The Most Wonderful Time of the Year Series - Part 3
Market history suggests that Value Stocks and Dividend Payers have been the place to be for those who share our long-term time horizon, with the former averaging a 13.5% annualized rate of return from 1927-2014, and the latter posting a 10.4% average return over the same time span, but we also like that a Democratic White House and Republican Congress has been an unusually favorable combination (see Figure 11) for our kind of companies. Throw in the historically auspicious calendar, along with the fact that plenty of undervalued stocks are still available, especially given that Growth Stocks have outperformed by a wide margin this year, and we can’t help but be optimistic about the long-term prospects of our portfolios.
Dividend payouts have continued to rise this year given that corporate balance sheets and income statements, on average, are in solid shape, equity valuations are reasonable in the context of the continued low interest rate environment, Q3 profit reports generally exceeded analyst projections and the Federal Reserve remains friendly. On that last point, the Fed continuously states, “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
Despite our enthusiasm, we respect that many folks are concerned that the Bull Market is now very long in the tooth. While we concede that the long-playing rally has stretched for quite some time, even as we can hardly ignore the summer swoon this year in which many stocks fell by double-digit percentages, the massive rebound in equities since the Financial Panic lows in March 2009 was actually interrupted by a Bear Market that stretched from April 29, 2011—October 3, 2011. True, on a closing basis, the S&P 500 index declined only 19.4% during that span, short of the 20% mark that classically defines a Bear, but the widely watched benchmark was off more than 21% through October 4 that year on an intraday basis.
No matter what the history books may suggest works in theory and what we actually have seen work in practice (see Figure 12), we understand that there are still tremendous sums of money that prefer the perceived safety of cash and fixed income investments. But paltry current yields on money markets, Treasuries and even many corporate bonds provide far less competition than in years past for the generous dividend income available in the equity markets. Indeed, Buckingham Portfolio, which is chock full of undervalued stocks, now yields a healthy 3.0%.
Readers should know we discriminate among potential investments primarily by their relative valuation metrics and
our assessments of stock-specific risk. We buy only those stocks we find undervalued along several lines relative to
their own trading history, those of their peers or that of the market in general. The prices at which we’ll buy and sell
stocks incorporate a range of fundamental risks (e.g. credit, customer and competitive dynamic) that we believe the
companies may face over our normal 3-to-5-year investing time horizon.
The dividend-weighted portfolio data is from Eugene F. Fama and Kenneth R. French. The dataset is broken into five
groups: non-dividend paying, top 30% of dividend payers, middle 40% of dividend payers, bottom 30% of dividend
payers and all dividend payers (weighted 30% of top dividend payers, 40% of middle dividend payers and 30% of low
dividend payers). The capitalization and factor-based (book value-to-price) portfolio data is from Eugene F. Fama and
Kenneth R. French. The dataset is broken into four groups: large value, large growth, small value and small growth.
The total return values presented in Figure 1 from Morningstar’s Ibbotson Associates are grouped into small- and largecapitalization stocks.
The Russell 3000 index is a broad stock market index for the largest 3000 U.S. stocks. It includes nearly 98% of the
investable U.S. equity market. The Russell 3000 Value Index measures the performance of the broad value segment
of U.S. equity value universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower
forecasted growth values. The Russell 3000 Growth Index measures the performance of the broad growth segment
of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher
forecasted growth values.
The Standard & Poors 500 index (S&P 500) is a broad stock market index based on the market capitalizations of the
largest 500 companies listed in the U.S. The Standard & Poors 400 index (S&P 400) is a stock market index for U.S.-
traded stocks with middle-sized market capitalizations. The Standard & Poors 600 index (S&P 600) is a stock market
index for U.S.-traded stocks with small-sized market capitalizations. Small company stocks, via Ibbotson Associates,
are the bottom twenty percent of the New York Stock Exchange. Large company stocks, via Ibbotson Associates, are
represented by the S&P 500 index.
Nothing presented herein is, or is intended to constitute, investment advice, nor sales material, and no investment
decision should be made based on any information provided herein. Information provided reflects AFAM Capital,
Inc.’s (AFAMs) views as of a particular time. Such views are subject to change at any point and AFAM shall not be
obligated to provide notice of any change. Investment recommendations provided herein are subject to change at
any time. Those recommendations provided herein are provided for informational purposes only and are not provided
as a recommendation to buy or sell any one security. Past and current recommendations that are profitable are not
indicative of future results, which may in fact result in a loss. See http://hvst.co/1I6JFmq stocks for a list of all past specific investment recommendations.
Buckingham Portfolio is John Buckingham’s actual investment portfolio. Though not presently leveraged, it has been
so in the past. It is not based on actual client returns. TPS Portfolio is the Al Frank Credit Trust’s actual investment
portfolio. Millennium Portfolio is unleveraged and hypothetical. It is not based on actual client returns. PruFolio is
unleveraged and hypothetical. It is not based on actual client returns. All portfolio returns are calculated on a total
return basis and reflect the reinvestment of dividends, if any, margin leverage and margin interest charges, trading costs
and subscription costs. There are inherent limitations with in hypothetical or model portfolio results as the securities
are not actually purchased or sold. They may not reflect the impact, if any, of material market conditions which could
have has an impact on AFAM’s decision making if the hypothetical portfolios were real. Hypothetical performance
is shown for illustrative purposes only and should not be interpreted as an indication of performance of any AFAM
portfolio. The use of leverage magnifies gains and losses and increases risk to a portfolio.
Opinions expressed are those of Al Frank Asset Management, a division of AFAM Capital, Inc., are subject to change
without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.
Past performance may not be indicative of future results. Therefore, you should not assume that the future performance
of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.
AFAM adheres to the same investment principles and philosophies in managing value-oriented individual client
accounts, its proprietary value mutual funds and in the information that appears in its investment advisory newsletter,
which is long-term growth of capital by owning a diversified portfolio of securities that are undervalued and holding
them for their long-term potential appreciation. Diversification does not protect against loss in declining markets.
AFAM Capital, Inc. is registered with the Securities & Exchange Commission, is editor of The Prudent Speculator (TPS)
newsletter and is the Investment Advisor to certain no-load proprietary mutual funds and individually managed client
accounts. Registration of an investment advisor does not imply any level of skill or training.
As adviser to its own proprietary mutual funds and manager of individual client accounts, AFAM may purchase, sell or
hold positions in the securities that appear in this presentation. Also, employees may hold, purchase or sell any of the
stocks that appear in this presentation subject to AFAM’s Code of Ethics, Insider Trading, and Personal Trading policies.
Dividend payouts have continued to rise this year given that corporate balance sheets and income statements, on average, are in solid shape, equity valuations are reasonable in the context of the continued low interest rate environment, Q3 profit reports generally exceeded analyst projections and the Federal Reserve remains friendly. On that last point, the Fed continuously states, “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
Despite our enthusiasm, we respect that many folks are concerned that the Bull Market is now very long in the tooth. While we concede that the long-playing rally has stretched for quite some time, even as we can hardly ignore the summer swoon this year in which many stocks fell by double-digit percentages, the massive rebound in equities since the Financial Panic lows in March 2009 was actually interrupted by a Bear Market that stretched from April 29, 2011—October 3, 2011. True, on a closing basis, the S&P 500 index declined only 19.4% during that span, short of the 20% mark that classically defines a Bear, but the widely watched benchmark was off more than 21% through October 4 that year on an intraday basis.
No matter what the history books may suggest works in theory and what we actually have seen work in practice (see Figure 12), we understand that there are still tremendous sums of money that prefer the perceived safety of cash and fixed income investments. But paltry current yields on money markets, Treasuries and even many corporate bonds provide far less competition than in years past for the generous dividend income available in the equity markets. Indeed, Buckingham Portfolio, which is chock full of undervalued stocks, now yields a healthy 3.0%.
To download the full report, click here .
-----------------------Readers should know we discriminate among potential investments primarily by their relative valuation metrics and
our assessments of stock-specific risk. We buy only those stocks we find undervalued along several lines relative to
their own trading history, those of their peers or that of the market in general. The prices at which we’ll buy and sell
stocks incorporate a range of fundamental risks (e.g. credit, customer and competitive dynamic) that we believe the
companies may face over our normal 3-to-5-year investing time horizon.
The dividend-weighted portfolio data is from Eugene F. Fama and Kenneth R. French. The dataset is broken into five
groups: non-dividend paying, top 30% of dividend payers, middle 40% of dividend payers, bottom 30% of dividend
payers and all dividend payers (weighted 30% of top dividend payers, 40% of middle dividend payers and 30% of low
dividend payers). The capitalization and factor-based (book value-to-price) portfolio data is from Eugene F. Fama and
Kenneth R. French. The dataset is broken into four groups: large value, large growth, small value and small growth.
The total return values presented in Figure 1 from Morningstar’s Ibbotson Associates are grouped into small- and largecapitalization stocks.
The Russell 3000 index is a broad stock market index for the largest 3000 U.S. stocks. It includes nearly 98% of the
investable U.S. equity market. The Russell 3000 Value Index measures the performance of the broad value segment
of U.S. equity value universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower
forecasted growth values. The Russell 3000 Growth Index measures the performance of the broad growth segment
of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher
forecasted growth values.
The Standard & Poors 500 index (S&P 500) is a broad stock market index based on the market capitalizations of the
largest 500 companies listed in the U.S. The Standard & Poors 400 index (S&P 400) is a stock market index for U.S.-
traded stocks with middle-sized market capitalizations. The Standard & Poors 600 index (S&P 600) is a stock market
index for U.S.-traded stocks with small-sized market capitalizations. Small company stocks, via Ibbotson Associates,
are the bottom twenty percent of the New York Stock Exchange. Large company stocks, via Ibbotson Associates, are
represented by the S&P 500 index.
Nothing presented herein is, or is intended to constitute, investment advice, nor sales material, and no investment
decision should be made based on any information provided herein. Information provided reflects AFAM Capital,
Inc.’s (AFAMs) views as of a particular time. Such views are subject to change at any point and AFAM shall not be
obligated to provide notice of any change. Investment recommendations provided herein are subject to change at
any time. Those recommendations provided herein are provided for informational purposes only and are not provided
as a recommendation to buy or sell any one security. Past and current recommendations that are profitable are not
indicative of future results, which may in fact result in a loss. See http://hvst.co/1I6JFmq stocks for a list of all past specific investment recommendations.
Buckingham Portfolio is John Buckingham’s actual investment portfolio. Though not presently leveraged, it has been
so in the past. It is not based on actual client returns. TPS Portfolio is the Al Frank Credit Trust’s actual investment
portfolio. Millennium Portfolio is unleveraged and hypothetical. It is not based on actual client returns. PruFolio is
unleveraged and hypothetical. It is not based on actual client returns. All portfolio returns are calculated on a total
return basis and reflect the reinvestment of dividends, if any, margin leverage and margin interest charges, trading costs
and subscription costs. There are inherent limitations with in hypothetical or model portfolio results as the securities
are not actually purchased or sold. They may not reflect the impact, if any, of material market conditions which could
have has an impact on AFAM’s decision making if the hypothetical portfolios were real. Hypothetical performance
is shown for illustrative purposes only and should not be interpreted as an indication of performance of any AFAM
portfolio. The use of leverage magnifies gains and losses and increases risk to a portfolio.
Opinions expressed are those of Al Frank Asset Management, a division of AFAM Capital, Inc., are subject to change
without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.
Past performance may not be indicative of future results. Therefore, you should not assume that the future performance
of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.
AFAM adheres to the same investment principles and philosophies in managing value-oriented individual client
accounts, its proprietary value mutual funds and in the information that appears in its investment advisory newsletter,
which is long-term growth of capital by owning a diversified portfolio of securities that are undervalued and holding
them for their long-term potential appreciation. Diversification does not protect against loss in declining markets.
AFAM Capital, Inc. is registered with the Securities & Exchange Commission, is editor of The Prudent Speculator (TPS)
newsletter and is the Investment Advisor to certain no-load proprietary mutual funds and individually managed client
accounts. Registration of an investment advisor does not imply any level of skill or training.
As adviser to its own proprietary mutual funds and manager of individual client accounts, AFAM may purchase, sell or
hold positions in the securities that appear in this presentation. Also, employees may hold, purchase or sell any of the
stocks that appear in this presentation subject to AFAM’s Code of Ethics, Insider Trading, and Personal Trading policies.
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