Bears Need to Hibernate!

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price."

- Warren Buffett

The Portfolio

Year-To-Date the portfolio is up +28.33%.

Our benchmark index, the S&P 500 is up 25.17% YTD.

If you're an investor looking for diversification and growth, and you'd like to know more about the way I build a portfolio; please feel free to email me. clay@claybaker.com

Bears Need To Hibernate

I'm calling out the bears, it's time you all went into hibernation for a while. The prognosticators of doom have been wrong for a long time and the rest of this year and 2020 are shaping up to offer even more upside. For those who have chosen to remain un-invested, I have some bad news for you. The S&P is up over 25% year-to-date. Interest rates are going to remain lower for longer, destroying traditional methods of saving. The stock market presents the greatest opportunity for savers and investors, but everyone needs to get back on the right side of the market.

Investors of every stripe are off sides, we all have too much cash on the sidelines and too little invested in stocks. One of the metrics I like to follow are inflows and outflows. Outflows are dollars that move out of stocks. The money has to go somewhere, so where have investors been putting their money; unbelievably into bonds and money-market accounts! High profile CEO's and politicians are calling for some kind of a change, a re-vamping of American capitalism; yet at the same time investors are sending their money to the lowest paying investments available. That doesn't sound like capitalism to me, it sounds like we need to do some serious work on personal financial literacy. Actually it's fear, and the fear, in my opinion is misplaced, and the hard data on our economy backs me up. The chart below shows a few of the metrics I track and the only thing that's a bit nervous for me is the valuation of the overall market vs. GNP.

The chart below shows that both individual and professional investors have pulled $1.1 Trillion dollars out of stocks through the first week of November. That happens to be an all-time historical high. From other data sources I discovered that all that capital was put into bonds (paying about 1.8% or less) and Money-Market funds (paying 1.85%-2.15%). The good news is during the last 3 weeks of November, investors began to come back into stocks seeking growth and yield from high quality companies that pay a solid dividend. Obviously we have a long way to go just to get outflows to revert to the mean.

According to Bankrate.com, the best rate available in December 2019 was 2.15%. So an investor with a minimum of $10,000 to invest, can earn 2.15% annually ($215), which will cover inflation; earning the investor nothing. Except that same investor can depend on a tax bill for interest income. Now you're behind. If this is you and your investment strategy, I'd like to point out some risks to your investments.

Best Money-Market Rates from Bankrate.com

  1. Best Rate: BBVA: 2.15% APY

  2. Trusted Bank: State Farm: 2.00% APY

  3. Intro Rate: TIAA Bank: 2.00% APY

  4. High Rate: UFB Direct: 2.00% APY

  5. High Rate: BMO Harris: 1.95% APY

  6. Big Bank: Wells Fargo: 1.95% APY

  7. High Rate: Investors eAccess: 1.90% APY

  8. High Rate: Sallie Mae: 1.85% APY

Many people invest in bonds and money-market funds through an ETF that trades like a stock. Professionals buy the actual treasuries at auction and keep cash that's in transition in interest paying accounts. It's individual investors trying to save for their family who buy the ETF's. The advantage of ETF's is they trade like stocks so they keep investors liquid. However; there are several politicians running for office who are proposing to impose a transaction tax when you buy one of these savings instruments. That tax will be imposed when you sell too. They want to additionally tax unrealized gains and tax the capital gains at a higher rate. So if you're a saver, trying to put some money away in what you think is a safe place, these proposals, if put into law, would destroy your savings plan even more than it already has been destroyed by low interest rates. Because it's individual investors who buy these instruments, these new tax proposals hurt people at the bottom disproportionately. You're probably ahead of me by now; if savers lose, why would anyone put money into these funds? Therefore, how could these tax proposal possible raise the amount of money being tossed around by candidates. They won't, it's really that simple. I don't know who the right candidate is, or what the right plan is, but I know when I'm looking at the wrong ones. When ideology replaces sound financial thinking, it's definitely time for a change.

If any of these policies makes it into law, now or 100 years from now, the bottom side of your mattress will be a better investment.

Upgrading Two Stocks

Today two of the blog's stocks exceeded my year-end price targets. Normally that would indicate a time to take profits and sell. After doing some more home work, I've decided to hold both companies and increase my 12-month price targets. SAP and Monolithic Power Systems are both well managed, growing and are investing in the long term trends that I think will help these companies continue to deliver value to investors through share appreciation and dividends.

SAP SE (SAP)

First up is our tech company from Waldorf Germany; SAP SE. Today I increased my price target on SAP because I don't think analysts have fully priced in the value of the business going forward. For instance, SAP partnered with Uber Freight and now provides the backbone network for Uber Freight. Uber isn't exactly a favorite of shareholders or analysts, but I think that Uber Freight may be the best business they own and likely to be the most profitable.

SAP currently trades at over 33 times trailing twelve month earnings, but management guidance lowers that valuation to just over 23 times forward earnings. While still above the market multiple around 17, SAP has traditionally guided future earnings conservatively. Since European stocks have been depressed for a couple of years now and appear to be turning the corner, I'm willing to stay with this company longer as it benefits from its own organic growth and larger macro trends.

The gross profit margin for SAP is currently very high, coming in at over 78% and its increased from the same quarter the previous year. Despite the strong results of the gross profit margin, SAP's net profit margin of 19.66% significantly trails the subsector average. The current debt-to-equity ratio, 0.45, is low and is below the subsector average, implying that there has been successful management of debt levels. SAP has improved earnings per share by 20.2% in the most recent quarter compared to the same quarter a year ago. I feel SAP is poised for EPS growth in the coming year. During the past fiscal year, SAP reported lower earnings of $3.92 versus $4.04 in the prior year. This year, the market expects an improvement in earnings of $5.01 versus $3.92.

If you're not completely familiar with SAP, here's some background. SAP SE operates as an enterprise application software, and analytics and business intelligence company worldwide. The company operates through three segments: Applications, Technology & Services; SAP Business Network; and Customer Experience. It offers SAP HANA, which enables businesses to process and analyze live data; SAP Data Hub, a solution for businesses to manage data from various sources; and SAP Cloud platform that offers an enterprise platform-as-a-service. The company also provides SAP Leonardo, a system that combines design thinking services with intelligent technologies for business processes; SAP Analytics Cloud, which leverages the intersection of business intelligence, planning, and predictive analytics; SAP BW/4HANA, a data warehouse solution; SAP S/4HANA, an enterprise resource planning suite for intelligent enterprises; SAP Integrated Business Planning solutions that deliver real-time supply chain planning capabilities; and SAP Business One, an on-premise and cloud business application. In addition, it offers SAP Fiori, an user experience interface; SAP SuccessFactors Human