Avoiding the Underperformers
Sometimes in life you want to pick the best. You read reviews on Angie’s list about the best electrician or plumber. You read endless Amazon reviews before making a purchase. You can to send your kids to the best schools. In stock picking maybe at least some of our focus should be on avoiding the losers instead of finding the winners.

My curiosity about this is based on a study by SPGI of stocks in the S&P 500 over the last 20 years. 55% of stocks in the index delivered a 100% or less return over 20 years compared to the indexes 322%. Including 1 in 8 that went bankrupt or lost at least 50% of its initial stock price.

I wanted to see what the worst 55% had in common and how this review can help us be better stock pickers.

Some we know the stories well. Don’t buy into frauds like Enron or Worldcom. That’s easier said than done. Companies don’t put in their 10k “these numbers are made up.” I’ve read Financial Shenanigans by Howard Shilit twice to get a better grasp on this. But for us non-forensic accountants, I’m not doing so well finding today's Enron.

Next, we need to avoid bankruptcupcies Lehman, Chrysler, GM, Washing Mutual, the Airlines. A company goes bankrupt if it can’t service its debt. So I avoid companies with excess debt and high-interest payments as a percent of net income. Warren Buffet suggests less than 15% interest payment/net income.

Lastly, we should strive to stay away from u**nder-performers**. These companies don’t go out of business like the previous 2 categories but they return -50 to 100% return over the previous 20 year period. When the market returned 322%. This was my favorite and most time consuming part of this review. What are some trends that I see among these companies that we can use to avoid the stocks that may significantly underperform over the next 20 years.

*note I haven’t completed the review. 500 is a lot of balance sheets. But I figured I’d post my initial findings then finish with a part 2 later

Without further ado, so what do under-performers have in common.

Low <10% or negative ROE and ROI
High-interest expense. Some are > 100% of net income are spent servicing their debt
High cap ex/net income. Frequently > 100% among under performers
Certain industries. Most notably banks (almost all of them), communications (50%), energy (33% which would have been 66% if the ending period was 2021 and not 2022).
On the other side only around 10% of basic materials, insurance, consumer cyclical and consumer defensive underperformed over the last 20 years.

Some companies stuck out to me while doing the review that where really bad offenders of the criteria

$T 56% interest expense. 76-135% capex/net income. ROE 10. ROI 4. One of the most indebted companies in the world. Stock return over 20 years $18 to $21. (Not including dividends, I know)

$F interest expenses 50-200% net income.
Capex to net income 35-200%. ROE 5 year avg is 11. Stock $15 to $11.

$CCL is a bankruptcy risk candidate to me. Neg ROE and ROI. Even in good times capex/net income >100%. Had to issue a Brinks truck loads of debt due to Covid to delay the inevitable

$CHTR 70-100% interest expense. 150% capex to net income. Despite these expenses still managing to buy back stock by issuing debt to do so. Approx 80% per year of buybacks financed with debt not cash flow from the business

Not all companies fit the mold. Below are exceptions

$HBI underperformed despite not meeting the above criteria
24% interest expense/net income
Avg 20% capex to net income
ROE 79%. ROI 10%
Stock performance $6 to $10 and was just taken out of the S&P 500 index

$AMZN over-performed despite consistently spending 100-150% capex/net income.

$HD over-performed despite having neg ROE

Discussion IMO the above can be used as a screen to avoid certain companies at risk of underperformance. If you’re highly leveraged and have to spend 50% of your net income on debt payments that doesn’t leave much cash flow to do other beneficial things like acquisitions or stock buybacks. If you have a very capital intensive business, where you spend over 100% of capex/net income to build new factories to build new cars or buy more airplanes as the old ones are retired you also may not be able to do fun things with cash flow. These two make high ROI harder to achieve and therefore you don’t get years of excess cash compounding to make more cash.

With that I’m going to avoid investing in these companies. What about you?
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Luka 🦉's avatar
$97.1m follower assets
AT&T 💸 $0.2775/share (in line)
I have mixed feelings about $T, for sure it is not my best-performing investment, but anyway I am happy to receive the dividend. Every dividend counts 💰
Yield 5.38%
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The intercompany sales of HBO Max to AT&T's Mobility segment were $224 million in 1021, which represented ~11% of HBO Max subscription revenue.
$T working with $ASTS
Knew a MOU existed with AT&T and there's been fairly strong evidence of collaboration (e.g., - ASTS' FCC application listed spectrums owned by AT&T). However, THIS is the 1st time I am seeing confirmation from the horse's mouth. Exciting!
Erick Mokaya's avatar
$87.9m follower assets
Interesting comparison on some Communication Services stocks:
Current NTM P/E vs March 23, 2020 COVID low

Alphabet Class A $GOOGL, 18.6, current vs. -0.5x
Alphabet Class B $GOOG, 18.7, -0.4x
Meta Platforms $FB, 15.2, -0.4x
Disney $DIS, 21.3, 4.9x
Verizon $VZ, 9.4, -0.7x
Comcast $CMCSA, 11.6, 0.9x
AT&T $T, 8.3, 1x
Netflix $NFLX, 17.2, -37.8x
90% Investor
My profile claims I am 90% Investor / 10% Trader.
My experience in the 10% is relatively limited but I have enjoyed the ups and downs while documenting lessons learned and understanding the variety of strategies. Thus far, my posts have been devoted to this 10% because it is new & exciting for me... but what about the other 90%??

On this side of things, it's pretty quiet.
Before going majority cash, I bought solid/established/quality names ($MSFT, $JNJ, $TGT, $T) or index/thematic ETFs ($QQQM, $SPY, $BUG) and forgot about them. Boring, right?
I look forward to when the market bottoms and starts to turn the corner to put 90% of my money back to work.

With that said, I would like to briefly touch on 2 high conviction holdings that have survived my move to cash.

1) $ZIM (sea-freight shipping/logistics company)

With all the supply chain challenges, shipping rates have soared and ZIM has been a FCF monster. They IPO'd in early 2021 and have been rising ever since. The company recently held their Q1 results announcing a 10% increase in full-year 2022 EBITDA guidance and a $2.85/share dividend. Perhaps most importantly, the company believes this environment will maintain throughout 2022 (and may extend into 2023):

Fairly volatile price action which makes it appealing for buying/selling shares or options (only CSP's or CC's for me!).

2) $ASTS (Satellite 5G direct to smart phones)

This one is more speculative.
In a nutshell: they are launching a large satellite array (named Bluewalker 3 - BW3) soon ("this summer") that will test 5G service from space directly to existing smartphone hardware. I believe the recent price action (current price ~$7.00) is partly due to the expectation that a date was to be announced at their Q1 earnings call (it wasn't).

Following successful BW3 launch and testing, a series of "BlueBird" satellites are planned that will provide service to actual customers.

I may be wrong on this but, for the 1st time, I noticed new names (Scotia Bank & Morgan Stanley) on the Q1 call. Looking into it, Scotia Bank actually released a May 9th report titled "Space Mobile: If Successful, BW3 Could Disrupt Global Tower Industry Within 20weeks". Deutsche Bank is one of the first banks to cover the company and recently adjusted their price target to $31.00 (down from $32.00). I expect Morgan Stanley to initiate coverage in the near future.

Additionally, the company seems to be making good progress on all fronts:
  • Backed by American Tower & Rakuten
  • Allegedly on track to complete their "Site 2" facility this year (designed to manufacture 6 "BlueBird" satellites per month)
  • Granted experimental license by the FCC for BW3 launch / testing
  • MOU's with strategic telecom providers ($TEO, $T, $LILA, $TEF, $AMX, $TIGO, $VOD, $MTN.JO, $ORAN)

Keep Treading!
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Dividend Portfolio Update 📈📈
Below is a paraphrase of the full portfolio update and market review article I write weekly. Click here for a full portfolio and economic review, plus a break down of all my trades (which you can see in my profile as well).

"The first week of May was a volatile one that ended in losses for the major averages. The NASDAQ had the worst of it with a 1.5% loss followed by 0.3% from the Dow Jones and 0.2% from the S&P.

The week started with some minor gains and then selling slapped the S&P down to its lowest level in almost a year. The market then bounced back from that weak start and made gains for the next two days. The rally really gained steam on Wednesday following the FOMC meeting where a 50-basis point rate hike was announced. Fed Chair Powell confirmed that a 75 point hike is not being considered which may have been the catalyst for the midweek rally. The S&P had made over a 3% gain on Wednesday.

By the end of the trading day on Thursday, those gains and more were lost. Friday was also weak and did not show much improvement even after the April jobs report beat expectations. Earnings season continued this week, but even the good headlines from notable reports still spurred selling due to market headwinds/concerns.

Portfolio

To date, I have invested $8,610 into the account, the total value of all positions plus any cash on hand is $8,814.78. That’s a gain of mere gain of $204.78 for a total return of 2.38%. The account is up $164.70 for the week which is a 1.90% gain. This week we made back more than half of the losses from last week.

Below is a table of everything we are invested in so far. There you can see my number of shares, shares bought through dividend reinvestments, average cost, gains, and more. The tickers in green are positions that I bought shares in this week.

Dividends

This week we received two dividends. $6.17 from AT&T ($T) and $2.59 from Verizon ($VZ).

In my portfolio, all positions have dividend reinvestment enabled. I don’t hold onto the dividend, I don’t try to time the reinvestment, I just let my broker do it automatically. All dividends were reinvested.

Dividends received for 2022: $113.99

Portfolio’s Lifetime Dividends: $136.91"
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💸 Dividend Forecast - Week of 5/2 💸
And we're back to our regularly scheduled Weekly Dividend Updates! Here are my incoming dividends this week and how I intend to use them:
Taxable
$T - $0.28 per share, $0.56 total, cash
Roth
$LOW - $0.80 per share, $0.80 total, reinvesting
Do you have any dividends coming in this week?
Luka 🦉's avatar
$97.1m follower assets
Earning Presentations 📊
Last 2 weeks of Earning Presentations for the stocks in my portfolio.
Maybe some of you can be interested in 👇

Johnson & Johnson $JNJ

Lockheed Martin $LMT


Procter & Gamble $PG

AT&T $T

Sonoco Products $SON

Genuine Parts Co. $GPC

Kimberly-Clark $KMB (report only)

Verizon $VZ (infographic)

Coca-Cola $KO (report only)


PepsiCo. $PEP (report only)

Archer Daniels Midland $ADM

3M $MMM

Kraft-Heinz $KHC

Microsoft $MSFT (ppt presentation)

Essex Property Trust $ESS (report only)

AvalonBay $AVB

The Southern Company $SO

Qualcomm $QCOM

Altria $MO

Intel $INTC

McDonald’s $MCD (report only)

Now without Fincredible, I need to do the dirty work myself 🤣
$UWMC - I'm getting out
Just last week I posted about the dividend on $UWMC. I had provided a bunch of quotes from leadership about keeping the dividend, but this week has caused me to lose faith. Down 5% today, this sucker just keeps dropping.

I was using $UWMC as a way to experiment with writing covered calls. At their cheap prices, it is easy to accumulate 100 and sell some covered calls. I learned a lot doing it. I also learned that stability in stock price and market cap is important to selling covered calls as well.

After watching this stock tank week after week. I had a change of heart and decided to get out. The yield is getting too high, sentiment for upcoming earnings is not great, the housing market is slowing, and I took a closer look at the companies balance sheet and am not comfortable with their debt levels and their decreasing revenues. In Q4 of 2021 their gross profit was $742M and their current portion of long term debt was $1,120M... obviously something's got to give. If they can't grow revenues in this contracting market, they will look to cut costs in other areas. Losing all this capital was not worth having the opportunity to learn about writing calls.

Finally, as a dividend investor, you constantly see people saying "don't chase yield" or to look out for yield traps. This was my only high yield position (that isn't an ETF), and boy were the sayings right! My confirmation bias on this position was STRONG, but the losses have finally become too much that I have realized the error of my approach with this position.

Though this is a mistake and a set back on the success of my portfolio, it is a great learning experience and an early one. I will have ample time to make up for it and build stronger dividend paying positions in better companies.

I've sold today and rolled that money into other positions in $T, $MMM, $INTC, and $SBUX.

Next
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