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Scottish Secession and Opportunities in…Spain?

We are officially in uncharted waters.  The biggest macro risk right now for the markets is not the Fed or European Central Bank…or ISIS or even Vladimir Putin.  No, the biggest macro risk is the mood of Scottish voters.

Scotland’s referendum on independence from the UK will be held on September 18.  Up until very recently, the polls of prospective voters consistently predicting that the “no” camp—i.e. Scots that prefer to remain in the UK—would win by a fairly substantial margin.  But a poll released on September 7 showed the “yes” camp in the lead for the first time.

The latest compilation poll by ScotCen shows the “no” camp still in the lead, but with a week to go, it is far too close to call.

Scotland is a soggy, wind-swept country of less than six million people on an island an ocean away.  Why would Scottish independence matter to the capital markets…or to our portfolios?

Because it brings uncertainty.  No one really knows how the capital markets will react to the disintegration of one of the oldest and most sophisticated financial powers in world history…or how it might spread.

The closer Scotland comes to independence from the UK, the more Catalonia will agitate for independence from Spain…which brings back all of the uncertainties of the past four years of on-again, off-again sovereign debt crisis.

Is there a trade here?

There might be.  If a Scottish secession vote spills over into a sharp selloff in the Spanish capital markets, I would suggest using it as a buying opportunity.  Put the iShares MSCI Spain ETF (EWP) on your watch list.  I don’t necessarily expect a swoon, but I want to keep a little powder dry…just in case.

Alternatively, if you prefer to buy individual securities, I like Spain’s banking juggernauts Banco Santander (SAN) and BBVA (BBVA).  Both have a global footprint and are in position to take advantage of the ECB’s coming flood of monetary stimulus.

Again, I don’t necessarily expect to see a major correction.  But if Scottish jitters send Spanish equity prices down a quick 10%, I recommend snapping up a few shares.  Plan to hold for 6-12 months and use a relatively tight 10%-15% stop loss.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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How Does Discover Stack Up Against Other Credit Card Stocks?

Apple (AAPL) made news this week with a leaked rumor of a deal with credit card giants Visa (V)MasterCard (MA) and American Express (AXP) that would transform the new iPhone 6 into a viable mobile wallet.

Conspicuously absent was any mention of the third-largest American credit card brand by cards in circulation, Discover Financial Services (DFS), operator of the Discover and Pulse networks.

And yes, I said “third.”  Despite its lower profile, Discover has more cards in force than the much older and more prestigious American Express: 61 million vs. 52 million, respectively, based on latest head-to-head comparisons. Though based on purchase volume, Discover remains a distant fourth.

Investors in DFS stock shouldn’t fret about the Apple snub; as I explained in my last article, I expect the iPhone mobile wallet to have a negligible effect on credit card transactions volumes. Far more significant is the fact that Discover has almost entirely closed the acceptance gap between itself and Visa and MasterCard, at least in the United States.  The number of merchants accepting Discover had grown by 24% since 2009 to 9.2 million at the end of last year.  Visa and MasterCard are accepted by about 9.4 million merchants. At least within the United States, it is now rare to find a card-swiping merchant that does not accept Discover.

Furthermore, Discover recently tied with American Express as card with the highest customer satisfaction, according to J.D. Power’s rankings.  The survey measured factors such as card terms, rewards programs and customer service. Discover’s leap to the top is significant when you consider that American Express sells itself as a prestige card for business and high-net-worth consumers.

So, who are all of these Discover cardholders?

Using data from ESRI, Pam Allison did an interesting study of the demographics of Discover cardholders.  True to its origins as a Sears (SHLD) product, Discover tends to be most popular in the prairie and rustbelt states of the Midwest and tends to be popular with an older, more conservative segment of the population—the segment of the population you would most expect to see shopping at a local Sears store.  From a risk management perspective, that’s not a bad thing; consumers in this profile are less likely to get overextended and become delinquent in their payments.  Of course, this conservatism also makes them less likely to do a lot of transaction volume.

Writing for MarketWatch, InvestorPlace.com editor Jeff Reeves recently called Discover stock “the best financial stock to buy today” based on its strong earnings growth, loyal customer base, shareholder-friendly dividend boosts and share buybacks, and its recent diversification into non-credit-card businesses such as student loans and mortgages.

I would add that Discover is also quite cheap, trading for 13 times trailing earnings and 11 times forward earnings—or about half the valuation of rivals Visa and MasterCard.

Granted, Discover—like American Express—is an actual bank with all of the risks associated with it.  Visa and MasterCard are essentially tollbooth operators; they are payment systems rather than lenders, and as such have higher margins and no credit risk.

So, all else equal, Visa and MasterCard should trade at a premium to Discover and American Express.  Though a gap as large as today’s would seem a little extreme.  Furthermore, Discover is significantly cheaper than American Express, which trades for 18 times trailing earnings and 15 times forward, and this despite American Express having significantly lower margins.

Discover cannot match MasterCard or Visa internationally, and both have made expansion in emerging markets a major strategic focus. But of the four major credit card stocks, Discover would seem to be the best overall bargain by a wide margin.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Apple’s New Mobile Wallet: Who Wins, Who Loses?

Apple (AAPL) is expected to make waves this month with the launching of the iPhone 6—and a version of the phone comparable in screen size to Samsung’s (SSNLF) popular Galaxy line running Google’s (GOOG) Android operating system.  Given the similarity of app selection and performance between high-end iPhone and Android models, screen size has long been a major differentiator; it will be interesting to see how Samsung responds in its next release.

But Samsung and Google are not the companies looking at stepped-up competition from Apple when the iPhone 6 is launched.  Apple has reportedly inked a deal with Visa (V), MasterCard (MA) and American Express (AXP) that will potentially make the iPhone far more viable as a mobile wallet. That’s bad news for EBay’s (EBAY) PayPal and for newer upstarts like Square, both of which had started to make inroads of late.

How will the new wallet work? You would essentially store your credit card details in your iPhone, allowing you to leave the plastic cards at home.  Your phone would communicate with the merchant’s cash register via a near-field communication (“NFC”) chip, and you would use your fingerprint to verify your identity.

Apple’s new mobile wallet is really nothing new. Already, various credit card issuers use NFC chips that allow you to “tap” your card rather than swipe it.  And Google has had a similar NFC-based mobile wallet product for years, though merchants have been slow to adopt it due to the cost of upgrading their systems and limited demand from consumers.

Let’s dig a little deeper into the details to see who stands to gain or lose the most.

Credit Card Issuers

One seemingly obvious beneficiary would be the credit card companies, though we need to see more details about the deal to draw any real conclusions.  Already, middle and upper-income Americans use their credit and debit cards for substantially all of their day-to-day spending, and anyone using Apple’s mobile wallet is already using a credit card.  It’s hard to imagine legions of cash-only Americans suddenly making the jump to electronic payments because their iPhone offers a snazzy new app.

Nationwide 66% of all point-of-sale transactions are made with plastic.  Small businesses have historically been less likely to accept plastic due to high costs and the need for expensive and cumbersome card readers.  But with Square and PayPal Here and their competitors now able to turn any smartphone or tablet into a payment terminal, it’s now not uncommon to pay your babysitter or the neighborhood ice cream man with a credit card.

Furthermore, we can assume that Apple will take some share of the swipe fees.  We have no information on what sort of fees would apply to merchants, but unless the fees are higher on the mobile wallet—which would discourage retailers from accepting it—it’s hard to see Visa, MasterCard or Amex really benefitting from this.  The only real positive I see would be the security benefits.  Apple’s fingerprint technology would make it harder for an unsophisticated thief to steal your card and go on a shopping spree.

Merchants and Consumers

For consumers, the benefits will be negligible at first. It will be years before mobile wallets become accepted broadly enough for you to leave your plastic at home. So even if you plan to use your mobile wallet everywhere you can, you’re still going to have to lug around a physical card.  Longer term—if it catches on—you might enjoy as slightly thinner wallet and have less risk of having your card stolen.    But for the foreseeable future the benefits are marginal at best.

As for merchants, unless the fees are drastically lower—and we’ve seen no indication that this will be the case—there is very little upside.  Upgrading payment systems will be an immediate expense with very little obvious benefit.  It’s hard to see a would-be customer going to one of your competitors because they allow payment with an iPhone whereas you require a plastic card.

5-10 years from now, the story could be different.  I rarely have cash in my wallet, and as a result I often avoid restaurants and parking garages that do not accept credit cards.  We could eventually have a similar situation with mobile wallets, but that might be a decade from now.

Mobile Payments Competitors

I would saw that the parties with the most to lose would be newer non-bank payment systems, such as Paypal or Square.  Some retailers—including giants like Home Depot (HD)—allow you to pay with PayPal.  Likewise, Square scored a major coup two years ago when it partnered with Starbucks (SBUX), though that deal ran out of steam once the new wore off.

A successful mobile wallet that used existing credit and debit accounts would make it harder for an upstart like Paypal or Square to emerge as a new standard.  Even in the absence of a successful mobile wallet scheme, I wouldn’t be surprised to see Square out of business and PayPal relegated to a niche market within five years.

What about Google or Amazon (AMZN), both of which offer rival mobile wallet platforms?

Counterintuitively, Apple might actually help them by pushing broader acceptance.  iPhone users can be a demanding lot, and if their enthusiasm for mobile wallets spurs merchants to accept them, this would potentially help all other NFC-based mobile wallet providers.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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What I Look For in a Good Investment

If you’ve been investing very long, you no doubt understand the importance of having a solid system in place.

By “system” I’m not referring to a secret black box or to technical trading rules, though both can be valid approaches in the right hands.  I am speaking far more broadly.  Whether you are a value investor, a technician or a data-crunching quant, consistently making good returns in the market depends on having basic investment guidelines in place.

Today, I’ll share with you the basic characteristics I like to see in place when buying a stock.

1. Is the stock on the right side of a durable macro trend?

This is the very core of my investment process and, naturally, what I spend the most time writing about.  A durable macro trend is an economic inevitability driven by forces too powerful to stop.  Demographic trends, such as the aging of the Baby Boomers or the family formation of the Millennials, fall into this category.

Why do macro trends matter?  Because, to borrow an old expression, a rising tide lifts all boats.  If you are on the right side of a macro trend, the rest of the investing process becomes much easier and you have a much higher probability of success.

2. Is the stock attractively priced?

That sounds good. But how do you define value?

My methods here will vary slightly from stock to stock.  Often, I will take an income statement approach, comparing the stock’s current price to its historical or expected earnings, cash flows, or sales.  This might mean looking at the current P/E ratio or looking at a longer-term indicator such as the cyclically adjusted P/E ratio, or “CAPE.”  Sometimes, rather than focusing on the income statement, I’ll focus on the balance sheet, looking for assets that are undervalued on the books.  In this kind of deep value investing, you can often find companies whose individual parts are collectively worth far more than the current value of the stock.

3. Is management shareholder friendly?

We want to own companies with management teams that know their place.  They are employed for one—and only one—reason: To make money for you, the shareholder.

One of the best signs that management takes its obligation to shareholders seriously is the payment and consistent raising of a regular dividend.  But well-timed stock buybacks can also be an excellent way to reward shareholders and without the tax complications of dividends.  But the key here is that buybacks must actually reduce the number of shares outstanding and must not be used to “mop up” new shares issued via executive or employee stock options.

4. Is insider trading/ownership favorable?

In an ideal stock investment, you are on the same side of the trade as the key personnel running the company.  A “perfect stock” will have both high insider ownership, possibly by the company’s founder, and consistent new purchases by insiders.

The key here is “skin in the game.”  You want a management team of shareholders with their interest aligned with your own.  If a CEO has a large share of his or her personal net worth in the company they are managing, they are more likely to run it prudently and with a long-term horizon.

As I said, a “perfect stock” will have both high current ownership by insiders and regular open-market purchases, but “perfect” insider stocks are rare gems.  For the most part, I can tolerate a benign insider picture in which insiders are neither aggressive sellers nor buyers.  I’m happy if I see either favorable ownership or favorable new buying, and I am downright thrilled if I see both.

This article is an excerpt from the July issue of Macro Trend Investor.  If you’re not reading Macro Trend Investor, consider trying a one-month trial for $9.99.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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The Bourbon Boom: Is It Investable?

Bourbon whiskey lovers rejoice: Production of your poison of choice has risen to levels last seen in the 1970s.

For whiskey to legally meet the definition of “straight bourbon,” it must be aged a minimum of two years in new charred oak barrels, and many of the high-end, small-batch bourbons so popular with the hipster crowd are aged significantly longer. For example, Maker’s Mark — one of Suntory’s (STBFY) higher-end brands — is usually aged about six years.This is definitely good news for bourbon drinkers. As recently as this past May, I reported news that I found to be deeply disturbing: we are drinking bourbon faster than the distillers can make it. And because bourbon — unlike, say, vodka or gin — has aging requirements, shortages cannot be immediately met by ramping up production.

So, a ramping up of production today is essentially a bet that today’s high demand for “traditional” spirits like bourbon is a sustainable trend and not merely a passing fancy of fashionable drinkers. Only time will tell whether this proves to be true, but we’ve seen drinks juggernaut Diageo (DEO) make a similar bet on scotch in recent years. In 2012, Diageo embarked on major five-year expansion plan, plowing $1.5 billion into new production facilities in Scotland.

And the aging period for scotch is significantly longer than that of bourbon; Diageo’s Johnnie Walker Black Label — a respectable though certainly not spectacular brand — has a minimum aging requirement of 12 years. (Diageo, by the way, has also jumped into the bourbon race with its heavily promoted Bulleit Bourbon.)

My bet is that the bourbon boom has longer to run. If you recall, the boom in vodka popularity steadily gained ground throughout the 1990s and 2000s, reaching its climax with the success of ultra-premium brands like Ketel One and Ciroc. If the past is any guide, the bourbon renaissance is still in the early stages.

The question is, is there any way to profit from it?

The Bourbon Boom

If you’ve ever dreamed of turning a moonshine still into a respectable business, this would certainly be the time. Just as microbreweries have become popular eating and drinking establishments, so have microdistilleries. And contrary to popular belief, you don’t have to distill your product in the state of Kentucky in order to legally call it bourbon; anywhere in the United States will suffice.

Of course, most of us lack the time, patience, and backwoods credentials to distill our own bourbon. And unfortunately, there aren’t too many pure bourbon plays left among alcohol stocks.

The two biggest alcohol stocks for bourbon — Diageo and Suntory — are massive multinational spirits companies, and bourbon makes up a relatively small part of their drinks portfolio. Suntory is the owner of the iconic Jim Beam brand, as well as Maker’s Mark, Knob Creek and even the stodgy Old Crow. But collectively, all of Suntory’s bourbon brands make up less than 10% of Suntory’s current revenues. And Diageo’s exposure to bourbon is so small as to be almost nonexistent.

What about indirect investments, such as in barrel makers (or “coopers” for the English majors out there)? Unfortunately, most coopers are relatively small and are privately held.

Are There Any Alcohol Stocks Worth Buying?

So, what alcohol stocks are we left with?

At the risk of offending purists, the closest thing to a pure play on “bourbon” would be Brown-Forman Company (BF-B), the maker of the iconic Jack Daniels Tennessee Whiskey.

I should be clear: Jack Daniels is not bourbon. It’s Tennessee Whiskey. But for most drinkers, bourbon and Tennessee Whiskey are close enough to be interchangeable, and Tennessee whiskey has enjoyed a healthy boom alongside bourbon over the past decade.

Alas, Brown-Forman is a very expensive stock at today’s prices, trading hands at more than 30 times trailing earnings and 25 times expected forward earnings.

That’s too expensive for my tastes. At, say, 20-22 times earnings, I would consider Brown-Forman attractive. But at today’s prices, your money might be better spent on its whiskey rather than its stock.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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