Saturday, August 15, 2009

Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009

1. Barron's Recommendation on Coca Cola (KO) (owned): In early March I bought Coca Cola at $38.72 Buy of KO at 38.72 , which seemed like at good entry point for a long term hold. At that price, the current dividend yield is around 4.23%. The data on KO's dividends provided in the Value Line report shows dividend increases in every year since 1993, which is when the VL data starts. The annual dividend doubled in the period starting in 1993 and ending in 2000, moving from $.34 to $.68. The dividend doubled again by 2007 when it reached $1.36. The percentage of dividends to net profits generally hovers near 50% which indicates to me at least that the dividend payment increases are being supported by a rise in earnings. This kind of data is important to me. If the past is prologue, then a KO shareholder could reasonably expect, though there is no guarantee as shown by what happened to the GE dividend, that the dividend rate will by $2.72 in 2014. While more doubt undoubtedly exists the further one goes out into the future, a continuation of the past pattern would result in $5.44 in 2021 and $10.88 in 2028. Since my cost is constant, then my yield would jump to about 7% in 2014, 14.05% in 2021, and 28% in 2028, assuming of course that KO continues to raise the dividend so that it doubles every seven years. This kind of data will now dictate my strategy. I will stay with the shares as long as KO continues to raise its dividend. If the shares enter into a parabolic rise similar to what happened between 1994 to 1998, when the stock rose from a split adjusted 20 to 86, then harvesting the profit from that kind of rise would be more valuable than the dividend stream. ( I also booked some profits on a higher cost buy of KO shares and this gives me in my mind's eye more leeway to hold what I bought at $38.72. Sold 1/2 KO at 44.2: Risk Reduction/BOUGHT 30 WL=Lottery Ticket)

After the price of KO shares fell from that unsustainable parabolic rise, unjustifiable by reasonably anticipated earnings growth, the trend over the past 11 years has been movement within a range of 40 to 60. That is another reason why I bought at $38. Some investors have probably been buying in the low 40s and selling when the price comes close to 50 or maybe a few points higher, a trade that would have worked most of the time for the past decade. That kind of movement is not enough to cause me to sell the shares bought at $38.72 because of the future value of the dividend stream at my cost basis. A move now to $80 to $100 within four years would likely produce a sell, however. I do not anticipate that happening.

I would agree with the Barron's writer that Coca Cola can not be viewed as a North American story. The future is dependent on how well KO can grow in the emerging nations, particularly in China, India and South America, where the volume gains have been robust. I would therefore agree with the point made by Joseph Tatusko in the Barron's article that the KO stock will be "range-bound" for years without continuous growth in these emerging markets. The stock is also selling now at around 15 times the consensus forecast of $3.3 (KO) which is a historically low P/E for Coke shares.

2. Bary's Column Recommending Nestle, PG, Berkshire, Microsoft, AT & T, Microsoft, Pepsico & Novartis and My trades in Those Stocks in 2009:

Nestle is trading on the pink sheets in the U.S. When I bought some shares earlier in the year, I had trouble receiving a decent quote from my broker. I then checked the quotes available from the pink sheets electronic OTC Markets: Pink Sheets Nestle S.A. - NSRGY I then saw a narrow bid/ask spread, and there was a lot of volume. Consequently, I used market orders for both of my trades. After receiving the annual dividend and a quick pop, I sold my shares at $38.28 having bought those shares a few weeks earlier at $31.28 and $33.38 (item # 4: AFTERNOON COMMENTS: 6/23/09/ SOLD NESTLE & BOUGHT BRKB BOUGHT Kraft & NESTLE Bought Nestle Late Today I would consider buying those shares back at less than $36. I would agree with the assessment that Nestle is the most balanced and strongest of the European food companies. Thirty of Nestle's brands generate more than a billion Swiss Francs in sales. I considered buying shares in Danone (DANOY: Pink Sheets Danone - DANOY), but preferred Nestle. Bary points out that the valuation is reasonable for Nestle at 14 times this year's estimated earnings of $2.76. It was much more reasonable at the prices I paid back in March. Another consideration in Nestle's favor is its large equity stakes in L'Oreal and Alcon (ACL). Revenues fell 1.5% in the last quarter (including a .7% decline from the netting of divestitures and acquisitions), and rose 3.5% only on a constant currency basis (organic growth). Analysts had been forecasting organic growth in the quarter of 3.9%. Most of that growth was achieved by price increases, rather than growth in volume which chipped in only .5%. Bottled water sales fell 2.9% on an organic basis as consumers opted for tap water. Nestlé I would agree with a comment that I read earlier in the week that these earnings compare unfavorably to the results of Unilever, which I still own and intend to keep. Nestle's dividend yield is low, and their is some currency for a U.S. investor buying shares in U.S. dollars when Nestle reports in Swiss Francs.

Proctor & Gamble was bought in April at $47.59 and sold at $56.89. I viewed the near and intermediate term sales and earning picture for PG to be underwhelming (Item # 5: Earnings fromPG). I am in no hurry to buy those shares back. I previously mentioned that I would consider buying the shares back at below $50, and my mind has not changed on that target for re-entry. It is hard to see PG gaining much upward traction with its own forecasts for earnings and sales. Sales did decline 11% last quarter, which included a 9% negative impact from currency fluctuations. Earnings declined 18%. Maybe earnings for fiscal 2010 will be flat at$3.75, or maybe not. The current negative sales and earnings trend is just too uninspiring to generate much buying interest, and I am satisfied with my decision to sell prior to the earnings release.

Novartis and Berkshire, both mentioned by Bary, are two stocks that I recently sold, and regret doing it as I previously mentioned in an earlier post. ING AND AEGON EARNINGS/Bearish Opinion of Barron's Technical Analyst/More Positive News Today I still view NVS as being the best large pharmaceutical company. Unfortunately, I sold at $41.46 shares that I had just bought at $36.9, when a $50 price would be have been a more reasonable target. Bought BRK-B/Sold NVS/Masters of Disaster-Talented? Now, I will just wait and see what happens. Most likely, I will buy those shares back near $40 but will not be buying any near the closing price from last Friday of $45. I would agree with Bary's comments on Novartis. RB had a fit after the baby Berkshire shares were sold for a quick profit, and Headknocker regrets allowing the LB to do that. SOLD BABY BERKSHIRE SHARES/

AT & T is another recent add, in both the retirement and taxable accounts, primarily for the dividend, and those shares are currently classified as a long term hold. Bought More AT & T All of those positions are currently in the black, but just barely, with the purchase in the IRA being in the $23 and change area.

Microsoft was recently pared but I mentioned that I am inclined to keep the shares bought at $17.79 ADD 50 MSFT until MSFT comes close to $30. It is hard for me to be enthusiastic long term about MSFT, hopefully it will receive a pop with the Windows 7 release. The last earnings report was just horrible.

Pepsico was bought at less than $50 in May and sold in July at $56.79, on the same day as my shares in General Mills were sold which had experienced a greater pop than the PEP since my purchase. 10 Year TIP Auction/Sold Pepsico/ Sold General Mills/SOLD 1/2 OF PIS POSITION/Sold Almost 1/2 of GRTPRG Position Part of the proceeds were used to fund purchases of ETFs like the Vanguard ETF for Industrial stocks, VIS, at $42.46Bought 100 VIS at $42.46 So, it was sold mostly due to the quick pop, what I viewed as lackluster earnings (Pepsico) and a desire to reallocate some cash into more cyclical names while keeping my 30% cash stash undisturbed. I would probably buy PEP back on a fall toward $50 again. LB is after all 1/2 trader.

So I am looking for an opportunity to sell Microsoft, being an Apple guy and somewhat prejudiced against the lumbering elephant anyway. Besides, I doubt that you can teach an elephant how to dance. I may buy PEP, NVS, PG, and Nestle back when and if their respective stock prices fall close to my current buy target levels. I have lost interest in the baby Berkshire shares for now. I am a long term holder of AT & T and Coca Cola, provided the dividend rate is at least maintained for AT & T and increased at the historical rate for KO.

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