FINANCE
Best Buy: FreeportMcMoRan
Over the past two weeks, FreeportMcMoRan Copper & Gold’s (NYSE:
FCX) shares fell as much as 19.9 percent from their intra-day high on April
9, as gold and copper prices tumbled
amid a fear-driven selloff.
Copper traders worried about what
China’s slowdown portends for the
global economy. And gold traders
panicked at the prospect of troubled
European countries following Cyprus’
lead by liquidating gold reserves to
finance bailouts.
However, positive economic data
caused copper prices to rebound 3.4
percent from the 18-month low they hit
on April 23, with May futures recently
settling at $3.24 a pound.
Reports of strong central bank
demand for gold pushed the yellow
metal up 7.8 percent from its intra-day
low on April 15, with the contract for
June delivery settling at $1,462 per
troy ounce.
Freeport’s shares have similarly
recovered, rising 9.6 percent since
hitting a 52-week low on April 18,
although they’re still down almost 32
percent from their 52-week high.
The mining giant, which is one of
the few pure-plays on copper, derived
79.4 percent of its $18 billion in
revenue last year from the red metal,
while gold and molybdenum accounted for 9.4 percent and 6.7 percent of
revenue, respectively.
Although Freeport’s first-quarter
profits fell 15.2 percent, to $648
million, that was still good enough to
beat analyst estimates, thanks in part
to cost-containment as well as copper
production that exceeded management’s earlier forecast.
Management expects to sell 4.3 billion pounds of copper in 2013 versus
3.6 billion pounds last year, with
net cash costs averaging $1.45 per
pound, down almost 6 percent from a
year ago.
After a dismal 2012 in which earnings per share (EPS) fell almost 36 percent, analysts expect Freeport’s EPS to
rise nearly 20 percent this year. But the
company’s bid to diversify its resource
portfolio into oil and natural gas is
clouding this picture considerably.
Disgruntled shareholders could force
Freeport to walk away from its pending
acquisitions of Plains Exploration &
Production Co (NYSE: PXP) and McMoRan Exploration Co (NYSE: MMR),
especially if shareholders of the former
require a sweetener.
While risk-averse investors should
steer clear of Freeport’s stock until
this uncertainty has lifted, it offers a
worthwhile contrarian play for income
investors with an aggressive streak.
Buy Freeport-McMoRan Copper &
Gold up to 42.
www.P Fnewsletter.c o m
703-394-4931
INCOME PORTFOLIO
The following investment advice is suitable for investors who seek a high level of current income while preserving
wealth. Typically, these types of investors are retired or less than five years from retirement.
Stocks and Preferreds (70%)
Date
Recent Total
Name (Exchange: Symbol)
Recomm. Price* Yield* Return+Advice#
Analyst
Asia
CLP Holdings (OTC: CLPHY)
08/13/08 $8.75 5.8% 24.0% Buy < 9
Conrad
Australia
AGL Energy (ASX: AGK, OTC: AGLNY)10/24/12 15.66 5.7
10.8 Buy < 16
APA Group (ASX: APA, OTC: APAJF) 10/12/11
6.58 5.4
68.6 Buy < 5.50
Dittman
Dittman
Canada
Canadian Apt Prop REIT (OTC: CDPYF) 10/12/05 24.62 4.4 225.3 Buy < 24
Vermilion Energy (OTC: VET)
04/14/04 47.44 4.9 518.8 Buy < 52
Dittman
Dittman
Electric Utilities
Dominion Resources (NYSE: D)
08/05/87 61.01 3.7 1,647.4 Buy < 55
Exelon Corp (NYSE: EXC)
08/15/12 36.87 3.4
1.0 Buy < 35
Southern Co (NYSE: SO)
07/09/97 48.65 4.2 674.0 Buy < 45
Xcel Energy (NYSE: XEL)
09/24/08 30.93 3.5
84.4 Buy < 26
Conrad
Conrad
Conrad
Conrad
Financials
Arrow Financial Corp (NSDQ: AROW) 12/24/08 23.84 4.2
34.2 Buy < 28
Dittman
Health Care
Bristol-Myers Squibb (NYSE: BMY)
02/10/10 42.30 3.3 103.7 Buy < 34
Shepherd
Metals
Freeport-McMoRan Copper & Gold (NYSE: FCX) 05/09/12
28.52 4.4
-16.8 Buy < 42
Conrad
Master Limited Partnerships
Alliance Resource Partners (NSDQ: ARLP)
11/28/12 66.95 6.6
22.3 Buy < 62
Enterprise Products Partners LP (NYSE: EPD)
12/13/06 61.37 4.3 207.6 Buy < 56
Energy Transfer Partners (NYSE: ETP) 05/23/12 48.58 7.4
13.6 Buy < 50
Genesis Energy LP (NYSE: GEL)
06/09/10 47.98 4.1 215.7 Buy < 35
Spectra Energy Partners LP (NYSE: SEP) 06/24/09 37.62 5.3 126.3 Buy < 34
Conrad
Charney
Conrad
Conrad
Charney
Preferred Stocks
AES Corp 6.75% Pref C (NYSE: AES C, CUSIP: 00808N202)**
02/08/06 50.34 6.7
42.9 Buy < 50
Cons Energy $4.50 Pref B (NYSE: CMS B, CUSIP: 210518304)**
02/28/01 99.00 4.5 148.7Hold
Conrad
Conrad
Real Estate Investment Trusts
WP Carey (NYSE: WPC)
11/07/12 68.74 4.8
44.9 Buy < 55
Conrad
Super Oils
Chevron Corp (NYSE: CVX)
03/28/90 117.48 3.1 1,439.2 Buy < 105
Eni (NYSE: E)
01/14/09 46.10 6.0
38.2 Buy < 50
Total (FP: FP, NYSE: TOT)
11/07/12 47.92 6.3
1.3 Buy < 55
Conrad
Conrad
Conrad
Telecommunications Services
Verizon Communications (NYSE: VZ) 08/17/87 52.32 3.9 898.1 Buy < 45
Windstream (NSDQ: WIN)
12/28/11
8.73 11.5
-15.0 Buy < 11
Conrad
Conrad
Bonds (20%) ***
Cash (10%)
*As of 04/23/13, close. Estimated yields for the next 12 months can differ from actual dividends because of company policy. +Returns are calculated from the date added and can be volatile due to significant price and dividend
moves. Returns for sold stocks are the returns on the date they were sold. Sold stocks continue to appear in the Portfolio for two subsequent issues. #Buy at or below prices given. All buy prices are in US dollars. Hold means we’re
looking to convert the advice to a buy or a sell within the next two months. We consider our Portfolio to consist of all
stocks rated either buy or hold. **Call dates and prices for the preferreds are as follows: AES Corp 05/21/13,
$50.00; and Cons Energy 05/23/13 $110.00. *** See Fund Portfolio Bond Selections.
To buy all or part of the Income Portfolio in one transaction, go to PFnewsletter.com/Folio.
To ask questions about Folio Investing, please call 1-888-973-7890.
Personal Finance and Folio Investing do not have a financial relationship.
May 8, 2013
9
FUND
FOCUS
Buying into Emerging Asia
We look at the best ways now for fund investors to profit from Asia’s growth.
BY BENJAMIN SHEPHERD
he global growth engine of China is
T
showing signs of slowing, but Japan’s
economy appears poised to accelerate,
thanks to its newly implemented stimulus
program.
As a result of that shifting growth
dynamic in Asia, our position in iShares
MSCI All Country Asia ex Japan
(NSDQ: AAXJ), which includes a hefty
allocation to Chinese equities and no exposure to Japan, has been badly lagging
not only emerging market indexes but
developed market indexes as well.
While both economic and political risk
remains high in the region, I’ve decided
to take advantage of the recent swoon in
many Asian markets to swap out iShares
MSCI All Country Asia ex Japan and
take a slightly more aggressive stance.
China and India figure prominently in
the portfolio of SPDR S&P Emerging
Asia Pacific (NYSE: GMF) at 35.7 percent and 15.9 percent respectively, but its
geographic allocation also includes Indonesia, Malaysia, Thailand, the Philippines
and Taiwan.
The economies of those countries
typically grow between 5 percent and 6
percent annually, with the exception of
Taiwan, which usually averages closer to
4 percent. Moreover, they all boast considerably more attractive demographic
profiles than Japan or even China.
Their citizens skew younger, with
median ages in the early-30s, and they’re
relatively well educated for the region,
attracting new manufacturers and other
businesses. These increasingly affluent
consumers are intent on spending money
on the perceived “good life.”
As a result, the economies of these
countries are decoupling from those of
China or other Asian nations, leaving
them increasingly insulated from the risk
of a regional slowdown.
These countries also have ample
foreign currency reserves, strong foreign
investment inflows and healthy government balance sheets, with relatively little
debt. Consequently, even if the Chinese
economy does slow, they should be the
real outperformers in the region.
I look for the fund to benefit not only
from strong economic growth but also
from currency appreciation, because the
fund doesn’t hedge out currency risk.
From a sector perspective, financial
companies account for 28 percent of the
fund’s assets, followed by a 19.8 percent
allocation to information technology and
a 10.7 percent slice devoted to energy
firms.
Financials and energy both play key
roles in economic development and,
historically, have been among the top
performers in the Asian equity markets.
SPDR S&P Emerging Asia will also be
slightly less volatile than iShares MSCI
All Country Asia ex Japan, with a lower
beta and standard deviation over the
trailing 3 years.
Sell iShares MSCI All Country Asia
ex Japan and buy SPDR S&P Emerging Asia.
Benjamin Shepherd is an investment analyst at Personal Finance and chief investment strategist of Benjamin Shepherd’s
Wall Street.
FUND PORTFOLIO
The following investment advice is suitable for investors who seek capital appreciation and current income.
Funds
(Symbol, Phone Number)
Alerian MLP ETF (NYSE: AMLP)
EGShares Dow Jones Emerging Markets Consumer Titans (NYSE: ECON)
SELL - iShares MSCI All Country Asia ex Japan (NSDQ: AAXJ)
iShares S&P Global Healthcare (NYSE: IXJ)
iShares S&P Latin America 40 Index (NYSE: ILF)
Matthews Asia Dividend (MAPIX, 800-789-2742)
PRIMECAP Odyssey Growth (POGRX, 800-729-2307)
BUY - SPDR S&P Emerging Asia Pacific (NYSE: GMF)
T. Rowe Price Small-Cap Value (PRSVX, 800-638-5660)
Date
Added
Recent Price*
06/13/12
11/10/10
01/13/10
02/10/10
02/13/13
07/09/09
08/26/09
05/08/13
12/10/08
$17.87 27.00
58.55 76.78 42.68 15.83 20.40
76.43
42.34
Fidelity Floating Rate High Income (FFRHX, 800-544-6666)
05/26/10
Fidelity GNMA (FGMNX, 800-544-6666)
04/08/09
Market Vectors Intermediate Municipal ETF (NYSE: ITM)
07/13/11
Osterweis Strategic Income (OSTIX, 866-236-0050)
12/10/08
Vanguard Intermediate-Term Investment Grade (VFICX,800-997-2798) 12/12/12
10.01
11.77
23.79
11.92
10.26
41.43
23.00
34.36 29.90
Bonds
Special Situations
Consumer Staples Select Sector SPDR (NYSE: XLP)
Fidelity Select Gold (FSAGX, 800-544-6666)
PowerShares BuyBack Achievers (NYSE: PKW)
Technology Select Sector SPDR (NYSE: XLK)
*As of 04/24/13. +Since original recommendation.
08/08/12
01/14/09
08/22/12
06/23/10
Dividend
Yield*
5.8%
0.4
0.0
1.4
1.6
3.5
0.5
1.8
1.3
Total
Return+
Type
19.6%
19.2
8.0
64.0
-4.2
82.7
71.3
NEW
107.2
MLP
Sector ETF
Asia Pacific
Health Care
Latin America
Asia Pacific
Large Growth
Asia Pacific
Small-Cap Value
3.1
1.7
2.5
4.2
3.2
18.1
24.5
14.7
62.7
1.3
Bank Loan
Int’l Government
Int’l Muni
Multisector Bond
Inv. Grade Bond
1.9
0.0
0.2
1.7
18.5
0.1
17.4
42.4
Sector ETF
Precious Mtls
Specialty Equity
Sector ETF
To Buy the entire Fund Portfolio in one transaction, go to Pfnewsletter.com/Folio. To ask questions about Folio Investing, please call 1-888-973-7890.
Personal Finance and Folio Investing do not have a financial relationship.
10
May 8, 2013
PERSONAL FINANCE
ARTICLE
UPDATE
Aligned With Economies
Article in Review: “Up From Scrap,” by Ari Charney, April 25, 2012.
BY KHOA NGUYEN
industry tends to ebb and
Theflowsteelin tandem
with economic
conditions. Last year, as the world
economy slowed by 1 percentage
point from the previous year, global
steel consumption in turn only grew
by 1.2 percent to 1.41 billion metric
tons—the lowest rate since 2009.
However, steel consumption for
2013 is expected to grow by about
2.9 percent to 1.45 billion metric
tons, largely driven by improving
economies in China and India, where
steel demand is expected to grow by
3.1 percent to 668.8 million tons and
by 5.9 percent to 75.8 million tons,
respectively.
Last year, Ari Charney recommended two highly efficient steel companies
that stood to benefit from a growing
global economy. Despite their underperformance due to weak economic
conditions, these companies’ value
grew in line with the broader market.
Steely DANR
After a strong start to its fiscal 2012,
Danieli’s (Milan: DANR) revenues
fell 1.2 percent to EUR3.08 billion
for the full year.
The reduced sales stemmed from
slowing 2012 global gross domestic
product growth, which declined by 1
percentage point from 4.3 percent the
previous year. The company’s largest sales drop came from its Middle
East sales, which fell 32 percent to
EUR616.2 million.
Although the European steel market
felt a 9.3 percent decline in consumption to 140 million tons in 2012,
Europe and Russia (which together
represent 46 percent of the company’s sales) actually grew 3 percent
to EUR1.42 billion. The company
saw the greatest expansion of its sales
in Asia, by 39 percent to EUR739.5
million.
For the first six months of fiscal 2013, sales fell 15 percent to
EUR1.29 billion, while profits fell 20
percent to EUR77.5 billion mostly
due to a loss of EUR21.4 million
from foreign currency transactions.
Danieli’s gross operating margins
showed signs of improvement, as
earnings before interest, taxes, depreciation and amortization (EBITDA)
grew 9 percent to EUR149 million.
The company’s current order book
of EUR3.3 billion—equal to a year
of sales— is up slightly from EUR3.2
billion at the end of fiscal 2012 and
remains well diversified by sectors and
product mix.
With EUR1.7 billion in cash and
equivalents and a EUR820 million
net financial position, Danieli should
continue to efficiently finance its steelmaking investments and wait for macroeconomic conditions to improve.
Danieli is a buy under EUR12.
shipments to outside customers fell
3.6 percent to 5.7 million tons. The
average scrap and scrap substitute cost
per ton used in the first quarter fell15
percent from last year to $379 per
ton.
Although the company’s operating rates fell to 72 percent from 79
percent a year ago, they’re up slightly
from 71 percent in the fourth quarter
of 2012. And average scrap cost also
improved 2 percent from $372 in the
fourth quarter of 2012.
Nucor still faces a challenging macroeconomic environment, but it expects earnings to continue improving
throughout the year, due to improved
performance at its downstream businesses, raw materials operations and
most steel mill product groups.
The company also is expected to
benefit in the second half of 2013
from the improving US automotive
and construction sectors.
This year, US industry sales of new
cars are expected to exceed 15.3 million, from 14.4 million in 2012 and
increase at an annual rate of at least
6.5 percent until 2015.
The company’s balance sheet
remains strong, with a total debt-tocapital ratio of 32 percent. Cash and
short-term investments totaled $1.1
billion at the end of the first quarter.
And the company has $1.5 billion unsecured revolving credit which doesn’t
mature until 2016.
Nucor is a buy if the price dips
below 42.
Steeled For Growth
Nucor (NYSE: NUE) saw revenues
in 2012 fall 3 percent to $19.4 billion, as a drop in the price per ton of
steel fell 3 percent, even as total tons
of steel shipped to outside customers
remained relatively flat at 23 million
tons.
For the first quarter, Nucor’s sales
fell 11.4 percent to $4.55 billion, as
Khoa Nguyen is an investment analyst at
Personal Finance.
Since Recommendation...
Company (Exchange: Symbol)
Price*
2012
2012 Revenue Growth Earnings Growth
Danieli (Milan: DANR)
€12.16
-1.6%
-10.1%
Nucor Corp (NYSE: NUE)
$42.32 -2.9
-26.7
*As of 04/25/13, close.
#Capital
www.P Fnewsletter.c o m
Total Updated
Return#Rating
15.5%
Buy < €12
11.5
Buy < 42
gain or loss plus dividend from 04/25/12 to 04/22/13. Source: Bloomberg
703-394-4931
May 8, 2013
11
ON THE
MONEY
The Big IRA Grab?
New budget proposals in Washington are putting a scare in IRA savers. Here are the facts.
BY JOHN PERSINOS
avers in Cyprus aren’t the only
S
ones worried that government policies will attack their nest eggs. Add
Americans to the list.
President Barack Obama’s 2014
budget proposal seeks to cap multimillion-dollar tax-favored Individual
Retirement Accounts (IRAs)—ironically, the type of IRA held by high net
worth individuals such as Mitt Romney, his Republican rival in 2012.
Introduced on April 10, Obama’s
budget blueprint would cap the
amount taxpayers can accumulate in a
single IRA.
The cap would start at $3.4 million, the amount required to fund
a $205,000 annual annuity for a
62-year-old, and would be adjusted
for the cost of living.
Individuals would be prohibited
from adding additional tax-free money
to their IRA accounts when the cap is
reached. Because the cap is linked to
annuities, it could decline if interest
rates rise.
The White House claims that the
proposal would generate an additional
$9 billion in revenue over the next 10
years.
The rationale for the change is
that these big IRAs are being used
by extraordinarily wealthy people to
accumulate several millions of dollars
more than they really need to live a
comfortable retirement, thereby twisting the original purpose of the IRA.
According to the administration’s
logic, the IRA is supposed to serve
as a retirement-planning tool for
people of modest means, but it has
now morphed into an estate-planning
scheme for wealthy families because
current IRS rules allow the accounts
to be handed down to heirs.
During the last presidential campaign, Romney’s IRA actually became
an issue, when he revealed that his
IRA held up to $87.4 million.
Most taxpayers can contribute a
maximum of $5,500 for 2013. Older
workers, self-employed workers and
those who save through 401(k)-style
plans enjoy higher caps and can roll
those accounts into IRAs.
Tax accountants say that Romney
was able to circumvent the limits by
contributing investments from his
private equity firm, Bain Capital, that
were valued at nearly nothing but
which grew substantially over time.
This tactic allowed the investments to
grow tax-free in the IRA, but when
taken out would only be subject to
taxation as ordinary income.
When the extent of Romney’s IRA
was revealed, it catalyzed calls in Congress for a reform of the laws, to help
generate more revenue to ameliorate
the federal deficit.
The president’s proposed IRA cap
is part of a $3.8 trillion federal budget
for next year that targets high-wealth
households for additional revenue.
Obama’s proposal is fiercely opposed
by Republicans and faces an uphill
battle.
Nonetheless, it pays to prepare for
the worst. The proposal could make it
prudent for wealthier investors to put
more cash into insurance, where death
payouts are generally exempt from
federal taxes.
Insurance policyholders who are still
alive can withdraw premium payments
from permanent coverage without a
federal tax bite. They also can take out
additional cash tax-free in the form of
a loan that’s repaid from the benefit
proceeds upon death.
For nervous IRA holders looking
for an alternative stream of retirement
income, tax-deferred annuities are
another insurance product that could
fit the bill.
Whenever a new income or estate
tax comes down the pike, it tends
to increase the attractiveness of life
insurance products. But keep in mind,
these products are purchased with
after-tax dollars, which gives them a
lesser tax benefit than a tax-deferred
retirement account.
Obama’s proposed IRA caps may
be irrelevant to your situation and as
such don’t warrant any drastic action
on your part.
In 2011, about 0.1 percent of savers
older than 60 had at least $3 million
in 401(k) and IRA accounts, according to the non-partisan Employee
Benefit Research Institute.
Consequently, despite the viable
alternatives mentioned above, don’t
get caught up in the political heat
and lose sight of your wealth-building
goals.
IRAs are still worth it for certain
high-income savers. Deductible or
not, any money you deposit accumulates free of taxes as long as it
stays there. This means it can grow
and compound without having a big
chunk sliced off for current taxes, as
would be the case with an ordinary
investment.
PF’S RECESSION RADAR
The Personal Finance Recession Radar measures the likelihood of a recession in the next six months.
For more information about this proprietary measure, please visit PFnewsletter.com/Radar.
31-50% Elevated risk
> 51%
Recession likely
Increase in index takes into account intangible
from risk of no Washington budget compromise.
The LEI is a broad measure of economic activity. A rising LEI
suggests that economic activity will increase in the near future.
January
December
November
0.5%
▲ 0.2%
▲ 0.2%
Initial Jobless Claims
4-Week Average:
357,500
Year over year:
▲
Normal statistical risk
16-30% Medium risk
▼
30%
< 15%
The Conference Board Index of
Leading Economic Indicators (LEI)
5.5 %