Deploying Available Cash
Here is our current portfolio sorted by the relative weight of our holdings. We are 8.2% in cash. We can purchase shares in an additional company and/or we can buy additional shares of companies we already own.
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I’ll post the results of some recent screens showing quality and projected average return (PAR). Given the current market conditions, staying with quality stocks (e.g., quality rating > 65 and VL Financial Strength Rating >= B++) with high projected average return (e.g., PAR > 15%) seems like a good idea.
Quality Growth Screen
Here is a Quality Growth Screen using Value Line data. Projected average return was calculated from Value Line data in two ways One calulation sued projected EPS growth, the other used projected sales growth.
Evaluating Energy Stocks
Energy stocks are difficult to assess. The standard NAIC growth stock methodology does seem not work particularly well with energy companies since their revenues are driven in part by the pricing of the underlying commodity (oil or gas).
Kurt Wulff maintains the “McDeb” website which contains a weekly analysis of energy stocks. He was written up in Barrons earlier this year.
He has developed the McDep ratio which compares a company’s market value and debt to its present value. (“McDep” stands for market cap and debt to present value.) The ratio provides a useful way to compare energy companies and to assess relative market valuation.
In addition to preparing a weekly analysis called the “Meter Reader,” Kurt Wulff also profiles individual energy companies.
The site is free and does not require registration. The information on the site lags a week or two from when he provides it to his paying clients.
ChevronTexaco has a projected average return (PAR) of 10.4% and a quality rating of 64. More importantly, CVX has a McDep ratio of 0.77. This means that CVX is undervalued. A ratio of 1.0 would mean that ChevronTexaco’s market value and debt equaled its its present value. This McDep ratio calculation assumes $37 bbl oil. (This is a conservative assumption since futures contracts over the next six years are currently priced at $51 bbl.) See Wulff’s assessment of ChevronTexaco.
Teva Pharmaceutical Ind.
The April 2005 Better Investing magazine featured Teva Pharmaceutical Industries as a stock to study. Here is a PowerPoint presentation and stock selection guide analyzing Teva.
Here is the bottom Line: TEVA is a good quality stock. Value Line financial strength is A but earnings predictability is only 55, RQR is 58.5. It currently has an upside/downside ratio of 4.3 and a relative value is 106. It has an estimated total return of 20.4% (assuming a 5-yr high PE of 24.8) and projected average return of 16.0%.
Berkshire Hathaway
The annual reports for Berkshire Hathaway include Warren Buffet’s letters to shareholders. In addition to discussing the state of the company, these letters contain sage investment advice applicable to all investors, including small investors. Here is an excerpt from this year’s letter.
Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.
There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
Portfolio Summary Updated
The portfolio summary has been updated.
We now have more in cash to invest. Kudos to those members who are saving and investing regularly. With the recent market down trend, we should continue to purchase new shares. It’s always better to buy stocks when they are on sale.
Here are two proposals.
Proposal 1. Replace Federal Home Loan Management Corp (FNM) with Fifth Third Bank Corp (FITB), a well managed mid-west bank. Most of the literature about FITB has been very positive. See attached SSG and related reports (e.g., Morningstar, S&P and Value Line). We would sell FNM and apply the proceeds to FITB.
Proposal 2. Use the remaining funds to purchase additional shares of four of our existing stocks with the best prospects, considering both quality and projected return. We would add to our holdings of each of the following stocks: PFE, FISV, ACS and BBY. (Note there other strong candidates for reinvestment, including LOW, CBH and AMGN.)
Financial Services Outlook
Here is an interesting article by Tom Brown, CEO of Second Curve Capital, discussing the outlook for 2005 for the financial services industry. The article notes that retail branch growth can’t go on indefinitely. The report is positive about Capital One (COF), Investors Financial Services (IFIN), Commerce Bancorp (CBH) and Morgan Stanley (MWD). (We hold three of these four stocks.) His website is www.bankstocks.com.
Quality Growth Screen
NAIC publishes an annual survey of the 200 most widely held stocks by investment clubs. Screening that list for stocks for a projected 5-year average return of 12% or more and for an upside /downside ratio of 3 or more, yields 34 stocks. We already own 11 of these stocks. Here is the list of stocks passing the screen.
Amgen Inc.
Stock Selection Guide Updated. The SSG for Amgen has been updated. 5-year EPS was projected using the “preferred procuredure” with the following assumptions: revenue growth of 15%, pretax margin 40.4%, tax rate of 26.5% and outstanding shares of 1,175 million. This results in a projected average return of 13.9% using an averate high PE of 29 and average low PE of 16.5. This puts Amgen in the “buy” range. Both IAS and First Call’s analysts consensus project growth at 20%, so the 15% projected growth used in the SSG is conservative.
For the fifth time, Amgen has been named one of the “100 Best Companies to Work for in America” by Fortune magazine. Also, Amgen ranked fifth in The Scientist’s annual survey of the best workplaces for 2004. Details. Amgen also has an excellent website for investors.
From December 2004 Investor Advisory Service by IClub: IAS also has Amgen in the “buy” range. “Amgen reported continuing solid results for the third quarter of 2004 with total product sales up 23%. On an adjusted basis, excluding one-time factors relating to the company’s acquisition of Tularik, earnings per share growth was 39%. The company also increased guidance for expected earnings per share for the year from about $2.35-$2.40. The sales guidance was also improved to about $10.4 billion for the year. While the company is dependant on a limited number of products, these have continued to grow and sell well. There are also a number of interesting new possibilities in the process of development. Certainly Amgen is the most successful of the world’s biotech companies. AMGN (59.87) is a buy up to 82.”
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