U.S. Dividend Watch List: April 18, 2014

Top Five Watch List Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from April 19, 2013 and have checked the performance one year later. The top five companies on that list can be seen in the table below.

Symbol Name 2013 Price 2014 Price % change
CATO Cato Corp. 22.70 27.43 20.8%
CAT Caterpillar 80.43 102.83 27.9%
EXPD Expeditors International 35.34 40.01 13.2%
FDS FactSet Research Systems 90.19 105.77 17.3%
FRS Frisch’s Restaurants, Inc 16.39 23.61 44.1%
      Average 24.6%
         
DJI Dow Jones Industrial 14,547.51 16,408.54 12.8%
SPX S&P 500 1,555.25 1,864.85 19.9%

NLO 4.18.2014

Our top five continued to outperform the market by a good margin.  We commented specifically on Cato (CATO) and Caterpillar (CAT).   We didn’t go into specific about Cato other than the fact that revenue declined.  Now that time has past, it’s interested to look back and note that earning (TTM) actually fell 12% ($2.11 to $1.86).  Based on this information, you would automatically think that stock should fall by similar margin.  However, one can see that the opposite occurred because of multiple expansion.  One year ago, Cato was trading at just 10x its earning compared to today at 14x.  We can’t conclusively say what drove the price up but we will speculate that reversion to the mean is the key aspect to this story.  If we look at historical average, stocks typically trade at 13x its earning.

As for Caterpillar, we state the following:

We highlighted this CAT’s bullish technical pattern on December 6, 2012 (found here) and the stock took off to trade close to $100, a gain of +16% gain.  Those gains, however, were short-lived and the shares are now trading 6 points lower than our December write-up.  Fundamentally, the stock is very interesting at less than 10 times earnings and a 2.4% yield.

We spoke about reversion to the mean above and this concept can be applied to Caterpillar trade over the past year.  Let’s take a step back and look at earning from one year back.  The company had net earning of $8.48/share.  Fast forward to today and you will note that earning fell to $5.75/share or roughly 32%.  That’s a large drop in profit in any business.  However, one year ago the stock was trading at less than 10x multiple when shares on average trade at 20x multiple.  Buying shares at 50% discount to its historical average provide a wide margin of safety one should look for when investing.  Incorporating the concept of reversion to the mean with margin of safety and one can see how these trade turned out profitable despite profit contraction.

We also highlighted IBM (IBM) last year but shares have literally gone no where.  Going back to the where shares traded one year ago at 13x multiple, this is essentially the same as their 5-year average.

U.S Dividend Watch List: April 18, 2014

Below are 31 companies that are in our watch list this week.

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Canadian Dividend Watch List: April 18, 2014

Performance Review

Below is the 1-year performance of the Canadian dividend stocks from our April 18, 2013 watch list (found here).

Symbol Name 2013 2014 % change
TA.TO TransAlta Corp. 13.88 13.13 -5.40%
NA.TO National Bank Canadian Equity SP 36.17 45.59 26.04%
IMO.TO Imperial Oil Ltd. 39.43 52.01 31.90%
FTT.TO Finning International Inc. 22.35 29.31 31.14%
CPG.TO Crescent Point Energy Corp. 35.67 44.5 24.75%
FTS.TO Fortis Inc. 33.48 32.01 -4.39%
D-UN.TO Dundee REIT 35.67 29.6 -17.02%
IFC.TO Intact Financial Corporation 60.89 70.22 15.32%
JE.TO JUST ENERGY GROUP INC 6.23 8.57 37.56%
LB.TO Laurentian Bank of Canada 43.1 47.42 10.02%
SU Suncor Energy Inc. 27.61 36.73 33.03%
CWT-UN.TO Calloway REIT 28.87 26.9 -6.82%
TD The Toronto-Dominion Bank 39.01 47.01 20.51%
FCR.TO First Capital Realty Inc. 18.86 17.92 -4.98%
CUF-UN.TO Cominar REIT 23.4 19.01 -18.76%
BDT.TO BIRD CONSTR INC 12.7 13.64 7.40%
CWB.TO Canadian Western Bank 27.45 37.8 37.70%
TMXXF TMX Group Limited 53.0417 48.51 -8.54%
REI-UN.TO Riocan Real Estate Investment Trust 28.11 27.57 -1.92%
RBA.TO Ritchie Bros. Auctioneers Incorporated 19.54 26.47 35.47%
AX-UN.TO Artis Real Estate Investment Trust 16.42 16.21 -1.28%
CAR-UN.TO Canadian Apartment Properties REIT 24.75 21.37 -13.66%
EMA.TO Emera Inc. 35.51 35.47 -0.11%

The performance of the entire list of stocks averaged +9.91%.  Stocks that lost the most in the last year were in sectors (REITs) that we warned against investing in.  The elimination of the REIT sector losses would have increased the average gain to +16.20%.

The top five stocks, stocks that we consider of strong interest and worth investigating further, averaged +21.69% in the last year as compared to the Toronto Stock Exchange gain of +20.67% (see chart below).  The top five stocks are charted against the Toronto Stock Exchange Index.

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Four of the five stocks exceeded the gains of the representative index. As recently as April 2nd, FTT.TO gained as much as two times (2x) the gain in the TSX Index. Not to be outdone, CPG.TO gained nearly +15% since early February 2014 to notch gains of +24.75% by the one year mark.  TA.TO wallowed in a narrow price range throughout the year at +/-10%.  The attractive dividend yield that was offered at 8.31% last year was cut down to size with the most recent dividend reduction by –38%.   We’ve noted that yield alone should not be the reason to invest.  Furthermore, a high yield stock should be considered high risk.  What is surprising is that TA.TO didn’t fall by very much when the dividend cut was announced.

The question of why bother with individual stocks that are only going to grow at +1% more than the index has come up from time to time.  However, obtaining the average dividend yield of 3.32% and being able to compound at that rate with companies that are well managed far exceeds the perceived reductions of risk associated with investing in a fully diversified index fund such as the iShares S&P/TSX Capped Composite Index ETF (XIC).

One stock that we singled out from last year’s list was Ritchie Brothers Auctioneers (RBA.TO).  At the time we said the following of RBA.TO:

“…be on the lookout for RBA.TO with a $18 handle ($18.99-$18.01) as a starting point for purchases of the stock.  The best case upside target is always 1/2 of the prior peak…”

As it happens, even without waiting for RBA.TO to achieve an $18 handle, the stock performed very well by gaining +35.47%, the 3rd highest return out of 23 stocks listed.  Suffice to say, when RBA.TO declined to $18.90 on October 9, 2013, the shares gained as much as +45% by April 1, 2014.  We believe it is worth reading our initial assessment of RBA.TO to confirm whether our thesis holds any merit (found here).  We continue to hold shares of RBA.TO in our partnership.

Canadian Dividend Watch List: April 18, 2014 (intra-day)

Below is the April 2014 watch list of nine stocks we think are worth your consideration.

Nasdaq 100 Watch List: April 11, 2014

Below are the fifteen Nasdaq 100 companies that are on our radar with the analyst estimates of price performance for the remainder of 2014.

Unemployment Rate: Our Downside Target Has Been Met

There aren’t many who are convinced that the recession ended in June 2009 and that the jobs numbers are real, as opposed to contrived.  Most investors believe that the economy is still in a recession, which has been masked by Federal Reserve stimulus and that positive jobs data is strictly a ploy by politicians to hold on to whatever perceived powers that they have.

Our take on these topics is most accurately reflected in several articles that we wrote in real time with unflinching candor and little care for conspiracy theories.  On the matter of Federal Reserve stimulus being the reason the stock market rose, we have said the following:

“…those that claim ‘this time is different’ aren’t trying hard enough to prove their claim false. A cursory review of market data during the periods from 1860 to 1914 makes it clear that declines of nearly -50% or more are likely to retrace +66% to +100% of prior declines. This pattern has been easily demonstrated in the periods after 1914. However, we’re only trying to illustrate that the acceptance of the Federal Reserve’s role as the leading cause of the current +69% retracement of the prior decline (2007-2009) is false (January 19, 2011).”

The above point was reiterated in our more detailed revision to the same article on February 17, 2014. On the topic of the recession and its end, we have not minced words about the prospects.  Additionally, we have steered away from the belief that the economy, if in recovery, should exhibit a low unemployment rate similar that of the booming economy of 2006/2007, which was built on excess in many sectors.

On August 21, 2009 (found here), we said the following about the recession:

“Implicit in my discussion of the IPI is that we are at a turning point for the economy. Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners. Additionally, the stock market will only follow the pattern of a cyclical bull market (bear market rally) within a secular (long term) bear market.

I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past. However, from the standpoint of an economist the recession is over provided the IPI June low is sustained over an extended period of time.”

We were 13 months ahead of the National Bureau of Economic Research (NBER) on our call that June 2009 would be considered the end of the recession, based on what the NBER looks at (NBER announces end to recession on September 20, 2010).

What is the connection between calling an end to the recession in real time and our work on the topic of the unemployment rate?  First, we are using data reported by the government that is frequently revised.  Second, we apply Dow Theory to arrive at what we believe to be reasonable estimates of future trends.  Do we always fall for our voodoo economics?  We hope not, however, Robert Rhea’s book Dow Theory Applied to Business and Banking suggests that Dow Theory has a broader application than simply stock indexes.

On July 26, 3013 (found here), we said the following of the Unemployment rate:

“According to Dow Theory, expectations of how low unemployment should go are far more reasonable without the requirement of a economic boom that is followed by a bust.  According to the chart of unemployment below, the most realistic scenario for how low the unemployment rate could go is 6.9%.

“Applying Dow Theory’s 50% principle suggests that the best we could expect for the unemployment rate, on the downside, is for 6.9%.  It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios.  The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextend economic boom.”

What has transpired in the unemployment rate since our July 26th article?  Our downside target of a 6.9% unemployment rate has been achieved. Again, we understand the conspiracy talk of the numbers being made up for the purpose of some politician to rally for more votes come election time.  However, such arguments are a waste of time.   Our view is that we need a detached perspective in order to come up with reasonable estimates.

image

So what do we make of the above chart?  In general, since all downside targets have been met, our next line of reasoning is basically a guess, at best.  However, we believe that our prior line of reasoning with a detached view might serve us well in what might come.

One item that stands out is the 2006 to 2007 low of 4.40% unemployment.  This was approximately 12% below the ascending Dow Theory downside target of 5.87%.  As the current level of unemployment is at or near the same ascending 5.87% level, we have looked at the point where the unemployment first touched the 5.87% line and then calculated 12% below that level as a worst case scenario.  Based on this line of reasoning, the next downside target should be 5.90%.

Given our prior experience with Dow Theory and downside projections, any decline in the unemployment rate below 5.87%-5.90% would be exceptional with only the 4.40% and 3.80% levels as mere reflections of an overextended economic boom which should be followed by an equally impressive bust.

Gold: Reassessing the Risks

On March 3, 2013, we said the following about the downside prospects for gold (article and chart found here):

“The prevailing controversy, among gold bugs, is whether or not gold stocks have bottomed.  As our Gold Stock Indicator has indicated, so far, gold stocks have a long way to go before reaching lows similar to what occurred in 2008, on a relative basis.  This debate about gold stocks only arise out of the fact that they have fallen so much while the price of gold has been ‘stable.’

“However, when the price of gold is viewed from the perspective of Edson Gould’s Speed Resistance Lines (SRL), we see that there is a lot room for gold to move to the downside.

“We can’t be certain that the price of gold has any further to fall. However, our experience with the work of Edson Gould cannot be ignored.  We’ll have to assume that if gold breaks below $1,531 then it would be wise to build $1,179.25 into our expectations.”

The above commentary was based on the March 1, 2013 price of gold.  Since that time, gold has declined from  $1,582.25 to slightly above Edson Gould’s ascending conservative downside target at $1,195.25 on December 20, 2013.  This was within 1.35% of the estimated target.  Additionally, gold stocks as represented by the XAU Index declined –37.72%.  Below is our updated review on the price of gold.

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