Gold as represented by the SPDR Gold shares (GLD) and gold stocks as represented by the Philadelphia Gold and Silver Stock Index (XAU) have declined –1.48% and –5.42%, respectively.
Gold and gold stocks are getting decimated in the latest decline. Our Gold Stock Indicator (GSI) is getting very interesting. Below are the GSI for the Philadelphia Gold and Silver Index (XAU) compared to the Barron’s Gold Mining Index (BGMI).
Posted in Barron's Gold Mining Index, BGMI, gold, gold bugs, Gold Stock Indicator, XAU
Tagged members
NOTE: In our Dow Theory posting of May 18, 2014, we revealed an issue with Dow Theory that had gone unaddressed since S.A. Nelson’s book, The ABC of Stock Speculation, coined the term “Dow’s Theory.” We believe the acknowledgment of this issue adds clarity to the writings of Charles H. Dow and may produce new insights that have not previously been explored.
Top Five Watch List Performance Review
| Symbol | Name | 2013 Price | 2014 Price | % change |
| NWN | Northwest Natural Gas | 40.72 | 43.82 | 7.6% |
| ED | Consolidated Edison | 54.88 | 56.43 | 2.8% |
| SCG | SCANA Corporation | 46.24 | 49.88 | 7.9% |
| XOM | Exxon Mobil Corp. | 88.40 | 95.78 | 8.3% |
| T | AT&T Inc | 34.32 | 34.50 | 0.5% |
| Average | 5.4% | |||
| DJI | Dow Jones Industrial | 15,376.06 | 16,987.51 | 10.5% |
| SPX | S&P 500 | 1,687.99 | 1,985.54 | 17.6% |
Gold as represented by the SPDR Gold shares (GLD) and gold stocks as represented by the Philadelphia Gold and Silver Stock Index (XAU) have declined –3.92% and –7.83%, respectively.
As indicated in our last review of the Gold Stock Indicator on August 23, 2014, we said the following:
“…the Gold Stock Indicator hovers at the higher end of the established range and appears to be on the cusp of a decline.”
Below is the Gold Stock Indicator as of September 12, 2014.
“The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great ‘earnings’ – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. ‘Mark-to-market’ then turned out to be truly ‘mark-to-myth.’”
Buffett, Warren. Berkshire Hathaway. 2002 Letter to Shareholders. February 21, 2003.
| Symbol | Name | Price | % Yr Low | P/E | EPS (ttm) | Dividend | Yield | Payout Ratio |
| MCD | McDonald's Corp. | 93.07 | 0.92% | 16.85 | 5.52 | 3.24 | 3.48% | 59% |
| VIVO | Meridian Bioscience | 18.87 | 0.96% | 22.20 | 0.85 | 0.79 | 4.19% | 93% |
| SCL | Stepan | 47.73 | 1.75% | 16.00 | 2.98 | 0.68 | 1.42% | 23% |
| DE | Deere & Company | 82.79 | 2.51% | 9.30 | 8.90 | 2.13 | 2.57% | 24% |
| WSO | Watsco Inc. | 91.58 | 2.83% | 23.51 | 3.90 | 1.80 | 1.97% | 46% |
| HSY | Hershey Company | 90.58 | 3.07% | 24.48 | 3.70 | 1.99 | 2.20% | 54% |
| CASS | Cass Information Systems, Inc. | 46.51 | 3.45% | 23.26 | 2.00 | 0.80 | 1.72% | 40% |
| ONB | Old National BanCorp. | 13.19 | 3.94% | 14.34 | 0.92 | 0.43 | 3.26% | 47% |
| RAVN | Raven Industries | 27.31 | 4.24% | 25.52 | 1.07 | 0.48 | 1.76% | 45% |
| AAN | Aaron's Inc | 25.81 | 4.28% | 21.19 | 1.22 | 0.08 | 0.31% | 7% |
| FFIN | First Financial Bankshares | 29.58 | 4.69% | 22.49 | 1.32 | 0.53 | 1.79% | 40% |
| FLO | Flowers Foods Inc | 19.39 | 4.81% | 23.62 | 0.82 | 0.47 | 2.40% | 57% |
| WABC | Westamerica BanCorp. | 48.80 | 4.99% | 20.50 | 2.38 | 1.52 | 3.11% | 64% |
| AFL | AFLAC | 61.46 | 5.28% | 9.70 | 6.33 | 1.48 | 2.41% | 23% |
| LNN | Lindsay Corporation | 75.07 | 5.54% | 19.15 | 3.92 | 0.92 | 1.23% | 23% |
| FNFG | First Niagara Financial Group | 8.66 | 5.68% | 11.86 | 0.73 | 0.32 | 3.70% | 44% |
| NPBC | National Penn Bancshares | 10.09 | 6.21% | 15.24 | 0.66 | 0.40 | 3.96% | 60% |
| GTY | Getty Realty Corp. | 18.84 | 6.26% | 10.07 | 1.87 | 0.85 | 4.51% | 45% |
| FULT | Fulton Financial Corp. | 11.75 | 6.33% | 13.82 | 0.85 | 0.32 | 2.72% | 38% |
| UTX | United Technologies Corp. | 108.70 | 6.35% | 17.22 | 6.31 | 2.36 | 2.17% | 37% |
| PFE | Pfizer Inc | 29.65 | 6.39% | 18.62 | 1.59 | 1.02 | 3.44% | 64% |
| ALB | Albemarle Corp. | 63.72 | 6.45% | 15.80 | 4.03 | 1.03 | 1.62% | 26% |
| MLAB | Mesa Laboratories Inc | 68.86 | 6.53% | 27.80 | 2.48 | 0.60 | 0.87% | 24% |
| UVV | Universal Corp. | 52.24 | 6.61% | 16.13 | 3.24 | 2.03 | 3.89% | 63% |
| VMI | Valmont Industries, Inc. | 137.55 | 6.63% | 16.01 | 8.59 | 1.13 | 0.82% | 13% |
| EMR | Emerson Electric | 65.08 | 6.95% | 18.29 | 3.56 | 1.72 | 2.64% | 48% |
| 26 Companies | ||||||||
Watch List Review
Second on our list is Meridian Bioscience (VIVO). We have a long history with this stock. This dividend achiever has a long record of dividend payment. However, one has to wonder if the company can continue to raise the dividend with slowing of the bottom line. A payout ratio of 93% is extremely high and leaves little room for error on the company operational front. The company currently has a dividend payment of $0.80 per share and is projected to earn $0.85 - $0.90 in 2014. The outlook for EPS in 2015 doesn't look different than 2014 with the company expecting to earn $0.85-$0.91. If we lean on the conservative perspective, the dividend payout ratio will be at 94%. There is one thing we believe would be make us somewhat bullish on the stock and that would be a dividend cut. If the company announced a dividend cut, we can expect shares to tumble lower. At that point, it would a great start for a re-assessment.
Disclaimer On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. Our view is to embrace the worse case scenario prior to investing. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.
Every stock market investor should be concerned about the impact that rising interest rates might have on future investment returns. The prevailing theory is that when interest rates rise then stock prices should decline due to the impact to earnings from higher borrowing costs. Since we are at or near the lowest level in interest rates, conventional wisdom suggests that eventually interest rates will rise.
With rising interest rates, investors should expect that stock prices will decline as per share earnings are reduced. One industry that borrows heavily for going operations is the utility sector (electricity, water, gas etc.). This article will give a cursory examination of utility stocks from the beginning of a rising interest rate cycle to the peak (1939 to 1980). We will attempt to determine if the conventional thinking on rising interest rates and their impact on utility stocks is correct.
The core of value investing is to obtain an investment for less than its worth. Professional investors will typically focus on the price to earnings (P/E) ratio which compares the current share price with its per share earnings. Although this is a good gauge, more than one ratio should be considered when assessing an investment. Students of value investing should also be familiar with price to book (P/B) ratio. This ratio (P/B) compares the current share price to the current shareholder equity.
In the book The Intelligent Investor, Benjamin Graham highlights a key concept which combined the two ratios [P/E and P/B] as a gauge on the valuation of a company. These combined ratios are known as the Graham ratio. The computation is elementary, simply multiply the P/E ratio with the P/B ratio. If the product is less than 22.5, the company may be of good value. This thesis is highlighted in Chapter 14 – Stock Selection for the Defensive Investor of The Intelligent Investor. We find this concept to be so compelling that we've decided to back test this ratio against our watch lists from 2012. Continue reading
Posted in Graham and Dodd, Value Investing, Warren Buffett
In our May 6, 2012 posting on Berkshire Hathaway (BRK-A) titled “Should Berkshire Hathaway Be Trading at 1995 Prices?”, we gave price projections based on Edson Gould’s Altimeter using very conservative estimates if BRK-A paid a dividend. As we’ve managed to achieve the middle of the three upside targets set down in our 2012 article, we’re going to list the price that we think BRK-A would be considered undervalued for each of the next 10 years.
Posted in Altimeter, BRK-A, Charlie Munger, Edson Gould, Warren Buffett
Tagged members
Below is our watch list with the estimated price targets for the remainder of the year.
Below is the one year performance of our August 23, 2013 Nasdaq 100 Watch List stocks (8/23/2013 to 8/26/2014):
| Symbol | Name | 2013 | 2014 | % change |
| SHLD | Sears Holdings Corp | 39.6 | 34.67 | -12.45% |
| EQIX | Equinix, Inc. | 170.01 | 217.25 | 27.79% |
| TEVA | Teva Pharmaceutical | 38.3 | 52.22 | 36.34% |
| CHRW | Robinson Worldwide | 57.2 | 68.45 | 19.67% |
| EXPE | Expedia Inc. | 48.84 | 87.43 | 79.01% |
| NUAN | Nuance Comm. | 19.31 | 17.17 | -11.08% |
| MXIM | Maxim Integrated | 27.71 | 30.91 | 11.55% |
| BRCM | Broadcom Corp. | 25.24 | 38.81 | 53.76% |
| ISRG | Intuitive Surgical | 390.09 | 478.68 | 22.71% |
| NWSA | News Corporation | 15.75 | 17.62 | 11.87% |
| Avg. % change | 23.92% | |||
| NDX | Nasdaq 100 Index | 30.26% |
The watch list of stocks gained +23% versus a gain of +30% in the Nasdaq 100 Index. The best performing stock, with gains of +79%, was Expedia which was a strong interest stock featured on our July 26, 2013 watch list. At the time, we said the following:
Travel website operator Expedia (EXPE) has suddenly dropped in on our watch list with a –27.38% decline in the stock price on Friday July 26, 2013. We’re not sure that a –28% decline in quarterly earnings requires a –27% decline in the stock price. This type of activity suggests that since June 2012, investors had not sufficiently assessed the prospects of the company before acquiring the stock. Extreme swings in the price indicate that there is more downside risk.
Applying Edson Gould’s Speed Resistance Lines gives us a conservative downside target of $42.56 and an extreme downside target of $22.70.
Our expectation is that there is a good chance that Expedia will decline to the $34 level. Once falling below $34, Expedia should be reviewed on a fundamental basis as a going concern. There may be significant opportunity for this stock as the performance has been in line with industry competitors.
As is often the case, we were too conservative in believing that EXPE would achieve the rising $34.00 level. Instead, EXPE fell exactly to the rising $42.56 level and moved higher from there (updated chart below).
Another strong interest stock in the same July 26, 2013 posting, Equinix (EQIX) also fell only as low as the conservative downside target. From the peak price of $229.02, EQIX spent only four trading days below $158.37. It has been nothing but an uphill climb since.
The worst performing stock was Sears Holdings (SHLD). Sears has essentially traded with descending peaks since 2007 with price support at around $30. A break below $30 could result in significant loss for any remaining shareholders. Private equity firms must be circling Sears at the prospect of a decline below the long-term support.
The strong interest stock from the August 23, 2013 watch list was Maxim Integrated Products (MXIM). At the time we said of MXIM:
“The stock of most interest to us is Maxim Integrated Products (MXIM). Maxim has had a great run since our March 20, 2010 highlight of the chip sector as potential investment candidates (found here). In the chart below, since the 2008 trough, Maxim has maintained a consistent ability to rebound from the conservative downside target of $26.97. However, if the stock cannot hold the line at $26.91, then we expect that the stock will fall to the $19.03 level. The extreme downside target is $11.10, however, we don’t expected this to be achieved. Potential investments at the current level along with stepped up amounts of capital at $19.03 and $15.87 is recommended.”
Since August 23, 2013, Maxim increased as much as +29.05% before falling to a 1-year gain of “only” +11%. If we include the dividend of 3.80%, the total return would be +15% for the last year. Below is the updated SRL for MXIM with new conservative and extreme downside targets.
Although Maxim has fallen considerably since the June 2014 peak, we’re only willing to re-consider the stock after falling at or below the rising $27.79 level.
Investment Consideration
To put all of the gains (and losses) into perspective, we like to compare any profits with the historical market return. Below are the annualized compounded annual growth rates (CAGR) for the last 50, 40, 30, 20 and 10 years (adjusted for inflation) [source].
| years | CAGR |
| 50 | 5.90% |
| 40 | 5.80% |
| 30 | 8.42% |
| 20 | 6.71% |
| 10 | 6.67% |
If an investor can achieve two times (2x) the 30-year CAGR in a single year, it is worth considering alternative investment opportunities while selling the principal and allowing the profits to compound in those stocks that pay a dividend.
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 July 26, 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 |
| IBM | IBM | 185.42 | 190.41 | 2.7% |
| NWN | Northwest Natural Gas | 42.26 | 44.71 | 5.8% |
| XOM | Exxon Mobil Corp. | 87.52 | 98.50 | 12.5% |
| PM | Philip Morris International | 85.37 | 84.34 | -1.2% |
| MAC | Macerich | 56.72 | 64.89 | 14.4% |
| Average | 6.8% | |||
| DJI | Dow Jones Industrial | 15,010.51 | 17,001.22 | 13.3% |
| SPX | S&P 500 | 1,663.501,988.4019.5% |
We didn't elaborate much about the top five companies on the list but we did indicate our position in Coca-Cola (KO). Coca-Cola performance was sub par with a gain of +6.75%. However, when we include dividend into the picture, the total gain is+ 9%.
U.S. Dividend Watch List: July 25,2014
The Dow is approaching its all-time high while the S&P 500 closed above its all-time high this week. We highlighted our macro view in the Dow Theory update on August 14, 2014. As a result of the market upward surge, our watch list dwindled down to sub 100 for the first time in several weeks.
Because the market multiple is at 19, many companies are likely to be closer to fair value and over valued. We highly encourage extra caution and due diligence when filtering through the list. Continue reading
Since our last posting, Gold (GLD) and gold stocks (XAU Index) continue to trade in a range as seen below.
On August 19, 2014, Apple (AAPL) stock price rose as high as $100.66. When Apple was trading at $61.61 on March 9, 2013, we said the following with the accompanying chart:
“Apple Inc. (AAPL) is at the top of our watch list as it is within 5% of the one year low. In our April 14, 2012 test of the quality of Edson Gould’s Speed Resistance lines, Apple fell from $636 [adjusted price of $90.85] to our projected level of $424.15 [adjusted price of $60.59] (found here). Now that the stock has achieved our downside target, we expected that a reaction to the upside is likely.”
On July 17, 2013, when Apple was trading at $61.47, we re-affirmed our view of the upside potential for Apple with the following commentary:
“Currently, Apple is demonstrating a basing pattern that if successful, could result in a breakout to the upside. At the current levels, we wouldn’t be opposed to buying some shares of Apple with the expectation that the stock could decline an additional –25% to –35%.”
The work of Edson Gould has proven to be astounding when considered in its context. On April 14, 2012, we posted an article titled “Considering the Downside Prospects for Apple”. At that time, we were revising the previous estimates of downside risk done on February 5, 2012 (third party source available here).
What was mentioned on February 5, 2012 is critical to understanding how Edson Gould’s downside projections work. At the time, we said:
“The very first thing that we look for, to determine speed resistance lines, is the most recent peak in the price. Because AAPL is continually making new highs, we only need to use the latest price of $455.68 [post split price of $65.09] as our starting point….As the price of Apple increases, so too does the SRL lines based on the work of Edson Gould.”
This means that as long as the price of the stock increases to a new high the speed resistance lines are expected to increase as well. Only when the stock starts on a declining trend can we expect that the stock price might go to the conservative and extreme downside targets.
On April 14, 2012, when Apple was trading at $90.89 (pre-split price of $636.23), we said the following:
“…we believe that, based on the current speed resistance lines, no one would expect Apple to decline to our conservative downside target of $424 (post split price of $60.57)...”
The strength of Gould’s downside risk estimates is that we didn’t even have the peak price of $100.71 set on September 18, 2012 but we were still able to see the conservative downside target of $60.57 achieved. Had we used the peak price, we would have achieved the $67.14 conservative downside target much earlier than the $60.57 level.
Posted in AAPL, Charles H. Dow, Dow Theory, Edson Gould, speed resistance line, SRL
Performance Review
Below is the 1-year performance of the Canadian dividend stocks from our August 16, 2013 list.
| symbol | name | 2013 | 2014 | % change |
| CUF-UN.TO | Cominar REIT | 19.3 | 19.51 | 1.09% |
| BEI-UN.TO | Boardwalk REIT | 55.6 | 68.2 | 22.66% |
| CAR-UN.TO | Canadian Apt Properties REIT | 20.4 | 23.84 | 16.86% |
| EMA.TO | Emera Inc. | 31.3 | 34.61 | 10.58% |
| AX-UN.TO | Artis REIT | 13.8 | 15.88 | 15.07% |
| D-UN.TO | Dundee REIT | 29.6 | 28.95 | -2.20% |
| CWT-UN.TO | Calloway REIT | 24.9 | 26.25 | 5.42% |
| REI-UN.TO | Riocan REIT | 23.8 | 26.75 | 12.39% |
| FTS.TO | Fortis Inc. | 31.2 | 33.55 | 7.53% |
| FCR.TO | First Capital Realty Inc. | 17.2 | 18.95 | 10.17% |
| FTT.TO | Finning International Inc. | 22 | 32.83 | 49.23% |
| REF-UN.TO | Canadian REIT | 40.9 | 48.47 | 18.51% |
| BDT.TO | BIRD CONSTR INC | 11.9 | 15.15 | 27.31% |
| LB.TO | Laurentian Bank of Canada | 45.1 | 50.86 | 12.77% |
| TLM.TO | Talisman Energy Inc. | 11.3 | 11.32 | 0.18% |
| CM.TO | CIBC | 78.8 | 101.32 | 28.58% |
| JE.TO | JUST ENERGY GROUP INC | 6.34 | 6.37 | 0.47% |
| TRP.TO | TransCanada Corp. | 46.5 | 55.59 | 19.55% |
| NA.TO | National Bank Canadian | 39.15 | 48.84 | 24.75% |
| RBA.TO | Ritchie Bros. Auctioneers | 19.6 | 26.1 | 33.16% |
The entire list gained +15.70% as compared to the Toronto Stock Exchange Composite Index gain of +20.16%. The stock with the biggest gains in the last year was Finning International (FTT.TO) with a gain of +49.23%. The stock with the largest decline was Dundee (D-UN.TO), now known as Dream Office Real Estate Investment Trust, with a decline of –2.20%. At the time, we didn’t think much of the REIT sector and said so with the following commentary:
“…we are worried that the REIT sector may spiral downward as was the case in the rising interest rate environment of the early 1970’s.”
We were completely wrong in our assessment of the REIT sector as rising interest rates either never materialized or did not have the anticipated negative impact. The gains that were achieved by the REIT sector were exceptional in our view. As an example, Boardwalk REIT gained +22.66% in the last year for a total return of +26.22%.
Two stocks of interest to us were Just Energy (JE.TO) and Ritchie Brothers Auctioneers (RBA.TO). We said the following of Just Energy:
“Because JE.TO is trending lower, we recommend reassessing the stock when and if it declines to the $6.15 level. The dividend for JE.TO should not be a consideration for this stock as there are continued risks to the dividend going forward.”
After our August 16, 2013 posting, Just Energy’s stock price declined to $6.16 on August 19, 2013. Soon afterwards, Just Energy increased as high as $9.03 by March 19, 2014, a gain of +46.59%. so far, we’ve had tremendous luck with JE.TO rising and falling as anticipated (February 15, 2013 & July 31, 2013). We can’t be certain of the prospects going forward for Just Energy, however, those interested in the stock cannot rely on the dividend and should invest accordingly.
Regarding Ritchie Brothers Auctioneers (RBA.TO), we said the following:
“Another stock of interest on our watch list is Ritchie Brothers (RBA.TO). Although we’d like to provide original analysis each time we write our postings, we find that sometimes such a pursuit is completely unnecessary. RBA.TO completely fits the billing on this matter. On August 17, 2012 (found here), we said that RBA.TO had the pattern of falling to $18/$19 and then recovering to higher ground.”
As we had observed, RBA.TO fell to $18.90 and has since risen as much of +33.16%. At this point, selling the principal position in RBA.TO would be acceptable for the purpose of raising cash or acquiring alternative investments.
Our August 2014 Canadian Dividend Watch List can be found here.
Posted in Canadian Dividend Watch List, D-UN.TO, FTT.TO, JE.TO, RBA
