Market Musings for January 2020

The Market was hammered today, down on Coronavirus fears and the potential for a global slowdown. Was the selloff warranted? or an overreaction in the heat of the moment, where much about this contagion is still unknown? The entire market was ravaged, including growth juggernauts like Microsoft MSFT and Apple AAPL who just recently crushed earnings expectations. The across the board selling makes me think that this is more algo driven, since software and cloud should not be impacted by risk of the disease, and Apple is shifting its business model to focus more on services and subscription based revenue.

The US Equity market for Friday January 31st 2020 showing weakness across the board with only a few exceptions, Amazon being one of them after beating earnings expectations by a wide margin. https://finviz.com/map.ashx?t=sec&st=

So where does this leave us going forward? With January 2020 in the books, where do you put money to work? Lets take a look at where we are for the year so far.

https://finviz.com/map.ashx?t=sec&st=ytd

As you can see, Big Tech, much like it did in 2019 is carrying forward its out-performance into January 2020. Even with a lousy end to January, Google GOOGL Amazon AMZN Microsoft and Apple are all up big for the month. These companies are continuing to grow and are not showing signs of stopping. So do you ride the momentum? or try to pick up some value along the way with some of the other sectors that have gotten unfairly beaten up by the market selloff?

The Investment banks have all taken a beating despite most of them beating earnings expectations, but with the FED lowing rates, Net interest margin, how traditional banks make the majority of their revenue, is compressed. The Energy sector has been getting destroyed and dividend yields are starting to look very attractive, but the commodity risk of oil still remains. The Drug manufacturers have gotten beaten down in January and are generally a safe bet with patents protecting future cashflows, but the threat of a healthcare overhaul by the next US presidential administration looms and could possibly put an end to that party.

I think that Big Tech and Large Cap growth will continue to outperform this year, and is exposed to the least amount of risk. Apple will soon be riding the 5G wave as consumers look to upgrade their phones. Amazon continues to dominate the online retail sector and with AWS is establishing itself as a “go to” provider of Cloud services. Microsoft has a monopoly on windows based office products and is also a huge Cloud player with its AZURE product. These are all secular growth stories. That being said, there are deals to be had in these other areas, but you have to be picky, go for best in class, and somewhere that has some dividend protection that can pay you while you wait for the stock to recover, like an Abbvie ABBV or a Chevron CVX These are both large well run companies with tremendous cashflows and outstanding dividends.

Abbvie currently yields over 5.5% and has consistently raised its dividend and returned value to shareholders via buybacks. It currently sells the most commonly prescriped rheumatoid arthritis drug in the world HUMIRA, and in 2018 the drug was responsible for 20 billion dollars in sales. Abbvie is also a great innovator with a strong portfolio of drugs, and future pipeline.

Chevron is one of the worlds largest integrated petroleum producers, and yields over 4.5%. They also have strong cashflows despite oil prices being low for quite some time. Chevron is better positioned than most of its peers from a debt perspective and has better profit margins.

Well those are my thoughts for today. Please do your own research and investigate these names for yourself. I am not recommending these stocks only trying to highlight their strengths. Remember, be patient, don’t trade scared, and buy when there is blood in the streets. Also, I welcome comments, interactions and appreciate feedback. Don’t forget to follow me on Twitter @Optimize_Pete

WFC Wells Fargo Stock, Value in plain sight, or just Value Trap

Greetings Optimizers, today I would like to discuss a recent investment, and dissect the reasoning that went in to it. 2 weeks ago, after WFC earnings, the stock dropped significantly. It had been trading in the $53 range before its earnings announcement. The earnings miss was significant. The estimate was $1.12 and earnings came in at .60 per share, mostly due to higher legal costs due to the recent scandal, and lower interest rates impacting their net interest rate margin. I saw this as an opportunity, since Wells has a wide economic moat, a strategy for cross selling products to customers, and a healthy dividend. when it dropped to the $50 dollar range, I decided to buy.

Above is a list of purchases i have made in the past 2 weeks.

Fast forward to today, the pain for the stock has continued for another week, but now it seems the stock has gained its footing in the $47.50 context. Currently, my investment is down about $675 dollars. I tried to catch a falling knife, and got cut on the way down. This is probably a valuable lesson not to pull the trigger to early on a stock that is down on negative sentiment. I see this one as a long term hold for me, and would consider subsequent buys since the stock is currently yielding a healthy 4.3%. I will happily get paid to wait for the stock to recover, especially since Wells has been raising its dividend by an average of 8.2% for the past 3 years. Its pay out ratio is currently 35.12% of earnings so the dividend is safe by most metrics, and has no reason not to grow.

WFC dividend increases since 2017. It currently pays a quarterly dividend of .51 cents

The bank has committed to an aggressive buyback program, which will help bolster the stock price, announcing a 23. billion dollar program in 2019. By reducing the number of shares outstanding, it will help boost earnings per share (EPS) in future quarters. The stock currently trades at 11.75 current earnings and 10 times the forward price to earnings ratio quite similar to its banking peers. Wells is also a Free Cash Flow monster, producing $4.69 dollars of FCF per share in 2019, more than twice that of what Bank of America BAC produces at $2.17 per share.

Please excuse my poor MS Paint skills. Chart was missing 2019 data.

The company, and new CEO Charles Scharf have much work to do. The reputational damage done by the fake accounts scandal has severely impacted market sentiment for the stock. This will not be easily undone. Warren Buffet once said, “it takes 20 years to build a reputation, and 5 minutes to ruin it” Scharf has learned from the best, spending years under Jamie Dimon at JP Morgan Chase. Dimon was at the helm of JPM during the “London Whale” scandal where a rogue traders series of credit default swap trades went south and trading losses of $6 billion were realized. Since that scandal, JP Morgan has cemented itself as the premiere investment bank and Dimon is now on the Mount Rushmore of CEOs on Wall Street.

In Conclusion, my position in WFC is still in the hole, but I consider time and the markets on my side. From almost every statistical measure the stock is moderately valued and will pay me to wait. I would love to get peoples opinions on this position, especially those who care to play devils advocate. I am passionate about investing, but I strongly feel that patience and OBJECTIVITY is paramount when your own money is at stake. I appreciate your feedback and thank you for reading!

  • What Do you think of WFC stock at its current valuation?

My First OPF Jouney Post

Hi Everyone. My name is Pete, and id like to think of myself as a fairly well traveled personal finance explorer, tinkerer, optimizer. I have always been fascinated by how people make a living, how they chose to spend their money, time, and knowledge. I thought i would start by sharing a little bit about myself and how i got here.

It all started one morning when i saw my father reading the newspaper. the page was covered with letters and numbers and fractions of shares. This was of course, the business section of the paper, before online trading, before Yahoo Finance, before the internet had taken hold. I asked him what he was looking at. He said “i am looking at the stock price of International Paper (IP)” (this was the parent company of the distributor he worked for) He followed up with saying, “i own a lot of stock in the company and i was checking the dividend”. This is where it started to get interesting. “Whats a dividend?” i asked. He responded with, “a dividend is when a company pays you money to own a piece of their company” This is when my head exploded. “HOW MUCH?!?” i asked. “about 30 cents or so” he replied. I could not believe what i was hearing. I know this knowledge seems commonplace to us now, but to a 10 year old, this was earth-shattering. “Do they pay you once a year?” i asked. My father then told me that the company paid the dividend 4 times a year. And so began my love affair with dividends, interest, and passive income streams.

Ever since, i have been trying to find ways to “optimize” and find assets that could grow in value, create streams of income, and work for me while i spent my time at school, sports and eventually work. stocks, bonds, preferred shares, rental properties, and eventually absentee small businesses. One thing we can all agree on is that we can’t be in more than one place at once, you can only work one job. However, our assets can. Money and time that we invest can work for us. My goal is to investigate and research them all. Hopefully with your help, we can learn from each other, our experiences and avoid the pitfalls along the way.

What are some of your first experiences with money making assets? Was there moment in your life that helped crystallize your desire for independence? I would love to hear your thoughts and would appreciate any questions, comments or ideas. thank you and i look forward to hearing from you!

How not to start your own Personal Finance Journey

What I would like to do, is give a brief overview of how I would start my personal finance optimization journey, if I could do it all over again. We all take different paths in life, and sometimes it takes some of us longer to figure things out. Someone once told me, “a wise man learns from his mistakes, but a genius can learn from the mistakes of others”. Well, I was the former. It took me a while to appreciate that there was no get rich quick scheme and that over the long haul, it takes planning, sound decision making, and impulse control to get on the path to financial success.

When i started out, fresh out of college, i was not making much money. maybe 30 grand a year. but i had freedom, and i had very little responsibility. I spent money like it was burning a hole in my pocket. Savings was foreign to me. I was just living life in the fast lane, dealing with the consequences later. Got my self a credit card, with a 600 dollar limit. I thought I was on top of the world. Long story short, that card was quickly maxed, and I forgot to make minimum payments. Well that party ended pretty quick. Soon the collection calls started. I eventually scraped enough money together to pay the card off, but the damage was done. My Credit Rating was severely impacted. In hindsight, this is one of the best things that could have happend to me, and I will tell you why.

Access to Credit, and your personal credit rating is one of, if not the most important thing you have to your name. You must protect it at all costs. Without a good credit rating, you cannot, rent and apartment, buy or lease a car, get a mortgage, get a credit card. This becomes a negative feedback loop. Because when you don’t have good credit, that is when you need to build it the most. Borrowing money is an essential part of being an adult. For you Game of Thrones fans out there, “A Lannister always pays his debts” remember? You cant build credit, if you have no loans to your name. You cant build a positive credit record when no bank will give you a credit card! you become invisible to banks and lenders. you are infected with grayscale, so to speak (another Thrones reference).

So what do you do? What i did was apply for what was called a”Secured Credit Card” which was my only option at the time. what you do is write a check to a bank, and they issue you a credit card, that you can then use. the balance is then “secured” or backed by the money of yours that they are holding. This was how i slowly crawled out of my credit hole, and established a credit history.

Credit now is a bit easier to come by. It seams like any bank will lend, for pretty favorable rates. listen to the radio long enough, and you will hear Car dealer commercials where they promise that “NO ONE is turned down” for an auto loan. Trust me, you don’t want to be that person. Do yourself one of the biggest favors to your future self. This is right up there with saving for retirement. Lay the groundwork so that when the future you goes out there an applies for a mortgage, the lender can’t look back at a spotty payment history and turn you down. Learn from my mistake, and you will thank me later.