Since Wednesday was PI day (3.14), I thought I might update my PI trade article, says Dave Landry, f...
IQ Trends: 50 Years of Blue Chips
03/28/2016 10:00 am EST
Focused on high quality, dividend stocks, Investment Quality Trends has been one of the popular and respected newsletter in the industry. This week it turns 50, and today we talk with editor Kelley Wright to discuss the service's strategy, as well as some current top blue chip buys.
Steve Halpern: I’m thrilled today to be introducing our listeners to Kelly Wright, editor of Investment Quality Trends. How are you doing today Kelly?
Kelley Wright: I’m well Steve, and you?
Steve Halpern: Very good. Now next week IQ Trends will celebrate its 50th anniversary and I’ve been an avid fan of your service for at least three decades. Can you give our listeners an overview of the newsletter’s history?
Kelley Wright: Well, first off Steven, thank you very much. I appreciate it. That’s very kind of you. The newsletter first was published April 1, 1966.
It was started by my predecessor and mentor, Mrs. Geraldine Weiss. Initially started publishing under the pseudonym G. Weiss so that no one knew that she was a woman.
A matter of fact one of the things she entrusted me with was a framed letter she has that a gentleman wrote to her that said he would never take advice from a woman unless he knew that she got it from a man in the first place. That’s kind of where were in 1966 in the investment advisory business.
Initially the service, Steven, was for the professional community and it kind of stayed that way until 1977 when Gerry made the first of many appearances on Wall Street Week with Louis Rukeyser and that’s when a whole new genre of debutants found out about Investment Quality Trends.
Steve Halpern: She also wrote a book, Dividends Don’t Lie, which has become one of the real classics of the investment world.
Kelley Wright: Yes, in 1988. She wrote it during most of ’87, was published in ’88. Considered by most to be the bible for dividend centric value investing.
Steve Halpern: The underlying strategy that’s been in place for all of these decades is the belief that there are historical dividend yield levels that help identify with levels of under and over valuation. Could you explain this process?
Kelley Wright: Sure. Before we get to the dividend yields, we have a qualitative filter of six criterions, which is just good old-fashioned Graham and Dodd fundamental measures of economic earnings and managerial performance.
Then the stocks that need that meet that criteria we go and get like 25 or 30 years of high, low and close prices on a monthly basis, plot it on a chart and we find the extreme high and low stock prices.
Then we find the cash dividend during each of those periods so that we can compute the dividend yield at each of those extremes. Steven, what we have found is that the stocks meet our criteria when you start looking at these extremes and the highs and lows. There’s symmetry in these dividend yields.
What Gerry found is that this repetitive pattern of a high and low dividend yield around certain point, what that indicated was that’s where that great global body of investors was making valuation judgments about a stock.
If we saw a repetitive low price high yield, what that tells us is — okay the market is making a decision that this is where good value exists for this stock and so that’s how the term undervalue came about.
Then conversely when you see a repetitive pattern of high price and low yield, what we divine from that is well, that body of investors is once again telling us -- gee, there’s no value left here. Each of the stocks that we follow, Steven, they have this repetitive pattern of trading between these two extreme dividend yield points.
Steve Halpern: For your system you focus pretty exclusively on blue-chip stocks. Could you explain why and perhaps touch on some of the most important factors you consider to determine whether or not a stock meets your high quality level?
Kelley Wright: Sure. You know there’s over 15,000 publically-traded stocks and clearly not all of them are worthy of your hard-earned investment dollars and you can’t follow that many stocks. It’s possible. You have to have some method of value identification, quality identification. That’s really what the six criterions represent.
I would say that three of the most important are a consistent pattern of earnings improvement and a consistent pattern of dividend increases, and then 25 years of uninterrupted dividend.
I would say that the thing about those three is that your average business cycle is about four years, so over the course of 12 years you are going to see three full business cycles — peak to trough to peak.
You are going to have some expansion and some contraction, bull market, bear market, etc. Then over the course of 25 years you are going to see soup to nuts, the whole nine yards.
If we can see a consistent pattern, Steve, in dividend increases and earnings improvement, but more importantly that you can maintain and grow a dividend over 25 years and attract, train and retain the next generation of management, basically what that does is that gives us a picture of competence, so that’s really what we want to associate our capital with is just highly competent companies.
Steve Halpern: One of the most popular features in your service is an ongoing list that you call the Timely 10. Could you tell our listeners a little about this feature, and perhaps to give them a better idea of the types of stocks you are talking about and maybe highlight a few that currently earn a spot on this elite list.
Kelley Wright: Sure. The Timely 10. Well, over the years folks that gotten after us - let me put it differently, encouraged us to do a mutual fund or an ETF, which is not something that we really wanted to do because we never really wanted to be into competition with some of our subscribers. Plus we wanted to maintain some of the objectivity.
We started something called the Lucky 13 in 2000 with just 13 stocks we pick at the beginning of the year. Then in 2006 as a complement to that we came up with the Timely 10 and the Timely 10 are just our 10 best ideas out of the current undervalue category that we think have the best total return prospects over the next five years.
Beyond the stuff we’ve already talked about, the qualitative measures and then finding the dividend yield, what I’m looking for us return on invested capital of at least 10% or greater and a free cash flow yield of at least 5% or greater.
Then I’m looking for a priced value which is kind of a proprietary thing, Steven, and I’m not going to put everybody to sleep describing it. It’s a metric that goes from 0.0 to 1.5 and actually the lower the number the better.
Like Fluor Corporation (FLR), the large construction company; that’s on there, 21% return on invested capital, free cash flow yield of 12. In other words, they’re basically printing money there on an internal basis.
Another on there is American Express (AXP), we have a 20% return on invested capital, 8% free cash flow yield. It’s phenomenal.
Those are the type of things that we’re looking for -- very high quality, dividend-paying blue-chip stocks that just represent really phenomenal intrinsic value.
Steve Halpern: Again, our guest is Kelley Wright of IQ Trends. Congratulations on your 50th anniversary and thank you so much for your time today.
Kelley Wright: Thank you Steven.
Kelley Wright will be a featured speaker at the upcoming MoneyShow in Las Vegas, May 9th-12th. He will be discussing dividend investing and the most important lessons learned over 50 years at Investment Quality Trends. To register, click here.
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