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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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  • Don't Be Manipulated By Price And Valuations 32 comments
    May 16, 2013 3:39 AM

    This instablog is going to take on the concept of valuations and attempt to show you when you may want to consider ignoring them. In fact, it is my hope to show you when you should ignore them. The time to ignore valuations doesn't come often, but when it does, that's where the big money is made, and it would behoove us to know how and when to apply the idea of ignoring valuations.

    I am not suggesting you stop looking for undervalued companies. I am speaking more along the lines of once you are in the position, you may want to consider ignoring valuations in order to allow your winners to run, or to add to existing positions in a strong uptrend. Keep in mind, the strong often get stronger.

    Most people who use the dividend growth investing strategy consider themselves Value investors. When they see a quality company selling at what they think is a low price, they don't believe the market. They believe the market is wrong about the value of that company. Yet, when the market tells us it is overvalued, we are too quick to take the market's word for it and we want to cash in and take some profits. This doesn't make sense to me. There's no consistency. If the market is wrong on the downside, what makes you think they are right on the upside?

    Valuations to me only matter at the time of entry. Valuation determines the price I pay to become an owner in a successful business. Once I am an owner in the business, price is almost irrelevant. What is relevant is how the business is being run.

    If you think the value of a company is what the market says, then you really have no business investing in equities. Stick to trading. If you owned your own personal business, you wouldn't be selling off ownership because some outside force valued your business at various prices on a daily or weekly basis. You'd focus on running your business and trying to earn a profit.

    I find it interesting that people have a greater fear of giving back some profits more than they fear the initial amount of money they put into a new position. That fear is why people will scalp profits but will hold on to a losing position for years, in the hopes of breaking even. It's crazy!

    Instead of looking at valuations, I'm looking to see how my company is performing. Most folks have avoided purchasing Realty Income (O) because it looks so overvalued, but that value is based on trailing twelve months (ttm). The market looks forward!

    When I saw that O was upgrading the quality of their tenants, and I saw the number of quality acquisitions they were making, I knew the market had valued O incorrectly, so I let my winner run, and boy oh boy, has it ever run. Then a funny thing happened! All of a sudden, Morningstar and other agencies started raising fair value, but it was after the fact. You were late to the party if you weren't looking forward. O continues to hit new price highs.

    Health Care REIT (HCN) is another one. By any measure of valuation using ttm, it has been overvalued and most retail investors have avoided buying shares. Then a funny thing happened (sound familiar?). HCN came out with an $18 million share offering and the market swallowed it whole without even blinking an eye. We didn't get the usual 3% drop in share price. The market, which looks forward, knew that HCN was more valuable than what the then current valuations were and price kept going higher. I had to laugh when Morningstar finally raised fair value by $10 per share.

    The moral of the story here is that in looking at valuations, price can either drop to the lower valuation levels, or earnings can increase, thus making the company more valuable and rating agencies have no choice but to raise fair value. This is why your focus should be on the performance of your company and not on price.

    I refuse to be manipulated by price and valuations because I watch the "Condition of the Market."

    Over the last several years, corporations seemed more interested in insuring their financial future than growing the business. That is starting to change and could take valuations even higher.

    In 2013 the Dow has not been down for at least three consecutive days. That breaks a 50 year record according to Raymond James strategist Jeffrey Saut. ... And we want to sell into that?

    The economy continues to improve. Housing is finally coming out of a coma. Companies are flush with cash. Companies are starting to show top line growth. Companies are raising dividends at rates higher than they did a year ago, and we want to sell into that? Are we crazy or are we fearful?

    Let's think about the "Condition of the Market" for a moment.

    As we headed into 2013 we had to face the fiscal cliff, sequestration and an ever increasing debt ceiling. Yet, the market continued higher.

    According to Morningstar, the best performing sectors of the market this year have been health care, consumer staples, utilities and telecom. All defensive in nature. This told me the market had room to go even higher.

    Macy's came out yesterday with better than expected numbers and higher same store sales. The consumer is opening their pocketbook. This indicates an improving economy and Macy's raised the dividend 25%. ... And we want to sell into that?

    There are over 10,000 baby boomers retiring every day and they are looking for income. With interest rates at near zero, these people are being forced into equities. This should help the demand going forward.

    Until the monetary stimulus and quantitative easing stops, the market is going higher over the long term.

    I have learned over the years to stop fighting the market. I'm not powerful enough to buck the trend. If you're going to go with the flow and learn to let your winners run, then you're going to need to take a step back and stop allowing price and valuation to manipulate you. Stop staring at your profits! Focus on the business you have part ownership in. As long as they continue to meet earnings estimates and they continue to guide higher going forward, then stop selling them. Price is going higher because the company will be more valuable.

    You've got to be aware of your environment. Everything about this market is making it easier for the market to head higher. We need to use common sense and put our fears aside. The market is telling us what to do. It is telling us not to be manipulated by price and valuation. We simply need to learn how to listen.

    The market may turn south tomorrow, next week or next month, but it will need a catalyst because right now companies are earning money and raising the amount of profits they share with share owners. And that's what owning a business is all about.

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Comments (32)
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  • Thanks for that article, Chowder. Always a pleasure to see your writings. Peace
    16 May 2013, 06:21 AM Reply Like
  • I am at the end of my first year since establishing a dividend growth portfolio. I have been pleased with the pay raises I have received from my companies that have announced dividend increases. I am reinvesting dividends back into the companies that paid them.

     

    I have learned much from chowder's blogs and comments, and I certainly appreciate them. Have Percy put a dollop of Irish cream in your coffee on your next day off.
    16 May 2013, 07:20 AM Reply Like
  • Thanks chowder for this, its full of wisdom. I am listening.
    16 May 2013, 08:00 AM Reply Like
  • Thanks for the article, as a reformed trader, sitting on profits is the hardest part. We have to keep the long term goal in mind, compounding investments in sound, growing companies.
    16 May 2013, 08:53 AM Reply Like
  • Thanks for the article and the comforting words. For example I've been contemplating a sale of Flowers Foods (FLO) since it has run up 35% since my purchase in January and appeared to becoming overvalued.

     

    However, they announced great earnings this morning and it looks like the higher stock price is validated based on the increased earnings from recent acquisitions.

     

    I'm glad I didn't sell.
    16 May 2013, 01:02 PM Reply Like
  • Author’s reply » Eric, I would say that FLO is moderately overvalued but it does have a history of selling at a premium.

     

    I don't follow FLO so I don't know what is going on within the company, but as long as they have great earnings and continue to guide higher, then it's a hold in my opinion.

     

    When companies miss on earnings and guide lower, or meet earnings and warn going forward, then if one wishes to lock in profits, that's an opportunity to do so.
    16 May 2013, 01:15 PM Reply Like
  • This morning FLO announced a 3:2 stock split and increased the dividend by 5.5% http://yhoo.it/13Isihl. The dividend increase was less than I hoped for but not surprising after the company spent a big chunk of cash buying out Hostess.
    The market apparently likes it though, stock is up over 4% today on the news.
    22 May 2013, 11:57 AM Reply Like
  • Author’s reply » Well then there you go! It was a hold. ... Ha!

     

    Congratulations, good job.
    22 May 2013, 01:31 PM Reply Like
  • Fantastic! Fantastic

     

    " Most people who use the dividend growth investing strategy consider themselves Value investors. When they see a quality company selling at what they think is a low price, they don't believe the market. They believe the market is wrong about the value of that company. Yet, when the market tells us it is overvalued, we are too quick to take the market's word for it and we want to cash in and take some profits. This doesn't make sense to me. There's no consistency. If the market is wrong on the downside, what makes you think they are right on the upside?

     

    Valuations to me only matter at the time of entry. Valuation determines the price I pay to become an owner in a successful business. Once I am an owner in the business, price is almost irrelevant. What is relevant is how the business is being run
    "
    16 May 2013, 06:30 PM Reply Like
  • Hi Chowder,

     

    Been following your blogs for a while now, great posts, catchy style, keep it up!

     

    Like you I'm about to assume a position in CVX.

     

    Curious to hear your thoughts on this. I'd like to minimize tax
    exposure obviously on companies with decent dividend, so I'd like to use a retirement acct for CVX. On the other hand, while I"m generally a core guy, buy and hold 20 year horizon, I would like to have some maneuverability with some positions and wouldn't mind using the retirement account for positions that may need some movement in/out of take profits etc. and minimize cap gains tax.

     

    SO....if you had a choice (in my situation) would you try and load the retirement account with the dividend plays only?
    16 May 2013, 06:32 PM Reply Like
  • Author’s reply » farstud, all I own are dividend paying equities in both taxable and tax deferred accounts.

     

    MLP's are in the taxable accounts. I WILL NOT place them in a tax deferred account. Since the distributions are mostly return of capital, they aren't taxed. Therefore, I should hold them in a taxable account.

     

    I hold a couple of Muni Bond CEF's in the taxable account for the same reason as MLP's, tax friendly.

     

    I own my REIT's in a tax deferred account because the dividends are taxed at the higher margin rates if held in taxable accounts, so I'm able to shelter the higher dividends from taxation.

     

    Other than that, I put dividend growth companies in both accounts.

     

    If you have room in a tax deferred account to add CVX, then that's what I would do. I always fill up the tax deferred accounts first and then whatever is left over has no choice but to go into the taxable account.

     

    I also own the same companies in both types of accounts. That way if I want to peel off profits, I can do it in the tax deferred account and not pay capital gains tax. By owning the same companies in both types of accounts, I'm not limited to the size of my positions either.

     

    Just some food for thought!
    16 May 2013, 06:47 PM Reply Like
  • thanks chowder! Great article as always.
    20 May 2013, 04:32 PM Reply Like
  • "I also own the same companies in both types of accounts."

     

    I've been doing the same, but have yet to take profits. I'm sure it will happen some day.
    16 May 2013, 07:28 PM Reply Like
  • Thanks for good blogpost, Chowder!

     

    I esp. like your statement about asymmetry of assumptions and actions for under/over-valued cases.
    I think EMH works mostly good (within +/- 10%-15% error) for big companies which are under microscopes of several analysts and their prices reflect market conditions quite good. Small stocks which are out of Wall Street radars might be under/over-valuated for a while. Therefore I think such micro/nano-caps with limited liquidity and good dividend history are good choice for individual investors (http://bit.ly/12FDOep).
    Although I intend hold stocks forever, I think price manipulations and/or market conditions on the background of honest earnings (i.e. real numbers without accounting tricks) sometimes "allows" to trade stocks even for long-term investors. Would you or any DGi refuse to buy IBM at P/E=5 or sell KO at P/E=200?
    SDS
    17 May 2013, 12:02 AM Reply Like
  • Chowder,

     

    This article came just at the right time. I will focus on acquiring high quality companies at a good valuation, and stop worrying about the price fluctuations.
    17 May 2013, 02:01 AM Reply Like
  • Perfect timing for a great article. I've been following your comments and always learn something new. I clicked the following option under your name awhile ago but never received email notices when you've written a new article -- only found this when you provided a link in your comments to Dave's article.....Can you let me know how to be notified?...or is that not possible unless it's an SA article.
    Thank you again for sharing your wisdom and ideas.
    17 May 2013, 12:43 PM Reply Like
  • Author’s reply » @misscbd, it has something to do with the RSS Feed and I haven't got a clue what that is, and even if I did, I wouldn't know how to utilize it.

     

    When I say I don't know anything about computers, I don't know anything except how to turn them on and surf the net.

     

    I can't get "new" messages in comment streams and I don't know how to correct it. People say clear your cache or something like that. I don't know what that is and wouldn't know how to follow up if someone tried to explain.

     

    I asked someone to explain it as if they were talking to a third grader and I still didn't understand. My son has often told me to stay away from computers. ... Ha!

     

    I wish he'd come home for a visit, I have a laundry list of computer stuff I need him to do.

     

    Anyway, I shocked myself by at least being able to get new messages. Instead of clicking on Chrome, I clicked on something Explorer and it worked. I felt like a genius!
    17 May 2013, 12:58 PM Reply Like
  • @misscbd just click on Chowder's name which will take you to his profile. Then click the "follow" button. Then I get all his updates in my feed...both comments and instablog posts. I couldn't bear missing out on anything Chowder says...I can't believe how much I have learned form him just from comments!
    17 May 2013, 01:00 PM Reply Like
  • Miss C ~
    Email notification is usually the day after the article is published. The best way to stay on top of new articles is to sign onto Seeking Alpha and look down towards the bottom of the Home Page under Authors You Follow. That will show you new articles as soon as they're released, as well as Blogs as soon as they're posted.

     

    Miz
    17 May 2013, 05:19 PM Reply Like
  • JMSIMS2 ... "click on Chowder's name which will take you to his profile. Then click the "follow" button. Then I get all his updates in my feed...both comments and instablog posts."...
    I did that - but what is "my feed"???
    I get email notices when my "favorite authors" have written something new -- and "new comments for you" -- such as this one -- in my email box...then I follow the link to the comments but what is "my feed"? ..I don't get Chowder's Instablog updates in my email. BTW I'm on a MAC ..usually using Safari but I also have Firefox....thnx again.
    19 May 2013, 12:20 PM Reply Like
  • MIZ MDD....Thank you ----I get my favorite authors thru an email - when I open it all the new titles from them are listed -- but Chowder is on Instablog and I don't get those notices....I generally find out about them thru his comments when he references himself thru a link...
    I see the Home Page lists "Authors You Follow" and yes, chowder is there but since he's not considered an "author" his blogs are not listed.
    Would love to get emails when his new blogs appear.
    19 May 2013, 12:26 PM Reply Like
  • Miss C ~
    On the brown SA menu bar up top, your name appears on the right.
    Click on your name and a drop-down menu list will appear.
    That list will say:

     

    My Feed
    Inbox
    Profile
    View Instablog
    Submit Article
    Settings

     

    Bring up My Feed and you should see Chowder's Instablog.
    You really need to explore the website a little bit. Start clicking on all the menu choices and find out what they all do.

     

    Miz
    19 May 2013, 05:52 PM Reply Like
  • Thnx MS MD....I have the attention span of a gnat :) ...wanted to receive email notifications (as I do with authors) so I can quickly get to it...I see now I have to log into SA and go to My Feed and scroll .... :0....probably won't happen often...but many thnx for the info...
    19 May 2013, 11:22 PM Reply Like
  • I follow chowder, but I don't get email notifications for his new blog posts. Is there a way to get SA to email me when an instablog is posted by a certain author?

     

    chowder, clearing cache in each browser follows different steps. You can google "clear cache in _____", where you fill in the blank with the browser you're using, which could be chrome, internet explorer, or firefox are the most common ones
    18 May 2013, 09:34 PM Reply Like
  • Canadian...Thank you for responding -- first, I should mention I'm on a Mac...
    But -- I do get email notifications for all authors and "new Comments" for me -- then the link jumps down the thread to the newest comments on that author's article (like this one from you)...what I'm not getting are Instablog notices.
    I may just email SA and ask them what to do...
    19 May 2013, 12:30 PM Reply Like
  • I am learning a lot from these instaposts, tons of gratitude! Please keep them coming.
    19 May 2013, 06:11 PM Reply Like
  • Enjoy your articles and comments much!
    I've been reluctant to buy MLPs because of the dreaded K-1s that come at tax time. I've had KMP for a while now and it's done great. But supposedly when the returns of capital reduce the basis to 0 it's necessary to start paying taxes on them even if you continue to hold the stock. I'm wondering how you handle these situations but suppose you may just let a CPA do it for you??
    19 May 2013, 08:41 PM Reply Like
  • Author’s reply » Yes, I let the CPA worry about that stuff. My job is to make money, his job is to try and figure out a way for me to keep most of it. He doesn't tell me how to do my job and I don't tell him how to do his. I love it.

     

    Have you considered KMI? No K-1's one there and you still have access to the Kinder product and some excellent expected dividend growth going forward.
    20 May 2013, 07:31 AM Reply Like
  • I swapped KMP for KMI and SEP for SE in our IRAs this year.
    20 May 2013, 08:23 AM Reply Like
  • Author’s reply » I own KMP in a taxable account and I own KMI and KMR in our tax deferred accounts.

     

    I went with both KMI and KMR because one gives me an immediate higher yield (KMR) and the other gives me terrific dividend growth (KMI), the best of both worlds.
    20 May 2013, 01:38 PM Reply Like
  • "one gives me an immediate higher yield (KMR)"

     

    KMR doesn't pay a cash dividend. I believe it pays a stock dividend. Is that what you meant, chowder?
    21 May 2013, 10:20 AM Reply Like
  • Author’s reply » Since I reinvest all dividends, I lumped them in with the rest. ... Ha!

     

    KMR receives the same payment as KMP as that is where the distribution comes from, but because they sell at a discount to KMP, the yield is higher. I don't know what else to call it other than yield.

     

    KMR can be purchased in either a taxable or taxed deferred account. There are no K-1's to deal with.
    21 May 2013, 02:33 PM Reply Like
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