Archive for October, 2012

Subjective Selection of Quantitatively Filtered Dividend Stocks

Monday, October 22nd, 2012

In a prior article, we reviewed our quantitative identification of high quality dividend stocks based on current and historical data.  Once that list is known, the next question we ask is what independent analysts think.  Those analysts make forward looking judgements, and may not all be considering the same information or criteria.  With the independent analyst ratings, we create a subset of our Quantitative List that we call the Subjective List.  That is step two in our process of generating three lists of high quality dividend stocks each month.

Each month our Rational Risk Equity Income Investor letter uses a rules-based method to identify three lists of high quality dividend stocks:

  • Quantitative List – based on purely objective historical quantitative criteria, including a minimum current yield
  • Subjective List –  subset of the Quantitative List,  based on favorable forward looking recommendations by independent analysts
  • Performance List – subset of the Subjective List, based on maximum historical volatility and maximum historical negative rolling return limits

This article shows this information from the October 2012 Issue:

  • how the Subjective Lists generated in each of the past 6 months have done on a long-term rolling return basis
  • 10-year dividend payback estimates for Subjective List
  • 10-year quarterly differences between Subjective List performance and the S&P 500 for last 6 monthly issues
  • the symbols for the stocks in the Quantitative List in each of the last 6 months
  • the specific rules used to select the Subjective List

FIGURE 1: LONG-TERM ROLLING RETURNS FOR PRIOR 6 SUBJECTIVE LISTS
(Rational Risk letter page 24)

This table shows a variety of performance data from the last 10 years for the Subjective List from each of the past 6 months versus the S&P 500 (proxy SPY) and an equal weight portfolio of four leading dividend ETFs (SDY, DVY, VIG and VYM).  Generally, each Subjective List when held in equal weight and rebalanced monthly, has outperformed both the S&P 500 and the equal weight portfolio of dividend ETFs.

The data points are:

  • Best 3 months
  • Best 1 year
  • Best 3 years
  • Worst 3 months
  • Worst 1 year
  • Worst 3 years
  • Trailing yield
  • 3-year standard deviation
  • 3-year total return
  • 3-year Sharpe Ratio
  • 5-year standard deviation
  • 5-year total return
  • 5-year Sharpe Ratio
  • 10-year standard deviation
  • 10-year total return
  • 10-year Sharpe Ratio

FIGURE 2: 10-YEAR DIVIDEND PAYBACK ESTIMATES FOR SUBJECTIVE LIST
(from Rational Risk letter page 15)

These symbols are for the 13 stocks among the Quantitative List that passed the rules for our Subjective List methodology (detailed below). This is data taken from page 15 of our Rational Risk Equity Income Investor letter.

The calculation for these estimates utilizes the 1-year, 3-year and 5-year dividend growth rates for each stock.  For the 10-year dividend price payback, we grow the current dividend for 10-years, sum those dividends and divide by the current stock price.  We perform this calculation two ways, first using an average rate which is the average of the historical 1, 3 and 5 year dividend growth rates, and then again using the lowest growth rate of the 1, 3 or 5 year growth rates.  We use the current dividend amount for year 1, then cap the growth rate for years 2-6 at 18%, and cap the growth rate for years 7-10 at 12%.

None of these estimates, of course, are certain to be the same as the future result, which could be more or less.  Probably the best use of the results is to compare the payback percentage from stock-to-stock, and also to compare the payback percentage to the payback of a 10-year Treasury (currently  18%) or to a 10-year AA corporate bond (perhaps 36% payback).

We estimate the dividend payback for the full Quantitative List, but this table presents the payback estimates for the Subjective List in the October issue.

10-yr Div Sum % Price 10-yr Div Sum % Price
Symbol Yield ttm Average Growth Rate Minimum Growth Rate
CA 3.90% 48.78% 39.23%
DRI 3.60% 67.26% 54.10%
GD 3.10% 52.86% 47.93%
GIS 3.30% 51.95% 47.43%
HNZ 3.70% 46.32% 44.06%
LLY 4.10% 44.45% 41.34%
LMT 4.90% 84.13% 67.66%
MCD 3.40% 58.48% 51.58%
MSFT 3.10% 56.31% 41.52%
PEP 3.00% 43.95% 40.80%
PPL 5.00% 54.61% 49.57%
RCI 4.00% 78.82% 62.61%
VZ 4.50% 51.17% 49.40%

FIGURE 3: 10-YEAR QUARTERLY ECXESS PERFORMANCE
(from Rational Risk letter page 6 of each month)

No approach, no matter how well it may work in the long-term, outperforms in all short-term periods.  This set of histograms shows the difference for the past 40 quarters (10-years) between the total of the S&P 500 and the equal weight, monthly rebalanced Subjective List.  When the broad market is moving up strongly, the Subjective List may underperform (not decline, but not rise as far or fast).  Similarly, the Subjective List may tend to outperform in periods when the broad market declines or is flat.  Figure 1 above, shows that over a period of years, the Subjective Lists have outperformed.

FIGURE 4: CROSS-REFERENCE SUBJECTIVE LISTS PAST 6 MONTHS
(Rational Risk letter page 28)

The stocks that qualify for the Quantitative List vary in number and sector classification over time as company financial performance changes, and as the broad market price levels rise and fall, and as sector rotation within the broad market occurs.  Additionally, the stocks that qualify for the Subjective List further vary as the forward looking opinions of independent analysts change, presumably based in part on a variety of qualitative factors that are not captured in the historical data used to generate our Quantitative List.

The table below presents the full list of Subjective List stocks for each of the past 6 monthly issues of the Rational Risk Equity Income Investor letter.

SUBJECTIVE LIST METHODOLOGY

The Subjective list is a subset of the Quantitative List, and is generally forward looking in identifying stocks that meet independently determined ratings for above average financial strength and forward total return expectations by at least one of several independent research organizations, including Thompson Reuters and Standard & Poor’s, among others.

Financial Strength

Each Subjective List stock must be rated as above average (B+ or better) for financial strength by Standard & Poor’s (or if not rated by them, rated similarly by a comparable independent and nationally recognized research organization).

Purchase Recommendation

A) Each Subjective List stock must be rated as a “Buy” by Thomson Reuters Star Mine or Standard & Poor’s, (or if not rated by them, rated similarly by a comparable independent and nationally recognized research organization), OR

B) If rated “Neutral”or “Hold” by both Thomson Reuters and Standard & Poor’s, then it must be rated “Buy” by another recognized analytic service or by the “Street Consensus”, OR

C) If it is rated “Sell” by either Thomson Reuters or Standard & Poor’s, then it must be rated “Buy: by the other and also by another recognized analytic service and by the “Street Consensus”.

Note: Some REITS, royalty trusts, MLPs, and some ADRs may not to be rated by any of the third party research firms above, and as a consequence may be in the Quantitative List but not able to be considered for the Subjective List.

NOTE OF CAUTION

No list of filtered stocks is certain or guaranteed to outperform, or to be free of individual stocks that due poorly going forward, nor to be immune from the gravitational pull of a declining stock market.

It is always appropriate for investors to evaluate individual stocks, including those in our Quantitative, Subjective or Performance lists in terms of personal suitability, and an appropriately allocated portfolio, which would include other types of securities than just dividend stocks.

Some stocks in our lists, while financially sound, are in the list because their price has deteriorated and have negative technical price charts.

Stocks in the Subjective List may or may not be in uptrends, but are attractive to independent analysts, however they may or may not turn out to be better opportunities than other stocks in the Quantitative List.

The Performance List consists of those Quantitative List stocks that pass the Subjective List criteria, and have also avoided certain minimum drawdowns and volatility, but are also not certain to perform in any particular way in the future.

See our general disclaimer for all posts.

 

 

Quantitative Selection of Quality Dividend Stocks

Saturday, October 20th, 2012

Each month our Rational Risk Equity Income Investor letter uses a rules-based method to identify three lists of high quality dividend stocks:

  • Quantitative List – based on purely objective historical quantitative criteria, including a minimum current yield
  • Subjective List –  subset of the Quantitative List,  based on favorable forward looking recommendations by independent analysts
  • Performance List – subset of the Subjective List, based on maximum historical volatility and maximum historical negative rolling return limits

This article shows:

  • how the number of Quantitative List qualifiers has varied over time
  • how the Quantitative Lists generated in each of the past 6 months have done on a long-term rolling return basis
  • 10-year quarterly differences between Quantitative List performance and the S&P 500
  • the specific rules used to select the Quantitative List
  • the symbols for the stocks in the Quantitative List in each of the last 6 months

FIGURE 1: QUANT LIST STOCKS SEMI-ANNUALLY SINCE 2007

The S&P 500 (proxy SPY) is plotted on the chart with the number of stocks that pass the Quantitative filter to illustrate how the change in the broad index price level tends to change the number of stocks with yields that meet the minimum level required by the rules.   All of the rules other than current yield are independent of price level.

FIGURE 2: QUANT LIST STOCKS MONTHLY SINCE 2010

FIGURE 3 (Rational Risk letter page 23)

This table shows a variety of performance data from the last 10 years for the Quantitative List from each of the past 6 months versus the S&P 500 (proxy SPY) and an equal weight portfolio of four leading dividend ETFs (SDY, DVY, VIG and VYM).  Generally, each Quantitative List when held in equal weight and rebalanced monthly, has outperformed both the S&P 500 and the equal weight portfolio of dividend ETFs.

The data points are:

  • Best 3 months
  • Best 1 year
  • Best 3 years
  • Worst 3 months
  • Worst 1 year
  • Worst 3 years
  • Trailing yield
  • 3-year standard deviation
  • 3-year total return
  • 3-year Sharpe Ratio
  • 5-year standard deviation
  • 5-year total return
  • 5-year Sharpe Ratio
  • 10-year standard deviation
  • 10-year total return
  • 10-year Sharpe Ratio

FIGURE 4 (from Rational Risk letter page 6 for each of past 6 monthly issues)

No approach, no matter how well it may work in the long-term, outperforms in all short-term periods.  This set of histograms shows the difference for the past 40 quarters (10-years) between the total of the S&P 500 and the equal weight, monthly rebalanced Quantitative List.  Generally when the broad market is moving up strongly, the Quantitative List will underperform (not decline, but not rise as far or fast).  Similarly, the Quantitative List tends to outperform in periods when the broad market declines or is flat.  Figure 3 above, shows that over a period of years, the Quantitative Lists have outperformed.

FIGURE 5  (Rational Risk letter page 27)

The stocks that qualify for the Quantitative list vary in number and sector classification over time as company financial performance changes,  and as the broad market price levels rise and fall, and as sector rotation within the broad market occurs.

The table below presents the full list of Quantitative List stocks for each of the past 6 monthly issues of the Rational Risk Equity Income Investor letter.

 

QUANTITATIVE LIST METHODOLOGY
We discuss our quantitative method in this article, and will discuss our subjective and performance methods and results in subsequent articles.

The quantitative list is based on current and historical data, and does not include forward looking data. The minimum yield criterion will vary over time based on interest rates. The minimum 5-year dividend growth rate criterion will vary over time based on the inflation rate.

Quantitative Filter Criteria

— Broad Scope:

  • Price > = $5.00
  • Market capitalization >= $250 million
  • Current dividend yield >= 3%
  • 5-year dividend growth rate >=3%

— Liquidity:

  • Per minute 3-month average dollar trading volume >= $25,000

— Dividend Consistency:

  • Dividends paid in each of the past 5 full calendar years
  • Dividends were not decreased in any of the past 5 fiscal years
  • Dividends paid over the last 4 quarters (1,2,3,4) >= dividends paid over prior 4 quarters (5,6,7,8)

— Growth:

  • Revenue growth over last 5 years >=3%
  • Revenue growth over last 3 years >=3%
  • Revenue growth over last 1 years >=0%

Profitability:

  • Cumulative cash flow from operations last 3 years > $0.00
  • Cumulative cash flow from operations last 5 years > $0.00

Dividend Coverage:

  • Cumulative dividends paid in last 5 fiscal years <= cumulative cash flow from operations over 5 years
  • Cumulative dividends paid in last 12 months <= cumulative cash flow from operations in last 12 months

OTHER DATA IN EACH ISSUE

Each issue identifies the three lists Quantitative, Subjective and Performance; and then provides these data for each list:

  • best and worst period, yield and rolling returns versus that of the S&P 500 and each of four dividend ETFs (SDY, DVY, VIG and VYM)
  • Equity style boxes and super sector allocation
  • Portfolio statistics (such as P/E and others)
  • 40-quarter return differential versus S&P 500
  • Sector and industry classification of each stock
  • Cross reference of each stock with holdings of 7 dividend ETFs (SDY, DVY, VIG, VYM, HDV,FVD, FDL)
  • Growth rates for sales, earnings and dividends for each stock
  • Solvency metrics for each stock
  • 10-year dividend payback estimates for each stock
  • Valuation metrics for each stock
  • Total returns for multiple periods for each stock
  • Links to websites and price charts for each stock
  • Backtest rolling returns for each of the three lists for the past 6 monthly issues of the letter
  • Comparison of list composition for each of the three lists for each of the past 6 monthly issues
  • Full detail disclosure of methodology

NOTE OF CAUTION

No list of filtered stocks is certain or guaranteed to outperform, or to be free of individual stocks that due poorly going forward, nor to be immune from the gravitational pull of a declining stock market.

It is always appropriate for investors to evaluate individual stocks, including those in our Quantitative, Subjective or Performance lists in terms of personal suitability, and an appropriately allocated portfolio, which would include other types of securities than just dividend stocks.

Some stocks, particularly in the Quantitative List, while financially sound, are in the list because their price has deteriorated, and may have negative technical chart patterns.

Stocks in the Subjective List may or may not be in uptrends, but are attractive to independent analysts, however they may or may not turn out to be better opportunities than other stocks in the Quantitative List.

The Performance List consists of those Quantitative List stocks that pass the Subjective List criteria, and have also avoided certain minimum drawdowns and volatility, but are also not certain to perform in any particular way in the future.

See our general disclaimer for all posts.

Big Picture Data From The Fed On Jobs, Profits, and Federal Government Finances

Friday, October 5th, 2012

Factual aggregate data from the Federal Reserve to serve as big picture background as we hear so many sound bites and isolated, non-contextual data points from the media and politicians.

Total Private Non-Farm Jobs Over 10 Years

Total Wages and Salaries Paid To Employees Over 10 Years

Total Household Debt Over 10 Years

Total Household Financial Obligations As Percent of Disposal Income Over 10 Years

Total Corporate Profits and Cash Flow Over 10 Years

US Federal Receipts, Expenditures and Surplus or Deficit, Post WWII

US Federal Receipts, Expenditures and Surplus or Deficit for 10 Years

Total US Federal Public Debt over 10 Years

US Nominal GDP Over 10 Years

 

Keeping An Eye On European Funds For Future Re-Entry

Thursday, October 4th, 2012

Europe will not stay down forever.  The US will not be the clear market of choice forever.  Depressed markets have substantial price recovery potential when their trend reverses from down to up.  Here is a look at some of the potentially more interesting European ETFs and a couple of European mutualf funds.

The fund is not totally inclusive.  Mutual funds are for the most part excluded, in favor of ETFs.  However, active management of a mutual fund may be advantageous.

To make the list a fund must outperform the S&P 500 proxy SPY in at least one of these periods: 10 years, 5 years, 3 years, 1 year or YTD 2012 or 3 months; and the fund must have at least $10 million in assets.

Many funds outperformed over 10 years.  No funds outperformed over 5 years and 3 years.   Some funds outperformed YTD, and more funds outperformed over 3 months.

Here’s the data — except for capture ratios, SPY is included in the data table for contrast.

Figure 1: Rolling Returns and Yield

Figure 2: Calendar Yields

Figure 3: Sharpe Ratio and Capture Ratio Spreads for 1, 3, 5 and 10 Years

Figure 4: Historical Valuation Multiples

Figure 5: Forward Valuation Multiples

 Fund Names and Symbols in Alpha Order By Symbol

WisdomTree Europe SmallCap Dividend DFE
iShares MSCI Poland Investable Mkt Index EPOL
iShares MSCI Sweden Index EWD
iShares MSCI Germany Index EWG
iShares MSCI Belgium Investable Mkt Idx EWK
iShares MSCI Switzerland Index EWL
iShares MSCI Netherlands Invstbl Mkt Idx EWN
iShares MSCI Austria Investable Mkt Idx EWO
iShares MSCI Spain Index EWP
iShares MSCI France Index EWQ
iShares MSCI United Kingdom Index EWU
iShares MSCI EMU Index EZU
First Trust STOXX Euro Select Div Idx FDD
SPDR STOXX Europe 50 FEU
SPDR EURO STOXX 50 FEZ
Fidelity Europe FIEUX
Fidelity Nordic FNORX
iShares S&P Europe 350 Index IEV
Global X Norway ETF NORW
Market Vectors Poland ETF PLND
SPDR S&P Russia RBL
Market Vectors Russia ETF RSX
T. Rowe Price Emerging Europe Fund TREMX
Vanguard MSCI Europe ETF VGK

3 Choice Emerging Market Country Funds: Malaysia, Thailand and the Philippines

Tuesday, October 2nd, 2012

We think these three emerging market countries (Malaysia, Philippines, and Thailand) offer better opportunity at this time than the emerging markets index, or the popularized BRIC countries (Brazil, Russia, India and China).  Let’s see why.

Those three selections are in the group of emerging market countries with positive total returns for 10 years, 5 years, 3 years, 1 years, YTD and 3 months, while the BRIC countries have negative total returns for 5 years. Figure 1 based on MSCI index data makes that point.

Figure 1: (click image to enlarge)

Of those in Figure 1 that had the better performance over all those periods, Figure 2 shows that the Malaysia ETF (EWM), the Philippines ETF (EPHE) and the Thailand ETF (THD)  have better looking 1-year daily price performance relative to the Vanguard MSCI emerging markets index ETF (VWO).  Figure 3 shows that the Brazil ETF (EWZ), Russia ETF (RSX), India ETF (PIN) and China ETF (GXC) have worse performance relative to the emerging markets index.

Figure 2:

Figure 3:

Figure 4 shows the weights of each of those seven countries within the MSCI index.  The select countries are a small part of the overall index, so any allocation to them as individual country funds is likely to be a major overweight relative to their world market weight or emerging markets weight.  The select countries are shaded in green.

Figure 4:

Figure 5 shows that the capture ratio spreads for the select countries are better for 1 year, 3 years and 5 years than the BRIC countries, and are positive for the period of 2007 – 2009, which included the market crash months.

China, India and Brazil have better capture spreads during 2007-2009 (Russia had a terrible capture spread), but the BRIC countries have had negative capture spreads over 1 year, 3 years and 5 years.

See our previous article on how larger capture spread correlates with higher total returns.

Figure 5:

What Are Capture Ratio Spreads:

Capture ratios measure a fund’s performance in up and down markets relative to the benchmark market index (in this case we used the Vanguard emerging markets ETF as the benchmark).  The ratio in this article is calculated by determining each month the size and direction of the price change for the S&P 500; then determining the size and direction of the price change for the same period for the fund being evaluated; and then dividing the size and direction of the subject fund by the size and direction of the benchmark index.

Higher ratios are better for the upside ratio, and lower ratios are better for the downside ratio  The idea is to participate maximally in upside moves and minimally in downside moves.

The capture ratio spread is the upside capture ratio less the downside capture ratio.

Because the Thailand and Philippines ETFs do not have 10-year operating histories, it is helpful to look at the MSCI  indexes for those countries, which have long histories.  Figure 6 plots the MSCI total return of the select countries versus the MSCI emerging markets index.  Figure 7 shows the BRIC country total returns against the emerging market index.

On a 10-year basis the BRIC countries have done better than the emerging markets index, and the select countries (except for Thailand) have underperformed.  However, more recently, the select countries are trending up while the BRIC countries are trending down.

Figure 6: click image to enlarge

Figure 7: click image to enlarge

From a trailing yield perspective the select countries are broadly comparable to the BRIC countries, with Malaysia being the highest yielder.

Select country yields:

  • THD 2.45%
  • EWM 3.64%
  • EPHE 1.04%

BRIC country yields:

  • EWZ  2.81%
  • RSX  2.16%
  • PIN 0.30%
  • GXC 2.39%

Year-over-years GDP growth is somewhat higher on average for the select countries:

Select countries:

  • Thailand  4.2%
  • Malaysia  5.4%
  • Philippines  5.9%

BRIC countries:

  • Brazil  0.5%
  • Russia  4.0%
  • India  5.5%
  • China  7.6%

Figure 8 shows that the select country ETFs have somewhat lower expense ratios on average, and higher Sharpe Ratios (Sharpe indicating how much return above short-term Treasury rates you get for the volatility you incur over a 3-year period).

Figure 8:

Figure 9 shows the total return for each calendar year from 2007 through YTD 2012 (as of 08/31/2012).  The select country ETFs have done better in 2010, 2011 and YTD 2012.  It was a mixed bag in 2009. It is necessary to go back to earlier figures in this article to get a feel for 2007-2009.

Figure 9:

Figure 10 shows the 12-month trailing valuation multiples for the ETFs as of 09/31/2012.

Figure 10:

Figure 11 uses forward data from Morningstar; 5-year forward earnings growth rate, forward price to cash flow, and forward price to earnings; and the ratio of the forward multiples to the 5-year projected earnings growth rate.

The select countries are generally more expensive on a forward projection basis, which we contrast to the price trend directions.  While more expensive, they are not expensive in an absolute sense and are similar to the valuations for the S&P 500 shown as the last line in Figure 11.

Figure 11:

Liquidity:

The Thailand and Malaysia ETFs are liquid, but the Philippines ETF is not.

Figure 12 shows the percent allocation to the top ten holdings in each ETF, the portfolio turnover rate and the net assets of each ETF.

Figure 12:

 

disclosure: QVM is long THD, EWM and/or EPHE is some accounts.

 

 

Stocks, Bonds and Gold Over 5-Yrs, 3-Yrs, 1-Yr and 3-Mos

Monday, October 1st, 2012

Here is a quick overview of the performance of world stocks (VT), US stocks (VTI), developed markets stocks (VEA), emerging markets stocks (VWO), aggregate US bonds (BND), and gold (GLD).

5-Years Monthly

3-Years Weekly

1-Year Daily

3-Months Daily

disclosure: QVM owns GLD in some portfolios