Global equity markets are falling yet again February 11, in part due to cautious comments from US Federal Reserve chair Janet Yellen about the health of the global economy and the legality/efficaciousness of negative interest rates, “Dividend Growth ‘Bubble’ To Continue But For How Long? (Feb 2016).” Market onlookers continue to fear that the Fed has nothing left to give, “out of ammunition,” with the tank of accommodative policy empty, and it might just be. To us, however, the news flow is more of the same.
The world continues to be awash in crude oil (USO), and many are now starting to think that what was once mostly an oversupply problem is now being compounded by a demand problem as economic weakness across the globe proliferates, from Brazil to China and beyond. West Texas Intermediate crude oil prices are now trading below $27 per barrel, at the time of this writing. We’ve been pounding the table on the likelihood of 2016 being a difficult year for the equity markets, “Not Doom and Gloom — But Just Cautious (Jan 2016),” “As the World Turns (Sep 2015), “Batten Down the Hatches — Another US Market Crash Probable (Sep 2015),” “Here Comes the Correction (Jul 2015), “The Coming Crash of 2016? (Mar 2015),” among several others, and it turns out the cautious tone has been prudent. If anything, your guard should be up.
The 35%+ weighting in cash in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio is how we communicate to our readership this broad concern, and we maintain our belief that the conventional wisdom of a “fully-invested” equity allocation may not make much sense for all types of investors, “The ‘Fully Invested’ Argument May Only Make Sense… (Aug 2015).” Over the past few months, we’ve been de-risking the newsletter portfolios, “Seeking to De-risk the Newsletter Portfolios (Jan 2016),” and high-grading the portfolios, “Alerts: High-grading! GILDàJNJ; EBAYàFB (Jan 2016),” in preparation for ongoing broader market malaise, which ensues. Removing HCP (HCP) from the Dividend Growth Newsletter portfolio yesterday, “Alert: Health Care REITs Whacked (Feb 2016),” has saved another drop today at the time of this writing. We fear things may get worse for the Dividend Aristocrat before they get better, and we’re not sticking around to find out how bad.
We mentioned the following when we explained our tactical decisions on Gilead (GILD) and Alibaba (BABA), and the same applies to an entity such as HCP, a very small part of the total picture of the Dividend Growth Newsletter portfolio: The ideas we select for the newsletter portfolios should be viewed in a portfolio management setting. Said differently, if we had to pick one stock individually, something that makes little sense in the way of diversification, it almost certainly would be different than those that we incrementally add to the newsletter portfolios, which are done at times for strategic or tactical reasons. We’re working to achieve the newsletter portfolio goals, and sometimes we may accept the probability of losses on individual securities if it makes sense in the portfolio context. The Best Ideas Newsletter portfolio hit an all-time high of relative outperformance to the S&P 500 (SPY) a couple weeks ago January 15, “,” and the Dividend Growth Newsletter portfolio continues to outpace its return goals, “.” The process is working.
In newsletter portfolio news specifically, Cisco’s (CSCO) announcement February 10 that it would raise its dividend 24% has sent shares of the highly-rated equity soaring 9%+ at the time of this writing, while one of our very favorite REITs, Realty Income (O), is also catching a bid on an optimistic outlook for funds from operation growth, “Cisco Hikes Payout 24%! Realty Income’s Dividend Coverage Solid (Feb 2016).” Expedia’s (EXPE) and TripAdvisor’s (TRIP) quarterly reports have shares of Best Ideas Newsletter portfolio holding Priceline (PCLN) soaring, and while we haven’t been pleased with the latter’s equity price performance, we still believe Priceline is undervalued, “Investors Punish Priceline for Conservative Guidance (Nov 2015).” We believe the newsletter portfolios continue to be well-positioned to grow outperformance during the current equity market swoon, as has been outlined more recently, “Bye Bye Energy MLPs, Part II” (Feb 2016).
In other news, Boeing (BA) is under even more pressure as Bloomberg reported February 11 that it will face an SEC probe on whether the company “properly accounted for the costs and expected sales of two (787 Dreamliner and 747 jumbo) of its best known jetliners.” We made a reference to the complexities of the company’s use of program accounting, “Giddy Up – It’s Earnings Season (Jan 2016)” being “tricky” at times, and we continue to encourage investors to focus on free cash flow, as measured by cash flow from operations less all capital spending, as a measure of the cash-flow generating capacity of any entity. Though accounting is certainly valuable in its own right, the cash flow statement offers far greater insight into the actual cash-related goings-on of the business than the income statement, which is accrual-based, “Financial Analysis Seminar.” Shares of Boeing have fallen more than 10% on the trading session at the time of this writing.
We brought up the following in “Best Idea Michael Kors up 20%+ — Yawn (Feb 2016),” but a disappointing outlook from SolarCity (SCTY) reminded us of all the landmines that the newsletter portfolios have steered clear from, the solar industry is but the latest example, “Solar Not So Bright (Feb 2016).” It’s sometimes easy for readers to forget how we avoided the “crash” in biotech (IBB) through most of last year and into this one (practically nil exposure in either portfolio) and the collapse in energy, but doing so were significantly value-creating tactics even if positions weren’t in the newsletter portfolios, “The Bounce in Energy… (Jan 2016).” I personally believe that one of the most valuable aspects of any research service rests in the problems it not only helps investors solve but also in the ones it helps investors avoid. In that light, if you are still hanging onto the belief that most of the energy MLP distributions will be retained at current levels, you may be sorely disappointed, “Kinder Morgan, MLPs and the Risk of $0.”
How can we forget about the Dividend Cushion ratio, “White Paper: The Dividend Cushion Beats the Aristocrats.” In just the past couple weeks, it has flagged in advance the dividend cuts of ConocoPhillips (COP), “The Dividend Cushion (Feb 2016),” perhaps the highest profile “call,” even bigger than Kinder Morgan (KMI) and Teekay LNG (TGP), and the dividend cut of Anardarko (APC), “You Knew Anadarko’s Dividend Was at Tremendous Risk (Feb 2016).” It also warned about the risks to the dividend of Cenovus Energy (CVE), which cut its payout February 11, and while Rio Tinto’s (RIO) ratio was near parity, its qualitative ratings of POOR-VERY POOR should have been enough to raise sufficient concern regarding the health of the miner’s payout, which was also cut today (Rio Tinto had been removed from the Best Ideas Newsletter portfolio several weeks ago). Precision Drilling (PDS) also suspended its payout, “.” Though we haven’t released our dividend report on the equity, the title of its valuation report was: “A dividend cut at Precision Drilling may be nigh.”
So what are we thinking now? Well, we continue to believe patience is in order as we monitor the ongoing fall-out of the equity markets, something we had been expecting. We’re anxiously awaiting to put cash to work, “Excited About Putting Cash to Work…Eventually (Jan 2016),” but we are not compelled to rush to do so, nor are we panicking either. Keeping composure, we’re waiting for the broader equity markets to find some support, and that may not happen for some time in light of the world’s economic troubles and the collapse in crude oil prices, the latter not stimulating consumer demand at a fast enough pace to thwart overall economic malaise. The S&P 500 is only ~15% off its all-time highs in a market that has tripled since the March 2009 bottom. More selling could be coming.
Please check back to the website today for additional commentary.