Very quiet session today, but notable in that modest good news on China trade did not simulate the m...
2 Overlooked Small Caps with Big Yields
01/05/2012 7:00 am EST
Kate Stalter: I’m speaking today with Paul Maher of Santa Fe Wealth Advisors.
Paul, you and I spoke back in July, a little bit before the big meltdown that we had in the indices earlier this year. You are a market technician, as part of your advisory services. Tell us a little bit about some of the indicators that you’re looking at these days, that maybe our listeners should be paying attention to.
Paul Maher: You’ve got to remember that these are kind of very deep drilldowns in many cases, and at the very least they are proprietary charts that’s part of a subscription that I use. Clients can review Dorsey Wright if they have an interest, but what I’m going to refer to is basically the results of the kinds of charts that I look at, because that will give a better reflection to anyone who wants to figure out what’s going on out there.
In a broad brushstroke, I review not only the ten basic sectors of the domestic economy—and I’m going to tell you that in my investing I do very much emphasize the domestic equity positions. I do diversify ever so slightly here and there into international positions, but our economy is actually in expansion.
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The third quarter, and very likely the fourth quarter, is on the books as a larger GDP than 2007, so it has become the all-time-high GDP, the individual quarter in record keeping. We’re looking at an overall gross domestic product that is healthy.
A piece of that, a healthy piece of that, is the fact that many of our domestically based companies are multinationals, so they are acquiring a very well managed exposure to the greater global environment. That has its good and its bad points.
But the other piece that is of great interest, and most people know this, is that corporate earnings have hit two all-time high quarters. In fact, the third-quarter results were the highest ever—over $27 for the S&P 500, earnings-per-share gross. That piece tells us that we have healthy environment for corporate investing.
I am emphasizing the domestic environment, and although I am diversifying across sectors, I’m trying to be very specific. I don’t want to be overly diversified in this environment, so I’ve become a stock picker, using technical analysis to determine the strength not only of the stock position in its own historical performance, but also relative to the S&P equal weighted index. I want to know that a position is stronger than that average of the 500 companies on an equal-weighted basis.
Also, using the subsectors within the ten basic sectors in our domestic economy, I want to know that the stocks I’m choosing are stronger than their peer group. I’m aiming more toward overweighting a portfolio based on sector performance, but choosing very strong stocks across basically all ten sectors, and then overweighting in a manner that reflects that certain sectors are just stronger than other sectors when compared to each other.
That’s how I’m constructing portfolios with the emphasis very clearly on income production. I’m looking for dividends; I’m looking for royalties; I’m looking for limited partnership distributions to create an overall yield so that I can get growth, even in a perfectly sideways market.
Every time I’ve been asked how I feel about the market, I have said, without fail, that I just totally expect them to be sideways. I’m not sure whether you had a chance to look, but the S&P closed 0.03% below last year, so we closed 2010 at 1,257.64, the S&P closed 2011 at 1,257.61.
Kate Stalter: That’s pretty flat.
Paul Maher: That’s flat, so the only growth that I can be certain of is some form of income, so that I can get a total return again in a sideways market.
Kate Stalter: I wanted to come back to what you were talking about regarding the sector weightings. Tell us a little bit about some of these sectors where you might be overweight at this moment.
Paul Maher: The two that I’m most overweight are energy and probably utilities. Utilities, health care, and consumer staples are the defensive positions. Health care doesn’t pay good dividends; it’s very hard to find good dividends in health care.
The utilities, which turned out to be the best sector in the economy this year, do pay very, very good dividends and are actually gaining on their P/E side. They are higher than they’ve been in a long time, which I think is kind of inconsequential because I really want the income.
Consumer staples...we can always look to consumer staples for that defensive posture, but inside of consumer staples are some very interesting areas. Business products, an area that is going to reflect very favorably inside of such a good, profitable, healthy corporate structure that we have.
I’ve been looking for those, probably more small- and mid-cap positions that actually have dividends or partnership distributions, and exist in an area where we can count on them in a healthy environment.
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Kate Stalter: Tell us about a few of these equities that you are putting your clients into, Paul.
Paul Maher: I want to disclose that I am long these positions on behalf of my clients, and the other is I’m not making a recommendation to anybody else.
I have a lot of favor in a position called Stonemar Partners (STON). It is a recession-proof industry. It is in the mortuary and cemetery business. They are again a limited partnership.
They have an awkward relationship with the IRS. The rules for the IRS make their fundamentals—if you’re not looking them as a partnership, limited partnership with a distribution characteristic, it’s hard to read that this company can afford to pay its dividend.
But when you do the proper research, you find out that this position has a great deal of assets that can’t get shown, because they have to wait at least a year for a certain percentage of them to be allowed on the books, even though they’ve already collected the money. And then they have to wait until the product is used when the client dies, or when they make up a selection for a specific whatever.
Kate Stalter: Interesting business model.
Paul Maher: Yeah, it very much is. The nature of their business allows them to leverage against assets that can’t be shown on their 10Ks and their 10Qs, because IRS rules don’t allow it.
They are growing so fast that it looks like they’re outreaching sort of their logistical line. Their ability to supply their growth is accomplished on the debt side, but it’s very carefully collateralized against assets that aren’t allowed yet to be shown as assets.
A limited partnership that’s not growing...this process would catch up with itself, and it would look OK on the books. But when a company like this particular company, Stonemar, grows as fast as it does, it’s harder to see it. It’s a bit underappreciated.
It goes through a little more volatility than I tend to like, but I’m there for my clients to earn a distribution, and that’s what we’re doing. That’s a really interesting one, if you’ll forgive me for saying so.
Kate Stalter: It is. Do you have another maybe Paul that you’re investing in for your clients that you can tell us about today?
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B&G Foods has a nonperishable food business. They have some of the names that we’re kind of used to—Cream of Wheat is an example of one of their products. They recently bought some additional assets that gave them a new direction in their shelf-space distribution, and their stock has just gone very, very well.
It’s not a high-yield, but it does have a yield, it does have a dividend, and it has grown 30%+ this year, so it’s been a very good position for this strategy of holding. Those are some of my favorites inside of consumer staples.
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