We Already Have High Inflation

We Already Have High Inflation 150 150 JP

There are over 2,000 publicly traded companies with market capitalizations in excess of $2 billion and close to 500 of them are priced at 10x current revenue with the majority of this sub group losing money.

The Russell 3000, which represents nearly 98% of public stocks in the United States, is up 110% in the last 5 years. That’s roughly 16% annualized where normally a large basket of stock would have produced around 9%.

Will Michael Burry and Peter Schiff be right with their forecast of hyper-inflation? I don’t know. What’s for sure is that when you look at a chart of the S&P 500 since 2009, it’s nothing but up up up hockey stick style.

Is that because so much value has been added to society? I don’t think so. What does seem to be happening though is a continued push of the can down the road now to a point now where the pain coming will be significantly greater than 10, 20, 30, 40 years ago.

Avoid Robinhood (for now)

Avoid Robinhood (for now) 150 150 JP

Robinhood, creator of the first free investing platform began trading as a public company today, with a market value over $30 billion. That’s roughly the same cap as Kroger (KR), but the grocery chain does more in bottom line net income than Robinhood generates in top-line revenue. The market is truly strange at the moment and likely building a bigger bubble.

As far as active user accounts, Robinhood only trails Fidelity and Schwab. Schwab is valued at north of $130 billion. Robinhood has already forced Schwab, Fidelity, and others to offer free trading to users. It’s only a matter of time before the technology platform allows for more and more and more.

I like using it personally, but I’m not trading a bunch of money there and understand that glitches have happened. So what. What matters is the stickiness of the accounts over the long-term. My guess is it’ll be around for a while.

That said, it’s not exactly a bargain at the current valuation, and if the stock gets cut in half or 1/3rd from this price point it may be worth owning.

The Palantir Opportunity

The Palantir Opportunity 150 150 JP

Palantir sells software solutions aimed at solving the issues of data integration without requiring organizations to start from scratch, and provides a centralized view to gain insight from the data through artificial intelligence supporting manual operations.

Palantir may be the best positioned organization to profit and grow with the expansion of big government. Its stock recently began trading publicly allowing anyone with about $10 to buy a share.

Sounds cheap. It’s not.

The company has 1.6 billion shares outstanding putting the market capitalization at more than $15 billion on $900 million in annual sales.

The company has about $1.5 billion in new cash, so ex-cash the stock is trading at about 15x sales, which will grow substantially in the next decade. Will the value of the company grow as well? That’s the question.

If the average technology company trades at 10x sales and if Palantir is just getting started in the growth phase, where it could easily see $5 to $10 billion in annual revenue in the next 10 to 20 years (or sooner) then the stock is grossly undervalued. $10 billion in sales with interest rates where they are in 10 years, could mean it is a $100 billion company, which would easily outperform the S&P 500.

Dollar Cost Averaging: Examples

Dollar Cost Averaging: Examples 150 150 JP

Have been talking a lot about investing in the last few days. That’s because while the market continues to rebound from March lows. Oh, don’t think that anyone is the kind of investor that can go error free. Even the best investors can make mistakes, big money losing mistakes. Kraft Heinz has lost Warren Buffett’s company Berkshire Hathaway billions of dollars in the short time it owned the company. For him, there’s nothing to do except take it on the chin and wait, unfortunately. For the rest of us mortals, it’s important to have management strategies when a trade gets cut in half, or worse. For illustration purposes, let’s take a look at the following chart of Bed Bath and Beyond, arguably one of the best retailers in the last two decades, and how it traded at the end of last year.

This is the last year of daily prices. The [D] signifies dividend payments equating to another 5.05% of added value. Let’s say you bought in at $15 per share in May, thinking that the stock, long-term, is good for a double, but by mid-August are scratching your head with a 50% loss.

What do you do?

Well, if you believe in the longevity of the underlying company, then it is typically a good strategy to dollar cost average, investing the same amount of money at the new lower price as you did originally. So, if you bought 1,000 shares at $15.00 per share, investing $15,000, you should then buy 2,000 shares at $7.50 per share, investing the same dollar amount — if you can. This brings your average price down to $10, which as the chart suggests, would mean today you’re sitting on a 40% profit.

40% Gain in less than 7 months.

This was obvious in hindsight, and while I’ve done this hundreds of times with investors all over the world, it doesn’t get any easier and won’t be next time the market drops 30%.

More Examples…

As the S&P 500 continues to climb back to and above its all-time highs, I start to think about portfolio management — one of the most important aspects of investing. Anytime you find that a company can produce above average profit on investment (“high yield“), you should consider owning it, regardless of whether you already own it at a different price, especially if the earnings are consistent and can remain that way into the future.

In most cases portfolio management is simply building a base of 20 to 30 great stocks, bought at the right value, and letting them ride long-term. However, I’m a big advocate for dollar cost averaging in the cases when stock is bought in a good company but decreases in price over the short term. Here are three examples to illustrate the point.

Pier 1 Imports (PIR)

If you estimated the value of the company in 2008 at $12/share (like Warren Buffett did), you probably bought it all day long for $4. What happens if the stock dropped to $1 and you still valued the company at $12? Would you sell or buy more? This is the hardest question for investors of all experience levels to answer. Yet, between 2008 to 2012 the ride of PIR was remarkable and dollar cost averaging would have produce solid results.

Price on September 19, 2008: $4.43
Shares on Initial $10k Investment: 2,250
Price on January 9, 2009: $0.57
Shares on New $10k Investment: 17,500
Total Investment: $20,000
Total Shares: 19,750

Price on January 3, 2013: $20.71
Total Account Value: $409,000
Performance Rate: 1,945% gain

Cliffs Natural Resources (CLF)

Another, more recent example is that of Cliffs Natural Resources (CLF). At the start of 2015, CLF was traded at $7.03 a share. By the start of 2016, the stock was down to $1.61.

Price on January 2, 2015: $7.03
Shares on Initial $10k Investment: 1,422
Price on January 8, 2016: $1.61
Shares on New $10k Investment: 6,211
Total Investment: $20,000
Total Shares: 7,633

Price on December 1, 2016: $8.78
Total Account Value: $67,019
Performance Rate: 235% gain

Petrobras (PBR)

Another recent example is Petrobras (PBR) the Brazilian oil company. At the end of 2014, PBR was traded at $9.72 a share. By the end of 2015, the stock was down to $4.74.

Price on December 3, 2014: $9.72
Shares on Initial $10k Investment: 1,028
Price on December 1, 2015: $4.74
Shares on New $10k Investment: 2,118
Total Investment: $20,000
Total Shares: 3,146

Price on December 1, 2016: $10.87
Total Account Value: $34,204
Performance Rate: 71% gain

Heading into 2021

Whether it happens next year or the year after, the short term crash the US markets experienced in the beginning of Covid is nothing compared to what could happen sooner rather than later. Of course, that would be caused by the trickle down affect of continued lockdown across the US or re-lockdown procedures that could happen in Q4. The idea here is that currently, the market is dislocated from the economy. That cannot last forever.

We’ll see.

A List of Dividend Stocks for the Current Market Panic

A List of Dividend Stocks for the Current Market Panic 150 150 JP

100 years ago, we (Americans) called sudden drops in the stock market panics. Now they’re recessions or bear markets. If you can be greedy when others are fearful and keep a level head when doing research, you’ll be fine.

On Finviz there is an incredible stock screener that investors should use to find and buy better stocks. With the market down 30% since its high in December, now is the time to start finding stocks for both the long and short-term. So far, I’ve lived through the S&L Crisis in 1987, the Dotcom Bust in 2000, the Housing Bust, and now Covid-19 — every time it was a different catalyst. That means, there will be different companies that offer the most upside.

With that in mind, here is a shortened list from a recent screen that produced over 370 stocks which yield more than 10% in annual dividends. There is a caveat. The earnings in these companies will likely be lower in the short term, maybe irreversibly damaged, but for many 10% will be the new baseline long-term and that will produce better returns than any major asset class, for 99% of investors. So, it’s worth exploring.

Note: This post will not provide any further insights onto why, figure that out for yourself. By the time you read this, yields may have changed, but I have tried to only offer up the companies that will likely not cut their dividend entirely, even if some cut backs take place.

1. The world’s largest ad agency (WPP) is offering a 12% yield

2. The Gap (GPS) is also offering a 12% yield

3. Asset managers Invesco (IVZ), Apollo Global (APO), and AllianceBernstein (AB) are yielding 14%, 11%, and 17% respectively

4. Ford Motor (F) is yielding 12%, and the race for electric vehicle supremacy is still far from over

5. One of the largest owners, suppliers, and operators of gasoline stations and convenience stores, Global Partners (GLP) is offering a 20% yield right now, with the stock down 50% this month

6. Retailers Kohl’s (KSS) is yielding 14%, with Big Lots (BIG) yielding 11%

7. Credit service company X Financial (XYF) is yielding over 11%

8. Iron Mountain (IRM) offers a10% yield

9. Foreign banks SantanderBarclays, and BBVA all have super sexy yields right now, and banking will still be the underlying ruler of the world, even in its current flawed form

10. Brazil’s largest electric utility firm Companhia Energetica de Minas Gerais CIG is providing 10% yield right now

11. Life insurers AegonING, and Prudential carry heavy yields of 18%, 15%, and 10% respectively. Let’s remember that current numbers for death to cases of Covid-19 is around 3%. I don’t know if that will put these firms under any long-term risk of bankruptcy.

12. Major oil and gas company’s XOMEni, and BP are getting hit twice with the price of oil per barrel below $30, but each yield over 10%. These could get much cheaper if oil drops into the teens.

13. For the non-major oil and gas companies that include drillers, equipment and service providers, refining, pipelines, etc. the list gets pretty long. A few of the better ones are CNOOCHolly EnergyWilliamsMarathonSunocoPhillips 66, and Valero which all yield over 10%.

14. B&G Foods, food manufacturer of grocery products like Skinny Girl and Weber is yielding 11%.

15. There are at least two pages of REITs but I stayed away from them, but there are two real estate developers Xinyuan and Brookfield that offer 16% and 12% respectively.

16. Cruise Liners Carnival and Royal Caribbean are struggling hard so the 15% and 11% dividend they have now will likely get cut.

17. Big restaurant chains Ruth’s and Brinker also yield over 10%, mainly because both of these organization’s stock has drop to levels I haven’t seen since before 2012.

Could it get worse? Of course. Every stock listed here could be down another 20–50% from today’s trading price by the end of this viral scare. My main question is will this be a one off black swan even, or will it be the norm?

Shareholder Equity

Shareholder Equity 150 150 JP

Shareholder equity is the difference between total assets and total liabilities. On a per share basis its known as book value. Companies that translate retained earnings to equity growth become more valuable. It is worth noting that legendary investor Warren Buffett has used book value to benchmark the value of his conglomerate Berkshire Hathaway for over 40 years.

Book value is a historic number, providing no information about the future prospects of a business, apart from demonstrating consistency. However, if every dollar in retained earnings can generate at least the same in market value, then the company has added value to shareholders. That’s why return on equity is such an important ratio to top value investors.

Even though Apple and Amazon are valued differently by the market, investors cannot overlook the ability of both companies to grow book value. No matter what strategy you follow, being able to find stocks attached to companies that can do this will virtually guarantee you make money in the market.

Apple (AAPL)

book value
2009: $5.02
2012: $16.99
2015: $22.53
2018: $25.81

stock price
2009: $13.74
2012: $59.79
2015: $111.44
2018: $169.23

Amazon (AMZN)

book value
2009: $6.23
2012: $18.04
2015: $26.39
2018: 64.84

stock price
2009: $55.74
2012: $175.17
2015: $314.75
2018: $1,169.47

Analyzing both book value and earnings per share, investors can estimate the future value of almost any stock. Companies that have built brand power and strong competitive advantages tend to last longer.

Payback Theory

Payback Theory 150 150 JP

Let’s say you live in a town with two bakeries for sale at $1 million each. Both offer similar products with almost exactly the same type of customer and asset structure — one earns $100,000, the other $150,000.

Which one do you buy?

The one that makes more money! That one has the highest yield, which in this case is the second bakery. In fact, if these numbers held up, bakery number two would pay you back in less than 7 years, a full 3 years ahead of the first one.

To know whether an asset is worth buying, you have to know the profit it generates compared to the price you’re paying, otherwise you’re simply speculating on whether or not you can sell it at a later date for a higher price. Not all art or Jordan sneakers fetch higher prices.

For example, if you buy a house for $500,000 and lease it for $2,500 a month, the annual yield before expenses is 6%. For private businesses its the profit for the price you paid. However, in the public markets, companies listed on big exchanges like the NYSE or NASDAQ tend to remain in business a lot longer and are thus valued at higher multiples of earnings. This means looking for growth potential at a fair or discounted market price.

Very rarely will investors acquire shares in an excellent growth company at current high yield prices. These companies must grow into the high yield prices.

Apple (AAPL)

Value: $76 billion
Profit: $6.1 billion
Yield: 8.0%

Apple (AAPL)

Value: $1.01 trillion
Profit: $56 billion
Yield: 73.9% on 2008

Investing Strategy

Investing Strategy 150 150 JP

In the next two decades, barring major advances in life extending technology, the wealthiest generation (aka Baby Boomers) will pass down close to $30 Trillion worth of assets to their children and grandchildren. That money has to go somewhere. To me, it’s not a question of what asset should investors buy because it’s only a race between stocks or real estate. There’s no third place asset in this race. Bonds, Savings/CD’s, and Gold will all fall well short of these two, which is why you do both — buy real estate and stocks.

If you’re happy with 7-8% a year, then you should buy an index fund like VOO, SPY, or FUSVX whenever you have additional cash to invest. Putting your money into a fund like this over regularly scheduled intervals will likely outpace 90% of investors during your lifetime. If you want to do your own homework, The Little Blue Book by Joel Greenblatt is a great starting point. Or, if you can handle more complex reading, Ben Graham’s Intelligent Investor or Warren Buffett’s collection of shareholder letters are fantastic. Each of these money managers produced market beating results for decades. My goal has always been to model and refine the best strategies to produce similar or better results.

That said, picking the right stocks is hard. It’s right up there with being a successful entrepreneur because it requires consistency and patience. Very few are going to be as good as Buffett or Icahn, which is why buying an index fund is becoming even more popular, along with services like WealthFront or Acorns. Obviously, my opinion is that buying stocks create the best opportunity to build wealth with the least amount of risk, but after 15 years in the financial markets, managing money and publishing research, the biggest hurdle that’s still prevalent today are the fees.

Regardless of what asset type you’re purchasing, here are three questions that can lead to better investment decisions.

#1 What is the future estimated value of the asset?

This involves looking at historical data to analyze financial metrics, growth rates, and price multiples estimating value based on past performance, current comps, and future potential. As with most assets, the more unique the more valuable and use a different set of core tenets to estimate value to price for each opportunity. Value estimates are determined in a variety of ways depending on asset class, but with most investments it comes down to the amount of cash that can be produced over the remaining life of the asset, then judge that figure against the price paid today.

#2 Can the asset’s value grow faster than the S&P 500?

With dividends the Standard and Poor’s index of 500 large publicly traded companies has produced an average of 10% a year for nearly five decades. An investment is one that beats inflation first, the market second. It’s rather easy for investors to buy an index fund and simply plug money in anytime he or she would like. Doing this will outperform inflation as well as the majority of their peers and professionals alike.

#3 What is the time frame for your investment?

For short-term trades like options, arbitrage, business/real estate flips, it’s important to know the time horizon. A 5% gain every 45 days turns into a 47% pre-tax return. For long-term investments, there might be months or years of flat to negative growth before seeing a massive return. What matters is that your money out brings back at least 1.15x money in every year, judged over a 3 to 5 year period. Even though the broad market may have periods of higher than average gains, normalized returns tend to be right under double digits for the stock market. And, as economies mature, count on lower returns.