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Visa, MasterCard Still Charging Forward

Credit card rivals MasterCard (NYSE:$MA) and Visa (NYSE:$V) released earnings on Wednesday, and both knocked the ball out of the park.

We’ll start with MasterCard.  This smaller of the two rivals enjoyed earnings growth of 25% in the first quarter and a 17% increase in worldwide purchase volumes.  Not to be outdone, Visa announced a 30% rise in earnings per share on an 11% rise in payments volume.

I admit, I’m a little partial to Visa.  The stock was my pick last year in InvestorPlace’s “10 Stocks for 2011” contest, and it crushed the competition.  (Alas, Turkcell (NYSE:$TKC), my pick for 2012, is off to a slower start—for now).

But as great as Visa’s performance has been over the past year and a half, MasterCard has been the better stock.

As a smaller, nimbler company, MasterCard’s growth has been more impressive than Visa’s in recent years, and MasterCard suffered less fallout from the Dodd-Frank Durbin Amendment fiasco that sought to limit the fees charged to merchants for debit cards.  Yet I contend that Visa remains the better long-term buy for reasons I’ll address shortly.  First, I’ll throw a bone to MasterCard bulls.

One of the provisions of the Durbin Amendment allowed merchants to choose the network that they used to process debit card transactions.  As the bigger of the two networks, Visa had far more to lose than MasterCard, and MasterCard has profiting handsomely at Visa’s expense.  Visa’s debit volume grew by only 2% for the quarter, while MasterCard’s grew by over 20%.  MasterCard will likely continue to nip at Visa’s heels for the foreseeable future in the U.S. debit market, which is the single most important segment of Visa’s business.

MasterCard and Visa have both benefitted from improving consumer sentiment in the United States and, outside of Europe, a healthier global economy.  But even if consumer spending growth is tepid in the years ahead, there is every reason to believe that both MasterCard and Visa can continue to see spectacular growth in purchase volumes (both credit and debit).

The world is going cashless.  Perhaps nothing illustrates this more than the various new iPhone credit-card-swiping apps.  Yes, next time you borrow $20 from your buddy, you can pay him back using nothing more than a credit or debit card and an iPhone.  Gotta love it.

Yet despite the seeming ubiquity of credit and debit cards, roughly 40% of all transactions are still carried out by cash and paper checks in the United States.  Remember, the United States is the most heavily penetrated of all major markets, so the percentage is much lower virtually everywhere else in the world.

This brings me to my primary reason for favoring Visa over MasterCard—Visa is far better positioned to profit from the rise of the emerging market consumer.

Visa already gets nearly half of its revenues from overseas, and most of this is from emerging markets. As incomes rise in the developing world, consumers have far more discretionary income than they used to, and they are spending a greater percentage of that with a swipe of plastic .

Alas, I would be remiss if I didn’t mention one big negative for Visa.  During the earnings release conference call, Visa announced that the U.S. Department of Justice was investigating the company for potential anti-trust violations related to debit card processing.  It’s too early to say how serious the investigation is or what Visa’s potential liability is, but the news sent the share price down sharply after hours.

At this stage, I do not see the investigation having a significant impact on Visa’s business, and I recommend using any weakness in the share price as an opportunity to accumulate more shares.

Disclosures: Visa is held by Sizemore Capital clients.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What Says the Big Money?

It’s that time of year again, dear reader.  Twice per year, Barron’s does a survey of large professional money managers to get their outlook for the market (see “Reason to Cheer”).

I get a lot of value out of reading the survey results, but not necessarily for the reasons you might think.  This is a topic I first covered for Market Watch late in 2011 (see “Big Money Looks Bullish”).

It generally pays to invest with the Big Money.  After all, these are some of the best and brightest minds in the business, and they have the ability to move the market.  But even professionals can succumb to herding behavior at times.  When it appears that “everyone” is on the same side of a trade, surveys like these can be useful for crafting contrarian bets.  Ideally, you like to see a general consensus among the Big Money but not quite unanimity.

So what says the Big Money today?

They are more bullish than they were six months ago, which makes sense when you consider that the survey was done before April’s volatility put a damper on the first-quarter rally.  55% of those surveyed were “bullish” or “very bullish” about the market’s prospects through June 2013.  31% were “neutral,” and only 14% were “bearish” or “very bearish.”

This is the sort of bullish consensus I like to see; the Big Money is optimistic without being euphoric. 

Sentiment towards other asset classes tells a very different story, however.  81% of the investors surveyed were bearish on U.S. Treasuries.  17% were neutral, and only 2% were bullish.

Normally, skewed sentiment like that would get my pulse racing, and I would be tempted to take the other side of that bet.  2% bullishness would suggest that there is “no one left to sell,” in trader parlance.  Unfortunately, with Treasury yields what they are, there is simply not enough upside potential to make the trade worthwhile.  Even if the 10-year note were to fall in yield from its current 1.96% to something along the lines of 1.50%, this would not be a particularly profitable trade unless you used reckless amount of leverage.  Some trades are best left alone.

Bullishness is surprisingly high for Latin American stocks, at 53%.  39% are neutral on the region, and only 8% are outright bearish.

Interestingly, the Big Money is not particularly bearish on Europe, despite Spain’s recent travails.  56% were neutral on the region, and 27% and 17% were bullish and bearish, respectively.  It would appear that the Big Money agree with Sizemore Capital’s view that the attractive valuations on offer in Europe more or less compensate investors for the short-term risks they face in investing there (Sizemore Capital has a large allocation to Europe in its Tactical ETF Portfolio).

Returning to the U.S. market, the Big Money appears to be a bit torn with respect to Apple (Nasdaq:$AAPL).  Apple made the “favorite” list, but was also ranked as one of the eight most overvalued stocks.  Go figure.

At the sector level, I see some evidence of mild herding (see chart).  Technology, presumably led by Apple, was picked as the best performer for the next 6-12 months by 31% of respondents and as the worst by none.  Meanwhile, utilities were picked as the worst performer by 30% and as the best by only 3%.

During last year’s volatile second and third quarters, the utilities sector performed extraordinarily well relative to the rest of the market.  Given the low expectations for the sector, could another solid run be a possibility?

Given investor hunger for yield these days, utilities could easily enjoy a nice run in an otherwise choppy market.  Investors wishing to test this theory can buy shares of the Utilities Select SPDR (NYSE:$XLU).  It yields a handsome 4% in dividends and should provide some measure of protection should the market experience another wave of volatility.

Disclosures: Sizemore Capital has no position in any securities mentioned. 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Sizemore Capital Allocation Change: Dividend Appreciation

Sizemore Capital is making a strategic allocation shift for all ETF portfolios with U.S. large cap exposure.  This affects the Tactical ETF Portfolio and the Strategic Growth Allocation.

To be consistent with Sizemore Capital’s focus on dividend growth, we are eliminating our long-term positions in the iShares S&P 500 Index (NYSE:$IVV) and replacing them with the Vanguard Dividend Appreciation ETF (NYSE:$VIG). 

The Vanguard Dividend Appreciation ETF tracks the performance of the Dividend Achievers Select Index, which consists of U.S. stocks that have long history of raising their dividends.  Every stock in the portfolio must have raised its dividend for a minimum of 10 consecutive years.

Much of our research and investment in recent years has focused on income and income growth, and for good reason.  Capital gains can be ephemeral, and the only way that investors can realize their returns is by selling shares.  Rather than enjoying the milk in the form of dividends, you end up slaughtering the cow. And continuing this analogy, once the cow is gone investors are left with nothing to eat.

I should note that both the Tactical ETF Portfolio and Strategic Growth Allocation are long-term growth models with current income as only a secondary objective. But even for growth-oriented investors with years or decades until retirement, a dividend-growth strategy makes sense, and the Vanguard Dividend Appreciation ETF is very consistent with a growth strategy.

Remember, the Vanguard Dividend Appreciation ETF does not have current income as its primary objective.   With a current dividend yield of 2.0%, it doesn’t pay significantly more than the S&P 500’s 1.9%.

Its focus on dividends is instead a focus on quality.  When a company raises its dividend, it sends a powerful message that management sees better days ahead. The discipline required to consistently pay a dividend also has a way of discouraging management from wasting shareholder money on quixotic empire building or on overpriced mergers that fail to deliver value.  It forces management to be efficient.  And importantly, it also helps to keep management honest.  Paper earnings can be manipulated, but dividends have to be paid in cold, hard cash.  Dividends don’t lie.

My good friend Albert Meyer of Bastiat Capital refers to his own strategy as “an index fund, but without all the rubbish.”  (It sounds classic in his professorial South African accent.)

This is how I like to think of the Vanguard Dividend Appreciation ETF.  With a portfolio turnover of only 14% per year and a management fee of only 0.13%, VIG enjoys the best aspects of an index fund—tax and fee efficiency—but without the baggage of the lower-quality companies that bog down most indices.

The Strategic Growth Allocation currently already has a position in the iShares Dow Jones Select Dividend ETF (NYSE:$DVY). It is fair to ask whether an additional position in the Vanguard Dividend Appreciation ETF is redundant.  But to this question, I would give an emphatic “no.”

DVY is primarily an income-focused ETF with a heavy allocation the utilities sector.  VIG is a growth-focused ETF with greater exposure to the consumer and industrial sectors.  Though they both have “dividend” in their titles, their strategies are vastly different (see “Dividend ETFs for Growth and Income”).

Disclosures: IVV, VIG and DVY are positions in Sizemore Capital accounts.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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5 Boring Stocks, 5 Sexy Yields

Investing is not all that different from choosing a spouse.  At some point in every man’s life, he has to make a choice.  Does he go for the alluring but volatile young vixen who will ultimately put him in an early grave, or does he take the more rational course of action and choose a mature, dependable companion to spend his life with?  (Women face similar choices themselves; to marry the handsome but unpredictable young buck or the more stable—if somewhat boring—workhorse?).

It’s nice if you can have it all, of course; romance and stability in a partner.

For investors, much the same can be said about stocks.   Sexy “glamour” stocks—and the heartburn they often bring—are best left to shorter-term traders.  Bonds offer stability but nothing in the way of excitement.   If you are looking for something in the middle—predictable, long-term wealth building—dividend-paying stocks are likely your best option.  They allow you reach your financial goals while still managing to sleep at night.

Today, I’m going to recommend five boring stocks with sexy yields.  We’ll start with that most mundane of American retailers Wal-Mart (NYSE: $WMT).

Wal-Mart is about as dull as it gets as a company; the world’s largest retailer of the basic “stuff” of modern life—everything from food to build-it-yourself furniture.

But Wal-Mart also  happens to be a dividend-growing dynamo.  In 2002, just 10 years ago, Wal-Mart paid $0.075 per quarter in dividends.  Today, it pays $0.398—an increase of more than five times.

With Wal-Mart’s domestic expansion slowing in the years ahead (and thus needing less cash for investment), I expect the company to continue aggressively raising its dividend.  The stock currently yields an attractive 2.7%, which is substantially more than what most bonds pay.

Next on the list is consumer products giant Kimberly-Clark (NYSE:$KMB).  If you thought it was impossible for a company to be more boring than Wal-Mart, then you failed to consider Kimberly-Clark.  The company manufactures and sells diapers, Kleenex, and other basic products you might find in your bathroom.

But like Wal-Mart, Kimberly-Clark is a dividend-raising dynamo.  Over the past decade, its quarterly dividend has risen from $0.30 to $0.74; not too shabby when you consider what a volatile decade it has been.  Kimberly-Clark currently yields 3.7%.

I can’t mention Kimberly-Clark without mentioning its much larger rival Procter & Gamble (NYSE: $PG).  Chances are good that half or more of the products in your bathroom and laundry room were made by Procter & Gamble, at least if you are an American (overseas, rival Unilever (NYSE:$UL) tends to dominate).  They make Crest toothpaste, Gillette razors, Charmin toilet paper, and Pampers diapers, among many, many other brands.  This is a company that Warren Buffett has dabbled in for years, and it’s easy to understand why.  Demand for its products is stable, and its brands have incredible intangible value.

Over the past decade, P&G has raised its quarterly dividend from $0.19 to $0.562; again, not a bad run.  The stock currently yields 3.5%.

Moving on, let’s take a look at the oh-so-boring world of natural gas transportation.   On this front, I recommend Williams Companies (NYSE: WMB).

Stop for a minute and think.  Can you think of anything more boring than natural gas transportation?  Yeah, me neither.

But William’s dullness is its strength.  Natural gas pipelines are stable, predictable businesses, regardless of what happens to the price of gas.  And if anything, the current glut in natural gas supplies should bode well for pipeline companies like Williams.  Cheaper prices encourage higher consumption.

Williams Companies is an IRA-friendly way to get access to the master limited partnership Williams Partners (NYSE:$WPZ).  For tax reasons that go beyond the scope of this article, master limited partnerships cannot be held in IRA accounts.  But as a corporation with a large ownership interest in a partnership, WMB can.

Williams Companies  currently yields 3.1%, and I expect this to rise substantially over time.

Finally, I want to put out one recommendation that is likely to get your pulse racing a little more than the rest: Spanish telecom juggernaut Telefonica (NYSE: $TEF).

There is little more boring than a telecom utility.  While you may “ooh and ah” over your latest iPhone, you generally spend very little time thinking about the company that provides cellular service to it.

Telefonica would have to be considered “riskier” than the rest of these recommendations by virtue of being domiciled in Spain.  But with a yield of over 11% at current prices, I consider it a risk worth taking.

Telefonica gets nearly half of its revenues from the fast-growing markets of Latin America, so continued recessionary conditions in Spain do not present an undue risk to Telefonica’s business.  Disruptions to the European financial system could result in the company cutting its dividend to preserve cash, but I consider this unlikely and, again, a risk worth taking for the potential rewards.

Disclosures: All securities mentioned are holdings of the Sizemore Capital Dividend Growth Portfolio.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Investing in Switzerland

Switzerland will always have a special place in the hearts of doom mongers.   For decades its franc has been the “go to” safe haven currency when the world got dicey.   The meticulous Swiss gnomes have always had a well-deserved reputation as prudent stewards of wealth—and a well-deserved reputation for discretion and privacy.  And importantly, their policymakers had little tolerance for inflation.

Investors with long memories will recall that the Swiss franc was the currency of choice in the 1970s for Americans looking to escape rampant inflation (and perhaps leisure suits and disco as well).  Outside of gold Krugerrands, few other asset classes offered much in the way of protection.

Like shag carpet and other novelties from the 1970s, Switzerland is popular again.  It’s easy enough to understand why.  With the world—and particularly Switzerland’s backyard of Europe—in a prolonged period of on-again / off-again crisis, the Alpine country is viewed as a refuge.

Consider the strength in recent years of the CurrencyShares Swiss Franc Trust (NYSE:$FXF).  As the European sovereign debt crisis really started to heat up last year, the franc almost went parabolic vs. the and euro.  Unfortunately, the strength of the currency was killing exports and destabilizing the Swiss financial system.  To the detriment of investors and traders who had been piling into the franc as a haven, the Swiss National Bank came down like a hammer to weaken the value of the franc.  Yet even after the move, many trust a devalued franc over a fragile euro or dollar.   I can’t say I that don’t understand.

There is a lot to like about Switzerland as an investment haven.  It is home to some of the world’s finest multinational companies, including Sizemore Investment Letter favorite Nestle (Pink:$NSRGY), pharmaceutical heavyweights Roche(Pink:$RHHBY) and Novartis (NYSE:$NVS) and engineering juggernaut ABB Ltd (NYSE:$ABB), which is the major competitor to Sizemore Investment Letter recommendation Siemens (NYSE:$SI).

Perhaps unfortunately, it is also home to two of the largest international banks in the world, UBS AG (NYSE:$UBS) and Credit Suisse (NYSE:$CS), two institutions that gave country quite a bit of heartburn during the 2008-2009 meltdown.

Investors looking for blanket exposure to Swiss stocks could consider the iShares MSCI Switzerland ETF (NYSE:$EWL).  It is a basket of Switzerland’s biggest and most influential companies.

A note of warning on this ETF, however.  If you buy EWL, you had better like Nestle, as the food and consumer products company makes up nearly a quarter of the portfolio.  Health care stocks collectively chip in 30 percent as well.  So, well over half of the ETF is investing in defensive (if not outright boring) sectors.    This is not necessarily bad, of course.  It’s just something to consider.

Nestle has been hit in recent years by rising commodity costs and the trend of consumers trading down to generic food products.  Even so, the company has a fantastic foothold in virtually every major emerging market country, and I consider Nestle about the closest thing to a “buy and forget” company available today.  It helps that the company pays a solid dividend of 3.5 percent.

Nestle recently made a splash by announcing that it would buy Pfizer’s (NYSE:$PFE) baby food business for $12 billion.  The purchase fits well with Nestle’s existing product lines, and it further strengthens its position in emerging markets.   Roughly 85 percent of the unit’s revenues come from emerging markets, and I would expect that number to only increase with rising incomes and livings standards.

On April 19, management announced that the company would be raising the dividend by CHF 1.95.  Expect to see more of this in the years ahead.  Nestle is not a “home run” stock, but it should be a steady producer for decades to come.

ABB also announced earnings in April, with mixed results.   Revenues grew by 8 percent  for the quarter , but new orders from China—one of ABB’s key markets—were down 35 percent.   ABB, like Siemens, is a fine company with great long-term prospects in building out the infrastructure that emerging markets need to rise to developed-world status.  But with budgets tight and markets jittery, the next year may prove to be challenging.

The Swiss banks, like their American and European counterparts, also face a rocky road ahead.  Regulators are squeezing risk out of the system and banks are shrinking their balance sheets and reducing leverage—all of which is good for long-term stability.  But it’s not good at all for bank profits.

Credit Suisse revealed late the month that earnings had improved over the last quarter but were down substantially from the first quarter of last year.  Profits were 44 million Swiss francs, down from 1.1 billion the first quarter of 2011.

Overall, I continue to like Swiss stocks in general and Nestle in particular.   But given the nonexistent yields and the SNB’s recent tendencies to aggressively lower its value, I’d stay away from currency positions in the franc.

Disclosures: Charles Sizemore is long Nestle.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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