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Foreword What a difference a year makes. Last year at this time the markets were in a major decline, and I was trying to convince our readers and people close to me to keep investing and keep buying good companies. Now the markets are trading at all time highs. 2019 it appears will end on a high note. What’s in store for 2020 is anyone’s guess. Most readers understand by now that we do not try to predict the markets. We keep to the same simple rule. Find good companies that have been undervalued by the markets and invest in them. Although the stock market has been on an 11 year bull run we believe there is value in the markets. There are technologies that could take the next step in 2020. Technologies like 5G and Blockchain for example. Then there is the marijuana industry, which has experienced a serious decline in the stock market during the second half of 2019, but still represents a tremendous growth opportunity. For this issue of the newsletter we've isolated two companies that we feel have good days ahead. One company is an industry giant in technology, but has been beaten down due to oversupply. The full roll out of 5G should help this company get back on track. Our second company operates in the food processing industry. The company's past two years leads us to believe that it is capable of more growth. Thanks again for checking out this issue of The Seville Report Newsletter. Should this newsletter reach you before or during the holidays, happy holidays to you. If it reaches you afterwards, Happy New Year, and may you have a prosperous 2020. Sincerely, Paul Black 2
Table of Contents Side A Micron Technology Page 5 Simply Good Foods Page 12 Canopy Growth Company Review Page 21 2020 Investor Reading List Page 27 The Safety Investment Strategy Page 34 Quarterly Economic Data Page 43 Side B Our Portfolio Page 46 How to Use The Seville Report Page 55 Stocks That Didn’t Make The Report Page 58 Glossary Page 59 Things You Should Know Page 62 3
“That is about all I have learned — to study general conditions, to take a position and stick to it.” Edwin Lefevre, Reminiscences of a Stock Operator 4
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What Does Micron Do Micron Technology, Inc. manufactures and sells memory and storage solutions worldwide. The company operates through four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit. It offers memory and storage technologies, including DRAM, NAND, NOR Flash, and 3D XPoint memory under the Micron, Crucial, and Ballistix brands, as well as private labels. The company provides memory products for the cloud server, enterprise, client, graphics, and networking markets; memory products for smartphone and other mobile-device markets; SSDs and component-level solutions for the enterprise and cloud, client, and consumer storage markets; other discrete storage products in component and wafer forms for the removable storage markets, as well as 3D XPoint memory products; and memory and storage products for the automotive, industrial, and consumer markets. 6
Why Invest in Micron Technology The universal adoption of 5G technology The expectation for memory needs to increase due to 5G technology. 5G tech will require more memory capacity than 4G. This is an investment case where the company does what it does well, and innovations finds the company. Micron has been a solid supplier of memory components for years, and 5G devices will require more memory. The stock has been beaten down over the last two years. The company has dealt with inventory issues and being stuck with an oversupply of memory as demand fell. This caused the company’s average selling price to decrease. Also the company has been hard hit by the trade war. 50% of Micron’s business comes from China, with a large part of that 50% coming from Huawei. In mid 2018 Micron traded to over $61 per share then the problems hit. The question over the past year has never been is Micron Technology a good company, it’s been has the bad days plaguing the company over? Many investors, us included have attempted to time when Micron would get its groove back, which meant timing when NAND and DRAM components had hit their bottom. This was a terrible decision on our part. The stock is up 47% in 2019, and 5G hasn’t been fully rolled out. There is some good news now surrounding the industry and Micron Tech. Recently the price of NAND rose 13.8% and DRAM prices are falling more slowly. On the technical side Micron started production of memory chips using it's 3rd generation 10 nm-class fabrication technology. The benefits of the new chip are increased bit density, lower power consumption, and enhanced performance. Micron is the third largest NAND chipmaker behind Samsung and Toshiba. Micron’s market share in NAND is 16.5% and 23% in DRAM. 7
The numbers for fiscal year 2019 have been anything but stellar. After revenue growth in 2016 ($12.3B), 2017 ($20.3B), and 2018 ($30.3B), revenue fell 22% in fiscal year 2019 to $23.4 billion. Net income in Q4 2019 dropped to $560 million, from $4.3 billion a year before. The numbers have been ugly, but that is the result of the issues we pointed out earlier. On the positive side cash from operating activities has increased over the past two years. The company boasts more cash than debt. According to E-Trade Micron’s gross margin is more than 61% of the other companies in the semiconductor industry, and MU controls its costs and expenses better than 94% of its peers A rising tide raises all ships. 5G is the tide, Micron is one of the ships. If there were a choice between great analysis and great timing, we would choose great timing, but timing the market is a game very few people do well. The idea with Micron is to invest and wait. Wait for the industry to work out of it’s cyclical decline, wait for a full worldwide 5G roll out, and wait for the stock price to increase. What are The Investment Risk The memory business is cyclical in nature, and extreme supply and demand are seen every few years. Investing at the height of they cycle can result in major losses, investing to early during the low of the cycle can result in capital not earning as much as it could elsewhere. There is risk that the oversupply that has weighed down the industry continues. In the case of Micron our investment thesis is that the company will benefit from the roll out of 5G. This roll out is expected to occur in 2020 and beyond, but it could be delayed for reasons outside of Micron’s control. Also Micron’s exposure to China and Huawei are causes for concern. We’ve been teased by a tweet that a deal is close to being done, only to see more tariffs put on Chinese products. At this point it’s anyone’s guess if a deal will be struck while Donald Trump is in office. Micron does not pay a dividend, so the time spent waiting for the stock appreciate will be down with no quarterly payments from Micron. 8
With the investment risks taken into consideration we still believe the long-term potential of Micron outweighs the current risks the company deals with. Micron Peer Review Income Statement MU AMD NVDA INTC Industry Sector Revenue (ttm) $23.4B $6.0B $10.0B $70.4B EBITDA $12.8B $557M $2.5B $32.1B Industry Sector Net Income (ttm) $6.31B $209M $2.41B $19.3B Diluted E.P.S. (ttm) $5.51 $0.19 $3.90 $4.27 Industry Sector Balance Sheet AMD NVDA INTC Total Assets MU $4.5B $13.2B $127B Industry Sector Total Liabilities $48.8B $3.2B $3.9B $52.9B 23.2% 2.37% Cash Flow Statement $12.1B AMD NVDA INTC 25.6% 5.44% Operating Cash Flow (ttm) $171M $4.19B $30.1B 14.2% 1.43% Levered Free Cash Flow (tm) MU $17.8M $2.82B $11.4B 24% 3.65% Margins $13.9B AMD NVDA INTC Sector Profit Margin $1.35B 3.47% 24.9% 45.5% Industry 31.4x Operating Margin (ttm) 5.91% 21.4% 30.8% 17.9x 2.76x Return on Assets (ttm) MU 4.64% 9.12% 10.3% 4.90x 3.37x Return on Equity (ttm) 26.9% 12.6% 23.3% 26.6% 4.87x 19.1x Ps 31.5% AMD NVDA INTC 7.98x Price to Earnings (ttm) 10.0% 204.9x 55.5x 13.5x Price to Sales (ttm) 18.1% 6.87x 13.17x 3.69x Price to Book (mrq) 20.0x 11.8x 3.40x Price to Cash Flow (ttm) MU 254.9x 31.6x 8.37x 8.62x 2.25x 1.46x 3.99x Micron’s profit margin and Operating margin are above its industry and sector averages. Its P/E, P/S, P/B, and P/CF are below its industry sector averages. Micron is either undervalued or a value trap, our belief is that Micron offers value at this price. 9
Micron Tech. Buy Zone $40.00 - $50.00 We like Micron between $40 and $50 per share. The most recent small pull backs have been able to find buyers above $40 per share. We believe this will continue and during the pull backs Micron will make higher lows. A fall below $40 per share will not automatically trigger a sell, but we will re-evaluate our position and investment thesis. 10
What is Wall Street Saying Organization Rating Price Target Date KeyBanc Buy $59.00 11/14/19 Mizuho Securities Buy $53.00 11/10/19 UBS Hold $47.00 11/08/19 Needham Buy $60.00 10/30/19 Longbow Research Buy - 10/15/19 Summary Top Reasons to Invest in Micron Technology 1. The memory needs of 5G devices will benefit Micron Technology 2. The price of NAND has seen a recent increase and DRAM has declined at a slower rate than it has in the past, indicating that prices may have bottomed. 3. A major player with good market share within the industry. Top Reasons to Avoid Micron Technology 1. The cyclical nature of the industry. 2. The company’s exposure to China and Huawei present significant risk for the company. 3. A 5G rollout could be delayed for reasons outside of Micron’s control. 11
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What Does Simply Goods Foods Do The Simply Good Foods Company is a holding company. The Company through its subsidiaries, is engaged in developing, marketing and selling of branded nutritional foods and snacking products. The Company offers a range of products such as nutrition bars, ready to drink (RTD) shakes, snacks and confectionery products. These all products marketed under the Atkins, SimplyProtein, Atkins Harvest Trail, Atkins Endulge, and Atkins Lift brand names. The Company offers three main types of nutrition bars including Atkins Harvest Trail Bars, Atkins Meal Bars And Atkins Snack Bars.The Company’s Atkins harvest trail bars contain eight grams of protein and 9 to 10 grams of fiber, and are available in a variety of flavors, including blueberry vanilla and almond, dark chocolate sea salt caramel and vanilla fruit and nut. 13
Why Invest in Simply Good Foods Simply Good Foods appears to be an undervalued company at this time. The company sells shakes and protein bars among other products that cater to the consumers who are conscious of their carb in-take. Simply Good Foods owns the Atkins name and has seen its revenue grow 21% in fiscal year 2019 from fiscal year 2018. We believe the company still has room to grow. The anti-carb movement is still a thing with no signs of slowing. The snack bar space, while very competitive is large and growing. In 2017 the market was valued at $6.8 billion and expected to reach $8.8 billion by 2023. Nutritional snacking has only seen 50% household penetration. We like the way the company has been trending over the last two years. Revenue is up 32% since 2017. Operating earnings have increased 180% since 2017, Free Cash Flow was negative in 2017 and jumped to $72 million in 2019. Cash and Cash equivalent has also increased in the same time span. The company is more than protein shakes and snack bars. Under the Atkins brand the company also offers meal kits and frozen meals geared toward the consumer looking for low-carb and low calorie meals. The recent acquisition of Quest has only helped to strengthen Simply Food’s position within nutritional snacking. We see the company continuing to grow with its industry and as the snack bar. What are The Investment Risk The revenue growth of 21% from 2018 to 2019 topped exceptions of 4 - 6% growth, can the company do it again in 2020 and beyond? The company’s growth is dependent on trends continuing towards being healthy. Should consumer trends shift this could hurt Simply Good Foods drastically. 14
Also to finance the acquisition of Quest Nutrition, Simply Foods issued new stock and increased its debt. As of this writing interest rates are low and the global economic outlook appears to be positive. The U.S. and China are in continued talks to complete a phase one trade deal. Although Simply Foods doesn’t have a large international exposure, how the U.S. and China trade deal gets resolved could still impact the company. Over the past year the global economic outlook has been tied to the U.S. - China trade war. We’ve seen consumers become frugal when the outlook isn’t positive, and less frugal when the outlook brightens. For non-essentials like snack bars and protein shakes, a bright economic outlook benefits Simply Foods. We’ve taken the risks associated with an investment in Simply Good Foods and believe the potential long term gains outweigh the risks associated with an investment. 15
Simply Good Foods Peer Review Income Statement SMPL MDLZ NOMD POST Industry Sector Revenue (ttm) $523M $23.7B $2.52B $5.68B EBITDA $91.5M $5.02B $424M $1.12B Industry Sector Net Income (ttm) $47.5M $3.97B $162M $124M Diluted E.P.S. (ttm) $0.56 $2.71 $1.01 $0.00 Industry Sector Balance Sheet SMPL MDLZ NOMD POST Total Assets $1.1B $62.7B $5.4B $11.9B Industry Sector Total Liabilities $304M $16.7B $3.2B $9.0B 4.7% 3.89% Cash Flow Statement SMPL MDLZ NOMD POST 0.95% 16.0% Operating Cash Flow (ttm) $13.9B $3.94B $420M $688M 1.35% 4.16% Levered Free Cash Flow (tm) $1.35B $2.44B $318M $279M 6.58% 6.30% Margins SMPL MDLZ NOMD POST Sector Profit Margin 9.08% 15.4% 6.45% 2.19% Industry 24.3x Operating Margin (ttm) 16.0% 15.7% 14.2% 13.1% 21.6x 1.34x Return on Assets (ttm) 4.96% 3.96% 3.47% 3.73% 1.27x 2.76x Return on Equity (ttm) 6.30% 15.2% 6.60% 4.20% 1.38x 13.3x Ps SMPL MDLZ NOMD POST 13.0x Price to Earnings (ttm) 49.3x 19.4x 24.1x 63.6x Price to Sales (ttm) 5.03x 2.67x 1.56x 1.32x Price to Book (mrq) 2.70x 2.82x 1.77x 2.60x Price to Cash Flow (ttm) 36.0x 19.1x 9.71x 10.8x Simply Good Foods has a better profit margin than the industry and sector averages, which is a good thing. The P/E, P/S, and P/CF are all higher than the industry and sector averages, indicating that SMPL at this level is not a traditional value buy. 16
Simply Good Foods Buy Zone $23.00 - $28.00 For Simply Good Foods we like the stock between $23.00 - $28.00 per share. Our goal is to establish our position before it breaks its most recent high. Over the $30 high is where we anticipate more investment dollars finding the stock and pushing it to new all time highs. Below $23.00 per share is where we will re-evaluate our position and investment thesis 17
What is Wall Street Saying Organization Rating Price Target Date - 11/18/19 Buckingham Research Buy - 09/09/19 - 11/08/19 Wells Fargo Outperform Bernstein Outperform Summary Top Reasons to Invest in Simply Good Foods 1. Solid company that operates in growing packaged-foods industry 2. The continued trend of health conscious consumers can continue to fuel revenue growth 3. The trend of the last two years of growing revenue, growing operating income, growing free cash flow, and growing cash and cash equivalent. Top Reasons to Avoid Simply Good Foods 1. Rising debt load. 2. Company does not pay a dividend 3. Outlook of global economics can impact consumer spending habits towards non- essential health related goods 18
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The Information “The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” -Peter Lynch 20
Canopy Growth Company 21
Learn Think Invest canopy Est. 2013 (CGC) SmOitnthsariFoalls Canada $19.16 Tweed, a Canopy brand. Tweed is NYSE the most recognized cannabis brand in the world according to Canopy. 1. Does the company have a product or service that can capture a sizable market share? When it comes to products Canopy has all the bases covered. It offers edibles, THC and CBD infused beverages, dried flower, oils and concentrates, soft gel capsules, and hemp. 2. Is the company spending on research and development? For fiscal year 2019 Canopy spent $15 million Canadian on research and development, which is 6.7% of 2019’s total revenue. It appears the company is serious about it’s R&D, the 2019 spend increased by 948% from fiscal year 2018. With one quarter reported for fiscal year 2020, Canopy has spent over $8 million during the quarter on R&D. 22
in 2015 2016 2017 2018 2019 2020 millions $2 $13 $40 $78 $226 $311* Year-over- 550% 207% 95% 189% 37.6%* Year Growth Revenue * estimated for 2020 3. Does the company have a decent sales force? If yearly revenue told the entire story, it looks like Canopy’s sales force is doing well. In the company’s earnings report for Q2 2020 Canopy reported C$57 million dollars in revenue, which was down from Q1 2020, but a year-over-year increase of 228% compared to Q2 2019. The company has proven it can move product. In Q2 2020, Canopy sold 10.913 kilograms per kilogram equivalents of cannabis products, an increase of 3% from the previous quarter. The company has also expanded where its salesforce can work after receiving a license for a storage and distribution facility in the United Kingdom. Canopy also secured exclusive rights to supply medical cannabis in Luxembourg. Canopy has also spent the money needed to get the word out to increase its sales. Money spent on sales and marketing in FY 2019 was $154 million, up from the $38 million spent in FY 2018. For Q2 2020, the company has already spent $60 million, up from the $40 million spent on sales and marketing spend during the same period last year. When it comes to companies in the marijuana industry we need to review revenue numbers with a grain of salt. The legalized weed industry is a new thing, and money is usually attracted to new. The real story of Canopy’s sales force will be told when the newness of legal marijuana wears off. 23
4. Is the company’s profit margins increasing and can the company continue to increase profit margin? In growth industries we don’t expect to see profits right away, but what we would like to see is the profit margin going from a large negative number to a smaller negative number and then to a positive number. At this time Canopy, like many other companies in the industry Canopy's profit margins are going in the wrong direction. But again, it is typical for young companies in growth industries to show losses, even big losses early as they try to build out their companies. Canopy Profit Margin 2016 2017 2018 2019 -23% -20% -89% -303% Profit Margin Many companies have spent heavily to build out their infrastructure, and that spending has eaten into potential profits. As the industry stabilizes and more laws are passed in favor of legalizing marijuana, the hope is that the companies in the marijuana industry can maintain high levels of growth while spending less, and potentially become profitable 5. Does the company have outstanding executives, managers, and board members? Who a company has on its board and its executive suite is no guarantee of running a successful business, but in the brand new legalized weed industry it helps separates the people trying to build businesses from the snake oil salesmen. Canopy has an impressive list of executives, managers, and board members. David Klein - Chair of the Board, is the Executive Vice President and CFO of Constellation Brands. Klein joined Constellation in 2004 as VP of Business Development. He has held the position of CFO at Constellation Europe as well. Constellation Brands is the home of Corona, Modelo, and Svedka Vodka to name a few of their brands 24
John K Bell, CPA. Director. Founded Shred-Tech and also purchased Polymer Technologies and turned it into a global auto parts company. John Bell is also the lead investor and chairman of BSM Wireless. Peter Stringham - Director, Served as CEO of the The Young & Rubicam Group of Companies starting in 2007, and has recently retired. Stringham also held the position of Group General Manager of Marketing of HSBC Holdings Bill Newlands - Director. Bill is President and CEO of Constellations. Judy Schmeling - Director. Served as COO for HSN from 2013 to 2017. From this short list of names we can see that Canopy has people with experience on its team. Judy Schmeling formerly of HSN, Davide Klein, and Bill Newlands of Constellation Brands have experience in retail and moving products, namely alcohol. Peter Sringham’s time at The Young & Rubicam Group brings marketing expertise, and John Bell has proven himself to be a successful serial entrepreneur. Five Question Summary 1. When it comes to products and services Canopy offers edibles, THC, CBD infused beverages, dried flowers, oils and concentrates as well as soft gel caps and hemp. The company is making itself a one-stop shop for consumers needs and business needs. 2. The company is serious about research and development increasing spending on research by over 900% in fiscal year 2019. The weed industry is a young industry, and the best the industry has to offer could be well ahead of it. Company’s will only reach that point with determined and focused research and development. 3. Canopy has been able to grow sales over the last four years, and revenue is expected to grow in fiscal year 2020. With a new law recently passed allowing for the sale of edibles and other cannabis derivatives in Canada, Canopy should be able to continue its revenue growth in the future. 25
4. The profit margin isn’t pretty for Canopy, it’s negative and heading in the wrong direction. Can Canopy be a profitable business or can any of these major marijuana companies be profitable? This is what investors should be keeping an eye on with Canopy and other companies all in on the marijuana industry. 5. When it comes to qualified and competent officers and executives Canopy has this covered. The company's board is occupied by people who have experience in retail, marketing, and entrepreneurship. As with most companies in the marijuana industry we’ve labeled Canopy a speculative buy. For an investor who is looking for a little excitement Canopy offers a lot of upside potential. The company should grow as the weed industry grows, but there are many fundamental issues that make it far from a safe investment. Large quantities of marijuana, a market that has been overestimated, slow moving legislation, high costs, and a lack of profits are just some of the issues. Investors eyeing Canopy need to continue to monitor the industry as a whole. New laws that allow the sale of edibles and other cannabis derivatives definitely help Canopy and its Canadian operations. However, Europe represents a large market and how laws change moving forward could help or hurt the company. The 5 Questions. The five questions are taken from the legendary investor Philip Fisher and his book “Common Stock and Uncommon Profits.” In this must read book Fisher breaks down how he found and valued growth companies. We’ve taken five of the questions from the book to use in our review of marijuana companies. The weed industry presents a huge growth opportunity, and because of this we continue to keep our eye on the companies within the industry. As we gain more insight of the industry and the companies within it we will be sure to keep our readers posted. 26
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2019 is just about in the books, which means it’s time to start looking towards 2020 while thinking about how we can improve on 2019. The best way to make an improvement in life, health, career, or investment is to increase knowledge in those particular areas. This year to close out 2019, we’d like to share our recommended reading list to be a better investor. We feel the selections will serve investors in several ways. First, the information learned by reading any of these selections will make for a more informed investor, which in turn will make this newsletter easier to understand. Second, these pieces can help an investor learn how to pick winning investments on their own. While there are hundreds, if not thousands of books written on investing and trading we’ve isolated this list because of the simple nature they are written in. These selections are written for people who don’t stare at Bloomberg machines and analyze companies all day for a living. These six recommendations, have been praised by investors of today and yesterday, and will likely receive praise from investors in the future. Without further ado let’s get into the list. 1 Warren Buffet’s Letters to Shareholders. There aren’t too many people who don’t know who Warren Buffett is. The billionaire investor has been writing a yearly letter to the shareholders of his Berkshire Hathaway company since 1970. Over time the letters have become must reads in the investment community. We recommend the letters because of how simply he explains the world of investing and finance. Buffett has said he writes the letters as if he’s writing to his sisters, who he says are intelligent women, but aren’t professional investors. The Essays of Warren Buffett: Lessons for Corporate America is the book that holds a collection of the letters, but you can find many of the letters online. 28
2. The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails - Steven M. Sears This book doesn’t receive too much press now-a-days. I believe it’s because it explains the game that is Wall Street investing. The book discusses why the big investment firms, banks, and even the investment media do what they do and how it causes the average investor to stay on the losing side of the market. The Indomitable Investor helps its readers develop an investors mindset that is more in line with the winners on Wall Street. When Warren Buffett says be fearful when others are greedy, and greedy when others are fearful, The Indomitable Investor explains why that strategy works. 3. The Intelligent Investor - Benjamin Graham The Intelligent Investor is considered a classic amongst investors professional and amateur. Written in 1949 the Intelligent Investor has aged very well. In my experience it’s the book most recommended to new value investors. This book may be the most technical of all the readings on this list, but it’s still fairly simple, What readers get from The Intelligent Investor is a fairly simple way to value a company. There are no crazy formulas, so the reader doesn’t have to have a Phd in math to put what’s in the book to practice. Benjamin Graham is seen as the godfather of value investing. He was Warren Buffett’s professor when Buffett attended Columbia’s business school, and later became Buffett’s mentor. This book continues to withstand the test of time and will only help any investor who dedicates time to reading it. 29
4. Common Stocks and Uncommon Profits - Philip A. Fischer This book is another classic amongst Wall Street pros and amateurs. Common Stocks and Uncommon Profits explains to the reader how Fischer was able to make investments in growth companies that won big for him and his clients. This is another book that is written in the format of this is how I do it, and this is how investors who would like the same success should do it. In his book Fischer explains it all. Where Warren Buffett and Benjamin Graham are known more as value investors, Philip Fischer explains how to successfully invest in growth companies. The “scuttlebut” will get a chuckle out of readers the first few times they read it in the text. But after reading Common Stocks and Uncommon Profits, investors will understand why scuttlebutting works. 5. One Up On Wall Street - Peter Lynch In One Up on Wall Street Peter Lynch explains how common sense investing made him and his firm millions of dollars. He explains to the reader how they can apply some of the same strategies today to make winning investments. The book skips the technical jargon that people would likely associate with a book this well known throughout the investment community. This is the reason the book shines and why it is still highly recommended. Whether it’s a new investor who has plans to buy their first stock in the near future, or someone who has invested for years, this book simply explains how to spot winning investments. 30
BONUS 6. Reminiscences of a Stock Operator - Edwin Lefèvre Reminiscences of a Stock Operator is more than an investment book, it’s a great story. The book follows trader Jesse Livermore through his ups and downs as a stock operator. The reader feels the highs that come with winning big on a trade, and also the lows that come with losing big. The book is part history book, part triumphant story, and part cautionary tale. Any investor looking for an entertaining, insightful, informative ride around the markets should check out Reminiscences of a Stock Operator. Summary Any investor from very green to very experienced can get something from the books on this list. If a chance presents itself over the holiday to read all six books that would be amazing, but reading even one of the books can help anyone get a better understanding of successful investing. 31
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In previous issues we’ve discussed the growth investment strategy and the income investment strategy. To recap, investors looking to grow the amount of their investment accounts rapidly use the growth strategy. These investors prioritize companies with strong revenue growth and earnings per share growth over other companies. Investors who are in need of income employ the income investment strategy and seek out investments that generate a return through dividend or interest payments. Investors that favor income investing are more concerned with monetary disbursements from their investments, than they are with growing their investment accounts quickly. In this quarter’s newsletter we’ll discuss the safety investment strategy. For investors who invest for safety, the security of their money ranks above growth or income. These investors may have short or long-term plans for their money, and want to avoid the risk associated with growth or income investing. Typically, the safer the investment, the lower the rate of return will be on the investment. Investors aren’t going to get rich investing for safety and we’ll explain why that is the case as we go through several safe investments available to investors. The Savings Account The savings account may be the most popular of any safety investments. Most people know what a savings account is and how it works. Benefits: Safety, is the biggest benefit to keeping money in a savings account. Investors don’t have to worry about market fluctuations affecting their deposits; and saving account deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) or 35
the National Credit Union Share Insurance Fund (NCUA) up to $250,000 in total deposits. Another benefit of savings accounts is that they are relatively easy to start, and can be set up at a local bank. As for this writing the average interest rate for U.S. savings accounts is 0.09%. according to ValuePengin.com. Another benefit of savings accounts is that there are no liquidity risk. Investors are able to withdraw their money whenever they need. Disadvantages: There are several disadvantages to savings accounts. First, there are the low returns offered by banks on savings deposits, as earlier stated 0.09% is the U.S. national average. Also saving accounts can be prone to bank fees if a certain deposit minimum isn’t maintained in the account. Where to Buy or Invest: Investors can establish a savings account at any number of local banks and credit unions, as well as online banks, which typically offer higher interest rates than their brick- and-mortar peers. Online Banks Brick-and-Mortar Banks Credit Unions 36
The Money Market Account Money market accounts operate similar to the savings accounts, except they offer higher interest rates, and have an account balance minimum. Benefits: As of this writing, the national average for money market accounts in the U.S. is 0.18% on accounts with less than $100,000 and 0.29% for accounts over $100,000. Money market accounts like savings accounts are liquid and allow depositors to access and withdraw their money whenever they need to. Disadvantages: Some of the disadvantages of money market accounts are the minimums required to open an account and the minimum account balance required. The minimum to open an account and to maintain the account do vary by institution. Where to Buy or Invest: Investors can establish money market accounts with their local bank or credit union. State Farm, an insurance company, also offers money market accounts. 37
CDs & CD Ladder Certificates of Deposit, or CDs provide investors looking for safety with another option. CD’s are loans to a bank with a fixed rate of return on the loan. The terms of CDs vary and could last a couple of months or a couple of years. Benefits: CD’s offer safety of principle like savings accounts and are insured by the FDIC or NCUA. CDs offer a higher rate of interest than savings accounts, a perk for providing money to the bank for a fixed amount of time. CDs with longer maturities offer higher interest rates. Disadvantages: A disadvantage of CDs is that they are not liquid investments. An investor who chooses to place $5,000 in a 2 year CD will be unable to withdraw that $5,000 before the maturity date of the CD. Investors that choose to withdraw money from the CD before the CD matures are charged a penalty for early withdrawal. A way to avoid penalties and a lack of liquidity is to create a CD ladder. To create a CD ladder an investor will spread their money equally over several CDs with different dates of maturity. For example and investor may choose to place $1,000 in a CD maturing in 3 months, another $1,000 into a CD maturing in 6 months, another $1,000 in a CD maturing in 9 months, and another $1,000 in a CD that matures in a year. CD ladders allow investors some sense of liquidity and allows them to take advantage of better interest rates offered on long-term CDs. Where to Buy or Invest: Investors can find CDs at their local banks. The T-Bills , T-Notes, T-Bonds Treasury Bills, Treasury Notes, and Treasury Bonds are loans made to the U.S. government and are viewed as the safest investments an investor can make. All 3 are backed by the U.S. government and vary in time to maturity. T-Bills are short-term investments, with maturity ranging from a few days to a year. The maturity on T-Notes can range from 2 years to 10 years, and T-Bonds mature in 30 years. 38
T-Bills are sold at a discount to face value, but the face value of the note is paid upon maturity. For example a $100 T-bill may be purchased for $90, but upon maturity the holder of the note will receive $100. The price of a T-Note can be greater than, less than, or equal to its face value depending on demand. T-Notes and T- Bonds pay out interest every 6 months until maturity. Benefits: Some of the benefits of investing in Treasury bills, notes, and bonds is their guarantor, the U.S. government. The varying maturities is also a benefit, allowing investors to decide on a short, medium, and/or long term investment. Also, T-Bills, T-Notes, and T- Bonds can be sold prior to maturity, but investors are not guaranteed their full principal back. Disadvantages: A disadvantage of T-bills, T-notes, and T-bonds is their interest rates. While they rank higher than a savings account, they are still low. As of this writing a 3 month T-Bill carries a 1.76% of interest rate, a 3-year note carries a 1.58% interest rate and a 30- year T-bond carries a 2.13% interest rate. Where to Buy or Invest: https://www.treasurydirect.gov/indiv/ products/products.htm Money Market Funds Money market funds invest in short-term securities that have a low- risk profile, such as T-bills, CDs, and municipal bonds. Unlike the money market accounts issued by banks, money market funds are bought and sold on the open market and they aren't backed by the FDIC. Benefits: Money market funds are considered to be an extremely safe place for an investor to place their money. The SEC mandates that these funds hold investments with high credit ratings to ensure a level of safety for investors. Disadvantages: Money market funds are not backed by the FDIC. The small returns can be wiped out by inflation, and because it is a fund, the fees associated with the fund could also wipe out a portion of an investors returns. 39
Where to Buy or Invest: Investment companies, Mutual fund companies, and some large banks Government Bond Funds A government bond fund is a mutual fund that invests in government bonds. Government bond funds provide investors an easier way to gain exposure to the bond market when compared to buying individual bonds. Bond funds do not have a maturity date like a standard bond. For an investor to recoup their principal investment - whole or in part depending on the performance of the fund - the investor would sell their shares in the Bond Fund at the current market net asset value. Bond funds are one of the safest investments for investors who require a stable place to put their money. Also, bond funds distribute interest payments just like individual bonds, however the interest payments will vary due to the number of bonds in the fund with different coupon rates and disbursement dates. Before making an investment, investors should do research to verify what the bond fund invest in, short-term, intermediate-term, or long-term government debt. Investors should also verify which government the bonds in the fund originate from. U.S. bonds are seen as the safest investment in the world, where as bonds issued by the Venezuelan government would be very risky at this time. Benefits: A professional asset manager in charge of the fund overseeing what bonds are bought and sold. A safe investment that provides steady income from bond payments. Funds that exclusively hold U.S. Treasury bonds may be exempt from state tax. Disadvantages: The annual expense ratio, which is the cost associated with managing and operating a mutual fund. These expenses are broken down and passed on to the investor. The annual expense ratio varies from bond fund to bond fund. 40
Where to Buy or Invest: Investors can find government bond funds at most full service brokers, discount brokers, and banks that offer investment services. Municipal Bond Funds Municipal Bond Funds are similar to government bond funds, but these funds invest in debt issued by states, municipalities, or counties. Bonds issued to raise money for the construction of a school or airport also fall under municipal bonds. Municipal bond fund objectives can differ from fund to fund. Some funds may focus on high yield bonds, while others focus on higher credit ratings. Interest income generated by municipal bonds are generally not subject to federal taxes. Other tax benefits are available to investors as well. If the bond held by the fund is issued by the state where an investor resides, the investor could be exempt from state and local Benefits: The tax benefits that come with municipal bond fund investments and regular interest payments. Disadvantages: Not as safe as some of the other options. While defaults on municipal bonds are rare, they do happen. Think Detroit filing for bankruptcy in 2013, in this situation pension obligations were put before bond obligations. In 2016 Puerto Rico defaulted on a bond payment. Where to Buy or Invest: Investors can find municipal bond funds at most full service brokers, discount brokers, and banks that offer investment services. Conclusion Investors have seven options for genuine safety of principal. Investments where they can park their money, gain a small return, but rest easy at night that their principal won’t disappear overnight. 41
Some offer higher returns than others, while others prioritize liquidity and safety over returns. Choosing the right vehicle will depend on the investor, their needs for their money, and their appetite for risk. While this newsletter is for investors looking for quality equity investments, there are many reasons why investors may need safer investment vehicles. An investor nearing retirement may choose to move money from income and growth investments into safety investments to avoid market risk. Also, investors who are making a large payment towards housing or education, may transfer those funds to a safe investment until the money is needed. With returns in the single digits, investors aren’t getting rich from playing it safe with the investments listed, but there are times in an investors life where safety of what has been acquired is more important than the next big win. 42
Quarterly Economic Data Assets 2/25/19 5/24/19 8/25/19 11/25/19 Gold $1,329.20 $1283.60 $1537.60 $1463.80 Silver $17.06 Platinum $15.84 $14.52 $17.55 $898.45 Palladium $857.50 $805.50 $860.25 $1769.65 Copper $1,512.95 $1327.70 $1452.90 Crude Oil $2.66 EUR/USD $2.94 $2.69 $2.53 $58.01 GBP/USD $55.50 $58.63 $54.17 $1.10 USD/CNY $1.13 $1.12 $1.11 $1.28 USD/CAD $1.31 $1.27 $1.22 $7.03 USD/JPY $6.68 $6.90 $7.09 $1.32 $1.31 $1.34 $1.32 $108.92 $111.04 $109.31 $105.41 Oct. 19 Inflation Jan. 19 Apr. 19 Jul. 19 1.8% U.S. Inflation Rate 1.6% 2.0% 1.8% 3.8% China Inflation Rate 1.7% 2.5% 2.8% 1.5% 1.8% 2.1% 2.1% 1.00% U.K. Inflation Rate 1.4% 1.7% 1.4% Sept. 2019 Euro Area Inflation Dec. 2018 Mar. 2019 Jun. 2019 2.10% Rate 3%* 3.2% 2.0% 1.5% 6.4% 6.4% 1.6% 0.30% Growth 1.3% 1.8% -0.2% 0.20% U.S. GDP Growth 1.2% 1.2% 0.2% China GDP Growth U.K. Growth Euro GDP Growth 43
Quarterly Economic Data U.S. Housing Dec.2018 Apr. 2019 July 2019 Oct. 2019 Housing Starts 1.078M 1.235M 1.253M 1.314M Building Permits* 1,326 1,290 1,336 1,461 Debt 2/26/19 5/28/19 July 2019 October 2019 $22.3T $22T $23 Trillion U.S. Debt $16.1T $9.3T $5.3T $9.8 Trillion $3.5T $2.4T $3.6 Trillion China Debt $5.2T $75.2T $75.8T $60 Trillion $1.5T $1.5T $1.5 Trillion U.K. Debt $2.4T World Debt $74.5T U.S. Student Loan $1.46T Unemployment Jan. 2019 Mar. 2019 Jul. 2019 Sept. 2019 Rates 4% 3.6% ^ 3.7% 2.1% U.S. 3.9%*** 3.8% 4%* 3.85 7.5% 7.5% Unemployment 3.6%*** 3.61% 7.9%** 7.7% U.K. Unemployment 3.8%* 3.6% Euro Area Unemployment China Unemployment 44
Quarterly Economic Data USO IWM AMLP VNQ SPY DBC EFA EEM PFF HYG LQD GLD UUP AGG 30% 22.5% 15% 7.5% 0% -7.5% -15% 2/26/19 To 8/23/2019 To 11/25/19 1/2/19 A quarterly look at a few of the ETFs we watch to track the markets and the economy. VNQ an ETF that tracks Real Estate Investment Trusts, and the SPY, an ETF that tracks the S&P 500 are up more than 25% on the year. AMLP which tracks the energy sector is down almost 10% on the year. 45
The Portfolio The Portfolio The Seville Report Recommendations 46
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The Seville Report 2019 S&P 500 The first chart represents are the returns in 2019. These are companies we entered 2019 having recommended in the past and those recommended in 2019. The green bars represent investments that have hit their price targets, black bars represent the return of the specific quarter's newsletter as a whole. ^GSPC represents the returns of the S&P500 on the year. The next chart represents recommendations and returns of The Seville Report Newsletters going back to 2017. 48
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2019 was a good year. On Wall Street if your portfolio beats the S&P you’ve had a good year. We entered 2019 down a lot in certain positions, and most of those positions performed very well in 2019. The investments that have really kept us from where we would like to be is Kroger, Cognizant, Tencent, and recently TriNet. Kroger, the largest grocer in the U.S. just can’t seem to get out of its own way. Management just can’t seem to get it together, but what keeps us holding on is because it’s the largest grocer in the U.S. Cognizant was another that just couldn’t quite get it going in 2019. We’ve held on, and have actually recommended it again. We believe 2020 is the year when CTSH puts it all together and hits the price targets we see for it. Tencent has been a victim of the trade war and China’s band on video games. Now Tencent plans to make video games for the Nintendo Switch and for the U.S. market. We're still believers in Tencent. The social media aspect in China as well the digital payment aspect of the company are why we still feel this stock is worth holding. TriNet was moving up steadily after our recommendation, but a second quarter earnings report that didn’t live up to expectations caused the stock to fall below our recommendation price. Ebay, is another stock that we expected would be trading higher by now. The company has had a recent shakeup in management and has sold its Stubhub unit. We still like our position in Ebay and expect better returns from the stock in 2020. We are still committed to Kroger, Cognizant, Tencent, TriNet, and Ebay. 50
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