ChuckCarnevale

Price volatility is an unavoidable aspect of investing in common stocks. During periods when emotions are dominating reason, price volatility can become more pronounced than is normal during calmer times. The insidious part of this fact is that the more volatile stock prices are, the more fear and stress they generate, which only feeds even greater volatility. Of course, the same can be said when greed raises its ugly head. The purpose of this article is to provide some logic and reason that can be applied to stock price volatility that simultaneously weakens its potential damage. However, in order to accomplish my objective, it is imperative that the reader be willing to consider what I believe is the undeniable reality that stocks are often mispriced by Mr. Market. This concept flies directly in the face of the so-called “Efficient Market Hypothesis (EMH)” accepted by proponents and followers of Modern Portfolio Theory. According to the Efficient Market Hypothesis, stocks are always accurately priced because existing share prices always incorporate and reflect all relevant information. Therefore, stocks are always trading at their fair value. I consider this notion preposterous, and in the context of this article, I intend to offer evidence that
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Introduction In my previous article found here I reported on Dividend Champions that I felt were fairly valued.  In contrast to Dividend Champions that have raised their dividends every year for 25 consecutive years, Dividend Contenders have raised their dividends every year for 10 to 24 years. Therefore, I feel that the Dividend Contenders list also provides numerous excellent candidates for a retirement portfolio interested in generating a constantly-increasing income stream. Moreover, I believe there are many candidates on the Contenders’ list that also meet the seven criteria of quality and quantity that the venerable Ben Graham expressed.  The seven criteria are repeated here as follows: Adequate Size of the Enterprise A Sufficiently Strong Financial Condition Earnings Stability Dividend Record Earnings Growth Moderate Price / Earnings Ratio Moderate Ratio of Price to Assets General Considerations and Thesis In order to avoid being repetitive, I suggest that the reader refer back to my previous article through the link provided above, in order to review the principles, justifications and primary thesis underpinning both these articles.  However, the following summary of the main points that I am articulating will hopefully prove useful. First and foremost, I believe that retirees can, and should, design and build
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Introduction In a previous article found here  I postulated that the S&P 500 (INDEXSP:.INX) was currently fairly valued.  In this article, I review a specific hand-selected list of Dividend Champions that I believe are reasonably priced and therefore capable of generating above-average returns at below-average risk.  In today’s low interest rate environment, I believe that high-quality blue-chip dividend growth stocks represent an attractive asset class that can provide a retirement portfolio with a growing income stream. Retiring Without Being Predestined to a Fixed Income Once we reach retirement, investing becomes all about income and safety. Yet over the years one of the greatest laments of the retiree is the struggle associated with living on a fixed income. Retirees have been conditioned to the notion that once they reach retirement age they must become completely risk-averse regarding their investing practices.  Therefore, they end up holding portfolios full of fixed income with little or no growth of either income or principal. However, it doesn’t have to be that way. I believe that retirees can have their cake and eat it too.  If they adhere to sound principles of investing, they can have safety, growth, and an increasing income each year. Perhaps the most important
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Allow me to start this article by emphatically stating that I have a real problem with forecasting stock markets in the general sense.  Instead, I prefer to forecast the intrinsic values of individual businesses based on their earnings justified fundamental values.  I hold this position because I believe that it is not only possible, but also quite practical to analyze a specific business and then make an intelligent forecast (not a guess) but a rational estimation, based on the assimilation of fundamental facts, as to its past, present and future intrinsic value.  Importantly, I’m not suggesting this can be done with absolute perfect precision down to the precise penny, rather I am suggesting it can be done within a reasonable range of rational probabilities. In contrast, trying to estimate the collective results of a large group of companies such as the S&P 500 (INDEXSP:.INX) is a very daunting task.  There are just too many variables and too many data points to contemplate from which to make a rational and/or reasonably accurate forecast. On the other hand, the evidence I’ve reviewed suggests that the earnings and price correlation and relationship is just as valid on an index, as it is on
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As I routinely do, I was recently searching for a hidden gem stock investment.  In other words, I was trying to identify a preverbal diamond in the rough.  As I was conducting my search, it suddenly occurred to me that if I wanted to find a jewel of an investment, I should look to where the most precious treasures would be found – so logically I “went to Jared.”  And in doing so, I discovered Signet Jewelers Ltd. (NYSE:SIG), a stock that has soundly outperformed the stock market since 2009. Since changing its stock market listing from the London to the New York Stock Exchange on September 11, 2008, Signet Jewelers Ltd. (NYSE:SIG) has been on a tear. Operating earnings growth has averaged almost 23% a year, and the stock price has risen from $8.67 on December 31, 2008 to $55.14 on the close of business on December 12, 2012. This has generated capital appreciation at a compounded annual rate of 59.7%, add in their modest dividend and annual shareholder returns have exceeded 60% per annum. The following earnings and price correlated FAST Graphs™ and accompanying performance table reveals these results.  Yet in spite of this stellar performance, Signet’s stock receives little to
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I have recently authored two articles showing that, all other things being equal, a stock that pays its shareholders a dividend generates a higher total return than a stock with similar growth characteristics that doesn’t. This is based on the reality that stock prices follow earnings in the long run, and it is this relationship that generates the capital gain component of total return.  Therefore, if there is a dividend it will provide the shareholder the additional return from the income component (dividends).  Links to the articles can be found here and here. Both of these articles generated a rather lively comment stream.  However, very few of the comments actually discussed the concept of the dividend providing additional return.  Instead, the comments denigrated into exhaustive discussions about whether or not a company would grow faster or not by not paying a dividend. In other words, the discussions did not talk about the return augmentation the dividend provided, rather, the debate focused on whether companies should pay dividends or not.  This led then to discussions about reinvesting into the business, and share buybacks, et cetera.  These are entirely different subject matters which inspired me to write this article. Consequently, the focal point of this
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The Two Components of Total Return There have been many recent published articles and discussions that indicate that dividends have become the Rodney Dangerfield of the investing world.  In short, dividends get no respect, as many believe that dividends do not add to a shareholder’s profitability.  We believe that dividends represent a return bonus.  This article is written to provide evidence of our thesis.  “The following is the definition of total return according to investopedia: When measuring performance, the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. “ With the above definition in mind, perhaps the best place to start is by examining the two primary components of total return in order to put everything in perspective.  But before we go on, we are utilizing the phrase “total return” as synonymous to the word “profitability.” In other words, an investor’s profitability logically must be measured as the total return they receive on their investment.  Total return is a function of two primary components, capital appreciation and income.  Of course, investments that do not generate an income
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Introduction: The Current Mispricing of Technology At the risk of jumping on the everybody’s-writing-articles-on-Apple-bandwagon, this article is offered at the request of a loyal reader.  Our objective is to put not only Apple’s valuation into perspective, but also what we believe to be the current undervaluation of technology stocks in general. If looking at how the stock market has historically priced technology stocks doesn’t convince you that the market is not only not efficient, but in fact totally irrational much of the time-then nothing will. It was approximately 15 years ago that the market was telling us that technology stocks had almost unlimited value. Mr. Market was placing literally insanely high valuations on everything tech that made no economic or even mathematical sense.  During this era, the simple Treasury bond was throwing off riskless interest that was many times greater than even the most optimistic expectations of what technology stocks earnings would be.  To be clear, you could earn Treasury bond interest payments that were many times greater than the total earnings being generated by technology stocks. Today, we find Mr. Market treating anything tech, in an exact opposite manner.  In 2012, and as we head into 2013, technology is
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Kinder Morgan Energy Partners LP (KMP) is the country’s largest pipeline master limited partnership.  Perhaps the clearest way to think about a pipeline MLP is as a toll road. According to their website, Kinder Morgan Energy Partners LP owns an interest in or operates approximately 75,000 miles of pipelines and 180 terminals. The company’s pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and store a variety of energy-related products and materials at their terminals.  These would include gasoline, jet fuel, ethanol, coal, petroleum coke and steel. Master Limited Partnerships (MLPs) were authorized in 1997 by Congress under the Internal Revenue Code Section 7704 in order to promote investment in the energy sector. The law greatly facilitated the formation of midstream MLPs such as Kinder Morgan Energy Partners LP. Midstream energy is mainly the transportation of oil and gas through pipelines. Since an MLP must by law derive 90% of their income from “sources related to income from specific sources, including dividends, rents, interests, capital gains, and mining and natural resources income identified in Section 613 of the tax code”, we believe that cash flow is more relevant than earnings as a gauge for valuation. As we will soon
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We often write about valuation because we believe it is one of the most misunderstood aspects of investing in common stocks.  This causes many people to hold what we consider to be unjustified biases that are based primarily on price action.  For example, the concept of the lost decade, which many almost gleefully point to as evidence validating that stocks are poor investments, fail to recognize that the true culprit was overvaluation during the appropriately labeled “irrational exuberance” days. However, one of the most misunderstood aspects of overvaluation is how wide ranging and relative it is. To clarify, one company can technically be labeled overvalued, but due to other important factors, still be a good investment or even an above-average investment. It all comes down to the degree of overvaluation the market is applying, relative to the potential long-term growth the business is capable of achieving. Starbucks Corp. (SBUX): Overvalued High Growth We offer  Starbucks Corporation (NASDAQ:SBUX) as an example of a stock that is technically overvalued, but not necessarily a poor long-term investment. First of all, by looking at the earnings and price correlated F.A.S.T. Graphs™ below, we discover that the market has historically placed a high valuation on this high-quality growth stock
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Not having the confidence that they know the true worth of their stocks, is one of the most common laments expressed by many individual investors. Even more importantly, knowing the price of all their stocks, but not knowing their value, is often a major source of shareholder losses. Expressed differently, when you don’t know the value of what you own, it’s very easy to be taken advantage of.  It’s an undeniable fact, that people are emotionally attached to their money.  Therefore, it’s no wonder that all the price volatility accompanying an often irrational stock market can be quite unnerving. As a result, investors often buy when they should sell, and sell when they should buy. Making matters even worse is the reality that there is no precise or absolute calculation of intrinsic value or what we like to call true worth. This stems from the fluid nature of a business where future prospects can rapidly change.  Think financial stocks in late 2006, going into 2007 and 2008.  Once apparently very healthy and profitable enterprises, the fortunes of many financials collapsed with a vengeance.  The following earnings and price correlated F.A.S.T. Graphs™ on Citigroup Inc. (NYSE:C)  provides a vivid portrayal of how quickly a company’s
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