Investment Ideas, First Rule of Life Insurance, and a New Stock Added to the Tactical Model
This is part of a weekly newsletter that includes some of our research and investing ideas that we share. Join the newsletter to get these updates weeks earlier by going here and filling out the contact form with your name and email! We hope you find this useful.
Enjoy the last weekend of August! We teased a new stock added to our Tactical Model in a recent Facebook and Instagram post. We believe it will help "plow" through growth for years to come. Thank you for your trust.
The First Rule of Life Insurance
September is National Life Insurance awareness month. It is my opinion that Crosby Advisory Group takes a slightly different view of insurance because we do not see it as a product, but rather a way to transfer risk. Insurance, when implemented properly is a financial tool that ensures wealth accumulation occurs. We can build a $350,000 home because we know that for a relatively small premium, we can place insurance on it so that we can rebuild it if it burns down. We can buy a $40,000 car and drive it without worry because we know that for a relatively small premium, we can pay to have the car fixed or replaced if we get in an accident. Without the ability to transfer risk onto an insurance company that is positioned to assume the risk, these purchases would be very risky. We are very quick to insure the home, car, boat or motorcycle for replacement cost, but oftentimes we fail to insure the one thing that makes all of that possible (us!). People ask me quite often, “What type of insurance policy is the best?” My answer: the one that is in place. If something happens to me on my way home from work tonight, my family will not care what type of policy I had. They will care that they will have the financial backing to pick up the pieces and continue with their lives. This brings me to the first rule of life insurance: get the amount right. Once you determine the appropriate amount of life insurance for your situation, then you can begin to look at the type of policy that best aligns with your goals. Always the life of the party, we love to talk about life insurance. If you need a consultation, refresher, or simply wonder how life insurance works and can bolster your financial plan, please give us a call. Blast from the past. Here is a video I post on life insurance. The content is still spot on if I do say so myself. And I do.
Invest In Shortages
The Conference Board which measures the health of the US economy through lagging economic data predicts the US economy will grow at a 6% annual rate in 2021. The Wall Street Journal reported US GDP (Gross Domestic Product) increased 12.2% year-over-year in the second quarter. To give you an idea of how good that is, China’s GDP increased 7.9% in the second quarter. A client of mine recently sent me an employment date that showed 48% of available jobs are still unfilled. Across our economy, there are shortages in qualified employees and materials which are creating bottlenecks leading, in part, to inflation. As investors, I believe it serves us to look at companies whose products are in high demand. One area that Crosby Advisory Group likes a lot is chipmakers. From gaming to smartphones to vehicles, chips are essential to the end products consumers use. Analysts believe chips could be in short supply for the next three years. We like Nvidia (NVDA), Advanced Micro Devices (AMD), and Taiwan Semiconductor (TSM) as stocks whose products will be in high demand for the foreseeable future.
Infrastructure to Build Wealth
The Senate recently paved the way for a 3.5 trillion dollar infrastructure bill in an attempt to repair existing, as well as modernize American infrastructure. With such a substantial allocation of resources, we were looking at companies who would benefit from such a proposal and have strong fundamentals with a long-standing history of growth. We generally think it's a bad idea to invest based on political news or what we think people in Washington are going to do. Nonetheless, we think we found an interesting opportunity in Deere & Company. Ticker symbol (DE) is on quite a winning streak when it comes to earnings and on the news that they decided to increase their dividend 17% this quarter. Looking at their fundamentals as well as their history of growth, we believe Deere & Company will make a good addition to the Tactical Model at a 3% allocation.
How does Deere & Company (DE) Make Money?
When first analyzing a company it's good to start with the basics and make sure we understand what products and services drive a majority of revenues. A majority of revenue is driven by production and precision agriculture. 4.25 B in Net Sales reported in Q3 up 29% from last year. Small agriculture & Turf generated 3.147B in Q3, up 32% from the same time last year. They are on track to increase the profitability of the production/precision ag business with the operating margin outlook above 20% compared to 15% last year.
Construction and forestry saw significant gains this year. Net sales are up 38% compared to last year and are expecting 20%+ growth in North America and double-digit growth in their global forestry segment. Combined with their financial service segment, they raised full-year guidance to a Net Income of 5.7 - 5.9B.
They expect to see double-digit growth in their Agriculture and Turf business. They expect the North American segment to increase 25% and a significant increase in the Asian segment.
DE is currently trading at 26x earnings and 3x sales. This is a similar valuation to its competitors if you compare it to a stock like Caterpillar (CAT) which is trading at a similar multiple. You aren't necessarily picking the stock up at a discount compared to competitors, but if you look at how fast the stock price grows relative to how fast earnings grows you can see there is a discrepancy. Looking at the PEG ratio (Price/ Earnings Growth) it's trading with a PEG ratio of .63. This is a famous metric that value investors look for, if a PEG ratio is below one the stock is considered to be a good value.
The stock price historically has been a grower, since 1994 it has averaged 15% growth compared to the S&P 500 which returned 10% over the same time period. If we look at the history of the stock there it was a good decision to buy and hold DE over a long period of time. If we turn our focus to the next 5 years which is the typical time frame for our Tactical Model investments. We see that analysts are expecting DE earnings to average a 39% growth rate over the next 5 years which is astonishing for a company as old as DE.
Another reason we are adding DE is their commitment to shareholder returns. The decision to increase the dividend by 17% is part of a long track record of increasing their dividend. The dividend is at a healthy and sustainable level with a payout ratio of 27%. If growth becomes an issue for DE there is still some possibility for them to increase the dividend further, but it seems most capital and resources are being deployed back into the business and expanding globally.
We are not producing a formal price target for the short term because we are looking to add and hold DE over the next 5 years assuming conditions are similar. Average analyst price targets sit at $405 but we are confident DE will grow beyond that in our investment time horizon. DE reported earnings on the 20th of August and beat earnings by 16.23% and beat revenue by .78%. This was the fourth consecutive quarter with a double-digit earnings beat.
Disclaimer: Do not buy or sell stocks mentioned in this newsletter without knowing if they are suitable for your goals. Investing involves risk, including the potential loss of principal. Understand all risks and fees before investing. Crosby Advisory Group, LLC is a registered investment advisor and licensed insurance advisor. Information in this newsletter is not intended to replace one on one consultation with an advisor.
Nate Crosby, CRPC
Wealth accumulation, Retirement income planning, Insurance.
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