For 2007, I predict the high for the S&P 500 will be 1560, the low will be 1280, and the close will be 1520. I think the S&P 500 will track sideways with a downward bias in the first quarter. I expect a good rally in the second quarter, during which the high for the year will be achieved. But I believe the third quarter is likely to feature a sharp correction during which the low for the year will be seen. However, I expect most of the ground lost in the third quarter will be regained in the fourth quarter, and that the year will have a strong close.
Archive for December, 2006
2006 has been a highly successful year. I am up 25.3% in the equity portion of my portfolio and 15.2% overall. I attribute most of the gains to overweighting in the energy and telecommunications sectors rather than astute stock-picking. However, a number of stocks I bought in 2005 and early 2006 have contributed significantly, including PFE, MRK, KFT, CAG, and KO. One of my goals in 2006 was to improve portfolio diversification through investment in a number of exchange-traded funds, with an expected outcome that portfolio volatility would be dampened at a cost of slightly lower overall performance. However, most of the ETFs have done better than expected. These include PID, PHO, PBW, ADRE, GDX, and FXE.
Today is buying day for the Dogs of the Dow. I already own these stocks. My only new Dogs investment this year is to increase my position in Pfizer by 50%. I just accomplished that with a limit order to buy at 25.90. These shares, which are yielding 4.48%, will make a nice complement to the ones I purchased last December at 20.19. The bearish case for Pfizer was succinctly summarized by Prakash Kolli in an article recently syndicated by SeekingAlpha. However, people were even more bearish on Pfizer last December. The shares I purchased then are up 28% for the year and my original investment is now yielding more than 7% due to dividend increases.
York Water was analyzed in this blog on December 22. This morning I bought the stock at 17.90 on a limit order. After writing the previous article, I learned that company insiders have been buying an astonishing amount of stock all year, including large purchases in December at 17.90. I assume that no one knows what this stock is worth quite as well as the directors of the company. The buying by company insiders has alleviated my concerns and I am following their lead. Insiders may sell stock for many reasons, but they only buy it when they think the share price is going to rise in the future.
One of my proprietary indicators has just given a sell signal for the 10-Year Treasury Note. I predict that the 10-Year Yield will rise from the current 4.69% to at least 5.35% by June 2007.
It is apparent that 15-Year and 30-Year Mortgage Rates are also rising.
Short-term interest rates are holding steady for now, resulting in a new trend toward flattening of the inverted yield curve which has been with us since July 2006.
These subtle changes have far-reaching implications for the economy and for the stock market, especially for banks and utilities and the REIT and housing sectors.
As we move into 2007, I am going to change the focus of the Alligator Investor blog a bit. There may be less analysis of individual companies and more commentary on investment themes and the overall market. There could be fewer posts, but hopefully they will be timely and relevant. I will be logging all of my personal trades as they occur.
The big change this week is that Pfizer (PFE) vaulted to the top of the list after raising their quarterly dividend from .24 to .29, an increase of 21%. PFE is now yielding 4.46%. Although Pfizer has well-known problems, the shares appear to be undervalued in relation to their dividend yield and future prospects. There is an excellent post by Fat Pitch Financials on SeekingAlpha setting forth the case for Pfizer.
Anything can happen in a week, and other Dow stocks could raise their dividends, but we are probably looking at something closely resembling the final Dogs of the Dow list as of December 29, 2006.
The market is looking toppy and the yield of the 10-year bond has risen to 4.62%. I would not be surprised to see a shakeout in the days ahead, although perhaps not a full-scale correction just yet. The energy sector weakened this week but the Philadelphia Bank Index is starting to strengthen against the S&P 500, and that is always a good sign for the overall stock market.
The final small-cap water utility stock I will report on for the time being is York Water Company. YORW is the oldest investor-owned water utility in the U.S., and it has been in continuous operation since 1816. This company, which has a market cap of 189M, impounds, purifies, and distributes water in York and Adams Counties, Pennsylvania. YORW owns two reservoirs, Lake Williams and Lake Redman, which have a capacity of more than two billion gallons. The company serves industry, businesses, and private homes in 34 communities.
York Water is a mini-blue chip. It has turned in a stellar performance in relation to the S&P 500 in recent years, despite having an extremely low beta of 0.08. This stock rose steadily while the S&P was having its bear market from 2000 to 2002. The shares have a current dividend yield of 2.61%. YORW has an excellent record of steadily increasing their dividend in recent years. However, the payout ratio is rather high now at 77%, and that is not good. There have been two recent stock splits – 2-for-1 in 2002, and 3-for-2 earlier this year.
York Water has a near-monopoly on the distribution of water in the area it serves, and it looks like York County is “one of the most progressive and fastest growing areas in our whole Nation”, according to the official York County government website. Numerous manufacturing businesses appear to be thriving in the area, including Hershey, Snyder’s of Hanover, Utz Potato Chips and many other food businesses; Harley Davidson, dinnerware and glass manufacturers, as well as several wineries and brewers, and considerable farming and dairy activity. I don’t know how our current economic slowdown is impacting current water demand in York County, but the existence of these businesses bodes well for future water demand.
After reaching a split-adjusted all-time high of 20.69 last September, the shares have undergone a correction of some 13% to date, so far, partly due to the effect of a new supply of 645,000 shares of stock the company recently sold at 17.90 to retire short-term debt incurred in recent capital expenditures. I believe YORW will soon be offering an excellent entry point for astute long-term investors. But I am going to watch and wait for a while. The payout ratio is too high, the market looks toppy, YORW’s on-balance volume chart reflects a distribution pattern, and the short-term price trend is down.
Pennichuck collects and distributes water in southern and central New Hampshire. PNNW also engages in several unregulated businesses, including water monitoring services and real estate ventures. New Hampshire is an attractive state and a good investment destination. It offers low taxes, a vibrant economy, and a good balance between development and preservation of rural and wilderness areas. There is plenty of good water in New Hampshire.
This company has been around a long time, in fact they claim to be New Hampshire’s oldest continuously operating business, but Pennichuck is still very small with a market capitalization of only 83M. The stock has a long-term performance profile similar to the S&P 500, but it is much less volatile (beta 0.03) and offers a much more generous dividend yield (3.35%). The company has an excellent recent dividend history and there were 4-for-3 stock splits in 2001 and 2005.
The shares achieved an all-time high of 25.25 last February, then declined until they found a bottom at 16.85 in September. They have rallied from there to a recent price of 19.79.
There are a several issues that make me wary of this stock. One is that the city of Nashua, N.H. is interested in a possible hostile takeover of PNNW. Secondly, the company is involved in expensive litigation with the city of Nashua regarding eminent domain issues. And finally, it must be noted that earnings have been erratic in recent years, and there have been several extended periods of declining earnings.
A well-balanced portfolio needs to have a variety of unrelated investments. I am always on the lookout for investment vehicles with a low correlation to existing assets which could dampen portfolio volatility and increase income. Earlier this year I was looking over the closed-end covered call funds and ended up buying some MCN. These funds buy dividend-paying large-cap stocks and write calls on the shares to generate additional income, sacrificing some of the stocks’ upside potential to increase yield. There are other covered call funds, and they may be better than MCN, but that is the one I own.
MCN hasn’t done very well in relation to the S&P historically but it does have a current yield of 8.89%, a low 1-year correlation to the S&P of .41, and a very low beta of .17. MCN was selling at a 5.1 % discount to net asset value when I bought it and that discount has narrowed to .07% at present. I would like to buy more, but I want to get it at a good discount to net asset value, so I am waiting.