IFB170: Suspended Dividends, Industry Focus, eLetter Holdings

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Dave (00:33):

All right, folks Well, welcome to the Investing for Beginners podcast tonight. We have episode 170, Andrew, and I am going to answer some great listener questions we get recently. So I will go ahead and start to read our first question. So I have Andrew; I know you have spoken about having hard rules about selling a company. And one of them is when they cut their dividend during COVID-19, some companies cut their dividend temporarily, but I’ve had a long history of dividend growth. Do you make an exception in this particular circumstance or stick to the rules?

A specific example is Disney’s great company, but they suspended their biannual dividend payout to combat the significant decrease in revenue. While this isn’t a sign, the company’s in trouble. Would you still hold on to such companies in this rare circumstance, respectfully? Matthew, what are your thoughts on that, Andrew?

Andrew (01:25):

Yeah, so I’ve had to deal with this quite personally, in the sense that, you know, you have varying degrees of how companies are dealing with their dividends during this crisis. We’re recording this now in the middle of September. And so you’ve seen a lot of initial fear that happened at the beginning. And then I’ll, it seems to me that there’s more confidence that’s been building since the crisis. You know, you have managements who are starting to provide guidance, feeling more comfortable with reinitiating dividends and things of that nature. So I tried, on the one hand, you want to take a case by case. On the other hand, you also want to understand that if you’re going to make rules hard rules like I did, where, you know, as an example, my, my hard rule is you sell on a D on a dividend cut, complete dividend cut. I also have another hard rule I sell on negative earnings. So those have been the two hard rules so far that I’ve stuck to in my investing life.

Andrew (02:31):

And I feel like it’s helped me make better-investing decisions. So now we have this gray area, right, where you have a company like Disney, or I have another retail company in my portfolio. And they also did a similar thing where they’ve even say that there’s not going to be a dividend. They said they’re going to delay their dividends. So, you know, you can trust that versus something like Southwest airlines. This was a company that I held through the pandemic. And once they announced that they were not paying the dividend, then I sold that company. So as Southwest, they had a situation where they took money from the federal government, the federal government said, okay, you’re not allowed to pay a dividend. You’re not allowed to pay a dividend for the next two years. And so they made that announcement. And with me looking at that situation, that’s several years of no income.

Andrew (03:27):

So that combined with everything else, it made for a pretty easy sell. If you take a company like Disney or the other retail company in my portfolio, I’ve already received a dividend for 2020 for these companies. And for Disney, they’re talking about delaying that dividend until the next, the next to go around. So we will see what happens with 2021. If I’m in a situation where it doesn’t look like there’s going to be any income for 2021, the way I perceive it is that’s going to directly go towards one of my hard and fast rules where I’m not getting an income for that year. Still, as it stands for this year, I’ve already received one dividend, and we’re management. Hasn’t said what they’re going to do, whether it’s going to be one way or the other. And so I’m kind of watching and waiting to see what happens.

Andrew (04:24):

And from there, you kind of make your decision making. And I think taking cues from management through their actions, I’ll dividend payments, I think it’s generally a good policy, and it’s, it makes for an easier way to follow what’s going on with the business and maybe the strength of the business. If you’re trying to make things very simple when it comes to the stock market, the bottom line is a company needs to generate cash flows. They need to be profitable in other to pay dividends. And so sometimes these dividend announcements can be great for shadows of, of, of future problems. And it makes rules like these very useful in helping with that decision making.

Dave (05:09):

I would agree with that. And I like the idea of having these hard and fast rules. However, during this time, I guess I have been a little more on the gray side of things that Andrew is, and we’ve talked about this in the past. And so Some of the things that I guess what I’m looking at the whole cutting of a dividend and cutting bait with a company, I think I try to take it circumstance by circumstance. In the example, Disney, I think personally, in the long run, the company, I think we’ll be okay. And I think the cutting of the dividend is approved and the decision based On what was going on at the time and still how things are kind of playing out for them. Some things are started to recover, but we’re not out of the forest yet. We’re still in the woods on, on the virus, and we don’t know how much longer this really will go, and nobody does. And so I think it will impact the company shortly. Do I think that Disney has a possibility of going bankrupt? I don’t; I think this is going to be a company for a long time. And one of Andrew and I’s heroes Porter, Stansberry, talked lots about Disney and other companies. And one of the things that he said about Disney that struck me on time ago was that this was the company he felt would be around for his grandkids. And I kind of took that to heart.

Dave (06:53):

And I think one of the reasons I bought Disney earlier when the COVID started, and the drop happened in March was because I felt like this was an opportunity to buy a company that I could give to my daughter. And that was kind of my incentive for doing that. And so I guess I have a, a different, a different thought about the company than other people might. And so when I look at Disney, I look at it as a company that when my daughter is 30 years old, this is something that she will own as well. And so for me, I guess whether they pay the dividend or not, I still feel like this is a company that I’m going to continue to own. Now, if I see things that foreshadow them, closing the parks permanently forever kind of thing, that, yeah, we’re going to, we’re going to have to have a different conversation, but I think when an unforeseen incident, like what just happened and what is still happening has affected a great many businesses and industries out there, restaurants, for example, great example.

Dave (08:02):

When I think about those kinds of things, then you have to, I guess I have to think about looking at it from a case by case basis. And I certainly agree with what Andrew was talking about. And I think having those kinds of rules are certainly beneficial. And I think it has certainly helped him a lot, and I don’t disagree with them at all. For me, it just works better to have those kinds of rules in place, but then also look at things on a case by case basis. And it just works for me, but you have to stick with what works best for you. And for me, in circumstance with Disney, I feel like this is something more of a one-off kind of thing, even though it may last longer than, than a year. There is certainly that possibility. But I guess for me, something that I would continue to hold on to because I have a different, I have a different mindset about the company, I guess.

Andrew (09:03):

Yeah. I think like an investor; what you said, Dave is really important. You know you got to pick the Hills that you choose to die on. You know you can pick whether the Hill you’ll die on will be evaluations. Will it be business health, any, any kind of investment philosophy or fundamental or idea or aspect of the business? You know you want to have parts where you’re going to be flexible. You’re going to understand when times have changed, but you also want to be, you know, understand where you’re going to learn from past mistakes, because one tricky mind, one Turkey pattern of, of mind thoughts basically would be, you know, this time is different. As it relates to any crisis that we’ve ever seen, you always have to be careful with that. And I think, you know, depending on your temperament and the way you like to invest, you’re going to lean one way or the other in this discussion or lots of other discussions. And so I think it’s good that we’re kind of hashing it out and using these real, you know, these real relevant examples because these are the type of decisions that investors are looking at making right now. And yes, they will be important as time goes on.

Dave (10:30):

I agree with that. And I love the analogy of dying on a particular Hill. Cause I think that’s very apropos when we’re thinking about some of these situations that we’re in right now, there, there, there are certainly difficult decisions that have to be made and certain industries, as we’ve talked about, have been impacted much harder than others. And so having to have kind of taking it on a case by case basis is, is I think the easier, not easier is maybe the, for me, the better way to go. And but I agree with you, you have to kind of think about how you have things set up and what your goals are and what works for you the best, I guess. All right. So let’s move on to the next question. So I have hi Andrew. I hope you’re well. So I’ve been following you and working with the V V PI since January, investing a thousand dollars per month split across 12 companies within the below industries, oil, and gas, mechanical engineering, airlines, life insurance, property, and casualty insurance raw materials, technology pharma he has two questions. Where do you find ideas to do industry slash companies to invest in? And I want to, I want my portfolio to be diverse, but struggling to find different Areas of investment with strong companies. So, Andrew, what are your thoughts on is a great question.

Andrew (12:00):

Yeah, it is a great question. I’ve had many recent thoughts about this, you know, we mentioned last week about your new newsletter and how I’m doing an industry analysis of the S and P 500 in the pages within. So I’ve found some very interesting things as I’ve done that research as an example, I think we all know technology has made up over 25% of the S and P 500 as it stands today. In previous years, it has not been that much, even as much as three, four, or five years ago, it was down to like a 16% weighting. So technology has taken a huge chunk of the S and P 500. Some of it, some of it has been reasonable and supported by fundamentals. Some of it, maybe not.

Andrew (12:50):

Some other things I found interesting, you know, big components like healthcare, healthcare is over 10%, and some sectors are, you would think they would be bigger and they’re not. So energy was down the 2% level, and real estate utilities and basic materials were all below 5% each. I think you tell these with something like less than a percent. I can’t remember the specifics in the newsletter, but, you know, so you have these huge, huge variations in how sectors are currently weighted in the S and P 500. And whether we like it or not, you know, how you position your portfolio in which stocks you pick, you’re going to be making, I don’t want to say a bet, but you’re going to be making moves that are influenced by how these, how these sectors change and how the way things change over time.

Andrew (13:50):

So I’ve been thinking about it a lot and some ideas of what, of how you can, how you can deal with it. At first, I will say if you find an interesting as if you find an industry that is interesting to you, just dive in. I think, you know, we’ve talked about in the past about circle of competence and how important that is when it comes to looking at stocks. And that is no more true than if you’re interested in adding an industry. So what I will say is if you dive into an industry, what I like to do is I like to take who I perceive as the top dog of that industry. And I like to start there and then kind of go down the list and make a list of all of the company’s competitors. And so if you’re struggling to do that, I found that the smaller competitors tend to do a better job of describing the industry better than the big ones, because I don’t know if it’s an ego thing or what, but the big ones feel like they don’t need to talk about the competition.

Andrew (14:56):

The little ones generally are more descriptive about the competition. So I like to kind of go into an annual report and list that out. And then, from there, you try to put the pieces together on some of the finer details. So, as an example, if we’re looking at technology, if we’re looking at an industry like servers, you know, maybe a company does some computer servers, and they have sales in there. Maybe some of it is network equipment like routers and switches, and maybe some of it is the software services that they provide that in addition to the hardware. So you’re going to want to try to, you know, it doesn’t have to be super complicated, but try to figure out a reasonable proportion, of where each of those revenues and profits is coming from. And then you would compare that with other competitors in the industry.

Andrew (15:52):

And so, you know, it can be more complicated or simple, depending on what industry you’re looking at. Tech maybe is a bad example because it’s so, and they’re woven in the inner weaving, and competitors are jumping in and out of various markets. And so that one’s a bit crazy. Still, some of the more traditional industries might see easier breakdowns where there are more natural market players and positions that you can easily identify. From there, I think it’s important to try to get a sense of whether the valuations of this industry, because, you know, companies will tend to trade in similar valuations as the companies in their industry. So if I’m looking at an industry like biotech, and if all of the biotech stocks, or at like 150 PE, for example, well, I don’t care to spend much time evaluating the biotech industry. Suppose I know that every stock in there is overvalued. So, you know, you want to make these industry maps. Still, you also want to check valuations and make sure not every company needs to have the evaluations you want to see, but are there enough companies in there where it appears like they have good valuations and then you can dig into it deeper? So that’s kind of what I think of, and that’s how I would look at approaching a new industry. Dave, what about you?

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Dave (17:28):

Those are all fantastic ideas. And I agree a hundred percent with all those. And I’ve taken some of those ideas because Andrew and I have talked about this a lot over the last six to eight months, and I have taken some of those ideas and kind of expanded on those as well. And I think the idea of creating

Dave (17:50):

A, an industry map is a brilliant idea and using the other relative related companies, as I guess, foundations, to do more research. And I think that I have thought about a lot recently too, is looking at, trying to look at our product and thinking backward about how the product came to be. And I’ll give you an example. Let’s say that I’m looking at, I’m not, I’m not doing this, but I’ll talk from an area that of something that I have some expertise in. So if I think about the wine industry, if I were going to invest in the wine industry, if maybe I wasn’t going to start at the wineries and start with, maybe I would try to work backward from the wineries look at maybe bottling companies. So the companies that make the glass that they put the wine in, and if that doesn’t, if that weren’t appealing, then maybe I would look at the grape growers themselves.

Dave (18:52):

And if that weren’t appealing, then maybe I would look at the distributors, the people that sell the wine to the liquor stores, and the restaurants that we buy them from. So there would be not just the actual product itself, but then there’ll be other related industry industries. And you can, you can do this with, with anything. Andrew was talking about the tech world, and there is there are so many different layers to the technology, part of it that you can think of to try to help spur other opportunities and other ideas. And you think about something like the restaurant business. So you don’t just have the restaurant business, but you also have all the things that feed the restaurant, business, the products, and the services and the equipment that they use to allow them to serve people, make them food and serve them.

Dave (19:41):

You are so thinking about restaurants. So you think about the food that they buy. So thinking about food distributors or production companies or meat producers, you could also think about companies like small wares. So the people that make things like spoons and forks and plates and glasses, and then you also have the equipment. So you have all the ovens and the stoves and the fryers and the coolers and the freezers to tables, the chairs, all those things that, that restaurants have to buy to allow people to sit in them and to store and serve the food. So all those different things are different ways that you can think about a particular industry. And if you’re having trouble finding something that may appeal to you, there may be something backward from those chains. Not necessarily like the Olive Garden chain, but just following the path of where the product came from can sometimes spur other ideas.

Dave (20:42):

Let’s say that you’re interested in real estate, and you want to do that. Still, maybe you don’t have the money to go out and physically buy an apartment complex or an office building, but then maybe there are other opportunities to get into something like the people that finance, all those people. So looking at banks or credit unions as opportunities to invest in, or thinking about something like REITs or which are real estate investment trusts, which people use to invest in real estate because they don’t have to spend the big bucks, but then it gives them opportunities to explore different aspects of real estate in that regard. Or you can look at realtors, the people that sell the homes to people, there’s, there are lots of different avenues. So I think when you’re thinking about the great, the great list that is listed here, you think about oil and gas.

Dave (21:36):

There are so many different aspects that you could branch out from the same thing with life insurance and property-casualty. There are different specialties in each of those. So I think if you work, if you work off of an industry list like Andrew was suggesting, that will spur other opportunities for you to think about. And let’s say that you’re interested in life insurance companies, and you start down a path of looking at somebody like Prudential life, and you think, Oh, you know, they’re okay. Still, I’m not sure that this is going to be a great fit, because maybe you don’t like the evaluation when you start to discover other companies that are competitive of theirs, you may find valuations more favorable from those other companies. So there are lots of opportunities out there. It’s just a matter of, kind of, as Peter Lynch talks about uncovering the rocks. And I think going back to what Andrew said, starting with that, that industry map will help you branch out from there. And I think that’s a great way to start trying to kind of uncover those rocks as you will.

Andrew (22:47):

Yeah. I love that Peter Lynch quote, something about w why was he successful? He turned over so many rocks, and, you know, you could get inspiration from anywhere. I think I was interested in the bottling industry. You mentioned Dave, and it was from just kind of paying attention to a label and just offhand seeing the brand and looking it up on Google. And then, you know, you just never know where these simple things that you interact with every day or a simple conversation or something you hear on TV that could disregard any sort of great investment idea. So, you know, don’t be afraid to get on the Google machine and try to find out about it. One free tool that we’ve mentioned before that I think would be beneficial is fin biz.com. That’s F I N V izea.com. And from there, you can get all sorts of lists of stocks that you can soar in any which way that you would like.

Andrew (23:47):

And they have major sectors in there. And that’s also within those major sectors, like technology, consumer cyclical, consumer defensive, they also have industries that are, you know, inside of each of those sectors. And so you can flip through those, and you can see the different stocks that are categorized by Finn is, you know, there’s no official categorization, as far as the sec, doesn’t say that a company has to be this, you know, but that’s one way also to do it and keep an open I think. And you’ll find a lot of cool ideas.

Dave (24:27):

Yeah. That’s great advice. I love the suggestion about Finviz.com. That’s a great tool. All right, let’s move on to the next question. Hi, Andrew. I enjoy your publications and your podcast. I was just wondering why you haven’t added to your BEN position, and I’d love to hear your thoughts as to why it’s a hold, but not a buy at these levels. Thanks for your time, Dominic.

Andrew (24:52):

Yeah. Another good question. To give backdrop, Ben has been one of those positions I recommended in the leather that has not been done as well. Not nearly as well as a lot of the other ones. And so compared to where I purchased or and recommended it, it is currently down. So, in general, if a stock goes lower in price, you would assume that it would be an even better purchase as it stands for my portfolio now. And, you know, I’m glad we brought up the industry weightings because when I bought the company, it was, it was quite a heavy weighting. It remains a heavy waiting, and it’s a healthy waiting for the industry it’s in. So this is a financial services company. They work with investment management. They collect fees for that and a variety of solutions for investors through retirement and other things.

Andrew (25:52):

As it stands for my portfolio, it’s already a, it’s already a strong position, and it’s not something I’m looking to add more exposure to. Secondly, I made a mistake a couple of years ago, maybe even a year ago, of recommending too many stocks simultaneously. So let me explain. So as, as you go through and you buy different stocks, right, they will change in price. And so if I’m recommending a stock and it’s at $25 as an example, and if it goes up to $30 and it might seem like it’s still a decent valuation, and if, if a subscriber makes a purchase, say the stock goes back down to 27, I’m still up on the position. So I’m looking at it from a different vantage point of somebody who’s, who’s down on the position. And it’s, it’s, it’s hard to, it’s a very simplified example, but as time goes on. Different portfolio weightings kind of get into the mix, it’s hard to, to really, to kind of like replicate, you know, I, I wanna, I want the subscribers to my leather to have as close of performance to my portfolio as I’m having.

Andrew (27:21):

So with the time gap, you know, when people sign up at different times, that makes it difficult. And so to try to mitigate that, I’ve, I’ve reduced from simply giving a big list of stocks that might’ve been great recommendations for me and done well for me at a certain point in time. And I’ve tried to just narrow it down to here’s the pick for the month. And if you’re dying to have a second pick, as this one might still be strong, but I’m really, I’m comparing each pick to everything else in the portfolio. And I’m constantly doing this for every, every single month, every single pick I’m looking at. So I accompany like Ben could be a strong pick, but if it’s not as strong as the one I’m currently recommending, or even a secondary one I’m recommending. I’m not going to recommend it anymore because I think an investor would get closer results to what I’m getting and have a better chance of success by doing the ones where I believe these ideas are the strongest and still are this strong on what price it is.

Andrew (28:37):

So, you know, in the case of Ben, they’ve had trouble since I’ve recommended it, revenue had trended down were in the past, when I recommended it, it was trending in the right direction. It was going up. And so they’ve had some, some struggles. They’ve also just gone through a merger so that things could pick up for them again. So it’s a situation where I don’t see them doing anything completely offensive to me where I’m going to completely just cut bait with them and say, you know, this is it we’re done. I don’t want to see you anymore. But at the same time, there’s a lot of other good opportunities out there now that might not necessarily be as good as Ben because Ben has had revenue decline lately. So though it’s a cheaper valuation. The business is not as strong as it seemed when, when first purchased.

Andrew (29:37):

And you combine that with all the other factors and the, and that’s why you’ll see this with this stock. And you also see it with a lot of the other stocks in the portfolio, because I’ve learned that it’s better than just really present one or two of my best ideas at any given time.

Dave (29:54):

All right, folks. Well, that is going to wrap up our conversation for this evening. I wanted to thank everybody for sending those great questions to us, keeping them coming, guys. This was a lot of fun. We enjoy answering these on the air for you guys. So without any further ado, I’m going to go ahead and sign this off. You guys go out there and invest with a margin of safety emphasis on safety. Have a great week. We’ll see y’all next week.

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