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Doug Meeks
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Doug Meeks is a Registered Investment Advisor in Plano, Texas. He is the Principal Advisor for Pier LLC, an investment management company. The focus at Pier is to build and manage income-producing portfolios for our clients. We provide individual service to those who are inclined to see their... More
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  • The Markets Are Down Big, Are You Getting Your Returns?

    I know what you are thinking.....

    "Should I sell now?"

    If you are in the market for just price then I'm hurting for you right now. I honestly don't have an answer. You did just watch a big part of those 2013 gains disappear. In fact you are now back to October 18, 2013, like these last 4.5 months never happened.

    If I was an MPT guy I would tell you not to worry that the long term average of the markets is something great like 10% CAGR and just hang in there we are efficient as hell, and you'll be fine.

    I'm happy to tell all of you who are investing for dividend growth (in quality stocks, and not just one or two of them) that things are great. Nothing has changed but the price. I want to further encourage you by taking a look at a return.

    I like to keep things simple. From Investopedia:

    (click to enlarge)

    I would add to this that the capital gains portion of a return is only meaningful when the investment is sold or closed out. A capital gain return does gain some mathematical relevance with large moves and can be further solidified, without selling, by adding some smart option contracts or stop loss orders. However, until the dust settles and you have cash in your hand you do not have a return.

    If you want more return..... well you have to buy another investment and another set of risks. All understand this.

    These kinds of returns are the returns that cause sell-side anxiety.

    Do you sell?

    When capital gains are the major goal or major component of your return then at some point you have to sell to get any return.

    Days like today and the resulting emotions are what cause sell side anxiety and often under performance. Risk against the price component of return is often forgotten about when the markets are moving up and up. Then we have a hard sell off, and we are all reminded that the sweet song of MPT and capital gains are best regarded over long time frames.

    When approaching the market I plan on dividends to be the most measurable and useful return. Dividends are new capital. You own a company that proceeded to get some business done and return you some of the profits. Your return is very real in this case, depending on what you do with it can have other results but because it is a cash payment it's a realized return.

    My returns are doing just fine right now. If you are savvy Dividend Growth Investor then your returns are doing just fine right now as well.

    I'm not a fan of falling prices, but if you are in the market then falling prices should be a part of the plan that you can withstand. The other part should be a growing return of new capital via a dividend.

    Feb 03 9:07 PM | Link | 4 Comments
  • Seasonality: Is The Run Up In Utilities Over?

    Seasonal weakness has effected the markets this year like most years. The pain typically starts in May and lasts most of the summer. Every year there are lots of doom and gloom headlines and many people crying about debt, corruption and government policy. Beginning on May 3rd this year you can see the US Investor Sentiment % Bearish indicator move up sharply from 28% to 42%

    US Investor Sentiment Index of % Bearish.

    (click to enlarge)

    An investor should try to ignore the noise and dig into information that matters to his or her investments. This kind of seasonality is a regular event and can become part of a larger investment strategy but patience is required. Cyclical weak sectors like energy and precious metals can be a good place to go shopping for great prices. In a hot defensive sector do not let a short term desire for something like a high yield effect your plan to get a great price for a stock. A portfolio well designed for income and growth should love the summer weakness season. Dividends are rarely effected and prices are better for buying and re-investing in many sectors.

    Measuring seasonal weakness for an Investment Strategy

    Measuring seasonal weakness with the indexes is a relative exercise that works best using a traditional defensive sector. With that in mind I want to look at the utility sector related to the S&P 500 as a whole. We could also use food, mid-stream MLP's or even the mREITs. All have held up well this year but the utilities hold up well every year.

    A strong group of utilities can add some comfort and stability to a portfolio this time of year. I use Consolidated Edison (ED), American Water States (AWR) and a smaller regional electric company named CMS Energy (CMS). ED and AWR have unblemished dividend history and CMS is doing a great job getting their business in order and growing. Since these three companies are near 52 week highs they have my attention. A shift or rotation in investor sentiment away from a defensive stance could signal substantial price declines from these elevated levels.

    Let's look at this years defensive performance of these three companies (and XLU) during the seasonal weakness in the broad market. Chart from ycharts.com

    (click to enlarge)

    From May 1st till now the S&P 500 has been weak showing a season loss of about 5% (bottom purple line). My small sample of utilities have performed very well, and so has the XLU. Sometimes issues, such as worker strikes, make the news but in the time frames I'm working with I pay little attention to that type of news. I do watch for the pace of regulation adjustment and the ability of a utility to structure it's product in real time with cost change. AWR has a recent approval for new cost of capital (read here) that locks in a return on equity of about 10% for a large subsidiary.

    Let's step back and take a longer more broad look to try to understand the magnitude of seasonal performance related to utilities. This is a four year chart of the S&P 500 against the State Street Utility ETF (XLU). It's no surprise to me that the S&P index has outperformed Utilities (as represented by XLU) across the longer time frame.

    (click to enlarge)

    Look at the S&P 500 dips just before each July marker those dips are very consistent at the beginning of May each of the last four years.. July represents a nice point to start watching for money rotation back in to the broad market. The XLU has out performed the S&P during the summer dips since 2009:

    Weakness Starting May 1S&P PerformanceXLU Performance
    2009-8%+1%
    2010-21%-8%
    2011-14%+0%
    2012-17%+2%

    These performance ranges are from May 1st each year to the summer low point put in by the S&P 500. The average seasonal outperformance gap of XLU (vs. S&P500) since 2009 has been 12.25%. This year the seasonality or market rotation drove the performance gap to 15% at the S&P low point on June 1st. It may grow more but for the purpose of this simple exercise I'm saying the seasonal advantage has ended. Since June 1 this year, the XLU and S&P 500 have had much more correlation than during May. A quick look at the top chart showing Investor Sentiment will show a peak in bearish feelings at the widest divergence between XLU and the S&P 500 near June 1. As the bearish sentiment drops the S&P should start to outperform the more defensive utilities. I would think that increasing bearish sentiment from this point on will effect utilities as well.

    I hold my utilities with very little interest in selling them. I do re-invest the dividends unless they are needed for current income. July is a good time to move up stops in utilities or to sell them outright in favor of better value in another sector if an investor has an interest in trading.

    ED, CMS and AWR have moved up strongly this summer and have recently shown weaker volumes at these higher prices. New capital that I have allocated to these utilities will wait for a better price for entry.

    Disclosure: I am long ED, AWR, CMS.

    Additional disclosure: Caution is advised in these markets. Investors participating should be prepared to bear loss. This article is for educational purposes only, it is not individual investment advice. Please consult a qualified professional who has specific knowledge of your investment needs and risk tolerance if you need advice.

    Jul 25 5:02 PM | Link | Comment!
  • Evaluating Social Media As An Investor

    I was talking with the CEO of a cutting edge hardware developer in the television market. A friend and a smart guy. Social media had become a part of that conversation and this is how it ended with both of us staring out into space.

    "......I know, I know, but what does 800 million users mean?"

    Chart below from icrossing:

    (click to enlarge)

    I still ask myself that same question and as an investment advisor I should have an answer that is relevant to investors (who are not to be confused with speculators).

    Let's look at social media as we know it today.

    It's free.

    What does that price mean to a customer and what value is that customer. What do those customers do with that product? What ultimate value is that business to an investor.

    I get it, or at least I think I get it. There is this place, but wait....it's not a real place it's an on-line place, that you can go and connect with anybody that has any level of relevance to you that you decide is worth connecting to. You can get together, well virtually, with people who like the same things that you do. You can play games, chat, share pictures and have a personality or not. It's free.

    Information can be gathered, space can be sold, well it's not real space, it's web space. It's social media. So instead of knowing your neighbor you can know somebody else's neighbor. Again, it is social media, but wait it's not the real old-world definition of 'social', it's on-line social.

    That is just my worry as an investor. What keeps your client coming back? What is in a clients way that keeps them from walking away. We could sit down and talk to the MySpace guys about that. Justin Timberlake and some business associates bought MySpace for $35 million dollars recently. I suggest everyone have a fascinating read at Wikipedia about the history of MySpace.

    I'm not bashing Facebook (FB), I would never do that. I'm reaching for a thought process that will help value a company like Facebook. I understand revenue, profit and popularity (or demand). I also understand that if a client has nothing to loose or can be tapped by a competitor for zero dollars then something as simple as a new color scheme could be a companies worst nightmare. I find this revolution of an on-line society to be a captivating study, but can a metric be developed to predict the direction of that revolution.

    I don't want to just rant here about how I can not figure it out. Let me put out a few things I need to see from a social media company before I would invest.

    1. A healthy dividend.
    2. A full business cycle including the birth and co-existence of competitors.
    3. A fundamentally understandable price metric, like P/E in line with the S&P500.

    Until I see these things I will go out on a limb and call the ownership of Facebook to be a speculation. I understand that speculators can do very well for themselves, best of luck to you.

    In my dry world of reading balance sheets, watching commodities, utilities and the financial markets I see no way to know what direction this revolution is going to go or how long it is going to take social media to develop an understandable place in the business world. Those reasons help me rest comfortably with no plans to invest in social media. It's a world of venture capital and news stories. My clear focus is long term value and growing income.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: FB, ipo-analysis
    Jun 08 6:57 AM | Link | Comment!
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