Articles filed under "moats"
If you’re sniffing around looking for values in the energy sector, the just-reconstituted Market Vectors Wide Moat ETF (MOAT) that tracks the Morningstar Wide Moat index needs to be on your must-vet list. For the upcoming first quarter of 2015, eight of the 20 spots in the equal-weighted portfolio will be energy stocks that have the double allure of possessing a competitive wide moat and a share price that Morningstar estimates is a discount to fair value.
The three steepest discounts are Schlumberger (SLB), National Oilwell Varco (NOV) and Williams Companies (WMB) all selling at discounts of at least 25%. Those discounts are based on a fresh round of reduced fair value estimates from Morningstar that reflect the sell-off in oil prices.
A quick aside if you’re not familiar with the success of the wide moat index: Morningstar’s index has a terrific long-term record, and the Market Vectors ETF that was launched in mid 2012 to track it has in its short history has managed to more than keep pace with the SPDR S&P 500 ETF (SPY). (Full disclosure: Morningstar is an investor in YCharts.)
A testament to the stock-picking chops for the Wide Moat ETF is that outperformance comes despite having a 49 basis point expense ratio drag, compared to just 9 basis points for the SPDR S&P 500 ETF.
But in perusing the latest portfolio holdings of top active value managers, Oracle is where fresh money is being put. This chart explains plenty:
While the market has surged back to avoid a classic correction (loss of 10%-20%), the recent selloff is a good reminder of what sorts of stocks tend to do best when downside volatility strikes.
Established and dominant companies, with one or more definitive competitive edges, often hold up best, as investors who want to maintain equity exposure will often rotate out of riskier fare. Moreover, the big, wide moat stocks tend not to trade at high multiples in the first place, and thus aren’t as exposed to major downside in a down market.
To be clear, the wide moats tend to lag in strong markets. But as we’ve pointed out before, the long-term performance of the underlying index this ETF is based on -- Morningstar’s Wide Moat Focus Index -- has shown net outperformance over periods that include both up and down swings. (Full disclosure: Morningstar is an investor in YCharts.)
It has been a tough year for true believers of Amazon (AMZN), with the online retailer’s shares down 23%, a failed smart phone rollout and recognition that its revenue growth – the statistic that has held Amazon shares aloft in recent years – is inexorably slowing.
Amazon stock could quite easily snack back to $400 and more on some positive news, but doing so on the basis of a reasonable multiple of net income any time soon seems highly unlikely. Tough territory for a value investor.
That said, there is very good news in Amazon’s third-quarter results and its results year-to-date, that is, if you’re UPS (UPS): Amazon is tilting toward increasingly being a domestic company, with its North American sales growth rate for the first nine months of the year running a quite-healthy 26%, while international sales grew just 17%. North American sales are already far larger -- $36.7 billion for the first nine months of 2014, versus $22.9 billion for international – and the more rapid rate of growth will widen that gap going forward.
What was supposed to be the victory lap stage for technology stocks is suddenly looking a bit wobbly. While tech stocks tend to outperform in the later stages of a bull market and the economy’s mid-cycle -- just where we are at right now -- that hasn’t been the case over the past five weeks, as volatility has picked up.
Apple (AAPL), was a relative outperformer, losing just 2% over the past five weeks. Neutralize Apple’s market-cap impact, and tech’s lag widens. Here’s the equal-weight index performance for the S&P 500’s tech sector and the overall index:
If you’re an investor in traded securities in this country, you should daily give thanks for the Securties Act of 1933, the Securities Exchange Act of 1934 and some follow-on legislation that helped turn a once-shady, caveat emptor marketplace into the world’s model for transparency and fair dealing.
Companies and their lacky consultants love to complain about onerous disclosure laws enforced by the Securities and Exchange Commission. But without these, we’d surely be treated to a never-ending string of accounting and stock manipulation scandals, the likes of which one can still witness in less-developed countries.
Thus, I was both peeved and felt a renewed sense of appreciation for our securities regulatory scheme reading last week that the SEC was investigating Western Union (WU) for possible securities fraud in connection with statements and accounting concerning the money transfer giant’s digital operations. Peeved because I’d written twice in recent months about the unit’s apparent robust growth and how Western Union stock wasn’t getting credit from investors for that achievement, while the market was rewarding tiny Xoom (XOOM), a digital startup that appeared to be growing more slowly that Western Union’s online operations.
It was just three years ago that Berkshire Hathaway (BRK.B) stock was unloved enough for Warren Buffett and Charlie Munger to codify that they would consider stock repurchases if the price-to-book-value ratio made its way down to the vicinity of 1.1x.
Here’s how “badly” Berkshire Hathaway stock was trailing the market coming out of the ’08-’09 bear market up until the formalization of the buyback ground rules.
In late 2012 Berkshire in fact repurchased more than $1 billion (buying back from a shareholder) and announced it was raising its buyback floor to 1.2x book value, which was close to where the stock was trading at that juncture. There were no additional buybacks, but for the naysayers, the next time Berkshire trades down to that level you might want to take notice. Price to book value is now 1.4x, and the dividend-less Berkshire stock has easily outpaced the total return for the SPDR S&P 500 ETF (SPY):
Xoom (XOOM), a digital money transfer company, has a board full of VCs, a 10-K that talks about the “antiquated” business model of its far-bigger competitor, without actually naming Western Union (WU) in that passage, and declares: “Our modern digital platforms disrupt the traditional forms of money transfer.”
Xoom also has a stock that has underperformed Western Union – and the broader market, as measured by the S&P 500 – since its February 21, 2013 initial public offering; a CEO who is already unloading Xoom shares in an automatic selling program; and a big hole in the story it seeks to tell: Western Union, in addition to its hugely profitable cash-changing-hands system of money transfer, supported by some 500,000 agents in more than 200 countries, has its own digital money transfer business and it’s bigger than Xoom and just might be growing more rapidly.
Who’s being disrupted, now?
With economic growth picking up a smidge, and seemingly stable enough for the Federal Reserve to get serious about a potential rate rise in the first half of next year, there’s little to suggest any need to get your inner bear on. But at the same time, with valuations anything but cheap, getting a bit more smart/defensive in your stock allocation seems like a reasonable pursuit.
Enter, the Schwab U.S. Dividend Equity ETF (SCHD). Its got the sort of high-quality large cap issues -- Johnson & Johnson (JNJ), Microsoft (MSFT) and Chevron (CVX) -- that participate plenty on the upside, but also have the nice habit of holding on better when the markets correct. And as Morningstar Analyst Abby Woodham recently noted in Morningstar magazine, about two-thirds of the portfolio is invested in stocks that have been designated by Morningstar to have a wide moat. That compares to less than 50% of the S&P 500.
For income investors, the Schwab US Dividend ETF does indeed provide a dividend yield premium to the SPDR S&P 500 ETF:
The projected yield for the Schwab portfolio is an even more compelling 3.1%. (You can now find an ETF’s prospective yield on its main quote page, under the Fundamentals section on the right side of the page.)
The Internet, asset bubbles and other large-scale economic changes can make it difficult to choose stocks that benefit from consumer spending. Will Amazon (AMZN) ruin the party for other retailers that in past economic cycles performed predictably? Will our turbocharged mortgage finance system lead to another housing bubble? Which auto, retail, gambling and travel stocks will come out on the winning side of consumers’ rapidly changing tastes?
The makeup of a market-beating mutual fund, Vulcan Value Partners, suggests a way to be agnostic on precisely how consumers spend their money, yet still benefit as consumer spending chugs along quite nicely, with a potential upturn in the second half of 2014. Three of the fund’s top-10 positions, accounting for a combined 12.9% of assets, are companies engaged wholly or in large part in payments processing for consumers: MasterCard (MA), Visa (V) and eBay (EBAY).
Sarah Max of Barron’s, in a smart article this past weekend on Vulcan and its recent stellar performance, quotes portfolio manager C.T. Fitzpatrick thusly on MasterCard and Visa:
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