Helping Clients Create a Steady Stream of Retirement Income Portfolio Focus Accounts

Transcription

1 Helping Grow and Sustain Client Wealth Helping Clients Create a Steady Stream of Retirement Income Portfolio Focus Accounts There s Wealth in Our Approach. Thomas W. Eaton, Sr., awm First Vice President Financial Advisor, Portfolio Manager Portfolio Focus Director s Council Direct Toll Free Fax Suzi Cordier-Kropp Senior Registered Client Associate Direct Toll Free Fax RBC Wealth Management 6720 N. Scottsdale Rd. Ste. 190 Scottsdale, AZ 85253

2 Time Magazine Cover Story November 2009 A Decade from Hell n Y2K Introduction to the Decade n Internet / Technology Bubble 03/24/2000 n Terrorist Attack 09/11/2001 n U.S. Invasion of Iraq 03/19/2003 n Financial Crisis 10/09/2007 n 18 Month Recession Begins 12/31/2007 n Lehman Brothers Bankruptcy 09/15/2008 n S&P Downgrades U.S. Sovereign Debt AAA to AA+ 08/05/2011 Guru Research January 3, 2000 through December 31, Years of Data Predictable Companies consistency of revenue/earnings growth; to qualify, all years must be profitable Total Number of Stocks Analyzed 3, % 9.4% 5 Star % 4 Star % 3 Star % 2 Star % Unpredictable 3001 < 1.2% Undervalued % Undervalued % Fair Valued % Fair Valued % Over Valued % Over Valued % 1 RBC WEALTH MANAGEMENT

3 Margin of Safety Concept Durable Competitive Advantage: Wide, Narrow or None Intrinsic or Fair Value Sell Zone Type n High Switching Cost n Cost Advantage n Intangible Effect n Network Effect n Efficient Scale Company Business Risk Uncertainty Corresponding to Required Discount to Intrinsic or Fair Value for Purchase Consideration Low Uncertainty 20% discount +25% Medium Uncertainty 30% discount +43% High Uncertainty 40% discount +67% Buy Range Trend n Positive n Stable n Negative Stewardship n Exemplary n Standard n Poor Extreme Uncertainty 50% discount +100% Industry n Positive n Neutral Time n Negative Consistency of Process Key Metrics n Price/Earnings n Price/FCF n Price/Sales n EV/EBITDA n Shareholder Yield n Gross Margin % n Operating Margin % n Net Margin % n ROE TTM n Debt/Equity n Revenue Growth Rate n EBITDA Growth Rate n EPS Growth Rate n Book Value Growth Rate n Asset Growth Rate THOMAS W. EATON, SR., AWM 2

4 My Portfolio Focus Investment Process Stock Universe Domestic & International Market Capitalization $500 Million Predictability Rank Financial Strength Rank Profitability & Growth Rank Gross Margin Operating Margin Net Margin Valuation Factors P/E, P/S, P/FCF, P/B EV/EBITDA, Shareholder Yield 3 RBC WEALTH MANAGEMENT

5 My Portfolio Focus Investment Process (continued) Growth Factors Revenue Growth Rate EBITDA Growth Rate EPS Growth Rate Book Value Growth Rate Asset Growth Rate Debt Growth Rate Special Situation Model Value Model Growth Model Dividend Model n Catalyst n Momentum n Core n Core n Dividend Yield n Dividend Growth Rate n Payout Ratio Wall Street Analyst Research Consensus Price to Fair Value Calculation...Margin of Safety Portfolio Focus Security Selections THOMAS W. EATON, SR., AWM 4

6 My Baker s Dozen Investment Principles These are the principles that I believe and strive to employ in helping investors to construct a portfolio of individual stock securities. These principles are at the core of my Process. You Own Part Of A Business. 1. Remember this: Behind each equity (AKA: Common Stock) is a business. A business that employs people and a business that produces, sells or both a product or service. I don t view stocks like trading baseball cards. Think like a business owner. Stock Analysis Holds Great Importance. 2. When you purchase stocks for your portfolio, 100 shares or 10,000 shares, you are now an owner of a proportionate percentage of that business. Therefore, we should value each stock like a business. A business is worth the discounted value of all future cash flows it can generate. No more, no less. John Burr Williams, Economist. Realized Value Is Witnessed In Time. 3. Warren Buffett, refers to the market in the short term as a voting machine. In other words, popularity rules the day. TV example: American Idol. However, Buffett says in the long term the stock market is like a weighing machine, gravitating toward a company s true intrinsic value. Disciplined Process Prevails Over Fear And Greed. 4. An information edge is nearly nonexistent. Information is plentiful and comes at us from multiple sources constantly. Behavioral finance is alive and well. Humans are fallible! Even smart investors behave poorly and can often make poor decisions based on short term myopia. The two common measures that drive that human fallibility are greed and fear. Through human history that has never changed. We will try to use this understanding to our benefit. When Investing Patience Is Truly A Virtue. 5. Together, our resolve should be to avoid unattractive securities, thereby building an element of safety in our portfolio. To use a baseball metaphor, there are no called strikeouts in investing, so we can be in our ready position, patiently waiting for truly fat pitches before taking a swing. Stock Entrance and Exit Ramps 6. As we build our portfolio I would suggest a strategy of phasing in, and phasing out of positions. I will illustrate this strategy in our meeting that will provide you with clarity Price is Easy 7. The price of anything, (stocks included) is easy to acquire. Pick up any newspaper or look at multiple internet sites. However, if we know only the price but not the value we know nothing. See Principle #8. Valuation Is Key. 8. Paying too high a price for a stock can lead to very disappointing returns, even if the business behind that stock performs admirably. In our meeting I will illustrate with clarity and specificity exactly what I mean between price and value. A Just Balance Is Pleasing. 9. Diversification is important, however, too much of it can definitely dilute the excess returns of your very best ideas. Risk and Reward Management 10. The future is obviously uncertain. Stocks constantly have to climb a wall of worry; therefore I believe each stock purchased should possess a significant margin of safety. This strategy should help mitigate risk. Risk, I believe is the permanent impairment of capital, not volatility. Volatility can be the friend of the long term investor. Weigh The Opportunities. 11. Don t be hesitant to phase out of an average or good investment to take advantage of what appears to be a great opportunity. I believe the investment consideration is paramount to our investment success and the tax considerations are secondary. Investing Is A Multidisciplinary Exercise. 12. Read widely, research with intensity, gather knowledge, weigh the biases, build and invest with confidence. 5 RBC WEALTH MANAGEMENT

7 The conclusion of my Baker s Dozen Investment Principles. 13. Benjamin Graham the Father of Value Investing authored in his book The Intelligent Investor Chapter 8 the following paraphrased: Mr. Market is like your business partner. Every day when the stock market opens, Mr. Market comes into your life. He will offer you a price for every business you own in your portfolio and he will also tell you an offer price for every business that you don t own. He then gives you the choice. You might decide to buy more of one of your current holdings, (phasing in) or (phasing in) to a brand new holding that looks like a great opportunity. If he offers you an extremely high price that exceeds what you believe to be the intrinsic value of one of your businesses you may decide to sell your business to him. Take your profits wait for another fat pitch to present itself in the market and then reallocate your assets. Maybe Mr. Market is in a very subdued mood today and the prices he is offering you to purchase your companies or the prices of new companies are not appealing to you one way or another. You may decide to hold your portfolio as is, and continue your quest of research. Your advantage: you know not only the price of your securities but you are confident in the value of your securities. That edge allows for more prudent decisions regarding taking advantage of market volatility. Key lesson, for the long term investor market volatility (up or down) can be your friend. Mr. Market is open to serve you, never let Mr. Market bully you. THOMAS W. EATON, SR., AWM 6

8 Thomas W. Eaton, Sr., awm RBC Wealth Management 6720 N. Scottsdale Rd. Ste. 190 Scottsdale, AZ Mortgages are financed by Capital Advisors, or by PHH Mortgage Services. RBC Wealth Management is not acting as a mortgage broker or lender. RBC Wealth Management is a registered trademark of Royal Bank of Canada, which operates under the brand name RBC. Trust services are provided by third parties. Neither RBC Wealth Management nor its financial advisors are able to serve as trustee. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor RBC Capital Markets, LLC. All rights reserved. 14-ST-282 (08/14)