Where to Buy in an Expensive Market

Written by Rob Copeland | 14 March 2017

The stock market has been pushing higher and higher for eight years now, including a strong leg up following the presidential election. As a result, some investors feel that stocks are now too richly priced to buy.

But there is still good value in the market if you know where to look. Hint: Don’t necessarily look within the sectors that have soared. Broad market rallies usually leave behind certain sectors, and within those sectors can be found individual stocks with attractive prices and strong growth potential.

It’s a cliché, but the market regularly throws out the babies with the bathwater. And that presents opportunities for those willing to do the work and find long-term winners.

Take Target Corp. (TGT). A year ago, the retailer traded in the $80s. Today, it’s around $55 a share. It’s easy to see why investors would be turned off by Target based on short-term criteria. One of the biggest is that it recently fell short of its fourth-quarter earnings projections.

But bear in mind that when the market punishes securities based on a disappointing quarterly report, it overreacts and drives the price down too much. Smart value investors might look at a stock like Target and see that its falling price has created a high dividend yield—currently 4.35%.

More importantly, Target also has a high return on invested capital. Return on invested capital is a key longer-term measure of a company’s profitability—it illustrates how effective a company is at generating a profit from every dollar you invest.

At Target’s current price—which is as low as we’ve seen since the wake of its 2013 credit-card data breach—its stock is a value. To be clear, the point of this blog isn’t that you should run out and buy TGT shares. It’s that even in this richly priced market, there are quality value plays to be found.

As always, value investments require patience. Those that reward investors do so over time, not immediately. But such stocks often have strong dividend yields that help us to remain patient. Target’s yield is about twice that of the 10-year Treasury, for example, and is easily outpacing inflation. By the way, the company has posted 49 consecutive years of dividend increases, which is another market of a strong organization.

The takeaway: When the market is up, certain stocks will be left behind. Those that are unfairly left behind by the market’s short-sightedness can prove to be long-term winners. 

How to Get (and Stay) on Track for Retirement

Written by Rob Copeland | 14 February 2017

We are well into tax season, and that presents a good opportunity not just to look at your earnings and tax liabilities, but to re-evaluate whether you are on track to retire and achieve other long-term goals.

Unfortunately, few individuals take an in-depth look at their complete financia picture every year. And most financial advisors only do a simple portfolio review. But I believe being prepared for retirement merits the extra effort.

Investors should sit down around now and take a close look at how much money they're making. They also need to understand how much of their income—after taxes, retirement savings, and debts such as home loans—they are actually using.

Remember that in retirement, you will likely not have the same expenses you currently do. Retirement savings won't be necessary, and you'll likely have your mortgage paid off. You'll then need to figure out how much income you'll need in retirement, adding 3% annual inflation to protect your buying power.

Here's an example. Let's take a 45-year-old married couple earning $150,000 a year.
After tax deductions and exemptions, they pay around $30,000 in taxes every year, bringing them to $120,000 of spendable income. Will they need the same amount of annual income once they retire at age 65? Not likely. For starters, their $2,500 monthly mortgage payment, including taxes and insurance, will just become $500 in taxes. And they'll no longer be contributing $10,000 a year for retirement savings.

That brings their retirement income needs to $85,000 a year; and 20 years from now, that will be $170,000 after inflation. Social Security will provide a big chunk of that: Let's say the wife gets $24,000 a year, and the husband gets $36,000. The gap is now down to $110,000.

Since the couple don't have corporate pensions, they'll need to generate $110,000 a year from their retirement savings. They will need $2.2 million to throw off that amount of annual income over the course of their retirement.

Based on this information, I can tell clients whether they're stashing away enough for retirement, or need to be saving more. And I can calculate the rate of return that they'll need to grow that savings to $2.2 million.

If they're ahead on savings, they can breathe easy. If they're behind, they know what they have to do. Either way, the clients will end up with peace of mind that they'll have the income they need. Remember, your savings rate is the part of the retirement equation over which you have the most control. You can't force the markets to give you a certain return, but you can definitely discipline yourself to contribute the right amount to your savings.

Bear in mind that this annual check-in can and should cover changes in your personal life and career. Maybe you've changed jobs, or remarried. Maybe one spouse has retired. Are you living larger these days? Or more modestly? All of that helps determine the amount of retirement income you'll need, and sets the stage for any needed adjustments you can make right away.

If you're reading this and feeling like you want more confidence about being on track for your retirement, feel free give me a call, and I'll be happy to review your situation.

Market Uncertainty Arises: How to Invest

Written by Rob Copeland | 11 January 2017

Experienced investors know that market expectations are never certain; there are just too many potential surprises out there. But there has rarely been more uncertainty than there is right now.

Example: Healthcare stocks had rallied since the election of Donald Trump, on expectations that a wave of deregulation would lift profits. Then, in a press conference nine days before his inauguration, Trump slammed drugmakers' business practices as "disastrous." Drug and biotech stocks dipped sharply, even as Trump spoke.

The truth is that most market sectors rallied in the wake of the election. But the rally has stalled for several days now, as investors look beyond "animal spirits" for concrete reasons to keep bidding up stocks.

The fact is that no one really knows the impact that the Trump administration and the Republican-controlled Congress, will have on the markets. On top of that, the post-election rally has stretched prices across the market. For investors, this isn't the time to bet on whether the rally can go on.

It's a time to step back and find investments that promise to make us money regardless of the market uncertainty. And that means looking beyond the expensive, fast-growing names that have dominated the market. The stocks we want in this environment are dividend-paying value stocks—intrinsically valuable companies whose prices have slipped because they're underappreciated. There aren't many of these diamonds in the rough, but they are worth the trouble of seeking out.

Unlike growth stocks, we don't buy value stocks in the expectation of rapid capital appreciation. Value stocks are part of a patient, conservative approach that can pay off in nice gains over a longer time horizon.

When evaluating stocks, one of the most important factors we look at is current and projected cashflow. Ultimately, an underpriced stock with solid cashflow will appreciate to reflect the value of that cashflow. Value stocks require patience: The nature of the market is that "the herd" is often slow to appreciate the intrinsic value of high-quality, out-of-favor stocks. Ultimately, value investors believe that the market will catch on and boost their share prices.

Meanwhile, value-stocks' dividends reward us for waiting until the market realizes they're undervalued. Dividends, if they are reinvested, also serve as a performance cushion to mitigate losses.

We're in uncertain times. Deregulation may or may not happen. Trump's policies in areas like trade may help or hurt American companies. We won't know how government actions will affect markets for months. But value investing doesn't rely on developments out of Washington, D.C. It allows us to buy good companies at a discount, wait until the market comes around, and collect dividends in the meantime. Right now, holding out for those diamonds in the rough is the smart strategy.

Should You Buy the Trump Rally?

Written by Rob Copeland | 12 December 2016

The stock market has been on a tear since the surprise election of Donald Trump. The Dow Jones Industrial Average has set 14 new records during that time, and is nearing the psychologically significant level of 20,000. Other major indexes have been cruising right along as well.

So the market can only go up from here, right?

Read more...