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Banks, Drugs, and Splits
01/27/2014 10:00 am EST
Neil Macneale's stock split methodology will soon become the basis for a NYSE index; here, he explains this development, along with some current buying ideas among stocks that have announced splits.
Steve Halpern: We're here today with Neil Macneale, editor of the 2-for-1 Stock Split Newsletter. How are you doing, Neil?
Neil Macneale: I'm great. How are you, Steve?
Steve Halpern: Very good. For listeners not familiar with your newsletter, let's begin by pointing out that you only buy stocks that have previously announced a 2-for-1 stock split. Could you briefly explain the reasoning behind this approach?
Neil Macneale: Well, it was found, through some academic studies back in the 1990s, that stocks that announced splits tend to outperform the market for about three years. That's, of course, on average. Not every company does, but if you create a portfolio only of splits, the odds are that you will be beating the market over the long haul.
Steve Halpern: Now, equally important to your investing strategy, you only buy one stock a month for your model portfolio, and then plan on holding that stock for at least a year. Could you explain how that overall process works?
Neil Macneale: Well, actually, we intend to hold the stock for 30 months. There are 30 stocks in the portfolio and we create a ladder, essentially, by buying a new stock each month and selling off the one that has been on the ladder the longest.
That way, the buy and sell disciplines are very mechanical. There is no emotion involved, and it doesn't really matter whether the market is going up or down, it's just a 30 stock portfolio that moves through time by adding and subtracting one position each month.
Steve Halpern: Now, using this strategy, your portfolio returned 33% last year. How does that compare to the long-term performance of what somebody could expect from a portfolio such as this?
Neil Macneale: Well, it's better than average. The annualized return for the portfolio, since its inception in 1996, has been a little over 11% a year. Of course, we can't expect the 33% to maintain, but that's okay, I'll take it. It was about 3% or 4% better than the market, so we did beat the market, which is our ultimate goal.
Steve Halpern: Now, we have a chance to break some very exciting news here today in this interview. The New York Stock Exchange will now be calculating and publishing an index based on your 2-for-1 portfolio methodology. Could you tell listeners a little about this new development.
Neil Macneale: Well, it's very exciting. We're happy that the New York Stock Exchange has recognized the work that we've been doing, and it's been my dream, really, for quite a while, that a mutual fund or an ETF could be created around the 2-for-1 strategy, and we're a lot closer to that by having a recognized index being published and calculated by the New York Stock Exchange.
Now, I have to say that we still need a sponsor for a fund. I'm the index provider, which is the neutral third party, essentially, so it's still a work in progress. Can't really get into the negotiations that are going on, but hopefully, within a year or so, sometime this year, you will learn of a new fund that's being created.
Steve Halpern: Well, meanwhile, for individual investors who are following your strategy, the latest stock that was added to your model portfolio was the Canadian bank, Toronto-Dominion (TD). Could you tell us why you chose that?
Neil Macneale: There were seven splits in December. I run all the numbers through a formula and Toronto-Dominion came to the top of the pile this month. It's a great bank. It's the second largest bank in Canada.
The Canadian banks are generally more conservative than the US banks, so it faired very well through the big crash a few years back.
The book value has been growing at about 10% a year for the last five years. It's really a well-run bank and, like Willie Sutton said, why does he rob banks? Well, he robs banks, "because that's where the money is.”
Steve Halpern: Now, in your newsletter, you also mention that there was another stock that was a close second choice for your portfolio. That was Novo Nordisk. Could you tell us a little about that?
Neil Macneale: Well, yes. Novo Nordisk (NVO) is a big pharmaceutical, Danish company. Its specialty is diabetes care, but it also has several biopharmaceuticals that it's been developing. In this case, the Novo Nordisk numbers were excellent, really. It has an impressive growth record.
I think the only difference between Toronto-Dominion and Novo Nordisk, in terms of our choice here, was, I just tend to go with the value stocks over the growth stocks if all other factors are equal.
Novo Nordisk came in number two, but it's still an excellent company, and if someone were building a portfolio from scratch, and hadn't reached 30 yet, I would say go ahead and add this one in as well.
Steve Halpern: Well, again, congratulations on the New York Stock Exchange Index for your 2-for-1 portfolio and thank you for taking the time to join us today.
Neil Macneale: Well, you're quite welcome, Steve. Thank you.
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