Global Gary’s First International Stock Idea Shortlist

 

Disney was the first international stock holding to make it into the Global Fund a few weeks ago.

Since then, I’ve been itching to add the next quality international business to the portfolio. I’ve been perusing a heap of other financial and investment blogs out there, and my list of stock ideas is growing ridiculously fast as a result!

I’m starting in the USA for now, where most of the best companies in the world reside. I’ve picked out 3 of these ideas as a shortlist for the next investment in the Global Fund.

Let’s have a quick look at each, as well as some insights from the other bloggers and investors who’ve been researching and investing in them…

1) Pepsico

Fund Performance Update May 2018 – A Bounce from Baby Bunting, but Trumped by Telstra Trouble

Well if this was the NBA finals series, Indexing Ian would have taken the title in a clean sweep.  And nowhere near as exciting a contest as the Cavs vs Warriors Game 1 in overtime!

0 from 4 months now Ian has been ahead. And it pains me to say that as of the end of May, he’s never had such a commanding lead since we started.

Let me share the gory details with you for this month…

Current Portfolio

May has been a quiet month with no purchases.

An extra $2,000 of cash has gone in, increasing the cash balance to $17,485 (including dividends), but the share portfolio has gone backwards this month by $715, sitting at $39,967.

That puts the cash balance at just over 30% of the total portfolio – definitely time to find another opportunity to put some of that cash to work.

And speaking of work – many of the current Fund constituents certainly have some work to do……

Transaction Costs – Part 2: TAX

It’s been a couple of months now since Frankie last gave me the limelight.  My last post before exploring the wide world of ETFs was a detailed look at the tipping point on transaction costs – specifically brokerage costs – and the potential impact this has on your returns.

I promised a follow up to that analysis on the other big transaction cost – TAX.  So here it is!

Not only does every brokerage transaction fee you pay chip away at your portfolio, but for every sell transaction, you also have the tax man (or woman) waiting to take a piece of your gains away.

Tax can be even more insidious than transaction costs. When you buy or sell shares, you can clearly see the brokerage fee on every transaction statement.  But nowhere are you presented with the specific tax costs.

It’s not until it comes time to do your tax return, when you need to add up all the gains you’ve made, that you’ll know how much of those gains you need to pay away in tax.

But even then it’s not necessarily that transparent – especially if you don’t do the tax returns yourself.  You (or your accountant) pull together all your financial information for the year, do a bit of maths, and finally come up with a single figure that will either be paid by you to the tax office, or vice versa.

Unless you pay attention to the detail, the tax consequences of your investment decisions can blend into the background.

So the first step for us here is to make very clear what tax you might pay whenever you sell shares.…

The Biggest Problem with Stock Recommendations

I might have given brokers a hard time in my earlier post.

Despite the potential conflicts of interest, and absurdities of putting short term price targets on shares based on ‘valuations’, the fact is even the most independent, diligent, stock analysts have a huge issue when it comes to stock recommendations:

The recommendation they make is universal.

It’s either a BUY, a HOLD, or a SELL (despite the various other descriptions used by brokers such as ‘accumulate’ or ‘strong buy’).

But does a BUY recommendation mean that everyone should by this stock?

Not a chance.

Making a tough job look easy

It’s actually one of the easiest things to do – to recommend a bunch of different stocks a BUY or a HOLD. Eventually, you’ll be able to cherry pick those few that did really well, and show off how great your investing skills are.

You need to be wary when you see the results of any stock picking newsletters in particular – “Here’s three stocks we recommended during the year, all up over 50%!” (just don’t ask about the other 47 stocks…)

Once you buy a stock – the easy part – the hard part is only just beginning.

When it comes down to actually investing money, and managing a portfolio, there are far more difficult questions to answer:

  • How will I prioritise which stocks get my funds?
  • How much money should I put into this one versus that one?
  • Should I buy in stages, or fully commit to this investment now?
  • How will I know when to sell?
  • How do I monitor my risk? How do I even know if and when my portfolio is getting more ‘risky’? What does ‘risky’ even mean for me?

To be clear, the challenge brokers have with making a recommendation, and then updating that as things change, is a challenge for any value-based investor.

The only difference is that brokers don’t have to worry about any of the questions above – it’s simply a matter of value versus price to them at any point in time.

They can write a new report every week on the same stock, whereas an investor has a finite amount of funds to invest, and realistically only has a couple of opportunities to make an investment decision.…

A Dazzling Disney Discounted Cash Flow Analysis (and a Dangerous Decision Making Tool)

After sharing my first International stock purchase of Disney in the previous post, some readers have asked for a little more detail around the business and the numbers.

Well, I’m going to try and give you much more than you bargained for, with some detailed Discounted Cash Flow (or ‘DCF’) Analysis!

The goal of this post is not to convince you that Disney is an awesome investment. It’s to show you how to use some valuation concepts, particularly the DCF analysis, but in particular, highlight the risks and limitations of relying on this too heavily in isolation.

So strap yourself in – it’s a long post with plenty of analysis, and we’re going to touch very briefly on a few theoretical valuation concepts. But don’t worry, we’ll still include plenty of charts and pictures…

Here’s an overview of what we’ll cover in this post:

  • Overview of Disney
  • History of financial performance
  • Valuation methods
  • Cash flow forecast assumptions
  • Other valuation assumptions
  • Sensitivity Analysis
  • And most importantly – The DANGERS of the DCF!

Overview of Disney

I’m guessing anyone reading this will know of Disney, particularly the movies and the theme parks that it’s so famous for, as well as some of the history starting with Mr Walt Disney back in the 1920’s.

From a business perspective, Disney manages its operations in four main segments:

  • Media Networks – Disney operates cable programming services under brands including ESPN, Disney and Freeform, broadcast businesses including ABC TV Network and eight other television stations, radio businesses including ESPN Radio network, and Radio Disney.
  • Parks and Resorts – the Magical Disneyworld in Florida and various Disneyland resorts and theme parks around the world, including California, Paris, Tokyo, Hong Kong and Shanghai, as well as a number of resort hotels and vacation club properties, and other recreational facilities.
  • Studio Entertainment – Disney produces live-action and animated motion pictures primarily under the Walt Disney Pictures banner (all the classics!), as well as Pixar, Marvel and Lucasfilm which Disney acquired in recent years.
  • Consumer Products and Interactive Media – Disney licenses its trade names, characters and intellectual property to various manufacturers, game developers, publishers and retailers throughout the world. This also includes retail and online distribution of products through The Disney Store, shopDisney.com, shop.Marvel.com and wholesale distribution direct to retailers.

Here’s a breakdown of the revenue and operating profit contribution from each of these four segments in 2017:

Global Gary’s First International Stock – Disney

After dumping half my cash into the VGS index, I’ve been itching to put the rest to work in stocks that I think will outperform over the long run.

I’m still looking around for ideas, and will share my first shortlist very soon. But in the meantime, one of my all-time favourite companies is looking like good value at the moment, so I’m excited to start the international stock holdings off with…

We know by now that Frankie likes to do some fancy analysis when sharing his investment decisions. I’m more a ‘keep it simple’, bullet-point kind of guy, so here’s my brief summary on why I’m investing in Disney:

The Company:

  • Disney is highly likely to be around 20 years from now – check
  • Disney has a huge competitive advantage in the content it owns – an unmatched theme park business and film content that just keeps getting better and better. And as a result…
  • Disney is highly likely to be bigger and better 20 years from now – check.
  • ESPN is causing some issues at the moment, but probably won’t be the area that’s driving its growth 10 years from now

The Numbers:

  • P/E ratio – around 14.4x based on 2018 EPS estimates – hasn’t been this low for over 5 years
  • Return on Equity – very healthy in the low 20%’s, and has been improving over the past few years

Fund Performance Update April 2018 – Woodside to the Rescue

We’ve just ticked over into May, so it’s time to see how the Fully Franked Fund performed during April. Has the Fund clawed its way back from a slow start? Or is Ian storming ahead and having a good ol’ laugh at all my analysis, wondering why I’m wasting my time?

First, let’s check out the balance of the Fund at 30 April 2018.

Current Portfolio

There’s only been one purchase this month – a top-up on Telstra with $3,488 contributed. Doing the maths on the share balance in the chart below, which has increased by $5,177, you can deduce that it’s been a month of positive performance for the Fund – more details on that shortly.

There’s only $8,850 left of the original $50,000 capital to be deployed into shares. Combined with the $2,000 of cash contributed to the Fund at the end of each of the three months to April, the current cash balance is $14,850.

Add in the $635 received in dividends, and we have nearly $15,500 to play with over May. Perhaps soon I can sit back for a couple of months with Ian in that hammock?

Beware the Broker BullS#!T!

Most of us are good at something. Perhaps even great at something.

For all the things we’re not so good at, there are plenty of experts out there that specialise in whatever obscure task we might need help with. This is particularly useful when there’s clearly a right way to do something, and a wrong way – I don’t think I’d be game to ‘have a go’ at rewiring my house or experimenting with the setup of the engine in my car.

But for many other things in life, including finance, things are a little more grey. Everyone has opinions, some even have techniques that seem to work really well for them.

Unfortunately most people want clear answers – like what stocks to buy – when there really isn’t a right or wrong answer. Yet we still search for experts to tell us what we want to hear.

And who are the industry experts when it comes to identifying the best stock investments?

If you’re answer is “Stock-brokers!”….then boy will this be an interesting post for you!

Broker Reports

If you haven’t seen a broker report before, they look something like this:

Some reports are brief, others have pages and pages of analysis, but they all usually have the same basics – stock recommendation, commentary and fancy analysis.

You can access certain broker reports through the ASX website – they issue a summary of new broker reports weekly if you sign up via email (see link here). Some companies also choose to put them on their websites as part of their resources for investors.

But the broker report above is one I found completely randomly on the internet by doing a quick Google search – one of the first reports that wasn’t for a mining or exploration company.

The company is Cash Converters (CCV), mostly known as a retailer of second-hand goods, but also a supplier of ‘financial products’ (mostly expensive short-term loans).

And much to my excitement, I discovered that Cash Converters has a whole heap of broker reports on their website dating all the way back to February 2010! (see link here)

What a wonderful opportunity this presents to do some analysis over the 8 year period, and use this as a real life example to discuss the usefulness of broker reports….…

A Fully Franked Australian Dividend Aristocrat Analysis

The US really sets the standard when it comes to world-leading companies. And many of those companies have world-leading dividend track records.

There are 53 stocks in the US which are part of the prestigious ‘Dividend Aristocrat’ club. This exclusive club is reserved for companies that have consistently increased their dividends for at least 25 years in a row without fail!

Of those 53, a few have blessed their long-term shareholders with increasing dividends for 50 or more years! Global Gary might have more to say about some of these in the near future.

But as a Fully Franked Australian dividend investor, I’m more interested in the track record of our local stocks.

The big questions is – does an Australian Dividend Aristocrat Club even exist? Who would make it in? Is there anyone that even comes close to earning this prestigious title?

Let’s look at some answers to these questions, and many more (but be sure to read the very important disclaimer* at the end of this post!)…

The ASX

There are over 2,000 companies currently listed on the Australian Stock Exchange (or ASX).

Nearly 1,300 of those have NEVER paid a dividend.

So that shortens the list of potential Dividend Aristocrats very quickly already.

Below is a ‘heat-map’ analysis of the dividend history of the top 1,000 ASX stocks for the last 40 years, ranked by market capitalisation. Green indicated a dividend increase, red a dividend decrease, and grey is no dividend.

Gary’s Global Stock Foundation – Vanguard MSCI Index International Shares ETF (VGS)

Frankie loves individual stocks. Ian is an Indexer through and through.

I’m a fan of both strategies, which is why I’m splitting my funds down the middle between index funds and individual stocks.

My first big step is to set a solid foundation for the global fund. This means putting half of those funds to work immediately in some solid index funds. The easy part of the investment strategy, where I intend to just set and forget.

Our buddy Ian highlighted the vast number of index funds or ETFs available a few weeks ago, and it can be a little overwhelming to know where to start.

For me, it’s very simple.

I’m looking for global exposure outside of our home country of Australia.

I want a single index fund to keep things simple.

So after a little research, I’ve landed on my index fund of choice:

Vanguard MSCI Index International Shares ETF (VGS)

I’m more a bullet point kind of guy, so here’s a few fast facts on VGS:…