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April 2014 Inside Information

Edited/Published exclusively for leading financial professionals - www.bobveres.com

VOLUME 24, NUMBER 4 APRIL 2014

David Wattenbarger, of DRW Financial--a fee-only planning firm in

Chattanooga, TN--is a former bond trader who has extensive experience using a Bloomberg terminal. Today, he uses his portfolio management experience to create stock and bond portfolios for clients, eschewing what he considers the high fees and lack of transparency he finds in actively-managed mutual funds. At his young firm, he can't afford to pay $2,000 a month for a Bloomberg terminal, which worried him initially until he found a $199 a month service that he considers to be even better. "I'm logged into YCharts all day long," he says, referring to the cloud-based screening, economic data and charting tool that is

Graphical Data InterfaceSynopsis: A new screening and graphing tool called YCharts offers a vastly simplified way to evaluate stocks. It may be an even better client communication resource.

Takeaways: Advisors are screening using multiple criteria, and they can add any of 4,000 different financial elements on any stock for evaluation. Others are looking at shifts in fundamental economic data--or embedding interesting charts in their blogs.

20% owned by Morningstar. (www.ycharts.com) "They have thousands of line items of data on every stock, and there's an easy export to Excel," Wattenbarger

about it in the financial planning world. The company was started by Shawn Carpenter, who previously worked in the revenue intelligence group at Google. "Our project was creating charts about what people were searching for on Google, showing us where the billions of queries were coming in," he says. "At the time, it was really hard to get macro-trend information, and company-specific data. I realized that there was an opportunity for somebody to build a database that would bring company and industry information together in one place, along with the macro trends that affect the global economy." As the name implies, YCharts will create a graph of just about anything--including 4,000 financial metrics pulled in real time from the SEC filings on all the publicly-traded companies, plus more economic indicators than I could possibly list here, from the yield on AAA-rated corporate bonds to the Zinc index. To make a point for a story in my Client Articles service, I charted the rising growth of U.S. GDP compared with the growth of the S&P 500, to see if share prices really do track the broader movements of the

YCharts will create agraph of just about

anything--including 4,000financial metrics pulled

in real time from SEC filings.

continues, "so you can do your own sorting and calculating to your own model. Everything is very graphical and intuitive." YCharts has been around since June 2009, but you're only now starting to hear the buzz

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economy. (The chart provided below.) Another article on America's shrinking current account deficit produced the next chart, and for this article you're reading, I went back in and charted the historical changes in the yield spread between 10-year and 2-year Treasuries (next page), to see whether the yield curve is paying you more or less than normal to take more interest rate risk. The charts are limited only by your imagination. You can graph the unemployment rate against new home sales, the yield on 10-year Treasuries, the inflation rate and the S&P 500 PE10 ratio--simultaneously. The YCharts screening tool, meanwhile, accommodates just about any selection criteria. Playing around with the system for about ten minutes, imagining that I was looking for a stock to short (NOT something I do in my own portfolio), I was able to find an interesting situation where the DR Horton company (market cap: $6.9 billion) had paid out a total of $60.2 million in dividends over the last 12 months despite having free cash flow over that time period of negative $644 million. The company's book value per share was $12.97, but it was trading at a share price almost twice as high ($21.45), perhaps because shareholders think they'll keep receiving that unsustainable dividend. (Maybe the company

could recast itself as a nontraded REIT.) Looking down the list, I also wondered if RGC Resources could continue paying out $4.65 million in dividends when its free cash flow was negative? Would its share price ($19.33) come closer to the book value per share ($10.73) if the dividend were eliminated?

Then I screened for price to tangible book value per share, and sorted on highest to lowest free cash flow. This brought me to Citigroup, which may be at the bottom of everybody's buy list since its banking operation failed the Fed's latest stress test. But the firm is generating free cash flow of $57.41 billion a year, price:

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$50.30, book value per share: $65.23. PE10: 5.84. Graphing Citigroup's stock price (see right) shows a pretty wild ride for investors, but the gradual recovery in earnings per share (orange line) suggests that the company might be undervalued by those of us who remember its

kinds of information," says Carpenter. "With the charts, you can very quickly figure out how companies are growing, how volatile their earnings are, how sensitive their various valuation metrics are. The visual nature of it," he says, "is something that people naturally gravitate to."

"and then I limited the search to industries that provide essential products and services. Then we started taking a deeper look at the quality of the companies." Since then Rench has added "shareholder yield" to the search function. "Shareholder yield takes the dividend yield and adds share

Screening and explaining

Since the service doesn't (yet) screen for mutual funds, its power users in the planning world are creating stock portfolios for clients. Jimmy Rench, of The Relevance Group in Denton, TX, first started using YCharts to screen for dividend-paying stocks for his clients (see sidebar). But with the wealth of available data, he keeps adding increasingly sophisticated selection screens. "The dividend yield was the first criteria," he says,

central role in the 2008 crisis. In all, I spent about 15 minutes on these (admittedly unprofessional) screens, but in the last four months I've spent more time, as you'll see shortly, digging for appropriate charts for my Client Articles service. There's no way to estimate how much a full-time analyst could learn about individual stocks by performing multiple YCharts screens. "It's very time-consuming for people to pull out a lot of financial statements and try to compare a lot of different companies based on different

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buybacks and debt reduction, because all three of those increase the equity to a current shareholder," Rench explains. "For example, with AT&T right now, the dividend yield is about 5%, but the shareholder yield is almost 13%." Rench added a screen using this data. "When you see a company's shareholder yield that is less than its dividend yield, that is immediately a red flag," he says. "That means they're either issuing more shares--which is diluting your equity--or it means you probably need to look and see how much debt they're taking on." Add it all together, and Rench now starts with a screen that identifies companies with a

high and growing dividend yield, screens for the shareholder yield, then evaluates the list of survivors for a low price to free cash flow metric over the trailing 12 months. Once he has a workable watch list, he'll screen for PE ratios, sales ratio, free trailing cash flow per share, earnings per share and shareholder yield. "They have something else which is kind of neat, where you can just add in a bunch of different financial columns," says Rench. "You can examine different data points in the context of that screen that you've run, right there in additional columns on the right." Meanwhile, Wattenbarger has begun using YCharts as a trading tool. "If I find a stock that

I like that is trading at $21," he says, "and I think that, based on its financials, a good price would be $19, I can set an alert that tells me when the stock reaches $19," he says. "It's cleaner than me putting a buy order out there to my custodian at $19, because the price might drop to $19 because the company has declared bankruptcy or something. I can look at the numbers and reports before I make the trade." The service also serves as a client communication and due diligence apparatus. "If I'm talking to a client about a stock, and he says, why do you like this stock, or don't like it?--I can download the report and email it," says Wattenbarger. "Whenever

From Funds to Stocks While I was writing the YCharts article, I discovered what appears to be a hidden trend in the planning marketplace: a growing number of advisors are replacing mutual funds with individual stocks in their client portfolios. Why? Jimmy Rench, of The Relevance Group in Denton, TX (see accompanying article) did some soul-searching after the 2008-9 stock market crash, which led him to reconsider what his clients truly wanted from their investment portfolios. "My main clientele is retirees or soon-to-be retired people," he says. "They have their kids educated and paid for, so their next hurdle is retirement. The one thing our clients need, being retirees, is income. And that is not going to change, no matter what the markets do." The problem, of course, is that the retirement date may or may not coincide with a favorable investment climate. "You don't get to choose what market environment you retire into," Rench says. Looking for a way to stabilize his clients' portfolio experience in volatile markets, Rench looked at and rejected bonds and CDs (not nearly enough return in this market) and annuities ("I've never been able to un-derstand their expenses"), and eventually his eye lingered on dividend-paying stocks. What impressed him, as he back-tested through the last two severe market downturns, was that dividend investors enjoyed a signifi-

cantly less bumpy market experi-ence than those who were investing for growth. "The share prices had gone down, but earnings had con-tinued to be fairly consistent, and dividends continued to go up," says Rench. "And the yields you could get on some pretty nice blue chip companies in March of 2009 were amazing. "I was able to get a 3.5% yield on Procter & Gamble," Rench continues. "The company had a pretty consistent earnings stream, and they had been growing their dividends for 58 straight years at an average of 9% a year. I'm think-ing: that beats anything on the fixed income side I can see out there, es-pecially the fact that the dividend should continue to increase." Better yet, the due diligence on the actual investments he was

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recommending was clearer and eas-ier to explain than the investments Rench had been using in client port-folios before the downturn. "I can show clients a big blue chip com-pany's earnings and free cash flow, and the metrics of what is going on in that company," he says. "That's a whole lot easier than trying to fig-ure out what various mutual fund managers are thinking and their attitudes, and what they're invest-ing in, and whether they're going to continue to do that." Rench's broad criteria is large companies diversified across ten different industry sectors, and all of them must provide essential products and services. "We know we're going to have to pay the utility bill, buy our prescriptions, buy gas for our cars and use companies like Apple and Microsoft and Intel to communicate and get work done," he says. "I have 26 stocks in the en-tire portfolio right now, and I don't want to go over 30," he adds, "be-

their earnings per share has been pretty consistently going up. At any given time, the market may not want to pay for those earnings, but if you owned the company yourself, and the earnings are going up, you wouldn't want to sell it." Plus, most of the companies Rench's clients own are increasing their dividends at a steady pace. "It's part of their corporate culture," he says. "We showed clients that if you had invested $100,000 in Proct-er & Gamble back in January 2000, the worst possible time, when your principal immediately went down 27%, and down again 20% during the financial crisis, if you looked at the dividend income, it stair-stepped up every single year during the worst decade in the history of the U.S. market. And their income rose as well. (See chart below.) "I was looking at a review of one of the first clients we put into this model," Rench continues, "and since March of 2010, his in-

come has increased at about 10% a year. If he had to start pulling in-come right now, it would give him a 4.25% yield. And that should in-crease every year regardless of what the market is doing." Rench says that the shift from funds to stocks, and the fo-cus shift from share prices to total shares and dividend income, was the best thing he ever did from a client communication standpoint. "When you talk about an invest-ment with a retired client, the defi-nition of success is income that is going to grow at the rate of inflation or better, on a relatively consistent basis," he says. "In a very uncertain world, and uncertain market envi-ronment--especially when you have clients who sit and watch Fox News all day long--it is very comforting to be able to show them that even as stock prices are going down, their number of shares and the income they're generating from them is still going up."

cause I know I can't look a cli-ent in the eye and say: I can keep track of more than that. Plus, based on the back-testing we've done, that gives us enough diver-sification." Today, Rench tells cli-ents that they can stop looking at their principal every quarter and focus instead on the growing number of shares in their portfo-lio--realizing that every share is an income-producing unit. "No matter how volatile the prices are going to be," he says, "when dividends are reinvested, they're getting proportionately more shares during the downturns. On that same chart I can show that

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I buy a stock, I'll take that same report and stick it in the electronic file on my desktop, in case I ever get asked by a regulator: why did you pick that stock on that day?" He also blogs through his website. "YCharts makes it simple to export a given chart or set of data to HTML, so you can embed it in your blog," Wattenbarger says. "Back in June, I showed a chart on my blog of the VIX vs. the S&P 500, showing how sometimes

inflation, and they, too, suggested that the CPI is not about to take off like a rocket. "We tell them we're going to keep watching these things, and we have the ability to do that," Rench says. "When the facts on the ground change, we'll let them know and we may change our stance. But at this point, it is just not going on." Brian Boughner, a former bank portfolio manager, who recently founded Parallel

list," and then pull different metrics and balance sheet information into Excel. "We'll rank companies by earnings per share, dividends and payout ratio," he explains, "and I don't need to update the metrics; it just updates automatically." In his big picture analyses, Boughner will start by comparing the S&P 500 to its PE ratio, trying to identify multiple expansion. He'll look at investor sentiment, on the theory that when people start to reach unusual levels of bullishness (or bearishness), it can be a contrarian indicator. Then, using the radar list, he'll examine the relative strength of the different stocks that he's following. "That gives us an idea of money flows," Boughner says. "Where is demand? Where is money flowing into? That's where the prices are getting bid up." Then Boughner will do the same analysis with 88 different ETFs that either represent a country or a region. "If we see something that hasn't been doing well," he says, "but over the last few months we're seeing a rate of change turn, where money is flowing in, those are the areas we want to look at possibly purchasing. On the other hand," he adds, "if something has been outperforming, and then it starts to move down our rankings, we may want to consider moving out of it."

Adding capabilities--and analyses

Will YCharts ever bring in mutual fund data for its screening tools? Carpenter points out that Morningstar--a big investor, as

With YCharts, you can take a market data pointlike price, and add on a fundamental data point

like historic dividend yields or price to cash flow,and look at a number of different things

all on one chart.

when volatility spikes, the market rises, and sometimes it falls." Like Wattenbarger, Rench also uses YCharts as a client communication tool. "One of the questions we hear a lot is about inflation, because the government has been printing all this money, and various news sources just get people scared to death," he says. "So I created a chart which shows the money supply, and sure enough since 2008, M2 has just skyrocketed. But then," Rench adds, "I was able to show them the other part of the equation, where the money multiplier and the velocity of money are actually lower today than they have been in 20 years." Next, Rench graphed factory capacity utilization and employment, two other drivers of

Financial Advisors in Greenville, SC, runs two different stock portfolio models for his clients: an all-cap appreciation strategy and an equity-income strategy. "We've found that most people will fall into one of the two areas, either wanting growth or needing some income," he says, adding that he'll round out client portfolios with funds, ETFs and individual bonds to fill in the asset classes. "YCharts is unique," says Boughner, "in that you can take a market data point like price, and add on a fundamental data point like historic dividend yields, or price to cash flow, or price to earnings, and look at a number of different things all on one chart." The initial goal is to create a workable number of stocks to look at--what Boughner calls a "radar

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noted earlier--already provides the industry standard mutual fund screening tools. But, interestingly, he doesn't rule out the possibility of making Morningstar's data more graphical. Meanwhile, the firm is adding to the number of different metrics it collects and calculates on individual companies, having hired graduates from the University of Chicago and some former Goldman Sachs and hedge fund analysts. "We're about a tenth of the way through our roadmap," Carpenter says with a laugh. "At the end of the day, you're going to have a really large terminal that is very simple to use, and the users are going to be able to do deep research on any asset class or any instrument very rapidly, and do it all in a visual way." And in some cases, they can rely on others to do this for them. One of Carpenter's early hires was a 25-year veteran of the Wall Street Journal, who has recruited

20 writers to create articles that analyze companies and industries for the site--and, of course, they use charts in those articles. Others have apparently noticed. "If you go to Yahoo! Finance, TheStreet.com, Time Magazine or Tech Crunch," says Carpenter, "you'll see that they're using our chart creator tools. They can compare things like Amazon's profit margins and revenue growth rates vs. all the major box store retailers--and do it very quickly." YCharts has positioned itself as a reasonably-priced alternative to the Bloomberg terminal on the high end, and free services like Yahoo! Finance on the low end. "Our service is much more powerful than what is available for free," says Carpenter. "When we talk to users, we're finding that they can really cut down on their operational expenses if they don't have to deal manually with reports." As you can see from the

sidebar, I think there may be a trend among certain advisors who are replacing mutual funds with stocks in client portfolios. And I think that as people begin to find easy ways to screen through virtually every number on every publicly-traded company's cash flow statement and filing, more advisors are going to do, easily and quickly, what many fund managers do in a laborious way. Mainstream advisors who will never give up mutual funds will still have to evaluate legacy stock positions brought in by their clients--which YCharts makes easy and even fun. In addition, I suspect that advisors might find YCharts to be a terrific client communication tool--a rare bargain at (platinum membership) $199 a month. Those of you who subscribe to my Client Articles service are going to start seeing these charts with greater frequency--and may decide to start creating a few yourself.