Shareholder Yield as a Valuation Metric

Shareholder yield measures the cash paid out both as dividends and as stock buybacks.

Shareholder Yield = Dividend Yield + Buyback Yield

Buyback Yield = Change in Number of Shares Outstanding ÷ Previous Number of Shares Outstanding

Shareholder yield can be looked at in addition to the dividend yield to see what kind of a return the shareholder will receive through the company’s capital allocation policy.  

A study by Wesley Gray and Jack Vogel of Alpha Architect (“Enhancing the Investment Performance of Yield-Based Strategies,” SSRN, 2012) found that stocks with shareholder yields ranking in the top 40% experienced higher annualized returns, particularly those ranking in the top 20%.

The Stock Market Summed Up

The final point is that stock prices reflect a set of expectations for future financial performance. A company’s stock doesn’t generate excess returns solely by the company creating value. The company’s results have to exceed the expectations embedded in the stock market. – Michael Mauboussin

Source: Thirty Years: Reflections on the Ten Attributes of Great Investors

Edward Altman: The Benign Credit Cycle Is in Extra Innings

Edward Altman says the benign credit cycle is in “extra innings,” but the metaphorical relief pitchers — central bankers — are running out of gas.

 

Source: Edward Altman: The Benign Credit Cycle Is in Extra Innings

Empirical Analysis of Warren Buffett’s Returns

Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks.

A good explanation of  how Warren Buffett has generated consistently high returns through his stock picking ability.  His focus on cash generating value stocks coupled with the use of a little leverage have led to an impressive track record and unimaginable wealth.

Source:  Buffett’s Alpha

Day to Day Noise in the Markets – Brexit Edition

“It is easy to confuse day-to-day noise with actual and significant signals. If you are merely reacting to the latest market action, then what you have is not a plan — you have an instinctual, fear-driven reaction, and it’s the makings of a disaster.”

Source: The Big Picture – Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media

Sequoia Fund Bails Out of Valeant Pharmaceuticals and You Don’t Have to Make Your Money Back in the Stock You Lost it In

Our new leadership elected to sell our position in Valeant Pharmaceuticals, exiting completely by mid-June. Valeant was our largest position to start the year and its 80% decline through June 30 badly penalized our results. – Sequoia Fund Shareholder Letter

Sequoia Fund management’s decision to finally exit their stake in Valeant Pharmaceuticals ends a painful almost year long slide in their biggest position and what was at one time their best performing holding.

Sequoia was an early investor in the Mike Pearson era Valeant.  A strong believer in what they saw as a savvy manager who took a value approach to buying healthcare assets and wringing efficiency from them.   Sequoia started purchasing Valeant in early 2010, probably at prices in the mid teens, and by the end of the year the position accounted for 10% of the funds assets.  At year end they already had a gain of 78%.  A fantastic return on investment in less than one year and a big boost to the fund’s performance.

The fund managers continued to build a position over the next five years and were enjoying the outperformance the stock added to the fund’s returns.  By 2015 the position reached 20% of the fund’s assets and Sequoia also became Valeant’s single largest shareholder.

Then in August of 2015 the position began to lose money.  You can’t fault the fund managers for sitting on the position while the stock declined in August along with the rest of the global markets. Continue reading

Second Quarter 2016 Asset Class Returns

Asset Class Index Performance YTD 2016
Emerging Markets MSCI EM 6.6%
REITs NAREIT Equity REIT Index 13.7%
High Yield Bonds Barclays Global HY Index 9.2%
US Bonds Barclays Aggregate 5.3%
US Large Cap S&P 500 3.8%
Commodities Bloombery Commodity Index 14.2%
Developed Intl. Markets MSCI EAFE -4.0%
US Small Cap Russell 2000 2.2%

More Bad News for Hedge Funds – and their Clients

Hedge funds provided lower average net annual returns to U.S. pension funds than any asset class except cash, according to a report analyzing $8.4 trillion in defined-benefit plans from 1998 through 2014.

Source: Hedge Funds Provide Worst Long-Term Gains to U.S. Pension Plans – Bloomberg