Larry's Blog

This is the personal blog of Lawrence Sautter. You should consider hiring me. This blog is not investment advice. This is not a solicitation to invest.

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Tue

31

Jan

2017

When Markets get frothy...

When markets get frothy, make sure you have a balanced portfolio!

 

By Lawrence A. Sautter, 31st January 2017

 

As the financial markets generally are unpredictable, it is crucial to have a well diversified portfolio with different assets. In an environment where you have increasing interest rates, high valuations and rising inflation expectations, you could suffer a big capital loss on long-duration bonds and overvalued stocks, but during a recession the fixed income part of an asset allocation could give you the cushion you need for lower volatility and stability within your portfolio.

 

However, you want to have some kind of an inflation-hedge over time, so you will need some balanced exposure to equities that can grow their earnings and dividends over time. You can stick with Dividend Aristocrats and Dividend Kings with above average Dividend yields and Dividend growth, low payout ratios and low beta as a core holding within your equity exposure.

 

Evidence: 

 

The Dividend Aristocrats for example (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year.

 

Because we do not have a crystal ball, we need a long-term balanced portfolio-solution with bonds, equities and perhaps some alternative investments that do not correlate at all with classical assets. Diversification with some real assets like commodities (Gold and Silver) and real estate could be a further step towards an inflation-hedge. Treasury inflation-protected securities (TIPS) may be an attractive alternative to Treasuries and fixed-income assets tied to real assets such as commodities and/or real estate. Floating-rate loans would be a good alternative to cash.

 

Low volatility Dividend-stocks with low-payout ratios are especially interesting and contribute to a lower portfolio volatility and offer higher real income. They have produced excellent risk-adjusted returns and historically seen smaller drawdowns during recessions.

So for uncertain times, it is safer to have a balanced portfolio versus a bond portfolio, especially when central banks follow a Zero-Rate or Negative-Rate policy the downside risk for bonds is capital loss and inflation risk looming around the corner.

 

 

Just have a look at this portfolio example:

 

 

You would have lost more than 9% on 20+ year treasury bonds (TLT) over the last 3 months and -3% over the last 12 months, while the low beta Dividend Portfolio managed to gain 3.9% and 9% over the same period. That’s an awesome  outperformance of 13% and 12.2% respectively with a better Sharp Ratio. 

 

1 Comments

Tue

23

Aug

2016

Are you hunting for Yield?

 

Do you have enough Real Estate exposure?

 

This Index Change is an excellent excuse to get some higher yield into your portfolio. Lower your risk, increase your diversification and get more income.

                                            

GICS Sector Change:  Effective August 31, 2016

 

Standard & Poor's Finance Sector composition will change.

The existing Finance sector will split into two Sectors:

 

 

Finance (new) and Real Estate (REITs)

 

Real estate will become the 11th equity sector within the GICS structure as of the market close on August 31, 2016. It will be elevated from its current position as an industry group within the financials sector.

Portfolios will need to be rebalanced to account for the new group. Financials now will account for a smaller portion of the index, possibly triggering substantial reallocation of resources, while the new sector, and real estate investment trusts in particular, could attract even more investor capital.

REITs have accumulated about $1.1 trillion in total market capitalization, according to the National Association of Real Estate Investment Trusts, and have become an increasingly popular tool in a yield-hungry investment world.

 

With the removal of real estate, the financials sector may become more volatile, with positive exposure to long-term interest rates.

The new real estate sector is likely to be relatively low beta, with high correlations to defensive sectors such as utilities and health care.

 

This sector may provide a new lower-beta tool for investors seeking to diversify risk or reduce their exposure to market volatility. Given that many investors have been underweight to REITs, they may want to take a closer look at their exposure to determine whether it is ade­quate given their investment goals.

Hunting for yield, a lot of investors could be rebalancing in favour of REITs and selling Banks. The Dividend Yield of REITs are very attractive at an avg. 5.7% vs. Financials with an avg. 2.1%. REITs have an excellent diversification potential and a lot of investors are underweight Real Estate. While interest rates are still very low and even negative in some countries, Real Estate is an excellent alternative to bonds and banks.

In this environment, a balanced portfolio should have at least 5% Real Estate exposure. And being underweight banks has been a great idea.

 

So before you are hunting in Emerging Markets, you can get some local developed Real Estate.

0 Comments

Sun

03

Jul

2016

What's in a name?

What’s in a Name? – Rumors about Harley Davidson

 

Lawrence A. Sautter, 3 July 2016

 

Summary

Rumors should come without surprise, especially on Fridays when options are set to expire. It keeps investors thinking over the weekend. Sleepless nights?   Imagine, markets without rumors? What a boring stock market and life it would be.

Valuation and debt. (leverage)

What’s in a name? Brand recognition and the Harley-Davidson lifestyle.

 

Shares of Harley-Davidson soared nearly 20 percent Friday, 1st July 2016 on speculation that it received a bid from private equity firm KKR.

 

Harley-Davidson and KKR declined to comment.

Valuation and debt

HOG is valued at a forward P/E of just 13.4x. The company trades at a price/sales of 1.8x and an EV/sales of 2.75x. The company is leveraged with $7 bn debt.

If the price of the acquisition would be 65$ per share or even higher, valuing the company around $11.5B or more and a 11x multiple to the Ebitda. This would imply a minimum additional 20% potential gain.

 

If you go for a fair value of $70 you would have a healthy margin of safety of approx. 22%.

What’s in a name? - Or the goodwill and value of brands, accounting for intangibles

The brand is the most valuable asset at most companies. It is also the most difficult asset to hang a dollar sign on. With intangible assets accounting for as much as 80% of market value of the S&P 500, being able to forecast the value of brands is essential to investors. Although brand value may be abstract, it is still the single most important thing about most stocks.

Goodwill is something which only arises when a business is sold and until this happens the value of goodwill is not included in balance sheet assets. In this view, goodwill is the difference between the price paid for the business and the value of its net assets at that time.

According to Interbrand, the Harley-Davidson brand is worth $5.4B (up 14% compared to last year) and it is the 79th most valuable brand worldwide.

Determine the economic value of your brand’s premium market position

When businesses get ready to sell brands, often they begin by calculating the actual economic advantage of the brand. You can assess your own economic advantage by watching two indicators:

·         Price elasticity: When your consumer demand remains high even when your prices go up, your brand enjoys pricing leeway known as favorable price elasticity. Price elasticity usually results from high brand value and usually leads to premium pricing.

·         Premium pricing: To assess your brand’s pricing advantage, determine how much extra consumers are willing to pay in order to purchase your branded product instead of the offering of a lesser-known or lesser-valued brand. This difference, multiplied by your sales volume, indicates the economic value of your premium market position.

In other words, high brand value leads to favorable price elasticity, favorable price elasticity leads to premium pricing, and premium pricing leads to higher brand equity.

 

 Adjust your result to account for future brand performance projections.

These projections include the likelihood that customers will continue to behave in a similar manner in the future, that the brand’s current economic reality is transferable to new owners, and that the brand’s momentum will continue at its current pace.

For example, if a service business commands premium pricing in large part due to the powerful reputation of the owner, and if the owner wants to sell the brand and depart the business, then the value of the price premium would likely be discounted by those considering a purchase of the brand.

When calculating the worth of a brand’s premium price position, be aware that the number you arrive at is a valuation starting point, not the finishing line. The effect of future brand-building activities, market growth or retraction trends, actions of competitors, and other market realities affect whether the value of the price premium should be adjusted upward or downward in assessing the brand’s worth.

 

"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you."

- John Stuart, Chairman of Quaker (ca. 1900)

 

On Rumors and Takeover chatter:

Always ask yourself if it is worth chasing and if you should play the news?

Would a buyout make sense? And at which price?

 

Harley-Davidson is more than a brand! However, to quantify that value is more an art than science!

 

Harley-Davidson is almost a philosophy, committed to preserving an renewing the freedom to ride.

 

 Opportunity or Challenge?  

Product evolution and innovation for loyal customers and a new generation

The motorbikes of the future with its all-electric motorbike.

 

This type of product is likely to excite a younger, environmentally friendly crowd. But only if Harley-Davidson stays loyal to it’s self and sticks to its traditional roots, keeping it’s style and myth story a life, while transforming slowly into the next generation.

Conclusion

Long term prospects look interesting. One alternative strategy would be to sell put options at a strike of 50$. For example, Nov 18 can be sold for approximately bid $2.90. This would guarantee a nice income if the option is not exercised (probability of 67%) with a yield boost of 15% annualized, and a safe point of entry if it is trading at 47.1$/share. Alternatively, it would be possible to buy call options and/or buy the shares directly on a pull-back, if you have the chance.

Not only KKR, also Honda, Suzuki and Kawasaki could be interested.

 

I whish you a very nice ride, either on the stock-exchange or enjoing your free ride outdoors. 

 

The motorbikes of the future with its all-electric motorbike. $HOG

0 Comments

Wed

29

Jun

2016

How much Gold for diversification do you need?

Portfolio Diversification with Gold 

Physical Gold, in general,  provides valuable diversification benefits and improves portfolio efficiency, even during periods of extended equity bull markets (1972-2016).

Even though gold may not provide the same efficiency benefits over stock-and-bond portfolios in the current 2009-2016 bull run, they remain an effective performance stabilizer through turbulent periods.

Gold should not be expected to outperform equity markets during protracted equity market rallies. Despite the focus on performance alone by many in the industry, Gold aims at volatility reduction, improving diversification within a portfolio and typically deliver superior long-term risk-adjusted return.

Using an asset allocation framework, the empirical evidence demonstrates that investment in Gold would have improved the portfolio efficiency of cash, bonds and equity portfolios, for any risk tolerance level, for the period 1972 - 2016.

 “When analyzing efficient allocations, we found that the optimal Gold allocation for a balanced USD portfolio lies between 5 - 20%.

Physical Gold should be looked at as sort of an insurance, you hope you never need.

 

 

6 Comments

Thu

09

May

2013

Are "quality stocks" a crowded trade?

As investors cluster around a handful of core names, you might have valuation risk

 

Not all large cap stocks are high quality, hence defensive investments. But a lot of index trackers and passive investors are crowding this segment, when the market gets worried. However, this does not mean that you cannot find value within the large cap stocks. You should not focus too much on your Benchmark and market cap weightings. Search for "quality" stocks within the whole market universe from small-, mid- to big cap stocks and globally with emerging market exposure. Concerning valuation risk, just stick to your own "quality" standards, when looking for a good company to invest for the long-term. You could look for the following characteristics:

 

1. High ROIC without accounting gimmicks or a lot of leverage.

2. Generating cash profits. (High profit margins)

3. Has predictable earnings and growing.

4. Not a natural target of regulation.

5. Owner-oriented management.

6. Understandable business model with a strong balance sheet.

7. Owns strong franchises, thus having the freedom to raise prices.

8. Low asset intensity with a lean expense structure.

9. High return on tangible assets.

10. Dominant and growing market shares in their principal products and/or service lines, long product cycles and excellent global market positioning. (strong product demand in a growing market)

 

Look for management with a record of doing what it says it's going to do and has a vision. Further management should spend on R&D and innovation.

 

Buy and stick to companies with the best global growth prospects.

 

Do your own diligent research before making any buy or sell decision.

 

Over time stocks are going to move with earnings growth.

 

You must calculate your "fair"-price you are prepared to pay for a good company and sometimes you have to wait for the price to come down first, before investing in a "quality" company. Never overpay, but do your fishing, when the weather is grey and terrible, when investors panic. This is called "bottom-fishing", when valuation risk is low and prices are attractive. www.sautterinvest.ch

Price is what you pay. Value is what you get.

Warren Buffett

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