Surveying the Landscape
Diversifying Your Portfolio
Two Stocks to Consider
Every issue of Cabot Wealth Advisory has a survey at the bottom and every so often we collect the results to get your latest opinions, comments and suggestions. We learn a lot from your answers and I urge you to take the survey. Below: My reactions to some of your comments.
Some of our readers feel that Cabot Wealth Advisory is too long, but others feel it is too short. The message: You can’t please everybody all the time. I prefer to write shorter issues because I’m a research analyst by trade who attempts to convey his findings to investors. While, I try to keep my written analysis short and sweet, I also want to provide enough detail for you to make informed investment decisions. I will attempt to keep my future communiqués brief and to the point
Some people complain that we have too much advertising. I believe Cabot Wealth Advisory, which is free, offers less advertising than most or all of the other freebies on the Internet. Our advertising brings in new subscribers, which keeps us in business. And that’s a good thing!
One reader’s comment is my favorite: “Best Advisory on the Internet.” Obviously, she is one of our most intelligent readers. Thanks, Mom.
We asked readers: “Where do you get your information about the stock market?” People gave various answers, but my suggestion is to subscribe to one or more of the Cabot investment advisories. It’s very likely that one will be the perfect fit for your investment objectives. You can go to http://www.cabot.net/Home/Subcontent/Which-Publication.aspx and fill in the quick questionnaire to find out which Cabot letter fits your needs.
I like this reader’s question: I need “more information for small investors like myself, investing for income, with not much money to invest.”
As a small investor, you have a huge advantage over large institutional investors. You can invest in large companies or small companies with little concern for the liquidity (shares traded) of the stock. Rather than 500 to 1,000 stocks that mutual funds are forced to choose from, you have more than six thousand from which to choose.
Also keep in mind that you should not eliminate stocks with high prices. Buying a few shares of a high-priced stock can provide returns that are just as good as buying a lot of shares of a low-priced stock.
Cabot offers two advisories that may help this person, Cabot Small-Cap Confidential and Cabot Benjamin Graham Value Letter. But again, I urge you to take the quiz first, as it will help you determine whether these are really the correct Letters for your needs.
One reader wanted more information on “managing downside risk.” There are several strategies that you can use to reduce your downside risk.
First, diversify your portfolio to avoid having all your eggs in one basket.
Second, when you buy a growth stock, you should make note of the price when you buy it and place a loss limit of 20% (in bull markets) and 15% (in bear markets) below that so you know when it’s time to cut your losses.
Third, if you own mostly value stocks, allocate more of your portfolio to bonds or bond exchange-traded funds as the stock market rises. In other words, switch out of stocks into bonds as the stock market becomes overvalued. For the average investor, I recommend 25% in bonds when the stock market is relatively undervalued and 75% in bonds when the stock market is relatively expensive.
My favorite bond ETFs currently include iShares iBoxx $ Investment Grade Corp Bond ETF (LQD) and SPDR Barclays Capital Municipal Bond ETF (TFI).
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I receive a lot of questions regarding portfolio risk, such as “How many stocks should I invest in, and should I concentrate on the few sectors that have the best potential in the current economic environment?”
I believe you should invest in as many stocks as you can keep up to date on. You should concentrate on sectors that look promising, but diversify enough to protect your portfolio from unforeseen events in the future. It is impossible to forecast exactly which stocks and which business sectors will perform best, so it’s best to diversify.
I am recommending two stocks today that are found in the same industry, but are almost opposites. Bunge (BG) is an average quality stock whose shares are quite volatile. The company is in the food processing industry and will prosper if inflation pushes agricultural commodity prices higher. J. M. Smucker (SJM), on the other hand, is a very high-quality company in the packaged food industry that will prosper if food prices stay the same or decline.
Bunge was founded in 1818 in the Netherlands and has grown to become one of the leading agricultural products companies in the world. Bunge buys soy, canola, flax and specialty oil seeds from farmers and processes them into protein meal for animal feed. The company also sells crude soy and canola oil or refines them and sells both to food manufacturers. Bunge is also the leading producer and supplier of fertilizer to farmers in South America, particularly Brazil. Despite the current recession and slump in commodity prices, Bunge is building a major export grain terminal in the state of Washington and two new sugar processing facilities in Russia and Ukraine. The company is also expanding its operations in China and India.
Bunge’s sales and earnings are suffering from weak demand for soybeans used in ethanol and from weak demand for fertilizer brought about by farmers’ inability to borrow at reasonable rates in the tight credit market. In addition, farmers have cut back on plantings until food commodity prices increase. Earnings per share have plummeted to the lowest level in nine years, but a big turnaround should begin in the current quarter. I foresee increasing commodity prices providing rapid EPS growth for Bunge during the next several years.
Bunge is a solid company with $45 billion in sales and a strong balance sheet with little debt. I believe demand for agricultural products has hit bottom and is poised to rise rapidly with sales to China leading the way. Bunge will sell 10 million shares of its stock to fund future growth. The dividend provides a 1.3% yield. I expect BG to increase to my Minimum Sell Price within one to two years.
J.M. Smucker is the dominant producer and seller of jams and jellies, peanut butter, shortening and coffee. The company also produces packaged cake mixes, health and natural foods, and beverages. Important brand names include Smucker’s jam, Jiff peanut butter, Folgers coffee, and Pillsbury mixes. The November 2008 acquisition of Folgers is providing better than expected cross-selling opportunities and will add significant sales and earnings in 2009 and beyond. International sales accounted for only 13% of total sales, so there is plenty of potential to expand outside the U.S.
J.M. Smucker’s sales rose 69% during the six months ended July 31, 2009, and EPS increased 25.0%. The company is benefiting from people eating more meals at home and brewing their own coffee. J.M. Smucker’s price increases in 2008 and lower commodity prices in 2009 will lead to higher profits in this year and next. The steady 10% EPS growth of the past should continue well into the future. Dividends, which provide a 2.8% yield, have been raised each of the past 22 years.
SJM is undervalued at 13.0 times next 12-month EPS. J.M. Smucker’s balance sheet is very strong despite the $3.3 billion purchase of Folgers. SJM will likely advance tomy Minimum Sell Price within one to two years.
J. Royden Ward
For Cabot Wealth Advisory
Editor’s Note: You can get continuing coverage Bunge and J.M. Smucker, including finding out their Minimum Sell Prices, in the Cabot Benjamin Graham Value Letter. There you’ll not only find buy and sell advice for BG and SJM, you’ll get 20 other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy developed by the father of value investing, Benjamin Graham, to find the market’s best undervalued stocks. And he will tell you exactly when to sell, too. This year he’s already recommended selling 10 stocks with average gains of more than 25%! Don’t miss out on his next recommendations … click here now to get started today!