Investment Risks and Rewards in 2015
Presentation by:
Lauren Rudd
www.RuddInternational.com
(941) 706-3449
January 15, 2015
Building a Successful Portfolio
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What you will learn
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Where we have been
Where we are going – What is the risk
Importance and use of economic data
The stock versus bond decision
Dividing up you equity dollars
Some investment ideas
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A Year to Remember
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2014 in Review
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2014 in Review
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The Bull Refuses to Die
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How Stocks React to Interest Rate Hikes
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Going Forward
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Do Not Miss The Best Days
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What Will 2015 Bring
• S&P 500 earnings per share rising 7.5%
• S&P 500 to end next year at 2350, up 17%
• Price of oil ????
• Every $10-a-barrel drop in the average
annual price equates to about 0.5%
increase in GDP
• GDP growth of 2.8% to 3%
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Decent Value
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Patience is a virtue
• Volatility is not just back…it never left. Financial
market volatility has always been and always will be an
integral part of investing.
• If you lose sleep over a dip in the market, or even a
10% correction, you need to bone up on patience.
• No one in the history of the stock market has ever
been able to accurately and consistently time
corrections.
• Wall Street moves two steps forward and then one
step back. When it takes a step back, don't panic or sell
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Unrealistic Expectations
• You don’t go to the gym for a week and expect to be
Mr. Universe.
• You don’t go from an entry level position to C-level
executive in a month.
• Nobody jumps from arithmetic to calculus in a month.
• Yet people want the market to make them rich
overnight.
• Investment strategies are not, and should not, be
designed for overnight success.
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Global Equity Forecasts
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Slow Global Growth
• The emerging markets of Brazil, Russia, India and China collectively
known as the "BRICs" — will likely grow in 2015 at their slowest
pace in six years.
• China may expand 6.5 percent or more, a far cry from the nearly
double-digit growth it enjoyed for decades. Europe and Japan will
be lucky to expand even 1 percent.
• Exports account for just 14 percent of U.S. output, the smallest
share among the 34 mostly rich members of OECD.
• Look for European Central Bank to ramp up its stimulus efforts by
buying government bonds.
• Japan's central bank is buying government bonds and other
financial assets in a bid to boost inflation and stimulate growth.
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Economic Growth in 2015
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3.1 percent advance in GDP
Jobless rate down to 5.4 percent
Global growth up 3.4 percent
China slowing to a 7.0 percent pace
Europe up 1.2 percent
Japan up 1.0 percent
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Economic Growth in 2015 cont.
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Federal funds at 0.75% by the end of 2015
Corporate profits up 6.7 percent
S&P 500 at 2,167 by the end of 2015
Exports to grow by 5.4 percent
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10-Year Treasury
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Where the Wealthy Keep Their Money
• The top 1% of Americans-who have a net
worth of more than $7.8 million-hold nearly
half their gross assets in unincorporated
business equity and other real estate.
• They have an additional 27% of wealth in
financial securities.
• Very little of their wealth is tied up in their
personal residences.
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Where the Wealthy Keep Their Money
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Who Holds What Where
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2 out of 2862
Who Routinely Trounces the Stock Market - Try 2 Out of 2862 Funds
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Laggards
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Add Insult to Injury
• As of Dec. 15, dozens of mutual funds paid out
taxable gains to their shareholders
• As of Dec. 19, more than 79% of all funds had
failed to beat their market benchmarks
• $2.6 billion Janus Forty Fund, generated a
market-lagging return of 8.3%.
• On Dec. 17, the fund’s S share class paid out
$0.76 in short-term capital gains and $13.44 in
long-term capital gains
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Exchange Traded Funds (ETFs)
• Index funds suffer from their emphasis on momentum over value
• Benchmark indexes tend to be capitalization weighted; the highest
allocations go to the market’s largest companies
• Increased investment in index funds means even more
money goes into those stocks
• Cheaper and more defensive stocks are ignored.
• The result is increased volatility, as ever-fewer stocks
dominate market capitalization and trading volume. That
can set up the market — and index funds — for a greater
fall as investors abandon the momentum stocks that had
become such major index constituents.
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Oil Stats
• 16 states benefit from high oil prices, of which six
really rely on oil for job growth
• One percent of employment growth in the past
four years has come from oil jobs, 2 percent if you
include oil-related jobs
• 10 percent of stocks in the S&P 500 are hurt by the
decline in oil. 12 percent including oil-related
stocks
• Down cycles in oil tend to be self-correcting in 18
months
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Supply Is Not The Issue
The Saudis have two targets in their latest oil war
• The first is trying to squeeze U.S. shale oil—which
requires higher prices to remain competitive with
conventional production—out of the market.
• Secondly, the Saudis are also punishing two rivals,
Russia and Iran, for their support of Bashar alAssad’s regime in the Syrian civil war.
• The Iranian regime—and to a lesser extent,
Russia—have provided the weapons and funding
to keep Assad in power.
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Inflation
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Economic models
Use one or more economic
indicators to predict a level
of economic or financial
activity
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Path to investment decisions
Economic
indicators
Analysis
Forecasts
Forecasts
Analysis
Investment
decisions
Investment
decisions
Stock Selection
Models
Individual stock
selections
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Wall Street
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So is this the time to invest
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5 Ways to lose money on Wall Street
• Denial - The trend isn't real
• Skepticism - it's too risky
• Bargaining - I'll invest if the price is right
• Regret - God, I've missed it
• Panic - I've got to buy in
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Portfolio Management Process
It all comes down to:
How you invest
What you invest in
How do you hold on to your profits
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IBM
IBM is the poster child of companies using buybacks to hide deteriorating fundamentals
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Perception problem
• 40% of 18-29 year-olds say cash is their
preferred way to invest money they don’t need
for at least 10 years -- despite the fact that the
S&P 500 has gained 17% over the past year
while the yield on cash investments is below
1%.
• Americans overall chose cash as their favorite
long-term investment. In fact, 1 in 4 Americans
prefer cash investments for money they will not
need for at least 10 years. Stocks came in third
with 19% of the vote.
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Investment Management
It all comes down to:
• How you invest
• What you invest in
• How do you hold on to your profits
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Goal
Your goal should be:
• Capital gain of 8% to 10%
• Dividend yield of 3% to 4%
• For a total of 11% to 14%
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Asset Allocation
Large
Capitalization
U.S.
Equities
Small
Capitalization
Value
Growth
Value
Growth
Equities
(Stocks)
Europe
International
Markets
Pacific
Region
Emerging
Markets
Fixed Income
Barclay’s
Aggregate Bond
(Bond)
Cash
Equivalents
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Asset allocation
• Single most important decision you make
• Get it wrong and you are doomed
• Academic papers show that 90 -95 percent
of returns are based on the initial bond
versus stock decision
• DO NOT use a 60-40 fixed benchmark
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Screening
• Many investors use "screens" to select
investments, meaning that they use a number
of quantitative criteria and examine only the
companies that meet those criteria
• Warning = Do not throw the baby out with the
bath water
• AAII’s Stock Investor Pro
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Methodology
• Dividends – 8 to 10 consecutive years of rising
dividends
• Intrinsic Value – ValuePro – ValuePro.net
• Free Cash Flow to Equities
• Discounted Earnings
• Dividend Discount Model (2 stage)
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Intrinsic value model- FCFF
• FCFF - the cash that is left over after
payment of all hard cash expenses and
all operating investment
• FCFF = NOP – Taxes – Net Inv – Net
Change in Working Capital
• ValuePro.net
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Intrinsic value – Dividends
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Dividend discount model
Used by every analyst
Many varieties
Can be found on the internet
Excel program available
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Tactical
Managing for Income: Tactical
Identify Dividend Achievers
Determine Intrinsic Value of Individual Companies
 Forecast Financials
Develop An Optimal Portfolio of 15 to 20
Companies
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Strategic
Managing Risk: Strategic
Identify Systemic or Non-Diversifiable Risks
Also referred to as “Market Risk”
Determine Risk vs Reward
Adjust Portfolio for Maximum Risk/Reward Ratio
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Value Investing
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Low P/E ratio
Low Price/sales ratio
Low Price/Cash Flow
Low Price/book ratio
High Dividend yield
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Value Guidelines
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Share price < than 2/3 of intrinsic value
P/E ratios in the lowest 10%
Stock price < than tangible book value
Debt to Equity ratio < 0.75)
Current assets 2X current liabilities
Dividend yield 2/3 of AAA bond yield
Earnings CAGR > 7% over 10 years
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Growth Investing
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High earnings growth rate
High sales growth rate
High return on equity
High profit margin
No or low dividend yield
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Growth Guidelines
Company Size
Minimum 5 Year
Growth
Greater than $4B
5%
Less than $4B and Greater than $400M 7%
Less than $400 M
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Does it Work
Here is the proof:
• Student Example
• Rudd International Example
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Rudd International- 2014 Results
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Rudd International – 10-Year Results
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Student Portfolio
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2014 Newspaper
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Biogen Idec (BIIB) up 5.52 percent
Gilead (GILD) up 34.17 percent
AbbVie (ABBV) up 40.68 percent
Abbott Labs (ABT) up 15.89 percent
Aflac (AFL) down 9.60 percent
MWI Veterinary Supply (MWIV) down 10.27 percent
Intel (INTC) up 51.26 percent
Tractor Supply (TSCO) up 4.86 percent
United Technologies (UTX) down 0.69 percent
Toro (TTC) up 6.66 percent
AmerisourceBergen (ABC) up 27.58 percent
Cummins (CMI) up 12.10 percent.
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The capital appreciation for the group 16.19 percent year-to-date.
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The average dividend yield for the group 1.66 percent
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Total return 17.85 percent.
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2015 Newspaper
1. Biogen Idec (BIIB)
7. Procter & Gamble (PG)
2. Gilead (GILD)
8. Norfolk Southern (NSC)
3. Intel (INTC)
9. Tech Data (TECD)
4. Tractor Supply (TSCO)
10. Energy Transfer Equity (ETE)
5. Hasbro (HAS)
11. Linn Energy (LINE)
6. Realty Income (O)
12. PepsiCo (PEP)
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So Where Do We Go From Here
• Consumer goods – Hasbro – HAS
• Consumer goods – JM Smucker – SJM
• Health care – Gilead Sciences – GILD
• Health care – AbbVie – ABBV
• Telecommunications – AT&T – T
• Technology – Diebold – DBD
• Technology – Tech Data – TECD
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So Where Do We Go From Here – cont.
• Basic materials – HollyFrontier – HFC
• Energy – Transfer Equity – ETE
• Basic materials – Schlumberger – SLB
• International – Novartis ADR- NVS
• Transportation – Norfolk Southern – NSC
• Real Estate – Realty Income – O
• Industrial goods – Babcock & Wilcox - BWC
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So Where Do We Go From Here – cont.
• Technology – Apple – AAPL
• Health care – Zimmer – ZMH
• Health care – Stryker – SYK
• Health care – Varian Medical – VAR
• Consumer goods – Clorox – CLX
• Consumer goods – Church & Dwight – CHD
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So Where Do We Go From Here – cont.
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Consumer goods – Kellogg – K
Defense – General Dynamics – GD
Industrial goods – Toro – TTC
Technology – Intel – INTC
Basic materials – Valero Energy – VLO
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Epilog
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Need help - email me
LVERudd@aol.com
Slides on my web site
RuddReport.com
Put Seminar in subject line
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Stick with a Bullish Strategy
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Disclosure
The data and analysis contained herein are provided "as is" and without warranty of any kind,
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When evaluating the results of prior Rudd International recommendations or Rudd
International performance rankings, one should also consider that Rudd International may
modify the methods it uses to evaluate investment opportunities from time to time, that model
results do not impute or show the compounded adverse effect of transactions costs or
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That’s All Folks..the editor
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