Archive for July, 2013

Historical Returns for US Stock/Bond Allocations, And Choosing Your Allocation

Tuesday, July 30th, 2013

Asset allocation has a larger impact on overall results than specific security selection.  Researchers argue about the degree of impact, but all agree the impact is major. Asset allocation comes first, and then security selection within asset categories.

Apart from cash reserves for expected withdrawals, or as dry powder for tactical purchases, the primary assets in allocation are stocks and bonds.  Let’s look at the 37-year history from 1976-2012 for various allocation levels between US bonds and US stocks.

First let’s look at a summary for each of three allocation risk levels: 60/40 stock/bonds, 80/20 and 20/80.

You will notice in Figures 1-3 that higher stock allocations produced higher mean returns, but also higher volatility, more loss years, and more severe worst years, as well as higher best years.

On the other end of the scale, higher bond allocations produced lower mean returns, but also lower volatility, fewer loss years, and less severe worst years and more modest best years.  The venerable 60/40 allocation has an in-between set of attributes.

Note:  The “-2 SD” and “+2 SD” show the return levels that are two standard deviations on either side of the 37-year mean return.  In theory, two standard deviations encompasses almost 98% of probable prices, with only slightly more than a 1% probability of prices outside of either side of that range.  Infrequently prices move outside the 2 standard deviation range, as they did in the 2008 crash, which was out several standard deviations (a “black swan”).

The 60/40 allocation has a +/- 2 Std Dev return range of negative 12% to positive 32%, versus the 80/20 with a negative 18% to positive 39%, versus the 20/80 with a negative 4% to positive 22%.  The 60/40 had 5 loss years out of 37.  The 80/20 had 6 loss years out of 37, but the 20/80 had only 2 loss years.

The actual worst year experiences of the 60/40 and 20/80 were within their probable price ranges, but the 80/20 stock/bond mix went in to Black Swan territory by going well beyond negative 2 standard deviations in the 2008-2009 crash.

Caution:  Interest rates have declined for over 30 years, from a peak in 1981 to historical lows in 2013, resulting in both interest return and capital gain return for bonds. For the next several years interest rates are likely to rise, resulting in negative capital gains.  Therefore, the historical data is probably overstating the potential for allocations involving bonds until rates normalize (perhaps at 10-year Treasuries yielding 4% to 5%).

Figure 1 (60/40 Stocks/Bonds):


Figure 2: (80/20 Stocks/Bonds):


Figure 3: (20/80 Stocks/Bonds):


Detailed Results By 11 Allocation Risk Levels:

We present data here for 11 levels of risk from Fully Aggressive (100% stocks) to Fully Conservative (100% bonds) and 9 mix levels between.  We call the range from 60/40 stocks/bonds to 40/60, Balanced-Aggressive to Balanced-Conservative.  Outside of those ranges, we call the allocation either Conservative to some degree or Aggressive to some degree.

The tables assume annual rebalancing at year-end, with no tax or transaction cost impact (most like rebalancing in a tax deferred or tax exempt account).

Figure 4 shows the nominal geometric mean return for the 11 risk levels over 37 years through 2012 ranged from 8.18% to 10.89%, with worst years from negative 2.92% to negative 37.14%.   The volatility (standard deviation) for bonds is less than the mean return, but for stocks is significantly greater than the mean return.

Figure 4:


Figure 5 shows the geometric mean return for periods of various length leading up to Dec 31, 2012.  The data show bond returns generally declining as periods grow shorter; and stock returns for 3 years about the same as for 37 years, with returns for 5 through 25 years lower (5 years being only 1.79%).

Figure 5:


Figure 6 shows the return for the various allocations on a calendar year basis from 2006 – 2012.  All are positive except for 2008, with only 100% and 90% bonds being positive that year.

Figure 6:


Figure 7 shows the number of years out of 37 that returned at least x% (from 3% to 10%) by allocation mix.

This is particularly interesting for personal planning, if you are in or near the distribution stage of portfolio life.

For individuals thinking of their retirement draw rate in the 3% to 4% range, no allocation achieved that level of return in all years.

Note: these data do not show the impact of structuring a portfolio with dividend growth stocks that history shows outperform stocks overall, and that may be necessary to deal with future inflation; nor do they show the probable under-performance of bonds for the next few years as rate rise.

Figure 7:


What Large Investment Organizations Recommend? (Target Date Funds):

Fund organizations try to solve the allocation choice with target date funds, which are based on the year in which the portfolio goes from being one of accumulation to one of distribution — going from more aggressive in early accumulation years to progressively more conservative as the distribution phase is near or present.

Review of the few dozen organizations that offer target date funds show wide variation in what each believes to be appropriate for each portfolio life stage.

Such funds have as a weakness that they assume some standardized, universal investor who may not be the same as you – with different levels of accumulation, different needed/desired standard of living in retirement, different levels of wages or entrepreneurial income at the same time portfolio withdrawals are being made, different emotional limits on how much volatility can be tolerated, how much you want to focus on preservation versus growth, whether you wish to leave an estate or consume all portfolio assets during your lifetime, and other factors.

While too generic, these funds do provide some third party perspective that can sometimes serve as a reality check –something from which to deviate with purpose and conviction to customize an allocation to your specific circumstances..

Vanguard is one of the target date fund providers.  Here is how they allocate between the three primary asset categories (Equities, Debt, and Cash).

Figure 8:


You can see the progressive move toward bonds and reduction in stocks as the withdrawal stage approaches, with high stocks and low bonds when the withdrawal stage is distant; as well as minimal cash liquidity in early years, and larger cash liquidity in later years.

During the distribution stage, it can be helpful to have enough cash to fund the difference (if any) between expected annual withdrawals and expected annual dividend and interest income.

T.Rowe Price takes a more aggressive approach to target date investing for those near or recently in the withdrawal stage, as you can see in Figure 9 in the green shaded rows for target dates 2010 and 2015 compared to the green shaded rows on Figure 8 for the Vanguard funds.

Figure 9:


Other fund sponsors have yet different allocations for the same target dates.  There is no agreed appropriate allocation, and perhaps the design teams have different profiles of the investors they are serving at each target date.  These funds and other allocation models are primarily useful as thought provokers and as a reality check, but not necessarily as automatic investment options.  Customization to your particular circumstances is appropriate.

Rebalancing Frequency

Returns vary based on the use or non-use of rebalancing and the frequency and/or triggers for rebalancing.  There are debates about the return value of rebalancing, but the more certain utility of rebalancing is maintaining a volatility (risk) level for the portfolio.

The data that we provide above assumes annual rebalancing and no tax or trading costs impact . The rebalancing approach is more correct for IRA. 401-k, 403-b, foundation, pension plans and similar accounts, but is generally illustrative for all accounts (with acknowledgement that current taxation eats into capital somewhat in regular accounts).

Emotional Interference With Rebalancing

The theory of rebalancing is that you sell-down winners that have exceeded their allocation target, and buy-up assets that are below their target level.  Ideally, all assets do well, but one does better than the other.  Sometimes, though, one asset does badly, and instead of having faith in the long-term, our fears take over and we fail to rebalance, thus not achieving the theoretical results that rebalancing history suggests.

Example: When the stock market crashed in 2008-2009, a dutiful rebalancer would have reduced bond holdings and increased stock holdings to maintain allocation policy levels.  However, at that time the world seemed like it was going down the drain, and many (perhaps most) “practitioners” of rebalancing went to cash or bought more bonds.  They did not achieve the same result as historic rebalancing data shows.


The comparative benefit of stocks and bonds may be dependent on ever changing tax regimes, and on the type of account (taxable, tax deferred or tax exempt) in which the assets are held.  The efficiency of rebalancing is also impacted by the tax status of the portfolio account.

Bottom line — allocation models are just, models.  Investors should be aware of the models and their implications, and then devise what fits their circumstances best.

Annual  Stock and Bond Returns for 73 Years From 1936 Through 2009

The actuarial consulting firm Callan produced some interesting long-term return charts for stocks and bonds for NASRA (National Association of State Retirement Administrators). The full report is available at this link.

The first Callan chart in Figure 10 shows the real (excess of inflation) return of US stocks and US bonds for 10-year rolling periods and 30-year rolling periods from 1936 through 2009.  The data for the last 35 years is for the Russell 3000 stocks (proxy: IWV) and the Barclays Aggregate Bond index (proxy: BND) [prior periods are backfilled with Ibbotson data].

Bonds – Over 10-year rolling periods bonds ranged from roughly negative 5% to positive 10% real return, with a 73-year average of positive 2%. Over 30-year rolling periods, bonds averaged a 1.4% real yield, with what looks like a low of less than negative 2% and a high of about 5%.

Stocks – Over 10-year rolling periods, stocks averaged 7.4% real returns, with a range of about negative 5% to positive 20%.  Over 30-year rolling periods, stocks also averaged 7.4% real returns, with a range of about negative 5% to positive 12%.

Figure 10:


Inflation or deflation has been all over the lot, but has a 3.5% to 3.9% long-term average.  Add the inflation rate to the real return of stocks and bonds to compute the long-term average nominal returns.

Figure 11:


What Is The Overall Allocation By Retail Investors?

Mutual fund holdings give one view on individual holdings.  As of 2012, the Investment Company Institute reports US mutual fund assets consisted of 45% stock funds, 25% bond funds, 23% money market funds, and 7% hybrid funds.  US assets were 49% of holdings, with Europe representing 30% and the balance in the rest of the world.

That is pretty much the Balanced-Moderate risk level in our eleven level scale.

Figure 12:


The American Association of Individual Investors surveys regularly, and focuses on all security types.  Currently they report 62.05% stocks (30.67% funds and 31.38% individual stocks), 17.24% bonds (13.50% funds and 3.74% individual bonds) and 20.71% cash.

Figure 13:


They also provide the long-term history of their survey as shown in Figure 14 for data since 1987.  Stocks are slightly above the long-term average, bonds are materially below, and cash is high.

Figure 14:


Three Level Conservative, Moderate and Aggressive Allocation According To iShares:

These three ETFs from iShares are based on the S&P Target Risk models.  They invest in a collection of other iShares ETFs to achieve these allocations with diversification among sub-classes.

Figure 15:

Posture Symbol % Stocks % Bonds % Cash
Conservative AOK 30.45 69.48 0.07
Moderate AOM 44.58 55.30 0.12
Aggressive AOA 82.24 17.69 0.07

Five Level Allocation Portfolios Run By Ibbotson:

Ibbotson runs portfolios of ETFs targeting five risk levels that they call:

  • Conservative 80/20 (debt/equity)
  • Income & Growth (60/40)
  • Balanced (40/60)
  • Growth (20/80)
  • Aggressive Growth (10/90)

Figure 16 shows how they choose to populate each risk level with types of ETFs.

Figure 16:


Balance of Total Investable World Stocks And Bonds Market-Cap:

As a matter of curiosity you might want to know how the total outstanding market-cap of investable stocks and bonds looks at this time.  That is what everybody in the work owns as one giant asset allocation.  Vanguard put out a nice pie chart for that to accompany their corresponding ETFs.

The world allocation is 46% stocks and 54% bonds, as shown in figure 17.

Figure 17:


QVM Allocations:

For accounts were we are one of several managers, our allocation is 90% to 100% stocks, due to the mandate.

As of this writing, for accounts we manage as the only manager, they are predominantly for high net worth investors in the later stages of asset accumulation or in the withdrawal stage.  In those cases, our current allocation for bonds and cash range from 25% to 33% (with cash between 5% and 10%), and for equities from 67% to 75% — moderately aggressive.

In addition to allocating among what we call Super Classes [Loaning (debt), Owning (equities) and Reserving (cash)], we prefer to also allocate according to Role within the portfolio, consisting of Broad Core, Income Core and Reserving, as illustrated by the matrix in Figure 18:

Figure 18:


Allocation Ranges: 

Super Classes tend to be in the 30/70 to 70/30 range for Owning (mostly stocks) and for Loaning (mostly bonds) depending on account/Client specifics.  Reserving (mostly money market funds) tends to be from 0% to 10% depending on account/Client specifics.

Portfolio Roles tend to have minimum and maximum allocations of from 30% to 70% for Broad Core; 30% to 50% for Income Core, and 0% to 20% for Tactical opportunity.  The minimum and maximums and target levels are determined by account specifics and are codified in the Investment Policy along with the SuperClass allocations.

Our security selection approach at this time for bonds is to bias toward shorter duration, variable rates, more credit risk than interest rate risk, and reduced bond allocation in favor of a combination of tactical cash and high quality dividend growth stocks.  For stocks, we favor US over international stocks, and European over other international stocks.  We emphasize high quality, dividend growth stocks.

S&P 500 Price Not Expensive By Historical P/Es

Tuesday, July 23rd, 2013

We plotted operating income P/E bands from 10x to 26x for the 4-quarter trailing reported operating earnings each quarter from June 1989 through March 2013, and for estimated earnings for calendar 2013.

Bottom Line:  the valuation multiple for the S&P 500 is not expensive by historical standards back almost 24 years.

The price of the index may be rising faster than it can continue without a pause, or maybe a correction, but the overall price level seems reasonable based on trailing earnings.

(click image to enlarge)



The median P/E is 17.79x.  The average is 18.72x.  The average of the middle 50% is 17.80x.  The 1693 price today as a multiple of the $109.22 operating earnings estimate for 2013 from Standard and Poor’s is 15.9x.

Of course, earnings could collapse in a recession, but that does not appear on most radar screens in the near term.  The risks associated with Fed QE tapering are probably minimal (beyond a knee jerk negative response for a short period when it happens).  Tapering is not tightening.  Under tapering, the Fed balance sheet will still be expanding by massive amounts.

Japan could find its central bank program doesn’t float their market, and their interest rates may have to approach global levels as they borrow more and more, while surrendering more and more export prowess to other Asian nations.

The plateau in S&P 500 revenue could persist for an extended period, with margin squeezes, making the earnings growth assumptions too rosy.

But those are shadows on the wall.  We have to work with what we have, and what we have is a growing US and world economy (not that much, but still growing), and the S&P 500 with valuation based on operating earnings that is not cheap, but also not expensive.

S&P 500 tracking ETFs are directly relevant to these data, but for practical purposes so are other broad market large-cap, market-cap weighted ETFs tracking these indexes:

  • S&P 500 (SPY, IVV, and VOO)
  • Russell 1000 (IWB, ONEK, and VONE)
  • Russell 3000 (IWV, THRK, VTHR)
  • DowJones Total Stocks (IYY)
  • CRSP US Total Stocks Market (VTI)
  • NYSE Composite (NYC)


Some other data, such as the Shiller 10-year inflation-adjusted, normalized P/E ratio based on reported net earnings, is used to argue differently.  One big issue is how much history to use.

(click image to enlarge)


Shiller’s data shows a current normalized P/E on reported earnings of 23.80.  The standard argument that 23.80 is expensive is based on the average value of 16.48 since 1870 (using the S&P 500 from its inception in 1957 and its best precursors before that date).

One could argue how relevant such a long history is given all of the changes in the world of securities since effectively the Civil War — income taxes, central banks, rise of the US as a world power and the dollar as the dominant currency, computers, mutual funds, tax deferred savings accounts, general public investing in stocks (mostly via funds), the internet, social safety nets, too big to fail, and many other things.

Taking some shorter periods to make the overall context more consistent, we see different normalized P/E ratios.

From 1945 (effectively after World War II, when the US became the dominant economic power), the normalized average P/E is 18.23.

From 1981, the peak of Treasury interest rates, the average normalized P/E is 21.56.

From 1994, the year HMTL and the web came out of academia and the military to start the march to the web-world we live in today, the normalized P/E was 26.65.

So at 23.80, the normalized P/E is way out of line versus 16.48, and not all that bad versus 26.65.

Overall, we think the valuation of the US stock market is within a reasonable range.

POST-SCRIPT: Compare Historical Operating Income, Net Income and Dividends


6 Highly Rated High Quality Equity Income Stocks

Thursday, July 18th, 2013


As of 07/18/2013, there are only 6 stocks traded in the US that have these attributes:

  • highly rated for fair value
  • highly rated for year ahead expected performance
  • highly rated for earnings and dividend quality
  • yield greater than that of the S&P 500
  • paid and increased dividend for at least 5 years
  • technical condition is neutral to attractive


This commentary is intended to be suitable for those portfolios that are required to seek consistent long-term growth of above average equity income, and for that income to be an important part of the overall total return due to approaching or current withdrawal requirements; and for which achievement of the income objective is more important than exceeding the total return of a broad equity index.

This commentary is not intended to be suitable for those portfolios for which maximizing price appreciation and exceeding broad index total returns is the primary objective. Neither is this commentary suitable for those portfolios engaged in short-term trading activities.

Each portfolio should be designed and operated to meet the real world needs and purposes for which it is intended.


32 stocks passed this filter:

• Fair Value rated 4 or 5
• Stars rated 4 or 5
• Earnings & Dividend Quality rated A+, A or A-


20 of the 32 stocks passed this filter:

• paid dividends for each of at least the past 5 years
• increased dividend payments in each year


11 of the 20 stocks passed this filter:

• yield greater than the yield on the S&P 500


6 of the 11 stocks passed this filter:

• BarChart net rating >= 50% BUY


The 6 surviving stocks are:

  • (K) Kellog
  • (UTX) United Technologies
  • (AFL) Aflac
  • (TGT) Target
  • (BAX) Baxter International
  • (SU) Suncor


Unfortunately for many (most?) dividend income seekers, none of these stocks have high yields — just above index yields. However, that’s the best you can do if you also want or need the stringent S&P filter terms. Highest quality stocks have been bid up so that high yield is not generally available among them at this time.

Name Symbol Yield


The charts below show the 5-year history of price, earnings and dividends for each stock.

Charts and ratings were obtained by subscription at the premium side of CorporateInformation (a description of Wright ratings is at our blog).

In brief, the three alpha Wright ratings are for liquidity, financial strength and profitability; and the numeric rating is for multi-factor growth on a 20 point scale.

K (rated ABA7)

UTX (rated ABA8)

AFL (rated AAA14)

TGT (rated ABA9)

BAX (rated ABA12)

SU (rated AAB7)


This table shows the number of reporting analysts and the high and low and average year ahead price change projections.

# Analysts Symbol % to Hi % to Av % to Lo
21 K 12.0 (1.0) (17.0)
24 UTX 14.0 3.2 (17.0)
23 AFL 27.0 5.9 (6.8)
23 TGT 14.0 1.2 (15.0)
19 BAX 12.0 3.9 (34.0)
21 SU 47.0 2.0 (9.4)


Here are the 5-year and 1-year dividend growth rates for the 6 stocks.

Symbol 5yr DGR 1Yr DGR
K 7.26 2.33
UTX 10.83 11.46
AFL 7.84 6.06
TGT 25.16 43.33
BAX 17.64 46.27
SU 31.95 53.85


Dividends can’t grow forever unless revenue grows too.

There is significant concern these days about weak revenue growth in general, with concerns about the ability of companies to maintain margins (and ultimately dividends) without good growth.

Here are the 5-year, 3-year and 1-year revenue growth rates for the 6 stocks.

Symbol 5yr RGR 3Yr RGR 1Yr RGR
K 3.81 4.13 11.14
UTX 1.19 2.99 7.56
AFL 10.50 11.62 8.75
TGT 2.96 3.90 3.31
BAX 4.73 4.15 1.81
SU 18.00 19.60 (0.50)

These stocks may not be right for you, but having passed a rigorous set of filters, they may provide a rational set of leads for further research for the Do-It-Yourself equity income investor.



Price Action vs Central Bank Speak Since Bernanke Taper Talk

Thursday, July 11th, 2013

Benjamin Graham once said that markets are voting machines in the short-term and weighing machines in the long-term — sentiment vs fundamentals.

These days, the primary driver of sentiment tends to be central bank statements and actions — with mere statements having huge impact.

If you have doubts about the market impact of central-bank-speak, just take a gander at this calendar of central bank statements compared to market price action:

  • 05/22  Federal Reserve president Ben Bernanke said that a tapering of quantitative easing could begin later this year if conditions warrant
  • 06/18  European Central Bank president Mario Draghi said he had an open mind to doing what was necessary
  • 06/19  Bank of Japan president Haruhiko Kuroda said they are taking steps and felt things would work out
  • 06/20  Peoples Bank of China governor Zhou Xiaochuan added liquidity to their banking system to relieve a liquidity crunch
  • 06/21  St. Louis Fed president James Bullard said QE could actually be increased if inflation slows
  • 07/10  Federal Reserve president Ben Bernanke said the economy needs the Fed’s easy-money policy “for the foreseeable future.”

Now let’s look at price movements on the day after each of those statements/actions:

US Stocks


European Stocks


Japanese Stocks


Chinese Stocks


Bernanke frightened the markets, and other central banks stepped in with voice and cash to stem the decline, followed by a dovish “clarification” by Bernanke yesterday.

It appears that all is well for now, at least as far as central bank driven sentiment is concerned.

12 GARP Stocks With Growth Faster and Multiples Lower Than The Market

Sunday, July 7th, 2013

The GARP concept (growth-at-a-reasonable-price) has logical appeal. Find stocks where the cost of growth is lower than the cost of growth for the market overall, and preferably lower than some absolute level.

GARP investing is a style that can exist within both the  Growth style and/or the Value style

The fact is that attractive GARP stocks are not always fast growing companies, just ones where what you have to pay for the growth you get is less than what you pay to own the growth level of the market.  The PEG ratio is one helpful tool in that search.  With slower growing GARP stocks, of course, it is important to distinguish between those that are slower growers that have the potential to continue at that level or surprise on the upside, versus others that may be slowing and likely to slow further, in which case they are not appealing.

The best situation would be above market growth levels and below market valuation multiples.  That is probably a typically small group of companies and one that need careful discrimination also.  The higher growth may be transitory.  The lower multiple may be the market correctly signaling  lower growth ahead.

Today, we did a filter to identify that second group of stocks with faster than market growth and lower than market valuation multiples.  Instead of just looking at earnings growth, we looked at revenue growth, and required some level of dividend greater than zero.  The dividend requirement was not to seek income, but simply as one indicator of management faith in the strength of the company — an imperfect indicator for that purposed, but one that we think helps a bit.

In other articles, we will focus on slower growing GARP stocks and on low PEG stocks that may or may not have a lower P/E than the market.

Filter Criteria:

Here are the criteria we used today filtering stocks available in the US markets:


We required the earnings growth rates (“EGR”) and the revenue growth rate (“RGR”) to be greater than the median level of the stock market.   For the yield, we required anything greater than zero. For the dividend growth rate (“DGR”) we had no requirement (means the stock may only have just recently begun paying dividends, or might have had an irregular payment history), but we did want a window on that attribute.

We required the estimated P/E ratios and the PEG ratio to be below the market median.

We had no requirement for the S&P Stars or Thomson Reuters StarMine year ahead ratings, nor for the Wright Investor’s Service quality ratings, but wanted a window on those too (see our blog for explanation of those rating scales).

12 Stocks That Passed The Filter:

[Note:  These are not recommendations. They are merely filter results which you may or may not want to investigate further.]

(click image to enlarge)


These are the names and symbols for those 12 with links to the latest Yahoo key financial data page for each stock.

AZZ INC (AZZ) Data Link

Of those that passed:

  • 3 were under $1 Billion market-cap
  • 5 were at least $1 Billion and less than $5 Billion market-cap
  • 2 were at least $5 Billion and less than $10 Billion market-cap
  • 2 were at least $10 Billion or more in market-cap

Most of the stocks are little known, and only 5 are rated for investment grade quality by Wright (minimum BBB4):

  • CHS
  • QCOR
  • CBI
  • BAP
  • NOV

Business Descriptions and 5-Year Charts of Prices, Earnings and Dividends:

(this data is from , by Wright Investor’s Service)

Noah Holdings Limited, through its subsidiaries is a service provider focusing on distributing wealth management products to the high net worth population in the People’s Republic of China (PRC). The Company provides direct access to China’s high net worth population. Noah Holdings Limited is a holding company and it operates its business through its PRC subsidiary, Shanghai Noah Rongyao Investment Consulting Co., Ltd (Noah Rongyao), its variable interest entity, Shanghai Noah Investment Management Co., Ltd (Noah Investment), and their respective subsidiaries in China. While Noah Rongyao conducts most of the Company’s businesses, it conducts its insurance brokerage business through Noah Investment and its subsidiaries. Its products choices consist of over-the-counter (OTC) products originated in China and designed to cater to the needs of high net worth population. Its registered clients were 12,353 as of June 30, 2010.


American Vanguard Corporation operates as a holding company. It is primarily a chemical manufacturer that develops and markets products for agricultural and commercial uses. The Company manufactures and formulates chemicals for crops, human and animal protection. It conducts its business through its subsidiaries, AMVAC Chemical Corporation (AMVAC), GemChem, Inc. (GemChem), 2110 Davie Corporation (DAVIE), Quimica Amvac de Mexico S.A. de C.V. (AMVAC M), AMVAC de Costa Rica Sociedad Anonima (AMVAC CR), AMVAC Switzerland GmbH (AMVAC S), AMVAC do Brasil Representacoes Ltda (AMVAC B), AMVAC Chemical UK Ltd. (AMVAC UK), AMVAC CV (AMVAC CV), AMVAC Netherlands BV (AMVAC BV), and Envance Technologies, LLC (Envance). In July 2012, it completed the restructuring of the International Sales & Marketing function of its principal operating subsidiary, AMVAC Chemical Corporation. On November 30, 2012, AMVAC and TyraTech, Inc. formed Envance Technologies, LLC, in which the Company owns 60% interest.


AZZ incorporated (AZZ) is an electrical equipment and components manufacturer, serving the worldwide markets of power generation, transmission and distribution, and the general industrial markets, and a provider of hot dip galvanizing services to the steel fabrication market nationwide and in Canada. The Company operates in two segments: the Electrical and Industrial Products Segment, and the Galvanizing Services Segment. The Company operates primarily in the United States of America and Canada. Effective February 1, 2012, AZZ Blenkhorn & Sawle Limited (B&S), an indirect wholly owned subsidiary of AZZ, acquired substantially all of the assets of Galvan Metal, Inc. In April 2013, it completed the acquisition of Aquilex Specialty Repair and Overhaul LLC (Aquilex SRO).


US Silica Holdings, Inc. is a silica sand supplier company. The Company is a producer of industrial minerals, including sand proppants, whole grain silica, ground silica, fine ground silica, calcined kaolin clay and aplite clay. The Company operates in two segments: oil and gas, and industrial and specialty products. The Company’s shipping capabilities include five of the class-one railroads, barge, full truckload, partial truckload and intermodal. The Company’s products include proppants, whole grain silica, ground silica, fine ground silica, testing silica, recreational silica, aplite, kaolin, hydrous kaolin and FLORISIL. It also operates as a research and development specialist for customized products and solutions. The Company serves a range of industries and applications, which includes oil and gas, glass, chemicals, foundry, building products, fillers and extenders, recreation, industrial filtration and treatment, and testing and analysis.


SouFun Holdings Limited (SouFun) operates as a real estate Internet portal in China. The Company has real estate-related content, search services, marketing and listing coverage of over 300 cities across the People’s Republic of China. The Company also operates the home furnishing and improvement Website. Through its Websites, it provides marketing, listing, e-commerce and other value-added services and products for the People’s Republic of China’s real estate and home furnishing and improvement sectors. Its Websites support active online communities and networks of users seeking information on, and other value-added services and products for, the real estate and home furnishing and improvement sectors in the People’s Republic of China. The Company provides marketing services, listing services, other value-added services and products, and e-commerce services. On February 8, 2012, the Company disposed its 90% interest in Beijing SouFun Information Consultancy Co., Ltd.


Chico’s FAS, Inc. is a specialty retailer of private branded, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items under the Chico’s, White House / Black Market (WH/BM) and Soma Intimates (Soma) brand names. The Chico’s brand primarily sells designed, private branded clothing focusing on women 30 and over. The WHBM brand offers feminine and alternative to designer fashion selling fashionable and clothing and accessory items, primarily in black and white and related shades with seasonal color splashes. The Soma brand sells designed private branded lingerie, loungewear and beauty products women who are 35 years old and over. It also produces catalogs and operates e-commerce Websites and a call center that sell its merchandise nationally and internationally. The Boston Proper brand s an online and catalog based retailer of women’s high end apparel and accessories. On September 19, 2011, it acquired Boston Proper, Inc. (Boston Proper).


Questcor Pharmaceuticals, Inc. (Questcor) is a biopharmaceutical company. The Company is focused on the treatment of patients with serious, difficult-to-treat autoimmune and inflammatory disorders. Its primary product is H.P. Acthar Gel (repository corticotropin injection), or Acthar, an injectable drug that is approved by the United States food and drug administration (FDA), for the treatment of 19 indications. Its research and development program is focused on: the evaluation of the use of Acthar for certain on-label indications; the investigation of other potential uses of Acthar for indications not FDA approved; and the expansion of its understanding of how Acthar works in the human body (pharmacology), and ultimately, its mechanisms of action in the disease states for which it is used, or may be used in the future. The Company sells Doral to pharmaceutical wholesalers, which resell Doral primarily to retail pharmacies and hospitals.


GNC Holdings, Inc. (GNC) is a holding company. The Company is a global specialty retailer of health and wellness products. The Company has three segments: Retail, Franchise and Manufacturing/Wholesale. Corporate retail store operations are located in the United States, Canada, and Puerto Rico, and in addition the Company offers products domestically through, and Franchise stores are located in the United States and 54 international countries, including distribution centers where retail sales are made. The Company operates its primary manufacturing facilities in South Carolina and distribution centers in Arizona, Pennsylvania and South Carolina. The Company manufactures the majority of its branded products, but also merchandises various third-party products. It sells products through a worldwide network of more than 8,100 locations operating under the GNC brand name.


Chicago Bridge & Iron Company N.V. (CB&I) is one of the integrated engineering, procurement and construction (EPC) services providers and process technology licensors, delivering solutions to customers primarily in the energy, petrochemical and natural resource industries. CB&I consist of three business sectors: Steel Plate Structures, Project Engineering and Construction, and Lummus Technology. Through these business sectors, the Company offers services both independently and on an integrated basis. As of December 31, 2012, the Company had more than 900 projects in process in more than 70 countries. On February 13, 2013, it acquired The Shaw Group Inc. (Shaw).


Credicorp Ltd is a Peru-based company engaged in the financial sector. The Company’s main activities include the provision of commercial and investment banking services and securities brokerage. The Company is also active in the insurance sector, with the provision of a variety of insurance policies in the fields of the commercial property, automobile, life, health and underwriting. As of December 31, 2011, the Company owned nine subsidiaries Banco de Credito del Peru (BCP), Atlantic Security Holding Corporation, El Pacifico Peruano – Suiza Compania de Seguros y Reaseguros, Prima AFP, Grupo Credito SA, CCR Inc, Credicorp Securities Inc, BCP Emisiones Latam 1 SA and Tarjeta Naranja Peru SAC.


Magna International Inc. (Magna) is a diversified global automotive supplier. It designs, develops and manufactures automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks. Its capabilities include interior systems, exterior systems, seating systems, powertrain systems, closure systems, roof systems, body and chassis systems, vehicle engineering and contract assembly, vision systems and electric vehicles/systems, electronic systems, and through its Magna E-Car Systems partnership (E-Car Systems). Magna operates in three geographic reporting segments: North America, Europe and Rest of World. In August 2011, it acquired Grenville Castings Ltd. In November 2011, it acquired ThyssenKrupp Automotive Systems Industrial do Brasil Ltda. In November 2012, its Magna Powertrain operating unit had completed the transaction to acquire ixetic Verwaltungs GmbH (ixetic).


National Oilwell Varco, Inc. is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates through three segments. Its Rig Technology segment designs, manufactures, sells and services complete systems for the drilling, completion, and servicing of oil and gas wells. Its Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells and service drill pipe, tubing, casing, flowlines and other oilfield tubular goods. Its Distribution & Transmission segment provides maintenance, repair and operating supplies and spare parts to drill site and production locations worldwide. In July 2012, its subsidiary, NOV Distribution Services ULC, acquired CE Franklin Ltd. In February 2013, National Oilwell Varco Inc acquired Robbins & Myers Inc.


Disclosure:  We do not own any of these stocks


This Month’s Story Stock (TUP)

Thursday, July 4th, 2013

Each month, we select one of the companies in our Rational Risk Equity Income Investor letter to be highlighted because of an appealing “story”.  This month (issue #22 covering the month ending June 2013) we look at:

Tupperware Brands Corporation (TUP)

TUP meets all of the Rational Risk Quantitative List criteria, and the Subjective List criteria (see methodology for each list here) and has an appealing story.


Participation in European recovery and the rise of the consumer in emerging markets …

TUP is a United States company that generates about 90% of its revenue outside of the United states, and about 61% of its revenue in developing economies. TUP products are plastic storage, preparation and storage products and beauty/personal care brands and jewelry re sold in nearly 100 countries via parties by 2.8 independent sellers on a “direct-to-consumer” demonstration sales-party method.  TUP is profitable with free cash flow, and attractive yield and dividend growth, and positioned to benefit from eventual European economic recovery and positioned to benefit from continued growth in the size and income of the middle class in emerging markets.  As emerging markets endeavor to transition from heavy reliance on commodities and manufactured good export to more consumer based internal economies.   The company states that they have low penetration in Latin America, Asia and Eastern and Central Europe, providing significant growth potential.


TUP operates in nearly 100 countries, selling through an independent sales force that includes approximately 1,800 distributors, 86,000 managers and 2.8 million independent dealers worldwide, collectively conducting 22 million sales parties, on average one every 1.4 seconds. Approximately 40% of product sales are for third party sources, which reduces inventory costs.  The company has 13,000 employees, only 1,000 of whom are in the US.  It has about 50,000 stockholders.

[click images to enlarge]





(see ratings definitions here)

  • Standard and Poor’s assigns a dividend and earnings quality rating of : A
  • Standard and Poor’s assigns a corporate credit rating of: BBB-
  • Moody’s assigns a senior unsecured debt credit rating of : Baa3 Stable
  • Wright Investor’s Service assigns a quality rating of: ABA15

Moody’s Comments On Reent Debt Issuance:

On Mach 6, 20013 TUP issued $200 million in debt maturing in 2021 under a revised leverage plan.  Moody’s said this:

“Tupperware’s announced on 29 January that its board of directors had approved a series of more aggressive financial policies including a 72% increase in its dividend and a new dividend payout target of 50% EPS from 33%. More importantly, the BOD approved a new leverage target (unadjusted) of 1.75 times, up from 1.5 times. Proceeds from today’s offering along with cash and cash flow will be used to fund additional share repurchases. 

To hit its revised target leverage, Tupperware plans to repurchase up to $400 million in shares in fiscal 2013 up from about $300 million in 2012 and about in line with the company’s 2011 repurchases. On a proforma basis, we project the company’s debt-to-EBITDA (including Moody’s standard analytic adjustments) will increase to 2.5 times as compared with approximately 2.0 times at December 31, 2012. Given our expectations for cash flow from operations, capital spending and the revised dividend payout ratio, we expect share repurchases above $125 million will increase the company’s leverage. We expect Tupperware to scale back its share repurchases if organic growth slows below its 5% to 7% target or if profitability declines below its return on sales target of 14.3% to 14.4%. 

Despite the reduction in financial flexibility as a result of its more shareholder oriented financial policies, Tupperware’s Baa3 senior unsecured rating and stable outlook remains appropriate given the still strong profitability, organic growth rate and considerable global franchise strength its direct selling business commands. 

The stable outlook reflects our expectation that Tupperware’s revenues and earnings will continue to achieve above-average organic growth relative to other consumer products companies, consistently generate free cash flow and maintain strong, investment grade credit metrics.”


  • Sales: #1,104
  • Assets: #1,828
  • Mkt-Cap: #993





Cash Conversion Cycle and Receivables Turnover

Cash conversion cycle is number of days to turn inventory to cash.  Receivables turnover is net credit sales divided by average accounts receivable.


Profit Margin, ROE and ROA


Quarterly Operating Statement



Quarterly Balance Statements



Quarterly Sources & uses Statements






The charts use these symbols: world stocks (VT), non-US developed market stocks (VEA) and emerging market stocks (VWO).

TUP has outperformed EM stocks over 3-months, 1-year and since the US stock market bottom in March of 2009.  TUP has underperformed US stocks by 4.69% over the past 3 months, approximately broken even with other developed market stocks over thee months, and underperformed total world stocks by about 1%

Daily for 3 months


Weekly for 1 year


Monthly since US market bottom March 2009



Current Opinions


Historical Price vs Historical Opinions



We own TUP in some accounts.