High Yield With Safety?
A Successful ETF System
10 Stocks to Hold Forever - Part Eight
The following email arrived more than two weeks ago.
"I am a senior in high school, from Westchester, New York, and
I have been a Cabot Wealth Advisory reader since 7th grade. Your
emails are the only consistent source I use for market advice and
analysis and sometimes some stocks. Unfortunately, I am not able
to pay to subscribe, since I cannot afford it with my current
portfolio value. Investing is my favorite academic hobby, and
since 7th grade I have managed to collect an entire shelf of
books on investing, plus probably hundreds of hours screening for
stocks. I wrote my college essay on investing, and before I begin
my homework each night, I always go through my watch list,
highlights in my portfolio, and economic reports for 20 minutes.
I currently have around 40% of my portfolio in cash. This is due
to multiple reasons: I am a little bearish right now on the
market and think speculation is too high and I need liquidity and
I am scared to invest in a stock and be forced to sell if I need
the money. With my excess cash, I wish I could invest it, but
with no yields thanks to the fed, I have been on a search for the
. I currently own EEM, JNK, QQQ, and PUW; I found JNK and PUW
screening, EEM on the news, and QQQ randomly (trying to look for
safety). However, I don't know anything about screening for ETFs
and ETF selection. I have found it extremely difficult to find a
safe ETF with a high yield that I could invest in. Would that
ever be a topic you would consider in your letter?
Thanks so much,
I did not answer J.B. directly. I found his letter interesting
enough to be answered here instead, so without further
First, congratulations on getting an early start! Your youth
is your greatest asset, in that the magic of compound growth can
be hugely beneficial to your portfolio in the decades to come.
Also, it's easier to learn successful investing practices when
you're young, before you develop bad habits.
Second, you say that you "think speculation is too high." I
respectfully disagree, and backing me up are the market timing
indicators used by Cabot Market Letter. Of course, these
indicators are occasionally wrong, but in the long run they add
value. Now, if you've got a proven market timing system that
you've been following, and that system is your reason for
caution, by all means stick with it. But if your reason is simply
what you read online-mainly that the market is already up a lot
this year, and is going to fall apart-the fact is that you have
no system. And if that is the case, I urge you to find one, like
one of Cabot's.
Third, your other reasons for holding cash may be valid; it's
always wise to save enough for a rainy day. If 40% cash seems
prudent for your needs, so be it. But it's unclear to me whether
the ETFs you mention are included in that cash portion or not.
Those are decidedly not cash, and here's my opinion on them.
EEM (iShares Emerging Market ETF yielding 1.7%) just fell out
of a consolidation zone, and I see little reason to hold
JNK (Barclay's High-Yield Bond ETF yielding 6.7%) is okay if
you really need the income. But you don't, so I recommend stocks
with far more upside potential instead.
QQQ (PowerShares Nasdaq ETF, with no yield) is okay, mainly
because we're in a bull market.
PUW (PowerShares WilderHill Progressive Energy ETF yielding
0.7%) is good now, but I'd use technical tools to sell when it
Fourth, it's interesting that you credit/blame the Fed for
today's low yields. I think it's more appropriate to credit the
market itself, namely the pervasive appetite for safety that has
driven money from stocks to bonds since the market top in 2000,
putting an exclamation point on a 32-year downtrend in interest
rates. This is a time you will remember decades from now-and
perhaps use as a benchmark-just as I look back on the 1970s, when
rampant inflation was the biggest worry of investors.
Fifth, and biggest of all, I think you're making a mistake in
looking for high yields from ETFs today, particularly because
it's impossible to get high yields safely.
What you should really be looking for, particularly because
you have decades of investing ahead, is great growth stocks that
can multiply your investment many times using the magic of
compound growth, while you avoid paying taxes until you sell
them. As a young person, you're in the perfect position to
discover fast-growing companies that are providing something
revolutionary and that have the potential to multiply
Finally, to get to your question about screening ETFs, we have
no expertise in that. In favorable markets I like simple
leveraged ETFs like SSO (ProShares Ultra S&P 500). And in
unfavorable markets, I like cash.
If you're set on using ETFs, Cabot ETF Investing System has a
great market-beating record, using a system of sector selection
and market timing. It's simple, and it works. But for someone
with your appetite for research, it wouldn't be intellectually
What I suggest is trying a subscription to our flagship
advisory, Cabot Market Letter, which combines stock selection,
market timing and educational features. In fact, as thanks for a
stimulating letter, I've signed you up for a free year's
subscription to get started. I wish you many decades of
In recent weeks, I've been writing a series called "
Ten Stocks to Hold Forever
," featuring 10 stocks, selected by Cabot editors, that you might
choose to, well, "hold forever."
The eighth stock is
Seaspan Corporation (
, which was selected by Paul Goodwin, editor of Cabot China &
Emerging Markets Report.
Seaspan is one of the world's leading owners of
containerships. The stock has appeared numerous times in various
Cabot advisories, because when shipping stocks are strong, it
rises to the top. Paul likes it for the long term (forever)
because management is top-notch, because the industry has very
high barriers to entry, and because there's a very fat dividend
yield. Here's what he wrote back in May of last year, just before
he added it to the portfolio of Cabot China & Emerging
"When a ship is heading in the right direction, the captain
will sometimes say to the helmsman, "Steady as she goes." Seaspan
is headed in the right direction.
"This Hong Kong-based company is a major owner/operator of
containerships, the primary movers of non-bulk goods in
international trade. Seaspan has a fleet of 69 ships, most of
which are under long-term time charter agreements of 10 or 12
years. When Seaspan has a ship built, it generally has a
long-term client for the ship's hauling services long before it
ever hits the water; the firm doesn't engage in so-called
"Seaspan was founded by Gerry Wang, a Canadian consultant who
was working for the Chinese national shipping line in the late
1990s. He foresaw the swelling of demand that China's expanding
export economy would produce, and when the Chinese government
refused to allocate the capital necessary to build a
containership fleet that was up to the task, he put together the
financing and started Seaspan. Wang is CEO today.
"Seaspan essentially rents the space on its ships, as it
retains ownership and provides the ships' crews and regularly
scheduled maintenance. This business model avoids any risk from
leaseholders that might be tempted to skimp on upkeep.
"Containerships are classed by their cargo capacity, and that
capacity is expressed in terms of the number of 20-foot shipping
containers it can carry. Seaspan's smaller ships can accommodate
2,500 TEU (twenty-foot equivalent units) and are leased for
$16,800 per day, while larger ones (up to 13,500 TEU) command
rates of $55,000 per day. These rates vary, including automatic
rate increases built into contracts, and you can get a bargain on
an older 4,800 TEU ship for just $10,000 per day. Or you could,
if they weren't already under contract.
"The transparency of Seaspan's fleet, rate structure and
contract lengths takes a lot of guesswork out of the job of
analyzing the company's prospects. In fact, while most
competitors' fortunes wax and wane primarily on the basis of
trends in global shipping that affect demand, Seaspan's long-term
contracts with high-quality clientele (it does business with only
eight shipping companies, and none have reneged on a contract
even during 2008) give it tremendous clarity on future cash
"Right now, the company's business is perfectly on track …
"SSW is likely undervalued at this point, as the Shanghai
Container Freight Index spiked higher by 20% in March. Further,
the percentage of idle containerships in the global fleet fell
from 5.8% in March to 3.7% in April. The stock's P/E ratio of
just seven times earnings is pretty cheap for a stock that pays a
That dividend is now $0.25 per quarter, making a yield of
5.1%. And Seaspan's fleet now consists of 89 containerships,
including 16 newbuild containerships on order scheduled for
delivery by the end of 2015. Furthermore, Seaspan may order as
many as 15 more ships over the next year, locking in construction
prices that are the lowest they've been in four years. Which
means if the years ahead bring increased global trade, and
shipping rates rise as management expects, Seaspan's earnings
could go through the roof!
In short, both the long-term and short-term stories look good
However, this may not be the best time to buy it. While I've
been featuring these 10 stocks in alphabetical order, SSW has
advanced from 18 to 20 so far this year (and from 17 when Paul
recommended it), which means it's not quite the bargain it was.
Furthermore, in recent weeks it's been hitting resistance that
stopped the stock in both March 2012 and March 2011. So there's a
real risk it will be stopped here again.
On the other hand, a high-volume breakout above that
resistance level could see the start of a great new uptrend. My
suggestion is that you take a no-risk trial subscription to Cabot
China & Emerging Markets Report here, so you can keep current
on all Paul's thoughts on the stock, while learning about other
great international opportunities.
Yours in pursuit of wisdom and wealth,
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Hold Forever, sign up free for the
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