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High Yield With Safety?
By: Cabot Heritage Corporation
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 best ETFs . 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 preamble:
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 it.
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 weakens.
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 manyfold.
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 stimulating.
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 successful investing.
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 ( SSW ) , 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 Markets Report.
"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 "speculative" building.
"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 flows.
"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 robust dividend."
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 here.
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,
Editor of Cabot Stock of the Month
To follow future recommendations of the Stocks to Hold Forever, sign up free for the Cabot Wealth Advisory here.