Tag Archives: etf

Project $1M: Achieving A $1M Portfolio With Growth Stocks Pt. 3

Summary I’ve created Project $1M to try and attain a $1M capital base from growth stocks in 11 years. I’m focused on including stocks that have a moat and some strong growth drivers. I will introduce the final set of stocks in this update. I previously introduced the concept of my growth oriented model portfolio in a previous article. The focus of that portfolio was directed toward achieving a $1M capital base in approximately 11 years, starting from a base of $217,500. I previously introduced the first 6 stocks in the portfolio here , and the next 6 stocks in the portfolio here . I’d like to introduce the final set of stocks in the Project $1M portfolio here and show how the portfolio stands. My Criterion In addition to companies with moats and strong barriers to entry, I set a specific focus on companies with high returns on invested capital and that were generally achieving double-digit growth with respect to net income and earnings per share. My thinking here was that these types of companies would be likely be able to continue earning above double digit earnings while maintaining their market multiples, and thus generate strong rates of capital growth. The Remaining Companies Westinghouse Air & Brake (NYSE: WAB ) is a technology supplier to the freight rail and the passenger transit industries. The company provides engine cooling, braking and other design and engineering services. Wabtec holds a dominant market share position in North America for the supply of technology to the rail industry. In some specific component segments, such as pneumatic braking systems, Wabtec is part of a strong duopoly along with Knorr Bremse. This dominance is reflected in the significant positive trend in gross margin and operating margin for Wabtec over the last decade. Positive Train Control represents the next revenue driver for the company. Positive Train Control refers to the requirement that certain operational functions of a train be capable of being monitored and controlled electronically. Wabtec has almost tripled revenues from $1.03B in 2005 to over $3.04B in 2014, representing an annualized growth of close to 14%. The company derives returns on equity and returns on invested capital that are consistently over 15%. Celgene (NASDAQ: CELG ) is a strong player in the biotechnology space, with a portfolio of drugs targeted toward cancer and inflammatory conditions. The company’s Revlimid franchise is a blockbuster and delivered over $5B in revenue in 2014. Revlimid has received approvals for the treatment of a variety of conditions including lymphoma and myeloma. With patent protection on the franchise likely to last well beyond the end of the decade, Celgene is poised for long term growth. Celgene’s return on equity have been hovering around 30% for the last few years, which indicates that it is a good steward of shareholder capital. Celgene has managed strong double digit revenue growth for the last decade. I don’t see too many reasons why this won’t be the case for the coming decade as well. Medidata (NASDAQ: MDSO ) solutions provides cloud based simulations and prototyping for life sciences. Medidata provides a valuable service for company’s engaged in drug discovery by helping them to simulate and prototype the effect of a given molecular combination quickly and more cost effectively than with traditional methods. The company has been growing revenues at almost 20% annually, with gross margins seeing a positive upward trend, and hovering at around 75%. With the continued push for faster drug development and continued pressure on traditional pharmaceutical companies, the need for Medidata’s product offerings will only continue to grow. Vipshop (NYSE: VIPS ) is discount e-commerce retailer in China that has pioneered the concept of flash sales. The company aggressively marks down oversupplied or out of season stock, which it makes available on its platform. Vipshop has a particular focus on pushing product to consumers in Tier 3 or Tier 4 cities in China, where there are typically no malls selling brand name product. The company’s rate of growth has been nothing short of extraordinary, with revenue growth in excess of 100% annually for the last few years. While that will undoubtedly moderate overtime, Vipshop occupies a unique niche in the Chinese e-commerce market, With returns on equity in excess of 40%, and a long runway of growth ahead, I think Vipshop could be poised for good long term returns. Zhaopin(NYSE: ZPIN ) provides an online recruitment platform in China. Zhaopin offers online recruitment services, including executive search and campus recruitment. Zhaopin has maintained a strategy of moving into lower tier cities in the quest to drive further revenues. While LinkedIn’s (NYSE: LNKD ) entry into China remains a long term threat for this company, Zhaopin’s early entry and focus on smaller tier cities should provide a competitive edge that allows the company to continue to grow profitably for a number of years. The company has returns on invested capital of over 25%, with revenue growth also in excess of 20%. Polaris (NYSE: PII ) designs and manufactures off road vehicles and other sport utility vehicles including snow mobiles, ATVs and motorcycles. Polaris has a well deserved reputation for design excellence and innovation, which has helped the company stand out in an increasingly crowded market. Polaris has demonstrated a track record of financial discipline over the last decade. Gross margins have shown sustained increase, rising 600 bp over the last decade. This is coupled with returns on invested capital that have exceeded 40% over the last few years. When combined with strong double digit revenue growth over the last decade, Polaris looks quite attractive for future returns. United Therapeutics (NASDAQ: UTHR ) produces drug therapies for patients with chronic conditions and is focused on the unmet needs space. The company currently produces drugs for pulmonary hypertension, congenital heart problems and neuroblastoma. While the company remains exposed to the risk of generics eventually making their way into some of the key niches that the company currently occupies, UHTR is looking to expand the markets it currently serves, and is even looking at the manufacture of artificial organs as a new line of business. The company has grown revenues in the high double digits for the last decade, with returns on invested capital over 40%. This write up concludes the initial set of positions for Project $1M, which is currently fully invested. Below is what the portfolio currently looks like. I will provide periodic updates on portfolio performance and any new positions that are initiated, or existing positions that are existed. Name Shares Held $ Cost Per Share $ Total Cost $ Market Value $ Unrealized Gain/Loss Since Purch % Unrealized Gain/Loss Since Purch Baidu Inc ADR 54 187.47 10,123.38 11,161.26 1,037.88 10.25 Celgene Corp 122 122.71 14,970.62 13,848.22 -1,122.40 -7.5 Core Laboratories NV 64 116.33 7,445.12 7,190.40 -254.72 -3.42 Facebook Inc Class A 99 101.97 10,095.03 10,624.68 529.65 5.25 LinkedIn Corp Class A 42 240.87 10,116.54 10,620.54 504 4.98 MasterCard Inc Class A 305 98.99 30,191.95 30,347.50 155.55 0.52 Medidata Solutions Inc 174 43 7,482.00 7,830.00 348 4.65 Mercadolibre Inc 102 98.37 10,033.74 12,377.70 2,343.96 23.36 Moody’s Corporation 156 96.16 15,000.96 16,277.04 1,276.08 8.51 Novo Nordisk A/S ADR 235 53.18 12,497.30 12,861.55 364.25 2.91 Polaris Industries Inc 89 112.34 9,998.26 9,386.83 -611.43 -6.12 Priceline Group Inc 7 1,454.00 10,178.00 8,970.71 -1,207.29 -11.86 ResMed Inc 174 57.61 10,024.14 10,286.88 262.74 2.62 Starbucks Corp 201 62.57 12,576.57 12,459.99 -116.58 -0.93 United Therapeutics Corp 51 146.63 7,478.13 7,709.67 231.54 3.1 Vipshop Holdings Ltd ADR A 243 20.52 4,986.36 3,973.05 -1,013.31 -20.32 Visa Inc Class A 256 77.58 19,860.48 20,528.64 668.16 3.36 Westinghouse Air Brake Technologies Corp 121 82.87 10,027.27 9,285.54 -741.73 -7.4 Zhaopin Ltd ADR 314 15.19 4,769.66 4,788.50 18.84 0.39 Project $1M 217,855.51 220,528.70 2,673.19 1.23

Dollar/Yen As A Hedge To Oil Investments

Summary Oil and oil companies seem like attractive bets, however there are many near term risks. In an environment of persistent low oil prices, the BOJ has assured continued QE or increases in QE. The dollar has an inverse correlation to oil, therefore a dollar hedge allows for a pure supply/demand bet on oil. The case for being long oil (NYSEARCA: OIL ) has been made numerous times on this website and others, but I will recap a few of the salient points here for completeness. Oil may be attractive from a supply point of view. Most of the new supply that led to the recent glut came from shale oil wells in the United States. In fact, oil production from other sources of world oil actually declined during the period from 2012 to 2014. Source: Resilience.org Shale oil wells have rapid decline curves compared to conventional wells. Source: oilprice.com As shown above, the production rate is a small fraction of the initial production by years 2-3. Therefore, we ought to expect that roughly two years after oil rig counts began to decline, the supplies of crude oil ought to begin to fall rapidly. However, the timetable for this recovery in oil price has been delayed due to the fact that several E&P companies were slow to stop drilling. In a last ditch effort to produce cash flows from their land, many companies continued to drill even at unfavorable prices. Source: marketrealist.com Though crude began to fall in July of 2014, companies didn’t start reducing rig count until many months later, and rig counts didn’t reach the current lower range until the spring of this year. This led to a situation where US supply didn’t start to roll over until the beginning of this year. Despite the drop in rig counts, the supply coming out of US shale is still higher than it was at the start of the crash in oil prices: Source: QuintoCapital.com This makes for an interesting situation of time arbitrage. The sharp decline in shale wells, combined with a lack of new drilling in the U.S., means that by 2017 (2 years from the peak shale oil supply seen in the above chart) the U.S. supply should be low enough to begin to positively affect oil prices. Investors who are convinced of the above argument may take a long position either in the commodity (via futures) or in specific, cash-rich E&P names that are unlikely to go bankrupt, and wait out the supply-demand imbalance. However, there is a danger in catching a falling knife – commodity speculators are currently riding the trend for lower prices, and stock traders are following suit with oil stocks. In addition, there is a risk that the oil supply/demand mismatch may worsen when Iran brings new production online. A long position in oil or oil stocks could pay off eventually, but lead to disastrous portfolio results in the meantime. Therefore, it is desirable to hedge such a position. The Case for Shorting the Yen ( YCS ) Japan’s central bank, unlike the Federal Reserve, uses a measure of inflation that includes the cost of energy. Thus, the fall in oil prices has set back its goal of ending deflation. Though Haruhiko Kuroda has been insisting that this is a temporary setback, one must consider what would have to happen for an investment in a cash-rich E&P firm to go poorly – namely, we would have to see much lower oil prices before the supply glut ends. Take a look at comments Kuroda made earlier this year (emphasis added): “…however, based on the assumption that crude oil prices are expected to rise moderately from the recent level , the CPI is likely to reach 2 percent in or around fiscal 2015. Needless to say, the Bank maintains its policy stance that it will make adjustments as necessary without hesitation, when there are changes in trend inflation, in order to achieve the price stability target at the earliest possible time. The Bank will not respond to developments in crude oil prices themselves, but in conducting monetary policy, it will closely monitor how they affect inflation expectations — or, in other words, whether conversion of the deflationary mindset will nevertheless proceed.” And, more recently, “The timing of reaching the inflation target depends on oil, he told reporters in Tokyo. Kuroda, 71, reiterated that the BOJ won’t hesitate to adjust policy if necessary.” And “Kuroda said he didn’t see limits to further policy steps, amid concern among private analysts that the BOJ’s campaign — mainly purchases of Japanese government bonds, or JGBs — is running up against constraints. He didn’t think a limit on buying JGBs would come soon.” The latest inflation numbers for September showed inflation at -.1% , a far cry from the 2% goal. While Kuroda stated that the BOJ will not specifically respond to oil prices, lower oil prices are bound to continue to bring down inflation expectations. I take the above comments as basically an assurance that as long as oil prices stay low, the BOJ will continue its QE program, and if oil prices fall further, there is a high likelihood that the BOJ will ramp up its QE program yet again. The Case for Being Long The U.S. Dollar There has been a strong inverse relationship between the dollar (NYSEARCA: UUP ) and oil: Source: quintocapital.com This correlation makes sense: because oil is priced in dollars, the strong dollar has contributed to the fall in oil prices. While Japan has been concentrated on stepping up its QE program, the US Federal Reserve has basically told market participants that it plans to raise rates in December. This divergence in policies is driving the USD/JPY higher, and the oil price lower. So going long the dollar in addition to being long oil provides investors a way to play oil purely for its supply-demand characteristics, rather than its aspect as an alternative currency. A word about China There has been a perception that the crash in Chinese stock prices will lead, or already has led, to weakening oil demand. However, the opposite is actually true – Chinese oil demand is actually up 9.2% year-over-year , as lower prices have stimulated demand. As Stanley Druckenmiller said earlier this year , the cure for high prices is high prices, and the cure for low prices is low prices. Putting it together I think there’s a strong case out there for being long oil right now. However, there is always a risk that the fall in oil could become overdone, and we could see oil prices that are in the $20-$30 range before we see prices in the $60-70 range. In order to hedge this volatility, I think there’s a good case for being long the US dollar, specifically against the yen, which will devalue further if oil either stays low or drops further. Any thoughts are always appreciated.

Playing The Ratings Game

By Alan Gula Care to take a guess at Lehman Brothers’ credit rating right before its bankruptcy? I’ll give you some help. Investment-grade ratings range from AAA down to BBB- (on the Standard & Poor’s ratings scale). Anything below investment grade (BB+ and below) is considered high yield , which is also known as speculative grade, sub-investment grade, or “junk.” The higher the credit rating, the higher the perceived credit worthiness. In other words, high-rated companies can probably pay you back. Thus, you’d assume Lehman Brothers had a solidly junky rating – perhaps CC – reflecting the high risk of default during the credit crisis… right? Actually, Lehman had an “A” rating right before it went bust! The major ratings agencies – Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings – took a lot of flak for this egregious misjudgment. To be sure, credit ratings still provide valuable information. In fact, looking up the credit rating and reading the commentary from the ratings agencies is a great place to begin when evaluating a stock. You can access Standard & Poor’s ratings for free by registering on their site. Just keep in mind that the ratings agencies may have missed some material risks. Therefore, we should really take notice when a company has a high-yield rating. Yet, most equity investors are unaware of the credit ratings of their holdings. For example, the following table shows three real estate investment trusts (REITs) that are in the S&P 500. Equinix Inc. (NASDAQ: EQIX ), Crown Castle International Corp. (NYSE: CCI ), and SL Green Realty Corp. (NYSE: SLG ) specialize in data centers, wireless communications towers, and commercial properties, respectively. I guarantee that the vast majority of retail investors in these stocks have no idea that the S&P’s long-term issuer rating of these REITs is sub-investment grade. It’s easy to see why these REITs have relatively low ratings, too. Their net debt (debt minus cash) to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios are all at least 4.0 times, which is high. The average net debt/EBITDA in the S&P 500, excluding financials, is 1.36 times. At a time when many high-yield bonds are coming under significant pressure, investors need to be vigilant . I’m not saying that these companies will default on their debt. However, I do think these REITs should have much higher yields to compensate investors for the additional risk, which is being ignored. The cost of debt capital will likely rise for most high-yield issuers during the next few years. This will be a painful process for unsuspecting equity investors in highly leveraged companies. Most stock watchers fail to appreciate the inextricable linkage between the credit and equity markets. Keep in mind, very few companies have rock solid balance sheets like Johnson & Johnson (NYSE: JNJ ), which is AAA rated. Sadly, many people’s idea of “research” involves pulling up a stock chart and (improperly) drawing some trend lines. If that’s the extent of your analysis, then you shouldn’t be investing in individual stocks. Stick with exchange-traded funds (ETFs). If you insist on individual stocks, at least do some credit analysis on your portfolio. You’ll thank me when defaults spike, sending shockwaves through the credit – and equity – markets. Link to the original post on Wall Street Daily