Britannia Radio

Dear Daily Crux reader, Right now, it's more important than ever to be sure the stocks you own are safe. So this week, we sat down with our friend Tom Dyson to pass along some easy ways you can do just that. Tom is the publisher of The Palm Beach Letter, an investment advisory focused on finding the world's safest low-risk investments. In this week's interview, you'll learn the three simple criteria he uses to uncover the best picks for his subscribers. This information could help protect you from taking another major loss, no matter what the market does next. Regards, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com –––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview Three traits of the world's safest stocks The Daily Crux: Tom, can you explain how you find the super-safe stocks you recommend in The Palm Beach Letter? Tom Dyson: Sure. We have a few criteria in particular that are useful not only for finding safe stocks, but also for evaluating whether the stocks you already own are at risk. The first thing we always do when we're evaluating a stock is open up a chart and look at how the stock performed in 2008. The 2008 financial crisis was the worst market panic since the Great Depression. It's an easy thing to do, and you can immediately see how safe that company is. Almost everything declined in 2008 to some degree... But if a particular company's share price plummeted, it's probably not a company you want to own for safety. If it tanked, we won't touch it. On the other hand, if the stock held up relatively well compared to the market – or better yet, was one of the rare stocks that actually rose during the crisis as a "safe haven" – it's worth evaluating further. A great analogy for this is the car market. A car manufacturer might tell you his car has airbags, side impact protection, and an onboard computer that keeps you in the center of the road... all the latest bells and whistles for safety. But until you've driven that car into a wall at 110 miles per hour, you don't know if it's safe. It's the same with stocks. It might be a great business, with a great CEO and a conservative management team... But until you've seen how it does in a true financial crisis, you can't know if it's safe. Crux: Can you name a couple stocks that made it through the crisis without much trouble? Dyson: There are a few we like in the financial sector that performed quite well. There's a bank in Texas called Cullen/Frost (symbol CFR) and a bank in Connecticut called People's United Financial (symbol PBCT)... which we have in our portfolio, actually. There's also an insurance company from Canada called Fairfax Financial (symbol FFH on the Toronto Exchange) that held up well. Crux: What's the second criterion? ---------- Advertisement ----------- What happens when a loaf of bread costs $23? In the past year, the price of coffee has more than doubled. Since 2009, sugar prices have jumped as much as 200%. What's going on here? Recently, the Federal Government has intervened in America's food supply, setting off a chain reaction which is already affecting prices as well as the amount of food we receive. The worst has yet to trickle down. For more information on the situation, click here. ----------------------------------------- Dyson: The second thing we look for is debt. The fact is, if a company doesn't have debt, there's no way it can go bankrupt. There's no way it can collapse. The definition of bankruptcy is when a company can't afford to pay off its debtors and must close its doors. It's different from just going out of business. Any company can go out of business if it can't make a profit. But if it doesn't have debt, it can't suddenly collapse – like Lehman Brothers did. So the first thing we do is look at a company's long-term debt. You can find it right on Yahoo Finance. Ideally, we like to see a big, fat zero there. Realistically, if you only evaluated with companies that had zero debt, you'd have very few options. So if the company does have debt, what we prefer to do is look at something called enterprise value. Let's take a company like Johnson & Johnson, for example. Johnson & Johnson actually has over $17 billion in debt. That sounds like quite a bit. If all you looked at was debt, you'd likely write it off. That would obviously be a mistake. If you look at its cash, you'll see it has over $26 billion. So it has almost $10 million more in cash than it has in debt... Effectively, it has a net debt of zero. The easiest way to quickly evaluate this is to look at enterprise value. Enterprise value is simply a measure of a company's market capitalization, plus its debt, minus its cash. So if you compare a company's market cap with its enterprise value, companies with an enterprise value less than their market cap are companies that have zero net debt or a positive cash balance. What you'll find is that a lot of companies have very small market caps in relation to their enterprise values. I would not touch these companies, because essentially what that's saying is these companies have huge debt loads relative to the amount of equity that shareholders have in businesses. Another way of saying that is they're extremely leveraged. So if you're looking for safety, you want to make sure a company's enterprise value is less than its market cap. Crux: That's simple enough. What's the next thing you evaluate? Dyson: The final thing we look at is the company's business. We're looking for businesses that are protected from two major risks – economic risk and business-related risk. Let's looks at economic risk first... For example, let's consider a company that makes luxury goods like Louis Vuitton. When a recession comes, are people likely to buy more or fewer $5,000 handbags? On the other hand, compare that to an industry like insurance. Do people stop dying in a recession? Do they stop driving their cars? Do they stop having house fires? Do hurricanes stop occurring? Of course not... People always need insurance. This is a little more subjective than the other criteria... But industries like insurance and vices like cigarettes, alcohol, and gambling tend to be recession-proof. We also like certain technology companies – because technology can help people improve their lives and reduce costs – and companies that make consumer staples. Companies like Johnson & Johnson, Procter & Gamble, and Pfizer fall into this category. They make products that consumers use every day, whether we're in a recession or not. On the other hand, we'll generally avoid companies in commodity-related industries... companies that boom and bust with the business cycle. Construction, infrastructure, shipping, retailers, and the luxury goods I mentioned earlier are all cyclical businesses. They do well when people have money... And they do poorly when people don't have money. The other thing we look out for is business-related risk. There are a number of problems that can negatively affect a company... from mistakes or accidents to changes in consumer preferences. Naturally, it's impossible to completely eliminate this risk. But there is a way to greatly reduce it – looking for companies with long track records. You want to see that a company has been successful for a long time. Ideally, you'd also like to see a long history of dividend payments – especially if it's been able to consistently increase those dividends. To me, that's the stamp of a company with low business risk. Crux: Sounds good. Any closing thoughts? Dyson: I think there's a misconception among many investors that these types of low-risk investments are only for super-conservative investors or retirees. But we don't believe that. You don't need to take a lot of risk to make big returns, which is the classic, conventional wisdom... Just because a company is safe doesn't mean it can't make you a lot of money. Crux: Thanks for talking with us, Tom. Dyson: My pleasure. Thanks for having me. Editor's Note: The Palm Beach Letter focuses exclusively on finding the world's most profitable, low-risk investments. Every stock they recommend meets these criteria... They're all extremely safe, have tons of cash, low or no debt, and long track records of success. To learn more click here.