Smart Alpha Investing Strategies

A yield hunter walks into a bar, sees a bunch of nice-looking men and women, but then gasps in delight. Not at the men and women, but at the other side of the room. Could they be casting agents working for HGTV or “Million Dollar Listing?” Not quite, but almost as good. Its a  crowd of beautiful-yielding REITS looking for love. How can our intrepid yield hunter choose? Here’s an idea: Get to know them not as equity vehicles but based on inner beauty . . . as sincere, genuine portfolios of real estate; dirt, bricks, mortar, tenants, rent checks, etc.

Like many, I was intrigued by reports that Nelson Peltz is seeking to win a seat on Procter & Gamble’s (PG) board. I also see that so many commentators have so much to say about PG, it’s incredibly easy for investors to trap themselves in confirmation bias (paying attention only to sources that are aligned with one’s own preconceptions). So I deleted all the articles I saved and decided instead, to trek through the numbers, lots of numbers. I emerged more bullish than I thought I would be.

Apparently taking lovability lessons from United Airlines (at least pre David Dao), ex-Uber boss Travis Kalanick and Pharma-bro Martin Shkreli, Wal-Mart (WMT) decided to lay down the hammer on suppliers telling them that they’ll be fined not only if deliveries are late but also if they’re early and that WMT will tolerate no disputes. Why is the company doing this? Will it help the mega merchant? What does this mean for investors?

A stock with a 4% dividend yield: I’m not saying it’s an automatic Buy for income investors (nothing ever is), especially when it involves brick-and-mortar retail. But in this continuing era of nano-yields, one has to at least look. As it turns out, I can’t warm up so easily to growth prospects, but then again, with a 4% yield, we don’t need much along these lines.

Restaurant stocks can definitely drive you crazy. On the one hand, there are reasons to believe these can make a tasty long-term addition to one’s portfolio. But we can just as easily make a case for the idea that too many of these are indigestible. Perhaps we can solve the dilemma by seasoning with a dash of fundamental data. (Pardon the puns; I covered the group for a while in the last century while working at Value Line and can’t resist.)

Rumors of the death of traditional brick and mortar retailing and the shopping malls in which many are located may or may not be greatly exaggerated. The answer likely depends on who you ask and whether the last earnings release at which they looked contained a positive or negative surprise. Let's see if we can slice through the clutter and see what's really behind Door Number Whatever.

There are thoughts I’ve been having lately that I haven’t had since I owned bright green bell bottom pants, wore earth shoes, and listened as may parents tried to pick a bank for the next CD by comparing the major appliances they were offering as gifts to consumers who would put their money on ice for a few years for an interest rate of a mere 15% or so. No, I’m not expecting those days to return, but some stock selection techniques from that era may be worth dusting off.

Yield, yield, yield . . . investors love it. Gurus and professors hate it (focus on total return they say). Having gotten out of grad school nearly 40 years ago, I’ve long felt free to ignore what gurus and professors think and obsess instead on real people who invest real money who want and need real income. That’s why equity income is such an important part of my strategic arsenal. That, and the fact that the fixed income bull market is over.

When you hear the phrase “quality versus junk,” your mind may prepare to hear something insulting to or about somebody or something. Actually, though, that is an accepted label among academicians for a well-known “investment factor;” factor being defined as an objectively identifiable and testable set of characteristics shown to have a relationship to equity returns. It’s right there with size (labeled by academicians as large versus small), value (high book-to-market versos low book to market), etc. So I’m being completely serious when I say that over the past few months, junk and been hot and quality’s been cold. And that has been the story for the Portfolios123 Designed Low Volatility Portfolio, which is firmly in the Quality camp.

Value, which had been in the doldrums, experienced some recovery during the three months since this model was previously refreshed and the portfolio reconstituted. I wouldn’t bet the farm on the near-term future though, given that at least some of the recovery is likely based on the Trump rally and questions about the sustainability of the Trump bull. From a longer-term perspective though, I’m still a big fan of this iconoclastic reinterpretation of the classic value style.

I found private-prison operating REIT CoreCivic (CXW) on the Buffett-inspired screen I introduced last week. The model doesn’t actually produce stocks Buffett owns or would necessarily buy (I can model data, but not Buffett’s human touch). Instead, it finds stocks that have demonstrated data characteristics consistent with the essence of what he prioritizes, successful capital allocation and good growth in book value. My case-specific analysis of CXW suggests, however, I may have to switch gurus. This may be more a Lynch-type stock.

My last post offered an analysts-eye view of Berkshire Hathaway (BRK.B) as a result of its having caught me by surprise through its appearance in a recently-discussed model based on data from Wall Street analysts. Today, I make good on a promise made at the end of my BRK.B piece, a new screening model inspired by my BRK.B takeaways.

I recently published a screen showing how one can make money using data from Wall Street analysts and was intrigued to see Berkshire Hathaway (BRK.B) on the list of passing stocks. That caught me by surprise, not because there’s anything wrong with BRK.B but because it’s not the sort of stock I typically associate with any aspect of the sell side. Motivated by curiosity, I decided to take a fresh look at Berkshire’s fundamentals in a way I hadn’t since the late 1990s, when covered the company at Value Line.

As we know, shares of for-profit education companies suffered mightily in light of crises and allegations regarding low-quality education, poor student outcomes, high-pressure salesmanship, ill-conceived lending, and eventual regulatory crackdowns. Some former industry mainstays have been shuttered. But times may change. It’s not just that Trump himself has regulation-cutting sentiments and has had past involvement in the business. It’s that this was always an important area calling for the solving of problems, not carpet bombing of the industry. So it may be worthwhile to look at some promising education stocks.

President Trump’s inaugural address painted a dark picture of U.S. society and has served as an enormous catalyst for political commentators of every stripe. Regardless of what you think of the man, his agenda, or his initial on-the-job actions, Federal Reserve Economic Data (the FRED database) suggest there is a reality underneath his assessment of the economic situation on Main Street. Use of the Portfolio123.com screener suggests there is also an investment angle.

Oh good gracious: Once again, the financial news media has “discovered” that ratings issued by Wall Street analysts cannot be taken at face value. Z-z-z-z-z-z. I thought the world had come to understand this more than 15 years ago, when Elliot Spitzer was a hot-shot attorney general running roughshod over the sell side. Oh well. I suppose this means I, too, should regurgitate an old theme, one that suggests investors stop whining about analysts and instead, use data based on their work product to make money in the market.

Emerson Electric (NYSE: EMR) is a company I first encountered in 1980 when I, then an entry-level analyst at Value Line, was assigned to write it up. I succeeded in having it re-assigned as soon as they hired another analyst more junior than me (the very next quarterly publication cycle) because the stock was so darned boring and with what seemed like a gazillion products all related to basic industry, largely incomprehensible. How’s that for rookie stupidity!