Market Tops, Froth And What I'm Watching Now

by: Integrator

Well, it seems like every new week brings a new market high. While we had a few nervous moments a couple of months ago, markets have resumed their upward momentum. I'm not actively looking to make net additions to my portfolio right now but I thought now's a good a time as any to put my watch list together.

Fears that the US debt merry go round may come to a grinding halt with a failure to raise the debt ceiling got some people temporarily worked up, with the pressure valve released once the debt ceiling was extended. With that slight diversion out of the way, the markets promptly continued their strong march upwards and brushed the debt ceiling worries aside.

Needless to say, the proverbial "debt ceiling can" has only been kicked down the road for another few months, but we'll save that one for another time. The debt ceiling limit was always going to be extended. The impact of not being able to pay the bills would have definitely led to global recession given current weakness in the global economy.

I recently took another look at my prediction of where the Dow Jones Industrial Average would end 2013 and it looks like I was probably way too conservative. If we finish out the year at current levels, I'll be off a significant amount!

Does anyone recall that we actually started the year at near 13,100? So we are up greater than 20% for the year. When I see a run of almost 20% in a year that makes me a little bit nervous. You don't get that sort of return on a regular basis, and when you do, it typically means a "mean reversion" or return to normal shortly after.

I only look at the performance of one of my small cap holdings Medidata Solutions (NASDAQ:MDSO) as evidence of this trend. I bought Medidata less than 1 year ago, and it has already tripled in price. A great business no doubt, but I'm not sure that it is worth the price that people are currently paying.

In any case, I recently put together my wishlist for the dividend payers I'd like to buy when I start my buying again early next year. Given I invested very heavily in the first couple of months of 2013, I plan to largely sit out the rest of the year, which will do me just fine given where prices are! I expect my current portfolio will deliver close to my targeted $27,000 in dividend income for 2013. I'm keen to further extend this next year and plan some significant net additions to the portfolio in 2014.

Qualcomm (NASDAQ:QCOM)

Qualcomm is a phenomenal business and a great way to play the telecom space. AT&T (NYSE:T) and Verizon (NYSE:VZ) are the not the only way to play telecom dividends. I have a lack of interest in the big telecom carriers given where their share prices currently are and the factors that may hamper earnings and dividend growth going forward.

Qualcomm is a very interesting Intellectual Property and licensing play. It provides the chipsets that power 4G devices, where it has significant market advantage over the likes of Intel (NASDAQ:INTC). It also licenses key CDMA technology that powers mobile networks around the world (including Verizon's). It's a solidly profitable business that has been growing revenues 20-30% recently, with gross margins near 60% return on equity close to 20%. With a dividend yield around 2.0%, a little drop in the stock would get me very interested for the dividend.

McCormick & Co (NYSE:MKC)

I'm very attracted to wide moat businesses given their stable earnings and economic power. If I can find myself a wide moat business in a defensive industry all the better. Consumer staples is one of those defensive industries that I love, and McCormick is a classic wide moat business selling spices and condiments. No matter how bad the economy, people will always want their spices and seasonings.

Revenue has almost doubled in the last 10 years, resulting from a steady 7% annualized increase over the period. Gross margins have also been maintained since 2003, hovering around 40%. The fact that McCormick has grown revenues at a pretty rapid clip, while keeping gross margins in tact is suggestive to me of a strong economic moat.

McCormick shareholders would have been pretty content with returns generated. $10k invested in 2003 would be worth almost $40k today. At a forecast yield of around 2%, this is a company that I'd be happy starting a position if it would come back just a little.

CSX Corporation (NYSE:CSX)

In certain industries, location can lend itself to the existence of an economic moat. Companies such as Burlington Northern and CSX have economic moats by virtue of where the railroad assets are located. Having rail tracks in high trafficked corridors, or those with strong economic activity creates a moat because that the existence of that infrastructure makes it less likely that another competitor can come along and replicate that access given geography and other logistical barriers, such as negotiating new access permissions across territories and setting up similar infrastructure.

I have had some luck in the past investing in infrastructure related assets such as toll roads and airports. They are a great asset class for reliable distributions. The problem has been that sometimes they are encumbered with too much debt. CSX is not in that position. With a gross margin comfortably above 60% and return on equity near 20%, CSX pays a nice yield of close to 2.2%. Again, a slight fall in share price would be welcome to start a position here.


Unlike the other stocks that I mentioned above, this is one that I already own, and recent falls in price make Cisco look more and more attractive to enter again. Cisco sells routers, switching equipment and cloud solutions into enterprise markets and has a very sticky customer with high switching costs.

While Cisco does not have a long track record of dividend growth, its revenue and earnings growth over the last 10 years is pretty impressive. Revenue has increased every year in the last 10 years except in 2009. Net income and earnings has shown a similar consistent increase over the last 10 years.

The thing I like most about Cisco is that it is very well positioned in a number of areas that I feel are going to experience strong growth in the medium term. Cloud services and video delivery solutions in particular should experience robust growth as enterprises move more of their storage from on premise solutions into the cloud.

Cisco is cheap on a valuation basis. It is also well positioned in some key markets and has a strong track record of growing revenue and earnings over the last decade. With a 3% yield and a very manageable payout ratio of only 30%, I expect that it should be able to lift dividends at least 10% per year over at least the next 5-7 years, providing total returns of around 13% per year.

A 3% yield is pretty attractive to me and the quality of Cisco's business will likely get me to top up my existing holding.

Disclosure: I am long CSCO, MDSO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.