Diversification is Key
I strongly endorse diversification of your stock portfolio by using different methodologies and strategies in your investments. And research backs me up.
Ned Davis, a 40-year stock market veteran and founder of one of the country’s best-known institutional research firms, Ned Davis Research Group, conducted an exhaustive study on diversification strategies. Mr. Davis concluded that using a diversified investment approach with different methodologies and strategies works best.
But many investors tend to focus on just one methodology or strategy. Their focus is usually an emotional response to what has or hasn’t worked most recently in their portfolios. They don’t seem to understand that all methodologies and all strategies struggle from time to time. Lots of investors and an alarming number of advisors tend to flee a struggling methodology or strategy whenever the stocks they chose underperform.
Investors then start to search for something better—something that would have worked well when their last approach didn’t. This is called “performance chasing” or “strategy hopping,” which results in buying high (moving into what has been working well recently) and selling low (moving out of what is not working well)—not a recipe for success.
Bottom line: there is no one solution to successful investing. There is no one best strategy, approach or methodology. The key is having diversified investments.
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Ned Davis found that using different investment approaches to find growth stocks, value stocks, small cap stocks, international stocks, dividend stocks, etc. produced the best performance results, and my experience agrees with his findings. I have been using six to eight approaches in Cabot Benjamin Graham Value Investor during the past 14 years, and these approaches have produced consistent, remarkable results for my subscribers.
Is the Stock Market Overvalued?
The answer is easy: Yes, the stock market is overvalued. But that doesn’t mean you should sell. As I advised in yesterday’s Wall Street’s Best Daily, ?stay fully invested. The stock market could be in a ‘blow-off’ phase that could carry stock prices considerably higher.
As you stay fully invested, however, you should allocate a larger portion of your portfolio to high-quality, very low risk stocks. One of the best stocks to add to your portfolio to add stability and income is AT&T (T). The methodology that I used to find AT&T was my A-List Dividend approach, which seeks high quality companies that are undervalued with steady dividend increases during the past 10 years. My last review of AT&T was in January when I wrote:
AT&T, Inc. (T: Current Price 41.82) is the largest telecommunications company in the U.S. and one of the largest in the world. The company’s AT&T Mobility division provides the largest wireless service in the U.S.
AT&T’s telecommunications services and products include wireless communications, data/broadband and internet services, video services and networking services. The company’s wireless subsidiaries provide both wireless voice and data communication services. The landline services include AT&T U-verse broadband and video and voice services. In addition, DIRECTV, the company’s new subsidiary, provides pay television in the U.S. and around the world.
AT&T’s $49 billion purchase of DIRECTV is a game-changer. Through DIRECTV’s massive customer base, AT&T is attracting many new users to its wireless business. The merger will provide $2.5 billion ($0.40 per share) of cost synergies annually starting in 2018. DIRECTV’s DirecTV-Now will launch a video streaming service over the internet that will offer HBO, Cinemax, ESPN, and other television programming. DirecTV-Now will require neither set-top boxes nor satellite dishes. The new streaming service will serve every segment of the streaming video industry and offer customers any content virtually wherever and whenever they want it. The service will compete with Dish Sling TV, Hulu and PlayStation Vue.
AT&T’s recent $18 billion purchase of significant radio spectrum in government auctions will enable the company to pursue new business in the fast-growing Internet of Things market, where objects can be sensed and controlled remotely across existing wireless infrastructure.
AT&T boasts the fastest internet speeds in the U.S. via its 4G network, which reaches 355 million customers. Recently, the company announced plans to expand its super-fast fiber optic broadband service, GigaPower, to 38 additional cities, tripling its city locations. The fiber optic network is becoming the most sought-after technology for secure and fast data transmission. The company also bought wireless assets in Mexico, and plans to greatly expand its telecom business in Mexico and other Latin American countries.
AT&T’s proposed $85 billion acquisition of Time Warner is not approved yet. The new Republican administration could be more amenable to the transaction, but the outcome is still uncertain.
Sales and EPS will likely advance 4% in 2017 before accelerating thereafter. If communications regulations are eased and corporate taxes are lowered, profits could jump significantly. In addition, AT&T’s deal to buy Time Warner could transform the phone company into a media giant, with potential to find new areas of growth. Management expects the deal to close before the end of 2017.
The company’s balance sheet is strong, and my risk rating for AT&T is Very Low. The company, a Dividend Aristocrat, has increased its dividend for 34 consecutive years. The company’s increase at the beginning of 2017 now provides a generous 4.7% yield. At 14.7 times current EPS and at only 6.2 times cash flow, AT&T shares are a bargain. Buy.
For more updates on AT&T and additional stocks, consider taking a trial subscription to Cabot Benjamin Graham Value Investor here.
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