Team Alpha Retirement Portfolio: By All Time Tested Metrics This Portfolio Has Room To Fly

by: Regarded Solutions

It never fails. The stock market has a week of gains because a self inflicted crises has been kicked down the road, and the naysayer's start coming out of the woodwork to claim that the party is over and the market is overvalued, or even in "bubble land".

Let's review reality:

  • The self inflicted crises was never going to come to pass and it presented a buying opportunity.
  • The market actually seemed to discount the shutdown, and did not have a serious drop in the S&P 500 of more than 16 points from September 19th, right up to Friday 10/18.
  • On 9/18 the S& P reached 1729, and by 10/18 it stood at 1745.
  • Some blue chip, mega cap dividend champion stocks saw some dips of 4-8%, others did nothing at all, in which we suggested to buy them.
  • The rise in the Nasdaq was actually led by a handful of stocks, most notably Google (NASDAQ:GOOG) which broke through 1,000 for the first time.

Now I am NOT saying that we will never have a correction, but waiting for one has been like waiting for "Godot". We simply cannot be certain when the market will correct, and anyone saying that the time is now is reaching for headlines in my opinion. After all, the sky is always falling. Right chicken little?

I think the best way for me to offer my own opinion on if we are ready for a meltdown, or are in a bubble, is to focus on our 2 year old portfolio with some history under its belt; The Team Alpha Retirement Portfolio.

The Team Alpha Retirement Portfolio consists of Apple (NASDAQ:AAPL), AT&T (NYSE:T) BlackRock Kelso Capital (NASDAQ:BKCC), Cisco (NASDAQ:CSCO), CSX Corp. (NYSE:CSX), Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Ford (NYSE:F), General Electric (NYSE:GE), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Newmont Mining (NYSE:NEM), Procter & Gamble (NYSE:PG), Realty Income (NYSE:O), and Wells Fargo (NYSE:WFC).

What The Basic Metrics Tell Us

I realize that there are various ways to place a valuation on any given stock, however from my simple point of view, the most time tested metrics are still quite accurate; Forward P/E ratio, and price to book value.

Here is what the Team Alpha Retirement Portfolio looks like right now, with those two metrics assigned:

Price/Bk FWD P/E Stock
2.3-1 11.7 XOM
3.7-1 16.7 JNJ
2.1-1 13.9 T
2.1-1 15.7 GE
1.0-1 10.8 BKCC
3.7-1 11.6 AAPL
5.3-1 18.5 PG
3.2-1 18.5 KO
1.1-1 14.1 NEM
1.5-1 11.1 WFC
1.8-1 17.3 O
2.0-1 11.8 CSCO
1.6-1 10.1 CVX
3.4-1 16.9 MCD
2.2-1 14.1 CSX
3.6-1 11.3 F
2.4-1 14 Average

The averages of each metric are by no means out of line, based on historical measures. As a matter of fact, our overall portfolio is actually below current and historical numbers.

You can view some detailed information at this website, but let me toss up a few significant charts.

First the average PE ratio of the S&P 500 since 1880:

(Click to enlarge)

The current average is 19.89, while our portfolio is at about 14. Well below the average.

Here is the average price to book ratio since 1999:

(Click to enlarge)

The current price to book ratio is 2.57, while the Team Alpha Portfolio is just 2.41.

Now, just for the heck of it, here is perhaps the most important chart I can show you. The average S&P 500 dividend yield since 1880:

(Click to enlarge)

Currently, the average dividend yield is at nearly an all time LOW of 1.91%, while the Team Alpha Retirement Portfolio yield on cost is almost exactly 5%. If you take a look at this intriguing report, you can see that even if we break down each market index, the dividend yields are significantly below our 5%.

Now, when we look at these simple, yet time tested metrics, the conclusion I come to is that any talk about a bubble, or even overvaluation, simply does NOT appear valid for at least our own portfolio.

That being said, a case can be made for the overall market being "fairly" valued.

Looking At Each Of The Market Index's Simply Is Inconclusive

How do we know when a correction or a meltdown is coming? We simply do not, and as far as I am concerned anyone that beats the drum of disaster is no better than the old time snake oil peddlers.

Again, the numbers tell us a story:

^SPX Chart
(Click to enlarge)

The S&P has risen roughly 165 points since the previous high back in 2007/08. That is barely over 11-12% ... is that overwhelming?

^DJA Chart
(Click to enlarge)

The Dow is up roughly 12-13% from its former high water marks in 2007/08. Is that an outrageous recovery?

^NASD Chart
(Click to enlarge)

Finally, the Nasdaq is the one index that "appears" to have risen beyond what some consider the norm; up over 35% from previous highs in 2007/08. Of course that index happens to consist of Apple, Google, Netflix, etc. One could argue about some tech company valuations, but as you can see just from our portfolio above, even Apple has a PE of just 11.6! Nowhere close to any of the averages. If anything, Apple is perhaps the most undervalued stock on the planet (based on just about every fundamental metric that investors use).

It Is All About Income Anyway

I have said this often, but it always is worth repeating; dividend income and dividend growth is the lifeblood of a retirement portfolio. The Team Alpha Retirement Portfolio has a YOC of 5%, delivers over $6,800 per year in income (on $138k invested) and even if we never buy on any dips, that YOC will go up, as will our income stream, simply by virtue of the fact that the majority of our holdings increase dividends nearly every single year.

So which stocks appear to be "undervalued" from just what we see here? How about looking into Exxon Mobil, Chevron, AT&T, Wells Fargo, Cisco, and Ford for starters.

I am not even talking about waiting for a correction, which could happen even as you read this article of course, or not happen until 2017! If you are an investor who is seriously seeking strong dividend paying mega cap stocks that you can rely on, I just do not see any part of the sky falling from what I have set forth in this article.

My Opinion

I will keep this very brief. Markets will correct, and we will have one eventually. It is my opinion, based on the facts presented here, that the Dow will hit 17k before we see one.

Strap those seat belts on. We only have about 110 days (2/7/2014 and the next debt ceiling) until the next self inflicted cataclysmic event offers us a really great buying opportunity!

Disclaimer: The opinions of this author is not a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decision.

Disclosure: I am long AAPL, BKCC, CSX, CSCO, CVX, F, GE, JNJ, KO, MCD, NEM, O, T, WFC, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.