Seeking Alpha
Profile| Send Message|
( followers)  

We continue to look for ideas to help build long term selections for retirement. The majority of ETFs are indexed so there is no selection and we use that as a benchmark to compare with stock selections. By and large the dividend bearing ETF portfolios do pretty well so it is a good comparison.

Today we pick up on an article by Morgan Housel of the Motley Fool that presents five attractive companies based on the Enterprise/Unlevered Free Cash Flow ratio.

We have covered this before but a brief recap:

  • Enterprise value market capitalization (share price x shares outstanding) plus total debt and minority interests, minus cash
  • Unlevered cash flow< with interest paid on outstanding debt added back in

The ratio of these two statistics provides a valuation metric that takes into consideration all providers of capital -- both stockholders and bondholders as focusing on profits and equity alone can be misleading.

Using this metric, here are five companies that Morgan found attractive.

Company

Enterprise Value/ Unlevered FCF

5-Year Average

Oracle (NYSE:ORCL) 11.2 15.7
Microsoft (NASDAQ:MSFT) 11.1 14.4
Bristol-Myers Squibb(NYSE:BMY) 10.0 16.5
UnitedHealth (NYSE:UNH) 10.0 10.6
Hewlett-Packard (NYSE:HPQ) 8.8 15.0

Source: S&P Capital IQ.

This is a list of well known names but probably too focused on tech and health. In any case, it will be interesting to measure against our dividend bearing ETF portfolio:

Asset Fund in this portfolio
REAL ESTATE (NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
CASH CASH
FIXED INCOME (NYSEARCA:TIP) iShares Barclays TIPS Bond
Emerging Market (NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF
US EQUITY (NYSEARCA:DVY) iShares Dow Jones Select Dividend Index
US EQUITY (NYSEARCA:VIG) Vanguard Dividend Appreciation ETF
INTERNATIONAL EQUITY (NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx
High Yield Bond (NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
INTERNATIONAL BONDS (NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond

Portfolio Performance Comparison

Portfolio/Fund Name YTD

Return

1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 1% 1% 21% 10% 77% 8% 54%
5 Companies that Look Attractive in March 2012 8% 2% 8% 21% 100% 5% 15%
Retirement Income ETFs Strategic Asset Allocation Moderate 5% 3% 24% 20% 118% 3% 8%

This portfolio gives middle of the road performance. The Sharpe ratios are low indicating that there is higher volatility but given that this is only five stocks in two market sectors, I think that is to be expected. Overall, I think that this selection has performed well and is worth considering as part of a larger portfolio.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

The five year chart tracks well with the strategic asset allocation benchmark and given that the stock selection has no rebalancing, it performs well and is worthy of consideration.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: 5 Companies That Look Attractive In March