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 (ORCL) | 11.2 | 15.7 |
| Microsoft (MSFT) | 11.1 | 14.4 |
| Bristol-Myers Squibb(BMY) | 10.0 | 16.5 |
| UnitedHealth (UNH) | 10.0 | 10.6 |
| Hewlett-Packard (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 | (ICF) iShares Cohen & Steers Realty Majors |
| CASH | CASH |
| FIXED INCOME | (TIP) iShares Barclays TIPS Bond |
| Emerging Market | (VWO) Vanguard Emerging Markets Stock ETF |
| US EQUITY | (DVY) iShares Dow Jones Select Dividend Index |
| US EQUITY | (VIG) Vanguard Dividend Appreciation ETF |
| INTERNATIONAL EQUITY | (IDV) iShares Dow Jones Intl Select Div Idx |
| High Yield Bond | (HYG) iShares iBoxx $ High Yield Corporate Bd |
| INTERNATIONAL BONDS | (EMB) iShares JPMorgan USD Emerg Markets Bond |
- 5 Companies that Look Attractive in March 2012 -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
