Monthly Archives: December 2012

Top Dividend Manager Talks Strategy

T. Rowe Price’s Tom Huber, whose Dividend Growth fund is in the top 13% of funds in its category over the past five years, according to Morningstar, says that tax increases associated with the fiscal cliff aren’t reason to avoid dividend-paying stocks.

“There is a lot of discussion and worry [about the tax hikes] more than I think it deserves,” Huber tells “Higher tax rates are not good. But I think [these stocks] have been shown to work over time.”

While consumer staples, utilities, financials, and telecom have traditionally been areas to find strong dividend plays, Huber says that’s changing, with consumer discretionary and tech firms now joining the dividend players. “Utilities and telecom stocks have higher yields, though the payout ratios are higher and dividend growth is slower,” he says. “But because technology stocks are new to the dividend-paying world, the payout ratios tend to be lower, which leaves lots of room to raise payments.”

Huber also talks about his dividend strategy. He says he generally wants his portfolio to have a market-level dividend yield, but he focuses on firms that he thinks can grow their dividend payouts faster than their broader sectors. He talks about some of his current favorite picks, including Automatic Data Processing and Pfizer.

Contrarian Indicators Flashing Buy Signals

John Buckingham of Al Frank Asset Management and The Prudent Speculator newsletter says that, as a contrarian, he’s been seeing a number of encouraging signs recently.

“Our market outlook as we head into 2013 remains one of cautious optimism for the prospects of our broadly diversified portfolios of undervalued stocks,” Buckingham writes in his latest column. “True, investor sentiment has improved somewhat … but bargains remain plentiful.”

Buckingham says that a number of good signs for a contrarian have emerged recently. “Whether it is a magazine story like Time’s recent ‘Stocks are Dead (and Bonds are Deader)’ feature or the fact that the American Association of Individual Investors Sentiment Survey a month ago (November 15) was at one of its highest Bearish readings ever, we like to see a preponderance of pessimism,” he explains. “Certainly, it is not always the case, but time and again we have watched the equity markets post handsome gains (like we’ve seen since November 16) when few are expecting much in the way of positive performance.”

Recently, a survey of CEO confidence, a consumer sentiment index, and an index that measures “economic policy uncertainty” have been showing that confidence is low and uncertainty is high — and such signals have historically usually been followed by periods of nice gains for stocks, Buckingham says. He notes that there’s no guarantee the current contrarian signals will be followed by big gains. But he does offer a list of ten stocks that “have yet to have their day in the sun”. Among them: Tech giant Intel Corporation.


Guru Strategy Ratings: Retailers on the Move

Each week, we take a look at which stocks John Reese’s Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today. A number of retail firms are among the movers.

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How Ben Graham Is Still Beating the Market Today

While Benjamin Graham’s classic The Intelligent Investor was written over six decades ago, the Defensive Investor strategy he laid out in it remains a winner, Validea CEO John Reese writes in his latest column.

“The investment world is no stranger to apparent greatness that doesn’t last,” Reese writes. “Every year, a number of fund managers will post stellar returns, catching the eye of the media and the public. Then many, if not most, of their funds disappoint the following year — and over the long term. That’s why I try to focus on investors with truly long-term track records, those whose greatness is, in fact, lasting.”

In terms of lasting greatness, “no investor fits the description better than the late Benjamin Graham,” says Reese. That’s because Graham didn’t just post exceptional returns during his own career in the middle of the 20th century — Graham also provided a blueprint for beating the market that Reese has used for the past decade. Reese has been tracking a portfolio of stocks picked using his Graham-based “Guru Strategy” since mid-2003, and since then it has returned more than 13% annualized, while the S&P 500 has returned less than 4% per year. It’s had a particularly good 2012, more than doubling the S&P despite the many concerns hovering over stocks.

Reese looks at how the Graham-based model works, and offers a handful of picks that have recently caught the strategy’s eye. Among them: Japanese telecom giant NTT Docomo.

Small, Illiquid, and Cheap: A Winning Combo

In a column for Canada’s Globe and Mail, Norman Rothery says that, while many investors focus on popular, frequently traded stocks, the real profits lie in smaller, illiquid shares. 

“While the return potential of small value stocks is well known, the benefits of low liquidity may be less obvious,” Rothery writes. He examines a study recently published in the Financial Analysts Journal, which was performed by Roger Ibbotson and others. It looked at U.S. equity mutual fund holding from February 1995 to December 2009, classifying funds into groups based on the size of their holdings, growth/value characteristics, and liquidity.

The study found that value funds outperformed growth funds by an average of 80 basis points annually, Rothery notes, while funds with small stocks beat large-stock funds by 189 basis points annually. And small-cap value funds outperformed large-cap growth funds by an average of 323 basis points annually. In addition, “funds holding less liquid stocks fared better across the board,” he says. “It didn’t matter whether they were value funds or growth funds. The same goes for funds with large or small stocks. Mind you, the effect was most pronounced in the small-cap arena.”

When value, size, and liquidity were combined, the gap was very large — funds with small, illiquid value stocks beat funds with large, liquid growth plays by 499 basis points on average per year.

Rothery says there is an inherent problem with small, illiquid value funds, however: As they grow and have more money to put to work, they are forced into larger stocks. “As a result, it remains an area where smart small investors have an advantage,” he says, though he warns that investing in such stocks requires dedication and experience.


Five Reasons for Optimism

In his bi-weekly Hot List newsletter, Validea CEO John Reese offers his take on the markets and investment strategy. In the latest issue, John looks at five reasons he’s optimistic about stocks as 2013 approaches, even though many investors remain fearful of equities.   

Excerpted from the Dec. 21, 2012 issue of the Validea Hot List newsletter

Five Reasons for Optimism

As 2012 winds down, the general mood surrounding the market and the economy remains one of fear. The fiscal cliff, unresolved debt problems in Europe, and the lingering scars of the financial crisis and Great Recession seem to be giving pessimism the upper hand over optimism, and keeping investors lukewarm (at best) on stocks.

But as we head into 2013, I think there are several reasons to be optimistic about where we stand. That doesn’t mean we aren’t facing some serious problems; there is no doubt that the U.S. and much of the developed world indeed have a lot on their plates. But what it does mean is that overall, a number of factors are combining to make stocks look like attractive investments right now for long-term investors. Here’s a handful of those reasons:

The Housing Rebound: It’s hard to believe that six years have passed since the housing bubble began to burst, but it’s true. And while the nascent rebound hasn’t been as dramatic as the decline was, it is significant. Housing starts are up 21.9% since a year ago. Permit issuance for new home construction is up 28.1% in that period. Existing-home sales have risen 15.5% in the last 12 months, meanwhile, and pending home sales are up 18%. Home prices are on the rise, too, having jumped 3.6% in the year ending Sept. 30 (the most recent data available), according to the S&P/Case-Shiller Home Price Indices.

That’s a big deal. Housing is usually a big part of economic recoveries, but until recently it’s been absent from this one. The sector’s impacts are so wide-ranging — impacting everything from construction companies to carpet manufacturers to home furnishing stores — that housing market improvements can lead to the creation of thousands and thousands of jobs.

Employment: It’s no surprise, then, that the housing recovery has been accompanied by a significant improvement in the jobs market. Yes, unemployment is still far too high, but we’ve seen real progress lately. The headline unemployment number (7.7%) is down a full percentage point from a year ago, and more than two full percentage points from where it was two years ago. The broader “U-6” measure (which also includes workers who have given up looking for a job or those working part-time who want full-time work) is down 1.2 percentage points in the past year, and 2.5 points in the past two years.

More employed workers means more people with money to spend. More people with money to spend means more profits for consumer-related businesses, which drive our economy. More money for them is leading to more jobs, which leads to more people with money to spend — and so on goes the cycle. As the fiscal cliff mess gets resolved, the hiring may well increase even more. Many companies have been staying in a holding pattern until they get clarity on tax policy and government spending plans. They want to know the rules of the game — whatever the rules may be — before they start to really play. If Congress and the President can reach some sort of agreement that lays the tax and policy rules out for them — whatever it involves — businesses may have the clarity they need to start spending their cash on new employees, and capital improvements.

Global Monetary Conditions: Yes, the Federal Reserve has been sharply criticized by some for its loose money policies in recent years. And, to be sure the Fed has been far from perfect in its decisions. But whether you’re pro-Fed or anti-Fed, the reality is that the central bank — and other central banks around the globe — are doing what they can to push investors toward riskier assets by keeping interest rates so low. And while that hasn’t resulted in a deluge of cash flowing into stocks, it has no doubt helped increase demand for stocks somewhat, and it should continue to do so in 2013.

Of course, there are unintended repercussions of loose monetary policy. One is that, if conditions were right, encouraging investors away from bonds and toward stocks could lead to a bubble, with stocks becoming highly overvalued. But that brings me to my next point …

Valuations Are Reasonable: As I noted in a recent Hot List, the broader market seems to be priced somewhere near fair value. Sure, there are some valuation metrics that are flashing warning signals, like the ten-year P/E ratio and Tobin’s Q. But there are many more that are indicating the market is in the range of fair value or undervalued. Trailing 12-month P/E ratios are in the low- to mid-teens; the market’s price-to-book ratio is lower than its long-term average; the price/sales ratio is a reasonable 1.3 or so; and the stock market-to-GDP ratio has been hovering around the high end of the fair value range/low-end of the modestly overvalued range. In addition, dividend yields are significantly higher than the yields on long-term treasury bonds, a historical rarity and a bullish sign for stocks.

Also keep in mind that those figures are for the broader market. When it comes to individual stocks, there are a myriad of good companies with strong track records whose shares are trading at extremely attractive valuations, the type of stocks that the Hot List continues to target. And, as Charles Schwab’s Chief Investment Strategist Liz Ann Sonders recently noted, even if the U.S. does go off the fiscal cliff and a recession results, the reasonable valuations should help provide a cushion that would keep a bear market relatively mild.

Time: It takes time — a lot of it — to recover from financial crises. It may sound obvious, but it’s very important to remember. Every year further out we get from the epicenter of the crisis, the more bad debt gets worked off, and the more the nation’s collective bearish psyche heals. Professors Kenneth Rogoff and Carmen Reinhart have done perhaps the most extensive research on past financial crises. In examining about 15 pre-2007 financial crises across the globe, Reinhart and Rogoff said in a 2008 paper that on average real house prices fell for six years before rebounding. In very few cases did the declines last less than five years. Unemployment, meanwhile, increased on average for nearly five years by an average of 7 percentage points. Real public debt jumped 86% on average in the three years after the crises. In other words, the tepid recovery we’ve seen in the past few years isn’t a sign that we’re headed for disaster, or that America will never grow the way it used to. It is instead a sign that we are experiencing a typical recovery from a financial crisis. (In fact, in a recent piece for, the professors said that the economy has in some key ways actually performed better than the average country has in the aftermath of past financial crises).

These five factors are, I believe, creating an environment that is pretty supportive for stocks overall, and very attractive for long-term investment strategies that can identify cheap shares of good companies. That doesn’t mean 2013 will be an easy, upward climb for the market, or the Hot List portfolio. In the short term, emotions drive the market, and right now there are still a lot of strong emotions out there on the negative side. But good investing is about looking past the short term and focusing on where the best long-term opportunities lie. Right now, I think the stock market is home to plenty excellent opportunities.

Shilling: Bond Prices to Rise in 2013

Economist Gary Shilling is betting on bonds over stocks in 2013.

“I think you play it with a ‘risk-off’ kind of approach,” he tells Yahoo! Finance’s The Daily Ticker. “And that means you probably look for more appreciation in long-term Treasury bonds, which have been a favorite of mine since 1981.”

Shilling says he doesn’t care that bond yields are exceptionally low. What he cares about is the direction of their yields, and he thinks the direction will be downward. “I’ve only bought Treasuries for appreciation,” he said. “I couldn’t care less what the yield is, as long as it’s going down.” He thinks the 30-year Treasury will fall to 2% and the 10-year note will fall to 1%.

Shilling says stocks are “vulnerable”, with the economy in danger. He thinks a global recession will occur, and he’s worried that profit margins are about as high as they can go. Those factors, and a strong dollar, will hurt U.S. companies’ profits, he says. He also is bearish on housing. “The fundamental problem with housing is still excess inventories,” he said. “In other words, there are too many vacant homes, whether they’re being officially reported in the market or not. We think in total there’s probably 1.9 million extra houses over and above normal working levels, and excess inventories are the mortal enemy of prices.”


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