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Discussion Starter #1
For those of you who follow (or care) here is what I found to be the Dogs of the Dow for 2010. Interesting new names include McDonalds. JNJ & PG were even close to making it on this year.

Price on 31-Dec/09 Yield on 31-Dec/09
T AT&T 28.03 5.85%
VZ Verizon 33.13 5.73%
DD DuPont 33.67 4.87%
KFT Kraft 27.18 4.27%
MRK Merck 36.54 4.16%
CVX Chevron 76.99 3.53%
MCD McDonald's 62.44 3.52%
PFE Pfizer 18.19 3.52%
HD Home Depot 28.93 3.11%
BA Boeing 54.13 3.10%


http://www.dogsofthedow.com/dogs2010.htm
 

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In my view, none of the "Dogs" stocks are well-priced at the moment -- generally-speaking, they wouldn't pass even my initial stock screen.

This does bring up the point of: "What counts as well-priced?" For the benefit of some of the newer or less experienced forum readers, I thought I'd take a few minutes and describe what I mean. Space and time do not allow me to render this post entirely comprehensive; for that purpose, there are plenty of good discussions elsewhere on the internet and in printed form. In particular, I commend, to your attention, "The Intelligent Investor", 2nd ed., by Ben Graham.

For illustrative purposes, I'll present some of the key statistics that I employ for my initial stock screens. My stock selection process is iterative -- I widdle-down the entire market in steps, iteratively employing more stringent criteria.

The following data are from Reuters.

Code:
Symbol  P/Book(mrq)     P/TangBook(mrq) Debt/Equity(mrq)        CurrentRatio(mrq)       NetProfitMargin(5yr)    RoE(5yr)
T       1.66            n/a             72.98                   0.78                    10.74%                  10.66%
VZ      2.18            n/a             145.45                  0.81                    7.08                    13.72
DD      4.11            10.40           144.76                  1.61                    8.11                    24.77
KFT     1.60            n/a             82.49                   1.08                    7.09                    8.96
MRK     3.36            5.34            39.60                   3.70                    22.46                   29.46
CVX     1.70            1.80            11.63                   1.40                    8.22                    27.55
MCD     5.11            6.25            84.02                   1.02                    13.70                   19.75
PFE     2.22            5.20            59.49                   3.08                    19.01                   13.83
HD      2.54            2.70            53.79                   1.28                    5.94                    19.69
When I look at the Dogs table, above, I see a set of companies which has generally performed very well over a long period of time; the management has done a good job of turning income into return for investors, often with good profit margins. However, many of these companies are carrying an enormous amount of debt. Furthermore, these companies aren't trading anywhere near their book values (which is one of the strongest indicators of overpricedness in my opinion).

Of the common valuation metrics, I should point out that I put very little credence on the popular Price/Earnings and Price/Sales ratios, preferring instead to focus largely on Price/Book (in particular, price-to-tangible-book), debt and cash flow, current ratio, profit margin, and Return on Equity (ROE) during my initial stock screens. Ultimately, I *do* look at pretty much everything, but I find these criteria to be quite decent for weeding out questionable companies early on.

For my initial stock screening, I usually employ a set of modified "Graham Criteria", such as:

Code:
- P/B > 0.3 and P/B < 1.2
- ROE >= 8% continuously for several years
- Revenue > $100M/yr
- Net profit margin >= 5% continuously for several years
- Debt/equity <= 0.5, and preferrably Current Ratio >= 1.5
I like to look at a stock which has performed very well historically -- I want to see high profit margins and good ROE over a period of about 8-10 years. (I generally allow for 1 or 2 years of less-than-desirable returns out of every 10 years, to account for turn-around situations.)

A very important difference with my approach is that, when I compute book value (and look at assets on the balance sheet), I deduct the value of all goodwill -- effectively, I consider goodwill to be worth $0. In my experience, goodwill is often carried on the books at a higher value than it should be; with only a few exceptions, I give little credence to the strength of patents or brand names, which, being intangibles, are not guaranteed money-makers, and can often decrease in value during both recessions and booms. So, because I don't like surprise asset impairment charges, I discount goodwill before I become an owner in the company.

Consider, for example, the following data:

Code:
Symbol  Total Assets    Goodwill        Goodwill/Assets Ratio
T       $266.5B         $71.27B         26.7%
VZ      $226.4B         $22.19B         9.8%
DD      $36.2B          $2.1B           5.8%
KFT     $66.9B          $28.6B          42.7%
MRK     $48.7B          $1.4B           2.9%
CVX     $162.5B         $4.6B           2.8%
MCD     $30.0B          $2.4B           8.0%
PFE     $141.3B         $21.8B          15.4%
HD      $43.0B          $1.1B           2.5%
While not entirely accurate, an approximate way of thinking about this table is that the goodwill/assets ratio represents the portion of company's valuation owing primarily to its "brand name". (I prefer to invest in companies that succeed because of what they make, not what they call themselves.)



regards,
K.
 

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Discussion Starter #4
Is there a 'Dogs of the TSX?'?
Yes, there is one, same concept. Highest 10 yielding stocks in the TSX at December 31st.

I'll see if I can dig those up over the weekend but if someone has them please post. I would think (trusts excluded) it would be heavy on the financials right now.
 

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Discussion Starter #5
I did a quick google search, i'll update the names later but this would the the canadian dogs as of mid-december.

As I thought, heavy on the financials.

Yield on Price on Price on Price
Company Ticker 31-Dec-08 31-Dec-08 16-Dec-09 Change
BIOVAIL CORP BVF 16.0 $11.54 $14.73 28%
BANK OF MONTREAL BMO 9.0 $31.25 $54.20 73%
NATL BK CANADA NA 7.9 $31.30 $60.74 94%
CAN IMPL BK COMM CM 6.8 $51.09 $68.66 34%
HUSKY ENERGY INC HSE 6.5 $30.87 $29.40 -5%
ENCANA CORP ECA 6.5 $30.24 $32.58 8%
BANK OF NOVA SCO BNS 5.9 $33.31 $48.50 46%
BCE INC BCE 5.8 $25.13 $26.38 5%
TORONTO-DOM BANK TD 5.6 $43.45 $64.91 49%
ROYAL BANK OF CA RY 5.5 $36.10 $55.26 53%
 

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up 94% ?
up 73% ?
these are dogs ?

also ... something wrong with some of those yields.

also ... encana split, the other half is cenovus, together = a substantial 2009 appreciation.
 

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Discussion Starter #7
also ... something wrong with some of those yields.
Like I said, I did a quick Google search on that one to post it faster. I think they might be using December 31st 2008 data for the yields.

Anyone who had the actual 31-Dec-2009 Dogs of the TSX list please post them!
 

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up 94% ?
up 73% ?
these are dogs ?

also ... something wrong with some of those yields.

also ... encana split, the other half is cenovus, together = a substantial 2009 appreciation.
This may also be showing just how crazy a year it has been; stocks up an incredible amount and yields still high on some of them; shows how high a yield some people are making when they bought some of these stocks when they were at super lows.

I agree that the specific stocks may not be the actual dogs, and would also like to know if someone finds a list of what the true dogs of the TSX are. ;)
 

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i belong to the artichoke school of investing. Soon as i come to a bad leaf i discard it. Couple defective leaves, and out goes the entire choke.

so i'd say that tsx list of dogs is a mizzuble vegetable that can't be trusted.

on anybody's dog list one might find MFC. Maybe X. And probbly a bunch of telcos - and they do have decent divs - although telcos have started to move last few weeks.
 

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Discussion Starter #11
From 12/27/2009


High Yield TSX60 Stocks


  • BCE (BCE)
  • Telus (T)
  • CIBC (CM)
  • Bank of Montreal (BMO)
  • Transalta (TA)
  • Sun Life (SLF)
  • TransCanada (TRP)
  • National Bank of Canada (NA)
  • Husky Energy (HSE)
  • Bank of Nova Scotia (BNS)
Thanks Scomac ... 50% financials ... a bit much for a portfolio of 10 stocks if you ask me, but then again betting against the grain is usually the best move!
 

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Dr_V on [url=http://www.canadianmoneyforum.com/showthread.php?t=1624]this thread[/url] said:
Anyway, the secondary purpose of my earlier post (mentioned above) was to get people talking more about stock-picking strategies & valuations ... though, in that respect, it didn't really seem to generate much discussion, so it kind of failed.
OK let's resurrect this thread and see if we can get some discussion brewing on this subject matter.


Dr_V said:
A very important difference with my approach is that, when I compute book value (and look at assets on the balance sheet), I deduct the value of all goodwill -- effectively, I consider goodwill to be worth $0. In my experience, goodwill is often carried on the books at a higher value than it should be; with only a few exceptions, I give little credence to the strength of patents or brand names, which, being intangibles, are not guaranteed money-makers, and can often decrease in value during both recessions and booms.
Maybe it doesn't matter because you still have plenty of stocks to pick from, but I have to ask if you really believe that brands and patents have no value? Yes, patents expire and there is always something on the horizon that is likely to be "new & improved", however you cannot discount the enduring power of brands in many cases. No one has really successfully challenged the power of the Coca-Cola brand for the better part of 100 years. The same can be said for several other consumer brands with an equally powerful allure. This is what allows a business to compete on its own terms with pricing power rather than simply competing in some sort of generic version of their particular industry. The soft drink industry is an excellent example in which Coke and Pepsi have consistently earned very high returns on their business, yet the generic manufacturers that are forced to compete on price have had a very difficult time making consistent profits. Almost all of the "business value" of Coke and Pepsi is really tied up in the intangible value of their respective brands. We can even put a number on it based on an inter-industry comparison.

I am in agreement with you on the point that many companies overpay for assets and this shows up on the balance sheet as over-valued goodwill, but not all goodwill and intangibles are created equal. It simplifies the task to reduce it all to zero, yet for my tastes that is far too restrictive especially when you couple it with a demand for low book-to-market in the first place. While price is important, the world is littered with cheap stocks that will rely on a well timed trade to make a profit from investing in what is a very mediocre business rather than being a long term holder of a great business with pricing power.
 

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I am in agreement with you on the point that many companies overpay for assets and this shows up on the balance sheet as over-valued goodwill, but not all goodwill and intangibles are created equal. It simplifies the task to reduce it all to zero, yet for my tastes that is far too restrictive especially when you couple it with a demand for low book-to-market in the first place. While price is important, the world is littered with cheap stocks that will rely on a well timed trade to make a profit from investing in what is a very mediocre business rather than being a long term holder of a great business with pricing power.
I don't pick stocks but I agree with scomac that you are eliminating a great many great business out there by insisting on low price-to-book combined with treating all goodwill and intangibles as $0. For an explanation of what counts as a "great business" see this Warren Buffett Letter to Shareholders (Page 6):

http://www.berkshirehathaway.com/letters/2007ltr.pdf
 

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Book value is only useful when everything is going wrong.

For a company that is prospering and growing, PE, Earnings Growth, Sales growth and ROE are by far, much more important factors.
 

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In my view, none of the "Dogs" stocks are well-priced

Of the common valuation metrics, I should point out that I put very little credence on the popular Price/Earnings and Price/Sales ratios, preferring instead to focus largely on Price/Book (in particular, price-to-tangible-book), debt and cash flow, current ratio, profit margin, and Return on Equity (ROE) during my initial stock screens. Ultimately, I *do* look at pretty much everything, but I find these criteria to be quite decent for weeding out questionable companies early on.




regards,
K.

Check out the Appendix of 1983 BRK Chairman's letter to shareholders. I think it's a good read about ROE, P/B and how unamortized goodwill relative to net earnings can be an indicator of a company's poor reinvestment of its earnings. The article gave me a different view on the value of price to book ratios when analyzing companies.

http://www.berkshirehathaway.com/letters/1983.html at the the bottom titled Goodwill and its Amortization: The Rules and Realities.
 

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I have to ask if you really believe that brands and patents have no value?
With a few exceptions, at least in the high-tech industry, most patents are used defensively -- that is, to protect against litigation. In my view, they should have almost no book value because very little revenue is ever generated from them. (Amusing aside: I'm a co-author on a US patent, in sql query optimization.)

There is, undoubtedly, some value to some brand names and patents, but it's often very difficult to quantify. I believe that, by zeroing-out their value in the balance sheets, I build-in a margin of safety when examining a stock. I have sometimes relaxed this goodwill constraint, but do so on a case-by-case basis.


you are eliminating a great many great business out there
Ahh, but that's the point :) It lets me sleep at night knowing that I've built-in a big margin of safety into the purchases. It does mean, however, that I tend to go long periods between stock purchases, but the strategy has worked reasonably well for me the past few years.

(Of course, there's more to deciding to go ahead with a stock purchase than simply mechanical screening. Of the screened companies, I review annual & quarterly reports in great detail, and do a fair bit of diligence with respect to characterizing the company's management and growth prospects.)


K.
 

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Ahh, but that's the point :) It lets me sleep at night knowing that I've built-in a big margin of safety into the purchases.
K.
I get your point and I agree with it.

Funny thing is if you had a more aggressive investing personality and followed the same rule you would likely not sleep at night because you would be worried about missing out on opportunities. Shows how much of someones actual investing approach / opinion seems to be psychology related.
 

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you are eliminating a great many great business out there
Ahh, but that's the point It lets me sleep at night knowing that I've built-in a big margin of safety into the purchases. It does mean, however, that I tend to go long periods between stock purchases, but the strategy has worked reasonably well for me the past few years.
Perhaps your sense of security that allows you to sleep well at night is misplaced. Rather than buying at a "big margin of safety" you're really only buying assets cheaply and then having to count on someone else valuing them higher to take them off your hands at a profit. This is the well-timed trade that I alluded to upthread.

To me, having a significant margin of safety is knowing that I don't have to rely on a well-timed trade to make money on an investment. The returns of the business and the reinvestment of those returns will do that for me. Essentially, being an owner in the business is a more profitable venture than trading the securities of that business. The margin of safety needs to be in relation to the intrinsic value of the business, not simply the bricks and mortar.
 
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