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Roger S. Conrad
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Roger S. Conrad needs no introduction to individual and professional investors, many of whom have profited from his decades of experience uncovering the best dividend-paying stocks for accumulating sustainable wealth. Roger built his reputation with Utility Forecaster, a publication he founded... More
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Energy & Income Advisor
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Capitalist Times
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  • Question of the Week: Excessive Fees
     Question of the Week

    In this section, I address a question frequently asked by readers. Here’s this week’s edition.

    • My brokerage has recently started charging me additional fees every time I buy Canadian income trusts. They’re also now withholding 25 percent of my dividends and won’t even buy some foreign stocks. Maybe I should just stick with US investments.

    It’s simply tragic that at the same time Americans need to invest abroad some brokerages seem intent on doing everything they can to discourage them.

    If you believe there won’t be any consequences from the unprecedented stimulus spending during this economic crisis and that all the world’s best opportunities are here in the US, then I don’t suppose you’ll see any reason to invest anywhere else. Unfortunately, that’s almost certainly the riskiest thing you can do now.

    We’re already seeing some weakness in the US dollar, as the Federal Reserve holds interest rates pretty close to zero. Inflation isn’t really a factor, either, yet. And it probably won’t be until we see a lot more economic recovery.

    Sooner or later, however, this much stimulus has always brought on more inflation. And, meanwhile, the US dollar will continue to lose value, at least until the US government thinks fighting inflation is more important than staving off economic collapse with national elections approaching in 2010.

    The Canadian trusts I recommend are interesting for other reasons besides being a hedge against US dollar weakness. All are strong, healthy and growing businesses, for one thing, and they’re getting more valuable over time. Some stand to throw off sizeable near-term gains as well, as they convert to corporations and pay dividends well above current expectations.

    The fact that trusts are priced in (and pay dividends in) Canadian dollars could prove to be the biggest advantage in coming years. That’s because the Canadian dollar tracks the performance of oil prices over the long haul, and inflation and a dollar collapse aren’t possible without a big boost in oil.

    Buying Canadian is therefore a first-rate inflation hedge, as a rising Canadian dollar automatically raises the value of dividends as well as principle.

    If you let a brokerage’s bullying tactics prevent you from buying Canadian trusts--or any other foreign stocks--you have no one to blame but yourself. The good news is not everyone is going that route.

    In fact, Fidelity is open as never before to buying on foreign exchanges directly, including Toronto, where the trusts trade. You can switch. But sticking with a brokerage that’s abusing its relationship with you shouldn’t be an option.

    Nov 13 3:35 PM | Link | Comment!
  • Question of the Week: Desperately Seeking High Yields

    In this space, I answer a frequently asked question. I hope you find this week’s entry helpful.

    • I lost a great deal of money over the past two years and am anxious to recoup by investing in high-yielding stocks. What can you recommend with a yield of at least 15 percent?

    First of all, you’ve got to get out of the mindset of trying to recoup what you lost the past two years.

    What we went through was a truly historic event, i.e. the worst credit environment and sharpest economic contraction since the Great Depression of the 1930s. Everything lost money except money market accounts and US Treasury bonds, and that’s only because Uncle Sam backed up both with our tax dollars.

    Investors who stuck with stocks and fixed-income securities (bonds, convertibles and preferred stocks) backed by strong underlying businesses have made back a surprisingly big chunk of their losses. But chances are even they’re under water. And those who were seduced by junk during the last boom--or who bailed out at the bottom earlier this year--are permanently out.

    I know it’s hard to do, particularly if you didn’t hang in there to enjoy this year’s rally. But you’ve really got no alternative but to put the past behind you. That means positioning your remaining funds in the best possible way for the future, not trying to make back what you lost. As someone a lot smarter than me once said, the market doesn’t know or care who you are or what your objectives are.

    Point No. 2: When something yields as much as 15 percent, there’s usually a good reason why. Back at the bottom in early March, there were plenty of investments backed by high-quality companies paying out that much. The reason was that investors were deathly afraid of everything except cash and Treasury bonds after what had been an historic decline in the market. Yields were that high because no one wanted to take the risk.

    That’s no longer the case today. Rather, anything yielding upward of 15 percent is almost certainly at high risk to a dividend cut. It could prove to be a big winner if the underlying business challenges are resolved, both for yield and capital gains. But it could also lose a lot of money if the dividend is cut, as the stock sells off in response.

    Once in a while in this business there’s a seminal moment where the nature of the market becomes clear. Back in the ’90s, the craziness surrounding Qualcomm (NSDQ: QCOM) stock was a red flag that investor appetite for technology stocks had run too far and a crash was imminent.

    This decade, it’s been all about yield--a good thing I think because dividends had too long been discounted as a way to build wealth. Over the past couple of years, however, yield investing too has reached an extreme.

    Last year, for example, an investor emailed me a list of 12 stocks yielding 20 percent and up. He then proceeded to berate me for running an income portfolio where the average yield was roughly 7 percent. What he failed to realize is that every last one of the stocks on his list had already cut its dividend and was rapidly sliding toward bankruptcy and a total shareholder wipeout.

    In contrast, those boring 7 percenters have held their own during one of the worst periods of market history.

    I currently recommend a handful of investments with extremely high yields. One of these is Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF), a Canadian trust that derives essentially royalty income from power plants run by its parent Boralex (TSX: BLX). It pays out monthly at an annualized rate of nearly 16 percent, mainly because of one of its biomass power plants has been shuttered due to troubles in the Canadian timber industry that supplies its woodwaste fuel.

    If Boralex can resolve the situation, we’re going to have a big dividend and capital gain. If not, the units are likely to sell off, though downside would be protected by the low price of 89 percent of book value.

    I’m willing to hold Boralex Power for two reasons. First, I think it has a good chance of beating expectations, mainly getting the woodwaste plant problem resolved.

    More important, however, I’m comfortable because it’s just one high-yielding and less secure stock in a portfolio of companies that are primarily lower-yielding but far more reliable and growing.

    Even if Boralex Power craps out, my overall portfolio isn’t going to suffer. And if it pays off, it has the potential to strongly boost my returns.

    Third quarter earnings, for example, were solid; management affirmed the current distribution after making up a small distributable cash flow shortfall with its ample cash reserves. Cost-cutting and hydro performance almost completely offset the negative cash flow from the biomass operations. Even management, however, acknowledged in its conference call that it needed to resolve the biomass situation to hold the dividend long term.

    If you want to go high yield, I can’t urge you enough to construct a similar portfolio. It may sound counter intuitive in today’s yield-crazed environment, but a 7 to 8 percent yield growing 5 percent a year is going to make you a lot more money than a 15 percent yield that’s perpetually at risk and won’t grow at all. That’s because share prices always follow rising yields higher. And if you hold on long enough, your current income will be higher as well.

    Nov 11 9:34 AM | Link | Comment!
  • The Expectations Game

    Building wealth is the ultimate goal in investing. And the surest way to do that--at least on the long side of the market--is picking investments that beat expectations.

    For those with near-term time horizons, few things are more important than quarterly earnings and whether or not a company has matched its own expectations and those of the analyst community.

    Stocks of companies that top projections aren’t immune from big market trends. But even in the worst of times, they will outperform. Conversely, stocks of companies that fail to live up to projections are always prone to take a tumble, even in the best of times.

    One of the most confusing aspects of the expectations game, particularly for new investors, is a company posting extremely strong results can still sell off if it doesn’t do as well as people expect. In fact, as people are inherently emotional creatures, this actually happens quite a lot. Equally, the stock of a company whose results look plainly horrific can rally, again if it does better than the consensus expects.

    We’re now in the heart of earnings reporting season for the third quarter of 2009. As the past 12 months have featured the worst credit crunch and recession in decades, it’s no great surprise that most companies are reporting numbers that fall well short of last year’s.

    One of the biggest exceptions is Apple (NSDQ: AAPL). The company has positioned itself at the front of one of the biggest growth trends in any decade--the insatiable demand for global connectivity--with what’s become the trend’s most popular tool, the iPhone. Earnings have been off the chart quarter after quarter as growth continues to accelerate.

    The better the news on Apple has gotten, however, the tougher it’s become for the company to beat the market’s expectations. Amazingly, it’s thus far proven up to the task, evidenced by what’s basically a double in its share price over the past year. But despite knocking the cover off the ball in the third quarter, Apple shares are basically flat since management announced them.

    Clearly, the bar for success has risen dramatically for this company. It’s going to be increasingly hard for management to measure up. And, should the company even disappoint a little, we’ll see selling, quite possibly a lot of it.

    In stark contrast, the last 12 months have been extremely unkind to oil and gas producers. During the third quarter, for example, even the strongest posted steep declines in year-over-year profits, as a halving of oil prices and a two-thirds drop in gas trumped production gains and cost-cutting. EOG Resources (NYSE: EOG), for example, announced today that its third quarter earnings per share dropped from $6.02 a year ago to just 81 cents, not including one-time items and despite solid gains in production.

    Those earnings nonetheless beat a consensus estimate of 61 cents a share. The result: EOG shares have surged today. Moreover, oil and gas producers across the board have risen sharply since early March. As with EOG, comparisons with a year ago have been absolutely abysmal. But they’ve topped expectations, and that’s brought in the buyers.

    Sound confusing? That’s why so many short-term traders wind up losing their shirts. The difference between winning and losing is second-guessing the consensus estimates for a number--profit per share--that no one can ever really fully predict, and the impact of which is ultimately fleeting.

    Every earnings season share prices fluctuate enormously as big money sloshes in and out. Those who guess wrong wind up a little poorer, and those who guess right are a little wealthier. And then they go back and play the same game three months later.

    That this is how most of the trillions in institutional money is invested goes a long way to explaining why it’s so difficult to build real wealth in most mutual funds. It also explains why turnover is so high for most mutual funds and why fund fees--even for the best--are so high.

    Success or failure as an institutional manager is determined by quarterly success or annual success at best. Beating the market over that time frame means picking enough stocks that beat expectations for quarterly earnings per share, and for larger companies “guidance” for future quarters. And that means selling underperformers and loading up on outperformers.

    Ironically, the game played by most institutions has little to do with building real wealth. In fact, what it basically does is ensure that most funds will mirror the performance of the broad stock market, at least before fees and commissions are taken out. It also ensures dividend yields are generally paltry for most funds, as positions may or may not be held long enough to pay distributions. And you’ll never, ever buy low and sell high.

    Rather, as anyone who’s built real wealth in the market knows, the key is buying good businesses cheap and holding until their value is reflected in share prices. Optimally, the value of that business should be growing over time, as management finds new opportunities and expands its base of profitable assets. And, as long-time readers know, I prefer management share the wealth with a rising stream of sustainable dividends.

    To this strategy, it matters little if a company beats Wall Street expectations in any given quarter. What we want is for it to beat the bar of expectations for the long haul by growing the value of its business, maintaining a steady balance sheet and paying dividends.

    Quarterly results, however, are no less important to meeting our objectives than they are to the trader betting on estimates. In fact, it’s far more important for the long-term wealth-builder to read over the numbers carefully. That’s because we’re not just buying a name or a number but a business. And we want to make darn sure it’s still worth owning.

    Happily, earnings reports are a treasure trove of information. The vast majority of companies send out a press release that’s basically an executive summary including the important numbers, or at least those figures management wants us to see.

    But they also send out 10-Qs and 10-Ks that contain all the dirty laundry as well. And then there are the conference calls, when management is forced to account for its actions by answering a barrage of analysts’ questions.

    As I approach earnings season, I generally know what to look for with the companies I track. That’s the benefit of following--with some exceptions--the same group of stocks over a number of years.

    One set of quarterly numbers isn’t going to tell you squat about a company’s long-term prospects. But put in perspective with prior quarters, the big trends become visible, as well as what’s going to make the underlying business more valuable or less valuable.

    I’d like a company I recommend to post improved numbers every quarter. That’s not necessarily earnings per share, or even distributions per share, but a group of metrics I consider to be important in gauging the health of the business.

    How I look at, for example, a master limited partnership (NYSE:MLP) that owns energy pipelines, for example, will be different from how I look at a wireless communications company or a producer of oil and gas. And becoming a more valuable business must be put in the context of the industry it’s operating in as well, and whether it’s growing or contracting.

    In Utility Forecaster, Canadian Edge and MLP Profits--which I co-edit with Elliott Gue--I attempt to provide the information that’s relevant to judging whether an underlying business tracked is growing. I sum it up in a safety rating, which is combined with valuation criteria to determine whether a stock is worth buying and holding, or whether it should be dumped.

    I’m not one who uses sector investing. True, stocks of a given sector tend to move together in the near term, and there are trends powerful enough to lift or sink an entire sector. For example, growing demand for connectivity has benefited all communications companies.

    On the other hand, a “sector” includes both well-operated companies that are taking market share and positioning for growth and poorly operated ones that may be destined for the dustbin of history. And if you own an exchange-traded fund (NYSEMKT:ETF) for a given sector, you’re going to get the garbage as well as the good.

    Fewer than half the communications companies I tracked in Utility Forecaster back in the 1990s are even in business today. Fully a third of the MLPs we track in MLP Profits are rated “sell” today because of overleveraged businesses and legal/regulatory vulnerability, though the sector itself boasts some of the best bargains for high reliable yields and growth now as well. Power utilities have been among the best-performing stocks since the market peaked in mid-2007, yet four have cratered by cutting dividends taking down the averages.

    Sector trading can be a great near-term investing tool. But if you’re about building wealth and collecting dividends, there’s no substitute for picking individual stocks. And the only way to that effectively is to know how they’re really performing as businesses.

    The good news as I look at third quarter results is that there have been very few negative surprises. That’s particularly been true of companies that have been successfully navigating their way through what’s been the most difficult economic environment in decades. If they’ve made it this far, they’re in great shape to take advantage of the recovery to come.

    As today’s spike in unemployment to 10.2 percent demonstrates, that may take some time to unfold. But the bar of expectations is also low. That means almost all of the surprises are going to be on the upside. And that’s what will build our wealth going forward, even if the actual news is less than ideal.

    Nov 11 9:33 AM | Link | Comment!
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