The Other Three “Must Buy Before the Election” Picks from Mark Skousen

by Travis Johnson, Stock Gumshoe | October 24, 2012 11:46 am

Finishing up our look at the Romney picks from Forecasts and Strategies

OK, so I was called away before we got through the rest of Mark Skousen[1]’s ideas for profiting from the election (which he is convinced will bring a victory for Romney and stock market ebullience) — so let’s jump right in and finish sniffing out those picks, shall we?

The first three were energy and dividend plays — Seadrill, Enterprise Product Partners, and a business development company … if you want to check out those and get the big picture intro, click on over to yesterday’s article here[2].

While you do that, we’re going to jump right in to picks four through six. Here’s the first batch of clues:

“BUY #4 — Way More Money in Your Pocket!

“Let’s face it, eventually — and probably sooner than most think — interest rates are going to rise in the face of inevitable inflation cause by Obama-era spending and record debt.

“My next pick is a closed-ended fixed income fund currently yielding 6.7%. This no-load mutual fund invests primarily in senior, secured floating rate corporate loans. As short-term interest rates rise, the fund will increase its monthly income gradually. Thus, this prime-rate fund operates just the opposite of a long-term bond fund. When interest rates rise, long-term bond funds decline in price; but prime rate funds like this one increase.

“The fund invests in fixed income securities operating across diversified sectors in the United States, primarily invests in senior, secured floating rate loans. It benchmarks the performance of its portfolio against the S&P/LSTA leveraged loan index.
Like all prime rate funds, this one is leveraged to maximize yield. Its 1.2% expense ratio is the lowest in the industry, and the 6.5% dividend yield is especially attractive.”

This one is almost certainly Eaton Vance Floating Rate Income Trust (EFT), a closed-end fund that does, indeed, invest in floating rate bank loans — which effectively means they’re buying floating rate corporate loans from banks, not bonds (which sometimes also have adjustable rates) but actual bank loans that typically reset interest rates much more frequently, often every month.

And, to reinforce that, we can tell you that this is one closed end fund that Skousen has touted publicly in the past as well — including in this article from earlier in the year[3]. Still yields around 6.5%, and like most closed-end funds[4] it uses leverage (meaning it borrows money to amplify its returns — leverage ratio is about 36% at the moment, which is fairly typical) and charges a fairly high expense ratio, right around 1%. It also, unlike most closed-end funds, trades at a small premium at the moment (typically they trade at a discount, on average), so if you buy the fund now you’re paying three or four percent more than the asset is worth — which is about half of a year’s expected dividend yield.

There are other funds which specialize in floating rate debt, both floating rate bonds and bank loans, and they’re fairly popular right now — EFT is the top-rated closed-end fund in this category according to Morningstar[5], but there’s also now an ETF that tracks this theme as well (the Morningstar report on that ETF is here — it’s a quick and useful read if you don’t understand bank loan funds[6]).

Next?

“BUY# 5 — What’s the One Thing People Want Most?

“When President Reagan turned the country around, consumer confidence quickly returned, and with it, consumer spending. I predict we’ll see a replay with a Romney win.

“Now ask yourself, what’s the one thing that you hear everyone talking about when it comes to sexy new gotta-have-it products?

“Answer: a head-spinning assortment of exotic mobile handheld devices! The whole world is tweeting and texting, Googling and GPSing. You can now watch movies of your choice on your internet-connected laptop, notebook, or smartphone. And it’s not just a U.S. phenomenon; smartphone penetration in India[7] and China[8] is twice per-capita what it is here. Believe it or not, in Asia[9], the Droid is outselling the Apple iPhone five to one!

“And there’s one chip company in particular that’s going to continue to profit from the demand for smartphones, notebooks, netbooks, servers, workstations, storage products, communications products, and other handheld devices.

“Business is already booming, but now is the time to invest before it gets even better… the company’s price-to-earnings (P/E) ratio remains near a 10-year low. It’s a cash machine, with more than $15 billion in cash, compared to a total debt of $7.3 billion. It has a healthy balance sheet, with current assets 2.24 times higher than liabilities.”

Well, I’m not complaining … but though those numbers are, again, a couple months old, this sounds an awful lot like Intel (INTC)[10], which is most often described as the loser in the battle for exotic handheld mobile devices.

Which, as you probably have noticed, is why it’s trading for only 2X sales and 10X earnings … or, to be more ridiculous, an Enterprise Value/EBITDA ratio of less than five. That cheapness, the high and growing dividend, and the fact that they’re the world’s best chipmaker is why I own the shares, but they are definitely taking a hit as mobile destroys the desktop. Or at least, that’s the narrative that Wall Street is running with — I’d counter that with the fact that there will always be desktop and laptop computers and servers, all of which are dominated by Intel chips, and that anyone betting against Intel working their way into new businesses (as with their mobile chips, which are starting slow but showing some initial signs of progress) should be at least a little bit worried.

Intel doesn’t lose very often — they’re not going to suddenly take away Qualcomm or ARM’s share of the mobile chip business (if you’re mostly interested in mobile, take a good long look at QCOM, they’re more expensive but are probably closest to being the “Intel of mobile”), but even if they have some weak years when folks buy tablets instead of laptops I think they’ll continue to be a best-in-class innovator and manufacturer with a huge amount of cash flow rolling through to shareholders. And if tablets are dominating laptops in five years, Intel should have a much larger share of the tablet chip market in five years than they do now. In case you haven’t guessed, I do indeed own Intel — I haven’t bought more in this recent slump, but I have considered it. My cost basis is pretty close to the market price now, though I’ve also been able to enjoy the compounded dividend to increase the size of my holdings over the last year or two since I first bought shares.

Next?

“BUY #6 — The Best Darn Bank in All of America?

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“According to the most recent Barron’s, this aggressive but well-managed North Carolina bank holding company is considered one of three highest-quality banks. With 1,800 branches throughout the south, it’s the 10th-largest bank in the south.

“The company, through its other subsidiaries, provides automobile lending, bankcard lending, consumer finance, home equity and mortgage lending, insurance, investment brokerage services, mobile/online banking services, payment solutions, sales finance, small business lending, and wealth management/private banking services to retail customers.

“It also offers asset management, association services, capital markets services, commercial finance, commercial middle-market lending, commercial mortgage lending, institutional trust services, insurance premium finance, international banking services, leasing, merchant services, mortgage warehouse lending, real estate[11] lending, supply chain management, and venture capital services to commercial customers.

“Current earnings per share are up to $2.12”

Well, I have no idea whether or not it’s really the “Best Darn Bank in All of America” … but the Thinkolator says that this time we’re looking at BB&T (BBT), which did indeed have a trailing annual earnings number of $2.12 a few months ago (with the last reported quarter it’s up to $2.40 now), and it does have approximately 1,800 branches. The branches are all in the “South”, though it depends on what you mean by south — they’re really focused in the economic sweet spot of the Mid-Atlantic-to-Carolinas region. And they’re huge, the tenth largest bank in the country (not just the South) and one of the largest “regional banks” if you’re listing them by market capitalization.

Other than that? Well, they’re a bank and, compared to headline makers like JP Morgan or Citibank they’re relatively simple — they take deposits and pay essentially nothing for those deposits with interest rates low, and lever those deposits with cheap money from the Fed to make business and mortgage loans and buy low-risk government debt. They make money on the size of their asset base and the spread between what they pay for money (not much) and what they earn on money (not all that much at the moment, but a helluva lot more than they pay), plus whatever fees they can sneak in for overdraft protection or ATM usage or whatever else.

Many regional banks are doing quite well right now, without the massive issues that have bedeviled the mega-banks and investment banks who have much more complex businesses and less transparent operations (not that the regional banks are that transparent either, I confess to not understanding bank balance sheets very well). But if our local neck of the woods here is any indication, “regular” banks are still making a lot of money and desperately trying to bring in more deposits so they can make more still — the only buildings that I see consistently being built or renovated as I travel around New England are new bank branches. (And bank branches are, indeed, pretty much the best retail businesses you can imagine — people pay you to take their money in exchange for … well, in exchange for nothing except the promise that you’ll give it back someday).

So I won’t pretend to know BBT particularly well, but they are a large and profitable regional bank that’s focused on the Southeast (trickling up to Indiana and out to Texas as well), they pay a decent dividend, and they’re priced right around book value. If you like the idea of the big regional banks but don’t want to choose one in particular, there are also several regional bank ETFs, including, among ohters, the very diversified S&P index version KRE and the more focused iShares version IAT, both own shares of BBT. Personally, when it comes to financial companies I would tend to go with insurance over banks, but that may be as much my reluctance to study banking balance sheets as anything else.

So there you have it — I can’t really draw a direct line between any of these three stocks and Obama or Romney, they’re all going to be sensitive to the broader economy and interest rates, and I’d argue that any predictions on those have a lot more moving parts and won’t be determined primarily by flipping a switch in two weeks. Some things will make a difference — for example, if Romney rolls back regulation on banks, that might help BBT, but it probably won’t help them much differently than it does any other financial companies.

Personally, I think there will likely be lots of other stocks that are likely to get a boost or a letdown, even if just a temporary one, from the outcome of the election and the aftermath, with the most likely near-term movements coming due to the spending decisions that are made in the lame-duck session as they try to avoid the fiscal cliff, particularly, since there are a limited number of very visible defense contractors, the military spending stuff — if they manage to sidestep defense cuts for this year some of the contractors are going to have a quick recovery, and if they resume defense spending growth somehow those companies, including the ones we talked about during our chatter about aircraft carriers[12], are downright cheap. In the big picture, though, I hate to throw money around speculating on an election or overstating the impact that a president can have on the economy — better, I think, to focus on good companies that can make a growing profit no matter who’s sitting in the oval office. The six stocks touted by Skousen are mostly large, solid, well run firms from what I can tell in my brief look, and they ought to do fine if the global economy stays on track, I wouldn’t throw any of them out for obvious red flags and I own two of them (Seadrill and Intel). I don’t know if they’ll do better than the S&P 500, but they ought to do fine.

Unfortunately, our divisive political culture has led a huge number of people to believe that if one man is elected the streets will be paved with gold[13], while if the other is elected the earth will open up and swallow us all alive, so I’m sure the stock market will do lots of crazy gyrations over the next several weeks as the election finishes up and the fiscal cliff discussions begin. I’m not using my portfolio to bet on politics, so I’m going to try to ignore those gyrations unless they present opportunities for buying good companies on the cheap.

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