Tag Archives: management

Learning From The Past, Part 6 [Hopefully Final, But It Won’t Be…]

This is the last article in this series … for now. The advantages of the modern era… I went back through my taxes over the last eleven years through a series of PDF files and pulled out all of the remaining companies where I lost more than half of the value of what I invested, 2004-2014. Here’s the list: Avon Products (NYSE: AVP ) Avnet (NYSE: AVT ) Charlotte Russe [Formerly CHIC – Bought out by Advent International] Cimarex Energy (NYSE: XEC ) Devon Energy (NYSE: DVN ) Deerfield Triarc [formerly DFR, now merged with Commercial Industrial Finance Corp] Jones Apparel Group [formerly JNY – Bought out by Sycamore Partners] Valero Energy (NYSE: VLO ) Vishay Intertechnology (NYSE: VSH ) YRC Worldwide (NASDAQ: YRCW ) The Collapse of Leverage Take a look of the last nine of those companies. My losses all happened during the financial crisis. Here I was, writing for RealMoney.com, starting this blog, focused on risk control, and talking often about rising financial leverage and overvalued housing. Well, goes to show you that I needed to take more of my own medicine. Doctor David, heal yourself? Sigh. My portfolios typically hold 30-40 stocks. You think you’ve screened out every weak balance sheet or too much operating leverage, but a few slip through… I mean, over the last 15 years running this strategy, I’ve owned over 200 stocks. The really bad collapses happen when there is too much debt and operations fall apart – Deerfield Triarc was the worst of the bunch. Too much debt and assets with poor quality and/or repayment terms that could be adjusted in a negative way. YRC Worldwide – collapsing freight rates into a slowing economy with too much debt. (An investment is not safe if it has already fallen 80%.) Energy prices fell at the same time as the economy slowed, and as debt came under pressure – thus the problems with Cimarex, Devon, and to a lesser extent Valero. Apparel concepts are fickle for women. Charlotte Russe and Jones Apparel executed badly in a bad stock market environment. That leaves Avnet and Vishay – too much debt, and falling business prospect along with the rest of the tech sector. Double trouble. Really messed up badly on each one of them, not realizing that a weak market environment reveals weaknesses in companies that would go unnoticed in good or moderate times. As such, if you are worried about a crushing market environment in the future, you will need to stress-test to a much higher degree than looking at financial leverage only. Look for companies where the pricing of the product or service can reprice down – commodity prices, things that people really don’t need in the short run, intermediate goods where purchases can be delayed for a while, and any place where high fixed investment needs strong volumes to keep costs per unit low. One final note – Avon calling! Ding-dong. This was a 2015 issue. Really felt that management would see the writing on the wall, and change its overall strategy. What seemed to have stopped falling had only caught its breath for the next dive. Again, an investment is not safe if it has already fallen 80%. There is something to remembering rule number 1 – Don’t lose money. And rule 2 reminds us – Don’t forget rule number 1. That said, I have some things to say on the positive side of all of this. The Bright Side A) I did have a diversified portfolio – I still do, and I had companies that did not do badly as well as the minority of big losers. I also had a decent amount of cash, no debt, and other investments that were not doing so badly. B) I used the tax losses to allow a greater degree of flexibility in investing. I don’t pay too much attention to tax consequences, but all concerns over taking gains went away until 2011. C) I reinvested in better companies, and made the losses back in reasonably short order, once again getting to pay some taxes in the process by 2011. Important to note: losses did not make me give up. I came back with vigor. D) I learned valuable lessons in the process, which you now get to absorb for free. We call it market tuition, but it is a lot cheaper to learn from the mistakes of others. Thus in closing – don’t give up. There will be losses. You will make mistakes, and you might kick yourself. Kick yourself a little, but only a little – it drives the lessons home, and then get up and try again, doing better. Full disclosure: Long VLO – made those losses back and then some.

Is Sugar The Best Commodity ETF Right Now?

2015 has been a bad year for both soft and hard commodities. Notably, S&P GSCI Total Return – the benchmark for commodity market performance – nosedived about 19.3% in the third quarter, representing the fifth worst quarter and the third worst third quarter since 1970. With this, the index is on the verge of recording the sixth worst year after 2008. The blame is largely heaped on the stronger dollar, global growth worries, plunging oil prices and weakening demand that have dampened the appeal for commodities. Economic slowdown in China is a major setback for the commodities market, as the world’s second-largest economy is also the world’s largest buyer of raw materials. However, there seems to be a torchbearer in this commodity market blackout. This is sugar, as its price has recovered as much as 30% since touching its seven-year nadir on August 24. Last week, sugar was the only commodity (except steel) that registered a double-digit rise of around 10%. The upsurge was mainly driven by the appreciation of the Brazilian real against the U.S. dollar, and Brazil’s decision to hike fuel prices. Sugar is greenback-priced in Brazil, the largest producer of the agricultural commodity in the world. Therefore, a weaker dollar discourages sugar exports from the country, lifting up its prices in the world market. Shortage of production is another issue that is playing on the bullish trend in sugar prices. As per International Sugar Organization , sugar cane processed this season in Brazil declined 2.1% to 412,624 million tons, while sugar output in the country is down 11% from the prior year, as mills are converting more cane to ethanol in response to a possible hike in gasoline prices. India, the world’s second-largest sugar producer, is also expected to experience a 5% fall in sugar output to 28.3 million tons in 2015, as per Indian Sugar Mills Association, thanks to the El Nino weather condition that is causing insufficient rainfall in the region. According to a note by Morgan Stanley, sugar consumption is expected to exceed demand for the first time in six years. The firm expects consumption to outdo demand by 3.7 million metric tons in the marketing year that began on October 1. Riding on the bullish trend in sugar prices, ETFs that are exposed to this soft commodity have been experiencing handsome gains (some double digits as well) over the past one month. Below, we highlight three of those ETFs that investors should definitely consider in this otherwise bearish commodity market (see all Agricultural ETFs here ). iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) SGG tracks the Dow Jones-UBS Sugar Subindex Total Return Index, which provides the returns that are seen in an investment in the futures contracts on the commodity of sugar. The note has garnered nearly $56 million in assets, and trades in a daily volume of 48,000 shares, on average. It charges 75 bps in annual fees. The note was up 15.2% in the past one month, and has a Zacks ETF Rank #3 (Hold) with a High risk outlook. Teucrium Sugar Fund (NYSEARCA: CANE ) This ETF tracks the Sugar Futures index, which reflects the daily changes of a weighted average of the closing prices for three futures contracts for sugar that are traded on ICE Futures US. The fund is nearly overlooked, as it has gathered nearly $4 million in assets and trades in a paltry volume of around 5,000 shares. However, the ETF is expensive, charging a hefty 176 bps in fees from investors per year. It was up 9.8% over the last one month, and carries a Zacks ETF Rank #3 with a High risk outlook. iPath Pure Beta Sugar ETN (NYSEARCA: SGAR ) This is another sugar ETN by iPath, and follows the Barclays Capital Sugar Pure Beta TR Index. The index consists of a single futures contract, but it has a unique roll structure which selects contracts using the Pure Beta Series 2 Methodology. SGAR is also neglected, with only $1.4 million in AUM, and is thinly traded, with average volume of nearly 2,000 shares. The note charges 75 bps in annual fees, and was up 12.5% in the past one month. It also carries a Zacks ETF Rank #3 with a High risk outlook. Original Post

VYM: A Quality Dividend Growing ETF

Summary Features great dividend growth and diversification across sectors. Traditional low Vanguard expense fees keep your costs down. Lags, though closely follows the S&P for total return. Fund 10% down for the year creates a buying opportunity. Solid ETF choice to balance with SCHD for long-term income generation. Introduction The Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) is a quality ETF by Vanguard, the leader in low-cost ETFs. The fund tracks the FTSE High Dividend Yield Index which tracks stocks that are forecasted to have above-average dividend yields. The fund applies no type of quality metric or additional screening to the companies. It also excludes REITs. It currently has 434 holdings and carries an expense ratio of 0.10%. The Holdings VYM holds a wider variety of stocks than the Schwab U.S. Dividend Equity ETF ( SCHD), which I wrote about in another article . (click to enlarge) To compare, both funds are light on materials while SCHD is also very light on utilities, financials and telecommunications. A few basic stats, the top 10 holdings make up 30% of VYM, 42% of SCHD, and the top 25 makes up 58% of VYM vs. 74% for SCHD. Dividend Growth VYM has also featured great dividend growth the last several years. We need to see what the December dividend is, but using the trailing 12-month period (last raise announced 9/23/15), it grew 12.4% this past year, and has a 3-year average of 12.7%. Performance Inception to-date performance vs. the S&P has slightly lagged as mentioned in the summary. This return is assuming all dividends reinvested. Data courtesy of DividendChannel. (click to enlarge) I like to compare this with SCHD’s inception to-date results to get a closer apples-to-apples comparison of a dividend based ETF. (click to enlarge) SCHD has lagged VYM since its inception by a percentage point each year. One other comparison point between VYM and SCHD is looking at their top holdings. Since their top holdings make up the majority of the funds, it’s important to see how they are similar and where they differ. This information may help an investor decide which fund to buy into (if it’s an either/or scenario) based on the business prospects of a company(ies) that may be absent from a fund. The green colors mean the company is contained within both funds, red means that one is not contained within the other (for example Wells Fargo (NYSE: WFC ) and AT&T (NYSE: T ) are not in SCHD) and yellow denotes they are in the other fund, just not the top 30. Why Now? The market has been off its highs in 2015 as there are now several factors weighing on the market. Looking at the past 5 years, the yield has never been higher. It briefly touched over 3% during the corrections of 2011 and 2013, but has sustained 3%+ for the last few months of 2015. This offers a historically good entry point. The sharp rally of the past week has pushed the yield down however from approximately 3.42% to 3.25%. VYM data by YCharts Conclusion VYM is another great ETF product by Vanguard. The fund has had a solid track record of performance, delivering growing dividends while closely following the performance of the S&P 500. The yield is still over a percentage point higher than the S&P for investors focusing on generating more income while still delivering great total return. I like the prospects of both VYM and SCHD and think they can be compared to one another whether adding to an existing or opening a new position.