September 13, 2014
Nothing to say following my Post of August 31, except it looks like Mr. V. Putin is giving the market an excuse to catch its breath while October, and its reputation for sell offs, begins to rise over the horizon.
Normally, I’d be looking for the slightest excuse to sell stocks, even though my VTI canary is still chirping away in the coal mine. Instead, not being in the VTI trade, I am looking for a safe rational way to improve on my VTI and SPY results. And, lo and behold, I found 3 ETFs that I want to own.
They are PKW. IPKW and SYLD and all their investments are based on the idea that good things happen to firms that are generating sufficient cash to buy back shares below fair market value.
According tro Morningstar, PKW with $2.5 billion in assets has outpaced the S&P 500 Index ( SPY ) by 2.4% annualized between December 2006 and June 2014. Interesting, but why ?, more risk ?, …not exactly. This ETF is known as Power Shares Buy Back Achievers targets companies that have reduced their shares outstanding by at least 5% in the previous year. The thinking goes…if a company is buying back shares ( and not borrowing to do it ), it is doing so with excess free cash it earns from profitable operations after all expenses, including any cash it needs for capital expenditures and research and development. This same free cash could have been used to pay dividends ( taxable to shareholders ), fund an acquisition, or build a monument to the CEO on the front lawn.
Of more recent origin is IPKW (Power Shares International Buy Back Achievers ) This ETF has only $ 17.99 million under management but follows the same methodology as PKW except the names are foreign. Its holdings include names such American Movil, ( Mexico ) , Nippon Telegraph and Telephone, ( Japan ), Magna International, ( Canada ), Westfield Corp, ( Australia ) . The third buyback ETF, Cambria Shareholders Yield ETF, SYLD, follows a rigorous criteria checklist which measures dividend payments, net share repurchases and net debt reduction . It picks a winning 100 and then equal weights each inclusion. Also, more recent than PKW.
All the above methodology is based on having a company that is generating more and more free cash, based on operations, and a management smart enough to know when its shares are undervalued and should be bought back.
Bottom line…these three ETFs appeal to me very much based on the PKW’s 8 year result vis a vis SPY and the philosophy and methodology they follow.
On Monday morning, or thereabouts, I intend to purchase 300 shares each of PKW and SYLD and 50 shares of IPKW. And more, once the V.Putin cloud either passes by or causes the market to correct..
Richard Maurice Gore
PS – I’ve been spending lots of hours turning over ETF stones, looking for winning concepts, for more than eight years. How PKW escaped my attention till now, I’ll never know !