us still showing strength plenty of ways to profit · 2019. 12. 9. · us-centric stocks and bonds....

(continued)

US Still Showing StrengthUS GDP for the second quarter

came in at 2.30%. At the end of October, we’ll see the third-quarter number, for which expectations are running near 2.00%. The St. Louis Federal Reserve Bank is calling for a reading of 3.06%, but even 2.00% would be a decent number when you remember that much of the globe is slumping or headed for recession.

On the US jobs front, with a 3.5% unemployment rate, a significant participation rate of 63.20% and average wage growth of 2.90%, households are in good condition to support the economy. And outside of the changing needs for automobiles and fuel, retail sales have reversed their late 2018 contraction and have been generally positive through 2019.

The forward-looking Bloomberg Consumer Comfort Index has continued to trend higher over the past several weeks to a current bullish level of 63.50. This means that the driver for the biggest contributor to the US economy—the consumer—remains positive.

This has been showing up in revenue gains for US-focused companies, including many that have reported their third-quarter results. But earnings for many other stocks have not been impressive so far, and the expectation for the 505 stocks inside the S&P 500 Index on average is an earnings drop of about 4%. This is certainly a cautionary signal but one that shouldn’t come as a surprise.

Meanwhile, with low inflation and a Federal Reserve that is stepping up to support it, US bond markets are stronger, which should support rising inflows into bonds and bond funds.

So, as we head into the closing months of 2019 and into 2020, my call for now remains to stick with US-centric stocks and bonds.

November 2019

Vol. 30, No. 11

Plenty of Ways to ProfitDear Friend,

After a 19.1% year-to-date run, it’s tough to say how much more upside there is for the US stock market, especially given all of the challenges and concerns around the globe.

The Organization for Economic Cooperation & Development (OECD) downgraded global growth forecasts for 2019 and 2020. The International Monetary Fund (IMF) also lowered global gross domestic product (GDP) estimates for this year and next, citing trade tensions beyond just the US and China.

On the global bond market front, the IMF has repeated its economic concerns over the fate of $19 trillion in corporate bonds, which it fears are at a rising level of risk amid the global slowdown. This amounts to 40% of the $48 trillion of corporate bonds in major markets.

And in Asia, with China’s slowing growth and current account (the net flows of cash and related financial transactions) plunging in relation to its GDP, the world’s second largest economy has more issues.

European economies are also suffering, and that’s before the Brexit drama even comes to a conclusion.

On the other hand, the US economy—led and sustained by consumers—has remained resilient. And the indicators I’m watching are pointing to a continuation of that trend. For example, revenue flows for the US-centric companies and sectors remain strong, as evidenced by the quarterly results released so far.

And there are other factors, which I’ll discuss in this issue, that provide more reasons to remain invested. In particular, there are specific companies on the front lines of major developments that will continue to reward shareholders.

Growth StrategiesWhat Sentiment & Fund Flows Show Us

The US stock market—as tracked by the S&P 500 Index—has gained 19.1% in price and 21.1% in total return for the year to date.

Those are remarkable numbers. But to put them into perspective, the price gain is only 7.9% and the total return is 10.1% over the trailing 12 months, which is a lot more calming than the year-to-date numbers might imply.

Moreover, US stock funds saw outflows of $60 billion during the third quarter as many individual investors saw reasons to pull back on their stock allocations.

This means that it’s the institutional money that is responsible for the buoyancy of the current market and for optimism that there is still value to be bought. This is also showing up in investor confidence in the stock market as well as the ancillary outlook for the economy behind the market.

State Street (STT) is a massive fund company and regularly conducts its Investor Confidence Index. It’s interesting to see how this index of sentiment is really more of an inverse indicator.

In the graph on the following page, you can see the Investor Confidence Index plotted against the S&P 500 Index from the fourth quarter of 2016 to date. Confidence was pretty steady at first, even as 2017 saw a strong run-up in the S&P 500.

Then, after reaching a peak in confidence, the stock market headed into the

2 Profitable Investing | November 2019 | profitableinvesting.investorplace.com

Neil George’s Profitable Investing® (ISSN 2577-9311) is published monthly by InvestorPlace Media, LLC, 1125 N Charles St, Baltimore, MD, 21201. Please write or call if you have any questions. Phone: 800/211-8566. Email: [email protected]. Web site: profitableinvesting.investorplace.com

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troubles of the fourth quarter of 2018. But even with the S&P 500 Index bottoming on December 24, 2018 and moving on to new highs, confidence has remained at subdued levels. This tells me that we are dealing with a less frothy stock market that isn’t fueled by the old “irrational exuberance.”

Let’s pause for a moment and think about the rationale for buying stocks. Stocks are bought under the belief that the underlying assets are undervalued and expected to rise as revenues and profits rise.

This is what went wrong during the fourth quarter of last year, as expectations for revenues and earnings went into the tank only to swiftly be reversed starting on the day before Christmas. And now we have the third-quarter reports for the S&P 500 Index members coming in along with the expectations for the current and following quarters.

You can see in the graph to the right that the average sales and earnings gains have slowed in 2019 but are projected to rebound for the fourth quarter and into 2020. As the current numbers for the third quarter are filing in, it’s interesting to see that expectations are providing a value proposition for stocks even if individual investors aren’t cued into the underlying numbers.

Even for the current quarter, overall sales are set to gain 3.2% on average, although earnings may well remain soft. And when you look deeper into the sector members, there is better news.

Consumer companies fortified by consumer participation should continue to rise. But when we look at other US-centric sectors, utilities are projected to report sales gains in excess of 7% and earnings gains in excess of 4%. Real estate investment trusts (REITs) are expected to gain over 17% in sales, with earnings

gaining in excess of 21%. This is one of the reasons I remain bullish on both of these segments.

We then come to the underlying net assets of the companies inside the S&P 500. As you can see in the chart on the following page, average book value per share continues its strong, consistent advance.

Book value per share for the S&P 500 members has been climbing by 14.1% over the past three years, which is supporting higher stock prices along with an increase in sales and earnings

over time. Again, this supports the argument that the stock market is less frothy than it might seem.

The average price to book value of 2.14 times and the average price to sales value of 3.41 times for the S&P are also well below levels seen in late 2017 and in 2018. Another argument for value.

Bonds Are Being BoughtThen we come to the US bond

markets. The overall US aggregate bond market has returned an impressive 8.3% year to date. But unlike stocks, the trailing 12-month return is even

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Profitable Investing | November 2019 | profitableinvesting.investorplace.com 3

better at 10.9%. The flow into US bond funds was up another $118 billion in the third quarter, continuing the bond-buying pattern we’ve observed for a while now.

Bonds are typically not an active market for individual investors, as most investors view bonds as just an allocation and not a market for growth and income. But that’s what I have always advocated, and that’s reflected in the allocations to specific bonds and bond funds in our model portfolios.

The underlying fundamentals remain supportive. Inflation—as measured by the Personal Consumption Expenditure Index (PCE)—remains well below 2%. Demand remains firm, which is partially reflected in the bond fund flows for the third quarter.

Add in the renewed bond-buying by the Federal Reserve and easier

monetary conditions, and bonds from corporates to municipals remain in the sweet spot for US issues.

All of this is also reflected in the continued strong demand for US bonds and stocks from foreign investors.

With over $13 trillion in negative-yielding bonds outside the US and foreign stock markets that are reflecting slower economic growth and other concerns, the US is a destination market.

Year to date, foreign inflows have soared on a month-by-month basis. This reflects well on institutional analysis of the value proposition for US stocks and bonds.

Now, there is the headwind of ongoing trade negotiations between the US and China as well as other nations. And elections are still evolving. But for the reasons outlined throughout this issue, I still see US-focused stocks

and US bonds as the top places for more growth and income.

Proven Growth & IncomeProfiting from Solving a Global Crisis

African Swine Fever (ASF) is a virus-causing disease that is highly infectious and takes down pigs in a matter of days. It originated in Africa and has quickly spread to 50 countries and climbing around the globe. While it has been denied by pig livestock producers in the US, it has a small footprint here now and will continue to strike the pig market in a big way.

The country where ASF has had the biggest impact is China, where more than half of the nation’s pigs have been eliminated. As a result, pork prices have soared in China by 120.0% since ASF emerged, and the government is now imposing price controls. In Europe, pig prices are up 31.0% over the past year.

Back in the US, pork prices are up since late July by 4.3%, and this is before ASF really starts to hit the broader swath of US producers tracked by the US Department of Agriculture (USDA).

In the June issue, I presented the key solution for a healthier sounder and other livestock. The company is a global leader in animal health medicines and vaccines and, since then, it has generated a return of 24.3%. That’s more than 3.3 times the price movement of the S&P 500 Index.

Zoetis Incorporated (ZTS) is a Parsippany, New Jersey-based company that has more than 300 product lines that are in rising demand in more than 100 countries, including China. And before you question whether China might impose tariffs or restrictions on Zoetis, remember that China is in crisis mode when it comes to its livestock production. Zoetis is already in cooperation with Chinese government and private livestock health projects to address ASF and other threats.

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The company already received two patents from the US Patent and Trademark Office to exclusively develop ASF vaccines late last year. And it is well on its way with needed products, along with its existing vaccines for conventional swine fever. And with a strong history of vaccine development and sales, it is on the front line for heavy revenue growth over time.

Over the trailing five years, the stock has returned 263.7% compared to the S&P 500 Index’s 71.5% return and the S&P 500 Health Index’s return of 57.1%.

Beyond livestock healthcare and vaccines, Zoetis is also a leader in pet health and medications. And with rising demand for pets around the globe, the company has been serving to keep them healthier and happier for longer.

Revenues are up over the trailing year by 9.80%, and operating margins are very fat at 31.1%. This results in a whopping return on shareholder equity at 62.80%. It retains the bulk of its profits at a rate of 81.7%, which in turn is channeled into drug, vaccine and other animal health products to support a robust pipeline of new revenue sources.

Cash is therefore ample, with the company’s balance sheet showing a current ratio of 3.60, which measures short-term cash equivalents against short-term liabilities. And with heavy cashflow and controlled debts to assets at 59.9%, it has the ability to easily borrow if needed to fund development.

This sort of company doesn’t come cheap, as it is valued at a price to trail-ing sales of 10.1 times. But underlying revenue has surged over the past 10 years by 57.38%, providing proof of a value proposition in the health tech-nologies developed in its labs and in the field. And with its ASF vaccines, I expect revenues to rise further. ZTS remains a buy under $130.00 in the Total Return Portfolio, ideally for a tax-free account.

The dividend is modest, with a yield of just 0.5%, but it has actually been increasing in the distribution amounts by 18.5% on average over the past five years, reflecting the retention

and reinvestment of earnings for development of new products including the current ASF-fighting vaccines.

Feed is the Other FightBeyond vaccines, the other front in

the fight against ASF is in the feed for pigs. Feed and related fortified supplements are being tested around the globe as part of an immunity effort to slow the spread of the disease. And with antibiotics increasingly seen to be something to be reduced in all livestock production, having alternatives is gaining sway. In Europe and now in the US, there are plans to ban imported feed from China and other nations due to concerns over it being tainted.

This brings in another company inside the Total Return Portfolio, which is already ahead of the game. Nestlé (NSRGY) is a Veney,

Switzerland-based company that you know as one of the successful consumer food products companies, with products ranging from chocolates to coffee and well beyond. But it also has a series of pet and livestock products. Much of it came from the acquisition of St. Louis, Missouri-based Purina, right in the heartland of US farm production.

Revenue growth for this unit is the second-fastest next to beverages and currently amounts to $12.8 billion. That should continue to rise with the urgent need for safe and effective feed for pigs.

The stock has already done well for us. It has well outperformed the S&P 500 Index this year with a return of 30.9% and is up 341.05% since it was added to the portfolio in 2008. Yet, the shares are still a good value at only 3.30 times trailing (and rising) revenues.

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Nestlé is highly profitable, with operating margins of 15.0% feeding a 17.4% return on shareholder equity. It has cash on hand and little debt at a mere 29.5% of assets. This is a solid credit company.

The dividend could be higher, but at 2.4% it continues to beat the average in the US market and has been gradually on the rise in distributions over the past five years. It has also announced plans for additional special dividends over the coming three years.

NSRGY remains a buy under $112.00, ideally for a taxable account given its status as a Swiss company to avoid withholding tax recovery work.

Healthier Pigs & Alternative Meats

Hormel Foods (HRL) is the third company with a solution to ASF. As one of the major US meat products companies, Hormel has been successfully walling off its supplies of pigs and making its products prime for China, European and other markets ravaged by ASF.

This does not mean that the company will be immune from ASF. It may well face some losses in supplies as well as some rising costs, but it has been successful at thwarting the threats so far. In addition, with pork supplies in jeopardy outside the US, alternative proteins including beef, turkey and chicken are also adding to Hormel’s product arsenal.

Revenues have been on the rise,

with exports and foreign markets leading sales growth by a wider margin over just the US market. Overall international sales are where more growth should be expected given the ASF issue. And for China, with the dire need for more protein over the coming months and into the annual celebrations early next year for the Lunar New Year, look for tariff easements and allowances that will benefit Hormel.

It is already profitable, with operating margins running at 12.4% and a return on equity of 17.5%. With lots of cash and miniscule debt running at only 7.70% of assets, this company is very under-leveraged for credit sustainability and expansion as needed.

It has generated a return of 24.0% since it was added to the Total Return Portfolio in 2017 and is still a value at a price to trailing sales of 2.30 times. Although its dividend is modest at 2.1%, it has been working to increase its distributions and has done so by 16.0% on an average annual basis over the past five years.

HRL remains a buy for bringing home the bacon under $45.00, ideally for a tax-free account.

Total Return Portfolio

The US economy continues to expand while the rest of the globe slumps. This makes the US stock market an island of opportunities for global investors. And with consumers remaining positive, the major driver for

US-focused companies remains intact. In the bond markets, the US is also

the place to be, as many of the major bond markets have negative-yielding bonds and deposit rates. And with low US inflation and improving credit, bonds are not just for income but growth as well.

The Total Return Portfolio’s allocation of 56% stocks and 44% fixed income, including 11% cash, continues to provide growth and income with controlled risk.

In the stock allocation, I continue to maintain a base of utilities and real estate investment trusts (REITs), along with cash-generating toll-taker pipelines. I’ve also built up a collection of other stocks of businesses that are thriving in the US. And for indexed investments, I have a collection of focused exchange-traded funds (ETFs).

New & Focused BuysIn the Indexed Equities segment,

I’m adding an ETF that has been a resident of the Model Mutual Fund Portfolios—the Vanguard Real Estate ETF (VNQ). While we have a great collection of individual REITs, the Vanguard ETF provides the focus on this strong value sector of the stock market. Buy VNQ under $97.00, ideally for a tax-free account.

In the Growth & Income Plays, our problem-solvers should continue to perform, as African Swine Fever (ASF) has brought up food safety on a global scale. Continue to buy and own Zoetis (ZTS) for its vaccines and animal health medicines, Nestlé (NSRGY) for its clean and safe feedstock and Hormel (HRL) for its healthy meat products.

Buy ZTS under $130.00 and HRL under $45.00, both for tax-free accounts. Buy NSRGY under $112.00, ideally for a taxable account to avoid withholding tax issues.

New to the Growth & Income Plays is Franco-Nevada Corporation (FNV). Gold is faring well for a number of reasons, including low-to-lower global interest rates, a dip in the strong US dollar, negative yields beyond the US and slowing global growth. This led me to add Franco-

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Nevada to the Niche Investments. It continues to do well, so I’m adding it to the Total Return Portfolio.

Franco-Nevada is not a mining company. Instead, it invests and owns royalty interests in gold as well as gold production from other companies. This means minimal capital requirements and reduced risk. At the same time, it also generates regular cash that is paid out in rising dividend distributions.

This means that investors get gold with a dividend rather than a storage cost like you get with the SPDR Gold Shares ETF (GLD) and its annual 40 basis-point (0.40%) charges. Its year-to-date return of 32.3% is also far better than GLD’s return of 15.4%.

FNV is a buy under $100.00, ideally for a taxable account because it’s a Canadian company, which could mean withholding taxes for US investors.

As Franco-Nevada is brought up, Walgreens Boots Alliance (WBA) is being sent down to the Niche Investments. Walgreens continues to integrate its acquisitions, while also working on costs and better utilization of its ubiquitous presence in the important healthcare sector.

The stock trades at a discount to rising sales, so I continue to recom-mend it. But management needs to step it up. And yes, I am following the alleged class-action suits against US pharmacies over pain killer prescrip-tions. Now in the Niche Investments, WBA remains a buy under $55.00,

ideally for a tax-free account.And with this change, I am

merging the last of our World Class Franchises—United Technologies (UTX)—into the Growth & Income Plays. The resulting combined allocation is 24%.

Bonds Still Working for Growth & Income

Bonds and related fixed-income securities, including preferred stocks, continue last year’s great performances for both income and growth. And I see that the fundamentals firmly support further progress.

I have been building up our collection of bonds and related securities, all to your advantage. Year to date, the US bond market has returned 8.3%. US corporates have returned 13.1%. Municipals have returned 6.9%—all great numbers for bonds so far this year. As for preferreds, they’ve returned 15.9%.

But I only want the best bonds and bond funds. This means we need to sell the Osterweis Strategic Income Fund (OSTIX) in the Multisector Bonds Segment. It has great, well-researched bonds, but it’s lacking the performance that I expect. Sell OSTIX.

I’m replacing this fund with the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which has returned 13.0% year to date. Vanguard’s ETF is better allocated and has performed better than the SPDR Intermediate-Term

Corporate Bond ETF (SPIB), which is now a Sell after returning 9.3% year to date and 10.7% since being added to the portfolio. Sell SPIB.

Use the proceeds to buy VCIT under $93.50, ideally for a tax-free account. Also, continue to buy the BlackRock Credit Allocation Income Trust (BTZ) and the DoubleLine Total Return Bond Fund (DLTNX). BTZ remains a buy under $14.00 and DLTNX remains a buy under $10.90, both for tax-free accounts.

With this move, I’m integrating the Intermediate Credit Bonds into the Multisector Bonds segment with a combined 15% allocation.

Incredible Dividend Machine

I’m making some changes to the Incredible Dividend Machine this month. Two stocks that were on Hold will be replaced by two members of the Niche Investments. The changes will result in more dividend income for Cycles B and C of the Machine.

In Cycle B, we have General Mills (GIS) on Hold. In the company’s last quarterly report, it showed a 1% drop in its non-acquired company sales (organic) and a 2.2% drop in overall revenues. That was sharply lower versus the similar quarter from last year and more so for the previous quarter’s improvement.

Core packaged food products are still facing consumer taste changes. But even in some of its newer products, including snack bars and other trendy segments, General Mills disappointed. I have become convinced that the company is having a hard time changing products and not just trying to increase prices where possible. The pet foods segment is a bright spot for the company thanks to its acquisition, but that is overshadowed by core consumer products.

Costs are still an issue, including transportation. While the company improved its margin over the same quarter last year, it slipped from the previous quarter, and it’s not

(continued on p. 8)

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Franco-Nevada is More than Worth Its Weight in Gold (FNV Price in Black, Gold Spot Price in Blue)



TOTAL RETURN PORTFOLIOStocks (56%)Indexed Equities (18%) Symbol T/TF

Entry Date

Fwd. Yield

Buy Under Comments

Vanguard Healthcare ETF VHT TF 3/16/16 1.48% $176.00 US healthcare spending remains robust for more profitsVanguard High Dividend ETF VYM TF 6/21/16 3.53% $90.00 Reduced risk with leading dividend-payers inside S&P 500Vanguard Info Tech ETF VGT TF 8/20/18 1.55% $225.00 Software vs. hardware is being debated for best value for technologyVanguard Real Estate ETF VNQ TF 3.13% $97.00 The index way to gain access to the defensive, high-performing REIT sectorVanguard Utilities ETF VPU TF 9/24/18 3.05% $145.00 US-based utilities remain one of the best investment sectors with less riskGrowth & Income Plays (24%)Alliance Bernstein AB T 11/19/18 8.05% $33.00 Great passthrough asset manager with fee income fueling high dividendCompass Diversified Holdings CODI T 5/21/18 7.40% $22.00 Great investments and a big dividend with less index market riskCovanta Holdings CVA TF 3/26/19 6.51% $18.50 Turns trash and excess recycling waste into profits with clean power generationFMC Corporation FMC TF 4/25/19 1.95% $90.00 Globally embraced crop protection and farm-yield enhancementFranco-Nevada Corporation FNV T 6/26/19 1.06% $100.00 Brought up from Niche; Can be bought in larger sums for gold with dividendsHercules Capital HTGC T 6/25/18 9.40% $14.50 Alt-financial for technology companies with defended dividendHormel HRL TF 4/17/17 2.07% $45.00 Bring home the bacon for your portfolioMicrosoft MSFT TF 11/30/12 1.35% $140.00 The essential tech company delivers revenue from cloud and recurring salesNestle NSRGY T 12/17/08 2.32% $112.00 Company is a leader in pet and livestock feed on top of successful consumer goodsNextEra Energy NEE TF 9/8/08 2.12% $240.00 Strong US-based utility with additional green energy growthProcter & Gamble PG TF 12/17/08 2.44% $125.00 Delivering profits with better managed brands and cost controlsUnited Technologies UTX TF 8/6/14 2.08% $140.00 Market getting onboard with Raytheon acquisition, Otis and Carrier spin-off plansViper Energy VNOM TF 7/23/18 7.21% $38.00 Oil & natural gas prices up or down, Viper gets paid and sends investors ample checksZoetis Incorporated ZTS TF 5/28/19 0.53% $130.00 Solution company for global livestock crisis and healthier pets as wellReal Estate Investment Trusts (8%)American Campus Communities ACC T 7/12/18 3.71% $52.00 Sole public REIT focused student housing market, increasing property portfolioDigital Realty Trust DLR T 2/9/18 3.20% $138.00 You can't have successful cloud computing without data-center propertiesLife Storage LSI T 12/26/18 3.71% $109.00 Self-storage remains a defensive REIT sector for bull and bear marketsMedical Properties Trust MPW T 2/26/19 5.14% $21.00 Medical properties market REIT leader with good yieldW.P. Carey Inc. WPC T 1/3/14 4.45% $95.00 A favorite REIT since its IPO with able management keeps raising dividendsMFA Financial MFA T 6/25/18 10.53% $8.00 Buy this alt-financial for mortgages with proven dividend even in 2007-2008

Toll Takers (6%)Enterprise Products Partners EPD T 2/22/05 6.40% $31.00 Proven pipeline operator for oil and natural gas during good and bad timesKinder Morgan Inc. KMI TF 11/28/14 4.92% $21.00 Alternative to pipeline and related asset MLPs without K-1Pembina Pipeline PBA T 8/14/12 5.04% $39.00 With Trudeau re-election, Canadian government's aid for pipeline expansion continuesPlains GP Holdings PAGP T 3/10/17 7.23% $26.65 The Permian Basin keeps pumping oil and gas, and company revenues keep flowing

Fixed Income (44%)Cash (11%)Synchrony Bank high-yield savings account 7/31/15 1.90% Market 1.90% yield—call 866/226-5638 to orderMultisector Bonds (15%)BlackRock Credit Allocation Trust BTZ TF 7/26/19 7.45% $14.00 Great collection of higher-yielding corporate bonds at a big discount to NAVDoubleLine Total Return Bond Fund DLTNX TF 7/22/14 3.36% $10.90 Well-managed bond fund fueled by higher income mortgage securitiesSPDR Interm-Term Corp. Bond ETF SPIB TF 4/21/17 2.96% SELL Good performance, but VCIT is betterOsterweis Strategic Income Fund OSTIX TF 4/19/18 4.39% SELL Dissapointed in performance despite great research on credit of holdingsVanguard Interm-Term Corp Bond ETF VCIT TF 3.23% $93.50 Corporate bonds are delivering growth and not just incomePreferred Shares (7%)Seaspan 7.875% SSW.PH TF 1/22/19 7.51% $25.50 CUSIP# 81254U304Teekay LNG Partners 9.00% TGP.PA TF 1/22/19 8.53% $26.50 ISIN# MHY8564M1131NuStar Energy 8.50% NS.PA TF 1/22/19 8.68% $25.00 CUSIP# 67058H201iShares US Preferred Stock ETF PFF TF 3/9/17 5.08% $38.00 Preferred stocks should be a go-to defensive income generator for all portfoliosFlaherty & Crumrine Preferred Opp. Fund PFO TF 7/23/18 6.09% $11.75 Great closed-end fund from good management team; watch buy under priceMinibonds (3%)JMP Group 7.25% 11/15/27 JMPD TF 1/22/19 7.55% $26.25 CUSIP# 466273109 Cowen Inc. 7.75% 06/15/33 COWNL TF 1/22/19 7.91% $27.00 CUSIP# 223622804US Cellular 6.95% 05/15/60 UZA TF 1/22/19 7.15% $25.00 CUSIP# 911684405Municipal Bonds (4%)Blackrock Municipal Income BLE T 4/23/18 7.20%* $15.15 Discount to NAV is back for great tax-free yield and bonus dividendNuveen AMT-Free Credit NVG T 4/23/18 7.32%* $17.00 Discount to NAV with monthly tax-free & AMT-free dividendsNuveen Municipal Credit NZF T 4/23/18 7.72%* $17.00 Discount to NAV with tax-free monthly dividend checksTreasury Bonds (4%)Two-year Treasury Bond T 12/24/18 1.62% Market Buy US Treasury with current coupon (interest rate) near 1.62% at market price

At least 10% below buy-below price as of the publication of this issue T: Buy in taxable account for best results TF: Buy in tax-advantaged account (IRA, etc.) for best results *Taxable-equivalent yield


demonstrating any proven momentum. The stock has generated a return of 40.43% year to date, with some recovery in its operations attracting stock buyers. But I see limits to what it can successfully accomplish, so it needs to be sold. Sell GIS.

Replacing it is the Alerian MLP ETF (AMLP), which is being brought up from the Niche Investments. Yielding 8.7%, it is a big pick-up in dividend income over the 3.7% yield of General Mills. The ETF synthetically holds pipeline and related infrastructure assets in the US oil and natural gas market.

As a toll-taker, these underlying companies are significantly less susceptible to petroleum prices and offer a great stream of dividend income. Already, the Dividend Machine has been benefitting from Cycle B member Magellan Midstream Partners (MMP) and its 6.3% yield. MMP remains a buy under $68.00, ideally for a taxable account.

But unlike Magellan, the ETF doesn’t have to issue K-1 tax forms, making it easier to own for some subscribers in tax-free accounts. This is also the case for the natural gas-focused ONEOK (OKE) in Cycle B, which is a regular corporation. Buy AMLP under $10.00, ideally for a tax-free account.

In Cycle C, we have Pfizer (PFE) on Hold. Pfizer is a major integrated drug company with both patented and generic products. Like Merck (MRK) in Cycle A, it should be benefitting from the rising demand for new and existing drug products. But it has been trailing the revenue gains generated by Merck. And to change things for shareholders, it announced that it would spin-off generic and consumer products company assets to form a new company with Mylan NV (MYL).

I believed the result of the transactions would aid Pfizer’s focus on more expensive and higher-margin new drug products while the spin-off would provide a nice payoff for us along with the potential to have that resulting company as a new cash-cow investment. The stock market hasn’t had the same perspective.

And while there have been some improvements, Pfizer hasn’t been doing shareholders much of a favor by poorly presenting the deals and the process. I now recommend selling Pfizer and I will look at the spin-off when it comes to the market. Sell PFE.

Replacing it in Cycle B is asset-management company BlackRock (BLK), which is being brought up from the Niche Investments. BlackRock has trillions of dollars in assets under management (AUM) and improves the dividend payout over Pfizer by a smidge. The benefit of asset managers is that the more AUM, the greater the fee income. That means more cash that’s available for dividends.

AUM are just shy of $7 trillion and are up over 55% since the third quarter of 2015. Dividend distributions are up 11.8% on average over the past five years for a current distribution yielding 3.0%. BLK is a buy under $467.00, ideally for a tax-free account.

Meanwhile, the collection of strong dividend-paying US utility stocks and real estate investment trusts (REITs) continue to outperform the general US stock market this year, following similar success last year. And both segments are showing better quarterly gains in sales and earnings, adding to their value proposition.

Finally, make sure that you own TPG Specialty Lending (TSLX) in Cycle A. This alt-financial is capitalizing on corporate lending and loan investment that continues to beat traditional US banks. Its 8.5% annual yield, including regular additional special dividends, is also particularly attractive and defended. TSLX is a buy under $22.00, ideally for a tax-free account.

Niche InvestmentsThe Niche Investments portfolio

continues to evolve in its role as the farm team of stocks, bonds and funds for the model portfolios of Profitable Investing. Just like in US major league sports, the Niche is where I try out stocks to see if they can make the cut to become part of the main portfolios.

Yet, if a good stock from either the Total Return Portfolio or Incredible Dividend Machine has a misstep, I’ll send it down to the Niche as it works to prove that it can stay and profit for us.

Moving UpTwo stocks and one fund are being

brought up this month. I’ll start with Franco-Nevada Corporation (FNV), which is joining the Growth & Income Plays section of the Total Return Portfolio.

Franco-Nevada is the first gold recommendation I made in my career as a newsletter editor. The company is not a miner. Rather, it owns a collection of royalty interests from gold producers, which means that it doesn’t have the capital costs or risks of exploration.

Gold has risen this year, mostly on lower US interest rates, which reduce both the opportunity costs of holding gold as well as the carry costs. And with interest rates beyond the US in negative territory, gold is even more valuable. Add in some potential softness for the US dollar, and gold (priced in dollars) may get an additional benefit.

Next up is BlackRock (BLK), which is being brought up into Cycle C of the Incredible Dividend Machine to replace Pfizer. BlackRock is one of the largest asset managers, with trillions of assets under management (AUM). It is seen as a dependable market-neutral stock with dividend capability.

Last up is the Alerian MLP ETF (AMLP), which is joining Cycle B of the Incredible Dividend Machine to replace General Mills. While oil and gas markets are in flux, the dependability of pipeline assets providing ample dividends makes this a good choice along with the ability to avoid K-1 tax forms.

Moving DownWalgreens Boots Alliance (WBA)

was added to the Total Return Portfolio back in 2017. It has an impressive operation of pharmacies in ubiquitous locations and online capability.

Management is working through costs as well as integrating acquisitions, and it is taking a bit longer than expected. But it is showing some


progress, and management (including the CEO) has a high investment stake in the stock. It trades at a big discount to rising revenue. It will either prove itself, or we’ll move along.

Model Mutual Fund Portfolios

The Model Mutual Fund Portfolios remain in line with the allocations of the main Total Return Portfolio: 56% stocks and 44% fixed income, which includes the 11% in cash or cash alternatives.

And using the surrogate sector ETFs from Vanguard, the stock allocation’s mix of dividend-focused S&P 500, REITs, Utilities, Information Technology and Healthcare segments have generated year-to-date returns ranging from 8.0% for Healthcare to 30.9% for Information Technology. The average return for all five is 21.6%.

For the Fixed Income mix, as represented by sector ETFs from Vanguard, iShares (BlackRock) and SPDR (State Street), corporates have returned 13.0% year to date, preferreds have returned 14.3% and municipals have returned 7.0%. The average return is 11.5%.

In addition, I’ve been working to make the fund alternatives match up with the general sector allocations of the Total Return Portfolio’s individual stocks and other investments so that fund investors get similar performances.

There are generally plenty of fund choices, with the exception of the T. Rowe Price family, including open-end funds, ETFs as well as closed-end funds. And there are advantages and disadvantages when comparing risks and rewards, including performance, expenses and taxes.

Given my most recent work on these

subjects, I’m making some changes to all of the Model Mutual Fund Portfolios with the exception of the T. Rowe Price All-in-the-Family portfolio.

I’m doing this to reduce risks that I’ve back-tested for the sectors and to focus on better-performing alternatives for the better market times. It also serves to reduce some of the taxable events for some of the open-end funds. And with brokerages largely eliminating commissions, the changes should be efficient and low- or no-cost. This process will also simplify the overall holdings across the fund portfolios.

All-in-the-FamilyStarting with Fidelity, sell iShares

Core High Dividend ETF (HDV) and use the proceeds to buy the Fidelity High Dividend ETF (FDVV). That keeps it all in the Fidelity family with a similar index focused on the general stock market with dividends.

Then, sell the Fidelity Real Estate Investment Fund (FRESX) and buy the Fidelity MSCI Real Estate ETF (FREL). This gets rid of the early with-drawal fee and should provide better performance with comparable expenses.

For the same reasons, sell the Fidelity Select Utilities Fund (FSUTX) and buy the Fidelity US Utilities ETF (FUTY). This also heads off two capital gains distributions slated for December.

Similarly, sell the Fidelity Select Health Care Fund (FSPHX) and buy the Fidelity Health Care ETF (FHLC).

For Vanguard, we already streamlined the allocations with just two excep-tions. I’ll start with the Vanguard Health Care Fund (VGHCX), which a subscriber enquired about recently. I now recommend that you sell VGHCX and buy the Vanguard Health Care ETF (VHT). It has lower expenses, better performance and it avoids the capital gains expected in December.

Lastly, I recommend that you sell the Vanguard Intermediate-Term Investment Grade Fund (VFICX) and buy the Vanguard Intermediate Term Corporate Bond ETF (VCIT). While it’s not clear about the tax savings as of this writing, it does reduce

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expenses and provides better risk-weighted performance expectations.

Fund SupermarketInside the stock allocation of the

Fund Supermarket portfolio, I’m lining up the allocation selections in a similar fashion to that of the All-in-the-Family. First, sell the Fidelity Select Utilities Portfolio Fund (FSUTX) and use the proceeds

to buy the very liquid Vanguard Utilities ETF (VPU), which is also in the Total Return Portfolio.

Then, sell the Vanguard Health Care Fund (VGHCX) and buy the Vanguard Health Care ETF (VHT). Next, sell the Fidelity Select Software & IT Services Fund (FSCSX) and buy the Vanguard Information Technology ETF (VGT).

In the Fixed Income allocation,

sell the Osterweis Strategic Income Fund (OSTIX). This fund has become a disappointment, and I believe that while the holdings are well-researched, its own allocations have been limiting the gains that should have been had. To replace it, buy the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

Finally, sell the Fidelity Intermediate Municipal Income Fund (FLTMX) and buy the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI), which tracks my favorite muni index.

Hassle-Free ETFJust two changes in this portfolio.

In the stock allocation sell the SPDR S&P 500 ETF (SPY) and use the proceeds to buy the more defensive Vanguard High Dividend Yield ETF (VYM) found in the Total Return Portfolio.

In the fixed income allocation, sell the SPDR Bloomberg Barclays Intermediate-Term Corporate Bond ETF (SPIB) and buy the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

The Ten-Minute Retirement Portfolio

Like the Hassle-Free ETF portfolio, I’m making just two changes to the allocations in the Ten-Minute Retirement Portfolio, which won’t

Fidelity (800/544-8888) T. Rowe Price (800/638-5660) Vanguard (800/662-2739)Stocks (56%) Stocks (56%) Stocks (56%)iShares Core High Div ETF (HDV)—SELL Equity Income (PRFDX) High Dividend Yield ETF (VYM)Fidelity High Dividend ETF (FDVV)—BUY Value (TRVLX) Real Estate ETF (VNQ)Real Estate Investment (FRESX)—SELL Growth Stock (PRGFX) Utilities ETF (VPU)Fidelity MSCI Real Estate ETF (FREL)—BUY Real Estate (TRREX) Information Technology ETF (VGT)Select Utilities (FSUTX)—SELL Science & Technology (PRSCX) Health Care Fund (VGHCX)—SELLFidelity US Utilities ETF (FUTY)—BUY Vanguard Health Care ETF (VHT)—BUYSelect Health Care (FSPHX)—SELLFidelity Health Care ETF (FHLC)—BUYSelect Software & IT Svcs (FSCSX)

Fixed Income (44%) Fixed Income (44%) Fixed Income (44%)High Income (SPHIX) Spectrum Income (RPSIX) Intermed.-Trm Inv.-Grade (VFICX)—SELLPrincipal Preferred Securities (PRFCX) Cash (11%) Intermed.-Trm Corporate ETF (VCIT)—BUYIntermediate Municipal Income (FLTMX) iShares Pref. and Income Secs. ETF (PFF)Cash (11%) Tax-Exempt Bond ETF (VTEB)

Cash (11%)

All-in-the-Family Fund Portfolios

The Incredible Dividend MachineCycle A (January, April, July, October) T/TF Buy UnderBCE Inc. (BCE, 5.2%) TF $49.00 EPR Properties (EPR, 5.7%)* T $80.00 Merck (MRK, 2.7%) TF $87.00 Mondelez International (MDLZ, 2.2%) TF $56.00 PPL Corp. (PPL, 5.0%) TF $34.00 South Jersey Industries (SJI, 3.6%) TF $36.00 TPG Specialty Lending (TSLX, 8.95%)** TF $22.00

Cycle B (February, May, August, November)Alerian MLP ETF (AMLP, 8.8%) TF $10.00 AT&T (T, 5.3%) TF $39.00 Colgate-Palmolive (CL, 2.6%) TF $74.00 General Mills (GIS, 3.8%) TF SELLMagellan Midstream Partners (MMP, 6.3%) T $68.00 ONEOK Inc. (OKE, 5.1%) TF $76.00 Realty Income Corp. (O, 3.4%)* T $81.00 Verizon (VZ, 4.1%) TF $62.50

Cycle C (March, June, September, December)BlackRock (BLK, 2.9%) TF $467.00 Dominion Energy (D, 4.4%) TF $84.50 Duke Energy (DUK, 3.9%) TF $97.00 Easterly Gov’t Properties (DEA, 4.7%) T $23.00 Main Street Capital (MAIN, 5.8%)* T $46.00 Pfizer (PFE, 4.0%) TF SELLPublic Svc. Enterprise Group (PEG, 3.0%) TF $63.00 Ventas (VTR, 4.3%) T $73.50

*Monthly dividend payer, **Annual Yield


take but a few moments to look after. First, sell the SPDR S&P 500

ETF (SPY) and use the proceeds to buy the Vanguard High Dividend Yield ETF (VYM).

Second, sell the Osterweis Strategic Income Fund (OSTIX) and buy the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

You Have Questions, I Have Answers

I always appreciate your queries and comments on my work in Profitable Investing and the Journal. This extends to the collection of individual holdings in our model portfolios as well as general investing discussions. Please keep your queries and comments coming. You can email my team at [email protected] (put Profitable Investing or Neil

George in the subject line) or call us at 1-800-211-8566.

Here are my replies to some of your recent queries:

Q: You have pointed out that both US stocks and bonds are up nicely this year. Do you think that they will both continue to move in step with each other? Or will they revert to their traditionally inverse rela-tionship?

A: You are right that stocks and bonds have had an inverse relationship in years past. After all, during periods of economic growth, stocks tend to pull in more capital. But growth typically comes with inflation, which is a cancer to bond investors.

During economic slowdowns, stocks lose their appeal, and the dependability of bond payments makes them more attractive. Inflation also tends to subside, making bonds’ future values higher in current terms.

But what happened over the past three years is that we saw low-to-lower inflation coupled with higher economic growth. As a result, we have seen gains in both stocks and bonds.

Furthermore, the improving economy has helped the underlying credit conditions for corporate and municipal bonds, adding to the attraction of bonds

in general. Demand for bonds by retirement and pension funds due to the demographics of an older population is also supporting higher prices. So, for now, I see both stocks and bonds as attractive.

Q: US financial stocks traditionally provide a good signal for the health of the stock market, and they have lagged this year. Is this a signal of strife for the general market?

A: US bank stocks have lagged the S&P 500 Index for most of the year, with only a quick uptick in October. In fact, they have also lagged over the trailing one- and five-year periods while the general market has continued to rise.

There are three major reasons for this. First, interest rates in the US have been very low. This means that banks have very little margin between what they pay for deposits against what they can earn on loans, which have shown up in their terrible net interest margins (NIM).

Banks have also had to deal with myriad legislated and agency rules and procedures that have made it increasingly more expensive to earn each dollar of revenue. This has shown up in the very poor efficiency ratios for banks.

Lastly, over the past decade of poor NIM and higher costs, alt-financials such as Hercules Capital (HTGC), Main Street Capital (MAIN) and TPG Specialty Lending (TSLX)—all Profitable Investing holdings—came in and grabbed more business from banks, particularly in business and corporate lending.

Hassle-Free ETF PortfolioStocks (56%)SPDR S&P 500 ETF Trust (SPY)—SELLVanguard High Dividend Yield ETF (VYM)—BUYVanguard Real Estate (VNQ)Vanguard Utilities ETF (VPU) Vanguard Information Technology ETF (VGT)Vanguard Health Care ETF (VHT)Fixed Income (44%)SPDR Bloomberg Barclays Intermediate-Term Corporate Bond ETF (SPIB)—SELLIntermed.-Trm Corporate ETF (VCIT)—BUYiShares Preferred and Income Securities ETF (PFF)SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI)Cash (11%)

The Ten-Minute Retirement PortfolioStocks (56%)SPDR S&P 500 ETF Trust (SPY)—SELLVanguard High Dividend Yield ETF (VYM)—BUYVanguard Real Estate (VNQ)Vanguard Utilities ETF (VPU) Vanguard Information Technology ETF (VGT)Vanguard Health Care ETF (VHT)Goldman Sachs MLP Income Opportunities Fund (GMZ)Fixed Income (44%)Osterweis Strategic Income Fund (OSTIX)—SELLIntermed.-Trm Corporate ETF (VCIT)—BUYiShares Preferred and Income Securities ETF (PFF)SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI)Cash (11%)

Fund Supermarket PortfolioStocks (56%)Vanguard High Dividend Yield ETF (VYM)Vanguard Real Estate ETF (VNQ)Fidelity Sel Utilities Port (FSUTX)—SELLVanguard Utilities ETF (VPU)—BUYVanguard Health Care Fund (VGHCX)—SELLVanguard Health Care ETF (VHT)—BUYFidelity Select Software & IT Services Portfolio Fund (FSCSX)—SELLVanguard Information Tech ETF (VGT)—BUYFixed Income (44%)Osterweis Strategic Income Fund (OSTIX)—SELLIntermed.-Trm Corporate ETF (VCIT)—BUYFidelity Intermediate Municipal Income Fund (FLTMX)—SELLSPDR Nuveen Bloomberg Barclays Muni Bond ETF (TFI)—BUYiShares Preferred and Income Securities ETF (PFF)Cash (11%)

These companies have the benefit of financing themselves in the cheaper corporate market, making for better NIM. And with less regulator woes, efficiency ratios are better. They also have a lot of talent that used to work at traditional banks.

One Final ThoughtUS Stock & Bond Markets Remain Resilient

How can we complain about the US markets? Stocks have delivered fantastic returns, and bonds have provided more than their fair share of growth on top of great income.

Overall, the US economy has been an island of opportunity for global investors plagued by lower growth or recession and negative yields and interest rates.

But remember that US companies are reporting lower revenue growth and a decline in earnings for the last quarter. That should be a warning.

After all, it was just one year ago that traders were panicking over fears of exactly what we’re seeing happen right now. And at the risk of sounding like a broken record, the globe’s major economies are in trouble. That’s not good for many of the major globally focused companies that are heavily weighted in the S&P 500 Index.

But while individual investor sentiment is showing concern, institutional investors seem to be bullish, especially for stocks.

In my view, it’s best to stay on the conservative side of the stock market. This means sticking with a good base of US-centric stocks, like utilities and REITs. I also recommend building up a collection of quality companies that are capitalizing on unique opportunities, such as our problem-solvers that are addressing ASF.

Then, look to my favorite alt-financials that are taking on traditional banks, including Hercules Capital (HTGC), TPG Specialty Lending (TSLX) and Main Street Capital (MAIN) as well as the mortgage magnate, MFA Financial (MFA).

And don’t forget about bonds, which worked beautifully last year and even better this year. They’re a necessary part of every investor’s portfolio.

I’ve made some upgrades to our bond fund and ETF holdings, including the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI), which continue to capitalize on the corporate and muni bond opportunities for steady income with strong growth.

Low inflation, a strong US consumer and a Fed that’s doing its job are all coming together to help round out the year. And who knows… maybe we’ll get a trade deal and a Brexit resolution that will provide more oomph for stocks and bonds. But if all else fails, we’ve got a position in gold thanks to the folks at Franco-Nevada Corporation (FNV).

I’m currently researching a few potential opportunities for further growth and income, and I’ll be sharing my findings with you in the next issue of Profitable Investing. And if Brexit does indeed happen, I have a list of local London stocks that I’ll be itching to tell you about.

All My Best,

Neil George

NEIL GEORGE began his financial services career in 1987 with Merrill Lynch International Bank in Vienna, Austria and subsequently held senior positions at what are now US Bank and globally-based Investec PLC. Neil’s long

career has included stints as a bond trader and the manager of a fixed-income fund worth over $1 billion. An income hunter at heart, he’s also the former editor of several successful investment advisories dedicated to finding Wall Street’s best yields. Neil earned an MBA in international finance from Webster University in Europe and a bachelor’s degree in economics from King’s College. His market commentary and insights have been featured in the Wall Street Journal, Barron’s, Bloomberg, CNN and NBC.

Actions to Take This Month

1. In the Total Return Portfolio: • Buy ZTS under $130.00 (TF) • Buy NSRGY under $112.00 (T) • Buy HRL under $45.00 (TF) • Buy VNQ under $97.00 (TF) • Buy FNV under $100.00 (T) • Buy VPU under $145.00 (TF) • Buy VCIT under $93.50 (TF)• Buy BTZ under $14.00 (TF)• Buy DLTNX under $10.90 (TF)• Sell OSTIX and SPIB

2. In the Incredible Dividend Machine: • Buy AMLP under $10.00 (TF) • Buy BLK under $467.00 (TF) • Buy TSLX under $22.00 (TF) • Sell GIS and PFE

3. In the Niche Investments: • Buy WBA under $55.00 (TF)

4. In the All-in-the-Family Portfolios: • Sell HDV and buy FDVV • Sell FRESX and buy FREL • Sell FSUTX and buy FUTY • Sell FSPHX and buy FHLC • Sell VGHCX and buy VHT • Sell VFICX and buy VCIT

5. In the Fund Supermarket Portfolio: • Sell FSUTX and buy VPU • Sell VGHCX and buy VHT • Sell FSCSX and buy VGT • Sell OSTIX and buy VCIT • Sell FLTMX and buy TFI

6. In the Hassle-Free ETF Portfolio: • Sell SPY and buy VYM • Sell SPIB and buy VCIT

7. In the Ten-Minute Retirement Portfolio: • Sell SPY and buy VYM • Sell OSTIX and buy VCIT

SUMMARY

us still showing strength plenty of ways to profit · 2019. 12. 9. · us-centric stocks and bonds....

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