February 2007 Issue
“Even If” Jeff…
| Top 10 Common Stock Countdown |
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Wow, what a great year for Dow component General Electric. 2006 was a great year. And this year, GE will register more solid low-risk growth. Earnings
will advance at a 10% to 13% clip. Solid for sure, even if below last year’s 15% growth. Revenues will grow by 7% this year versus last year’s
11% hyper gain. For 2006, GE will record $27 billion in revenues from emerging markets. By 2009, it is expected to hit the $40 billion mark from developing
countries. GE’s board of directors recently increased the quarterly dividend by 12% to $0.28 from $0.25/quarter. Over the long term, I expect a
stock’s average annual total return to match its sustainable dividend growth plus initial yield.
Long-Term Comfort
Total revenue should hit $175 billion this year, up from $163 billion in 2006. Jeff Immelt tells us his solid overall assessment even allows for a conservative ’07
contribution for GE’s financial services unit. Immelt considers GE “a company that is built to perform over the long term. According to Mr.
Immelt, “We’re going to be able to hit [the earnings numbers] even if the economy slows.”
The Power of Dividends and Compounding
My chart shows that GE’s stock has broken out of its narrow 2005–2007 trading range. It is now trading 15% above levels earlier in 2006.
The current dividend provides a 3% yield. I feel confident that you can draw 4%/year on average from a long-term investment in GE and that regular dividend
increases and modest capital appreciation will maintain the purchasing power of your 4% draw for decades. That is what the power of dividends, compounding,
and investing for a safe and comfortable retirement is all about.
Defeat Inertia
If you do not already have a position in GE, I’d like you to enter a buy order before continuing on with this issue. Defeating inertia is one
of the most difficult tasks facing the thoughtful, conservative investor. So a little prodding from me may be useful in lighting a fire under your venerable
self. Make your call!
Your World-Class Partner
OK, so you now have a stake in GE or have added to a previous stake. Nice going. You will not be disappointed. GE’s management is among the best
in the world, and CEO Jeffrey Immelt stands with a small group at the pinnacle of the corporate management quality ladder. You’re with the “A” team
when you invest alongside Mr. Immelt and, for that matter, my family investment management company.
Retirement Compounders Up 21.8% in 2006
GE is a major component of Young Research’s Retirement Compounders program. In fact, it is #1. And 2006 was a fabulous year for Young Research’s
Retirement Compounders, with the list up 21.8% (unaudited). I rely 100% on Young Research’s in-house proprietary research to bring you the common
stock advice in these monthly letters. And much of the credit for Young Research’s consistently stellar performance goes to our research director
Jeremy Jones, CFA.
Dow Theory Caution
What’s up for 2007? The year before a presidential election is, as you might imagine, full of heaps of B.S. from aspiring presidential candidates,
always a plus for the stock market. Lower interest rates would be the certain icing on the cake. There are, however, significant roadblocks. As my charts
show, the Dow transports look shakier than my dismal Boston Celtics. The transports have failed to confirm the DJIA’s new high. The yellow light
is flashing here. As I wrote last month, I’m a multi-decades fan of Charles Dow’s Dow Theory, and lack of confirmation is always a condition
to observe with caution. And confirmation is a must in terms of Dow Theory.
So the transports look shaky. I’ll provide an update each month. We need a breakout here fast. Next up on the problem list is the issue of value.
Despite all the self-serving yak you read, stocks simply are not cheap. With the P/E on the Dow over 20 and the yield only a little above 2%, it’s
not wise to dismiss the fact that historically stock P/Es are high and stock yields are indeed puny. On balance, it seems that investors are throwing
caution to the wind.
Monster Master List Stocks
Berkshire Hathaway (NYSE: BRKb). Believe it or not, today you can invest with Warren Buffett below trend. Buy.
Citigroup (NYSE: C).After trading in a narrow range for three years, the largest provider of credit cards in North America has broken
out with gusto, as my chart indicates. And I love the near 4% yield. Buy.
Coca-Cola (NYSE: KO). If you have been a stockholder for the last 113 years, you have been paid a dividend every single year. So why aren’t
investors piling into KO at its current deep discount to trend? They should be. Buy.
Forest City (NYSE: FCEa). My Cleveland, Ohio-based real estate heavyweight has given you a 28% average annual return over the last five years,
and, for the last 60 months, FCE has been on my Monster Master List for you. Buy.
Hormel (NYSE: HRL). You scored big once again in 2006 with the house of Spam. I keep a vacuum-sealed blue can of this protein-packed favorite
on my desk at all times. If you can overlook the savage bloating effect of 750 milligrams of sodium per 2-ounce serving as well as the artery-clogging
horror of Spam’s 6 grams of saturated fat per serving, you have yourself a real nice snack. Buy.
Mandarin Oriental (SINGAPORE: MOIL.SI).The stock gave investors a near 75% profit in 2006. Where else have you read about Mandarin? The
stock is not even in the jumbo S&P 1500 Stock Guide. The shares are now way over trend. Time to sell and wait for my re-buy.
McDonald’s (NYSE: MCD). You know what I really like about McDonald’s (certainly not the food or restrooms)? The dynamite real estate
locations. And despite the cuisine, the shares have consistently outrun the S&P 1500. Buy.
Plum Creek (NYSE: PCL). Let’s see. You plant seeds and cut down trees. Anyone not understand the concept here? My chart indicates a nice
price breakout. And you get a compounder’s dream yield of about 4%. Buy.
Polaris Industries (NYSE: PII). When they first came out, I said about the Victory motorcycle that I would rather ride a camel. Yes, I’d
quit riding if I couldn’t ride a Harley, but I do like the sharp-looking Polaris Hammer S. One of my four mandates for motorcycling is a strong
dealer network, and Polaris isn’t bad on this front. I also much like the company’s $200 million (max) accelerated share repurchase program.
And my chart shows the stock has bounced off a two-standard-deviations downside trashing. Buy.
Sturm, Ruger (NYSE: RGR). Management, such as it is, has announced a $7 million pre-tax non-cash inventory and asset-impairment charge.
There is more impairment here than dust-covered inventory. The company has also announced that its razor-sharp CEO and the VP of sales and marketing
have been granted, if you can believe this, nice fat severance agreements in the event their employment is terminated under specified circumstances.
How about a takeover? I think the board is, as they say, dressing the bride. Sturm, Ruger is a spec buy.
T. Rowe Price (NASDAQ: TROW). Say goodbye to the heyday of the mutual fund industry. ETFs are going to eat this industry up like the Internet
is chewing up print media. T. Rowe Price, however, will be one of a handful of prospering survivors. My chart shows that today you can buy T. Rowe at
the low end of its trend line versus the S&P 1500. Buy.
Unilever (NYSE: UL). A new Monster Master List name.
You may not be real familiar with this name, but you sure know all about Vaseline,
Skippy, Dove, Ben & Jerry’s, Breyers, Good Humor (if you are over 60 years old), and Popsicle. All are blue-chip members of the Unilever family.
The company has paid a dividend since 1937 and, for the last decade, has had 10% dividend growth on average annually. Today, you get better than a 3%
yield. Buy.
Disney (Walt) (NYSE: DIS). You made over 30% last year on my regular hounding of Disney. As my chart shows, Disney has regularly outrun the S&P
1500 this century. As a cheaper dollar brings more and more foreigners to Disney’s theme parks, I think the stock’s success will continue.
Your Questions, My Answers
| Q |
In the January issue, you said 64 stocks is too many, but you give us 76 stocks and 61 mutual funds to choose from. I am a 6-month subscriber |
I write to a broad spectrum of investors. Some have just joined me and others have been with me for many, many years. Some have millions of dollars
to invest and some have a few thousand.
For investors with portfolios of no more than $350,000 I advise sticking with mutual funds. My Mutual Fund Master List includes 60 open-end mutual funds,
closed-end funds, and exchange traded funds. Of those 60, eight are closed to new investors, three are only available to new investors with loads (I
don’t advise new purchases), and four are muni funds only suitable for certain investors. From the remaining 45 funds, I regularly provide specific
advice on which funds I strongly recommend.
For investors with portfolios of more than $350,000, I advise 32 stock portfolios. In a 32-stock portfolio, you will achieve over 90% of the diversification
of owning all NYSE-listed stocks. My stock Monster Master List currently includes 71 stocks. If a stock is on my Master List, it can be held, but inclusion
isn’t a green light to buy. Purchases should be restricted to stocks on my Top 10 Countdown or stocks for which I have provided specific buy advice
in the report. I would be doing my subscribers a great disservice if I only followed stocks that I currently recommend for new money. It would create
an enormous amount of turnover in investors’ portfolios leading to return-zapping tax bills and high transaction costs.
| Q |
As a long-time subscriber, I bought 32 stocks from your Monster Master List and began my program with you. Each month I read the new issue |
It depends on your individual circumstances. In a taxable account where you have substantial unrealized short-term gains, I don’t advise selling
your existing positions to purchase stocks on my Top 10 Countdown. If you have a loss on a stock, and I haven’t recommended it for purchase with
new money in a while, you may consider replacing it with a stock on my Top 10 Countdown. In tax-deferred accounts you can afford to be a little more
active since taxes aren’t a concern, but don’t go hog wild. The vast majority of my recommendations are long-term in nature. Don’t
buy the 10 stocks on my countdown one month and then three months later sell them all to buy the current Top 10 Countdown—I don’t advise
that.
| Q |
Would you consider including in your upcoming newsletter a review on percentages devoted to natural resources, international stocks, domestic |
Your most important decision and the one most likely to impact the overall risk and return of your portfolio is going to be how much you decide to devote
to fixed income. Younger investors with a time horizon longer than 20 years will want no more than 30% in fixed income. Investors approaching retirement,
but not quite there, will want between 30% and 50% in fixed income. Retired investors will want between 50% and 75%, depending on age and risk tolerance.
Our research on asset allocation shows that the portfolio with the least amount of volatility devotes about 75% to fixed income. On the equities side,
I include domestic and international stocks, natural resources, including gold, and real estate. The optimal amount to allocate to each sector varies
depending on its overall attractiveness at the time of investment, but today a good baseline guide would include 50% in U.S. stocks, 10% in real estate,
15% in natural resources, including gold, and 25% in international stocks.
| Q |
I would like to see more information on Exchange-Traded Funds. I understand that you buy and sell them just like stocks and that they are |
That’s correct. ETFs are baskets of securities like mutual funds, but they can be traded throughout the day like stocks. Traditional mutual funds
are only priced and purchased at the end of the day. The ETF industry is rapidly evolving and product availability and breadth is improving by the day.
As the build out of the ETF industry evolves, I’ll start to include more information on ETFs.
| Q |
In the December issue you say the BlackRock funds are good for IRAs. Are you saying not to begin a position in them if the money is not going |
BlackRock Global Opportunities and BlackRock Enhanced Dividend Achievers both write covered calls on their underlying positions in order to generate
additional income. The drawback to this strategy is that call income is substituted for capital gains. Call income is generally taxed at ordinary income
tax rates and long-term capital gains are taxed at 15%. To circumvent the tax issue, hold BOE and BDJ in tax-deferred accounts. There are no penalties
for holding them in taxable accounts, but you are sacrificing returns in the form of higher taxes.
| Q |
I would like to start a college savings plan for the grandkids. What are your favorite 529 plans? |
For those of you who aren’t familiar with 529 plans, they are state-administered tax-advantaged savings plans designed to encourage saving for
future college costs. The plans allow investors to save money in a special account in which the earnings will grow tax-deferred and when used to pay
for “qualified education expenses” will be free of federal income tax.
I won’t run through all of the details of 529 plans, but some of the positives that stand out to me are no income limitations, the donor retains
control of the funds, and annual contribution limits are equal to the $12,000 gift tax exclusion with an option to contribute up to $60,000 in one year
(gift assumed to be $12,000 ratably over five years—may require gift tax filing). On the negative side, 529 plan investment options can be limited,
expenses can be high, investment choices can only be changed once per year, and non-qualified withdrawals are subject to a 10% penalty. If you are interested
in reading more about the features of 529 plans, you can check out www.collegesavings.org on the web.
Once you’ve decided that a 529 plan is the right college savings vehicle for you, the more difficult task is choosing a plan. Investors are not
limited to the 529 plan offered by their state of residence. Often times a plan offered by another state may be more attractive than the plan that your
state offers. Every state offers a 529 plan and the fees charged and investment options available are not uniform. To further complicate matters some
states offer tax breaks and matching contributions to investors choosing an in-state plan. You’ll have to weigh the in-state benefits against the
investment expenses and options before you choose a plan.
Strictly based on the investment options and expenses, I favor the Michigan plan managed by TIAA-CREF. The expenses are reasonable and the age-based
portfolios offer a more diversified mix of assets than some of the other low-cost plans. I also like the Utah plan managed by Vanguard and the Alaska
plan managed by T. Rowe Price. Utah offers rock bottom expenses and Alaska offers reasonably priced active management from one of the few actively managed
mutual fund shops I advise.
| Q |
I’m 63 and my wife is 48. She has assets in an IRA and 401k. Do we have to wait until she is 59 ½ until we start taking distributions |
Check with your plan administrator on the 401k. Distributions taken on an IRA before the account owner turns 59 ½ are subject to a 10% penalty.
Certain distributions are not subject to the 10% penalty. One of the exceptions is substantially equal periodic payments. This allows the account owner
to take substantially equal payments for the greater of five years or until the account owner turns 59 ½. There are different methods to calculate
the substantially equal payments. They are somewhat complicated and the consequences for calculating the amount incorrectly can be harsh. Consult with
a tax advisor first.
| Q |
Dick, could you elaborate some more about your family investment group, what type of rules does it operate on, the type of organization, |
My family investment company was founded in 1989 to help investors eliminate the emotional stress that comes with day-to-day investing. It is a registered
investment advisory company managing portfolios for a select group of individuals and small businesses with more than $1,000,000 in assets. We manage
portfolios of stocks, mutual funds, preferred securities, treasuries, and municipal bonds. Our management fees start at 0.80% and drop from there. We
aren’t traders or speculators and don’t offer strategies for either. We help investors who share our investment philosophy achieve their
long-term investment goals. My son Matthew is the president & CEO and my son-in law EJ is a managing director. To learn more about my family investment
company, visit www.younginvestments.com.
| Q |
I am extremely frustrated trying to purchase Mandarin Oriental International, a stock on your recommended list. The symbol you give is MOIL.SI. |
Mandarin Oriental is listed in Singapore and trades under the symbol MOIL. MOIL.SI is the Reuters code for the stock and .SI indicates it trades in
Singapore. MNOIY.PK is the symbol for Mandarin Oriental ADRs that trade on the pink sheets in the U.S. MAROF.PK is the symbol for Mandarin Oriental shares
that trade on the pink sheets in the U.S. All three symbols provide an investment in Mandarin Oriental. We typically favor purchasing international securities
without listed ADRs on local exchanges because the liquidity is better and the bid-ask spreads are more attractive. If your broker doesn’t allow
you to place trades on international exchanges, you can purchase the stock on the pink sheets, but expect to pay higher transaction costs.
| Q |
What’s going on with gold? I have invested in the mutual fund American Century Global Gold (BGEIX) per your recommendation and the |
The stocks of gold producers and other commodities are infamously volatile. They can drop quickly and rise quickly. If you have a well-diversified portfolio,
chances are that when your gold and commodities holdings decline in value your other holdings will increase in value. The long-term outlook for gold
remains positive. Continue to add to American Century Global Gold and streetTracks Gold Shares.
| Q |
Why did all 4 Third Ave. funds implode for approx. 10% of their value in 2 days. As I was adding to positions recently, my gains for a year |
Not to worry. Your gains weren’t eliminated. The funds made their year-end income and capital gains distributions. Assets were transferred from
the fund to shareholders. If you reinvest dividends and capital gains, the number of shares you own will have increased. If you don’t reinvest
dividends and capital gains, your cash balance should have increased. The per share net asset value of the funds declined, but the value of your investment
did not.
| Q |
Is there something wrong with Alliance Resource Partners or the other coal stocks on your Monster Master List? |
Coal stocks were one of the few laggards on my Master List in 2006. Above-average coal inventories at utilities and lower natural gas prices contributed
to the decline. The chart below compares an index of the coal stocks that Young Research follows and the price of natural gas. Coal and natural gas are
substitutes. When the price of natural gas increases, utilities use more coal resulting in greater demand and a higher price—both are positive
for coal companies and coal shares. When natural gas prices decline, the reverse happens. In 2006 the reverse happened, but the good news is the worst
appears to be over. My chart on natural gas shows the year-to-year rate of change approaching -2 standard deviations on the downside—indicating
the worst of the declines for natural gas and, in turn, coal stocks is probably over. Continue to hold your coal shares.
| Q |
Of great portfolio concern is a major terrorist attack (WMD) and or an unraveling of the nearly 400 trillion derivatives market. I am concerned |
A well-diversified portfolio similar to the one outlined above is your best defense against a major terrorist attack or a major shock to the global
economy. Be sure to include a healthy fixed-income component and allocations to precious metals and other natural resources, real estate, international
stocks, and of course domestic stocks. You’ll also want to diversify among different industries within your domestic and international stocks.
A major terrorist attack or economic shock is likely to affect some industries more than others.
10 Great Retirement or Second Home Spots
I have considerable first-hand experience with each of these most special places. In no special order, be sure to check out (1) Dorset, VT, (2) Newport,
RI, (3) Beaufort, SC, (4) Charleston, SC (5) Woodstock, VT, (6) Salisbury/Lakeville, CT, (7) Naples, FL, (8) Gainesville, FL, (9) Mattapoisett, MA, (10)
Fernandina Beach/ Amelia Island Plantation, FL.
My $$$ in 2007
I will shortly be making my pension fund contribution for 2007. My intention is to invest in the following, and, if there is a change, I’ll let
you know: (1) iShares Switzerland, (2) iShares Singapore, (3) Third Ave. International Value, (4) Fidelity Canada, (5) Fidelity International Real Estate.
As I begin my 44th year of helping investors make money and with January being the month leading up to the Super Bowl, I want you to re-focus on turnover.
In pro football, you turn over the football via fumbles and interceptions—you lose. Force the other team to commit turnovers—you win. In
pro football, turnovers lead to losses. Check out the stats. What teams have the best takeaways/giveaways differentials? At the top, you’ll find
the good teams—New England, Baltimore, San Diego, and Indianapolis. Not surprisingly at the bottom, you’ll find the worst teams—the
Raiders, my poor Browns, Tampa Bay, and the Lions. For you, turnover (as in portfolio) will most often be a killer. Slash your trading activity, and
make more money. I promise. And start 2007 on the right foot by following my advice of last month of making at least one move from each of my monthly
letters. Perhaps this month you’ll go with GE. Or maybe you’ll select a name or two from my Top 10 Countdown or invest along with me with
one of my own great pension fund selections. Whatever you decide, even if it is simply to make a New Year’s resolution to focus on the two most
important words in investing—compound interest—you will be off on the right foot in 2007.
RIP James Brown, the Godfather of Soul, and Ahmet Ertegun, co-founder of Atlantic Records. Make it a good year.
Warm regards,
Richard C. Young
P.S. We have four Sony VAIO computers, and all are dying. I’d avoid VAIOs and all the lower-end Dell products. There are quality issues. The antioxidant
I mentioned last month that research indicates may be useful as protection from strokes, heart attack, and edema is Pycnogenol. Also on the health front,
the antibiotic that has been linked to severe liver problems is Ketek.
P.P.S. Go to YoungResearch.com for part I of my personal asset protection series. One of the features is intelligence I’ve received from
a Wyoming state trooper on how to use my favored Kimber Lifeact Guardian Angel, professional non-lethal self-defense, ultra-hot pepper spray. This product
won the Swiss technology award.
Did you know that over the last five years the ultra-conservative Vanguard Wellington Fund (+8.5% average total return) has outrun the highly
publicized and aggressive Legg Mason Value Fund (+7.2%) and that last year Vanguard Precious Metals & Mining was up 34.3% after a monstrous
gain of 43.8% in 2005? And are you aware that without big-time foreign investment, Iran will run low on oil by 2015? Finally, North Coast Brewing Company
is handcrafting a beer honoring Thelonious Monk called, not surprisingly, “Brother Thelonious.”
P.P.P.S. This Christmas, I received some really cool gifts that I know you will like also. And I gave some gifts I think you will also find terrific.
Go to YoungResearch.com for all the “Good Gift Stuff” as well as this month’s essential music.
Special Note: I hate the new weekday WSJ format. No more P/Es, no more dividends, no more yields, no more 52-week highs and lows, and
many of my best names have vanished entirely, including Wrigley; Sturm, Ruger; and St. Joe. Since 1959, I have highlighted, dismembered, and carried
around my copies of the WSJ. Now it’s missing a whole lot of what I need, and squinting at a computer screen is not the answer. The Journal has
hit a real foul ball. I hope the din of disaster will force some readjustment. Remember Coke’s Classic Coke fiasco?
Richard C. Young’s Intelligence Report® (ISSN 0884-3031) is published monthly by ACP Phillips Investment
Resources, LLC, 9420 Key West Ave., Rockville, MD 20850. Please write or call if you have any questions. Phone: 301/424-3700 or 800/301-8968. E-mail: service@intelligencereport.com.
Web address: . Editor: Richard C. Young; Group Publisher: Michael Bell; Associate Editor: Deborah L. Young; Marketing Manager: Jim Brinkhoff; President: John J. Coyle; Research Director: Jeremy Jones,
CFA; Managing Editor: Kenneth L. Washington; Business Manager: David Bishop; Research Associate: Rebecca L. Young; Sr. Vice President: Christopher
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