Question:
We are looking to retire in two years. It’s been recommended in more than one guide that we “stockpile” some cash before retirement. I’m not sure why. We moved some investments to fixed-income, but we never thought about increasing our cash reserve. Is this something we should consider?
Answer:
Our investment philosophy is that any money needed within the next 10 years should be in fixed income investments. Money not needed in the next 10 years should remain in growth investments, such as, individual stocks or mutual funds that invest in common stocks. If you have provided for 10 years of liquidity needs, you should be in good shape. However, you should consider your emergency reserves. We recommend having three to six months of living expenses in emergency reserves, as you never know what expenses may happen. Health care costs may become more expensive as you grow older. Medicare premiums start around $100 a month. Supplemental insurance and prescription drug coverage are extra. Coverage for dental could be extra premiums.
Liquidity is always a good thing when you have no current earned income. However, liquidity can mean more than just cash-on-hand. An asset that can be sold or quickly converted to cash should suffice. The market for U.S. Treasury bills could provide you with adequate liquidity. We still recommend keeping maturities short. For a cash equivalent, this should almost always be the case to minimize price volatility. Beware of keeping too much of your wealth in cash. This can make it difficult to maintain purchasing power (beat the negative effects of inflation) in the asset class.
Question:
I own shares of Clearwater Paper. I know it is a basic materials stock, but from what I can tell, it produces the paper for consumer products like tissues, towels and napkins. Could I be better off moving to a consumer staples stock?
Answer:
Clearwater Paper Corp. (NYSE: CLW) is very similar to Kimberly Clark Corp. (NYSE: KMB) in that it is a producer of private label tissue and paperboard products, although on a much smaller scale. Kimberly Clark has a market cap of $36.3 billion compared to Clearwater’s at $1.14 billion. Kimberly Clark makes products for personal care, consumer tissue, health care and professional products. As a larger company, Kimberly Clark has more debt—124.1% of equity—than Clearwater at 96.9%.
Kimberly Clark’s return on equity is almost triple that of Clearwater (34.2% v. 12.5%). On the other hand, Clearwater Paper is expected to grow earnings by 11.67 in the next few years, while Kimberly Clark expects a smaller 7.6% growth. Clearwater looks less expensive when you include growth expectations. Even though Kimberly Clark has been the better performer over the past few years, you couldn’t tell by year-to-date performance. Clearwater Paper has improved by 26.2%. Clearwater Paper does not meet our criteria for investment; however, if you own it, you should be OK holding the stock for now.
Question:
So Macy’s hit a 52-week high last week. Is this a sign to sell? If I did sell what other Discretionary stocks should I look at? I already own a small amount of Kohl’s, which I’ve heard you recommend.
Answer:
First, let’s talk about the notion that a company’s stock price hit a high, so it must be sold. That is not sound thought for your investment portfolio, as the stock may have good prospect. You should concentrate on the fundamentals, namely price ratios, to aid in your decisions. For example, how is the stock priced relative to its earnings; its book value; its sales, and so on.
In the case of Macy’s, Inc. (NYSE: M), earnings have experienced 15.55% growth in the past five years, while the price suffered an annualized loss of 0.57% during that same period. This includes the decline in 2008-2009. The company has performed quite well from the market bottom, gaining 560% (60% annualized) since March 9, 2009. Not too bad for a four-year return. However, the price-to-earnings ratio is currently at 12, which is only slightly higher than its five-year average of 11.76. Checking the company relative to its peers, you find the earnings per share growth of 9% is respectable. The P/E is half that of Macy’s peers and return on equity of 22% is double the peer average. The price seems justifiable to us, with the company’s dividend adding nearly 2% to the return. Macy’s, however, does not meet our investment criteria.
As for Kohl’s Corp. (NYSE: KSS), we own shares in our Large Cap model and recommend them for purchase. The shares are priced at a discount to Macy’s, but the company has been beaten up over new store additions in recent years. We believe Kohl’s management is capable of dealing with the issue, but economic growth is necessary to justify new stores.
We sugest Coach, Inc. (NYSE: COH) for purchase in the Discretionary space. Coach looks a bit more expensive, with a P/E of 13.76. This can be justified, however, by earnings growth of 13.5%. Price-to-earnings-to-growth is approximately 1, which is lower than Macy’s and Kohl’s.
Question:
What are your thoughts on Penn National Gaming? I was also considering Regal Entertainment Group. I know they’re a bit different, but I think this might be a good year for discretionary spending in entertainment.
Answer:
Penn National Gaming, Inc. (NASDAQ: PENN) is a gambling operator, with a history of volatility, . Penn has a price-to earnings ratio of 26.64, which is well above its peer average of about 18 times earnings. Regal Entertainment Group (NYSE: RGC) is a movie theater operator that has experienced a nice return of 17%, annually, since 2009. However, that trails the S&P 500, which has increased by an annual rate of 22.63% during that same period. Regal is less profitable than Penn Gaming, as you might expect, if you have ever spent much time in a casino. If you look at fundamentals like price-to-earnings-to growth, the theater company is preferred, with a PEG of 4.41 for Penn Gaming as compared to Regal’s 1.63. Regal is expected to grow earnings by 10% in the next few years, while PENN is expected to grow at less than half that rate.
Investors should consider that the performance of a stock like Regal is very dependent on the ups and downs of domestic ticket sales so expect volatility. On a positive note, the shares pay a nearly 6% dividend. Neither company meets our investment criteria; thus, we do not recommend buying either stock. If you absolutely must buy one, we prefer Regal. If you decide you have to buy shares of Penn, we recommend waiting a bit. The company has announced plans to separate the company into gaming operations and a separate real estate investment trust. With the gaming business being the revenue driver, we suggest you wait until the spin-off is complete and purchase the shares of Penn National Gaming.
Question:
At the end of last year, my adviser put me in BorgWarner. I’ve made a profit since. This was meant to be a temporary position, but so far I’m pleased with its performance. What can you tell me about the outlook for the year for this stock?
Answer:
BorgWarner, Inc (NYSE: BWA) manufactures automotive parts, namely differentials (rear-ends) and brake components. The company is expected to grow earnings by 15% in the next few years. Even though the price is almost 16 times the company’s earnings, it still seems reasonably priced at a price-to-earnings-to-growth of 1 on forward earnings. With a return on equity of 18.3% and historic ratios in line with current levels, an investor could easily justify holding the stock a bit longer. BorgWarner meets the Henssler criteria for investment based on financial strength and safety.
At Henssler Financial we believe you should Live Ready, which includes understanding the fundamentals of your investment choices. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
