A safe 8% dividend

ARCP is a REIT that we recommended in our 10 Predictions for 2014 posting earlier in January.   As we expected this stock has moved up nicely to now just over $14 from around $12.50 when we picked it. ARCP is soon to be the largest triple net leasing REIT in the country with the shareholder approval of their merger with Cole, another big real estate company.  

ARCP invests in commercial real estate, a lot of it in single tenant operation where business is good and renters remain for long periods of time.  Size matters here as the more buildings you own the more you can leverage expenses and command cost structures.  Of course one must also be investing in good real estate and not just some real estate.  We believe ARCP is doing just that.  They just raised their dividend and now yield over 7%.

Value is what you get, price is what you pay.  ARCP is financing some of the merger with a preferred share issue symbol ARCPP.  Preferred shares have dividends that are not raised, but have preference before common shares.  Therefore they are safer and if things really go south they get their money back prior to common shares.  Not that ARCP is going to go south, just saying ARCPP is a very safe investment. 

ARCPP is sold in shares priced at $25 per share and pay $167.50 annually on a very nice monthly pay schedule.  However there is value here since the shares are undervalued right now selling at $21 per share. The reason has more to do with what is known as float than real value.  There were and are too many shares on the market currently since many Cole shareholders did not want preferred shares, but wanted to invest their buyout proceeds elsewhere.  So these people have dumped their shares on the market pushing the price artificially down.  

Your opportunity here is to buy some of these undervalued shares, collect what is basically a 8% monthly dividend, and wait for the market to sort things out and push the shares back up nearer the $25 true value.  Nice dividend and good capital gains as well.  Now we have no idea how long this might take, but we would assume less than a year.  In any case you still collect your 8% dividend while you wait.  

Investing in a Obama's Crony Capitalism World.

We tried for several years early in the Obama presidency to figure out where to follow in the big money people as to position long assets to take advantage of the new normal.  Last year we struck gold and frankly by accident more than planning.  The real point here is our 35% plus gains in long holdings last year leaves us ashamed we did not see it earlier. 

The idea is quite simple.  The Federal Reserve is pumping $80 billion plus into the economy each month printing money.  The Federal Government under Obama is pushing just under $100 billion monthly in deficit spending into the economy.  Where is that money going and how do you get your hands on some of it, call it your fair share if you like.  

If you know anything about small business you know if that small business is growing it is quite slow and the profits there are being held onto tightly by the local owners.  Local owners see no reason to hire due to the higher regulatory burdens, especially from Obamacare and the EPA.  The additional costs do not justify the hiring or spending capital to expand. The same can be said for medium sized business as well. Just too concerned with additional regulatory burdens and costs to take a chance.  However the one place that where all these extra billions are finding a home is mega sized businesses.  Mega sized businesses can lobby Obama for regulatory relief and in many cases push regulations to hurt their smaller competitors. The current buzz about the minimum wage is nothing more than mega sized businesses who can find ways around almost any law due to crony capitalism wanting their competitors, which tend to be small business, to take a big hit from employee costs. 

Obama's crony capitalism, where big companies buy off protection from EPA rules, exemptions from federal rule making and  get in on big government contracts is where the gains where in 2013.  Here are the sectors that scored by stock valuation gains in 2013, healthcare, consumer discretionary, financials, and consumer staples.   Easy here to define as in anywhere all those government checks from welfare, food stamps, unemployment, and such can be spent.  Healthcare comes from all that crony capitalism going into companies who where bought off by Obamacare.  Financials are banks and such who have prospered from lower mortgage rates and bailouts from Obama.  Trust me here bankers, big bankers not your local community banks, are doing well under Obama and he is getting lots of campaign funds in return.  Rhetoric is to be ignored. 

The leaders early on in 2014 are drug stocks and biomedical stocks.  Again Obamacare is the reason.  Big drug companies and medical companies were bought off by Obama to get onboard Obamacare and now is their turn at the crony capitalism trough.  I would expect consumer stocks to prosper again in 2014.  Repeat of banks and such. In fact most mega sized companies. 

How do you prosper and get in on the action?  We have two ideas and we would put any money next year in these two vehicles.  Fortunately for us we were positioned in one of these last year and another less concentrated mega stock fund as well.  Our first pick is the S&P 500 Vanguard Index Fund.  The symbol is VFIAX.  This fund targets the largest 500 companies in the US and most of these companies have worldwide assets.  The other one is MGV, again a Vanguard Fund, but this one is concentrated in the top 100 stock companies in the US.  MGV is sorta a concentrated 500 fund so as to make place your assets more deeply into mega sized companies that will prosper from all this crony capitalism.  Use both so as to spread your assets making sure not to miss any gains. 

Now we are not here to say if all this crony business is right and morally correct, which we personally find disgusting.  We are here to make money and prosper from what is out there to be had. So choose accordingly. 

We are long the Vanguard 500 Index and shortly will buy some MGV long as well.  One other note both these funds are operated on the dirt cheap under .15% of holdings. We like Vanguard Funds since no where else will you find this kind of investments at this cheap operating expense. 

             

Very early check on some 2014 picks and adding one more.

We are about three weeks into the new year and we are going to do a quick check on our 2014 picks and add another one that has popped up since our new year posting. 

ARCP...We suggested that you purchase this triple net lease as a long term holding under $13.  As expected this stock has moved up nicely closing in on $14 per share as more people discover the promising future of this company.  Still yielding just under 7% there is still time to buy it as a fair value here is around $16.   Add in the monthly paid dividend and this is just a beauty of a buy.  Strong conviction and safe pick. 

MONIF...As yet this stock has not moved up to what we believe will be fair value of over $2 a share and maybe more. Selling at $1.28 as we write if you are a risk taker do some due diligence and buy some with some risk capital.   Be sure to buy before Feb. 1 as the company will report earnings that month and if they are as good as expected the stock could take off.  Of course they could go the other way too.  Not for homegamers. 

NNC...Another good early mover going from $12.01 since we suggested it to now $12.26.  We expect this closed end fund to move up above $13 this year and maybe a bit more since it is a good bit undervalued.  Pays a 5% yield in monthly installments.  Good safe pick with little downside risk. 

PM...New pick for the year.  Phillip Morris has been sold off due to concerns over it's comments regarding 2014 as a investment year and maybe less stock buybacks.   Investment year means they are going to use some of their vast free cash flow to take advantage of opportunities to improve free cash flow even more going forward.  What's not to like?  Now selling in the low $80's this stock is almost a long term steal now.  Great safe 4.5% dividend and long term growth in capital in double digits.  Buy, hold, and forget. 

We are long NNC and MONIF.  We hold options on ARCP and PM.

Two of our 2014 picks are now owned.

Ok for you homegamers we at Small Town Investor have put our money where our mouths are as we are long NNC 5000 shares and long 4000 shares of MONIF.   These are two of our picks for long gains in 2014.  We still own 4800 options on ARCP as well.  We would suggest purchasing ARCP on any weakness below $13 a share.

Ten predictions for 2014

Since everybody else is putting out their predictions for 2014 we figured we would join the game. Our predictions cover a lot of subjects, local, state and national, with most being financial since this is a financial blog.  So here goes. 

1.  The stock market overall in 2014 will be basically an average year . We expect the S&P to up about 6% or so year end.  Somewhere along the way some international event will spook the market and we will finally get a long due correction, not a deep one however. The economy will remain dormant with the feds pumping machine of printing dollars keeping a floor under the stock market. Keep your retirement money in safe steady index funds. 

2. The best stock of the year will be MONIF.   This little beauty is mobile banking for the un-banked.  Do your own due diligence here but buy some MONIF in your speculative account. Selling just above $1.  We expect it to end the year at no less than $2, maybe $3.  Homegamers can participate here. 

3. The run up in mortgage loan rates will finally find a wall somewhere in the high 4% range.  With a flat economy as noted in number one there is just no pressure to push these rates up despite the desire by banks to do so. If you are in the market for a house buy one this year since rates are so low for long term buyers.  The next move up in rates is mid-year 2015 as we can see right now. 

4.  One of the best no worry picks for the year will be ARCP.   This stock will be the new darling of the triple net leasing group.   Joining Realty Income and National Retail Properties as a blue chip hold.  We expect the stock to move up nicely by $2 per share from the current just under $13 per share and still pay the current 7% dividend or more giving you a 20% plus profit for the year.   So buy ARCP as a long term hold. 

5. Politically in North Carolina the Republicans will keep the legislature in November losing no more than a 2 or 3 seats in each house as the Moral Monday crowd will turn off women voters. Rev. Barbour is not the correct choice for a front person for a movement, too scary looking and sounding for moderate women voters.  US Senator Kay Hagan will lose to Thom Tillis and US Rep. Mike McIntyre will lose to David Rouser and a off year election does not bring out enough Obama voters to offset the increase in conservative voters coming out against Obamacare. 

6. Politically in the US.  The US House will stay in Republican hands and they will pick up 3 to 5 seats.  The US Senate will stay in Democratic hands due to infighting of Republicans who will pick some non electable in general election Senate candidates.  The Republicans will however pick up 4 or 5 seats where good general election candidates survive the infighting. 

7. Politically in Smithfield NC even with many new town council members John Lampe will find changing town hall next to impossible.  He will get some movement on electric rates and some small concessions in spending, but overall it will be status quo. Understand we consider Mr. Lampe Smithfield's last best hope to revive this town's growth prospects so we would be very pleased to be wrong on this one.  Status quo for Johnston County politics except of course for the Clerk of Court race.   We will go out on a limb here and predict that Michelle Ball will pull a surprise in the Republican primary and win the general election and be the new JC Clerk of Court. 

8.  This cold winter will be the repeated next year and this coming summer will be cooler than normal.  This due to the cooling of the oceans and the normal cycle of weather.  This is a ten year cycle and we are at the start of the cycle.  Therefore if you are smart find ways to depend more on natural gas than electricity for energy.  Natural gas will bump up in price, but supply is plentiful and elastic and more sources will come on line from the price move up and will move prices down again. Electricity on the other hand is going to see prices move up due to more heavy handed EPA regulations. 

9.  More local small banks in Eastern North Carolina will be taken over by either a much larger bank or either merged with another small bank. In fact the pace of consolidation will quicken in 2014.  The Dodd Frank rules which become effective in 2014 and the costs will make it prohibitive to remain independent unless you are big enough to survive. The big five banks who controlled just over 8% of deposits under Republicans now controlled about 45% under Obama purposely.  Case in point is the continued consolidation by Vantage South or New Bridge Bank.  The stocks, symbol VSB and NBBC, might be worth some of your capital as an investment.  But this is a long term buy no quick profits. 

10. There are still a few independent daily newspapers in North Carolina. At least one or two more will be bought by a private equity firm in 2014.  The investment in small daily newspapers is like an annuity paying 10% to 15% going forward. This is not like the 20% to 25% some made a decade ago, but still good money for those operations not leveraged to piles of huge debt making owning newspapers not financially acceptable.  Therefore private equity has found a niche and the death of local newspapers is quite premature. 

11.  Bonus prediction.  I absolutely positively guarantee I will wrong on at least one of these predictions. 

             

First Quarter 2014 Trading Portfolio.

First quarter 2014 trading stocks.  These are the securities we use for trading since we believe they are priced at a good value. Therefore the strike price or just above that price would be a good entry point for long term buyers. 

We are option traders.  Hedging and leverage is our stock in trade. Our purpose is free cash flow and profits from selling put options.  Put options offer the buyer insurance on stock they currently own or wish to own at a strike price. The buyer pays us a premium to provide that insurance. Therefore we are "the house" in this transaction and the odds favor us winning the insurance bet.  However much of those odds depends on our ability to select good stocks and correct strike prices on options. 

Our current profits goal remains around 12% annually, in 2013 we produced about 9.5% profits on total insured stock values. 

AFL..We continue to like the insurance stock due to the excellent valuation.  Little downside risk with the duck. Strike price $60. 

ARCP..With mergers coming this company will be the largest triple net leaser in the country.  We like triple net leasing a lot and we believe this company is moving up.  Excellent sustainable yield above 7%. Strike price $12.50

AAPL...Careful price selection is important, but Apple continues to be valued priced at around 13 PE.  Frankly we have concluded Apple people are hooked like drug attics on their devices and will pay anything to keep them.  Our strike price is $475.

BP..Oil major that is slowly exiting the problems of the Gulf oil spill.   Very attractively priced at around 6 PE so our strike price of $45 looks even better. 

CSCO...Still the king of routers and hard to avoid buying something they make if you are building a network.  Good value right now. Strike price $19. 

IBM..Warren Buffet is buying it and it is value priced. Add in a huge buyback reducing shares regularly.  Strike price $170

JPM..Big banks still attractively priced.  We like JPM right now at $50. 

KO...Coca Cola is also a value priced stock and we are slowly thinking their might be a good reason why as consumers switch tastes.  Our strike price of $38 should be safe, but we might exit soon. 

NNC...We discussed this one last week in a posting. Already has moved up a bit, but still a good buy anywhere here around $12.10 plus a few cents.  This is a long position for us at 3000 shares and we might add another 2000 if there is near term weakness. 

NNN...Strike price of $25.  Great long term holding which has become a much less attractive trading stock due to price issues with options so we might exit soon. 

O...We love Realty Income and sleep well trading it.  One of the best shareholder friendly companies out there. Monthly dividend over 5% for those looking to buy. Strike price $35. 

PM...Best long term tobacco holding right now for increasing dividend and capital gains opportunities. Strike price $82.50

POT...Fertilizer giant with our strike price of $29.  We believe POT is still oversold even in this weak fertilizer market. 

SHLD...Lousy retailer, good real estate play.  Patience is necessary and a good price too. Strike price of $34. 

SO..Value priced electric utility at $29.  Utilities have been beaten down a good bit due to Obama's EPA.   Despite all the efforts by Obama and democrats to move us to solar power and such regulated utilities will continue to do well as many switch to gas power generation. SO is the best placed going forward. 

T...Premier communications company.  Strike price of $33.  Good solid safe pick. 

VZ...Like T above, good solid safe pick in communications.  Strike price at $45. 

MONIF...We have added this one for those of you who want to gamble some money.  We have not pulled the trigger, but we believe this financial operation has a huge up side from it's just over $1 price. Good speculative play. 

             

A short term trade pick.

We follow Doug Kass regularly.  His insights on the bearish side keep us grounded and even when we do not think he is correct we value his ideas since he hits home runs consistently on individual buys.  Last year his call on AAMC was absolute dynamite, go look it up and think if you had just bought a few hundred shares one year ago.  He also liked RESI about the same time and it has not done too bad either.  Unfortunately we were not smart enough, or more likely brave enough, to follow him into either pick. We did pick up a couple hundred shares of APPL when he said they were value priced and made some darn good short term profits.  Dougie nailed to the precise month the bottom of the generational bear market in March 2009 and that one we did ride with him up a good ways to some very nice profits. So as we said he can pick'em.   However he tends to be a bear too long in our summation and misses a lot of upside due to his bearishness. We follow a good number of stock pundits to help us get a good feel of the market and Doug is top notch. 

His latest longs are Ford, symbol F, and lately Citigroup, symbol C.  But the one he has been pounding the table on recently is closed end municipal bond funds.  Now we do NOT like bond funds since you are open to interest rate rises and serious drops in value.  We DO like individual bonds since you can hold them to maturity and keep your principal in tack.  So with that said we have been surveying his CEF picks and thoughts here.  Note that Doug Kass's thoughts are that due to worries over Detroit bonds and the muni market in general the values of these funds have been unduly punished.  Many of the closed end funds are federal tax free, but not state tax free and we do not like paying state income taxes as part of the possible long.  However today we picked up on a idea where we can have our cake, Dougie's pick, and eat it too, as in no state tax as well. 

The symbol is NNC, a Nuveen fund that holds NC municipal bonds with a few other non taxable entities throw in for liquidity.  The bond ratings average BBB, which is good investment grade, and the monthly payout currently is just over 5% tax free.  The price as we write is around $12 per share. The kicker here is that net asset value is about $13.67 and that is over 12% off the selling price. So if Dougie is right and these funds return to correct pricing we get to sit on 5% tax free payout and maybe a 12% or so bump in capital gains in short order, read two months. 

We will be buying in the next day or so since the ex-divy date is generally around the 10th of the month.  Hoping for a sell in the first quarter of 2014.  Now understand this trade could likely be like watching paint dry as there will be no big quick move here.