Thursday, December 21, 2006

Investing in 2007 - summary

In this series, we started off by examining the returns in 2006 through various asset categories. The asset categories included REITs, small caps, mid caps, large caps, foreign stocks and commodities. We then analyzed the P/E and valuations of different asset categories. We found REITs to be overpriced and we also found the outlook for commodities a bit weaker going into the new year. In the other asset categories, we found many asset categories to be richly valued because of the broad bull market in the second half of 2006.

Our analysis didnt include individual stocks. Despite the broad bull market, it is possible to find a few companies trading below intrinsic value. Such a find requires careful study and deep analysis. We will be analyzing some companies individually in this blog from time to time.

The analysis of the macro economic trends indicates a strong year for the emerging markets and a decent year for the developed economies especially the ones in the Euro zone. All in all, the future looks bright with a few road bumps along the way.

We conclude this series of investing in 2007 by wishing the readers a happy holiday season and a prosperous investing new year.

Investing in 2007 - commodities

In the previous article, we looked at the foreign stocks from both the developed world as well as the emerging markets. In this section, we will touch upon commodities - a topic we briefly looked at in the first article of this series.

Let us start with gold. The year over year gold consumption has fallen by 3%. While the usage of gold for industrial use has increased, its use for retail and investment purposes has declined. The high prices typically reduce consumption and this has been the case with gold. The industrial use of gold will increase as the global growth increases but the retail/investment sectors are difficult to predict. Another 20% rise in gold prices most likely will dent the retail usage further.

Silver has had a comparatively weak year thus far this year after a runup. This indicates the supply is meeting or exceeding demand already. The creation of the silver ETF generated a lot of enthusiasm for the metal. The main silver production comes from mining, government selling and from scrap. The main consumers of the metal are industrial usage, photography, jewelry and coins.

The other key industrial metal, copper has also declined in value from its highs earlier in the year.

The other common commodity is coffee. Its price has also increased by about 20% from the previous year. Coffee has been very cyclical - increase in prices causes higher growth and decline in prices causes some of the smaller farmers to go bankrupt. Sustained increase in prices will result in higher production and consequently lower prices for this commodity.

Orange juice and pork bellies have also increased in price. Some of this has to do with higher inflation and the devastating hurricane seasons of the prior years. It remains to be seen if these higher price levels can be sustained in the next year.

Finally, the mother of all commodities, oil is expected to remain flat to lower in the next three years. This considers that the current situation in the middle east wont deteriorate further and increase in gas prices will curtail consumption. Oil has cyclical effect on the economy and other commodities as energy is the least common denominator in modern civilization.

Overall, the outlook for commodities doesnt look bullish for the new year. However, disruption to oil supply, further decline in the dollar or other unforeseen events can move the prices higher.

Tuesday, December 19, 2006

Investing in 2007 - foreign stocks

In the last article of this series, we looked at midcap stocks and their returns and P/E ratios. In this section, we will look at some foreign ETFs and their current P/Es and valuations. As noted in the second article in this series, the foreign ETFs of interest are the iShares EFV, EFG, EFA. We also have the vanguard funds VGK and VPL. In addition, we have the emerging market funds EEM and VWO. We will look at each of these in detail in this section.

First, let us look at the top holdings in EFV, EFG and EFA respectively. We will start with EFV.

EFV - the top holdings for EFV are:

HBC - HSBC Holdings PLC. The analysts seem to say there is some upside to this stock still.
TM - Toyota Motor Corp has a P/E of 15 and a market cap of 203 billion
Nestle SA - no data is available.
VOD - Vodafone Group PLC has a market cap of 162 billion
RDS-A - Royal Dutch Shell PLC-Class A is selling for a P/E of about 10
Royal Bank of Scotland Group PLC - no good data available
STD, Banco Santander Central Hispano SA has a P/E of 12 and market cap of 116.5 billion
RDS-B - Royal Dutch Shell PLC-Class B is also selling for a P/E of about 10 and market cap of 230 billion
BNP Paribas - no good data available
BCS, Barclays PLC has a P/E of 13 and a market cap of 92 billion.

Overall, this ETF has done better than the ING International Value Fund - NIIVX since inception and carries a lower expense ratio. The stocks in this portfolio are similar to that in VTV except that a declining dollar would make this ETF do better. EFV has returned about 25% so far this year. This ETF has exposure to Europe, Japan and Australia. Exposure to Europe is about 70% ( Great Britain at 25% ) followed by Japan ( 22% ) and Australia ( 6% ).

EFA is the blend that has the growth and value stocks in the mix. EFA has the following companies in its top 10 holdings.


BP PLC
HSBC Holdings PLC
Toyota Motor Corp.
Total SA
GlaxoSmithKline PLC
Vodafone Group PLC
Nestle SA
Royal Dutch Shell PLC-Class A
Novartis AG
Roche Holding AG

This portfolio includes oil, banking, technology companies and drug majors. This is overall a good mix. EFA has returned 24% thus far this year. This stock has exposure to Europe, Japan and Australia. Exposure to Europe is about 70% ( Great Britain at 24% ) followed by Japan ( 22% ) and Australia ( 5% ).

EFG is the growth counterpart of the above family. The top holdings of this segments include:

BP
GlaxoSmithKline
Novartis
Roche Holding
Mitsubishi UFJ Financial Grp
Total SA
Sanofi-Synthelabo
AstraZeneca
Siemens
BBVA

This ETF has returned 18.5% thus far this year. The geographic exposure of this fund is Europe, Australia and Japan. In Europe, it has exposure to Great Britain is the highest around 23%.

The Vanguard European ETF, VGK has returned 32% YTD. VGK has heavy exposure (~30%) to Great Britain market. The Vanguard Pacific ETF VPL has returned about 10% thus far this year. VPL has heavy (~70%) exposure to Japan.

Summary: The main thing to note here is that the above ETFs reflect developed country markets with focus on large stable companies. Some of these companies have significant operations in the U.S. The markets in the developed countries are not overvalued but cant be said to be undervalued either. It is prudent to wait for a market downturn before adding further capital to these ETFs.

Let us look at the emerging markets - the main ETFs here are VWO and EEM.

VWO:
The country wise distribution of holdings is - Korea (18.5%), Taiwan (15.8%), Hongkong (10.64%), South Africa (10.4%), Brazil (8.3%), India (7%) and Mexico ( 6.69%). This ETF has 771 holdings altogether. The top holdings in this ETF are:

Samsung Electronics
Taiwan Semiconductor Mfg.
China Mobile
Petroleo Brasileiro Sa Petrobras
America Movil S.A. de C.V
Kookmin Bank
Sasol Ltd
Petroleo Brasileiro Sa Petrobras
Teva Pharmaceutical Industries Ltd
PetroChina

EEM:

The geographic distribution of the holdings are South Korea (15.64%), Taiwan (10.99%), Brazil (10.43%), Hongkong (9.95%), South Africa (9.73%), Mexico (7%), India (6%) and Russia (5%).

Gazprom OAO (ADR)
Samsung Electnc GDR 144A
Taiwan Semiconductor Manufacturing ADR
Posco ADR
Kookmin Bank ADR
Lukoil ADR
United Microelectronics Corporation ADR
Siliconware Precision Industries Co, Ltd. ADR
Chunghwa Telecom Company, Ltd. ADR
Korea Electric Power ADR

Summary: EEM has outperformed VWO of late inspite of the higher expense ratio. The emerging markets in India, China, Brazil and Mexico have all done extremely well in the past two years and may be ready for a correction. The correction can be significant - in the range of 10-20%. It may be time to pick up more of either of these ETFs decline significantly.

Sunday, December 17, 2006

Investing in 2007, mid caps

In the last section, we looked at the small cap category and examined the growth, blend and value segments. In this category, we will look at midcap ETFs. As noted earlier, this analysis looks at the sector as a whole and doesnt look at individual stocks. It is always possible to have a mispriced stock within each category.

In the past segments, we looked at vanguard ETFs for our analysis. Since there isnt any comparable vanguard funds in the midcap section, we will look at the iShares section instead. By definition, a midcap stock is a stock with valuation between 1 and 5 billion.

Midcap value:
IWS is the ETF we will analyze for this article. As noted in the first article of this segment, this ETF has notched about 20% return already this year. The top holdings of this segment are as follows:

ETR, Entergy Corp has a P/E of 20.5 and a market cap of 19 billion.
EOP, Equity Office Properties Trust has a large P/E and a market cap of 16.9 billion.
AEP, American Electric Power Co., Inc has a P/E of 24.8 and a market cap of 16.67 billion
PCG, PG&E Corp. has a P/E of 17.48 and a market cap of 16.52 billion
XRX, Xerox Corp. has a P/E of 13.48 and a market cap of 16.44 billion
PLD, Prologis REIT has a P/E of 24.75 and a market cap of 15.13 billion
EQR, Equity Residential REIT has a P/E of 18.97 and a market cap of 15 billion
VNO, Vornado Realty Trust REIT has a P/E of 36 and a market cap of 17.47 billion
EIX, Edison International has a P/E of 12.84 and a market cap of 14.69 billion
F, Ford Motor Co. has a market cap of 13 billion


Midcap blend:
IWR is the ETF in this segment. This ETF has notched about 16.5% return already this year. The top holdings of this segment are as follows:

HD, Harley-Davidson, Inc. has a P/E of 18 and a market cap of 18 billion
CELG, Celgene Corp. has a P/E of 400 and a market cap of 21 billion
ETR, y Corp.
JCP, JC Penney Co., Inc. has a P/E of 15 and a market cap of 17 billion
Thermo Electron Corp.
EOP, Equity Office Properties Trust has a large P/E and a market cap of 16.9 billion.
AGN, Allergan, Inc. has a market cap of 18.5 billion
ERTS, Electronic Arts, Inc. has a market cap of 16.3 billion and a P/E of 90.
YUM, Yum! Brands, Inc. has a P/E of 20.29 and a market cap of 15.51 billion.
COH, Coach, Inc. has a P/E of 30.7 and a market cap of 15.45 billion


Midcap growth:
IWP is the ETF in the midcap growth segment. This ETF has returned about 13% this year. The top holdings in this group are as follows.

HD, Harley-Davidson, Inc. has a P/E of 18 and a market cap of 18 billion
CELG, Celgene Corp. has a P/E of 400 and a market cap of 21 billion
JCP, JC Penney Co., Inc. has a P/E of 15 and a market cap of 17 billion
AGN, Allergan, Inc. has a market cap of 18.5 billion
ERTS, Electronic Arts, Inc. has a market cap of 16.3 billion and a P/E of 90.
YUM, Yum! Brands, Inc. has a P/E of 20.29 and a market cap of 15.51 billion.
COH, Coach, Inc. has a P/E of 30.7 and a market cap of 15.45 billion
AMT, American Tower Corp.-Class A has a market cap of 15.6 billion
FRX, Forest Laboratories, Inc has a P/E of 23 and a market cap of 16.15 billion
AES, AES Corp. has a P/E of 42 and a market cap of 14.9 billion

Summary:

The advantage of midcaps is that one gets a larger concentration of stocks that have good capitalization. If one has both large cap and small caps, a concentration of mid caps will be in the portfolio but to a far lesser extent.

Again, as we have seen in the other segments, the value segment has managed to outperform the blend and the growth segments. Overall, the value segment carries a lower P/E and P/B compared to the other segments.

Next article:

In the next article, we will look at international stocks and the prospects for them.

Friday, December 15, 2006

Investing in 2007 - part VI

In the last article, we looked at investing in 2007 with large cap value and blend ETFs. Prior to that, we looked at REITs and the large cap growth sector. We found that REITs to be unattractive at current prices while large cap value and blend to be comparitively more attractive.

In this segment, we will look at small cap ETFs. Again, we will use the vanguard funds as examples where they are available. If not vanguard, a similar study can be done on other funds. It is the author's belief that the investors should look at the overall valuation of a fund/ETF along with expense ratios.

The small cap value ETF VBR has 953 stocks in the ETF. As of 11/30/2006, the ETF had a P/E of 18.9, Price to book ratio of 1.9. The return on equity is 10.7% and the earnings growth rate is 10.4%. The ETF had a yield of 2%. The top stocks in this ETF are as follows:

NU, Northeast Utilities has a P/E of 38
RA, Reckson Associates Realty Corp has a P/E of 28.29
SRP, Sierra Pacific Resources has a P/E of 12.82
CMS, CMS Energy Corp has a P/E of 15.
OGE, OGE Energy Corp has a P/E of 12.
OMX, OfficeMax, Inc has a forward P/E of about 20.
CLI, Mack-Cali Realty Corp. REIT has a P/E of about 36.
CVG, Convergys Corp has a P/E of 23.59
BRE, BRE Properties Inc. Class A REIT has a P/E of 31.55
CMC, Commercial Metals Co has a P/E of 9.94

VB is the small cap blend and has a yield of 1.2% which is much lesser than the SP500 yield of 1.76%. As of 11/30/2006, the small blend stocks as a whole had a P/E of 22.6, with a price to book ratio of 2.4, ROE of 11.7% and earnings growth of 15.7%. The top holdings in this sector are:

NU, Northeast Utilities with a P/E of 38
RRC, Range Resources Corp has a P/E of 20.38
RA, Reckson Associates Realty Corp. REIT has a P/E 12.82
RMD, ResMed Inc has a P/E of 39.67
MTW, The Manitowoc Co., Inc has a P/E of 26.35
FWLT, Foster Wheeler Ltd has a P/E of 58.37
CAL, Continental Airlines, Inc. Class B has a P/E of 13.4
SRP, Sierra Pacific Resources has a P/E of 12.82
PXP, Plains Exploration & Production Co has a P/E of 13.59
CMS, CMS Energy Corp has a P/E of 9.94

VBK is Vanguard's small growth stock. It has an yield of .37%. As of 11/30/2007, this group as a whole had a P/E of 28, price to book ratio of 3.5, ROE of 13% and earnings growth of 23%. The top holdings of this group are:

RRC, Range Resources Corp. has a P/E of 20.38
RMD, ResMed Inc has a P/E of 39.67
MTW, The Manitowoc Co., Inc has a P/E of 26.35
FWLT, Foster Wheeler Ltd has a P/E of 58.37
GPN, Global Payments Inc has a P/E of 28.51
GME, GameStop Corp. Class A has a P/E of 39.17
DNR, Denbury Resources, Inc has a P/E of 18
CCK, Crown Holdings, Inc is expected to be profitable next year
AME, Ametek, Inc has a P/E of 19.35
FTO, Frontier Oil Corp has a P/E of 9.4

Summary:

In the small cap category, the top ten holdings constitute about 4% of the portfolio. So, they arent indicative of the entire sector. In looking at small value, small blend and small growth, the small growth category is looking pricy and there is little margin of safety in this segment. While small blend is looking better than small growth, it is not as attractive as the small value category. The small cap value stocks are a bit cheaper and are fully valued at the moment. Market price drops may provide an opportunity to add more small value to one's portfolio.

Next Article:

In the next article, we will look at mid cap segment. We will also evalutate the midcap segment with respect to the large cap and small cap segments.

Investing in 2007 - part V

In the previous article, we looked at REITs and large cap growth segments. We found the REITs to be somewhat overpriced compared to the earning yield and P/E ratios. The large cap growth segment has some potential to do well in 2007.

In this article, we will look at two other segments, large cap value and large cap blend categories. Again, we will use Vanguard funds as the examples as we have more information about the funds and vanguard funds are one of the most widely held funds.

As noted in the first part of this series, the two vanguard funds in the value and blend category are VTV and VV respectively.

The outlook for VTV is as follows. As of 11/30/2006, VTV had a P/E of 14.2 with a price to book ratio of 2.2, ROE of 18.2% and growth rate of 16%. The growth rate denotes the earnings growth for the past five years. The ETF had about 400 stocks in its core holdings. The top holdings of this group are as follows.

XOM - Exon Mobil Corp has a P/E of 12
GE - General Electric Company has a P/E of 22
C - Citigroup Inc has a P/E of 11.4
BAC - Bank of America has a P/E of 12.2
PSE - Pfizer Inc has a P/E of 14.8
MO - Altria Group has a P/E of 12
JPM - JP Morgan and Chase has a P/E of 13.6
CVX - Chevron has a P/E of 9.6
AIG - American International Group has a P/E of 17.11
T - AT&T has a P/E of 19.4

The top ten holdings accounted for ~30% of the funds portfolio. This sector looks good and can potentially rake in decent returns in 2007. The energy sector is a wild card but the share holder friendly moves by cash rich management should help.

The profile of VV is as follows. This fund holds about 790 stocks. As of 11/30/2006, this fund had a median market cap of 45.6 billion, P/E of 17.1, Price to book ratio of 2.9, ROE of 18.7% and earning growth rate of 19.1%. The earnings growth rate denotes the growth rate for the past five years. Let us look at the top holdings in the ETF as these comprise 18.2% of total net assets.

XOM Exon Mobil has a P/E 12 and market cap of 450 billion
GE General Electric has a P/E of 22 and a market cap of 385 billion
MSFT Microsoft has a P/E of 24 and a market cap of 295 billion
C Citibank has a P/E of 11.6 and a market cap of 265 billion
BAC Bank of America has a P/E of 12 and a market cap of 235 billion
PFE Pfizer has a P/E of 14.88 and a market cap of 184.88 billion
PG Proctor and Gamble has a P/E of 23.8 and a market cap of 203 billion
JNJ Johnson and Johnson has P/E of 17 and a market cap of 192 billion
MO Altria Group has a P/E of 15.78 and a market cap of 178.6 billion
CSCO Cisco has a P/E of 29 and a market cap of 167 billion

In the value category to the blend category and their top ten holdings, both have some of the same stocks. The interest is in the differences, the blend has Microsoft, JNJ and Cisco and other stocks in different composition levels. Microsoft is expected to do well in 2007 as is JNJ. Cisco is on a tear currently and may not be considered as cheap. The value segment has Chevron, JP Morgan and AT&T. The telecom sector has been hot this year and both oil and banking have had record years. This performance may be hard to beat in 2007.

Summary:

I like the value and blend segments to the growth ETF we discussed in the earlier article. The growth ETF has more potential but is also priced higher. Again, the time to buy these securities is when the market is down and when the valuations are more attractive. Currently the market is going up, a situation that may not reverse itself till well into the new year.

Next article:

In the next article in this series, we will look at the domestic small cap segment and go into the details of that sector.

Investing in 2007 - part IV

In the previous articles, we looked at the different asset categories and the returns from these asset categories in 2006. The return from asset categories in 2006 is important as the current prices will tell us if the asset is a buy at current prices or not. In this section, we will look at the REITs and the large cap growth sector in US to see if they are buys at current prices. The analysis in this segment is limited to the sector as a whole as opposed to individual stocks. It is possible for the sector to be expensive and thus unattractive. At the same time, a stock in this category might be a buy because of the fundamentals.

First the vanguard REIT etf VNQ. The current yield for VNQ is 3.63%. Given that the REITs are required to return 90% of their income to the shareholders, the effective yield is 4%. The ten year bond is currently yielding 4.6% and is entirely safe. So, the REITs aren't looking attractive at the moment. Let us look at some more details to see how VNQ looks like.

As of 11/30/06, VNQ's equity characteristics were as follows. The P/E ratio was 49 with return on equity of 8% and projected earnings growth of -3.6%. The REIT ETF held 104 stocks altogether. Let us look how some of the top holdings for this ETF looks like:

SPG - Simon Property Group has a P/E of 59.
EOP - Equity Office Properties has a P/E of 40.
VNO - Vornado Realty Trust has a P/E of 37.
PLD - ProLogis has a P/E of 25.
EQR - Equity Residential has a P/E of 19.
ASN - Archstone Smith Trust has a P/E of 17.
BXP - Boston Properties has a P/E of 16.
PSA - Public Storage has a P/E of 67.
GGP - General Growth Properties has a P/E of 229.

As a group, the above equities have high P/Es and the stocks with lower P/Es have low dividend yields. Looking at the fundamentals of this sector, it is safe to stay away from this sector at this moment till the P/E and the dividend yield become more reasonable.

Looking at the large cap growth sector, let us take a look at VUG, the vanguard growth ETF. The growth ETF equities have the following characteristics as of 11/30/2006.

The ETF held 457 stocks altogether with a median market cap of 34.8 billion. The P/E of the ETF is 21.5 with a price to book ratio of 4 and earnings growth rate of 23.1%. The return on equity is 19.1% which is very respectable. Let us look at the top ten holdings from this ETF and their P/E ratios and growth prospects. The ten largest positions account for 21% of the ETF holdings.

MSFT - Microsoft Corporation has a P/E of 24.
PG - Proctor and Gamble has a P/E of 24.
JNJ - Johnson and Johnson has a P/E of 17.4
CSCO - Cisco Systems has a P/E of 27.
INTC - Intel Corpoation has a P/E of 21.
WMT - Walmart Stores has a P/E of 17.
GOOG - Google Inc has a P/E of 61.
PEP - Pepsi Inc has a P/E of 21.
IBM - International Business Machines has a P/E of 16.
AMGN - Amgen Inc has a P/E of 29.

As a group, the top ten holdings of this group are mixed. On the one hand there are fully priced stocks such as Google and on the other hand, there are low priced stocks such as WMT and JNJ with a bunch of stocks in between. It should also be noted that as a group, this sector is entirely dependent on growth to power the stock price. My bet for this group would be to do decently in 2007. The main reason being the top holdings of MSFT and INTC are expected to do well on the back of new product launches, CSCO is doing ok and the some of the low priced stocks may succeed in getting out of the negative publicity surrounding them. It is not possible to find the right time to get in but I would get in once the major indices have a correction from the current price points.

In the next segment, we will cover the large cap blend and value segments.

Monday, December 11, 2006

Investing in 2007 - part III

In the previous article, we looked at the return in foreign economies thus far in 2006. In this section we will look at the economic fundamentals of some of the key economies in 2007. In the next article, we will look at the prospects for stocks in some of these economies in 2007 and look at sectors that may do well.

The size of the world economy is 50 trillion dollars with the US contributing about 26% and the EU contributing about the same. IMF forecasts the EU zone economies to expand at the rate of about 2 - 2.5%, the US economy to expand at around 2%. The growth in Canadian economy would be around the same number and the world wide economic exapnsion to remain intact at close to 5%. The emerging economies are expected to do well - growing around 5% in 2007. Of the emerging ecomonies, Indian economy is expected to grow at around 9%/year and the Chinese economy is expected to continue posting double digit growth increases.

The emerging markets comprise of economies of South America, Mexico, South Africa, Eastern Europe and Asia. Let us look at the growth prospects in these segments.

The Latin American economies are expected to grow about 5% this year, 4.2% in 2007 and about 4% in 2008. The fundamentals are good for the Latin economies with commodities prices buttressing the export engine of these countries. The large economies of Brazil and Argentina are expected to do well in the coming year. Mexico is also expected to do well with its economy growing at 3.8% in 2007 compared to this year.

According to IMF, the economies of western Europe are expected to grow around 2% in 2007 and the emerging economies of central and eastern europe are expected to grow more than 5% in 2007. Many of these economies are part of the emerging market funds.

The Asian economies are expected to do well in 2007. As noted earlier in the article, the dragon, tiger economies of China and India respectively are expected to do extremely well with growth rates of close to ten percent. The South Korean economy is expected to grow in the 4-5% range. The largest economy in the group, the Japanese economy is expected to post a modest 1-2% growth.

Given the continued projected growth, the main issue a US based investor has to look at is the strength of the US dollar versus the world currencies. Given the huge trade gap that exists between US and the rest of the world, there is a good chance the dollar will not appreciate significantly against the world currencies. On the other hand, strengthening economies of Europe and Japan may cause the local central banks to increase the interest rates to stem inflation. At the same time, if the US economy slows down, the federal reserve may have to reduce the short term rates. In this scenario, the US dollar becomes a less attractive financial instrument for the central banks and hedge funds. However, the currency rates are very difficult to predict correctly and the fundamentals may take a long time to unwind. The main reason for this is that millions of peoples jobs and livelihoods are dependent on stable currency rates and a significant decline in the dollar can cause world wide recession.

Sunday, December 10, 2006

Investing in 2007 - part II

In this series, we will look at possible sectors and companies that one can invest in 2007. In order to do this, one has to look at the returns in the current year and understand the fundamentals better. In the first part of this series, we looked at the returns of US stocks and found that many of them have done extremely well with mixed results in the commodities sector. In this segment, we will look at REITs and then returns in foreign markets. Once this is done, we will look at different segments and choose the ones that are of interest.

The vanguard REIT index - VNQ has returned 32% for the year. The iShares Dow Jones US Real Estate fund IYR has returned about 30% for the year. streetTracks Wilshire REIT RWR has returned 32% for the year. Although REITs have done very well for the year, the REIT dividend yield is low compared to their long term average.

Now let us take a look at international ETFs and then the returns in some key country indices thus far this year. There are many popular international ETFs and we will take a look at the main ones.

Of the global etfs, iShares EAFE Global Large Cap Growth Fund EFG has returned 15.35% for the year. The EAFE Global Blend EFA has returned about 18% and the value fund EFV has returned about 22% thus far in the year. The interesting thing to note here is that the return from international stocks is comparable to that from the US even taking into account the depreciation in the value of the dollar.

In addition, the popular vanguard funds VGK for European Index has returned 27% YTD and the Asia Pacific Index Fund VPL has returned 6% YTD.

The iShares emerging market fund EEM has returned 17.35% YTD and the corresponding fund from Vanguard VWO has returned 15.88% YTD. EEM charges a higher management fee compared to VWO. Again the interesting part to note here is that despite a falling US dollar, the US assets have performed well and have comparable returns to that of the emerging markets. Let us now look at the country by country performance of some key economies around the world.

Wikipedia has the world's largest countries by nominal GDP. The European Union is at the top of the list at 13.5 trillion dollars followed by the US at 12.5 trillion dollars. China is at 2.2 trillion dollars and Canada is at 1.2 trillion dollars. The emerging markets of Brazil, South Korea, Russia, Mexico and India are in the 750 billion dollar range with India poised to make a significant leap over the others in the next five years.

The main index in the U.S, the SP500 index has gained close to 15% thus far this year. This came after last year's anemic growth. The other large north american economy Canada also saw its index grow by about 14% this year. The Mexican index has increased by 43% YTD as well. The Brazilian index has also grown by about 33% thus far this year.

In Europe, the British FTSE100 index has gone up by about 12%. The German DAX has gone up by almost 21% thus far in the year. The Swiss index has gone up by about 12.5% thus far this year.

In Asia, where the giant dragon (China) and Tiger(India) economies are growing at quick rates, the indices increased as follows. In India, the BSE Sensex index has grown by about 55% thus far this year. This is on top of the 45% growth observed last year. In China, the Shanghai SSE Composite Index has grown by about 75%+ thus far in the year. The Hangseng index has grown by about 26% thus far this year. The Nikkei 225 index has been relatively flat thus far in the year. The Korean index has been relatively flat where as the Taiwan stock market has surged by about 17.5% YTD.

To summarize, the global stock markets have seen more advances than declines and majority of the stock markets have advanced significantly thus far this year.

In the next article, we will look at the economies of the world and the economic growth prospects in some of these countries.

Saturday, December 09, 2006

Investing in 2007 - Part I

In this series of articles, we will look at what would be possibly be good investment strategies for 2007. We will begin by looking at 2006 and go on to see what categories would perform well in the coming year. In this article we will focus on 2006 performance thus far of various asset categories.

In general, 2006 has been a stellar year for investors with many raking in double digit returns. This year has seen a steady bull market across all asset categories. Let us review the returns thus far in the various asset categories.

Large cap value:

As of 7th December, IWW, the Russel 3000 value index fund had returned 20%.
Similarly, the Vanguard value vipers VTV had returned close to 20% for the year as well.
The spider dividend ETF, SDY had returned 16.25% thus far in the year.

So any buy and hold investor has racked up double digit gains without expending a lot of effort.

Large cap blend:

In the large blend category, there are several interesting indices. The most interesting is the SP500 index. SPY, the spiders has returned 14.83% thus far in the year. The competing funds from iShares IVV has returned 14.92% and the vanguard fund VV has returned 14.7%. The most mentioned category in CNBC is the Dow Jones Industrial average. Diamonds or DIA that tracks the Dow Jones Industrial Average has returned 17.03% thus far in the year.

The iShares Russel 3000 index fund, IWV has returned 14.96% this year comparable to the SP500 index fund. The other interesting fund is the Ryder SP500 equal weight ETF that buys all stocks in the index in equal proportion. The ETF RSP has returned 13.5% this year thus far.

The vanguard total stock market vipers VTI has also done well returning 14.95% for the year.

Large cap growth:

The large cap growth category has been a laggard (comparatively) thus far this year. In the large growth category, the Nasdaq composite QQQQ has returned about 8.14% so far. The Russel 3000 growth index fund IWZ has returned 9.75%. The other interesting ETF in the category, the vanguard growth vipers, VUG has returned 9.77%.

Midcap value:

In this category, the iShares Russel Midcap value index fund - IWS has returned close to 20%. Another ETF in this category, streetTracks DJ Wilshire Mid Cap Value ETF, EMV has returned 16.67% so far this year.

Midcap blend:

In this category, the iShares Russel Midcap Index Fund - IWR has returned 16.15% thus far this year. Midcap spider MDR has returned 11.69% and Vanguard Midcap Vipers VO has returned 14.94% thus far this year.

Midcap growth:

In the midcap growth category, iShares Russel Midcap Growth Index Fund IWP has returned 12.25% for the year. StreetTrack Wilshire Midcap Growth ETF, EMG has returned 12.22% for the year.

Small cap value:

In the domestic small value category, IJS has returned close to 20% this year. The returns from Vanguard Small Cap Value Vipers, VBR has been a shade lower at 19.7%.

Small cap blend:

In this category, the Vanguard Small Cap Vipers VB has returned 17.01% for the year. The iShares Russel 2000 Index Fund, IWM has returned 18.89% for the year.

Small cap growth:

In the small cap growth category, the Vanguard Small Cap Growth Vipers VBK has returned 14.2% for the year. The iShares Russel 2000 growth index fund IWO has returned 14.76% for the year.

Commodities ETFs:

The vanguard materials vipers VAW has returned 20% for the year. Similarly, XME, an ETF for the SPDR metals and mining fund has returned 18% in the last six months. The iShares Goldman Sachs Natural Resources ETF IGE has returned 16.3% for the year. The gold ETF GLD has returned about 19% for the year and silver ETF SLV has returned -2.3% for the year. The oil ETF USO has returned about -20% since inception in mid year this year.

Summary:

In summary, 2006 has been a good year for domestic investments. All the fund categories have done well with many posting double digit gains. The commodities have been mixed with some doing better than others.

Next article in this series:

In the next part of this series, we will review the results from international funds thus far in 2006.

Sunday, December 03, 2006

A case for selling Berkshire?

Lately, some of the big value names have been selling Berkshire. The famed value funds include Sequoia fund. The Sequoia fund has a long term association with Buffett but has recently got some new management. Mohnish Pabrai, a rising value investor has also diluted his Berkshire holdings significantly. Also, popular hacks such as Jubak have started writing negative articles about Berkshire.

Before jumping on to the bandwagon and selling off our Berkshire holdings, let us do some analysis. Currently, the Berkshire consensus IV is ~130K. It is likely to reach 134-135K by end of FY06. The growth in earnings from the operating companies, the equitas deal and the growth in the BRK stock portfolio should contribute another 10% to IV growth in FY07. The hurricane season is a wild card but it can trim earnings for one quarter at worst. We are looking at an IV of about 148 to 150K by year end FY07. The current stock price at 106K is selling at around 40% discount to next year's IV. Following this year's bull market across all segments, there arent as many good businesses selling at such a discount.

Let us consider a typical scenario for an investor this year. Assume the investor bought BRKA at 91K and has seen the gains to 106K. This comes to 16.5% short term gain. If we follow Jubak's advice and sell the stock, our gains reduce from 15K to 10.8K at 28% short term capital gains tax. Now, there is the secondary problem of investing the money in another investment that will provide bigger gains while providing the same AAA balance sheet.

For long term investors, following the likes of Jubak is like applying sand paper to one's portfolio. While the reasons for Mohnish Pabrai and Sequoia funds selling may never be known, it will not affect their performance as the performance is calculated before tax and the tax burden is borne by the fund investor.

From a cursory analysis of Berkshire, it is clear that it is still significantly undervalued and the bull market in all segments of the stock market has left very asset categories that are undervalued.

Saturday, December 02, 2006

BUD Analysis

In this article, we will look at the iconic beer manufacturer BUD and see if it would make a good investment.

The company's goals as stated in its 10-K are as follows:

Anheuser-Busch remains focused on its three core objectives designed to enhance long-term shareholder value:

▪Increasing domestic beer segment volume and per barrel profitability which, when combined with market share growth, will provide the basis for earnings per share growth and improvement in return on capital employed.

▪Increasing international beer segment profit growth. Anheuser-Busch has made significant marketing investments to build recognition of its Budweiser brands outside the United States and owns and operates breweries in China, including Harbin Brewery Group, and in the United Kingdom. The company also has a 50% equity position in Grupo Modelo, Mexico’s largest brewer and producer of the Corona brand, and a 27% equity position in Tsingtao, the largest brewer in China and producer of the Tsingtao brand.

▪Continued growth in pretax profit and free cash flow from the packaging and entertainment segments. Packaging operations provide significant efficiencies, cost savings, and quality assurance for domestic beer operations. Entertainment operations enhance the company’s corporate image by showcasing Anheuser-Busch’s heritage, values and commitment to quality and social responsibility to 21 million visitors annually.

2005 was a disappointing year for BUD as net sales increased by only 0.5% and EPS declined by 15%. In 2005, BUDs sales in the US declined slightly whereas its international volume increased significantly.

However, the company has rebounded from its disappointing 2005 with increase in operating cash flows of about 11% in 2006 compared to 2005. Let us look at some other financial ratios.

The company has very good return on equity, return on asset and return on invested capital ratios.

For ten years from 1996-2006, the EPS increased by 8.06% on the average for BUD. The number of outstanding shares declined by 23% in the same period helping the EPS as well as dividends per share. The revenues in this period have increased by 4.8% where as the gross profit has increased by 6.4% on the average. The free cash flow in the same period increased an average of 7.8% per year compounded. Dividends increased by 49% in five years from 2001 till now.

The stock price has more than doubled in the last ten years - growing at around 8% per year. About 46% of earnings are paid out in dividends. Currently the fair value of the stock is about $55 - making it undervalued by about 15%. If the stock does as well as it has in the past ten years, we are looking at a stock price of about $100 in ten years with about $15 returned back to the share holders in dividends.

So overall, one can look for a return in the 8-10% range including dividends from BUD in the next ten years. BUD's moat is the manufacturing and the distribution network and one can expect this to remain the same in the coming years in the United States.

SAB Miller, the main US competitor - though posting strong results world wide ( and showing strong stock performance as well ) got bruised in north america. In its earning report, SAB Miller says - "In North America Miller Brewing Company has continued to be impacted by competitive pricing conditions and significant increases in commodity and energy prices." The operating margins declined for SAB Miller by 1.2% points to 9.6% in the U.S. The figure for BUD is about 16%. This shows the efficiencies and the moat the company has against its competitors. SAB Miller has a good global presence and this is an area to improve for BUD.