by Travis Johnson, Stock Gumshoe | May 30, 2013 2:45 pm
Elliott Gue will be a familiar name to longtime Gumshoe readers — he’s been a fixture in newsletter land for as long as we’ve been around (Stock Gumshoe’s sixth birthday was a couple months ago, thanks very much), and he’s got a new home. He ran the venerable Personal Finance letter for a while and built a bit of a name for himself as an energy investing specialist at Energy Strategist before leaving that publisher and signing on with StreetAuthority.
And now Gue is headlining several letters for StreetAuthority, including the StreetAuthority Top Ten Stocks letter that tries to pick out favorite ideas from all the other letters at that publisher. Several of the publishers have these “best of the best” newsletters, and they’re usually treated as inexpensive ways to get people introduced to the letters (and hopefully drive them to “upgrade” to subscriptions to the more expensive services they offer).
But that doesn’t mean they’re not useful or interesting, of course — and one of the ways they’ve pitched this service in the past, back when it was still helmed by founder Paul Tracy, was by teasing a list of their favorite “forever” stocks that you can buy and hold, well, forever. So whenever they trot out this teaser campaign, as they’ve just done under Gue’s signature, I like to have a look.
Why? Well, partly because lots of readers ask about these — and partly because, frankly, buying solid stocks of this ilk and holding for a long time is probably still the easiest way for an investor to do well without great expertise or a big time commitment. The average holding period for stocks is probably down to just a month or two now, maybe less, and that means a lot of individual investors are trying to time little market moves and are probably, on average, failing to keep up with the market — and paying higher commissions and taxes along the way.
I can’t get up here and tell you that “buy and hold” is the best or only strategy for everyone, of course, and it’s not the only strategy I pursue … but buying great companies and holding for many, many years — preferably with a nice, compounding dividend stream that lets the investment grow even faster — has worked better for me, more often, than most of the other strategies I use.
I know that the chorus of “buy and hold is dead” is rising in the chest of many of you right now, and that’s fine — we all have to make our own decisions. But I maintain that holding great companies for a very long time is the best and least risky way to grow a portfolio for most people — that doesn’t mean you have to buy and ignore them, of course, some decisions turn out to be bad because the company or the world changes, or because you were just plain wrong in the first place, but trading for the sake of “doing something” and trying to find the next hot trend is clearly a disastrous strategy for many small investors.
From a quick look at the picks that are teased, I think we’re going to find that several of them are repeats from the last “forever” list they teased back in 2011 — which would make sense, of course, if it was a “forever” stock two years ago you probably still like it today. But let’s dig in and see which stocks they’re keeping “secret”. I won’t have much chance to opine on each of them if I’m going to get to naming all ten, so I’ll leave much of the chatter to you in the comment section.
As in past iterations, they “give away” the top two names for free — the first is what Elliott Gue calls his favorite “Rockefeller Stock,” Brookfield Infrastructure Partners (BIP). That’s a publicly traded partnership that owns infrastructure assets, including a lot of utility assets (transmission lines, pipelines, connections) and transportation assets (railroad, toll road, ports), among other things (including a lot of timberland). The stock has been extraordinarily successful coming out of the financial crisis, with a very price appreciation and a solid and slowly growing 4.5% distribution yield.
This is one of those stocks that I’ve missed by always hoping it would get a bit cheaper — if rates rise considerably, it will be hurt, but they do own very valuable and long-lived assets, with regulated payouts, so that’s mostly just an interest rate risk (if you can buy a “safe” bond for 6% yield at some point in the future, the 4.5% yield from BIP will look less impressive).
And the second “freebie” is Google (GOOG). I have owned this one almost “forever” myself (I started buying about six months after the IPO and haven’t ever sold any), and if you can’t formulate an opinion on it for yourself it’s not for a lack of information — I consider Google one of the key utilities of the information age, and increasingly the most important advertising company in history. It’s not cheap anymore, but it shouldn’t have ever been cheap — adjusted for their huge cash balance they trade, on an earnings valuation, as pretty much an average S&P 500 Company. They’re far better than average, and they’re still growing nicely.
Then we get into the teasers …
“‘Forever’ Stock #3 is the most shareholder-friendly company I’ve ever seen. It has raised its dividend 84.8% since 2008… and has bought back 432 million of its own shares (about 20% of all shares outstanding). That’s one reason why earnings per share jumped 20% in 2011 and 6% in 2012. Buy it now and you’ll lock in a solid yield of about 4% (and I expect another dividend increase in the next few quarters). Meanwhile, the company plans billions more in share repurchases this year, which should support the stock price in just about any market.”
That one’s Philip Morris International (PM), the global tobacco company. Yield is down to about 3.6% now thanks to a rising share price, but they have increased the dividend 84.8% since they split from Altria in 2008 (46 cents/quarter to 85 cents/quarter), and they probably will keep raising the dividend and buying back more shares — the debt is low and the payout ratio is low (they pay out 64% of earnings as dividends), so it should be pretty stable. I don’t buy tobacco stocks for personal reasons, but most of them have been excellent income investments over the past decade or more — when Jeremy Siegel looked at the best stock market returns from 1925 to the present, Philip Morris (the original, combined company before the Altria-PM split) was number one, thanks largely to the many decades of reinvesting those dividends.
“‘Forever Stock’ #4 is a fund with a simple mission — to buy stakes in the most stable utility companies on the earth and pay investors a fat dividend yield. It owns telecoms in Israel, electric companies in Brazil, and water utilities in the United States. It’s returned 11% per year since its inception in 2004… and it has boosted its dividend 28.9% along the way. In total, the fund has paid more than 100 consecutive dividends and currently yields 6.0%. But don’t expect to have heard of this one… it trades only 100,000 shares a day — about what Apple trades in two minutes.”
This one they’ve teased in previous lists, it’s the Reaves Utility Income Fund (UTG), a closed-end fund that holds utilities and uses leverage to boost their returns — they include telecoms in their definition of “utilities”, so you’ll see both Verizon and AT&T in their top holdings alongside familiar utilities like Duke Energy or Entergy, but they have indeed returned an annualized 11% a year since 2004. The fund has actually done better than that on a net asset value basis (12% annual return), but the typical closed-end fund discount means that actual shareholders have gotten an 11% average annual return.
Right now, with folks getting a bit concerned about utilities as they watch the Fed’s chatter about possible interest rate increases, the shares are down a bit and the fund is trading again at a decent discount to net asset value. Right now, you can buy shares at about a 5% discount to the net asset value, and the yield is about 6%, with a monthly payout of 13 cents. You can see their full profile at CEF Connect here.
You can also, if you don’t want to go “forever,” go riskier and higher-yield with utility closed-end funds with, for example, the Gabelli Utility Trust (GUT), but some of the higher yield on that one comes from return of capital — and that particular fund has fallen by more than 25% over the past year even as the net asset value has risen because investors have bumped it down from a huge and ridiculous 50% premium to NAV to a still-high 13% premium. Or go more mainstream with an ETF like the Utilities Select SPDR (XLU), but that gets you a yield below 4%. Utilities are worrisome when investors start to see rising rates in the future, so be mindful that even solid companies that will be needed forever can go down in price if they’re valued by investors based on their dividend yield, as most utilities are, and the interest rate universe changes around them. I’d definitely buy a fund before I bought an individual utility, but I don’t need current income from this sector so I’m just as happy letting Warren Buffett build up his Berkshire Hathaway (BRK-B) utility holdings on my behalf.
“‘Forever Stock’ #5 was founded in 1966, but you couldn’t buy a stake until six years ago. Since it’s gone public, the stock is up 1,079% thanks to its seemingly unstoppable growth. Maybe that’s what attracted the world’s greatest investor– Warren Buffett– and his investment team. His giant investment firm, Berkshire Hathaway, bought a 216,000 share stake in this ‘Forever’ stock in 2011. And then Berkshire doubled down — buying 189,000 more shares the next quarter.”
This one is MasterCard (MA). Dammit. Every time I see this stock I’m reminded of not having bought it years ago because I was wary of the price. Turns out, a duopoly with a rapidly growing global clientele can be a great buy even when it’s not clearly cheap — I didn’t buy MA when it was at $100, and though it’s not cheap at the moment it might not ever be cheap, you can certainly argue that the valuation is fair with a forward PE of 19 and a near-$600 share price. I might slightly prefer the larger Visa (V) at current prices, but it’s a close call and both are hugely profitable behemoths who will probably continue to rule the world of plastic and electronic payments. Both pay dividends that are almost criminally small, but both are also growing their dividend rapidly.
“Forever Stock #6 tracks an index that has returned 396% over the past 10 years. It does so well because it holds dozens of energy partnerships that are legally bound to pay out the bulk of their cash flow to investors. Best of all, most of these businesses pay zero corporate tax.”
This one looks like it’s a repeat, the “Forever Stock #6” back in 2011 was teased similarly and they offered more clues that time, so unless they’ve switched to a different fund of master limited partnerships (MLPs) this should be the JP Morgan Alerian MLP Index ETN (AMJ). That’s an Exchange Traded Note, not an Exchange Traded Fund, so it’s a JP Morgan debt instrument that they promise will track the returns of the Alerian index of mostly pipeline and midstream MLPs.
There are also ETFs and closed-end funds that track MLPs. Over the past year the AMJ ETN has done considerably better than the most widely-followed ETF, ticker AMLP — partly because JP Morgan halted creation of new units of this ETN because it was getting so big, so it’s now trading at a premium to its actual value now, and partly because ETNs don’t pay taxes like the ETFs do. So AMJ now has an effective yield of about 4.5%, and AMLP yields closer to 6%, based on effectively the same underlying portfolio and same management fee. Given that, if you want the ETN structure I’d be a bit wary of giant AMJ and consider one of the newer ETNs that is not self-limited and probably isn’t trading at a premium, like AMU from UBS, but I have not double checked the current state of that one. Buying any ETF or ETN to get your MLP exposure basically means you give up some of the tax-deferral advantage of MLP ownership in exchange for some diversification and the absence of those dreaded (by some) K-1 forms for partnership unitholders.
“‘Forever’ Stock #7 is a fund that holds 280 fast-growing companies in emerging markets like Taiwan, Brazil and Malaysia. At first glance you might think that’s risky… until you realize that these economies are growing 2X and 3X faster than ours. This ‘Forever’ idea is a superb way to profit from that fact. Meanwhile, you get a yield close to 4% — surprisingly generous for stocks with such explosive potential.”
I’ll wager that this is another copy-and-paste from their last “forever” list, and that time I guesstimated that this was the WisdomTree Emerging Markets Equity ETF (DEM), which does still yield better than 3% (3.3% at the moment, according to Yahoo Finance), and it has tracked the broader emerging markets ETF (EEM) almost exactly over the past two years while payout out a dividend yield that’s twice as high. That dividend focus means they have big exposure to energy/commodities and banks, which is not unusual for an emerging markets fund — Gazprom, Vale, Lukoil and a few Chinese banks are in their top ten holdings. EEM is far more diversified, for sure (largest holding is Samsung, they index by market cap, not by dividend yield), and has done better than DEM over the past year, but since DEM’s inception about five years ago it has edged out EEM.
“Every $1,000 you invested in “Forever” Stock #8 back in 1972 would be worth a stunning $2,030,000 today. Maybe that’s why it’s one of Congress’ favorite “sweetheart” stocks. In total, more than 50 members of Congress own a stake. All the big banks own a piece of this company, too. Morgan Stanley owns 31 million shares. JPMorgan Chase owns 32 million. Bank of America owns 37 million. And Goldman Sachs owns over 13 million shares of this stock.
“Meanwhile, the company is raising its dividend, spending billions to buy back its own shares, making smart acquisitions, and according to investment research firm Morningstar, owns an ‘80% stranglehold on a $30 billion market…'”
This one is Intel (INTC), another stock that I own and am delighted to allow to compound in my portfolio — they get beaten down from time to time as fears rise about the soft PC market, but I wouldn’t bet against Intel’s unmatched manufacturing capacity or their ability to pound their way into the growing mobile market, and they still make lots of money on PC and server chips even if the speed of the collapse of the personal computer business has really shocked most of the players. I’ve built my personal position in Intel over the last couple years with buys between $20-$23, and bought most recently back in March. I don’t know if it will be a forever stock for me, but I think investors are over-worrying when it comes to this dominant company and I like watching those new shares compound and grow my account every few months.
“I like to call ‘Forever’ Stock #9 ‘Baby Berkshire.’ It invests just like Warren Buffett’s Berkshire Hathaway, but there is one major difference…
“This company is still small enough to make nearly any investment it wants, which frees it up to short for big returns. Warren Buffett himself said of his company, ‘Berkshire’s capital base is now simply too large to allow us to earn truly outsized returns.’
“House Majority Leader Eric Cantor (R-VA) owns at least $100,000 of this stock… and for good reason. From its low in March 2009, the shares have more than doubled.”
Looks like this is another repeat and another personal favorite, Markel (MKL), the specialty insurer that does often get compared to Berkshire Hathaway and which just closed a company-changing acquisition of Alterra to almost double their size. Markel is a great company, it was an extraordinarily easy buy when it collapsed on the announcement of the Alterra bid, and I bought some then and wrote about it for the Irregulars (it jumped up to be of my top five holdings this year). There’s still a possibility that the integration of the companies will be trickier and hurt earnings or book value, particularly if Markel wants to increase reserves on the Alterra business to match its more conservative profile, or is slow to adjust Alterra’s portfolio, so I’m trying to be patient and wait for a possible a dip in the stock when they announce their first couple consolidated quarters later this year — but, to be honest, I’ve considered adding to my position recently even without a dip, just because Markel’s more flexible investing mandate tied to Alterra’s now bond-dominated portfolio could generate dramatic performance improvement over the next few years.
And finally, number 10:
“I looked all the way to South America for ‘Forever’ Stock #10, but don’t worry… it trades right on the New York Stock Exchange.
“It’s the largest electricity company in Brazil, boasting more than 7 million customers. Like many utilities, its profits are driven by its monopolistic position. It sells three-quarters of its total power to captive customers who can’t switch to another supplier.
“Meanwhile, the company makes the point of distributing at least 50% of its income to shareholders… good now for a very safe yield of 7.0%.”
Similar picks have been teased by the StreetAuthority folks several times over the last couple years, and the two likely picks are the two largest NY-traded Brazilian electric utilities, CPFL Energia (CPL) and Companhia Energetica de Minas Gerais (CIG). CPFL has been a bit steadier and pays closer to a 7% yield (it would be 7% based on the 2012 dividends and the current share price, though the initial 2013 dividend paid just last month trended lower). Brazilian utilities are having some trouble with regulation and haven’t been able to get pricing increases — in many cases they’ve seen rate cuts as the government wants to lower costs for users — so the regulatory environment might not be as steady as we typically see for US utilities. Both have more than seven million customers and both do generation, transmission and delivery of electricity to end users, though concentrated in different states (CIG in Minas Gerais, CPL in Sao Paolo and Rio Grande do Sul — all three are among the most populous and developed states in Brazil).
So there you have it — not a lot of new names for you, but a reiteration under new editor Elliott Gue that they’ve got ten “forever” stocks to build a future on. What do you think? Interested in any of these picks, love or hate any of ’em? Let us know with a comment below.
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