Weekly Musing (Sep2019)

For the umteenth time during this presidential reign, I have to say, “What a week!”.  What surprised me was the markets took the probable presidential impeachment in stride, only faltering when Trump decided to fuel trade tensions with China (again) – and this being just prior to the next round of talks.  The topic this time being capital restrictions – neither of which would likely be very successful. For instance, rescinding the waiver allowing Alibaba (BABA) or Tencent (TCEHY) to trade on US exchanges would not change their ways but force them to move their listings to London or Hong Kong.  Noble but not realistic.  Then there’s the issue of the impact on Hong Kong listings … My potential impacts include Yum China (YUMC) and Swire Pacific (SWRAY) which I’ll have to investigate further if this idea gains traction.

I am not alone!  BAML decided to upgrade CHD to Buy citing “strength in their largest business (laundry) and seeing the company’s brand-building efforts paying dividends.”  The one quibble I have with this assessment is the attribution of recent weakness to “value rotation” rather than placing the blame squarely on a short seller (Spruce Point).  Shares were up for the week but still down 5.5% from their September 5th close. This puts last week’s buy squarely in the green. Gotta love it when you are on your game.

Last week’s lament was regarding the lack of novel concepts emanating from the Delivering Alpha conference.  Fast forward a week and one appeared out of nowhere – well actually on the CNBC set. David Zaslav, Discovery’s (DISCA) CEO was interviewed on the launch of a new concept dubbed the Peloton model, aka,  The Food Network Kitchen. Like Peloton (PTON), this offering provides multi-level customer engagement; Subscription, Interactive and Transactional. This type of engagement – if successfully executed – has the potential to attract, retain and increase sales – all while the customer is eagerly forking over their cash.  I chose not to participate in PTON as the dual class and pricing was a turnoff. DISCA pays no dividend so I’m not invested there either. But the concept, if not the companies, is intriguing. 

Thumbing through other news, I ran across an interview with Robert Herjavec regarding his view on interest rates in which he opines, “If I can borrow at 2% or 3% and grow by 10% or 20%, I’m going to take that all day long.”  Well, yes, I would too – and then Eureka!  (yes, I can be dense at times), a rationale behind Trump’s persistent jawboning of the Fed.  I’ve never believed the President’s motives were pure, as people on fixed incomes are disproportionately impacted by low rates.  If a successful businessman such as Herjavec can leverage off of low rates, a leveraged real estate guy – such as the President – should easily profit (or reduce losses) via refinance.  Particularly when other ways to increase business are being scrutinized and licensing deals are drying up.

There are my thoughts for this week.  With both month and quarter end arriving Monday, I’ll be heads down.  I don’t know how it happened but fully 15% of my dividends arrive on two days … the last day of the quarter and the first day of the subsequent quarter.  Next week will be the Monthly/Quarterly recap.

Have a great week!

Delivering Alpha – NOT!

Perhaps I was anticipating too much based on hype and previous editions, but this years CNBC Delivering Alpha conference failed to deliver.  Come on, aren’t there any new and exciting things on the horizon to capture an investor’s fancy? Obviously not, as the VP’s message of a booming economy was sandwiched between short ideas and negative interest rate survival.  All interlaced with the drizzle of ESG investing and streaming concepts – in theory new and improved versions. Sorry, all this is old news, making me think CNBC has lost the concept of Alpha.  ESG has largely turned political (which introduces uncertainty) and the window of opportunity for nice gains in streaming closed about a year ago (about the time I added to my Comcast position).

Investopedia defines Alpha as a term used in investing to describe a strategy’s ability to beat the market – what most of us aspire for.  DGI investing generally attempts to quantify (and reduce) said risk while serving up a theoretically predictable outcome. My portfolio is a modified DGI strategy in that I attempt to introduce some Alpha to maintain my streak of beating the market as defined by the S&P index. I do this by introducing an underlying theme that I meld a portion of my portfolio into.  Past examples include Community Bank consolidation and the Rise of Fintech.

One that delivered Alpha to my portfolio this week was within the theme Transaction Processing.  On Thursday, Total Systems Services (TSS) was lost from my portfolio and replaced by Global Payments, Inc. (GPN)  via the consummation of their merger. TSS was a company that I seriously doubt was held by many other DGI enthusiasts.  To identify why, let’s run it through the illustrious Dividend Diplomat stock screener which addresses most – if not all – the conventional metrics most individual investors would use in decision making.  

Metric #1 P/E Ratio Less than the S&P 500

At purchase, the ratio was 19.16 and the S&P was 20.12.  A technical pass, although the Diplomats prefer a greater margin.

Metric #2 Payout Ratio of Less than 60%

At purchase, the payout ratio was roughly 22.95% (FY2016).  A definite pass.

Metric #3 Increasing Dividends

Here lies the major failure, which probably would have caused the Diplomats and most DGI purists to pass on TSS.  Their record is pitiful with two raises in eight years and the yield rarely exceeded 1%.


My take has always been to consider Total Return as the primary metric with a significant emphasis on Dividend Growth/Safety.  Although TSS’s dividend has been wanting, since I owned it it has delivered 30% average annual price appreciation with an additional 49% since the merger was announced, bringing my total unrealized capital gain to 390% plus a miniscule, taxable dividend.

Rather than reward shareholders directly, they chose to reinvest in R&D and growing the business which probably provided a greater return – and tax-deferred to boot.  The arguments against this approach are consistency and dependability. Additionally, this requires a level of trust in management. Granted, in some cases this depends on being in the right place at the right time as well – and this example is an extreme success story.  Yes, I do have several that I’m waiting on to pan out which is why I categorize this approach as speculative with only a small portion of my portfolio looking for the next emerging brilliant idea or better mousetrap.

Don’t get me wrong, I love my dividends.  In general, DGI provides a stable, consistent foundation.  But a little dash of Alpha through total return could be the difference in beating your index. As always, your views are welcome!

Old Fashioned Horse Race

the horses rounded the bend and started down the home stretch. “Look! Look! See his stride now!”

Black Mack by Neil Dawson in The Canadian Magazine, Vol. 29, Oct. 1907

In a followup to my last post, I decided to increase my position in Church & Dwight (CHD) this week which I posited was a possibility with the current weakness.  I’m assuming that a floor has been reached following Spruce Point’s short campaign and some insider selling reported. Quarterly filings also revealed some increases in long positions by entities much larger than Spruce Point.  With the price decline now at roughly 10%, I thought it prudent to begin accumulating some more. Its’ position in my portfolio was about 0.2% – and now about 0.22%, there’s still plenty of room to add until my 1% limit is met. This is one I’ll be keeping an eye on prior to there next ex-dividend date.  

The Dow Jones Industrial Average rose for eight straight days, I believe largely on the heels of positive-sounding trade news – particularly on President Trump’s acknowledgement that he would at least consider an interim trade deal.  This may be short-lived if his base considers this a retreat from the all-or-nothing position that was held stating the tariffs will force China to conform with established standards. Perhaps the message to the base would be, “See how easy trade wars are to win when the goal posts are moved.

With the yield curve steepening, some pressure was off of financials contributing to my portfolio attaining a new record high as well, eclipsing the prior high set in July.  Let’s see if this can continue through month-end as there are some issues like the Fed meeting and the attack on Saudi oil to consider.

This is the time of year that I begin the fine tuning of the portfolio strategy as there are limited possibilities remaining to impact dividend results as the final quarter of the year looms on the horizon.  Considering that ten of my companies have no more ammunition available until next year, the pickings will become increasingly slim until we turn our focus to the new year. Plus there’s a delicate balancing act to perform with the cash allocation as October has historically been a volatile month.  Keeping a little dry powder in place could also be a viable strategy. Just some random ideas that are framing my thought process a little.

So to come full circle, we’re rounding the bend and coming down the home stretch. Being a nose ahead of the index is something I’m not accustomed to as generally I’m several lengths ahead. Which is why my final assessment this year (about two weeks away) will be crucial. Here’s hoping your week is fruitful!

Analyst BullS#!T!

My friend Frankie posted an aptly titled piece (Beware the Broker BullS#!T!) on analyst’s actions awhile ago (along with a followup) which struck a nerve as my early investing career had several of the pitfalls mentioned.  While I did evolve to settle primarily on a modified DGI strategy, I have to wonder as to the due diligence exercised by some of the broker’s clients. In the US, there are some shops that are essentially pay for play schemes, meaning pay us money and we’ll cover your business.  One of these is Taglich Brothers (which has a clearing business relationship with Pershing, LLC in which I am a shareholder (BK)).  Taglich, through it’s press release with NXNN (a spec holding of mine) disclosed, “In October 2017, the company paid Taglich Brothers a monetary fee of $4,500 (USD) representing payment for the creation and dissemination of research reports for three months.  After the first three months, the company will begin paying Taglich Brothers a monthly monetary fee of $1,500 (USD) for the creation and dissemination of research reports.”  Unbiased?  Unlikely. Another take on them was provided by D/M/O.  Point of reference, Orchids Paper (TIS), mentioned in the article was formerly in my portfolio and subsequently filed for bankruptcy protection (I had sold prior to the filing).

Another angle on alternative strategies was brought front and center this week with the publication of Spruce Point’s analysis on Church & Dwight (CHD).  Spruce Point is a small, short focused firm similar to Muddy Waters Capital or Kerrisdale Capital that use Seeking Alpha, Twitter and other social media to broadcast their research.  Spruce Point takes a short position, runs a campaign and determines the traction being gained. In the words of the founder Ben Axler, “Because I run a small business, we don’t have a lot of time to waste going down rabbit holes where there’s a dead end,” he says. “I can generally sniff out a company pretty quickly.”  OK, then.  

I admit that CHD is richly valued and perhaps they overpaid for some acquisitions.  I also submit that Spruce Point is highly vocal for their smallish size. They have, however, been building a little bit of a track record in this bull market.  On first blush, it appears the Spruce Point results have been stellar thus far in 2019 with a by moving the market in their intended direction 77% of the time on the day their report is released – translating into an average market loss of their targets of 3.78%.  I would posit their gain is even greater as I suspect their investors and subscribers get a first look at the reports. My guess would be a 5-10% short term gain.  

As of Sept 7, 2019

In the shorting game, the real money is to be had by riding a target down, but to do so requires conviction, stamina and staying power.  Based on Ben’s comment, I doubt they are riding the targets down other than a select few high conviction ones. My reasoning being that they would be booking a loss for 2019 as their targets, in aggregate, are 2.88% higher post call.  The three that would have rocketed their results lost 49%, 26% and 25%. Conversely the three they should have exited quickly gained 86%, 51% and 12% for the longs.

Over the weekend Spruce Point has continued their campaign against CHD using Twitter to gleefully proclaim success as CHD has not chosen to engage in their antics.  Although some of Spruce Point’s issues have some validity, in large I feel they are overstated – essentially a headline grabber.  

One issue they raise is the use of factoring to manipulate results.  Possible, but it depends on whether it is recourse or non-recourse. Spruce Point also takes issue with an undisclosed UK acquisition.  My take is with sales in the £764,000 range this is negligible. The current year “slowing dividend growth” could be explained by prudence in digesting its last two acquisitions.  I suspect this dividend trend may be the new normal for a period of time if management executes on their goal of expanding their “power brands” to twenty.

In summary, they could very well be right. They could also be playing a manipulation game. If weakness intensifies my thoughts are that a buying opportunity may be at hand. Then again – I may be wrong 🙂