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“Sell in May, Go Away” Is Terrible Advice

The language of Wall Street is infused with pithy maxims.  “Don’t frown; average down.”  “The trend is your friend.”  And perhaps most relevant to us at this time of year, “Sell in May; go away.”

The last one is perhaps the most dangerous because, at least for the past several years, it has held true.  Since 2010, we’ve had strong first quarters followed volatile, choppy springs and summers.

VIDEO: See Charles discuss “Sell in May” with InvestorPlace’s Jeff Reeves.
 

But it is important to not be fooled by randomness here or, more accurately, be swayed by the recency bias.  I’ll never forget a simple study that money manager Ken Fisher published years ago in The Only Three Questions That Count.  Using data back to 1926, Fisher calculated the average return of the S&P 500 by month.

What did he find?  Well, as it would turn out, May happened to be one of the least profitable months, with an average return of 0.30%, though February, at 0.26%, was lower.  The only negative month was September.  Interestingly enough, October—which was the month of the 1987 Crash and the 1929 Crash—had an average return of 0.62%.

Yet the summer months of June, July and August were three of the most profitable months of the year, with returns of 1.37%, 1.87%, and 1.25%, respectively. July was actually the most profitable of all months; even December and January, the two months believed by many investors to be the best, were lower at 1.78% and 1.69%, respectively.

My point by now should be clear: “Sell in May, go away” is a losing strategy if you are basing it on seasonality alone.  In any given year, there could be legitimate reasons for selling in any particular month, but selling because it is a particular month is sloppy analysis that will lead to sub-par results.

So, what about this year?  After the great start we had, I’m not expecting much from the next quarter.  And in fact, given that the market has traded sideways since mid-March, you could argue that we are currently in a mild correction.

But any weakness here should be used as an opportunity to put new funds to work.  There is never an “ideal” time to invest, but I like to see valuations that are modest and sentiment that is lukewarm at best.  Today, both of these conditions are in place.

I’ve recommended income investments such as dividend paying stocks and master limited partnerships as the best way to generate returns in a sideways market.  If you haven’t loaded up your portfolio with them yet, do so on any weakness.  For “one-stop shops” I continue to like the Vanguard Dividend Appreciation ETF (NYSE:$VIG) for dividend-paying stocks and the JP Morgan Alerian MLP ETN (NYSE:$AMJ) for MLPs.  I own both personally and in client accounts.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. This article first appeared on TraderPlanet.

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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Are Coke and Pepsi the New Big Tobacco?

Earlier this year, I commented that semiconductor titan Intel (Nasdaq:$INTC) was my favorite tobacco stock.

I said this tongue-in-cheek, of course.  I am aware that Intel designs and manufactures microprocessors, not cigarettes.  But my point was simply that slow-growth (or even no-growth) investments, such as tobacco stocks, can be wildly profitable under the right conditions:

  1. There should be substantial barriers to entry for new competitors (what Warren Buffett likes to call “moats.”)
  2. The company should be financially healthy (strong balance sheet, manageable debt, etc.)
  3. Management should be committed to rewarding shareholders with rising cash dividends and, to a lesser extent, share repurchases.

But most importantly, even if all of these other conditions are met, the stock must be cheap.  Remember, if this is an industry in decline, you cannot pay top dollar for the stock and expect to have decent returns going forward.

Big Tobacco giants such as Altria (NYSE:$MO), Reynolds American (NYSE:$RAI) and Philip Morris International (NYSE:$PM) easily pass the first three conditions.  All benefit from the moats encircling the tobacco business (it would be all but impossible to start a new cigarette company today), all are financially healthy, and all solid dividend payers and growers.

Yet none is particularly cheap at the moment; all trade at a premium to the S&P 500’s earnings multiple.

Big Tobacco’s rich valuations these days are particularly noteworthy because tobacco is not just any run-or-the-mill no-growth industry.  It’s also a vice industry and perhaps, outside of firearms, the biggest of all social pariahs.

In many American cities, cigarette smoking is for all intents and purposes illegal.  Smoking in indoor public spaces like bars and restaurants is not allowed, and in the most aggressive cases (such as New York City) even smoking in outdoor public parks is prohibited.  But even where smoking is less persecuted, it’s not exactly welcome.

And this brings me to the crux of this article.  Princeton professor Harrison Hong and University of British Colombia professor Marcin Kacperczyk published an insightful paper in 2005 titled “The Price of Sin.”

The professors showed that social stigmas against investing in vice industries such as tobacco and firearms cause the stocks of companies in these industries to be depressed due to lack of institutional ownership.  No college endowment fund, foundation, or pension plan wants to be labeled a “merchant of death.”  As a result, vice stocks tend to be priced as perpetual value stocks and thus deliver market-beating returns over time.

So…by this rationale, wouldn’t Coca-Cola (NYSE:$KO) and Pepsico (NYSE:$PEP) be vice investments too?

New York Mayor Michael Bloomberg certainly seems to think so.  About the only thing he has fought as hard as tobacco is super-sized sodas.  His controversial ban on all sugary sodas larger than 20 ounces in NYC was tossed out in court, but he’s not throwing in the towel just yet.  His war against Coke and Pepsi will be a war of attrition.

And Bloomberg is not alone.  First Lady Michelle Obama has actively campaigned against soda consumption as part of her anti-child-obesity efforts. Calorie counts started appearing in menus a few years ago, and calls for assorted “fat taxes” have sprung up across various parts of the United States and Europe.  Japan—not normally a country associated with an obese population—started measuring the waist lines of its citizens in 2008 and requires diet changes for anyone deemed too fat.

How fat is “too fat”?  Try a 33.5-inch waist line for men and 35.4 inches for women.  I’m willing to bet that most of my readers would fall outside these bounds given that they are well below the American average.

Anti-tobacco laws did not spring up overnight.  It was a gradual process taking place over decades.  Smoking rates declined over time, driven more by changing attitudes than changing laws.

Is something similar happening to soft drinks?  Indeed it would appear so.  U.S. soda consumption fell in 2012 for the eighth consecutive year.  Even more foreboding, consumption per person is at the lowest levels since 1987.

Sales are still strong in emerging markets…for now.  But rising emerging-market incomes will only provide a temporary boost, if tobacco is any indication.  As incomes rise, so does health awareness.

But does any of this actually matter to Coke and Pepsi shareholders?  I made a strong case for slow-growth companies, and both Coke and Pepsi meet my first three criteria.  Both have enormous moats due to their branding power and global distribution (If you’re the investor of a new soft drink, you shouldn’t waste your time; Coke and Pepsi will bury you.) Both companies are financially healthy, and both have long histories of strong dividend growth.  On the dividend front, both Coke and Pepsi are proud members of the Dividend Achievers Index and major holdings of my favorite ETF: the Vanguard Dividend Appreciation ETF (NYSE:$VIG).

 Coke Pepsi

But what about price?  Coke and Pepsi have both seen price/earnings multiple contraction since the go-go days of the 1990s; for that matter, so has the entire U.S. stock market.

Yet both sport current multiples well above the market average of 17, making them too expensive to be “tobacco stocks.”  (Of course, tobacco stocks are too expensive to be “tobacco stocks” too, so at least they have something in common.)

marlboro_manPricing here is complicated.  Coke has what is by most accounts the most valuable brand in the world, and Pepsi’s brands are also quite valuable.  It is the value of these brands that allows the stocks to trade at premiums to the market even while their core products are seeing weak demand.  But then, 20 years ago, I might have said the exact same thing about the branding power of the Marlboro Man.  Altria still has branding power relative to its Big Tobacco rivals, but this has to be viewed within the context of a shrinking industry.

In other words, I don’t expect Coke’s brand, as iconic as it is, to justify a premium valuation forever.

Bottom line: It would appear that Coke and Pepsi are slowly transitioning into vice stocks, though they are not quite there yet based on valuation.  Both stocks pay solid dividends and have a history of growing their dividends.  But at current prices, I wouldn’t expect either to outperform the market by a wide margin.

And on a final note, I’m going to be a proper Texan by enjoying a Dr. Pepper with my lunch.

Sizemore Capital is long VIG

 

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 Talks EBay, the Future of Mobile Payments, and More on CNBC


Watch Charles discuss EBay’s (Nasdaq:$EBAY) earnings, the future of mobile payments, and Apple’s (Nasdaq:$AAPL) transition to an income-focused value stock on CNBC’s Asia Squawk Box.

Can’t view the embedded media player? See Apple Looking a Lot Like Microsoft

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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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Update on the Best Stocks of 2013

Charles Sizemore and Jeff Reeves give their latest thoughts on their picks for the 2013 Best Stocks contest: Daimler ($DDAIF) and Intel ($INTC)

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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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Charles Sizemore and Jeff Reeves Discuss the Microsoft Drubbing

From Jeff Reeves at The Slant:

It was a rough Thursday for PC stocks Microsoft (NASDAQ:MSFT), Intel(NASDAQ:INTC), Hewlett-Packard (NYSE:HPQ) and the like.

That’s because late Wednesday, IDC reported PC sales slid nearly 14% in the first quarter, well below the 7.7% decline that was expected and the worst drop since the firm began tracking the sector in 1994.

Ouch.

To add insult to injury, Microsoft was downgraded Thursday by Goldman Sachs(NYSE:GS), Normura and Hilliard Lyons. All  cited the ugly IDC numbers.

So what’s going on? Can these companies — particularly Microsoft — evolve?

Charles Sizemore thinks so, based on hopes of getting Microsoft Office software on Apple and Android devices.

The tug-of-war between hardware and software always favored keeping Office native to the Microsoft Surface tablet. But that may be changing.

“It’s a bit of a game in that does Microsoft … minimize their plans to grow their tablet business by pushing Office onto their competitors, or do they hold out and see if they can generate margins?”

Charles thinks the rumor mill is strongly favoring a push onto Apple (NASDAQ:AAPL) devices powered by iOS or mobile gadgets running Android from Google(NASDAQ:GOOG).

There’s also hope for the xBox business with innovative in-home entertainment options, Charles says.

 

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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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