Tip of the hat to the great new Amazon money and investing blog. A post there(via motley fool) noted the importance of looking at total returns including dividends while almost all charts and news reports show price only.
The article presents this graph comparing price only with total return(dividends+ price change)
The article notes that in the "lost decade" for stocks from 2000 -2010 an actual investor in the S+P would have had a total return of 20%.
I ran charts for the period since Jan 2007 for growth of 100,000 in total return=+15.3%
But the price only chart below shows a negative return of close to 5% for that period
A resource for debunking the investments myths peddled by the financial press and Wall Street hype and presenting rational,sensible investing approaches based on sound research and academic findings. This blog is maintained by Lawrence Weinman MBA an independent Registered Investment Advisor www.lweinmanadvisor1.com
Friday, September 28, 2012
Thursday, September 27, 2012
That Dividend Trade is Getting Very Crowded
If there is one current conventional wisdom in the investing world it's investing in dividend or "dividend growth" stocks. It's not hard to figure out why: dividend yields above treasury yields, a need for cash flow and disappointing returns on the US overall equity market over recent years.
In fact strategies represented based on dividend weighting with reliable data (such as backtesting of formulas used in etfs like VIG and SDY) show some outperformance vs market cap weighted indices, as does performance of some large cap stocks that frequently show up on dividend screens. Furthermore this has been the case in recent years, even the utility index (XLU) was a star last year top performing sector for the first time in the last 50 years.
And many investors seem to be using the dividend flows as a substitute for bonds in their portfolios. Despite the cogent arguments against equating dividend stocks with bonds (like this one from Vanguard) the view persists. As I will point out in a future article they might be much better up expanding their horizons and constructing a portfolio of bond ETFs covering a mix of durations and credit risk to create their cashflows...and diversification.
Beyond those factors is another issue...the trade is getting very crowded. I found this chart in a recent research piece from Fidelity. They used it as an argument for investors to continue to buy dividend growth stocks because of growing demand. I view it as a sign of a crowded trade.
The picture is similar on the ETF side. Despite meager inflows into equity ETFs overall
Dividend ETFs remain popular as investors prefer funds that offer above-average yields and conservative strategies for exposure to the stock market.
A hot new dividend ETF from ishares HDV has amassed over $2 billion in assets in less than a year. A July Morningstar article noted the following...and there has been no sign the trend has slowed down since then.
Dividend-themed exchange-traded funds have been a popular choice among investors over the past year. The 42 dividend-themed ETFs that we follow raked in $16 billion in flows, nearly a third of every dollar going into equity ETFs, despite the fact that they make up just 5% by count of the 812 equity ETFs available.
The above is a bit ironic since HDV uses a stock screen created by and licensed from Morningstart to pick its holdings.
What does that mean: a category that has been known for relatively low valuations (often considered "large value stocks) with low volatility has begun to carry valuations closer to that of "growth" stocks. Not surprisingly the very strong above market performance of last year has started to reverse itself, particularly during the market rally.
Here are returns for VTI (green,total stock market) and VUG (blue, large cap growth) vs fast growing (in assets) Dividend ETF HDV (gold)year to date. Chart shows growth of $100,000.
Ultimately dividends must come from either earnings growth or increasing the dividend payout. Based on the metrics below it seems that investors in some very popular dividend stocks are paying a very high price for those earnings. In fact those looking for dividends might well turn their sights outside the US...more on that in a future blog.
Here are some valuation measures of the top five holdings in HDV(courtesy of forbes.com) I'm not exactly how the current numbers can in some cases beabove the 5 year numbers. As a point of comparison the current p/e of the Vanguard large cap growth ETF has a p/e of 16, the S+P 500 14.
current p/e 5 yr p/e high 5yr avg p/e
In fact strategies represented based on dividend weighting with reliable data (such as backtesting of formulas used in etfs like VIG and SDY) show some outperformance vs market cap weighted indices, as does performance of some large cap stocks that frequently show up on dividend screens. Furthermore this has been the case in recent years, even the utility index (XLU) was a star last year top performing sector for the first time in the last 50 years.
And many investors seem to be using the dividend flows as a substitute for bonds in their portfolios. Despite the cogent arguments against equating dividend stocks with bonds (like this one from Vanguard) the view persists. As I will point out in a future article they might be much better up expanding their horizons and constructing a portfolio of bond ETFs covering a mix of durations and credit risk to create their cashflows...and diversification.
Beyond those factors is another issue...the trade is getting very crowded. I found this chart in a recent research piece from Fidelity. They used it as an argument for investors to continue to buy dividend growth stocks because of growing demand. I view it as a sign of a crowded trade.
The picture is similar on the ETF side. Despite meager inflows into equity ETFs overall
Dividend ETFs remain popular as investors prefer funds that offer above-average yields and conservative strategies for exposure to the stock market.
A hot new dividend ETF from ishares HDV has amassed over $2 billion in assets in less than a year. A July Morningstar article noted the following...and there has been no sign the trend has slowed down since then.
Dividend-themed exchange-traded funds have been a popular choice among investors over the past year. The 42 dividend-themed ETFs that we follow raked in $16 billion in flows, nearly a third of every dollar going into equity ETFs, despite the fact that they make up just 5% by count of the 812 equity ETFs available.
The above is a bit ironic since HDV uses a stock screen created by and licensed from Morningstart to pick its holdings.
What does that mean: a category that has been known for relatively low valuations (often considered "large value stocks) with low volatility has begun to carry valuations closer to that of "growth" stocks. Not surprisingly the very strong above market performance of last year has started to reverse itself, particularly during the market rally.
Here are returns for VTI (green,total stock market) and VUG (blue, large cap growth) vs fast growing (in assets) Dividend ETF HDV (gold)year to date. Chart shows growth of $100,000.
Ultimately dividends must come from either earnings growth or increasing the dividend payout. Based on the metrics below it seems that investors in some very popular dividend stocks are paying a very high price for those earnings. In fact those looking for dividends might well turn their sights outside the US...more on that in a future blog.
Here are some valuation measures of the top five holdings in HDV(courtesy of forbes.com) I'm not exactly how the current numbers can in some cases beabove the 5 year numbers. As a point of comparison the current p/e of the Vanguard large cap growth ETF has a p/e of 16, the S+P 500 14.
current p/e 5 yr p/e high 5yr avg p/e
ATT | 51.5 | 48.4 | 20.5 | |||||||||
Pfizer | 18.4 | 19.3 | 13.4 | |||||||||
JNJ | 21.9 | 19.5 | 15.6 | |||||||||
PG | 18.9 | 17.9 | 15.2 | |||||||||
Verizon | 45.1 | 30.6 | 29.2 |
Tuesday, September 11, 2012
As I Was Saying...
Last week I noted the strong market rally on September 6 was likely due more to many portfolio managers returning from the beach vacation with performance anxiety more than any particular news item.
It seems I am not alone in my view. Raymond James analyst Jeffrey Saut wrote this in his September 10 commentary (after citing the same WSJ article I had noted):
In last week’s verbal strategy comments I suggested participants study the chart pattern of the S&P 500 (SPX/1437.92) and then think about what it would feel like if you were an underinvested portfolio manager (PM), or even worse a hedge fund that is massively short of stocks betting on a big decline. The concurrent performance anxiety would be legend because not only would you have performance risk, but also bonus risk and ultimately job risk. Accordingly, I have been opining that stocks were likely going break above the April highs (1420 – 1422) and then trade higher toward the 1450 – 1477 zone driven by what Dan Greenhaus said, “that pressure to try and play catch-up and not just merely play along but to gain some outperformance." Of course that performance pressure is magnified with end of the third quarter “report cards” due for PMs, followed by fiscal year-end, as many PMs close their books at the end of October.
I'm reminded of the story in Scott Patterson's book The Quants . He writes about how in the middle of the financial crisis major hedge funds unwound their positions in quantitative strategies leading to large moves in stocks in the absence of any fundamental news. One of the quants looked up at the reporters on the CNBC screen scrambling to give reasons for the moves based on fundamental factors. The hedge fund manager just looked up shook his head at the cluelessness of the reporters...they had no idea what was going on ...they were looking in the wrong place.
It seems I am not alone in my view. Raymond James analyst Jeffrey Saut wrote this in his September 10 commentary (after citing the same WSJ article I had noted):
In last week’s verbal strategy comments I suggested participants study the chart pattern of the S&P 500 (SPX/1437.92) and then think about what it would feel like if you were an underinvested portfolio manager (PM), or even worse a hedge fund that is massively short of stocks betting on a big decline. The concurrent performance anxiety would be legend because not only would you have performance risk, but also bonus risk and ultimately job risk. Accordingly, I have been opining that stocks were likely going break above the April highs (1420 – 1422) and then trade higher toward the 1450 – 1477 zone driven by what Dan Greenhaus said, “that pressure to try and play catch-up and not just merely play along but to gain some outperformance." Of course that performance pressure is magnified with end of the third quarter “report cards” due for PMs, followed by fiscal year-end, as many PMs close their books at the end of October.
I'm reminded of the story in Scott Patterson's book The Quants . He writes about how in the middle of the financial crisis major hedge funds unwound their positions in quantitative strategies leading to large moves in stocks in the absence of any fundamental news. One of the quants looked up at the reporters on the CNBC screen scrambling to give reasons for the moves based on fundamental factors. The hedge fund manager just looked up shook his head at the cluelessness of the reporters...they had no idea what was going on ...they were looking in the wrong place.
Monday, September 10, 2012
IPOs and Shooting Stars...Not Healthy For Your Portfolio
Shooting Stars and Ipos
As an investment advisor there are two categories of stocks
I most frequently get asked about. IPOs and shooting stars.
These categories share 2 things in common high visibility
(everyone seems to be using their product), often it’s in the news and it seems
like a “sure thing’ Potential investors
also suffer from two well known characteristics now part of the textbook list
of pitfalls of behavioral finance and in fact decision making in general. The
brilliant and highly readable book on this subject is by Daniel Kahneman:
Thinking Fast and Slow. Kahneman was the first and only winner of the Nobel
prize in economics to come from Psychology and I think the first Nobel Prize
winner in the field without a degree in economics (there have been other social
scientists since).
Kahneman’s work is important for learning about the
sometimes irrational behavior of the markets when price differs from value. In
other words markets can be irrational and cause bubbles and busts. But I think
there is merit to the critique: no one has shown a systematic way to make
money off behavioral finance.
But I think there is a way to avoid losing a lot of money
through investing avoid IPOs and shooting stars. And avoid falling into the
biases of paying attention to a selective sample of information which
reinforces confirmation bias. You think the product is ubiquitous therefore it
is a good investment and you know people that have made a lot of money IPOs
picking hot stocks or buying the individual stock in question. In fact as a
group IPOs and shooting stars are as a group the worst category of stocks.
IPOs (initial public offering). This one may be more obvious due to the
largest and most publicized IPO…facebook.
Nevertheless before the IPO many investors were salivating at the
prospect (investment professionals(mutual and hedge fund managers) were
included in the group. Relatively unusual this time was that some retail
investors got access to the IPO …that in itself not a good omen.
Why were they interested in facebook ? Because they only
remembered and/or remember about the big money made in some IPOs…and didn’t
hear (especially at cocktail parties) of the larger percentage of duds.
What were they looking at something like Google (of course
ignoring the jaw popping 50% drop.
But they failed to think about IPOs such as Groupon
Therefore they looked at Facebook with optimism. As a wiseguy
(not me of course) would say: how did that work out for you:
Shooting Stars: shooting
stars are attractive for some of the same reasons: I see someone using all of
the product, therefore it must be a successful company and a good stock. In
addition since the stocks are already on the market. The stocks also share:
They are usually small growth
stocks (small companies with forecasted high growth) in general the worst
category of stocks in the traditional market
cap (large/small) and growth/value division. Think of a quadrant dividing
the market (small value large value large growth large value)
They trade at a very high
(P/E) price earnings valuation (as well as other metrics) indicating high
optimism of continued high growth.
Because stock prices have had
tremendous gains they have heard from or read about some
investors/traders making big money.
Often the stocks will become “short positions” for
professional aggressive investors. Therefore if they were early and the numbers
temporarily remained positive..they may wind up buying back the shares (short
covering) and the stock will have a sharp move up.
The problem because the forecasted high growth is factored
into the price bad news about
prospective growth falls and the stock price takes a big drop as the “shooting
star” falls to earth.
Why is this: often the shooting star is related to a
consumer (often fashion/fad) product that seems ubiquitous, is premium priced
for it’s uniqueness. But it is usually a product that can easily be knocked of
appear in a cheaper person in a mass market retail outlet (think Target). The
number of people willing to pay the premium price drops as does the stock.
An example would be Deckers the importer of those UGG boots
that seemed to be on the feet of every trendy young person. To put it bluntly
when the popular shoes were available at Nordstrom or the UGG stores at a premium price and the
knockoffs at places like Target…there were only a limited number of people to
buy the original. Despite the effort to broaden the brand the anticipate
earnings…and stock price as dropped like a rock.
Another would be Crocs
Two Shooting Stars That Earn a Yellow Light
Two stocks that fit the characteristics of shooting stars but
have not(yet ?) fallen to earth:
Lululemon: This is the seller of yoga pants and other hot
products sold at their own stores at premium prices. Knockoffs that are priced
at a far lower price are prominently displayed at Target and elsewhere. Is
there a limit to the number that can be sold at the premium price. The market
seemed to think so, although good news last week created a big (I think short
covering) rally. The stock carries a P/E of 57.
Underarmour: the hot athletic wear premium priced product.
It’s current p/e is an eye popping 128.
As a point of
comparison Nike trades at a P/E of 21 and sells products competing with both
Lululemon and Underarmour
What is my answer to clients interested in buying IPOs and
shooting stars: I make the points above and suggest if they want to buy them
they open an account I don’t manage and purchase it there.
Interestingly a company/stock that doesn’t fit the characteristics
of a shooting star is Apple. Apple does have a unique premium priced product
but they are difficult (and given recent court rulings perhaps even more
difficult) to copy.
Apple of course is the world’s largest company, it’s large
cash position makes bankruptcy virtually impossible. And interestingly relative to earnings it
doesn’t seem expensive. the p/e is 16. A
new iphone is to be unveiled this week and a smaller cheaper Ipad is in the
works. Is the stock worth buying on price dips
? I’ll leave you to judge.
Friday, September 7, 2012
That Stock Market Rally of September 6....Don't Believe the Explanations in The Media
As the business news and today’s press will report
it…today’s 2% rise in the S+P 500 and
rise in European stocks (based on
ETF VGK) of3% was attributable to actions (or pledges of )
·
Further action to support the European bond market
·
A stronger than expected employment report
from private payroll firm ADP (which doesn’t always match the government figures which
this month are released on Friday).
I have another explanation: the
calendar and money managers trying to catch up.
The calendar: We are in the first
week after Labor Day. The summer was a quiet one in the markets giving money
managers a chance to get away…as described in a recent WSJ article. The deadly
low volume and volatility of the last weeks in August indicate a lack of managers
taking on new positions.
Paradoxically large moves are not
uncommon in the summer—whether they are panic selloff or “melt ups in rallies
Some may attribute this to
breaking news. Having worked on trading desks I can suggest another reason.
The reason: trading desks are
lightly manned with junior staff in the summer. That staff is either instructed
to cut back positions if the market moves against the portfolio in sharp moves,
but not to undertake new strategies….or
the senior portfolio manager watching the markets intermittently
from his iphone on the East Hampton beach calls up the junior staff and tells
them to liquidate some positions pending a
portfolio review after Labor Day.
Well, the summer house is closed
down, the trip to the mountains or lake
cabin with poor cellphone reception and no wifi is over and everyone is back to
work.
And what are many mangers
looking: at a missed summer rally in the stock market
In fact I would not at all be surprised if much of
the summer rally was fuelled by hedge managers short the market…anxiously
calling their junior traders and instructing them to cover those short
positions.
Stocks jumped nearly 10% over the
summer, defying the expectations of many hedge- and mutual-fund managers who
had bet on a decline. They saw a multitude of headwinds from Europe's woes to
the slowing U.S. economy and sluggish corporate earnings.Now, those defensive fund managers are facing what's known in Wall Street lingo as the "pain trade": having to buy stocks just to avoid being left in the dust.
Here’s the picture and it’s not
pretty. Jeremy Grantham recently wrote a great paper on career risk in money
management. Underperformance gets
punished with fickle investors chasing performance and fleeing from
underperforming managers….this may be particularly the case with the increasing
preference for index instruments among individual investors. Many will give up
on active mangers and index…others will move funds to a hot manager
Whether it’s a hedge fund manager or mutual
fund manager their compensation is tied to assets under management and assets
under management tied to performance. With a little less than 4months in 2012,
those mangers are forced to catch up and buy stocks.
This whole pattern leads to short
term fund management, the managers are not totally to blame….the investors
respond to short term performance and movetheir money accordingly.
Academics callthis concern of managers
of exceeding a benchmark “information risk”. The risk of underperforming the
index is greater…the more the manager strays from the index….even if he thinks
the move may make sense. Of course this
is ironic beause investors think they are paying active manager to find
investing opportunism….Short termism and concern about the information ratio leave
some opportunities unexplored. There seems evidence of potential for
outperformance…on a risk /return basis but often not on an outright basis….more
of that in a future article.
Other cyclical dates to watch:
The period towards the end of
the quarter when managers will window dress, increase their stock allocation particularly in top
performing stocks
The period right after the end of
the quarter when individual investors
review their 401ks and inevitably chase hot asset classes. With the heavy move
of investors away from stocks and into bonds in the last couple years…they may
rethink that positioning. With the S+P 500 total return over 13%for the year
and the aggregate bond index +3.5%....I wouldn’t be surprised by some asset shifting(missing
much of the move) from individuals around the end of September/beginning of
October.
A major survey of individual investors AAII shows a great deal of caution despite the stock markets strong 2012 performance....A look at those September 30 401k statements may lead to moving some more money into stocks....chasing performance.
Bullish sentiment among investors was down during the week ended this
Wednesday, according to the most recent weekly online survey of members
of the American Association of Individual Investors.
Bullish sentiment fell to 33.06% from 34.72%, while bearish sentiment rose to 33.06% from 32.64% during the previous week.
The percentage of investors who described themselves as neutral on the
stock market rose to 33.88% from 32.64%, according to the poll.
I wrote this blog entry (honest) before I saw this from Barry Ritholtz on his Informed Consent blog
If you want an explanation as to what is driving stock prices, that is as good as any . . .
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