October 2015 - BetterInvesting

Transcription

C1_Oct15 _DigiCover_Oct15_C1 9/8/15 11:31 AM Page C1
STOCK TO STUDY: Delta Air Lines — Tailwinds Should Aid Earnings Growth (p. 21)
October 2015 VOL. 65, NO. 2
www.betterinvesting.org
C2_ERS Ad_Oct15_C2 8/19/15 3:04 PM Page C2
Dig Deeper into the Fundamentals, Key
Financial Ratios, Technicals, and Industry
Comparisons for Any Stock
Comprehensive Graphs, Data Tables, and
Financial Ratios for all Stocks
Detailed, Multiple-Page Printed PDF Reports
for all Stocks
$
119 .99
Multiple Watch Lists and Portfolios Assist
in Tracking Fundamental Changes
SAVE
$80
Unique Ratings and Indicators Flag
Potential Problem Areas
Completely Online. No Software to Update or Install. Ever!
Improve Your
Stock Portfolio
Today
10 Areas of Analysis
• Review Growth, Quality, Dividends, and Cash Flow
Histories and Future Trends
• Get Key Technical Trends and Signals
• Check Out Historical Returns Compared to Overall Market
Compare Stock To Peers
• Review Company In Light of Competitors
• Graphs Illustrate Key Differences
• Peers May Be Edited to Reflect Your Own Best Analysis
Find Ideas to Study
• Message Boards Connect Smart, Like-minded Stock Investors
•”Most Active Stocks” Feature Helps Bring to Light the Best Ideas
• Save Your Stock Screening Criteria for Future Use
1.877.334.2582 or www.EquityResearchService.com
01_Folio Investing Ad_Oct15_01 8/19/15 3:46 PM Page 1
02_TOC _Oct15_02 8/21/15 6:15 PM Page 2
CONTENTS | BetterInvesting | October 2015 | Vol. 65, No. 2
BetterInvesting’s mission is to provide a program of sound investment information,
education and support that helps create successful lifetime investors.
OUR PRINCIPLES
■
■
Invest a set amount regularly.
Reinvest earnings, dividends and profits.
■
■
Invest in quality growth stocks and equity mutual funds.
Diversify your investments.
FEATURES
Cover Story
37
A Menagerie of Investments
The stock market thunders, the stock market
whimpers. Sometimes it all seems as wild as
the savannah out there. One way to protect your
portfolio’s value is to lock and load it with
a diversity of uncorrelated assets. (No animals
were harmed in the making of this cover story.)
OTHER STORIES
Repair Shop
15
Mutual Friends Investment Club of St. Louis
The Mutual Friends began as six poker players in 1973 and now has
a full house of 41 guys who deal for high stakes in the stock market.
How high? They’ve hit the jackpot with a $2.5 million portfolio.
37
STOCK TO STUDY
Featured Company
Delta Air Lines, Inc.
21
With demand for flights up and fuel costs down, keeping seat supply
at reduced levels works for Delta Air Lines, as it has for other U.S.
carriers. Delta’s cancelled plans to order aircraft, but that doesn’t mean
it lacks new wings. The company’s been investing in overseas carriers.
21
UNDERVALUED STOCK
Featured Company
Biogen Inc.
26
Biogen’s best-selling product today aids individuals with multiple
sclerosis, but in the pipeline is a therapy that may push profits higher.
A drug to slow Alzheimer’s disease is set for final-stage clinical trials.
26
PERFORMANCE REVIEW
Assessing Stock to Study and Undervalued Picks
52
LQK Corporation, ResMed Inc.
Replacement car parts distributor LKQ isn’t crashing, but it didn’t beat
the S&P 500. ResMed investors breathed easily as the stock grew.
STOCKS
International Stocks New Stakeholder May Dial Up Telecom Italia
Stock Screen
2
From Railroads to Biotech, It’s on Our Radar
| BetterInvesting | October 2015
29
30
Magazine Advertising Policy
BetterInvesting Magazine accepts advertisements from companies promoting ownership of their stock or use of their products and services. Their appearance in the magazine does not
constitute or imply endorsement by NAIC’s BetterInvesting.
Investors should conduct their own review and analysis of any
company of interest seen in an advertisement before making an
investment decision. The association has posted its Sponsorship
and Advertising Policy on the website. On both the public and
members homepage, click Advertising at the bottom of the page.
On the page that follows is a link to the document. If you have
questions, please email [email protected].
03_TOC_Oct15_03 8/21/15 6:20 PM Page 3
BetterInvesting
CONTENTS | Inside | Upcoming Events | Online
4
7
EDITORIAL
PERFORMANCE PERSPECTIVE
PERSONAL FINANCE
Cash Flow
Due Diligence
Book Value
Financial Planner
The New Gurus of Finance? Hipsters
8
U.S. Aging Forecast: Economists Predict 9
a Sag in Jawlines but not Prices in Future
All’s Fair in Renaissance for Richest Man 10
Charity: a Gift You Give Yourself
13
BEGINNERS
Fundamentals
of Investing
Lessons on Buying a Stock Can
Lead You Down the Road to Riches
31
Mutual Friends Investment Club
Time Shares: Portfolio Allocation
Friendship Yields Dividends in N.C.
15
19
20
MUTUAL FUNDS
Mutual Fund Matters Closed-End Funds: Losing the Popularity
Contest, but Not Without Congeniality
32
etterInvesting members have the opportunity to expand their
learning through online classes. Please join us for the following
webinars. Most webinars last from one hour to 75 minutes. Register
at: www.betterinvesting.org/webinars
StockUp: Jumpstart Your SSG Skills
Wednesday, Sept. 9
8:30 PM ET • FREE
Join the instructors for an interactive session as they
complete a Stock Selection Guide using the CoreSSG
online tool. Many of the concepts presented throughout the Introduction to the SSG Series are reviewed and reinforced in
this webinar. Recordings and class materials for the Introduction to the
SSG Series are available to all BetterInvesting members in the My Classes
section of the BI website (login is required). Instructors: Ann Cuneaz,
education program manager, BetterInvesting; Ken Kavula, president,
Mid-Michigan Chapter, BetterInvesting.
Monday, Sept. 14
8:30 PM ET • FREE
Investors are constantly searching for new stock ideas, and BetterInvesting members have an advantage. To help find those hidden gems,
this tutorial demonstrates how to use the Screening and Stock Ideas app
integrated with BetterInvesting’s online tools (CoreSSG and SSGPlus).
Our presenters also review the wealth of relevant stock ideas that are
available from the BetterInvesting website. Suzi Artzberger, BetterInvesting’s information technology director, will lead this tutorial.
TickerTalk
Wednesday, Sept. 23
8:30 PM ET • FREE
DISCUSSION & ANALYSIS
Between the Lines
B
Screening and Stock Ideas From
the BetterInvesting Website
INVESTMENT CLUBS
Repair Shop
The Clubhouse
Online
Variable Annuities: Investments
Cloaked in an Insurance Policy
34
‘Go-To’ Women Keep Oregon Club Going
Clear Lake Club Makes a Ripple in Texas
Shop on Amazon.com, Support BI
Through AmazonSmile :)
43
44
45
MEMBERSHIP
Essential information to help you become a better
investor is presented in this online program. Topics
and panelists vary each month. A regular feature is
Five in Five, five stock ideas for you to consider.
StockUp: Tending to Your Portfolio
Home Office
see page
48
Sunshine, Fla. (Sept. 12)
San Diego (Sept. 19)
Southern Arizona (Sept. 22)
Upcoming Investors Fairs & Events include:
see page
51
51
51
Chicago Coalition Chapters (Sept. 12)
Alaska (Oct. 10)
see page
Upcoming Annual Meetings include:
see page
see page
see page
51
51
Twitter and Facebook
W
Portfolio management is easy, but it isn’t automatic.
In this session we discuss the basics of portfolio construction and management with an emphasis on updating and using diversification and summary reports to care for
your portfolio.
TickerTalk
Upcoming Events
Chapter Contacts
Wednesday, Oct. 7
8:30 PM ET • FREE
e invite readers to follow us on Twitter and
join our growing community on Facebook.
Just go to our homepage and click the links to begin
participating.
Thursday, Oct. 15
8:30 PM ET • FREE
Essential information to help you become a better
investor is presented in this online program.
Topics and panelists vary each month. A regular
feature is Five in Five, five stock ideas for you to consider.
StockUp: Case Study —
Analyzing the Small Company
Wednesday, Nov. 4
8:30 PM ET • FREE
This session demonstrates how to make the judgments
necessary on the Stock Selection Guide for companies
that don’t have much coverage by analysts. A company
that doesn’t have a Morningstar or Value Line report to reference can be
more challenging to research. We provide tips on other sources where
investors can find information. The Preferred Procedure is used to help
develop the future EPS growth rate.
October 2015 | BetterInvesting |
3
04_Editorial_Oct15_04 8/21/15 12:17 PM Page 4
Editorial
Interest Rate Increases on the Horizon?
Stocks Should Still Rate High
A major conversation in the investing world today centers on the potential of
interest rates edging higher after sitting at historic lows for the past several
years. The Federal Reserve Board has sent strong signals that rates will begin
increasing again soon.
I
nvestors are becoming agitated about the prospect. Higher interest
rates can curtail economic growth, the thinking goes. On the other
hand, the Fed would probably raise rates only when board members
believe the economy is in full recovery mode.
Investors doubtless understand the puts and takes of interest rate
increases. Indeed, as Heather Kennedy Miner of Goldman Sachs pointed out
in an Aug. 5 Barron’s article, “Equity market performance both in the U.S.
and globally has tended in most cases to be positive when the tide of interest rates turns.” What disrupts this scenario in the short term is when rate
increases are faster than expected. But these are buying opportunities for
long-term investors, she says.
Most importantly, expectations of interest rates should be just one factor
of many when investing. And remember that the Fed doesn’t always take
action when we expect it to. We’ve been living with “imminent” rate
increases for a while now.
When rates do increase, they’ll still be quite low by historical standards.
There is no free lunch in economics, and the price of a recovering economy
will be some control over growth rates so that we avoid sustained, high
rates of inflation.
Measuring the True Cost of Treatment
T
he following is from a response sent by Dan Boyle to a reader about a positive
comment regarding Gilead Sciences in the June/July “Repair Shop.” The reader’s
concern centered on the high price of Gilead’s new hepatitis C drug, Sovaldi.
“It certainly seems unconscionable that Sovaldi can be so expensive. However,
here are some facts for you to consider.
“Hepatitis C is a life-threatening disease that often ends in a liver transplant.
The lifetime cost of care to treat an individual with hepatitis C is estimated to be
between $250,000 to $500,000. Health care systems understand that curing the
disease will actually save them money over a patient’s lifetime.
“Existing treatments for hepatitis C were painful, ineffective and ongoing for
years. Patients now can take a single pill per day for six to 12 weeks with minimal
side effects. This is a major improvement in quality of life for hepatitis C sufferers.
“Competition from AbbVie, which released a hepatitis C cure in late 2014, has
already reduced the price of treatment by up to 50 percent (the press focuses on
the drug’s retail price, not the discounted price health care plans actually pay).
Further competition is expected from Roche later this year. Competition will bring
the cure to many more who have less progressive cases and can afford to wait.
“Gilead paid $11 billion to purchase Pharmasset in late 2011 to gain access to
the molecule that forms the basis of its hepatitis C cure. The company and its
investors took a substantial risk that the molecule would actually cure the disease.
As an investor, I believe a company should expect a return on its investment.
“Drug pricing does seem out of control and many treatments seem unaffordable. However, I believe the profit motive and competition is the best way to bring
innovative treatments to market that solve life-threatening diseases.”
4
Vol. 65, No. 2
Official Publication of the
National Association of Investors Corporation
US ISSN 0006-016X
Toll Free: 1-877/275-6242 (1-877/ASK-NAIC)
248/583-NAIC (6242) Fax 248/583-4880
BetterInvesting website: www.betterinvesting.org
Editorial e-mail: [email protected]
NAIC/BETTERINVESTING BOARD OF DIRECTORS
Gary Ball, Robert Brooker, John Gannon,
Roger H. Ganser, Elizabeth N. Hamm, Eve Lewis,
Shanna Rendon, Stephen Sanborn, Stuart Schechter,
Julie M. Werner, Robert L. Wynn II.
NAIC OFFICERS
Roger H. Ganser, Chair; Kamie Zaracki, CEO and President;
Stephen Sanborn, Treasurer; John Gannon, Secretary.
BETTERINVESTING VOLUNTEER ADVISORY BOARD
Directors: Carol Theine, Chair; Susan Tampasis,
President; William Peterson, Treasurer; Patrick Donnelly,
Secretary; Diane Amendt; Kim Butcher; Len Douglass;
Henry Gold; Allen Holdsworth; Joan Loken; Joe Parks;
Christi Powell; Claire Struthers.
Associate Directors: Diane Ellison; Deane Jaeger;
Bobbie Kincaid; Mary Ann Rentsch; Sue Spurlin.
BETTERINVESTING MAGAZINE
Editor: Adam Ritt
Managing Editor: Jan Jeffres
Graphic Designer: Jack Downs
Editorial Staff: Cindy Kelley, Brenda Gayle
Editorial Advisory & Securities Review Committee:
Robert M. Bilkie, Jr., CFA; Daniel J. Boyle, CFA;
Donald E. Danko, CFA; Philip Dano, CFA;
Maury Elvekrog, CFA; Walter J. Kirchberger, CFA;
Paul McVey, CFA; Marisa Bradbury, CFA.
BetterInvesting Magazine is published 10 times per year
(January/February and June/July issues are combined) by
NAIC’s BetterInvesting, 711 W. 13 Mile Road, Suite 900,
Madison Heights, MI 48071.
Subscriptions: Individual subscriptions are $31 a year or
less; go to the store at the BetterInvesting website:
www.betterinvesting.org/Public/Store/Store/
BetterInvesting+Magazine/default.htm
Stocks and mutual funds mentioned in BetterInvesting
Magazine articles are used as illustrations or
suggestions for study and are presented for
educational purposes only. They are not to be
considered as endorsed or recommended for
purchase by NAIC’s BetterInvesting. Advertisements
in the magazine also do not constitute or imply
endorsement of these companies or their products
and services by the association. Investors should
conduct their own review and analysis of any
company of interest using the Stock Selection Guide
before making an investment decision.
Copyright© 2015 National Association of Investors
Corporation. All rights reserved.
Postmaster: Send change of address notices to National
Association of Investors Corporation, 711 W. 13 Mile
Road, Suite 900, Madison Heights, MI 48071.
Canada Subscriptions: Canada Post Agreement
Number 1736450. Send change of address info.
and blocks of undelivered copies to P.O. Box 1051,
Fort Erie, ON L2A 6C7.
PRINTED IN THE USA
05_SCI Ad_Oct15_05 8/19/15 3:01 PM Page 5
Stack the Deck
In Your Favor
FREE
Sample
Issue
Pick Up Winning Small-Cap Stocks Every
Month with the SmallCap Informer Newsletter
Online Subscription
Print Subscription
■ Available in Online and Print Editions
$ 99/Yr
$199/Yr
■ In-Depth Small-Cap Profiles in Each Issue
Regularly $199
Regularly $299
■ Educational Articles to Teach You How to Invest
in Small-Caps and Build a Successful Portfolio
Use Promo Code:
DEALMEIN
■ Market News and Commentary in Plain English
1.877.334.2582
www.SmallCapInformer.com
*Results from 12/2/2013 – 5/6/2015 (includes dividends).
Always conduct your own analysis of profiled stocks. Past performance not indicative of future results.
06_StockUp_Ad_Oct15_06 8/19/15 4:06 PM Page 6
REGISTER TODAY FOR
StockUp
StockUp Is a Popular Program that Presents a Variety of
Important Investing Topics in a Fun and Informative Format
StockUp offers members a unique perspective on investing topics designed to improve your ability to conduct
a stock analysis, manage a portfolio, make sell decisions and more.
Register for These Upcoming Live StockUp Webinars
Tending to Your Portfolio — October 7, 8:30 PM ET
Portfolio management is easy, but it isn’t automatic. This session discusses the basics of portfolio construction and
management with an emphasis on updating and using diversification and summary reports to care for your portfolio.
Case Study: Analyzing the Small Company — November 4, 8:30 PM ET
This session demonstrates how to make the judgments necessary on the Stock Selection Guide for companies that
don’t have a Morningstar or Value Line report to reference. We identify other sources where investors can find more
information. The Preferred Procedure is used to help develop the future EPS growth rate.
If You Missed Any of the Live StockUp Sessions You Can Access Them Anytime
Jumpstart Your SSG Skills • Bridging the GAAP — How to Evaluate Data Differences
Shopping in Your Portfolio • The StockUp Book Club — Meeting Number ONE • Yes! We Do Sell Stock!
A Look Under the Hood of LKQ Corp • Feeding and Weeding Your Portfolio
A Bull/Bear Debate on Apple APPL Keep Current: Make Sure Your SSG Speaks to You
Visit www.BetterInvesting.org/StockUp to Register for Upcoming
Live StockUp Webinars or to Access a Recorded Session OnDemand
07_Performance Perspective_Oct15_07 8/21/15 6:00 PM Page 7
Performance Perspective
Performance Parameter
At 7/31/2015
5-Year Change
Annualized
BetterInvesting 100 Index (BIXX)
BetterInvesting 100 Index (BIXR — Total Return)
S&P 500 Equal-Weight Index (Total Return)
Vanguard Total Stock Market (CRSP U.S. Total Market Index)
Dow Jones Industrial Average (DJIA)
267.79
342.34
5,414.84
57.64
17,689.86
14.7%
16.9
17.0
13.3
11.1
S&P MidCap 400 Index
Russell 2000 (Small-Cap Index)
Nasdaq Composite
MSCI EAFE (Europe, Australasia, Far East) Index
MSCI Emerging Markets Index
1,502.89
1,238.68
5,128.28
1,879.75
901.68
14.6
13.7
17.9
5.0
(1.9)
Value Line Arithmetic Composite
Consumer Price Index (June)
4,664.05
238.64
14.8
1.8
Sources: Yahoo! Finance, Value Line, Bureau of Labor Statistics, Thomson Financial, Morgan Stanley Capital International, Nasdaq, Standard & Poor’s
Most Active List: Bubbling Under
Most Active List
Here are the companies attracting
the interest of the BetterInvesting
community, according to about 4,600
transactions by users of myICLUB.com
club accounting for the trailing
eight weeks ended Aug. 10.
Company (Ticker)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Buys-Sells
Apple (AAPL)
106-49
Gilead Sciences (GILD)
80-9
Skyworks Solutions (SWKS) 36-25
Netflix (NFLX)
58-2
Disney (DIS)
49-8
Qualcomm (QCOM)
26-24
Starbucks (SBUX)
34-10
Google (GOOG/GOOGL)
20-23
Southwest Airlines (LUV) 25-15
General Electric (GE)
20-18
Ambarella (AMBA)
19-17
Ford (F)
13-22
This list is presented as a source of stock study
ideas. No investment recommendation is intended.
Nos. 13-40 With Buy-Sell Ratio Over 2:1
Transactions for trailing eight weeks ended Aug. 10.
Company
Fitbit
Ticker
FIT
Buys
28
Sells
3
Total
31
LKQ
LKQ
28
2
30
Visa
V
24
4
28
Under Armour
UA
24
3
27
Air Lease
AL
23
2
25
Costco
COST
18
7
25
AT&T
T
17
8
25
Verizon
VZ
17
8
25
Fastenal
FAST
19
5
24
Facebook
FB
18
5
23
CVS
CVS
18
3
21
Taser International
TASR
14
5
19
FireEye
FEYE
12
6
18
Home Depot
HD
14
3
17
Kroger
KR
15
1
16
Blackstone
BX
14
2
16
UnitedHealth
UNH
14
1
15
Priceline
PCLN
13
2
15
Our thanks to ICLUBcentral for
this information.
Berkshire Hathaway
BRK.B
11
4
15
GoPro
GPRO
11
4
15
We maintain a Most Active List at the
website’s homepage. Please submit
investment transactions online at:
www.betterinvesting.org/members/
investing/stocks/mostactive/default.html
NXP Semiconductors
NXPI
10
3
13
T. Rowe Price
TROW
10
3
13
Wells Fargo
WFC
9
4
13
Chicago Bridge & Iron
CBI
11
1
12
Cyber Security ETF
HACK
10
2
12
Gentex
GNTX
10
2
12
Nike
NKE
10
2
12
AmTrust Financial
AFSI
10
1
11
by email to
[email protected]
or by letter to:
BetterInvesting Magazine
Box 220, Royal Oak, MI 48068
Source: myICLUB.com
F
itbit, a purveyor of fitness
tracking devices, became the
latest popular initial public offering among BetterInvesting clubs.
Definitely a speculative investment, clubs have been taking
modest positions in the stock to
add some spice to their portfolio.
Interestingly, however, only five
studies have been completed on
the stock since early July using
BetterInvesting’s online tools.
Meanwhile, industrial retailer
Fastenal continues to interest
clubs. Members have conducted a whopping 334 studies,
according to the online tools’
Member Sentiment Feature.
The average growth rates are
in the 10 percent to 11 percent
range. The high expected priceearnings ratio is about 30, giving
the stock a ratio of P/E to forecasted earnings growth (PEG) of
around 3.0. That’s pretty high —
many investors who follow the
PEG generally look for this figure
to be in the 1.0 to 1.5 range.
Members are expecting a lot of
growth in the P/E over the next
five years.
(Stocks are mentioned only
for educational purposes. No
recommendations are intended.)
7
08_10 WW_DD_BV_Oct15_08_09_10 8/20/15 10:22 AM Page 8
PERSONAL FINANCE | Cash Flow | Due Diligence | Book Value
Cash Flow
Take a Selfie As You Follow These Money-Saving Tips
My Financial Adviser Is a Hipster
by Natasha Gural
Younger generations are often maligned for being bad with
money, but it turns out millennials may be doing a better job
of saving than baby boomers. It turns out that hipsters may
not be as lazy and entitled as they seem to older folks. Next
time you see a bearded, tattooed 20-something engrossed
in his iPhone, you may want to introduce yourself and ask
for investing advice. Taking a cue from mainstream culture’s
primary adversary could help you save $$$ a year to reinvest in stocks.
A
recent survey by T. Rowe Price of 1,505 millennials with 401(k) plans found that 75 percent
carefully track expenses, 67 percent stick to a
budget and 40 percent have bolstered their retirement
savings contributions over the past 12 months. That
places the tech-savvy, social media-focused investors
well ahead of boomers, of whom 64 percent track
expenses, 55 percent adhere to a budget and 21 percent have boosted retirement savings over the
past 12 months.
Maybe older people are mistaking humility
for apathy. Millennials (58 percent) are
much more likely than baby boomers
(24 percent) to admit they’d benefit
from someone helping them with
spending and debt management,
the survey found. Here are some
cultural habits that could help investors of any age squirrel away savings
for smarter investing.
Ditch the Retail Therapy
Hipsters shun mainstream trends and fashions and craft their wardrobes from cheap
finds at thrift stores. It’s likely that your own
closet may be a millennial’s idea of winning the style lottery. The next time you have the urge to hit the outlet
malls or off-price retailers thinking that you’ll save
money, go through your storage space instead. A North
Dakota State University study from 2010 found that the
average American household spends 3.8 percent of its
income on clothing.
Median U.S. household income was $51,939 in 2013,
according to the Census Bureau, which amounts to about
$2,000 spent on clothes.
Cut the Cord
Channel surfing once-cheap basic cable has become an
unnecessary and mounting expense, all for dozens, if
8
not hundreds, of options you don’t want. The average
monthly cable bill has spiked about $2 to $3 a year for
the past two decades and is nearly triple what it was in
1995, according to the Federal Communications Commission. The NPD Group estimates that the average subscription pay-TV customer is shelling out $123 per
month, compared with $86 in 2011.
The number of pay-TV subscribers tumbled in 2013, as
more people “cut the cord” in favor of streaming-based
services such as Netflix and Amazon Prime Video. This
practice, often called “hipster cable,” has spread to 6.5 percent of U.S. households as of 2014, up from 4.5 percent in
2010, according to Experian Marketing.
By curating what you watch, you can dramatically
curb costs. For $8.99 a month, Netflix offers unlimited
streaming of its original content along with its constantly updated library of thousands of movies
and TV shows.
For $7.99 a month, Hulu gives you access
to cable TV shows from channels such as Fox,
CBS,ABC, NBC and Comedy Central, as well as
foreign shows that you won’t find on Netflix
or cable TV. It also has a film library.
If you’re hooked on sports, Dish Network’s
Sling TV enables you to watch ESPN, along
with CNN, the Food Network and the Cartoon
Network, for $20 a month.
Amazon Prime’s subscription to premium
movies and TV shows, for $99 per year, includes
original programs such as Alpha House and
HBO’s back catalog.
By cutting the cord, you can watch as
much as you want and on your own schedule
from your computer, mobile device or TV via a
gaming console (which you likely have if there
are children or grandchildren in your home); a streaming
box such as Amazon Fire, Roku or Apple TV; a variety of
screen-sharing devices; and streaming apps on TVs and on
many Blu-ray/DVD players.
If you start by replacing your cable with just Hulu or
Netflix, you can save about $1,380 a year. As the cost of
cable continues to rise, so will the options for streaming
your favorite shows and movies.
Hipsters may be mocked for wearing “grandma dresses”
and “grandpa sweaters” while binge-watching the latest
series or the same classic shows you love. But their old
school ways are paving a new era of savings and investing.
Taking a millennial approach to dressing and viewing can
mean $3,380 more to invest in these stocks.
Due Diligence | Book Value | PERSONAL FINANCE
Due Diligence
Study Finds No Reason to Fear Age-Induced Drop in Inflation Rate
Going Gray Is Bad Enough, but Deflating, too?
by Thomas D. Saler
To anyone who lived through the inflation-wracked 1970s,
the question might seem surreal: Could the United States
experience falling consumer prices and the corresponding
drop in stock prices that typically accompanies
deflation?
O
ver the quarter-century since Japan
became ensnared in a tenacious
deflationary spiral, the possibility
of outright deflation in the U.S. has been
viewed by many economists as almost as
likely as a renewed outbreak of unacceptable
inflation.And given that the average Japanese
stock is still 50 percent lower today than it
was 25 years ago, it’s a question of prime
importance to investors.
Especially, that is, since the demographic
factors that are believed to underpin Japanese deflation
also are at work in the United States, albeit to a lesser
degree.
According to the U.S. Census Bureau, 60 percent of
the U.S. population in 2010 was between the ages of
20 and 64; by 2030, that number is projected to drop
to 55 percent, mostly because of retiring baby boomers.
The so-called age dependency ratio has important
implications because people at the low and high ends of
the demographic spectrum contribute less to the consumer spending that accounts for 70 percent of U.S. economic output. Reduced economic activity, in turn, could
slow corporate earnings growth and restrain the demand
for goods and services that would keep prices from
falling.
So it’s with interest that we examine the findings of
economists Mikael Juselius and Elod Takáts from a working paper for the Bank for International Settlements.The
duo’s research uncovered a statistically significant correlation between demography and inflation. But it wasn’t
the correlation that economists had expected.
Juselius and Takáts explored the relationship between
demography and inflation in 22 advanced countries
from 1955 to 2010.They began by noting that the recent
emergence of a demographic explanation for the sharp
fall in inflation since the 1970s arose in response to the
apparent failure of central banks to raise inflation from
the dangerously low levels that prevailed following the
global financial crisis in 2008.
If high interest rates slew the inflationary dragon in
the 1980s, why has easy money been unable to vanquish
deflation now?
The answer, the authors posit, is that the relationship
between “dependents” and those in the labor force has a
counterintuitive effect on prices.
Even though seniors clearly consume less
than they did during their working years,
they — in combination with the youngest
segment of a population — nonetheless consume more than a shrinking workforce usually
produces, thus causing prices to rise, or at
least not fall.
“A larger share of dependents (i.e, young
and old) is correlated with higher inflation,”
Juselius and Takáts wrote, “and a larger share
of working age cohorts is correlated with
lower inflation.”
But given that the global population is aging,
why have central banks been unable to raise inflation to
more comfortable levels via ultra-low interest rates?
“
A larger share of dependents
(i.e., young and old) is correlated
with higher inflation.
”
The authors provide a complicated explanation that
might be boiled down to an inconsistent application of
monetary policy as it relates to shifting demographics.
Juselius and Takáts acknowledge that their findings are
preliminary and that more research is needed to better
understand how demographic patterns can inform
monetary policy to achieve a desired rate of inflation.
In the meantime, investors can take comfort in the
likelihood that the graying of America won’t by
itself cause the U.S. to follow Japan into the deflationary abyss.
Which is fine, since none of us is likely to get any
younger.
Websites of Interest
“The Next Four Decades: The Older Population in the United
States, 2010 — 2015,” U.S. Census Bureau
www.census.gov/prod/2010pubs/p25-1138.pdf
“Can Demography Affect Inflation and Monetary Policy?,”
Mikael Juselius and Elod Takáts, Bank for International
Settlements; Working Paper No. 485, February 2015
www.bis.org/publ/work485.htm
9
PERSONAL FINANCE | Book Value
Book Value
Renaissance Banker Might Have Made Mincemeat of Today’s Tycoons
The World’s ‘Richest Man’ Never Landed on a Forbes List
by Angele McQuade
There’s something so captivating about a well-researched
historical biography. A brightly sketched tale by a writer with
a gift for bringing history to life can spark interest in a subject
or person you may never even have heard of. That’s exactly
the kind of magic Greg Steinmetz, former Wall Street
Journal London and Berlin bureau chief, conjures in The
Richest Man Who Ever Lived: The Life and Times of Jacob
Fugger.
“
Jacob Fugger’s Renaissance-era
business methods blazed the path
for five centuries.
”
What I loved: How deeply Steinmetz explores Fugger’s
f you — like me before picking up this book — have influence on the beginnings of modern capitalism. The
no idea who Jacob Fugger was or why his life’s story afterword describing his introduction to Fugger and his
research process is just as interesting
is relevant to us today, Steinmetz
as the book itself and would make
wastes no time in clearing things up.
a fabulous story in its own right
“It is fair to call Fugger the most influ(hint, hint).
ential businessman of all time,” the
What makes The Richest Man Who
author writes.“His deeds changed hisEver Lived worth reading: How Steintory more than those of most monmetz makes Fugger’s accomplishments
archs, revolutionaries, prophets and
relevant even to readers who don’t
poets ever did, and his methods
have much knowledge of finance or
blazed the path for five centuries.”
Renaissance Europe. This is especially
Fugger, a Renaissance-era banker
apparent in Fugger’s efforts to end
from Augsburg, Germany, is considered
the church’s ban on loaning money
the richest known person in history.
with interest. “To the extent that we
When he died in 1525, his wealth
can thank any single individual for
($400 billion in today’s dollars)
our ability to borrow money to buy a
equaled nearly 2 percent of the entire
house, lease a car or earn interest on
European economy at the time.
our savings,” Steinmetz says, “we can
The “German Rockefeller” was an
thank Fugger.”
ambitious, driven businessman who
Read The Richest Man Who Ever
revolutionized the financial practices
Lived if: You’re a fan of history,
of his time. A genius at negotiation, he
whether the history of finance or of
even persuaded the Vatican to legalize
The Richest Man Who Ever Lived:
truly fascinating people. Steinmetz
money lending, opening up a lucraThe Life and Times of Jacob
transforms the facts of Fugger’s life
tive market for himself and others
Fugger, Greg Steinmetz, Simon &
and times into a compelling, pageand eventually gaining the papal bank
Schuster (2015), hardcover ($27.95)
turning story that reads like a novel in
as a customer. His ruthless business
and ebook, 283 pages
all the best ways.
tactics ensured he wasn’t especially
well-liked, however.“Fugger spent the
first half of his career making money,” Steinmetz says,
“(and) the second fighting to keep it.”
What I liked: The vivid picture Steinmetz sketches of The book’s website
Fugger’s life and times, including his dealings with now- www.richestmanwhoeverlived.com
famous contemporaries Machiavelli, Charles V, the Borgias Twitter: @steinmetz_greg
and the Habsburgs of Austria. Politics, religion, corporate
■■■
monopolies, finance, personal rivalries and even journalism are all weaved into a brilliantly detailed portrait. Angele McQuade (www.angelemcquade.com) is the author
There’s even a surprising connection between Fugger and of two books, including Investment Clubs for Dummies. She lives
Martin Luther’s 95 Theses, the document that helped in Arlington, Va., where she also writes novels for children
and teens.
trigger the Reformation.
I
10
11_12 FINRA Use_Oct15_11_12 8/18/15 1:00 PM Page 11
FINRA | PERSONAL FINANCE
Rising Interest Rates or a Shift to a Seller’s Market May Pinch Your Portfolio
Why Bond Prices Fluctuate
by Gerri Walsh, Senior Vice President, FINRA’s Office of Investor Education
If you’re like many investors, your portfolio contains bonds.
If you purchased individual bonds, you may not have given
much thought to whether you’d be able to sell them when
you want to — a concept known as liquidity. After all, many
investors purchase individual bonds for the income they provide, planning to hold the bonds until maturity. Nevertheless,
it’s important for all investors to consider the ease of buying
and selling investments, and how cost-efficient it is to do so,
when building a portfolio.
L
iquid investments can be bought and sold with
relative ease and without a significant change in
price. Liquidity declines whenever it becomes
more difficult to trade an investment due to an imbalance in the number of buyers and sellers or because of
price volatility. In the case of bonds, investors should
understand what professional bond traders already
know: The bond market isn’t always instantly liquid, and
some bonds are easier to trade than others.
FINRA is issuing this alert to educate investors about
bond liquidity, and the potential for decreased liquidity
and investment losses for those who sell their bonds
before maturity at a time of market stress.
For example, rising interest rates generally cause
bond prices to fall, which in turn can be accompanied
by a bond market sell-off that might further depress
bond prices. An increase in interest rates also could
make it more challenging to sell a bond at a desirable
price, especially bonds with longer duration. Similarly, a
credit scare across an industry sector or with respect to
a particular issue can have a dramatic liquidity impact.
This alert focuses on liquidity with respect to individual bonds and does not address liquidity issues related to
bond funds.
Buying and Selling Bonds
Not all investments are bought and sold the same way.
A market’s structure dictates how trading takes place
and impacts the liquidity of what is traded.
Most bonds trade through dealers who buy and sell
bonds for their own account. This is different from
exchange-listed stocks, where generally your broker acts
as your agent and delivers the order to an exchange
where a buy order is matched or crossed with a sell
order.
In the case of most bond orders, if you place a sell
order with your firm, it will offer to buy your bonds at a
stated price. As part of that process, your firm will likely
search the market to find other potential buyers, and
may sell the bonds to another buyer immediately after
purchasing them from you. Alternatively, the firm may
buy your bonds and hold them, taking the risk that it will
find a buyer(s) at a later time.The relatively recent development of electronic bond trading platforms has helped
increase the efficiency of bond trading, but these platforms are not exchanges and a firm may not have linked
to all of them.
The bond market is structured in this way because
bonds have diverse characteristics, can trade in large
blocks and may trade infrequently. Many investors hold
bonds to maturity — in other words, they collect interest payments throughout the life of the bond and then
receive a return of principal at maturity. Unlike bonds,
stocks do not mature — an investor must trade a stock
to realize a return of principal. This contributes to a
higher volume of trading activity in the stock market
versus the bond market.
Broker Compensation
In the majority of bond transactions, a brokerage firm
acts as principal, selling you a bond that the firm already
owns. When a firm sells you a bond in a principal capacity, it may increase or mark up the price you pay over
the price the firm paid to acquire the bond. Similarly,
if you sell a bond, the firm, when acting as a principal,
may offer you a price that includes a mark-down from
the price at which it believes it can sell the bond. The
mark-up or mark-down is the firm’s compensation. If the
firm acts as agent, meaning it acts on your behalf to buy
or sell a bond, you may be charged a commission, which
will appear on your trading confirmation.
Pressures on Bond Liquidity
A number of factors have the potential to put pressure
on bond liquidity.
■ Market breadth. The sheer number and diversity of
bonds potentially affects liquidity. The market includes
corporates, municipals and Treasuries to name a few,
each with different characteristics and risk factors.
Different bonds issued by the same company can
have different characteristics. Assigning value and
quickly matching buyers and sellers in a market with
so many bonds and so little uniformity is no easy
task.
■ Dealer inventory. Since the financial crisis, many dealers have reduced their risk-taking and are not buying
or holding as many bonds as in the past. With fewer
buyers and sellers in the market, it may be harder for
you or your broker to find a buyer willing to purchase your bond at a price you consider attractive,
11
11_12 FINRA Use_Oct15_11_12 8/18/15 1:00 PM Page 12
PERSONAL FINANCE | FINRA
■
especially during periods of market volatility.
Selling pressure. Any time multiple owners of a bond collectively seek to sell at the same
time, liquidity may be reduced.
Market corrections, domestic or
global economic shocks, or
interest rate increases could trigger many investors to sell bonds
without many buyers interested
in purchasing.
■
■
Investor Action: Questions to Ask
Even buy-and-hold investors who
have no intention of selling their
bonds before maturity can benefit
from better understanding how
bond markets work. These questions
can help clarify how lower liquidity
in the bond market could impact
your bond holdings. Whether you
are thinking about making a bond
investment, or already own bonds,
ask your broker or adviser:
■
12
1. How does your firm handle bond
trades, particularly sell orders? For
instance, some firms have fullservice bond desks that can commit the firm’s money to purchase
your bonds, or have arrangements with dealers that offer liquidity. Most firms also subscribe
to one or more electronic bond
trading platforms. A firm with
these types of resources may be
■
■
able to find liquidity when you
seek to sell your bonds.
2. How often has this security
traded in the recent past? Bonds
that consistently trade with relative frequency tend to have more
potential buyers and greater
liquidity than bonds that trade
sporadically.
3. In what price range has the security traded during that time period?
Price swings (volatility) may make
it harder to trade your bond, or
increase the cost of your trade.
Investors can go to FINRA’s
TRACE Market Data Center for
real-time and historical transaction prices for corporate and
agency bonds, and end-of-day
prices for U.S. Treasury Bonds.
Investor s can also use the
Municipal Securities Rulemaking
Board’s EMMA service. EMMA
provides disclosures, trade data
and other information related to
municipal securities.
4. Does your firm offer any fixedincome analysis tools? These tools
may help you model the impact
of interest rate fluctuations on
the value of your bond holdings. Not all investments will
be equally affected by rising
interest rates.
5. How can I construct my bond
portfolio to better meet my liquidity
needs? Your broker or adviser can
help you determine which securities may be better matched
with short-term versus long-term
liquidity needs. You may also
want to discuss how you can
construct a bond portfolio that is
relatively more resilient to interest rate changes, particularly a
rise in interest rates, and the pros
and cons of doing so.
In addition to talking to your
broker or adviser about these questions, read the information about
your bond in the bond circular,
information sheet or official statement. Pay close attention to infor mation about the risks that the bond
investment poses, including liquidity
risk. Those risks can change over
time, so be sure to read any supplements to the original disclosure documents that update investors. Ask
yourself when, at various points
over your investment horizon, you
will need readily available cash, and
whether the cash flow from your
bond investments will be consistent
with your needs.
■■■
FINRA is the largest independent
regulator for all securities firms
doing business in the United States.
Its chief role is to protect investors
by maintaining the fairness of the
U.S. capital markets.
13_14 PF_Financial Planner_A_K 2_Oct15_13_14 8/18/15 1:56 PM Page 13
Financial Planner | PERSONAL FINANCE
Becoming a Benefactor Does Wonders for Your Health and Your Tax Status
Giving to Charity Is Good for You
by Alexandra Armstrong, CFP, and Kelly Wright, CFP
Mahatma Gandhi said, “The best way to find yourself is to lose
yourself in the service of others.” A 2008 study by Harvard
Business School found that giving money to someone else
lifted participants’ happiness more than spending it on themselves. These good feelings are reflected in our biology. In a
2006 study, the National Institutes of Health found that when
people give to charities, it activates regions of the brain associated with pleasure, social connection and trust, creating a
“warm glow” effect. Scientists also believe that altruistic
behavior releases endorphins in the brain, producing the positive feeling known as the “helper’s high.”
A
December 2014 study in the Journal of Economic
Psychology showed that giving to others reduces
stress and strengthens the immune system and
that tax subsidies for charitable giving may have positive
spillover effects on health. So why not try to help the
world and your own well-being in the most tax-efficient
manner possible? The tax laws are written so that we get
a tax deduction when we give money to charities we support, so it makes sense to plan accordingly.
Giving Cash
The easiest way to give monetarily is to write checks to
the charities of your choice. As long as you itemize your
deductions, these amounts are subtracted from your taxable income, up to a maximum of 50 percent of your
adjusted gross income. Thus, if you’re in the 28 percent
federal tax bracket, for a donation of $10,000, you save
$2,800 in federal taxes so that your actual out-of-pocket
cost is $7,200. Of course, if you live in a state with income
tax, the out-of-pocket cost is even less, since you save state
income tax as well. Although the easiest, this method is
the least tax-efficient way to make a charitable gift.
Giving Shares of Stock or Mutual Funds
Besides gifts of cash, there are several other ways to give
to charity. From a tax-efficiency standpoint, gifting appreciated securities is far more advantageous. Let’s say you
invested $2,000 in a stock several years ago and it’s now
worth $10,000. If you sell it, you’d owe $1,200 in capital
gains tax, netting $8,800 after tax.You could then give the
$8,800 to charity and get a $2,464 deduction.
Instead, if you give the shares directly to charity, you’ll
receive a $10,000 tax deduction, which will save you
$2,800 in federal income tax and save the $1,200 in capital gains tax, assuming a 28 percent tax bracket.You’re saving the world and $1,536 by giving shares rather than
cash. Everyone comes out ahead!
It’s important to note the maximum deduction for giving appreciated securities is 30 percent of your AGI versus
50 percent for cash in any one year. If your gift of stock
exceeds this limitation, the excess amount can be carried
forward for up to five more years. If you own an appreciated security and still feel it has upside potential, you
can buy more of it and then gift the older appreciated
shares. But be very careful doing this — it’s crucial in this
and other gifting strategies that you identify which shares
you’re giving to charity.
If giving appreciated shares, it’s important to identify
the shares with the lowest cost basis so that you’re removing the maximum in capital gains from your portfolio.
Broker/dealer firms don’t do this by default, so we recommend you instruct them in writing, as they may not even
have a place on their forms for it. Also, the shares you give
must be held for more than one year or you get credit only
for your cost basis of the security rather than for the
appreciated amount. For example, if you bought a stock
that went from $2,000 to $10,000 in less than a year
(kudos!) and gave that stock to charity, you would only get
a $2,000 deduction.
Donor-Advised Funds
What if you have an appreciated stock, are worried about
it going down from current levels, want to give to charities, but don’t want to decide which charities to give to at
this time? Here you can give your stock to a donor-advised
fund, which qualifies as an intermediary charity. You’ll
receive a full market value deduction in the year that you
give the stock to the DAF. The DAF establishes a fund in
your name. Thereafter, the DAF makes gifts to charities
from your fund. Legally, you cannot control these distributions, since you gave the stock permanently and irrevocably to the charity. But you retain the right to make “suggestions” as to who receives the distributions.
The DAF is entitled to accept or reject those suggestions, but in practice it won’t usually reject proper and
reasonable suggestions. As always, investigate and compare before selecting a donor-advised fund. Generally,
DAFs are established with gifts of $5,000 and more.
Split Gifting
As charitably inclined as you might be, you may not be
able to afford to give away stock or cash to charity.
Instead, there are various ways you can give to charities
and let them provide you with lifetime income. Included in
this group are a pooled income fund, a charitable gift annuity
and a charitable remainder trust.
Pooled income funds usually are for gifts of $20,000
and up. Charitable gift annuities are generally used for gifts
above $10,000. Charitable remainder trusts are typically for
larger gifts of $200,000 or more and are the only choice
where the person giving wants to continue to control the
investments.
13
13_14 PF_Financial Planner_A_K 2_Oct15_13_14 8/18/15 1:56 PM Page 14
PERSONAL FINANCE | Financial Planner
There are differences between
these gifting devices, but the basic
principle governing each is the same.
In each case, you give your shares to a
recognized charity and, in return, you
receive income of at least 5 percent
of the value of the trust each year for
life and possibly for the life of your
spouse or beneficiary. In the year you
give your shares, you’ll be entitled to
an income tax deduction.The amount
of the deduction is determined by
your age, if the income is for your
life and the life of your spouse, and
the amount or percentage of in come you’re projected to receive.
After you — or you and a designated
beneficiary, such as your spouse —
die, the remaining principal goes to
the designated charity. The tax deduction is determined on this remainder.
In the case of the pooled income
fund and charitable gift annuity, you
give the shares to a specific charity.
It’s important to realize all charitable
gifts are irrevocable — that is, you
can’t change your mind as to the gift
or the recipient. With a charitable remainder trust, however, you can have
the flexibility to designate the charities
you want to benefit from your gift and
can reserve the right to change the
beneficiaries at a later date.
Pooled Income Fund
With a pooled income fund, you give
the shares to the charity, and it places
them in a “pool” with other gifted
money. The sponsoring charity manages the money in the fund for you
and the other beneficiaries and pays
you monthly or quarterly income.
The level of income you receive will
change periodically based on the
income that the assets in the pooled
income fund are earning.
Charitable Gift Annuity
With the charitable gift annuity, you
give the shares to the charity, and in
exchange it provides you with fixed
income based on actuarial tables. The
older you are when you give to the
charity, the higher your income will be.
Charitable Remainder Trust
The charitable remainder trust is a
more complex way to gift and is
14
really more suitable for larger gifts of
$200,000 or more. If you want to give
the money to just one charity and
don’t want to reserve the right to
change your mind as to the beneficiary, the charity often will help by
providing you with sample documentation and may even serve as trustee
of the trust. If you want more than
one charity to benefit or if you want
to retain the right to change the charities at a later date, you’ll need a
lawyer to draw up the document for
you. It’s important to consult a lawyer
skilled in charitable tax planning
matters, as this is a complex area.
The CRT will pay you income for
your lifetime, plus that of another
beneficiary, if you so wish, or for a
specified period up to 20 years. At the
end of this period, the CRT terminates
and the assets go to the named charity or charities. Under a 1997 law
change, the charitable interest must
have a value equal to at least 10 percent of the amount placed in the
trust. Once the CRT has been established, you can give either appreciated property or cash to the CRT.
There are two types of CRTs: the
unitrust and the annuity trust. The
unitrust pays you a percentage of the
annual appraised value of the account.
The annuity trust pays a fixed dollar
amount or a fixed percentage of the
amount given. This amount wouldn’t
change annually.
Once the CRT is set up, you must
name a trustee. You may be your own
trustee, but if so you must name a successor trustee for the disposition of
your assets after your death or in the
event of your disability. Of course,
if you choose to serve as your own
trustee, you’ll be subject to fiduciary
limitations in investing and otherwise
managing the trust, with potential liability for mistakes. The CRT must file
a tax return each year and this, too, is
the trustee’s responsibility.
If you exchange your shares for an
interest in a pooled income fund or a
charitable gift annuity, you’ve given up
control over the investments. The same
is true if you give your money to a CRT
run by a charity. Your gift is irrevocable.
If you’re the trustee of your CRT, you
must supervise the investments.
A Great, But Complicated, Strategy
Using one of these planned giving
techniques is an excellent financial
planning strategy. You can avoid paying capital gains on a stock gain, receive a current tax deduction, obtain
regular income — usually at a higher
rate than your investment is currently
paying — and benefit your favorite
charities.
Gifting your securities isn’t a simple
matter, particularly since once you’ve
given the money away you can’t take it
back.Therefore, it’s mandatory that you
seek independent professional advice
before giving to charity.
Also, remember to identify which
shares are to be gifted without exception and that any gifted security has
been held for more than a year.
Your financial planner, working
with your estate-planning lawyer as
well as your charity, should be able to
provide you with the necessary specific advice.
Ms. Armstrong is a certified financial
planner practitioner and chairman of
Armstrong, Fleming & Moore, Inc., a registered investment advisory firm located
at 1850 M Street, NW, Suite 250, in
Washington, DC 20036-5813, 202-8878135. Securities are offered through
Commonwealth Financial Network,
member FINRA/SIPC.
Kelly Wright, certified financial planner practitioner, co-author of this article,
is vice president of financial planning at
Armstrong, Fleming & Moore, Inc.
Investment advisory services are offered
through Armstrong, Fleming & Moore Inc., a
SEC-registered investment adviser not affiliated with Commonwealth Financial
Network. Consult your personal financial
adviser before making any decisions.
Ms. Armstrong and Mr. Wright can’t
answer individual inquiries, but welcome
suggestions for future article topics.
This material has been provided for
general informational purposes only and
does not constitute either tax or legal
advice. Investors should consult a tax or
legal professional regarding their individual situation.
The above examples are hypothetical
and are for illustrative purposes only. No
specific investments were used in the
examples. Actual results will vary.
15_18 Repair Shop SH_Oct15_15_16_17_18 8/18/15 3:51 PM Page 15
Repair Shop | INVESTMENT CLUBS
6-Player 1973-Era Club Now ‘Deals In’ 41
From Poker Night to a $2.5M Portfolio
by Scott D. Horsburgh, CFA
Mutual Friends Investment Club of St. Louis began in 1973
with six members. Its primary purpose was to have an excuse
to get out of the house and play poker. Its first investment was
more like playing cards than investing. The club used its first
two months of dues to buy 100 shares of a $1 stock, a small
oil company that went bankrupt.
D
espite this inauspicious beginning, within three
years it had amassed a portfolio approaching
$10,000 and decided it needed an investment
method rather than just listening to hearsay. It joined
BetterInvesting. Fast forward another 39 years and by any
standard, Mutual Friends is an exceptionally large investment club. It now has 41 members, including three of the
six founders, and a $2.5 million portfolio. In contrast to
the early days as a poker night, the club has developed
businesslike processes to manage its club and the portfolio. One significant benefit has been a “guiding light” all
these years, a member who “has the greatest passion for
investment clubs,” in the words of another co-founder.
Among its healthy practices are the ways it tries to
“force participation on members.” All members have to
know how to prepare a stock study, and the club offers
classes for new members. Having 41 members and about
20 stocks means that each stock is followed by at least
two members. Sometimes there are benefits to having
such a large club. It’s succeeded in attracting younger
members, a challenge for many clubs. One secret to its
success is that it keeps monthly meetings brief by encouraging members to prepare and share their work in
advance, by email or by posting to the club’s website. To
maximize the efficiency, the club produces a monthly
Portfolio Committee Report that provides updates on
each stock, including a buy-hold-sell recommendation.
Mutual Friends admits that it trades a lot. In fact, it
trades more than any club I’ve seen. In a one-year period,
the club transacted in every stock in the portfolio.The total
number of holdings remained at 20, 10 of which were
brand-new holdings; 10 former holdings were sold in their
entirety and another 10 were either partially sold or added
to. I don’t think the club realizes that it’s far out of the
BetterInvesting mainstream. Trading is good when it’s
based on facts, but this level of trading suggests restlessness. In addition, studies have shown high levels of trading
to be associated with lower returns. But Mutual Friends
beat the Standard & Poor’s 500 handily in 2013 and trailed
Mutual Friends Investment Club
Company
Ticker
No.
shares
Agrium
Air Lease
Archer-Daniels-Midland
Cognizant Technology Solutions
Cummins
Customers Bancorp
Gentex
Greenbriar Companies
Heartland Financial USA
HollyFrontier
IPG Photonics
National Oilwell Varco
Packaging Corp. of America
PRA Group
Skyworks Solutions
Synaptics
Cash
Average
TOTAL
AGU
AL
ADM
CTSH
CMI
CUBI
GNTX
GBX
HTLF
HFC
IPGP
NOV
PKG
PRAA
SWKS
SYNA
2300
2200
2100
2200
1350
4050
5000
1550
3800
5400
800
1800
2400
3000
1200
2400
Cost
June 15, 2015
Price
Value
$214,788
85,001
76,680
87,436
147,076
97,406
72,074
93,999
111,179
202,279
54,420
125,906
163,676
171,618
55,881
155,108
256,574
$104.20 $239,660
35.96
79,112
51.27 107,667
62.98 138,556
135.85 183,398
26.54 107,487
16.94
84,700
59.57
92,334
36.58 139,004
40.73 219,942
91.84
73,472
48.35
87,030
66.80 160,320
58.92 176,760
106.11 127,332
100.52 241,248
256,574
Gain/
(loss)
%Gain/
(loss)
$24,872
11.6
(5,889) (6.9)
30,987
40.4
51,120
58.5
36,322
24.7
10,081
10.3
12,626
17.5
(1,666) (1.8)
27,825
25.0
17,663
8.7
19,052
35.0
(38,876) (30.9)
(3,356) (2.1)
5,142
3.0
71,451 127.9
86,140
55.5
Quality % Growth % of
Trailing Trailing
rating* estimate** portfolio
P/E
EPS
3
3
2
2
3
3
3
4
3
3
3
3
3
3
3
3
12
18
7
17
11
N.A.
11
12
10
16
35
(9)
9
15
21
16
9.5
3.1
4.3
5.5
7.3
4.3
3.4
3.7
5.5
8.7
2.9
3.5
6.4
7.0
5.1
9.6
10.2
13
$2,171,101
$2,514,595 $343,494
15.8
19
15
15
26
14
15
17
13
14
13
22
8
15
15
32
35
$5.46
2.42
3.35
2.41
9.45
1.75
1.01
4.64
2.59
3.14
4.12
5.92
4.59
4.01
3.34
2.91
18
100
* Based largely on rankings published by Value Line.
** As estimated by the author, with data from Thomson Financial Network.
Note: Numbers in the table have been rounded.
15
INVESTMENT CLUBS | Repair Shop
it modestly last year, so the additional
trading doesn’t appear to be a significant problem.
The club has questions about certain economic sectors. Specifically, it
wonders whether there are any to
avoid in an aging bull market and if
the club should invest in the drug/
health care sector.
The Mutual Friends portfolio is
eclectic. More than one-third is in
small-cap stocks and only a quarter is
in large-caps. Although technology is
its largest sector representation, financial services and industrial companies
are the next largest sectors.
Cognizant Technology, IPG Photonics,
Skyworks Solutions, Synaptics
The club’s tech holdings are Cognizant
Technology Solutions (ticker: CTSH), IPG
Photonics (IPGP), Skyworks Solutions
(SWKS) and Synaptics (SYNA). Skyworks
and Synaptics sell components for consumer electronics, primarily mobile
handsets. Skyworks manufactures analog circuits, the low-tech cousin of
sexier computer chips. Its products
amplify, convert or regulate basic
functions such as power and signal
flow. The increasing complexity of
communications devices provides opportunities to develop new products
to limit the weight and power demands
of various components. Synaptics specializes in human-computer interfaces,
including touch screens, fingerprint
ID systems and physical and digital
pointing and scrolling features.
Both stocks appear reasonably
valued when viewed on a non-GAAP
price-earnings ratio basis, as these two
companies encourage. GAAP refers to
generally accepted accounting principles, established by professional accountants. Non-GAAP earnings ignore
certain noncash expenses such as
stock-based compensation and intangibles’ amortization.
Skyworks’ non-GAAP earnings per
share was 35 percent higher than its
GAAP EPS in the first quarter.
Synaptics’ non-GAAP EPS was about
double its GAAP EPS in the first
quarter. Skyworks’ P/E is 24 on a
non-GAAP basis but 32 on a GAAP
16
basis. For Synaptics, the P/Es are 18
and 35, respectively.
There remains considerable growth
potential in both companies despite
the risks. Rapidly changing technology has a way of making losers into
winners and winners into losers faster
than in other industries. The way to
control the risk is by keeping the position sizes reasonable, which means
taking occasional profits. The high
portfolio concentration of the club’s
Synaptics holding should be evaluated
in this context. I’m a bit concerned
about the club’s exposure to smartphone components in general, and
the club may want to evaluate networking technology firm F5 Networks
(FFIV) as a way to diversify.
Cognizant is a stabilizing factor
among the club’s tech investments.
It’s a leading provider of technology
services to large companies primarily
in the U.S. and Europe. It’s a steady
grower with solid margins. Cognizant’s
superior ability to capitalize on customer demand for social, mobile, analytics and cloud (SMAC) services will
drive future growth. Cognizant is a
classic “railroad track” stock, but it
trades at a premium P/E that reflects
its reliable growth.
IPG Photonics is a combination
of technology and manufacturing. It
provides fiber lasers for welding and
cutting applications. Compared with
conventional lasers, fiber lasers offer
more precision, better energy efficiency and lower maintenance costs.
Growth is strong, but the cyclicality
of its industrial applications makes
the stock vulnerable in a recession.
Cummins, Gentex, Greenbriar,
Packaging Corp. of America
Overall, portfolio has a higher degree
of economic sensitivity than most I
review. Even excluding semicyclicals
such as IPG Photonics, Agrium (AGU)
and Archer-Daniels-Midland (ADM), its
exposure to traditional industrial companies is almost 21 percent of the
portfolio. This isn’t a problem when
the global economy is growing, but it
could become an issue as we approach
the next inevitable slowdown.
Diesel engine manufacturer Cummins (CMI) is a very well-run company at a reasonable price. Its growth
has been solid, particularly for an
industrial company. It stands to benefit from the Environmental Protection Agency’s plan to require heavy
trucks to improve their fuel efficiency by 2027.
In a high-priced market where
growth has become harder to find,
Gentex (GNTX) continues to move forward. The company manufactures
auto-dimming car mirrors and related
electronics. It’s found ways over the
years to expand the importance of
mirrors, including as a medium to control garage door openers, house lights
and even backup-assist cameras. It
offers reasonable growth and value.
The club’s investment in Greenbriar (GBX) is a head-scratcher. This
company is a large manufacturer of
train cars. The club appears to have
been emboldened by its previous
favorable experience owning rival
Trinity Industries (TRN), which it ultimately sold owing to concerns about
lawsuits faced by one of its nonrail
businesses. Greenbriar’s recent results
have been tremendous, but its longterm history is characterized by moderate, cyclical growth.
Packaging Corp. of America (PCA) is
all things paper, packaging and cardboard. It operates in a mature industry, so much of the growth comes
from acquisitions. The big jump in
sales in 2013-2014 occurred because
of the acquisition of Boise, Inc.,
which made PCA the fourth largest
producer of containerboard in North
America. But organic growth has still
averaged 5 percent to 6 percent, including the impact of the 2008-2009
recession. The company continues
to diversify its product mix away
from pure commodity products in
favor of higher value-added ones.
Looking at their histories, Cummins,
Gentex and PCA could experience
EPS declines of 20 percent to 40 percent in a recession. The club is concerned about exposures in an aging
bull market, but these three should
do fine until recession worries even-
Repair Shop
Mutual Friends Investment Club of St. Louis. Font row, from left: Ken Belcher, Jim Belcher, Bill Belcher, Ray Bahr, George Vallar, Jim Russomanno,
Jim O’Gorman, Dave Wicks and Bryan Hagerty. Back row: Matt Morehead, Joe Brueggemann, Charles D'Angelo, Bud Vance, Tom Visconti,
Jerry Smith, Greg Ziegenfuss, Denny Fleming, Curt Boyer, Bob Roberts, Jerry Wright, Jerry Arana and Kyle Lang. Not pictured: Dave Augsburger,
Bryce Bunton, Tom Farishon, Jerry Frein, Rich Grawer, Max Karpman, Alan Lee, Tim May, Santee Nixon, Allen Osuka, Jay Peters, Rusty Ryan,
Rocky Sandcork, Tim Seymour, Jim Sievers, Pete Stevener, Ray Stoltz and Steve Zielinski. Each member is required to know how to prepare a stock study.
tually creep into investors’ psyches.
The risk in Greenbriar is higher; selling this stock would be one way to
reduce the portfolio’s economic risk.
Archer-Daniels-Midland, Agrium
Exposure to agricultural companies
also raises the economic sensitivity
of the Mutual Friends portfolio.
Archer-Daniels-Midland is one of the
largest processors and manufacturers of agricultural commodities and
food ingredients. ADM’s P/E is a reasonable 15, but growth has been modest since the recession. Packaged
food companies, ADM’s customers,
are coming under increasing pressure because of slow growth. The
club should challenge this holding,
as it is a candidate for an upgrade
when a better, reasonably-priced
growth stock comes along.
Agrium is one of the largest manufacturers of fertilizer and potash.
The stock is trading at more than 10x
peak EPS from 2011-2012 and 19x
trailing EPS. This seems fairly rich for
such a volatile company. The bottom
line is that 9 percent of the portfolio
in Agrium is a major investment in
such a cyclical company. I’d consider
selling at least half the investment
soon and, though I’m certainly no
expert on agriculture, would look at
selling the entire holding unless the
club can point to an imminent surge
in business that’d warrant holding
onto Agrium.
National Oilwell Varco,
HollyFrontier,
The portfolio has additional economic exposure from its energy
holdings (12 percent of the portfolio). Before oil prices came down,
energy stocks made up 31 percent of
the portfolio. The current allocation
approximates energy’s weight in the
S&P 500 and is the most I’d consider
investing in energy. Personally, I’ve
never invested in the sector. The
problem with commodities companies is that investment success
depends more on the commodity’s
price than on managements’ smarts.
Even poorly run commodities companies look good when the price of
their commodity goes up, but even
well-run commodities firms fare
poorly when the commodity price
falls. I prefer to invest in a company
whose management is more impor-
tant to its growth than factors
beyond its control such as prices.
National Oilwell Varco (NOV) appears
to be one of the better-positioned
energy companies for the long run,
even though its recent results have
been poor. If one must invest in
energy, this is what I’d consider.
Refining companies such as HollyFrontier (HFC) have held up better than oil
exploration companies, but they’re
extremely volatile over time. Oil refining spreads fluctuate wildly, making
refiners more suitable for short-term
trading than long-term investment.
I’d look to exit HollyFrontier.
Customers Bancorp,
Heartland Financial
The remainder of the Mutual Friends
portfolio consists of cash (10 percent)
and financial stocks (20 percent).
This is a heavy allocation to financial
stocks.Customers Bancorp (CUBI) is a
very interesting, but somewhat risky,
smaller bank. It’s led by Jay Sidhu,
who also led Sovereign Bancorp to
become an $89 billion bank that
was ultimately acquired by Banco
Santander (SAN) of Spain. Sidhu’s leadership of Sovereign was controverOctober 2015 | BetterInvesting |
17
INVESTMENT CLUBS | Repair Shop
sial, but there’s no doubt that he knew
how to grow. Sovereign became difficult to control because of the many
acquisitions it made. He says Customers Bancorp will be different,
but acquisitions remain key to its
strategy. Only time will tell.
The club also owns a small bank
called Heartland Financial (HTLF). It
looks like most other small banks —
modest growth, decent P/E, took a hit
in the 2008-2009 downturn. Nothing
really stands out in terms of investment appeal, so I’d sell and move on.
Air Lease, PRA Group
Mutual Friends also has two nonbank financial companies, Air Lease
(AL) and PRA Group (PRAA). Air Lease
is run by aircraft industry legend
Steven Udvar-Hazy, the founder and
longtime CEO of International Lease
Finance. Both companies buy and
lease out aircraft around the world.
Air Lease has one of the youngest
fleets of aircraft in the industry. It’s
leased all its 2015 aircraft deliveries
and almost all of 2016’s deliveries, so
growth should be predictable over
the next couple of years. Air Lease
also operates a fund that allows institutional investors such as pension
funds to participate more directly in
aircraft leasing. In this market, a P/E
of 15 for 18 percent annual growth is
very difficult to find.
PRA Group was formerly known
as Portfolio Recovery Associates. Its
primary business is the purchase of
portfolios of charged-off credit card
debt from banks for pennies on the
dollar; PRA then attempts to collect
what’s owed.
The collections industry has a bad
reputation, and there is little PRA can
do to change that. It seems to make a
reasonable effort to police its collectors and to develop systems and methods to comply with collection laws.
Growth has been good, and its reasonable P/E of 15 reflects investor distaste for the industry.
Parting Thoughts
Mutual Friends is concerned about
its high degree of turnover. Most
clubs I write about are too patient,
meaning that they stay with losers
too long. Clearly, stocks sometimes
need to be sold, such as when Mutual
Friends sold Michael Kors (KORS)
before a big downstroke. But the
club needs to learn to be more
patient with its stocks. One helpful
method would be to buy more
durable companies that can be held
for many years. The club has had in
the past too much exposure to oil, and
now it has too much exposure to
industrial, agricultural and energy
companies that together represent
more than 45 percent of the portfolio.
Pare back that exposure.
Diversify the exposure to smartphone components by selling at least
some of Synaptics. Other stocks can
likely be improved on and should be
regularly challenged until a better
opportunity is identified.
The club doesn’t have any health
care exposure, a very unusual situation for a growth-oriented club.
Unfortunately, health care stocks have
become more expensive. Consider
Gilead Sciences (GILD) and Celgene
(CELG) as possibilities.
Stock prices change every day,
but company fundamentals change
much more slowly. I’d urge more
patience with holdings as long as the
fundamentals remain favorable.
Resist the temptation to take
major action at every meeting.
Remember, studies have shown that
high levels of turnover are associated with below-average returns.
The author and/or clients of his firm
may have positions in some of the
stocks mentioned in this article. No
investment recommendations are
intended.
Announcing a New Member Benefit for BetterInvesting Investment Clubs
Investment Clubs Can Now Calculate
Their Renewal Online
Using Our New Club Renewal Calculator!
Just fill in the information requested on the online form and the application
will generate the correct fees for your club renewal. You can then print out
a PDF to include with your payment.
No paper form to fill out • Take advantage of club offers and discounts
Avoid miscalculation • Update your club roster • Explore multi-year options
To Access the New Online Club Renewal Calculator
Visit: www.BetterInvesting.org/clubrenewal
18
19_The Clubhouse_Oct15_19 8/21/15 10:59 AM Page 19
The Clubhouse | INVESTMENT CLUBS
Club Accounting
Software Helps You Divvy Up Earnings Based on Time
How Much of a Portfolio Do You Allocate to a Member?
by Russell Malley, Club Accounting Adviser, ICLUBcentral
Recently I answered a support question that was related to a
setting chosen by the club in its accounting software. Software
settings have an effect on what the club sees on reports and
the numbers reported to the Internal Revenue Service at tax
time. In this article I’ll cover settings that may affect allocations and tax report numbers.
T
he more important of these two settings is the
Time-based earnings allocation. This setting should
be set to use the time-based allocation process.
The nontime-based allocation will use each member’s
ownership percentage at year-end to allocate income and
expenses. The time-based allocation will allocate income
and expense items according to the ownership interest of
each member at the time the income or expense transaction was posted into the software.
For clubs with stable membership and minimal changes
in percent ownership during the year, the difference
between the time-based and nontime based allocations
will be minimal.Withdrawals and adding new partners can
make the difference significant, especially if they’re posted
late in the year-end.
Here’s an example: A club sells several positions early in
the year, realizing total gains of $10,000. The club doesn’t
sell any other positions during the year. It also adds a member in November. This new member contributes enough
to have a 10-percent interest in the club.
At year- end the treasurer runs the allocation process.
If the allocation setting was set to time-based, the new member would have zero capital gains allocated to him, as the
club didn’t realize any gains from sales during the period
this member belonged to the club. If the allocation setting
was nontime-based, the software would allocate $1,000 of
the club’s gains for the year to this member. The nontimebased allocation setting uses the year-end percent ownership of 10 percent to allocate this member’s share of club
earnings. Because the club used nontime-based allocation
of earnings, this new member would be reporting a capital
gain of $1,000 and a possible increase in taxes owed.
The next allocation setting is the Do not distribute units
at end of year starting in: setting. This setting has its roots
in the original ICLUBcentral Club Accounting software. Club
earnings and expenses were to be treated like a mutual
fund’s earnings. Most funds assume the net income from
yearly operations is distributed to shareholders.
If the net income was positive, this asset left the
mutual fund, resulting in the net asset value dropping. If
the net income was negative, this liability left the mutual
fund, resulting in an increased net asset value.
The unit value of an investment club is similar to the net
asset value of a mutual fund.The original Club Accounting
performed this same process at allocation and then assumed
the distribution was reinvested by the members. The
result was often an allocation report that confused club
members. It also resulted in many explanations from support staff on why units were being added or subtracted
by this process.
With the launch of myICLUB.com, clubs had the chance
to opt out of the fund process with this new setting. From
the beginning it was recommended that clubs start the
“Do not distribute” option as soon as possible.
To check and possibly change these settings in your
software, go to the following:
In Club Accounting 3, go to Tools > Settings
For myICLUB.com the path is:
Utilities > Allocation settings
19
20_The Clubhouse_Oct15_20 8/21/15 11:52 AM Page 20
INVESTMENT CLUBS | BetterInvesting Family
20 Years Together Celebrated in Orlando, Fla.
N.C. Club Takes Anniversaries on the Road
as told to Angele McQuade by Tammy Fussell and members of the $In the Black$ Investment Club of Greensboro, N. C.
The partners of the $In the Black$ Investment Club of North Carolina recently
celebrated the club’s 20th anniversary
with a vacation to Reunion Golf & Spa
Resort in Orlando, Fla. Over their weeklong celebration, the partners held the
club’s annual fellowship lunch with
homemade dishes and desserts, and
they toasted to “many more years of
prosperity.”
other online resources for stock research, tracking and management.
“BetterInvesting’s educational benefits have been invaluable,” Fussell
says. “It’s important to stay connected and keep learning. Technology
has greatly improved the productivity and effectiveness of this work.
“All clubs should take advantage
of investment fairs and conferences
“We look for growth companies
with a long horizon that will appreciate in price and dividends,” Fussell
says.“We try to diversify our portfolio,
stick with businesses that we understand, companies without major debt
and look for diversity on the board.
Bed Bath and Beyond (BBBY) is our
favorite investment, with returns
of over 70 percent! As women and
shoppers, it was a stock with
hey greatly enjoyed
which we could easily
the many offerings of
relate.”
the Orlando area, in“For our 10th anniversary
cluding a water park, outlet
in 2005,” Fussell says, “we
malls, Universal Studios City
took a trip to New York. We
Walk and dinner at the Bob
toured the New York Stock
Marley restaurant for authenExchange and Financial
tic Jamaican cuisine and live
District, being sure to take a
reggae music. They also atpicture with the bull. The
tended a soul-stirring gospel
true test for our club was
brunch at the House of Blues
the recession in 2008. We
in Downtown Disney.
did not panic but relied on
From the club’s first meetthe analysis tools to guide
ing in Winston-Salem, N.C.,
us through the ‘financial
in 1995, $In the Black$ has
storm.’ First and foremost,
built lasting friendships.The
our strong relationships
new club’s partners chose
were the support to stay the
the name $In the Black$ “as $In the Black$ Investment Club of North Carolina. From left: course.”
a means of identifying the Tammy Fussell, Johnsey Steppe, Saundra Scales, Sharon Munroe,
Asked the club’s best
ethnicity of club members Tanya Robinson-Caldwell and Yolonda Gaylor.
advice for other clubs,
and suggesting the financial
Fussell’s answer is simple.
success of the club,” mem“Spend the time and money
ber Tammy Fussell says.
on developing your partner“We’re all African-Amership agreement, and also be
ican women from different
sure to invest in the personal
walks of life,” she says. “We
relationships.That’s what will
started out with 10 mempay the greatest dividends
bers living and working in
over time.”
North Carolina. Today, due to career to learn the latest concepts and tips
moves, we hold our annual meeting to investing.”
in person, but all other meetings
With a current portfolio value of Angele McQuade is the author of
with our six current members are about $110,000 (after $44,000 in pay- two books, including Investment
conference calls.”
outs to past members), the club has Clubs for Dummies. She lives in
purchased 49 individual stocks and Arlington, Va., where she also writes
Online Resources
realized double-digit total returns novels for children and teens.
If you’d like to be featured in
The club initially created manual over the past 20 years.
Stock Selection Guides using colored
Club partners’ plans for those in- a future profile, contact Angele
pencils but now uses the Investor’s vestment gains include travel around through her website:
www.angelemcquade.com
Toolkit 6 program, webinars and the United States, Europe and Africa.
T
“
Be sure to invest in the personal
relationships. That’s what will pay
great dividends over time.
”
20
21_23 Stock to Study_Oct15_21_22_23 8/20/15 1:19 PM Page 21
Featured Company | STOCK TO STUDY
Flaps Up and Gaining Altitude
The skies seem to be clearing for domestic airlines. Lower
fuel costs, growth in passenger demand, better pricing
power and reduced debt have brightened the industry’s
prospects these days.
mon types were the Boeing 757-200 (124) and McDonnell
Douglas MD–88 (117).
In addition, seven regional lines were operating 499
aircraft on behalf of Delta in 2014.
Transporting passengers
generated $35 billion in fiscal
assenger volume is up,
2014 (ended Dec. 31, 2014),
according to Standard
which constituted 86.6 perand Poor’s.Total revenue
cent of total operating revepassenger miles, a standard innue. The passenger revenue
dustry metric, rose 2.3 percent
included Delta’s results from
in 2014. Last year’s growth
regional carriers.
was stronger than in 2013,
The company reported flywhen total revenue passenger
ing 202.9 million revenue pasmiles increased 1.8 percent.
senger miles in 2014, up 4.1
Delta Air Lines (ticker:
percent from 195 million the
DAL) is among the carriers
year before.
benefiting. The improved inHauling cargo represented
dustry environment is in sharp
$934 million in total operating
Checked In. With 772 aircraft in its fleet, Delta Air Lines ranks
contrast to 10 years ago, when
No. 3 in passenger volume among domestic carriers.
revenue, 2.3 percent of the
it was one of at least two
total. Other business produced
major carriers to enter bankruptcy following terrorist attacks, high fuel costs and $4.5 billion, 11.1 percent of the total.
Delta offers a variety of aviation services. The comother difficulties.
Management has cut expenses to help ensure con- pany provides maintenance and repair services for other
tinued earnings growth.The company acquired a refinery aircraft operators. The airline also offers staffing, profesto meet some of its fuel needs at reduced cost, for example. sional security and training services, aviation solutions,
In choosing Delta as the Stock to Study, members vacation packages, aircraft charters and aircraft manageof the Editorial Advisory and Securities Review Commit- ment services.
International flights generated $11.7 billion — 33.4 pertee cited improvement anticipated for Delta’s earnings
growth rate. They also judged Delta’s recent valuation to cent of the passenger trade. Atlantic routes accounted
for 16.7 percent; Pacific routes, 9.8 percent; and Latin
be reasonable.
American routes, 6.9 percent.
P
Cockpit Display
Delta is the world’s third largest airline behind United
Continental Holdings (UAL) and top-ranked American
Airlines Group (AAL), as measured by traffic volume.
Management has estimated that in 2013 Delta held
about 19 percent of the U.S. market, which totaled
about $200 billion, according to industry group Airlines
for America.
As of mid-April Delta was serving 321 destinations
in 58 countries, centered on four domestic hubs —
Atlanta, Cincinnati, Salt Lake City and New York (John F.
Kennedy). Additionally, its route network included
Amsterdam, Detroit, Los Angeles, Minneapolis–St. Paul,
New York (LaGuardia), Paris (Charles De Gaulle), Seattle
and Tokyo (Narita).
Delta was operating 772 aircraft at the end of 2014 —
587 owned and 185 leased. Its fleet consisted of Boeing,
Airbus and McDonnell Douglas aircraft. The most com-
Background
Delta began in 1924 as the country’s first crop-dusting
business. World War I pilot Collett Everman Woolman
developed a system for dropping insecticide on Louisiana cotton fields.
Woolman led Huff Daland Dusters, a crop-dusting division established by aircraft manufacturer Huff Daland
Aero. The business soon served much of the South and
expanded into Mexico and South America.
The business diversified by earning airmail contracts.
It first offered U.S. passenger service in 1929. That year
Woolman and four local partners purchased the division, renaming it Delta Air Services in reference to the
Mississippi Delta region the business served.
By the end of World War II airmail and passenger
service had become Delta’s chief businesses. In 1967 the
company merged with Delaware Airlines and adopted its
21
STOCK TO STUDY | Featured Company
2014
2013
%
(ended 12/31/14) (ended 12/31/13) change
FY 2015
Q2
FY 2014
Q2
%
FY 2015
change year to date
FY 2014
year to date
%
change
Net sales
$40.4 billion
$37.8 billion
6.9%
$10.7 billion
$10.6 billion
0.8%
$20.1 billion
$19.5 billion
2.9%
Net income*
$0.7 billion
$10.5 billion
(93.7%)
$1.5 billion
$0.8 billion
85.4%
$2.2 billion
$1.0 billion
120.0%
Diluted EPS*
$0.78
$12.28
(93.6%)
$1.83
$0.94
94.7%
$2.73
$1.19
129.4%
Declared dividends
$0.30
$0.12
150.0%
$0.09
$0.06
50.0%
—
—
—
Stock exchange
Ticker symbol
Price at time of selection
Past year’s price range
NYSE
Value Line long-term earnings growth estimate
18.0%
Consensus long-term earnings growth estimate (3 analysts)
19.8%
$46.04
2015 consensus EPS growth estimate
36.3%
$30.12 – $51.06
2016 consensus EPS growth estimate
20.2%
Recent price-earnings ratio**
20.2x
DAL
Recent market price
$46.35
Market capitalization
$39.9 billion
* Excluding nonrecurring and special items.
** The P/E ratio is based on diluted EPS of $2.29 for the four quarters ended June 30.
Sources: Morningstar, Yahoo! Finance, Value Line, Reuters and company reports
Flying Higher
tors, Morningstar reported, are Ryanair Holdings (RYAAY), Southwest Airlines (LUV) and United Continental
Holdings. Direct competitors include
American Airlines Group, United Continental Holdings and privately held
Deutsche Lufthansa, Yahoo! Finance
reported.
Along with other U.S. air carriers,
Delta was in financial difficulty following the Sept. 11, 2001, terrorist
attacks. High labor, pension, fuel and
debt costs contributed to its challenges. In September 2005 the company filed for Chapter 11 protection.
Delta emerged from bankruptcy in
May 2007.
Richard H. Anderson, 60, joined
Delta as CEO in September 2007. He
previously served at Ingenix, United
Health Group, Northwest Airlines
and Continental Airlines.
Daniel A. Carp, 66, has served as
the board’s nonexecutive chairman
since 2007. He previously was chairman and CEO of Eastman Kodak.
Morningstar reported that institutions recently held 85.3 percent of
820 million weighted average shares
outstanding; directors and senior executives owned less than 1 percent.
According to Yahoo! Finance, institutions owned 87 percent and insiders,
less than 1 percent.
Among the company’s competi-
In mid-2012 Delta acquired the
Trainer refinery from Phillips 66,
paying $150 million for the Philadelphia-area complex. The transaction
included a commitment to spend
$100 million to refit the facility to
maximize jet fuel production.
Delta also arranged to exchange
nonjet fuel produced at the refinery
for additional jet fuel from other producers.The Trainer facility can refine
up to 185,000 barrels of crude oil
per day. At the time management
estimated the refurbished plant
would reduce annual fuel expenses
by $300 million.
The refinery has helped counteract losses from hedging contracts
short-circuited by dropping fuel
prices. Delta routinely hedges its
fuel costs, but with prices declining,
the hedges instead reduced pre-tax
income by about $1 billion over the
12 months through midyear.
In July Delta pilots rejected a pro-
current name. The Delaware merger
was one of several that have driven
Delta’s growth over the decades.
One of the most recent was its
acquisition of Northwest Airlines in
October 2008.
22
Adjusting the Trim
posed three-year contract by almost
a two-thirds margin. The tentative
agreement with the Air Line Pilots
Association would have included
concessions on work rules and
profit sharing. The union had also
negotiated significant concessions
during the carrier’s difficulties 10
years ago. The current contract runs
through the end of the year.
Rejection of the tentative contract led management to cancel
orders for several dozen new aircraft. Delta had planned to obtain 40
new Boeing 737–900ER and 20 used
Embraer E190 jets. The orders were
contingent on reaching an early
agreement with the pilots.
With cancellation of the orders,
the average age of aircraft in Delta’s
fleet will continue to rise. At the
same time, opting out of the orders
means Delta has joined other carriers in restricting capacity. With air
transportation demand continuing
to rise, capacity limitations may give
Delta and other carriers more ability
to raise fares. Management has reported that capacity growth will be
flat for 2015.
In July Delta announced plans to
pay $450 million for 3.6 percent of
China Eastern Airlines. The company
previously had invested in three
foreign airlines, obtaining minority
Featured Company
stakes to strengthen its international
business.
Also in July, Delta expressed interest in taking a stake in financially
troubled Skymark Airlines. Skymark is
Japan’s third largest airline, as measured by passengers flown.
Japan allows foreign ownership
of up to 33.3 percent. Striking a deal
with the Japanese carrier would
grant Delta a foothold in some of
Asia’s busiest air routes.
Delta has made significant progress reducing its debt, which stood
at about $15 billion at year-end
2010. The company’s net debt had
fallen to $7.1 billion by mid-2015.
Management hopes to reduce net
debt to $5 billion by the end of 2016
and cut an additional $3 billion by
the end of 2017.
Delta has launched a new share
buyback program. Starting in July
this year and running through the
end of 2017, the company plans to
repurchase up to $5 billion of its
outstanding shares. Under a previous
buyback program, Delta repurchased
$2 billion of its shares through June.
The company continues to raise
its quarterly dividend. The payout
rose 50 percent in mid-2014. Delta
announced another 50 percent
increase this year, raising the dividend to $0.135 from $0.09, payable
in August. The increased payout will
return about $1 billion to shareholders through year-end 2017.
Final Notes
Readers are urged to conduct their
own studies of Delta using the
BetterInvesting methodology. The
Stock to Study goal is a doubling in
investment value (capital appreciation plus dividends) within five
The Editorial Advisory and Securities Review Committee met on Sept. 3. The Stock to
Study and Undervalued Stock that its members selected were announced shortly afterward. Look for the Stocks to Study box on the right-hand side of the homepage. The link
will take you to the announcement at the BetterInvesting Newsroom:
www.betterinvesting.org/Public/MediaCenter/MediaCenter/News+Releases/default.htm
years. No investment recommendation is intended.
BetterInvesting hasn’t previously
featured Delta. The company ranked
No. 168 in the Top 200 survey of
investor holdings for 2014 (see the
April 2015 issue). A projected 65
clubs owned its shares.
Delta doesn’t offer a dividend
reinvestment or direct stock-purchase plan. Its shares haven’t undergone any recent splits.
More background on Delta and its
industry, including the Morningstar
data sheet, Value Line analyst report
and Value Line industry report, can
be accessed through the Additional
Resources menu in the magazine’s
section of the website. For more information, contact Investor Relations,
Delta Air Lines, Inc., 1030 Delta Blvd.,
Atlanta, GA 30354–1989.
www.delta.com
Airlines for America
www.airlines.org
The International Air Transport Association
www.iata.org
— Reporting by contributor Kevin Lamiman
SSG Study Notes
for the inconsistent EPS growth? If you access the Value
Line report, you’ll also notice differences in EPS results,
par ticulary over the past several years. Why are there differences, and do they affect your perception of company quality
and growth trends? For more information, watch the webinar
“Bridging the GAAP — How to Evaluate Data Differences,”
presented on May 6 and available in the StockUp archives
on the member website at www.betterinvesting.org/members/
tools/stockup/archive.htm.
During your analysis of Delta Air Lines, you might consider the
following comments and questions for further study:
■
■
Capitalization section: Delta Air Lines has a high amount
of debt relative to capital at almost 52 percent. How does
this value compare with that of other airlines? Value Line
has assigned a Financial Strength rating of B+ to the company, which is in the average range, but the service reports
that the company’s been improving its balance sheet. The
company also is reducing the number of common shares
outstanding. Shares outstanding fell to 825 million in 2014
from 851 million the year before, and Value Line expects
the number to drop to 800 million in the next three years to
five years.
Section 1 (Visual Analysis of Sales, Earnings and Price):
The sales growth line shows consistent growth, while the
earnings per share line jumps up and down. What accounts
■
Section 2 (Evaluating Management): Note the rate of pretax profit on sales. How does this compare with that of
peers and that of other industries?
■
Section 3 (Price-Earnings History): P/Es for Delta Air Lines
are often under 10, but the current P/E is 12.5. Would you
expect the future P/E to be higher than the historical average,
and if so, why? Note that the company began paying a dividend in 2013.
23
24_25 SSG Oct15_Oct15_24_25 8/18/15 4:25 PM Page 24
STOCK TO STUDY | The Stock Selection Guide
Figure 1
Capitalization information.
Besides background about
the company, including the
data source used for the
study, this section provides
information about the
number of common and
preferred shares and the
percentages held by
insiders and institutional
investors. The company’s
total debt and the percentage of debt to total capital
also are detailed.
Figure 2
Recent sales and earnings results. This section
contains the company’s
most recent quarterly results along with a comparison of results from the
same quarter a year ago.
Figure 3
Visual analysis of sales,
earnings and price. The
graph provides a quick view
of the company’s financial
results. A long-term history
of consistent sales and
earnings growth at relatively high rates indicates
the company is well-managed and worth the time
to study further.
The company’s historical
sales growth is plotted on
the green line and historical earnings growth is
represented by the blue
line. The black bars provide information about the
stock price. For each year,
the top of the bar is the
annual high price, while
the bottom is the low
price.
1
Company
Prepared by
Where Traded
NYSE Major product/service
CAPITALIZATION --- Outstanding Amounts
Preferred($M)
Common (M Shares)
Debt($M)
1
Date
Data taken from Morningstar
0.0
803.0
Airlines
Reference
% Insiders
% Institution
0.6
90.4
9,257.0 % to Tot.Cap. 43.6
% Potential Dil. None
Symbol: DAL
VISUAL ANALYSIS of Sales, Earnings and Price
2K
FY 2015 Q2 (Ended 6/30/2015)
2
1K
700
600
500
400
($M)
($)
Latest Quarter
10,707.0
1.83
Year Ago Quarter
10,621.0
0.94
0.8%
94.4%
Percentage Change
3
2014 sales = $40.4 billion
300
200
100
70
60
2014 high price = $50.20
50
40
30%
30
2014 low price = $27.30
25%
20
20%
10
2014 EPS = $0.78
7
6
15%
5
4
10%
3
2
5%
1
2005
2006
2007
2008
2009
2010
11.8 %
4 (1) Historical Sales Growth
%
(2) Estimated Future Sales Growth
Forecasting future sales
and earnings growth rates.
This is the section in which you provide the first two primary judgments. The
core of the BetterInvesting methodology is this: Sales growth drives earnings growth, and earnings growth drives stock price. Using the Stock
Selection Guide, you’ll forecast growth rates and determine the stock’s
potential high and low prices over the next five years.
Figure 4
2011
2012
2013
2014
2015
(3) Historical Earnings Per Share Growth
(4) Estimated Future Earnings Per Share Growth
2016
141.6
2017
2018
2019
%
%
The first step is to forecast sales growth. The company’s historical performance is useful information, but you’ll need to research the company
and decide whether its revenue growth will continue at the historical level,
slow down or possibly speed up.
Remember, however, that even though a company can grow earnings
faster than sales by cutting costs or buying back shares, this can’t last
forever. EPS growth eventually will drop to the same rate as sales.
You’ll use the estimated growth rate for earnings to forecast the earnings
per share five years from now. On the second page of the SSG, you’ll use
the future EPS to determine the stock’s potential high price.
A key question to ask yourself is whether the company is growing at a
sufficient rate relative to its size. Look for higher growth rates for small
companies compared with medium-size and large companies.
After estimating sales growth, the next step is to forecast growth in earnings per share. In many cases you can estimate EPS growth that’s similar
to the rate you used for sales. EPS growth can differ from sales because
of rising or falling expenses, an increasing or decreasing number of outstanding common shares and changing tax rates.
Editor’s note: The Value Line and Morningstar company and
industry reports are available in the Additional Resources section at the BetterInvesting website for your use in conducting
stock studies. You’ll need Adobe Acrobat software to read the
Portable Document Format files.
24
24_25 SSG Oct15_Oct15_24_25 8/18/15 4:26 PM Page 25
The Stock Selection Guide
2
Company
EVALUATING MANAGEMENT
(DAL)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
A
% Pre-tax Profit on Sales
(Net Before Taxes ÷ Sales)
B
% Earned on Equity
(E/S ÷ Book Value)
3
-23.8 -40.6 9.5 -2.7 -0.1
7.5
8.5
8.4
7.8
LAST 5
YEAR AVG.
UP
5
TREND
DOWN
4.4
-55.1 -119.5 225.3 94.1 82.1
484.5
PRICE-EARNINGS HISTORY as an indicator of the future
Figures 7 & 8
This shows how stock prices have fluctuated with earnings and dividends. It is a building block for translating earnings into future stock prices.
PRESENT PRICE
A
B
C
HIGH
LOW
Earnings
Per
Share
14.9
13.2
12.3
29.4
50.2
9.6
6.4
7.8
12.0
27.3
PRICE
Year
1
2
3
4
5
2010
2011
2012
2013
2014
LOW THIS YEAR
D
E
F
G
H
Dividend
Per
Share
% Payout
F ÷ C X 100
% High Yield
F ÷ B X 100
0.000
0.000
0.000
0.120
0.300
0.0
0.0
0.0
1.0
38.5
0.0
0.0
0.0
1.0
1.1
Price Earnings Ratio
HIGH
LOW
A÷C
B÷C
13.7
6.3
6.6
1.0
35.0
21.2
13.0
10.4
2.4
64.4
0.70
1.01
1.19
12.28
0.78
6
6
TOTAL
7
AVERAGE
8
AVERAGE PRICE EARNINGS RATIO
4
HIGH THIS YEAR
9 CURRENT PRICE EARNINGS RATIO
EVALUATING RISK and REWARD over the next 5 years
Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward.
A HIGH PRICE — NEXT 5 YEARS
Avg. High P/E
X Estimate High Earnings/Share
(3D7 as adj.)
B LOW PRICE — NEXT 5 YEARS
(a) Avg. Low P/E
= Forecast High Price $
7
(4A1)
= $
X Estimated Low Earnings/Share
(3E7 as adj.)
(b) Avg. Low Price of Last 5 Years =
(3B7)
Selected Estimate Low Price
Present Divd.
High Yield (H)
=
=
= $
High Forecast Price Minus
Low Forecast Price Equals
(4B1)
(4C2) Lower 25% = (4B1)
to
(4C3) Middle 50% =
to
(4C4) Upper 25% =
to
Range. 1/3 of Range =
(C)
8
(4B1)
C ZONING
(4A1)
(4CD)
9
(Buy)
(Maybe)
(4A1)
Present Market Price of
(Sell)
is in the
Range
(4C5)
D UP-SIDE DOWN-SIDE RATIO (Potential Gain vs. Risk of Loss)
High Price (4A1)
Minus Present Price
=
Minus Low Price (4B1)
Present Price
=
10
To 1
(4D)
E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.)
High Price (4A1)
=(
) X 100 = (
) - 100 =
Present Market Price
5
5-YEAR POTENTIAL
A Present Full Year’s Dividend $
Present Price of Stock
% Appreciation
(4E)
This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks.
Note: Results are expressed as a simple rate; use the table below to convert to a compound rate.
$
B AVERAGE YIELD OVER NEXT 5 YEARS
Avg. Earnings Per Share Next 5 Years
Forecasting the high and
low prices. The stock’s
P/E history will inform
your judgments about the
potential high and low
prices. Multiply your predicted high P/E by the
high EPS you calculated
on the first page to determine the potential high
price. Multiplying the expected low P/E by the low
EPS (for a growth company, this often is the
most recent year’s earnings) is one way to predict the future low price.
Figures 9 & 10
(c) Recent Severe Market Low Price =
(d) Price Dividend Will Support
of the past five years. You
can also see the average
P/E for the last five years
as well as the current P/E.
Information about the dividend yield also is offered.
=
X 100 =
X Avg. % Payout
C ESTIMATED AVERAGE ANNUAL RETURN OVER NEXT FIVE YEARS
5 Year Appreciation Potential (4E)
5
Average Yield (5B)
Average Total Annual Return Over the Next 5 Years
(5C)
(5A)
(3G7)
11
Present Yield or % Returned on Purchase Price
=
%
%
© 1996. National Association of Investors Corporation; 711 West Thirteen Mile Road, Madison Hgts., Michigan 48071
Figure 5
Evaluating management. The key to successful investing is finding wellmanaged companies whose stocks are reasonably priced. The company’s
historical growth rates provide evidence of good management, as do the
numbers in this section.
Pre-tax profit margins represent how much of each sales dollar a company
keeps before taxes. We look at pre-tax margins because companies have
limited control over their tax rates. Look for stable or growing margins.
Return on equity indicates how well the company manages the money shareholders have invested in the company. Again, look for stable or growing returns.
Figure 6
Price-earnings ratio history. Section 3 includes information you’ll use in
Sections 4 and 5. Columns D and E detail the high and low P/Es for each
%
Figure 11
Estimated average annual
return over the next five
years. In this final section, you’ll learn about the
stock’s potential return
over the next five years.
This figure includes both the expected return from increases in the stock’s
price and predicted dividends.
Present Price $
%
=
Buy-Hold-Sell zones and
upside-downside ratio.
After calculating the potential high and low prices,
you can use the SSG to
determine whether the
stock is reasonably priced.
The upside-downside ratio
compares the potential
price increase to the potential price drop. Look
for stocks that are both in
the Buy zone and have an
upside-downside ratio of
at least 3 to 1; beware of
abnormally large or small
ratios.
(5B)
Editor’s note: Those who want to learn more about estimating
future growth rates, predicting a stock’s potential return and other
issues regarding the SSG are urged to contact their local chapter
for a schedule of classes. See the Regional Notices section in this
issue for a list of chapters and contact information. A number of
resources also are available at the BetterInvesting website. Among
them is the Introduction to the SSG Series, a webinar series available free to members. The sessions explain how to select the best companies, determine a fair price, estimate future growth and project future
P/Es. Go to the My Classes page in the Education menu at the website to
access these classes.
25
26_27 Undervalued_Oct15_26_27 8/21/15 12:51 PM Page 26
UNDERVALUED | Featured Company
Selloff Fever Breaking?
Biogen Inc.
Shares of Biogen Inc. (ticker: BIIB) took a beating in July. A
combination of factors soured investors on the stock, leading
them to hammer the share price. Some analysts described the
selloff as a market overreaction that created a rare buying
opportunity for a leading biotechnology company.
effective and safe enough to meet regulatory requirements. Value Line even suggested that individual investors
might best take advantage of Biogen’s growth potential
within the structure of a low-cost exchange-traded fund.
They could reduce their risk by owning an ETF basket of
biotechnology companies that includes Biogen.
n July 24 the stock closed at
$300.03, down 22.1 percent
Corporate Genetics
from the previous day.At the
Biogen is a leading biopharmaceurecent share price the stock had
tical company providing gene-based
recovered only 3 percent.Triggering
products for the management of
the slide was Biogen’s release that
blood cancers and inflammatory
day of results for the second quarter
and autoimmune disorders.The firm
(ended June 30). The company reoften collaborates with other bioported a year-over-year increase in
technology companies to develop
earnings per share of 30.6 percent
and market products.
(see the accompanying data table).
Product sales in 2014 was $8.2 bilThat reportedly represented a slowlion,
84.5 percent of total revenues.
down in the pace of earnings growth.
Bred in the Blood. Biogen offers therapies for
Biogen
reported overseas product
New product launches had fueled
blood cancers, as well as products for genetic
revenues
of $2.6 billion for 2014,
outsized growth since 2012.
blood disorders such as hemophilia.
32.1 percent of total product sales.
Management also revised downTherapies for multiple sclerosis are the company’s
ward its full-year guidance. Biogen shaved about a dollar off
its projected EPS for 2015.The July news added to investor largest business. Value Line reported that sales of Biogen’s
concerns that began to build late last year, when Biogen MS treatments represent about 38 percent of the $17 bilannounced a patient taking one of its newest drugs in com- lion global market. Avonex, the company’s oldest MS treatbination with another therapy died of a rare brain infection. ment, accounted for the largest share of Biogen’s revenues.
The July skid was in sharp contrast to the stock’s pre- It generated $3 billion, 36.7 percent of 2014 product sales.
vious performance. Argus Research reported that Biogen Introduced in the U.S. in 2013, Tecfidera is the company’s
generated a five-year return of about 460 percent, versus newest MS therapy. In 2014 it accounted for $2.9 billion,
35.5 percent of total product sales.
90 percent for the Standard and Poor’s 500 index.
Many MS therapies are injectable. Distributed in pill
In choosing Biogen as the Undervalued Stock, members of the Editorial Advisory and Securities Review form, Tecfidera could be one of Biogen’s chief long-term
Committee emphasized its reduced valuation. Biogen’s growth drivers. Safety concerns cropped up in October
recent trailing 12-month price-earnings ratio of 20.9 was 2014 when the company announced a patient taking
well below the industry average of 30 reported by Yahoo! Tecfidera died of progressive multifocal leukoencephalopFinance. Committee members also judged Biogen to have athy (PML), a rare neurological condition. That may have
strong long-term potential. Biogen has an impressive line- contributed to dampened enthusiasm for the stock this year.
MS therapy Tysabri accounted for $2 billion, 23.9 perup of current products and a strong pipeline of therapies
cent of product sales. Biogen developed Tysabri in collabunder development.
Members acknowledged that a volatile stock such as oration with Elan Corporation, launching the product in
Biogen may not be for the faint of heart. Biotechnology 2004. The company later acquired Elan’s remaining rights
companies face heightened risks. The industry can be to the product. In addition to being a treatment for MS,
intensely competitive. When multiple therapies are avail- Tysabri is approved to treat Crohn’s disease, an intestinal
able for a particular disease, physicians — and health inflammatory illness.
Tysabri was withdrawn from the market in 2005 after
insurers — may gravitate to the most effective treatment
three patients developed PML. In 2006 Tysabri was reintroand reject the others.
Approval of a new therapy for a particular disease can duced after strict new safety protocols were put in place to
change the competitive environment overnight. On the protect patients against the brain illness. Biogen has two
other hand, new drugs under development may not prove other MS products: Fampyra (1 percent of product sales)
O
26
26_27 Undervalued_Oct15_26_27 8/21/15 12:51 PM Page 27
Featured Company
Biogen Inc.
2014
2013
%
(ended 12/31/14) (ended 12/31/13) change
FY 2015
Q2
FY 2014
Q2
$2.6 billion
$2.4 billion
%
FY 2015
change year to date
FY 2014
year to date
%
change
Net revenues
$9.7 billion
$6.9 billion
40.0%
7.0%
$5.1 billion
$4.6 billion
13.0%
Net income*
$2.9 billion
$1.9 billion
57.6% $927.3 million $714.5 million 29.8%
$1.7 billion
$1.2 billion
46.5%
Diluted EPS*
$12.37
$7.81
58.4%
$3.93
$3.01
30.6%
$7.42
$5.03
—
—
—
—
—
—
—
—
Dividends
Stock exchange
Ticker symbol
Price at time of selection
Past year’s price range
Recent market price
Market capitalization
Nasdaq Value Line long-term earnings growth estimate
BIIB Consensus long-term earnings growth estimate (6 analysts)
47.5%
—
19.5%
15.7%
$316.60 2015 consensus EPS growth estimate
15.1%
$290.85 – $480.18 2016 consensus EPS growth estimate
11.7%
$309.00 Recent price-earnings ratio**
20.9x
$72.7 billion
* Excluding nonrecurring and special items.
** The P/E ratio is based on diluted EPS of $14.78 for the four quarters ended June 30.
Sources: Morningstar, Yahoo! Finance, Value Line, Reuters and company reports
and Plegridy (0.5 percent).Three other
Biogen products each accounted for
less than 1 percent of product sales:
■ Alprolix, a therapy for a form of
hemophilia.
■ Eloctate, a treatment for another
form of hemophilia.
■ Fumaderm, a therapy for severe
plaque psoriasis.
Collaborations were another sales
category — unconsolidated joint business revenues. The segment generated $1.2 billion, 12.3 percent of total
revenues.
Biogen’s chief collaboration has
been with Genentech, a division of
Roche Holding (RHHBY). The companies have partnered on Rituxan for
rheumatoid arthritis, non-Hodgkin’s
lymphoma and other blood cancers.
Another joint product is Gazyva for
chronic lymphocytic leukemia.
Other revenues accounted for
$304.5 million, 3.1 percent of total
sales. Of that, royalties on patents that
Biogen has licensed accounted for
$176.6 million, 58 percent of the segment total.
Royalty revenues came chiefly from
licensing The Medicines Company
(MCCO) to produce Angiomax, an
anti-coagulant therapy for angina.
Corporate partner revenues produced
$127.8 million, 42 percent of the
unit’s revenues.
Competitors include Gilead Sciences (GILD), Novo Nordisk (NVO)
and Roche Holding, Morningstar reported. Among the company’s direct
competitors are Pfizer (PFE) and privately held Bayer Pharma, according
to Yahoo! Finance.
Growth Injections
One of Biogen’s new developments is
aducanumab, designed to slow Alzheimer’s disease. The compound has
blockbuster potential. Initial research
suggested the therapy can significantly
delay the buildup of amyloid plaques
in the brain, believed to play a key role
in Alzheimer’s. With such a promising
outcome, management plans to take
the therapy into the final stage of clinical trials later this year. Results may be
available within 18 months.
In recent acquisitions, Biogen said
in January it would purchase Convergence Pharmaceuticals, a British clinical-stage firm. The deal would speed
development of a treatment for trigeminal neuralgia, severe facial pain.
Biogen agreed to pay up to $675 million — $200 million upfront, plus up
to $475 million contingent on meeting
future sales milestones. Biogen announced in July it will pay Applied
Genetic Technologies $124 million
for license and commercialization
rights to eye disease treatments.
Final Notes
The goal for an Undervalued Stock is
a 20 percent increase in investment
value (market price appreciation plus
dividends) within 18 months. BetterInvesting is profiling Biogen for educational purposes only. No investment recommendation is intended.
BetterInvesting hasn’t previously
featured Biogen. The company didn’t
appear in the Top 200 Survey of
investor holdings for 2014 (see the
April 2015 issue).
The company doesn’t offer a
direct stock-purchase plan, and shares
haven’t undergone any recent splits.
Internet links to background on
Biogen and its industry, including the
Value Line and Morningstar analyst
reports and Value Line industry report,
can be found via the Additional
Resources menu in the magazine’s
section of the website. For more
information, contact Investor Relations, Biogen Inc., 225 Binney St.,
Cambridge, MA 02142–1031.
— Reporting by contributor Kevin J.
Lamiman
Correction: The Hershey Company
does offer a direct stock purchase
plan and dividend reinvestment
plan. This was stated incorrectly in
the September magazine.
27
28_Webinars and TickerTalk_Oct15_28 8/21/15 5:58 PM Page 28
BE SURE TO WATCH
These BetterInvesting Guest Speaker Webinars
If you missed these special live presentations from
BetterInvesting featuring investing industry experts you can
still watch them online. These FREE presentations are
available to all BetterInvesting members and their guests.
Invite your friends, family and co-workers to enjoy these
informative presentations.
Great Companies: Past, Present and Future
Presented by the experts at Stack Financial Management
View Presentation at:
www.betterinvesting.org/greatcompanies
Yes! We Do Sell Stock!
Presented by Scott Horsburgh, Author, CFA and
SPECIAL BONUS FOR NON-MEMBERS
Anyone who views one of these presentations and is not
currently a member of BetterInvesting will automatically
be given access to sample BetterInvesting member
benefits at no Charge or obligation.
President of Provident Investment Management
www.betterinvesting.org/sellstock
The Savage Truth on Money —
Personal Finances Beyond the Stock Market
Presented by Terry Savage, a nationally recognized expert
on personal finance, the economy and the markets.
www.betterinvesting.org/savage
Join Us Each Month for TickerTalk, a Free Online Program
for BetterInvesting Members. Each Session Is Packed Full of
Investing Tips and Stock Ideas to Help You Become a
More Successful Investor.
■ All Online Sessions Are Recorded and Available 24/7
■ Designed for the Newer Investor
■ BetterInvesting’s Top Educators Share Knowledge and Experience
■ Stock Ideas to Investigate Further
■ Every Month Offers Something New
29_ International Stocksx _Oct15_29 8/18/15 11:48 AM Page 29
International Stocks | STOCKS
Can a French Billionaire Woo Profits Out of a Weary Milanese Media Operator?
Telecom, Italian Style
by Nic Van Brookhaven
European telecom players have been consolidating over the
last two years as the market is
saturated, growth is limited and
cost pressures continue to build.
Both France and the United Kingdom
have seen multiple mergers, but
Italian consolidation has been more limited. In Italy, the largest telecom operator is Telecom
Italia.
is expected to reach close to $1 billion. Telecom Italia
is trading at 16 times 2015 earnings estimates, six times
EV/EBERTA (enterprise
value/earnings before interest, taxes, depreciation,
and amortization) and at 1.3
times book value.
Currently there’s no dividend, but this could be
reinstated in 2016.
T
Picking Up Signals
Investor concerns about Telecom Italia have centered
on regulatory changes in the European telecom landscape and price controls on roaming by the European
commission. Telecom Italia’s balance sheet remains a
concern, considering its high gearing and stagnating
business.
Investors have pushed up the stock since early
2015 by more than 25 percent as speculation
builds that Vivendi will deliver much needed
change to the company. As a result, any failure
to sell off Telecom Italia’s Brazilian assets or
consolidate the
Ital ian ma rket
could be taken
negatively.
Companies
mentioned in
this article are
for educational
purposes only;
no investment
recommendation is intended.
Readers are urged
to conduct their
own studies of
any stocks of
interest.
elecom Italia owns majority stakes in TI Media
and TIM Brazil. The domestic operations in
Italy offer wireline (48 percent market
share) and wireless services under the brand TIM
(32 percent market share).The Brazilian operations
offer wireless services only (27 percent market
share), while TI Media is an Italian commercial TV
network.
Telecom Italia is headquartered in Milan and
trades on the stock exchange the Borsa Italiana
S.p.A. American depositary receipts representing Telecom Italia shares are traded on the New
York Stock Exchange under the symbol TI.
TI has been a bad investment since its stock peaked at
$41 per share in 2004. Since then it’s undergone a series
of downgradings by Moody’s to bottom out at around $7
a share two years ago. Recently, the stock was trading at
around $13 as Vivendi accumulated a 14.9 percent stake.
Vivendi is controlled by Vincent Bolloré, a French billionaire who has an excellent track record of creating
value for minority shareholders. His likely goal is to
restore balance sheet health at TI.
This could be achieved by a sale of the Brazilian assets
and paying down debt. It could also mean a further integration of the Italian media assets with Vivendi. Because of
its high gearing TI had to suspend its dividend, an issue
which Vivendi would probably also like to address.
Any Action Ahead?
Selling its 67 percent ownership of TIM Brazil might
return close to $8 billion to Telecom Italia. Another
option might be to merge its Italian operations with a
competitor and create economies of scale. Bottom line:
Vivendi didn’t make this investment to sit on the sidelines and do nothing.
TI financial results have stagnated over the last few
years, but its market capitalization still is a respectable
$25 billion. The enterprise value — including debt — is
more than $55 billion. The company is expected to
achieve revenues of $24 billion in 2015. Profit after tax
Nic Van Broekhoven
is a portfolio manager at Value Square
Asset Management,
which holds no
position in Telecom
Italia but does own
shares in Vivendi.
October 2015 | Bettermosting |
29
30_Stock Screen_Oct15_30 8/21/15 12:45 PM Page 30
STOCKS | Stock Screen
From Railroads to Biotech
8 Combining Growth and Quality
by Adam Ritt, Editor
The following screen combines elements of growth, quality and
value. Using the MyStockProspector.com online program, we
filtered for these qualities on Aug. 10:
■
■
■
■
■
10-year annual sales, earnings per share growth of 10
percent and above
Quarterly sales, earnings per share growth exceeding
3 percent
■
10-year sales, EPS growth R2 (a measure of consistency,
with 1.0 the highest figure possible) of 0.90
Trends of even and above for pre-tax income and return
on equity
Current price-earnings ratio of 30 or less
Ratio of debt to capital of 33 percent or less
Stocks are mentioned only for educational purposes.
No investment recommendations are intended.
10–Yr
10–Yr
Quarterly
Quarterly Current
Rev Growth EPS Growth Rev Growth EPS Growth
P/E
10–Yr
EPS R2
Debt/
Capital
Ticker
Biogen
BIIB
Biotechnology
14.7 %
39.3 %
7.0 %
30.7 %
21.4
0.96
0.92
4.4 %
Check Point Software Technologies
CHKP
Software – Application
12.4
14.5
9.0
6.3
22.8
0.97
0.96
0.0
Equitable Group
EQB.TO Specialty Finance
19.3
15.7
17.9
16.0
7.6
0.99
0.98
20.2
F5 Networks
FFIV
Software – Infrastructure
21.7
25.5
9.8
22.9
26.3
0.98
0.94
0.0
Heico
HEI
Aerospace & Defense
15.2
18.4
3.3
15.9
29.1
0.94
0.98
30.6
MEDNAX
MD
Medical Care
14.8
13.2
13.6
13.8
24.9
1.00
0.97
15.9
United Natural Foods
UNFI
Food Distribution
13.8
10.9
18.7
13.7
16.7
0.99
0.97
23.6
Railroads
12.4
19.9
15.9
14.0
25.1
0.94
0.94
22.1
Westinghouse Air Brake Technologies WAB
Industry
10–Yr
Rev R2
Company
Source: MyStockProspector.com
41
consecutive years of
CASH DIVIDEND
INCREASES
Our Brands
Pay Dividends
RPM International Inc.
A World Leader in Specialty Coatings and Sealants
800-776-4488 [email protected] www.RPMinc.com
30
1.8
billion in
CASH DIVIDENDS
RETURNED TO
SHAREHOLDERS
over past 4 decades
31_ Fundamentals of Investing_Oct15_31 8/21/15 1:52 PM Page 31
Fundamentals of Investing | BEGINNERS
Costs Are One of the Few Things You Can Control
Hey, Capitalist, You Bought a Stock. Now What?
by Sam Levine, CFA, CMT
In this column last month, we bought our first share of stock
together. Though it’s great if this stock went up since bought,
don’t concern yourself if it hasn’t. Its real value will be in the
lessons it can teach.
I
f you already have a portfolio but
have left the decision-making
entirely to professionals, this
series will be equally valuable.
This time, let’s chat about
maintaining realistic expectations about your stock
investing and how to see
whether those realistic expectations are
being met — in other words, measuring
performance.
My Stock Is Up — Wait, It’s Down — Why Didn’t I Sell?
Take a few moments every day to check on that stock you
just bought. Was there any recent news about it? Did its
price move in the same direction and about the same percentage as the overall market?
Sooner or later, the stock will have a dramatic move,
and you may wish you had sold to capture that sudden
gain or avoid that painful loss.
As you continue in your investing career, you’ll likely
become more emotionally attached to your buys and sells.
You have to manage these emotions to be successful. Given
any reasonable length of time, some of your stocks will
underperform and some will lose money. It’s also as rare as
hens’ teeth to buy a stock at an exact low and sell it at the
exact high.
Take heart, though: As long as you follow conservative
investing practices and stay patient, you can be a mediocre investor and still become far wealthier than if you
keep all your savings in certificates of deposit or your
checking account.
As you watch your stock, keep an eye on the broad
market and how other stocks in the industry are doing.
Note how they tend to move together, though not exactly.
Stocks also move according to what investors anticipate
will happen in the future. If shareholders of a gold mining
company believe the price of gold will fall, they’re more
likely to sell their gold stock.
Your job is not only to analyze a stock, but also to anticipate what other investors are likely to do. With experience, you’ll be more comfortable making those judgment
calls or at least recognizing when the outlook is so uncertain that it makes more sense for you to sell.
Are You Making Money or Not?
Profit isn’t quite as simple as the dollar amount your stock
has risen above the price you bought it for, but it isn’t that
much more complicated, either. Your net profit or loss
depends on three things: the price you paid for the stock;
the costs to buy, hold and eventually sell it; and any cash
dividends you receive. The formula is:
Total return = Sale proceeds – purchase cost + dividends
Sale proceeds are what the brokerage firm will deposit
in your account after you sell the stock. You’ll receive the
sale price of the stock per share multiplied by the number
of shares sold, minus the commission you paid to sell the
shares and any other charges the firm adds on the trade,
such as a confirmation fee. Put another way:
Sale proceeds = (Sale price per share x
number of shares sold) – transaction cost
The purchase cost is similar, except the costs are added
instead of deducted. The purchase cost is the price paid
per share multiplied by the number of shares you bought,
plus the commission paid and any additional charges.
Purchase cost = (Purchase price per share x number
of shares bought) + transaction cost
Dividends are cash payments made by the company to
its stockholders. Not all companies do this, preferring to
keep profits within the company for further growth or to
build the balance sheet. When a company does pay dividends, it’s usually quarterly.
Dividends are common in high-quality utility and financial services companies, less so for firms in technology or
other rapidly evolving industries.The dividends usually are
rather small but predictable. Many companies increase
their dividend over time, helping stockholders keep pace
with inflation.
As you look at how profits and losses are calculated, it’s
pretty easy to see that costs are one thing you can control.
The fewer trades you make and the less money each trade
costs, the more you can profit.The same goes for managed
accounts, by the way: Those annual fees can add up, so be
sure you’re getting your money’s worth.
Sam Levine, CFA, CMT, is a frequent contributor to this magazine
and manages online investment community Buttonwoodpost.com.
31
32_33 Mutual Fund Matters_Oct15_32_33 8/18/15 4:54 PM Page 32
MUTUAL FUNDS | Mutual Fund Matters
Investment Category Drying Up as the Money Cascades Into ETFs
Closed-End Funds: a Quirky Option for Diversity Seekers
by Craig Guillot
Individual investors have often viewed closed-end funds as an
oddball instrument of the investment world. Few investors
know much about them, and they’re not commonly held in most
portfolios. Shares are issued only at the initial public offering,
and they trade in real time on a market at a premium or discount to net asset value. A closed-end fund is neither a stock
nor a mutual fund nor an exchange-traded fund.
et for all their quirks, closed-end funds can offer
benefits for the right investors. They often carry
higher distributions, and unlike open-end mutual
funds, they trade throughout the day. Selling shares only
at the IPO and keeping a stable asset base allows funds to
take on leverage and invest in less liquid assets. Although
CEFs may be dwindling owing to the growing popularity
of ETFs, they still offer some investors another option for
yield and diversification.
Y
Long-Term Investors Dip Into a Stable Asset Base
According to the recent ICI Research Perspective on
closed-end funds, these funds’ total assets reached $289 billion at the end of 2014. Bond CEFs represented 59 percent
of total assets while equity CEFs totaled 42 percent. One
notable trend is that investor demand may be waning —
new CEFs issued $13.7 billion in shares in 2013, dropping
to just $4.8 billion in 2014.
Cara Esser, CEF strategist with Morningstar, says CEFs
start with a “fund idea” then go through underwriters and
a brokerage board to sell shares at an IPO. Once a CEF is in
operation, no new shares are issued for the life of the fund.
Investors buy and sell shares from one another and don’t
buy or redeem through the fund company. Cash raised from
the IPO essentially serves as the asset base to invest and produce returns; investors are essentially pooling their contributions for a piece of the pie. Because of the structure, shares
trade based on demand at a discount or premium to the NAV.
“Money doesn’t flow in and out of the portfolio,”
Esser says. “It has a stable capital base that comes from
the IPO, then that’s it. Shares are traded amongst
investors themselves.”
That difference between price and NAV can be a boon
or burden for investors. As of the first quarter of 2015,
Morningstar reports, the average CEF was trading at a discount of 7.1 percent.
As with stocks or mutual funds, market price is influenced
by such things as distribution rate, underlying investments
or market conditions. Investors who purchase shares at a
discount may benefit from price appreciation if CEF shares
rise later. Yet other CEFs can trade at a premium, meaning
that investors must buy shares at a price higher than NAV.
32
In other aspects, CEFs are measured just like traditional mutual funds. Analysts and investors typically
review performance over time, distributions and the
manager’s tenure. Investors also look for high yields and
low expenses, most of which Esser says can be on par
with mutual funds in the same sector.
CEFs are ultimately used by investors who have a longterm view and are “seeking (extra) diversification and higher yields,” Esser says.
Wider Investment Options and Daytime Trading
Anne Kritzmire, the Chicago-based managing director of
CEFs and global structured products at Nuveen Investments, says CEFs typically offer more income over the
fund’s life. With less cash coming in and going out, CEFs
can employ leverage and take a “longer and wider view” in
long-term, less liquid securities. The ICI report found
roughly two-thirds of CEFs employed structural leverage,
portfolio leverage, or both, in 2014.
CEFs cover most of the sectors and management styles
one would find in traditional mutual funds. CEFs can offer
more, Kritzmire says, because the use of leverage allows
them to amplify returns.“They can create a higher level of
income and distributions over time, particularly for the
long-term investor,” she says.
Another advantage of CEFs is that they trade in real
time during the day just like a stock or ETF. Unlike with
open mutual funds, investors don’t have to wait until after
hours to determine at which price their buy or sell orders
will be processed.
And because the fund is closed to issuing new shares or
redemptions, investors don’t have to worry about fluctuating asset flow as with mutual funds. Esser says this allows
the funds to take strategic holdings in less liquid assets.
“The fund doesn’t have to worry about cash coming in
and out,” she says, “so they have a greater investment universe. The goal is to take the return and convert it into a
slow stream of cash flow over time.”
But investors shouldn’t actively seek out CEFs simply
for the sake of being in one, Kritzmire says. They should
first follow their investment objectives, risk tolerance and
time frame to determine whether one meets the criteria
and is right for them.
Although they shouldn’t be seen as a “fixed-income substitute,” Kritzmire says CEFs can be a great tool to add
diversification to the fixed-income portion of a portfolio.
“The structure offers a wider range of investment strategies, and it’s often used as a less mainstream investment to
increase diversification,” she says. “Investors often seek
them for income and cash flow.”
32_33 Mutual Fund Matters_Oct15_32_33 8/18/15 4:55 PM Page 33
Mutual Fund Matters
A Morphing Market
The CEF market is clearly changing.
Between 2011 and July 2015, the number of CEFs had fallen by 20 percent
from 700 to only 565, according to
Morningstar data.The growing ETF market may be capturing some investors
who may otherwise have eyed CEFs. At
the same time, the number of ETFs on the
market jumped to more than 1,700.
Kritzmire suspects much of that
decline in CEFs is because of consolidation. As at many investment firms,
Nuveen has been merging products,
as larger funds benefit shareholders
by creating more liquidity, more flexibility and better bid-ask spreads on
the shares.
“We’ve also saved shareholders
millions in management fees on several funds that we’ve merged,” Kritzmire says. “Consolidation certainly is
part of the story.”
CEFs may be tricky for investors. It
can be risky to buy a CEF at its initial
public offering. Esser says it’s a challenging prospect because no one
really knows how big the fund is
going to be until the IPO.
The process from inception to IPO
typically takes from six months to a
year, she says, with the possibility that
market conditions can change the
process. Some funds don’t even make
it to IPO. “You never know how big
the fund is until the shares get sold,”
Esser says.
The fact that CEFs don’t trade at
NAV can also create risk when entering or exiting a fund. Most CEFs trade
at a discount, but investors need to
weigh the “average discount” to see
whether they’re getting a good deal.
A discount of 5 percent isn’t what
it appears if the average discount is 7
percent. On the other end, there needs
to be a strong, compelling reason for
investors to buy a CEF trading at a premium to NAV.
Chris Cook, president of Beacon
Capital Management in Dayton, Ohio,
doesn’t like CEFs primarily because of
their pricing structure with premiums
and discounts.
“It’s about the pricing, not necessarily whether we like the underlying
holdings of the fund or the management itself,” he says. “There are some
good funds, but you’ve got to consider
the price you’re paying.”
Although Cook says CEFs do offer
advantages over traditional mutual
funds because they can trade during the
day, investors can now find that capability in ETFs. Like many investors,
Cook gravitates toward low-cost ETFs.
Some expense ratios for ETFs, for example, approach the 0.10 percent level.
“People are becoming very aware
of costs and realize they’re one of the
top predictors in performance,” he
says. ETFs are becoming a primary
tool for many investors who recognize the importance of costs.
Finally, the stability of the asset
base can be offset by the added
volatility of using leverage, Esser says.
That added volatility in price can be a
disadvantage for investors who don’t
have the stomach to stay the course
or hold for the long term.
As Esser says, “If you’re not a person who can weather a volatile storm
— some CEFs for example, lost more
than 50 percent of their net asset
value in 2008 — you should not be
investing in them.”
33
34_35 Between the Lines_Oct15_34_35 8/20/15 3:01 PM Page 34
DISCUSSION & ANALYSIS | Between the Lines
Investments Packaged in Insurance Policies Are Tied Up With Protection — and Fees
Do Variable Annuities Belong in Your Portfolio?
Insurance companies and the government, to a large degree,
play an enormous role in advancing society by allowing
a mechanism for individuals and groups to manage risk.
Society benefits by allowing people to pursue opportunities
they feel well-equipped to pursue while minimizing the risk of
the unforeseeable. Unemployment, illness, severe weather and
of course death are difficult to predict on an individual basis,
but statistical analysis yields enough certainty for companies
to accept the risk of a substantial payout in exchange for
relatively small premiums.
I
nsurance companies gather large streams of premiums,
invest them prudently and maintain reserves to pay out
what in the aggregate are largely predictable claims.
Premium charges also include the costs of running the
business and, if it’s a for-profit entity, an additional charge
that allows for profit.
The appeal of wrapping an investment such as a variable annuity in an insurance policy is that if you adhere to
all the conditions of the policy, you’ll be protected against
losing your original investment and will likely get at least
some benefit of the market going up over this time. One
of the primary attractions is that growth in an annuity is
treated similarly to that of a retirement account: The
growth is tax-deferred. If you’re already putting aside the
maximum contributions in an individual retirement account
and any company-sponsored retirement plans, a variable
annuity might be an attractive alternative to buying aggressive, high-turnover mutual funds, which trigger short-term
capital gains taxes in a rising market.
There are many different flavors of variable annuities,
however, and each of them have unique features to address
a certain perceived need in the marketplace. Some contracts guarantee only the return of your entire principal
upon death or even a specific return over a specific time.
Meanwhile, others offer guarantees or high-water marks
based on the market while you’re still alive. These benefits
can be particularly costly.
Liquidity Concerns
Being able to tap savings without penalty is important.
You may need to pull money from a retirement account
in an emergency or wish you were able to do so if there
comes a compelling opportunity down the road. Some
variable annuity contracts don’t charge early surrender
fees, but if you withdraw money early from your annuity
or surrender the policy entirely, the entire withdrawal will
most likely be taxed as ordinary income, plus a 10 percent
early withdrawal tax if done before the age of 5912⁄ . Before
buying a variable annuity, consider whether you can min34
imize capital gains taxes yourself through an alternate
method such as harvesting tax losses, holding for the long
term or, if you prefer to buy a fund, at least buying a fund
that seeks to manage after-tax returns. Regulators frown
on buying annuities within retirement accounts because
investors are often paying extra for tax deferral they
already have by holding the money in a retirement
account.
Most variable annuity contracts offer many different
investment choices, frequently managed by different
mutual fund companies, from which you can choose and
switch among without incurring tax or transaction fees —
provided you don’t trade within the first 90 days or some
other very short term they specify. The fact is, though,
by buying an annuity contract you’re committed to the
range of investment options within that contract. You
might not want to limit yourself to only a few different
choices of a global growth fund, for example, and the
ones offered in the annuity might not be the best ones
available on the market.
The lifetime of an annuity contract is usually divided
into two parts.The accumulation phase begins when you
contribute money into the contract and continues while
you allow it to grow through market appreciation or the
crediting of interests and dividends to the account. When
you’re ready to receive an income stream, you turn on the
distribution phase of the contract. At that point the insurance company guarantees a specific income stream —
depending on the guarantees in the contract and the
underlying investment performance in exchange for the
principal in the contract. Though a specific monthly
income stream is valuable, you no longer have the ability
to withdraw lump sums once you annuitize.
The Cost of (Almost) Certainty
The most frequently sold variable annuities carry death
benefits that assure a certain or stepped-up benefit in
case of the contract-holder’s death before he would begin
to take income from the annuity. There are also benefits
that guarantee specific benefits for the retiree. These riders, as they are known, add on a layer of cost. If you put
$100,000 into an annuity with a principal guarantee only
to watch the value drop by 20 percent and, even worse,
then die shortly after, your beneficiaries would be paid
the full amount of $250,000. If the value went up instead
of declining, they’d receive the higher value after fees.
Though the possibility of seeing all your principal go
down to zero theoretically exists, it’s likely the potential
payout value of the rider will be much lower than the full
amount of the contract (in this case, $50,000). It’s even
34_35 Between the Lines_Oct15_34_35 8/20/15 3:01 PM Page 35
Between the Lines
more likely the market will significantly rise enough over the contract’s
life to render that rider an unnecessary expense.
Step up riders sweeten the deal by
allowing contract holders to lock in a
higher market-appreciated benefit at
certain times as a death benefit instead
of just the principal. This carries additional cost. The cost and complexity
of these contracts may make it more
advantageous for you to unbundle
these products and pursue the least
expensive insurance option you can
find and build a diversified portfolio
yourself.
The commission cost of buying a
$500,000 portfolio of 30 stocks at a
discount broker at $7 a trade would
be $210. A healthy 48-year-old male
might be able to buy a $200,000 term
insurance policy with premiums level
for 10 years at $33.65 per month,
or $403 per year. (I used USAA as an
example.)
If the portfolio value is the same
after 10 years and the policyholder
dies, a spousal beneficiary would net
$200,000 cash, minus the $4,030
insurance premiums paid over the
years along with the $500,000 portfolio. The addition of term insurance
would protect against the market
being down by as much as 40 percent, while allowing your stock portfolio to be fully invested. Although
always keeping in mind that tax policies can change, you might be withdrawing from your stock portfolio at
long-term capital gains rates of 15
percent instead of withdrawing from
an annuity at ordinary income rates.
Annuities with death benefits can
have annual expenses totaling as
high as 4 percent a year, though typically they’ll be lower. A product reference sheet from Morgan Stanley
dated June 2015 provided some
ranges for annual expenses.The mortality and expense component range
is 1.15 percent to 1.85 percent per
year. Using the midpoint of 1.5 percent, those expenses of $7,500 per
year on the annuity would be more
than 18 times the amount of premiums charged on the term policy,
though admittedly the annuity would
protect the full principal rather than
a mere 40 percent decline. Going
back to USAA’s site, I found that a
$500,000 policy would be only $545
per year. In that case, the charge
levied by the annuity is only slightly
less than 14 times the term policy
price. Yikes.
Just Charge It
But we aren’t done with the charges
yet — not by a long shot. Annuities
may also charge administration and
distribution fees ranging between
0 percent to 0.60 percent per year
and, in addition, an internal subaccount.A subaccount is effectively the
annuity version of a mutual fund: fees
that, depending on which option you
select, can range from 0.70 percent
to as high as 2.73 percent per year.
Adding insult to injury, some contracts
will charge an annual fee of $30 to
$50 if the size of your account is
below a dollar threshold.
Some annuities will impose surrender charges if you decide to pull
your money out early. This permits
the insurance company to recoup
any commission paid to an agent or
other financial adviser upon the sale
of the contract. Surrender charges, if
present, usually decline over time the
longer you hold the contract.
Annuities often offer share classes
that further complicate matters. One
share class of the same annuity might
have comparatively high annual expenses but will not charge a surrender
charge. Others will have relatively
lower annual expenses — still high,
nonetheless — but have a long surrender period.
The good news is the combination of increased scrutiny and
competition is driving these costs
downward, and there are some noload annuity contracts that focus on
the tax-deferral features rather than
on the bells and whistles of death
benefits or income guarantees. But
I argue that solid management of
capital gains would go a long way to
defer taxes and be taxed at a lower
capital gains rate.
Annuities can be enormously
rewarding for agents and financial
advisers, who actually are acting as
agents when selling an insurance
product. Commissions are paid in
two forms: an upfront commission or
an ongoing trail. Agents may split
commissions as high as 7 percent
with their firm, or they may receive
an ongoing “trail” of a much smaller
amount, typically 1 percent per year.
There are also combinations of the
two options.
Broadly speaking, the longer the
surrender period and the more complex the annuity, the more the agent
is receiving in commission. At the
time of this writing, the Department
of Labor is proposing new guidelines that would require agents and
advisers to make recommendations
concerning retirement accounts that
are solely guided by the clients’ best
interests. This fiduciary standard is
far more stringent than a mere suitability standard.
This change would likely dramatically slow annuity sales within IRAs
and from 401(k) rollovers, because
there are often far better solutions
for clients. Sadly, the new rules don’t
address money held outside of retirement accounts, so you must remain
particularly vigilant when your agent
recommends buying an annuity.
Questions to Ask
Here’s a checklist to work through
before signing on the dotted line:
■ Are you already maxing out your
contributions to other retirement
vehicles?
■ Are the scenarios in which the
annuity benefits you the most
very likely to occur?
■ Are there lower-cost options you
can employ to achieve the same
result?
■ Are you happy with the investment
options available in the contract?
■ Is this really going to be kept for
retirement?
Sam Levine, CFA, CMT, writes frequently for this magazine.
35
36_CreditCard_Ad_Oct15_36 8/19/15 5:09 PM Page 36
NO OTHER CARD IS
MORE REWARDING
It’s not what you get with the new BetterInvesting
Points for purchases1
®
Platinum Rewards Visa card, it’s how it helps you
give back. That’s because every purchase you
Bonus points at select merchants
make directly supports the nonprofit mission of
Points for balance transfers
BetterInvesting. So while you’re enjoying great
Points for billed interest
ways to earn points and competitive rates and
empower future generations of informed investors.
Redeem for statement credits,
travel and more
And that’s a return everyone can feel good about.
Personalized custom cards
terms, you’re also helping BetterInvesting to
Choose your official BetterInvesting Visa® card at
www.BetterInvesting.org/card
The BetterInvesting card program is operated by UMB Bank, n.a. All applications for the BetterInvesting Visa credit
card accounts will be subject to UMB Bank n.a.’s approval. Please visit www.cardpartner.com for further details of
terms and conditions which apply to the BetterInvesting Visa card program.
1
Please see rewards program rules for more details.
37_41 Cover Story_Oct15_37_38_39_40_41 8/21/15 3:59 PM Page 37
Cover Story | FEATURE
Over time, most investors tend to specialize. It could be
a favorite industry, a particular country or a preference for
growth stocks over value stocks. It’s productive and rewarding to become knowledgeable about your favorite corner of
the market. Yet, as any cliché-pounding sports pundit will
say, “defense wins championships.” Invest from your happy
place by all means, but don’t neglect those fundamental
investing principles.
O
ne of the best ways to protect your portfolio
from crippling losses is to diversify your investments among different sources of risk and opportunity. Diversification protects you from what you can’t
foresee and exposes you to potential profits you didn’t
expect. Hedge your bets.Advisers and portfolio managers
are expected to diversify. Even the most aggressive industry-specific mutual funds have more than one stock in
their portfolios. The common argument against diversification is that the more spread out your portfolio, the
less likely it is you’ll enjoy above-average performance.
This is true, but excessive losses can derail a financial
plan or, more broadly, a life goal. You can still pursue
above-average performance while staying mostly, if not
perfectly, diversified.
Every investment, including cash, has a variety of different risks and different practitioners have different
names for them.They include the risks of inflation, changing interest rates, country/political upheaval, exchange
rate fluctuation, default risk and risks specific to one
investment, such as that of Sir Richard Branson falling
out of a balloon somewhere over the Himalayas. These
sources of risk manifest themselves in the degree and
direction an investment fluctuates in price.
A Quick Dip Into Performance
Before discussing diversification’s impact on performance in any depth, it’s a good idea to define what performance is. Portfolio performance is properly evaluated
in comparison to a benchmark that will help you determine whether your performance came from simply
37
FEATURE | Cover Story
BLENDED RETURN AS INVESTED IN
TWO BUSINESSES SHOWING OPPOSING
being in the market while it was
BOTH STOCKS AT LEFT
PATTERNS OF RETURN
going up, buying riskier stocks
than the average or buying the
2014 2013 2012 2011 2010
2014 2013 2012 2011 2010
right investments at the right
31% 26% 16% (9%) (4%)
time. It can be the performance First Oil
Blended 13.5% 5.5% 16% 8.5% 13.5%
of a stock or a bond index such Drillers
as the Standard and Poor’s 500 Secondhand (4) (9) 16 26 31
index or a weighted combina- Stores
tion of indexes that reflects the
amount of risk you’re willing to
would have been under par. age to account for compounding.)
accept. That last option is particu- Likewise, if you outperform your But imagine if you unexpectedly
larly helpful if investing to meet a benchmark with less volatility, you needed to raise funds in an emerspecific financial goal.
are knocking it out of the park.
gency at the end of 2011. Your
You might be concerned only
options would be more limited if you
about beating inflation, which would Let Those Risks Duke It Out Among
were fully invested in First Oil,
imply that you should need to earn Themselves and You Come Out
because the stock sank for two years.
only above the change in the con- the Winner
Now, let’s look at what the
sumer price index or some other Some frequent air travelers swear returns would be if you divided
appropriate inflation measure. Most by noise-cancelling headphones for your money evenly between the
U.S. stock investors rely heavily on minimizing outside noise, especially two stocks. Your results would have
the S&P 500 index. Benchmarking the sounds of noisy jet engines. The been quite different. (See second
allows investors to evaluate, admit- headsets have a small microphone chart, above right.)
tedly imperfectly, how much of their that listens to the outside noise.
Notice that the biggest swing
performance might be due to luck Circuitry listens to the outside from zero has shrunk from 31 perand how reliable that performance sounds and generates sound waves cent down to almost half that.
has been. That’s no guarantee for the that exactly cancel out the intrusive Diversification reduces the volatility
future, but it does offer some insights noise. When added to the music, the of portfolios and the chances of havabout past performance.
intrusive sounds are eliminated and ing a really, really bad day or, worse,
Performance is usually examined what remains is the music you want an underfunded retirement.
from two perspectives: the nominal to hear. The same idea drives diverreturn and the amount of risk taken sifying a portfolio: You want some Negatively Correlated Assets or
to achieve that level of return. Risk investments to zig while others zag. How to Implement a Sitcom
equates to volatility, the amount of
Let’s look at two imaginary Strategy in Your Portfolio
fluctuation up and down in price. In stocks. First Oil Drillers possesses “The Odd Couple,” originally a play
a perfect theoretical world, the huge oil reserves and its profits are by Neil Simon and now in its third
value of your portfolio would go up highly dependent on the price of incarnation as a TV series, is cenin a straight line and quickly enough oil. If the price of oil increases, prof- tered on two roommates with
to allow you to hit or exceed your its go up with it. For the sake of this opposite personalities and personal
financial goal. Since the real world discussion, oil fell for the first two habits, most visibly in personal
isn’t that cooperative, you must bal- and a half years and began rising in hygiene. When sloppy roommate
ance your desire for a solid return the last two and a half years.
Oscar drops garbage on the floor,
with avoiding undesirable risk.
Secondhand Stores sells more neatness freak Felix inevitably
Professionals usually evaluate risk- clothing when consumers tighten rushes to pick it up.
adjusted performance.
their belts, and consumer spending
Likewise, when the anal-retentive
Risk-adjusted performance rec- also fell during the first two and a roommate goes into a frenzy about
ognizes that the more volatile your half years and began rising steadily some minor etiquette matter, the
portfolio returns are, the more possible after. In short, they have almost more casual one will always throw
it is that performance will eventually opposite patterns of returns. (See in a wisecrack. If their personality
falter. There are different ways to first chart, above left.)
test results were averaged together,
calculate risk-adjusted performance,
If you invested in both of them in the result would probably be a fairly
but, broadly speaking, they penalize the beginning of 2010, they both normal score. Statisticians, who really
volatility. If your portfolio perfor - earned exactly the same average do see the world differently from
mance returns the same as the S&P annual return of close to 11 percent. other people, would likely call Felix’s
500 index but was far more volatile, (We use what’s known as the geo- and Oscar’s behavior negatively
your risk-adjusted perfor mance metric mean instead of a simple aver- correlated.
38
Cover Story
Correlation is a somewhat sophisticated statistical concept that measures how much items move together. Any investment you add to your
portfolio that moves even slightly differently from the others you already
own will help diversify your portfolio because whenever two of your
holdings move in opposite directions, their movements cancel each
other out to some extent. Correlation
is known as R2 and varies between
-1 for perfectly negative correlation
and +1 for perfectly correlated items.
As you would expect, a correlation of
0 means there’s no statistical relationship between the two.
Two stocks that consistently move
exactly opposite to each other at
the same time are referred to as
being negatively correlated. When
looked at together on a chart,
they’re a Felix and Oscar. The two
stocks in the previous example
were negatively correlated. Positively
correlated stocks tend to move in
the same direction.
Purchasing a stock that’s perfectly positively correlated with another
one of your holdings would do nothing to reduce volatility; you would
see the same investing result if you
purchased more of one of the stocks
instead of both. Uncorrelated stocks
are neutral; they don’t show any
leanings whatsoever.
Ideally you should look to minimize the positive correlation among
your holdings. You don’t need to be
a math wizard to diver sify your
holdings. If you aren’t statistically
inclined — and even if you are —
you should concentrate instead on
learning what drives investment
performance and then continually
look to diversify among those
sources of volatility so that one market event or change in market sentiment will have less of an impact on
your portfolio’s value.
We’ll list common ways portfolio
managers and analysts classify
investments next and how you can
use that to maintain or increase
diversification.
Asset Classes
S&P 500 SECTORS AND THEIR CORRELATION
TO THE S&P 500
Most brokerage statements
categorize portfolio holdings by asset class: stocks,
bonds, cash and other.
The “other” can be alternative assets or options.
Regardless of how your
brokerage firm categorizes them, know that
mutual funds are merely
wrappers. A stock fund
belongs in the stock asset
class total and a bond
fund should be considered part of your bond
holdings. If you have an
asset allocation fund,
you’ll have to dig deeper
to find out how the fund
is invested.
Closed-end funds (see
article on page 32), even
if they trade on an exchange like a stock, also
Guide: Sectors are Consumer Discretionary, Consumer
Staples, Energy, Financials, Health Care, Industrials,
need further analysis if
Information Technology, Materials, Telecommunication
they’re invested within
Services and Utilities.
more than one asset class.
You may be startled if you
analyze your asset allocation by surely as the sun rises — the talking
examining each holding instead of heads will declare, “Everyone is a
just relying on your brokerage state- genius in a bull market.”
Even though stocks are highly
ment. It’s a worthwhile exercise.
correlated, they’re not perfectly correlated. You’re also not required to
Stock
Though from day to day a stock will pick stocks randomly.
You can purposely choose
perform better or worse than the
overall market, if we take a bird’s- stocks in different countries and
eye view, most of an individual industries and also diversify among
stock’s performance will depend on underlying fundamentals to divershow the stock market overall is ify your stock holdings. As a final
doing.The chart at above right is the check, you can put together a correcorrelation of different Standard & lation matrix that compares each
Poor’s sectors to their parent, the stock’s movement with one another to see whether you’re buying a
S&P 500 index.
In practice, most stocks display stock that is truly different.
You can read more about corresome form of positive correlation to
other stocks because they’re all sub- lation matrices, if you wish, in the
ject to the general appetite of June/July 2013 issue of this magainvestors to buy or sell stock. When zine in the article “Correlation
correlations between stocks are Matrices 101” in a “Between the
low, pundits are likely to call it a Lines” feature by this author..
The following are some com“stock-picker’s market.”When correlations are high and the markets mon ways analysts differentiate
have been going up, inevitably — as among stocks and why.
39
FEATURE | Cover Story
Investor Style
Some investors prefer to invest in
companies that are enjoying evergrowing profits and sales, while others prefer to buy distressed stocks at
a bargain and wait until the company’s prospects turn and the stock
can be sold at a profit. The market’s
preference for one style over another
changes over time. Typically growth
is in favor during a bull (an upwardly rising) market and value outperforms growth in a bear (declining)
market.
As tempting as it might be to
overdo growth investing when the
market is skyrocketing and overemphasize value in a falling market, I
think you should always keep an
allocation in both growth and value.
Country or Geographic Region
As we’ve seen most dramatically
from Greece recently, countries differ in their political structure, their
economic drivers and their sources
of income. You can reduce your
portfolio risk by investing a significant portion of your portfolio overseas.Your net worth will be less tied
to the policies of one central bank
and one politician’s whim.
Keep in mind, however, that
some developing countries don’t
protect the rights of investors as
effectively as developed countries
do and they’re also prone to be
much more volatile.
Some countries’ fortunes are
closely related to one specific industry or commodity. If you aren’t careful, you may find out, for example,
that your play on Moscow realestate development was actually a
bet on petroleum production.
Investing overseas is also generally more expensive than investing
domestically.
Mutual fund expense ratios of
international funds are generally
more expensive than ones for
domestic funds. With those caveats
firmly in mind, it still makes an enormous amount of sense to welcome
some foreigners into your portfolio.
40
Sectors
Stocks can be further segmented by
what Standard & Poor’s refers to as
sectors. Each sector is a grouping of
similar or related industries. The
S&P 500 is divided into 10 sectors,
the three largest being information
technology, financial services and
health care. As you can likely guess
from looking at those three sectors,
the performance of each will be
driven by very different economic
factors. Health care stocks, especially in this political environment, are
subject to different political and
economic risks from information
technology. Likewise, the factors
that drive utility stock performance
will be somewhat different from the
forces that drive sales and profitability of consumer goods.
Market Capitalization
Stocks are further categorized by
their value in the market, otherwise
known as their capitalization. So-called
large-cap stocks are perceived as
having more resources and ability to
weather a downturn, while smallcap stocks are thought of as having
more upside because they have more
opportunity to grow. A well-diversified stock portfolio will have both
small-cap and large-cap stocks (as
well as middle-size companies).
A Note About Conglomerates
In their quest to maintain smooth
earnings trends and reduced risks
themselves, large companies often
diversify their business lines and markets. Conglomerates seek out acquisitions that will reduce the cyclicality
of their quarterly results.
Consider a company such as General Electric. It does business all over
the world and makes everything
from light bulbs to locomotives and
still has a very significant presence in
financial services, though the company is in the process of divesting
much of the former GE Capital. If
fact, many large U.S.-headquartered
companies actually do the bulk of
their business overseas.
As you evaluate a holding or consider adding a new one, analyze the
company’s sources of revenue and
profit to assess how its internal diversification helps or hinders your portfolio diversification.
It’s questionable whether company-level diversification adds value
to investors. Many conglomerates
have divested themselves of everything other than their core lines of
business. Investors prefer the simpler analysis of “pure plays” and the
ability to control their risk exposures directly.
Bonds
This high correlation among stocks
makes a strong argument for diversifying into other asset classes. Highquality bonds frequently move in
different directions from stocks
while still providing a possibility for
a positive return.
Bond prices are most sensitive to
interest rate expectations.The longer
the maturity of the bond — meaning the longer you have to wait to
receive your principal back — the
more dramatically the price will
move in response to changes in
interest rates.
High-quality bond indexes often
rise when there’s a market panic.
Bonds and cash are considered less
risky than stocks and as such benefit from a flight to safety.
Many publications differentiate
between high-yield (“junk”) bonds
and high-quality bonds. Junk bonds
tend to have equity-like returns, so
before you start adding the highestyielding bonds you can find just to
have part of your portfolio in bonds,
think further. Likewise, convertible
bonds, which are becoming rarer as
time goes on, blend characteristics
of bonds and options and tend to
be illiquid.
Alternative Assets
Alternative assets isn’t so much a
specific asset class but rather a
catch-all category that includes anything that isn’t stocks, bonds or
Cover Story
cash. Real estate, art, rare coins, collectibles, commodities and currencies fall into this category. The very
different drivers of return behind
each of these assets mean that they
must be analyzed individually. Other
than commodities and currencies,
alternative assets tend to be illiquid
and can frequently be costly to
own. Commodities, however, have
proven to be quite helpful in diversifying portfolios. If you don’t wish
to choose individual alternatives,
there are many managed alternative
funds from which to choose.
Implementation
Professional investment managers
often start with a baseline asset allocation first and then overweight
investments they believe will outperform their benchmark and
underweight the ones they project
will underperform. A portfolio manager might require a compelling reason to overweight or underweight a
holding, because dramatically underperforming the benchmark hurts a
portfolio manager’s career. It’s even
more relevant to investors, since it’s
their money.
Your baseline asset allocation
doesn’t need to — and actually
shouldn’t — fit a magazine’s idea of
a perfect asset allocation. It should
take into account the risks you face
in your everyday life.
Think carefully before you put
retirement savings into your employer’s stock, even if the stock is offered
at a significant discount to the market. Purchasing company stock while
relying on your employer for your
paycheck dramatically increases the
potential damage should the company hit hard times.
Though many Lehman Brothers
employees earned very high incomes,
they took a hard hit when the company went belly up. They were out
of a job and their company stock
effectively went down to zero.
Financial services professionals
are, paradoxically, sometimes the
most egregious offenders when it
comes to being too concentrated.
Stockbrokers and analysts would be
safer if they invested in real estate
instead of pouring more money into
the stock market.
Though you may know your
field and your company best, inadvertently doubling up on risk may
come back to you at the worst possible time.
Another financial planning question you should consider as you
build that baseline allocation is the
amount of risk you can accept.
Stocks are more volatile than bonds,
and cash isn’t volatile at all, though
your purchasing power will be
diminished by inflation.
The less able you are to accept a
less-than-optimal result, the less risk
you should accept. Your decision
should reflect your circumstances,
goals and personality.
Think too about whether accepting risk is even desirable. If you
already have enough money to
meet your financial goals in the
present, it might be the prudent
course to only pursue enough
growth to match inflation.
Now Go Forth and Diversify
It would likely be expensive or too
intimidating to sell the majority of a
long-established portfolio for the
sole reason of pursuing a perfect
asset allocation. You might find it
easier to incorporate a few new
checkpoints in your investment
process. If you have a substantial
concentration in one stock, for
example, consider the tax implications and, if sensible, use that as
your preferred source of funds for
new investments. When you’re considering adding a new stock or fund
to your portfolio, look to see
whether it’s moved in tandem with
your other investments and, if it
does, consider looking for an alternative that hasn’t.
Sam Levine, CFA, CMT, is a frequent writer for this magazine
and manages the Buttonwood
Post, an online investing portal.
41
42_Investment Club Webinars_Oct15_42 8/19/15 5:05 PM Page 42
Investment Clubs and BetterInvesting
... a Winning Combination
View These FREE Webinars to Learn How to
Start an Investment Club and Multiply the Benefits
of a BetterInvesting Membership
Starting an Investment Club Series — Session 1: The Benefits of an Investment Club
Learn the benefits of starting an investment club, how to get one started and where to find the resources you need
to run a successful club. View Presentation (58 min.) at: www.betterinvesting.org/startaclub1
Starting an Investment Club Series — Session 2: The First Meeting
This session focuses on the getting started process, getting you organized for your first investment club meeting,
directing clubs to valuable resources and presenting real world examples.
View Presentation (56 min.) at: www.betterinvesting.org/startaclub2
Starting an Investment Club Series — Session 3: Your Club Is Up and Running…Now What?
It’s time to focus on capital contributions, learning how to invest wisely and ensuring that all club members are
working toward the same goal. View Presentation (56 min.) at: www.betterinvesting.org/startaclub3
For even more information about starting an investment club, we invite you to
sample some of BetterInvesting’s Investment resources at no charge.
Visit www.BetterInvesting.org/Clubs
Special Bonus for Non-Members
Any non-member who views one of these presentations will
automatically be given access to sample BetterInvesting member
benefits at no charge or obligation.
These webinars are available to all BetterInvesting members and
their guests. Invite your friends, family and co-workers to enjoy
these informative FREE presentations.
43_ From Our Members_Oct15_43 8/21/15 12:23 PM Page 43
From Our Members | MEMBERSHIP
Portland, Ore., Area Group’s Won State Honors for Portfolio
‘You-Go-Girl’ Attitude Keeps Club Feisty for 28 Years
by Jim Zaleski
For the Gotham Investment Club of Forest
Grove, Ore., each new year is a milestone. This year the club is celebrating
28 years of successful investing and
shows no signs of slowing down. If you
talk to current members, many with the
club since its inception, it appears
they’re just getting started.
tage of Toolkit 6, essential to their
investing success, and use the Internet
exclusively for classes and investment
resources, including BetterInvesting’s
webinars and the Investor Advisory
Service newsletter. Toolkit’s been an
invaluable resource in guiding them
through all investment transactions.
In 1994 their portfolio had the best
four-year record in the Portland area.
In 2001, the club made the Top 50
Honor Roll and was selected as the
BetterInvesting Oregon State Winner
for Lifetime Portfolio Performance.
The club recently outdid itself by
managing to earn a 51 percent return
on its 2013 portfolio.
or although this smallEach spring the club heads
town women’s investto Mount Hood or the Oregon
ment group has seen
coast for a fun-filled weekend
many successes, members
and annual meeting. Memare continuing their hard
bers review their portfolio,
work with the same zeal,
sign up for quarterly and
camaraderie and “you-goannual reports, new stock
girl” attitude that first
presentations and educationlaunched their investing
al events, and elect new offiadventure in 1986. They
cers. They also find out the
proudly claim to be the
results of the annual stock
same group as when they
contest. The winner, a memGotham Investment Club of Forest Grove, Ore. Front row, from left:
started, a forward-thinking
ber who selected the bestKate Grandusky, Ireta Sitts Graube and Laura Ryba. Back row: Judi Margroup of women, who, like
performing stock for the
Zaleski, Stephanie Edwards, Marilyn Duistermars, Vera Deines, Sue
their portfolio, keep getting
year at a previous annual
Vosburg, Winnie Beu and Stephanie Lommen.
better with age.
meeting, gets her weekend
Inspired by a magazine article feaThe majority of today’s members paid in full!
turing investment groups, founding are part of the founding membership
After the business is complete,
member Ireta Sitts Graube called 15 or have been with the group more they take time for fun and feasting.
friends together on April Fool’s Day than 15 years. But the club’s evolved Over the years they’ve enjoyed annual
to discuss starting a club. Before their with the recruitment of new mem- meetings with many “creative” themes,
meeting ended the Gotham Invest- bers, who are sponsored by an exist- from murder-mystery dinners to Mexment Club was born.
ing member and are assigned a men- ican and Hawaiian nights, as well as
The group’s focus has always been tor to help them become more com- ’70s retro night and belly dancing!
education. It was an early consensus fortable with the investing process.
Scrabble, games and book exchanges
that success would hinge on how
To make investing affordable, initial also add zest to their time together.
well members understood the ins dues are set at $20 or increments of
The club believes in giving back
and outs of serious investing. So they $20. Members may contribute any to the community. Over the years
set about educating themselves using amount, but no one can accrue a port- members have contributed by purBetterInvesting resources. Initially, folio value of more than 20 percent of chasing toys for Christmas drives,
members were required to take BI- the overall holdings. Voting on invest- sponsoring needy families from local
sponsored classes to help them learn ments are weighted by the percentage schools and donating to the food
the Stock Selection Guide. As the of each member’s current holdings.
bank and to the library.
women pursued their education, they
Members work in groups of three
The women have thoroughly entransformed themselves into an award- or four to select a new stock or to joyed their journey together and have
winning, “investment-savvy” club that challenge an existing holding, with built lasting friendships. They claim
has defied the stereotype of a rural the help of Toolkit’s feature tracking their involvement in the club has
women’s group.
quarterly trends.They aim to diversify helped them treasure the special qualAnother key to their growth has their portfolio by industry and com- ities in one another. Looking back,
been their willingness to embrace pany size.The club’s performance has they wouldn’t change a thing —
technology. All members take advan- been recognized in BetterInvesting. they’re ready for 28 more years!
F
43
44_ From Our Members_Oct15_44 8/21/15 12:08 PM Page 44
MEMBERSHIP | From Our Members
Founder Was Inspired by Beardstown Ladies in 1995
Clear Lake Club Enjoys Their Dive Into the Market
by members of the Clear Lake Investment Club of Houston
The Beardstown Ladies have touched
more lives, perhaps, than they’ll ever
know. Renee Harrison, founder and
president of the Clear Lake Investment
Club of Houston, saw the Ladies on
“The Phil Donahue Show” back in
1995.
T
hat show sparked her enthusiasm for becoming a member of an investment club, and
she immediately began searching
her area for a club to join.
She found investment clubs —
with long waiting lists.
Rather than wait for an opening,
Renee decided to form her own
club. “I thought, ‘Heck, I’m going to
form my own club’ and I sent out
invitations,” Renee says.
Two months later, she had founded and formed the Clear Lake Investment Club.
Club members invest a minimum
of $35 a month into companies such
as Ross Stores, LKQ Corp. and MWIV
Veterinary Supply; their portfolio is
currently valued at about $70,000.
“We are there so that we can learn
to invest and build our own private
nest eggs,” Renee says. “Some club
members are already investing on
their own.”
Usually, it takes investment club
members about a year to gain the
confidence to spread their wings.
The Clear Lake Investment Club of Houston. Top row, from left: David Wilkerson, Bob
Holkan, Neil Miserendino, Mike Hibbetts, Trent Hubbert and Roland Irby. Bottom row: Lois Troxell,
Renee Harrison, Eileen Buiesing and Marcie Hale.
“The first year in a club is the time
to really soak in all the education,”
Renee says. “That’s when you learn
how to use the Stock Selection
Guide and the BetterInvesting principles, and you bounce ideas back
and forth with other club members
to decide why a company is or isn’t
a good investment.”
Like the other club members,
Renee has come a long way since
that first day back in 1995. Renee, a
flight attendant for United Airlines,
recalls a day back in 1982 when she
attended a Continental Airlines share-
Share Your BetterInvesting Story at
www.BetterInvesting.org/MyBIStory
44
holders meeting — and didn’t know
much about what was going on.
Now she attends the Berkshire Hathaway annual shareholders meeting
on her own and follows it every step
of the way.
But she emphasizes that people
shouldn’t wait until they “know
enough” or “have enough money”
before they begin investing.
“You don’t have to have a lot of
money to start off,” the club founder
says.“No matter how little you have, invest it and let it grow. And you’ll learn
more and more as you go along.”
45_HomeOffice_Oct15_45 8/20/15 10:06 AM Page 45
From the Home Office | MEMBERSHIP
Program Contributes to Nonprofits
Shop and Give Via AmazonSmile
One of the world’s largest retailers is offering BetterInvesting members a way to support the organization while
shopping at its site. The AmazonSmile program contributes
0.5 percent of the amount spent on eligible purchases to the
501(c)3 organization selected by the shopper.
AmazonSmile will be earmarked for the NAIC general
fund, which will use the funds to develop additional
BetterInvesting programs and member initiatives.
For more information, go to
www.betterinvesting.org/Members/Tools/SpecialPrograms/
AmazonSmile/Default.htm
he AmazonSmile is an automated program that requires
selecting the nonprofit only
once. After doing so the AmazonSmile Foundation will make the
donation based on the price of eligible purchases.
To give support to BetterInvesting,
go to amazon.smile.com, a site operated by Amazon with the same selection and prices as Amazon.com.
Select National Association of Investors
Corporation as the nonprofit organization that will receive funds. The
site will remember your selection.
When shopping through the
AmazonSmile site, eligible products
will be marked Eligible for AmazonSmile
donation in the product detail box on
the right-hand side. (Recurring subscribe-and-save purchases and subscription renewals currently aren’t eligible
for the program.)
You can use your current account
at Amazon at AmazonSmile, including your Wish List and registries.
Your shopping cart settings will
remain the same.
Contributions received through
T
Prime Time. An Amazon Prime truck makes
deliveries in Seattle. Artists worldwide created
murals such as the one above for the company’s #PrimeLiving project. BetterInvesting
friends can help the nonprofit through the
AmazonSmile program.
45
46_47 First Cut_Oct15_Oct15_46_47 8/19/15 2:38 PM Page 46
MEMBERSHIP | First Cut
Slow and Steady
Hormel Foods Corporation
by Liz Goode, ICLUBcentral Staff
Editor’s note: This month’s First Cut — a Stock Selection Guide
recently completed by a member of the BetterInvesting community — is of Hormel (ticker: HRL), completed on June 26. This
study was submitted by Liz Goode, an ICLUBcentral staff member. First Cut studies, found at the BetterInvesting website, are an
efficient source of stocks to study and a way to compare judgments with those of other members. SSGs are available for companies such as Apple, Tractor Supply, Buffalo Wild Wings,
American Water Works,
F5 Networks and others.
This First Cut is offered for educational
purposes only. No investment recommendation
is intended.
We invite you or
your club to provide
SSGs as well. Just click
the link on the First Cut
homepage.
Discuss why you
consider this to be a
high-quality growth
company that should
be investigated
further.
Hormel Foods is consistent; slow and steady
wins the race. Except
for a small dip during
the 2008 recession,
sales and earnings
growth have been consistently up. Pre-tax
profit is up, return on
equity is about even
and debt is down.
Describe how the
company makes
money.
Hormel Foods Corporation, based in Austin,
Minn., is a multi national manufac turer and marketer of
consumer-branded
packaged food and
meat products.
46
Projected growth rate for sales:
9 percent
Why did you select this rate?
Future growth will be from Hormel’s continued product
expansion as well as further planned acquisitions, such
as the company’s recent ones of Skippy, Muscle Milk and
Applegate.
46_47 First Cut_Oct15_Oct15_46_47 8/19/15 2:38 PM Page 47
First Cut
Projected growth rate for earnings
per share:
9 percent
Earnings growth percentages have
been higher than sales, but a conservative 9 percent keeps the projection in line with sales.
Projected high P/E: 19.3
Why did you select this value?
This is the average high P/E ratio of
the last five years.
Hormel Background
Industry: Packaged Foods
Price at time of study
$57.72
Current P/E
23.6
2014 revenues
$9.3 million
2014 EPS
$2.23
Pre-tax profit on sales
(five-year average)
9.2 percent
2014 pre-tax profit on sales
9.9 percent
Percent earned on equity
(five-year average)
17.0 percent
2014 ROE
16.5 percent
Annual dividend
$1.00
Projected low P/E: 14.8
This is the average low P/E ratio of
the last five years.
Projected low price: $46.20
At the current price, the upsidedownside ratio is: 0.7 to 1
Why did you select this value?
This is obtained using 80 percent of
the current price.
At the current price, the stock is a:
Hold
Projected compounded rate of
return: 4.5 percent
Your final recommendation: Hold
Hormel Foods was again named
one of “The 100 Best Corporate Citizens” by Corporate Responsibility
Magazine for the seventh year in a
row. Hormel Foods was recognized
as a 2015 Military Friendly Employer
by G.I. Jobs Magazine, was on the
2015 Best for Vets Employers List by
Military Times and was also named
one of the 2015 40 Best Companies
for Leaders by Chief Executive Magazine. The company has a sound
reputation among consumers, grocers and the food service industry.
Company growth is slow but steady
and solid, and consistently up.
Our Doors Are Open
Invite a Guest to Tour BetterInvesting’s Open House
BetterInvesting members, this is your opportunity to invite your family,
friends and co-workers to attend our FREE Open House Video Tour to
experience the value of BetterInvesting. This webinar takes BetterInvesting
members and prospective members on a “virtual tour” to sample our
in-depth investment education sessions, powerful online tools and
resources, exclusive unbiased investor information and other valuable
benefits available to BetterInvesting members.
Attend the FREE BetterInvesting
Open House Video Tour Today at:
vwww.BetterInvesting.org/OpenHouseVideoTour
If you’re not a BetterInvesting member, you can join today, take our
Open House Video Tour or sample our many, member only resources
on your own, at no cost or obligation.
Simply visit www.betterinvesting.org/OpenHouse or
call toll free at 877-275-6242 to speak with a
member service representative.
47
48_51 Regional Notices_Oct15_48_49_50_51 8/18/15 1:03 PM Page 48
MEMBERSHIP | Chapter Contacts
Using This Section
I
n this section readers seeking to network with other long-term
investors will find resources for information about programs
in their communities. Meetings provide investment education
for interested individuals of all ages and experience levels.
We’ve listed each BetterInvesting chapter along with the chapter’s website, contact information and whether the chapter offers:
■
NEW – new meetings listed at the chapter website
■
MC – model club meetings for learning about club
operations and stock selection
CV – club visits during which a chapter volunteer
can answer questions about operations and portfolio
management
SSG – upcoming classes on the Stock Selection Guide and
related stock study forms
SOFT – upcoming seminars on using computers and
■
■
■
BetterInvesting-related software
TREAS – upcoming classes for club treasurers and those
interested in club accounting
■ CG – Computer Group
Upcoming Investors Fairs, Educational Fairs, annual meetings
and other major events are listed at the end of this section. For
current details on any meeting, go to the relevant chapter’s
website.
We urge investors to contact the chapter for full details
about any event and to learn of any changes in time or location.
The regional programs described in this section are the heart
of BetterInvesting’s educational effort. Some request a modest fee
to defray costs, while others are free.
BetterInvesting’s objective is to help people learn about longterm investing in an atmosphere in which they are free from
pressure to buy anything.
■
CHAPTER CONTACTS
ALABAMA
Alabama
Barb Gierloff
256/582-7718
[email protected]
www.betterinvesting.org/alabama
CG
Emerald Coast — S. Alabama
Maurice Johnson
251/986-8170
[email protected]
DISTRICT OF COLUMBIA
Contact your local chapter for details such as changes in
time or location. You may also go to the BetterInvesting website
at www.betterinvesting.org and click on Chapters.
D.C. Regional
Sheryl Patterson
[email protected]
703/314-7384
www.betterinvesting.org/dcregional
NEW • MC
Southern Arizona
Kathryn Beatty
520/743-0279
[email protected]
www.betterinvesting.org/tucson
Sacramento Area
Dan O’Donahue
917/967-9631
[email protected]
www.betterinvesting.org/sac
NEW • MC
MC • CV
ARKANSAS
San Diego
Barbara J. Odom
858/566-2015
[email protected]
www.betterinvesting.org/sandiego
FLORIDA
(also see Alabama)
Big Bend
Brian Fitzgerald, 850/224-0595
www.betterinvesting.org/bigbend
NEW • MC • CV
Emerald Coast — N.W. Florida
Frank Sansone
850/474-3581; sanshonea@
yahoo.com; president@emerald.
betterinvesting.net
www.betterinvesting.org/
emeraldcoast
NEW • MC • CV • SOFT • SSG
ALASKA
Alaska
Tim Janneck
907/346-2792
www.betterinvesting.org/alaska
NEW • CV • SSG
ARIZONA
Phoenix
William Peterson
602/485-0954
[email protected]
www.betterinvesting.org/phoenix
NEW • CV• MC
(also see Louisiana/Texas)
Central Arkansas
Randy Pouwels
501/220-4397
[email protected]
investing.net
www.betterinvesting.org/centark
NEW • MC
CALIFORNIA
Channel Islands
Carol Haverty
[email protected]
Registrar and hostess for
events/model club:
Jeanette Casserly
[email protected]
www.betterinvesting.org/channel
CV • CG
San Francisco
Kathleen Shay, 925/443-5766
[email protected]
www.betterinvesting.org/sanfran
NEW • MC
Silicon Valley
Char Pitts, 408/984-5888
[email protected]
www.betterinvesting.org/silicon
NEW • MC • CG • CV
NEW • MC •SOFT
COLORADO
Rocky Mountain, includes
Northern New Mexico, Utah
and Wyoming
Jane Nelson, 303/665-0287
[email protected]
www.rmchapter.org
NEW • CV • SSG • SOFT
48
Emerald Coast — S. Alabama
Maurice Johnson
251/986-8170
[email protected]
emeraldcoast
NEW • MC • CV • SOFT • SSG
SE Florida – Broward/Palm Beach
Barbara Cobb, 888/901-0154
[email protected]
www.betterinvesting.org/seflorida
NEW • SSG • SOFT
NEW • MC • CV
Golden West (includes Nevada)
Linda Blay
714/973-7613, #2
[email protected]
www.betterinvesting.org/goldenwest
Emerald Coast — N.W. Florida
Frank Sansone
850/474-3581; sanshonea@
yahoo.com; president@
emerald.betterinvesting.net
Chapter Contacts | MEMBERSHIP
SE Florida – Dade/Monroe
Barbara Cobb, 888/901-0154
[email protected]
www.betterinvesting.org/seflorida
NEW • SSG • SOFT
Space Coast-Brevard
Joan Fosdick, VP-Administration
321/631-2591
[email protected] or
[email protected]
Bob Houle, VP-Membership
410/353-7032
bhoule@
spacecoast.betterinvesting.net
NEW • SSG • MC • SOFT • CV
Space Coast-Orlando
Bruce Layman
407/302-6307
blayman@
Space Coast-Gulf Coast
John Fraser
727/527-7648
jfraser@
Sunshine
Dave Yearwood
904/708-2529, call or text
[email protected]
Barbara Drake, Model Club liason
904/504-4953
[email protected]
www.betterinvesting.org/sunshine
NEW • MC
GEORGIA
Georgia
Ann Newman, president
706/561-2913
Model Club
Larry Reno, 770/461-4096
[email protected]
www.betterinvesting.org/georgia
MC • CV
IDAHO
(also see Washington)
Southwest Idaho
Alice Gonzalez, (208) 376-6957
[email protected]
www.betterinvesting.org/swidaho
MC
ILLINOIS
IOWA
MASSACHUSETTS
(also see Indiana)
Chicagoland
Information Voice Mail
847/266-2711
www.betterinvesting.org/chicagoland
Heartland
Nancy Allen
[email protected]
Roger Loof, 515/987-0275
[email protected]
www.betterinvesting.org/heartland
(also see Connecticut and Rhode
Island)
Patriot
Bill Stafford, 508/337-2970
[email protected]
investing.net
www.betterinvesting.org/mass
NEW • MC
NEW • MC • CV
Chicago West
Jim Crabill
vpe@chicagowest.
betterinvesting.net
815/236-9203
west-chicago
KANSAS/MISSOURI
Kansas City
Janice Stonestreet
913/451-0620
www.betterinvesting.org/kansas
NEW • CV •MC • SOFT • TREAS
NEW • CV
Heart of Illinois
Betty Sinnock, 309/543-4950
[email protected]
Susan A. Tampasis, 217/972-4512
[email protected]
www.betterinvesting.org/hoic
KENTUCKY
(also see Ohio )
Northern Kentucky
Mary Lyn Fledderman
859/384-1991
www.betterinvesting.org/okitri
NEW • MC • CV
NEW • CV
ILLINOIS/IOWA
Illowa Buy States
Allen Holdsworth
309/754-8870
[email protected]
www.betterinvesting.org/illowa
NEW • CV • SSG
INDIANA
Central Indiana
Diane Byron, 317/844-5904
Charles Barker, 317/844-7022
[email protected]
www.betterinvesting.org/indiana
NEW • MC • CG • CV
Evansville Tri-State
John Hamilton, 812/476-4533
[email protected]
Kim Butcher
[email protected]
www.betterinvesting.org/evtri
CV
Northern Indiana
Martha Branion
[email protected]
219/465-0587
www.betterinvesting.org/nw-indiana
CV • MC
Southeastern Indiana
Mary Lyn Fledderman
859/384-1991
NEW • MC • CV
NEW • MC • CV • SSG • SOFT • TREAS
LOUISIANA
ArkLaTex
Charnia Cheatwood
318/445-0823
[email protected]
www.betterinvesting.org/arklatex
LOUISIANA/MISSISSIPPI
LA/MS – Louisiana Area
Lawrence Adams, 337/783-0582
[email protected]
www.betterinvesting.org/lams
MICHIGAN
Capital Area (Lansing)
Cynthia Leet
734/973-0264 or 734/663-0466
[email protected]
www.betterinvesting.org/capcity
MC • CV • CG
Mid-Michigan
Ken Kavula
810/640-2231
[email protected]
www.betterinvesting.org/midmich
NEW • MC • CV
Southeastern Michigan
Jane Bellaver
248/685-8246
[email protected]
www.betterinvesting.org/semich
NEW • MC • CV
Western Michigan –
Grand Rapids
Beth Hamm, 616/949-6979
www.betterinvesting.org/westmich
NEW
NEW • MC • CV
LA/MS – Jackson Area
Joe Farrell, 601/982-0432
[email protected]
St. Joseph/Kalamazoo
Beth Hamm, 616/949-6979
www.betterinvesting.org/westmich
Mississippi Gulf Coast Area
Dick Bristol, 228/860-2686
[email protected]
MINNESOTA
MAINE
Maine
Pat Jones, 207/236-3550
[email protected]/maine
or [email protected]
www.betterinvesting.org/maine
NEW
MARYLAND
(also see D.C. Chapter)
Maryland
[email protected]
www.betterinvesting.org/md
NEW • MC • CV • CG • TREAS
NEW • MC • CV
Northern Lights
Pam Eilertson, 608/797-1008
northernlights
NEW • MC • CV • SSG • SOFT
MISSOURI
(also see Kansas City)
St. Louis
Ruby Lawrence
636/394-7186
[email protected]
www.betterinvesting.org/stlouis
NEW • MC • CV
NEBRASKA
Heartland
Nancy Allen
[email protected]
Roger Loof, 515/987-0275
[email protected]
49
MEMBERSHIP | Chapter Contacts
NEW HAMPSHIRE
TEXAS/NEW MEXICO
Granite State
Joan Connacher, 603/577-1435
[email protected]
www.betterinvesting.org/granite
OKI Tri-State: Cincinnati and
Southeastern Indiana
Mary Lyn Fledderman
859/384-1991
Pittsburgh
Larry Robinson
412/461-7120
[email protected]
www.betterinvesting.org/pgh
Southwest Desert
Donald Lopez, 915/581-7072
[email protected]
www.betterinvesting.org/elpaso
NEW • CV • SSG • SOFT • TREAS
NEW • MC • CV
MC • CV • CG
NEW • CG • TREAS • MC
NEW JERSEY
(also see Pennsylvania)
New Jersey
Pam Deisher, [email protected]
www.betterinvesting.org/newjersey
Columbus
Dianne Jordan
dijordan@okitristate.
betterinvesting.net
State College Area
John and Donna Diercks
814/234-8775
[email protected]
NEW • MC
NEW • MC • CV
South Jersey
Carla Krasnick, 856/235-0813
www.betterinvesting.org/sjersey
Dayton
Gene Senter
937/256-7858
[email protected]
NEW • MC • SSG • CV
NEW MEXICO
NEW • MC • CV
Northern, see Colorado,
Rocky Mountain
Southern, see Texas,
Southwest Desert
OKLAHOMA
NEW YORK
New York Chapter
Joyce Ivanovitch
(212) 333-2525
[email protected]
www.betterinvesting.org/newyork
MC
NORTH CAROLINA
North Carolina,
includes S.W. Virginia
Jane Chatterjee, president
919/913-8055
Louise Sechler, director
president@northcarolina.
betterinvesting.net
www.betterinvesting.org/ncarolina
CV
OHIO
Northeast Ohio – Cleveland
Gerhard Moskal
440/333-6526
www.betterinvesting.org/neohio
NEW • MC • CV
Northeast Ohio – Akron
Louise Gregory
330/666-8513
NEW • MC • CV
Northwest Buckeye
Jane Sullivan
419/841-6196
[email protected]
Marilyn Adams
419/865-6061
www.betterinvesting.org/nwohio
NEW
50
Greater Tulsa Area
Debbie McClain
918/341-7469
[email protected]
Bob Branson, Media Contact
918/481-3637
[email protected]
www.betterinvesting.org/tulsa
NEW • MC • SOFT
Heart of Oklahoma
Lewis Hoffman
405/737-1432
Joe Whitaker
405/478-7990
[email protected]
www.betterinvesting.org/oklahoma
NEW • CV • SSG
OREGON
(also see Washington)
Portland
John Radford
503/490-7296
[email protected]
www.betterinvesting.org/portland
NEW • MC • CV
PENNSYLVANIA
Central Pennsylvania
Bruce Kennedy
president@centpenn.
betterinvesting.net
www.betterinvesting.org/centpenn
MC • SOFT • TREAS •CV • NEW • SSG
Philadelphia Area
Gloria Mankonen
215/796-1214
[email protected]
www.betterinvesting.org/philly
NEW • MC • CV • SSG
MC • CV
SOUTH CAROLINA
South Carolina
Allan Steinkuhl
803/649-5696
contact@southcarolina.
betterinvesting.net
www.betterinvesting.org/sc
SOUTH DAKOTA
See Colorado, Rocky Mountain
VIRGINIA
S.W. Virginia
see North Carolina
www.betterinvesting.org/ncarolina
CV
D.C. Chapter
www.betterinvesting.org/dcregional
NEW • MC
WASHINGTON
Heartland (Sioux Empire)
Nancy Allen
[email protected]
Roger Loof, 515/987-0275
[email protected]
Inland Empire
Mike McKinlay, 509/327-1848
Paula Riccelli, 509/448-9270
[email protected]
www.betterinvesting.org/inlandempire
NEW • MC • CV
Inland Empire – Lewis Clark
Dorothy Fritz
208/743-6837
TENNESSEE
East Tennessee
William Morton
865/659-4343
[email protected]
www.betterinvesting.org/eastenn
CV
TEXAS
(also see Louisiana – ArkLaTex)
Dallas
Dave Swierenga
214/509-9931
daves@dallasftworth.
betterinvesting.net
www.betterinvesting.org/dallas
NEW • MC • CV • SOFT
Houston
Jerry Pillans
281/984-7306
[email protected]
www.betterinvesting.org/houston
MC • CV
South Texas
Wanda Iddings
210/647-7717
[email protected]
www.betterinvesting.org/stexas
CV
West Texas – Lubbock
Richard Mills
806/786-3875
[email protected]
www.betterinvesting.org/westtex
NEW • MC
UTAH
CV
Puget Sound
Mike Torbenson
[email protected]
Class Hotline, 206/935-0861
[email protected]
www.betterinvesting.org/puget
NEW • MC • CV • SSG • TREAS
WISCONSIN
Wisconsin
memberservices
@milwaukee.betterinvesting.net
www.betterinvesting.org/milwaukee
NEW • CV • SOFT
WYOMING
See Colorado, Rocky Mountain
Annual Meetings | Investors Fairs | MEMBERSHIP
ANNUAL MEETINGS & ELECTION MEETINGS
ARIZONA
Southern Arizona
6 p.m.. – 8 p.m., Sept. 22
Woods Library
3455 N. 1st Ave., Tucson
Annual Meeting. Speaker:
Barbara Gray, J.D., director of
educator programs at the
Thomas R. Brown Foundation,
on the work in K-12 economics
education in southern Arizona
and the foundation’s strategic
plan for greater economic and
financial literacy in southern
Arizona. Cost: free.
Contact: Barbara Engelhardt,
contact@southernaz.
betterinvesting.net or
520/466-5229.
www.betterinvesting/tucson
CALIFORNIA
San Diego
10 a.m. – noon, Sept. 19
Community Room
Branch Library, Mission Valley
2123 Fenton Parkway
Annual Meeting, Educational
Program. “Which Is Best for Me?
Investing in Stocks, Bonds or
Mutual Funds.” These investments
will be compared over long time
periods that show how well vari-
ous investments fared during
rising markets and recessions.
See website below.
www.betterinvesting/
sandiego.org/
Yearwood at yearwood@
aug.com if you’re attending.
sunshine
INDIANA
COLORADO
Rocky Mountain
7 p.m. – 10:30 p.m., Sept. 10
Online event
Annual Meeting, Election,
Portfolio-Centered DecisionMaking Educational Presentation. Speaker: Cy Lynch
explains why it’s best to make
portfolio management decisions
by focusing on the potential
impact on your overall portfolio,
rather than by just looking at a
stock in isolation. Cost: free.
Register: https://attendee.
gotowebinar.com/register/
8054433213749722114.
www.rmchapter.org
FLORIDA
Sunshine
10:15 a.m. – 12:30 p.m., Sept.12
Jacksonville Public Library
S.E. Branch,10599 Deerwood
Park Blvd., Jacksonville
Annual Meeting. Cost: free.
Registration: Email Dave
Northern Indiana
1 p.m., Sept. 8
Online event
Annual Meeting. Cost: free.
For information, contact
Martha Branion at
[email protected].
nw-indiana
Beaverton
Annual and Elections Meeting
With Education Session.
Education: “The Retirement
Process,” presented by Christi
Powell, and “Investing for
Income,” presented by Allen
Holdsworth. A Stock Talk session over lunch. Cost: free.
Registration: www.eventbrite.
com/e/training-and-annualboard-meeting-of-the-portlandbetterinvesting-chapter-tickets17341104711.
portland
IOWA
Heartland
7 p.m., Sept 16
Online event
Annual Meeting and Elections.
Register at www2.gotomeeting.
com/join/5007994262 or
through your phone. Information
is at the website below.
heartland
OREGON
Portland
8 a.m. – 3 p.m., Sept 12
Beaverton Hilton Garden Inn
15520 N.W. Gateway Court
WASHINGTON
Puget Sound
6 p.m. – 9 p.m., Sept. 10
Coast Bellevue Hotel
625 116th Ave. N.E., Bellevue
Annual Meeting and Elections.
Speaker: Mike Torbenson,
chapter president, “How to Buy
Low and Sell High Using
BetterInvesting Methodology.”
Cost: free. No registration is
necessary.
www.betterinvesting.org/puget
INVESTORS FAIRS & EDUCATIONAL EVENTS
ALASKA
Alaska
9:30 a.m. – 2 p.m., Oct. 10
BP Energy Center
900 E. Benson, Anchorage
Education Fair. Guest speakers
will address topics relating to
Alaska’s interests and economics, including Neal Fried,
state of Alaska economist who
will deliver his “State of the
State” presentation. Cost,
including lunch: $25 in advance
or $30 at the door. For reservations or information, contact:
David Lenig, [email protected].
www.betterinvesting.org/alaska
COLORADO
Rocky Mountain
9 a.m. – 4 p.m., Oct. 17
Colorado Christian University
New Academics Building
8787 W. Alameda Ave.
Lakewood
Investor Education Day 2015.
Speakers: Avi Horwitz, three
sessions — “The Simplified
Income Statement: Preferred
Procedure,” “Hidden in Plain
Sight: Potential Company
Problems” and “Challenging
Weak Stocks in Your Portfolio.”
Don Cassidy — “Selling Well to
Improve Your Investment
Returns.” Cost, includes box
lunch: $60, $65 after Oct. 14.
Register: http://www.eventbrite.
com/e/investor-education-day2015-tickets-15353816679.
www.rmchapter.org
FLORIDA
Southeast Florida
10 a.m. – noon, Sept. 26,
Oct. 3, Oct. 17, Oct. 24
Jim Ward Community Center
301 N.W. 46th Ave., Plantation
2015 Beginner’s Investing
Series. Introduction to investing
terms and Toolkit 6. Toolkit 6
will be used to complete the
Stock Selection Guide. Cost:
$60, includes book Take Stock.
For registration info, see the
website below.
seflorida
ILLINOIS
Chicago Coalition Chapters
8 a.m. – 5 p.m., Sept. 12
College of DuPage
425 Fawell Blvd., Glen Ellyn
Chicago Investors Expo 2015.
Join us to interact with active
investors who are part of the
BetterInvesting community as we
learn and look for new investing
opportunities. Activities include
corporate presentations, educational classes and panel discussions. Speakers include Doug
Gerlach, Ken Kavula, Mark
Robertson, Jim Crabill, Dan
Boyle and Ray Giese. Cost: $65,
includes meals. For information,
call 847/266-2711. For more
details, see the website below.
www.chicagoinvestorexpo.org
TEXAS
Dallas
8:30 a.m. – 2:30 p.m., Oct. 24
Center for Community
Cooperation, 2900 Live Oak St.
Dallas
Investor Education Day 2015.
Avi Horwitz, New York Chapter
director, BetterInvesting teacher
and certified public accountant,
will present four classes
focusing on choosing stocks
and maintaining a healthy growth
portfolio. Cost, includes lunch:
$35 in advance; nonmembers,
$45; students, $25; $50 at the
door. Register at http://investor
educationday2015.eventbrite.
com or by check to Dallas BI
Chapter mailed to Dallas
BetterInvesting, P.O. Box 833554,
Richardson, TX, 75083-3554.
www.betterinvesting.org/dallas
51
52_Perf Review_Oct15_52 8/21/15 4:58 PM Page 52
MEMBERSHIP | Performance Review
Reviewing Stock to Study and Undervalued Selections
LKQ Corporation, ResMed Inc.
STOCK TO STUDY
UNDERVALUED
LKQ Corporation
ResMed Inc.
Ticker: LKQ
Ticker: RMD
Company description: Distributor of replacement parts for Company description: Developer, manufacturer and disauto repairs.
tributor of medical products for
Price at time of selection: $20.27
treating, diagnosing and managing
High price during past five years:
sleep-disordered breathing and
$34.32 (2013)
other respiratory disorders.
Closing price five years later: $31.49
Price at time of selection: $43.94
Total return at five-year price (includHigh price during past 18 months:
ing dividends): 55.4 percent
$75.33 (2015)
Standard & Poor’s 500 five-year total
Closing price 18 months later: $56.37
return: 106.5 percent
Total return at 18-month price (includValue Line long-term earnings growth
ing dividends):
estimate when featured:
32.0 percent
25.0 percent
Standard & Poor’s 500 18-month total
Consensus long-term earnings growth
return: 19.2 percent
estimate when featured:
Value Line long-term earnings growth
18.1 percent
Sounder Sleep. ResMed creates devices to enable estimate when featured: 13.0 percent
Five-year sales growth rate:
Consensus long-term earnings growth
people with sleep apnea to breathe easier at night
27.7 percent
estimate when featured: 15.4 percent
and avert possible health risks such as stroke.
Five-year EPS growth rate:
Comment: ResMed, despite a pull21.1 percent
back in stock price in recent months, easily beat the
Five-year pre-tax profit on sales: 10.0 percent
20 percent goal within 18 months for an Undervalued
Five-year return on equity: 13.2 percent
Stock and outperformed the S&P 500 during this time.
Comment: In the five years since being named the Stock And at its high price achieved earlier this year the stock
to Study for the October 2010 issue, LKQ has continued would have returned 71.4 percent on capital apprecits steady, high-growth performance. But lower profit iation alone. The company recently has seen healthy
margins in more recent quarters have helped con- demand and is in a growing market. But weaker margins,
strain the stock price. At its high point in 2013, the increased competition and negative effects of foreign
stock’s return was 69.3 percent — certainly not a bad currency exchange rates have been providing challenges.
performance. But at the recent price the return was
about 55 percent, well under the performance of the Companies are mentioned only for educational purposes.
Standard and Poor’s 500 index during this time.
No investment recommendations are intended.
Contacting BetterInvesting
To ensure faster service, please have the following information ready:
BetterInvesting Membership Number (on your BetterInvesting Magazine
mailing label).
DIAL #
Then the extension
for a specific
employee
DIAL 0
For the Employee
Directory
DIAL 1
For Membership
and Subscription
Services
When calling BetterInvesting please listen to the recording that will direct
you to the service you require. You can reach a specific department by
dialing the extension below:
DIAL 2
For Investment
Products
Toll-Free: (877) 275-6242 • Phone: (248) 583-6242 • Fax: (248) 583-4880
Mail: BetterInvesting, P. O. Box 220, Royal Oak, MI 48068
email: [email protected] • Website: www.betterinvesting.org
52
DIAL 4
For Club
Accounting
Products
DIAL 5
For Chapter
Services
C3_IAS Ad_Oct15_C3 8/19/15 3:53 PM Page C3
SIX
Four Times the
Performance
Named to the Investment Newsletter Honor
Roll for the Sixth Consecutive Year as One of
the Nation’s Top Performing Stock Newsletters.
December 31, 2000 to
July 31, 2015
Annualized Total Return
12%
10%
10.9
Special Savings for
BetterInvesting Members
%
8%
6%
5.2
4%
2%
IAS
Online Subscription
Print Subscription
$149/Yr
$199/Yr
Regularly $299
Regularly $399
%
Wilshire 5000
Total Market Index
With an annualized total return that’s more than double the
performance of the Wilshire 5000, the Investor Advisory
Service is one of the best-kept secrets among all financial
newsletters. It’s no wonder that the IAS has again been named
to the Investment Newsletter Honor Roll of the Hulbert
Financial Digest as one of the nation’s top performing
investment newsletters.
■ Online and Print Editions
■ Three Recommendations
and In-Depth Company Profiles
in Each Issue
■ E-Mail Updates and Sell Alerts
■ Time-Tested Methodology
■ Award-Winning Performance
Use Promo Code:
BETTER
1.877.334.2582
InvestorAdvisoryService.com/BI
C4_OLT_Ad_Oct15_C4 8/19/15 2:57 PM Page C4
BetterInvesting’s Powerful Online Tools:
CoreSSG, SSGPlus and Stock Comparison Guide
Keeps Getting Better and Better
Stock Ideas Page — More Options for Finding Quality Companies
The screening or stock ideas page has been updated
for SSGPlus users with an easy link to the Ticker Heat
Map as well as more screening criteria. The “Roster of
Quality” pre-defined screen has been added to identify
quality companies based on ICLUBcentral’s quality
methodology, and PE/Historical EPS Growth has been
added to the individual screening criteria to help identify
companies that are trading at reasonable prices.
Portfolio Summary and PERT
Reports Help Maximize Returns
The Portfolio Summary Report provides a snapshot of your
portfolio and valuation information to help you effectively manage
a portfolio. The Portfolio PERT Report, available only in SSGPlus,
offers an additional level of detail. It allows you to review a
company’s recent quarterly performance against your expectations
to potentially provide an early warning signal for companies
where you need to investigate sub-par performance.
New Sector, Industry and
Size Diversification Reports
The Diversification Report displays either a Sector & Industry
Diversification Report or a Company Size Diversification
Report for the portfolio in a table or pie-chart format. The
data in the report can be based on the stock prices as they
were last stored with the study or based on the previous
day’s closing prices. All portfolio reports are exportable in
PDF format.
Look for Major Updates to the CoreSSG, SSGPlus
and Stock Comparison Guide Coming Soon
More Sharing Options Between Users and Club Members • Importing and Exporting with Toolkit 6
More Updating Options • Industry Averages Added to the Stock Comparison Guide
An Updated Look for the CoreSSG • And Many More
Finding Quality Stocks Is Now Easier for Investors of All Experience Levels
Explore and Upgrade at www.BetterInvesting.org/OnlineTools

October 2015 - BetterInvesting

Transcription

Similar documents

Neat Document-Thumbsuckers Calendar

OPEN HOUSE PARTY 223 CLUB KICKOFF

Jan 2013 - MONEY LETTERS 2 MY DAUGHTER

Rotary Club of Denver West | Golden, Colorado

36th Annual In-Vette-Tational Fun Car Show

CLUB NAME: CLUB CITY/STATE: JOB OPENING TITLE: Wianno

Ski Club - Lake Michigan Catholic Schools

Join the Club! - The Golf Club at Hawks Prairie

Diving Club Constitution

USTATicket Flyer - Tiburon Peninsula Club