Hi members,
We hope you had a long and happy holiday weekend with your families!
I wanted to touch base today for a variety of reasons. I received a few emails over the holiday weekend regarding a couple of the newsletter portfolio holdings that are trading down with the markets. Nothing out of the ordinary, but for those who are new to the stock market, this may be a bit startling and confusing. If you didn’t know already, we target the best ideas to converge to intrinsic value over a 12-24 month period, and sometimes longer, if market conditions do not cooperate.
First, you should be aware of the collapse in crude oil prices (1). As it relates to the Best Ideas portfolio, there is no exposure to the energy sector in it, and we think this asset allocation will be a source of outperformance. This is a good thing for those following the best ideas. The other newsletter portfolio, the Dividend Growth portfolio, holds Chevron (CVX), Kinder Morgan (KMI) and Energy Transfer Partners (ETP). Chevron has the strongest balance sheet among the majors (as it relates to net debt) (2), while Kinder Morgan and Energy Transfer Partners are very well positioned for the slide in crude oil prices because their business models are based more on volume than commodity prices. The portfolios are extremely well-positioned for the slide in oil prices, in our view, and readers should probably brace for $2-per-gallon at the pump by Christmas. By the way, did you see our call on Seadrill (SDRL) (3)? We’ve witnessed a surge in new members as a result!!! The Dividend Cushion ratio is remarkable.
Second, we’ve received a couple emails from members regarding the slide in a few of our recent ideas as of late – Gilead (GILD) and Coach (COH), which are down a few percentage points. We have to reiterate that the market is near all-time highs at the moment, and that the broader market can account for as much as 20%-40% of any stock price return over the near term, by our estimates. Said differently, it is very likely (in fact, it is probable) that our most recent picks may decline with the overall market in the near term before they eventually converge to intrinsic value over the long term. If you are trading to make gains in the next week or few weeks, our best ideas are not for you. We’re looking to build wealth in the Best Ideas portfolio and income in the Dividend Growth portfolio. Reading through this note (4) on Teva Pharma (TEVA) will offer some perspective.
Let me repeat, it is very likely that some of our best ideas may trade down 5%, 10%, or more in the near term with the markets, if they head that direction. Does this mean we’re not a good service or the best service out there? No. The broader equity markets have more than tripled from their March 2009 bottom, and in this context, even a 20% retracement of certain stocks would not be outside the range of probable outcomes. Out of the 40 or so ideas that we’ve added to the Best Ideas portfolio and Dividend Growth portfolio during the past few years, only a couple are currently underwater (and only because we’ve just added them). Clearly, our hit-rate is fantastic, though we know that it is difficult for new members to accept this when some of our new ideas don’t work out immediately. I can’t tell you what to do, but the goals of the newsletter portfolios are geared for outperformance.
Third, I want to remind you that the most valuable aspect of our service is not only based on the outperformance of ideas we provide (or the bad ideas we steer you away from), but also in the instruction we offer on how to look at the markets. There is nothing more valuable that I can give you than to teach you how to ask the right questions. It’s not enough to know about the investment prospects of your companies. Investing is about identifying mispriced future free cash flows. If you don’t know what’s already factored into the price of your stocks, then you are setting yourself up for failure. You may get lucky, and the company you bought may bail you out with stronger than expected performance, but this is never guaranteed. You need to know what you are paying for. Learning is a never-ending process, so be sure to sign up to the investment education workshop I will be hosting. Today is the last day for the early bird special. Sign up here >>
Fourth, due to the Thanksgiving Day holiday last week and the Cyber Monday extravaganza today (where emails may be lost), we will be releasing the December edition of the Dividend Growth Newsletter tomorrow, Tuesday, December 2.
If you have any questions, please be sure to let us know.
(1) /20141129
(2) /20140506_1
(3) /20141126
(4) /20141103
Thanks for reading!
Hope you have a blessed holiday season,
Brian Nelson, CFA
President, Equity Research
Valuentum Securities, Inc.
brian@valuentum.com