Wolf's Pick of the Week for March 29, 2016 - ARM Holdings (ARMH)

This week we're going to look at the technology that's at the heart of every little gadget you own - the CPU, or microprocessor.

Microprocessors are a commodity device - we know that they are in our computers, phones, tablets, and smart watches - but they are also omnipresent in our cars, controlling and monitoring our engines, brakes, and entertainment systems.  Modern appliances (washers, dryers, microwaves, dishwashers, ovens, even toasters) have them.  Many children's toys have them.  The Maker community has been taken by storm in the past few years by the release of embedded controllers (really just small CPU boards) such as the Arduino and the Raspberry Pi, which allow hobbyists to build sophisticated electronics devices of all sorts.

So if CPU's are a commodity - meaning that the market is well developed and not emerging - can we still make money by investing in them?

Cellphonus Rex

The answer is "yes."  For one thing, The Internet of Things is just around the corner, and we're soon going to see microprocessors deployed in everything.  For another, we have emerging markets in many countries including Brazil, South Korea, and China, where more and more consumers are gaining access (both physically and financially) to luxury items like consumer electronics.  Lastly, witness our culture of obsolescence - we're all trained from an early age to want the latest, greatest device.  Cell phone two years old?  You're a dinosaur, man, trade it in!  Tablet or computer too slow, screen too small?  Trade it in!  The turnover rate in consumer electronics alone will ensure that CPU manufacturers will be very, very busy for a long time to come.

There are many CPU manufacturers.  Some you've heard of:

Intel (INTC)
AMD (AMD)
Motorola (MSI)
Texas Instruments (TXN)
IBM (IBM)

Others you may have heard of, but weren't aware that they make CPUs:

Qualcomm (QCOM)
Broadcomm (AVGO)
Samsung
Apple (AAPL)

Others you may simply not even know exist:

ARM Holdings (ARMH), which was mentioned in my previous article on the Internet of Things
NXP/Freescale Semiconductor (NXPI)

There are more, but the big players are all mentioned above.  So which of these are the most interesting in terms of future growth potential?  One of the ones you've probably never heard of - ARM Holdings (ARMH).

To be fair, ARM Holdings doesn't actually manufacture CPUs - they design them, then license those designs to other companies.  Other companies like Apple, AMD, Broadcom, Samsung, Qualcomm, Texas Instruments, NVIDIA, Toshiba, Panasonic, and Fujitsu - in fact for their three product lines (the Cortex-A for high end processing, Cortex-R for embedded realtime applications, and Cortex-M for mobile applications) they have licensed their CPU designs to well over 250 different manufacturers.

Acorn Computer.  From old-computers.com

Why is ARM so successful?  They started in the 1980's as Acorn Computers, manufacturing their own coprocessors to supplement the then wildly popular MOS 6502 chip (which was used as the CPU in practically every "home computer" of that era).  While moderately successful, especially in the UK, they quickly realized that a new type of architecture was required to truly improve computer performance.  Inspired by the Berkeley RISC project white papers, they developed a true RISC (reduced instruction set chip) processor in 1985.  RISC processor use a simpler core instruction set, relying on the software and operating system to supply the complexity, which makes them more flexible and adaptable - especially when it comes to running multiple operating systems.  In the earlier days, RISC chips were also just plain faster - and consumed less power - than the CISC (complex instruction set chips) that Intel and everyone else was cranking out.

To this day the advantages of the RISC architecture hold true - as witnessed by the fact that they are able to license these chips to so many manufacturers, which use them for every conceivable application.

Licensees of ARM technology are free to improve on those designs - something Apple tends to do with every new generation of chip they put in the iPhone, iPad, and Watch.  But at core, those chips are still based on ARM technology, which means that ARM can sit back and rake in a tidy profit and sip sherry while designing the next generation of chip.  They incur none of the cost or risk in manufacturing - kind of an ideal situation if you like designing CPUs.

ARM chips are in almost every smart phone and tablet on the market.  In 2013 alone 10 billion ARM processors had been produced, and 60% of all mobile devices had at least one ARM processor.  Hard to say that ARM isn't winning!  So this is one case where you could invest in the manufacturer (Samsung, Apple, Qualcomm, etc.) and probably make money - or invest in their supplier (ARM) and definitely make money as we move into the larger Internet of Things and bring all of these technology to the newly emerging markets of Brazil, Russia, China, South Korea, etc.

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Disclaimer - I am not a financial expert and I am not responsible for any losses - or gains - you may make if you make decisions based on the information posted here.  If you do make money, please feel free to let me know!

Disclosure - Wolfgang Rumpf owns shares in Apple (AAPL) and Qualcomm (QCOM) mentioned above, and plans to purchase shares in Intel (INTC), Texas Instruments (TXN) and ARM Holdings (ARMH) within the next 12 months.

Special Issue: Five must-have tools for managing your finances

This week I'm posting the first in a series of special articles - I won't be talking about a market sector, or a particular stock.  Instead, since by now you're hopefully considering diving into the market, I thought I'd share with you some of the tools I use to help manage my investments.

In reality, investment management is really all about financial management - after all, you can't (or shouldn't) invest money in the stock market if you don't have some extra money to begin with.  So realistically you need to have tools to help you with the following things:

1.  Budgeting
2.  Debt/Asset Management
3.  Trading (including Research)
4.  Tax Preparation

And since part of good, sound financial health is knowing what your credit score is (crucial for making large purchases like automobiles or houses), let add to that list:

5.  Credit Tracking

I'm not necessarily going to talk about them in that order - but let's start with the first item - Budgeting.

There are many ways to keep a budget.  Spreadsheets are awesome.  You can also buy software specifically for tracking a budget.  And most banks now support some sort of budget tracking in their online web apps.  But really the important thing is to know how much income you have, and then decide how to parcel that out.  Most of us can do that - but the problem is that there are always unexpected expenses that crop up (repairs, accidents, doctors, etc), and sometimes even the expenses we expected are higher than anticipated.  So while planning a budget out in advance is important, it's equally important to reconcile that with what you are really spending your money on.  This also helps you plan on what to try to cut back on, leaving you with extra money for investing!

The tool I use for this is Mint.com.  Mint is a free service - just sign up with a valid email address and you're off and running.  Once you have an account, you tell Mint about your other financial accounts - bank accounts, credit cards, mortgages, loans, brokerage accounts, etc - and give it access to them.  This is all done securely, with a high level of encryption.  Once this is done, Mint can access your accounts and create a nice overview of the state of your finances - plusses and minuses.  The nice thing is that by looking at your bank account Mint can tell just where you are spending money - and now so can you.  Your spending habits are broken down into general categories - e.g. household, food, recreation - and you can tweak and customize it if necessary.  Then, every month, you can look at the way you've been spending and decide where (if anywhere) to cut back.  For example, last month I spent far more than usual on restaurants.  Not only does Mint show me this, but it even sends me an email letting me know!  You can of course set a budget amount for each of the categories, and Mint will tell you when you are getting close to - or over - the preset limit.  Mint also takes care of the Debt/Asset Management part of your finances, by giving you a nice summary of each and linking to the appropriate category.

One last perk of Mint - it will link you to offers which may help you manage your finances better - such as lower interest rate credit cards.  This is how they make their money, by the way - Mint doesn't charge you a dime.

While Mint does have links to your credit score, for Credit Tracking I like to use CreditKarma.com.  CreditKarma is another 100% free service that takes some of your personal information (again, securely) and then pulls your credit score from all 3 major bureaus.  This pull does not affect your score in any way, and you can check your score at any time, as often as you like.  CreditKarma will update your score, and more importantly it will tell you why your score is at the level it is - listing factors such as credit utilization, missed payments, etc.  And when your credit changes CreditKarma tells you why - for example, maybe your balance went up - or down - on a credit card.  CreditKarma also makes suggestions for how you can improve your score, and will link you to available offers for loan consolidation or low interest rate credit cards.

Now that you have your finances under control, lets talk about investing tools.  The first step is to set up a Brokerage Account.  A brokerage is the entity that can actually buy and sell stocks for you, and while you can do this at a Brick and Mortar company, like your bank, chances are that they will charge you significantly higher fees for trading than if you just do it yourself on a website.  There are many online brokerages to choose from, and they're all very similar - I use eTrade.com, but you should shop around (click here) and see which one you like best.  Each brokerage will have different requirements - some will have a minimum account balance, others may have a minimum number of transactions required, and all of them will charge you a commission fee per trade.  The advice and bling they offer will vary too - I choose eTrade because the $9.99 commission per trade is reasonable, and the online tools for stock evaluation, as well as the mobile apps they offer, are really nice.  Add to that the fact that eTrade talks seamlessly with my Tax Tool (below), and it's a no-brainer.

Now that you are ready to start trading, it's time to figure out which stocks to invest in.  When I am Trading I pay attention to a couple of web sites - one of which you've already read about extensively if you follow me regularly.  Dividend.com is by far the easiest place to find out which companies pay a dividend, how much that dividend is, and how regularly they've paid - or increased - it.  I like to just sort the companies by percentage yield and scroll down to about the 9% or lower mark (if you've read my previous articles you'll know why) and then jot down the companies that I think merit further investigation.

And that takes us to the next subtopic of trading - doing your Research.  Dividend.com is one stop you should make, but not all of your stocks are likely to be dividend yielders - you should also have a few stocks that are just good bets for the future - Apple (APPL), General Electric (GE), and Coke (KO) are all stocks that seem to do good for their shareholders despite their relatively low dividend yield.  But how do you choose what stock to buy?  The answer is buy companies that you know something about - in industries you know something about - and buy those companies because you think they'll do well in the future.  You should spend some extra time researching them on sites like Yahoo Finance, where you can see their press releases, or even at the Motley Fool, which is a great site for investors (I'm a member).  Eventually you'll have a big list of stocks that you want to buy - and that's where SigFig.com comes in.

SigFig is designed to be a one-stop portal for you to track your investments - it ties in to your brokerage account and gives you live, updated quotes - and values - for all the stocks in your portfolio.  It also displays the latest news on all of the companies, as well as clever widget that shows you where the stock is trading today compared to the past year - which is extremely useful when it comes to making decisions like "buy more" or "sell".  It also comes with a very handy mobile app, so you can track this data on the go.

I like SigFig so much that I not only gave it access (securely, again) to my eTrade portfolio, but I created a manual portfolio that I called "To Buy".  You guessed it - this is where I keep that list of all the stocks I want to buy in the future.  Now I can quickly and easily look at all of them and see their current price, relative to the past year, the current dividend yield, and all pertinent news.  This makes it far easier to weed through the list of all the stocks I want to buy, and pick the one I'm buying today.

There's only one more tool to talk about, and that one deals with Tax Preparation.  We all have to do it, and we all hate doing it, so why not make it as simple as possible?

I work two jobs - one is my "main" job in my home town, and for the other job I teach online at a major University in another state.  The end result of this is that I have to file not only Federal taxes and taxes in my home state, but I have to file taxes in state where my other job is based.  Add to that my portfolio and my taxes are more complex than your standard "EZ" form allows for.  That's why I love TurboTax (and if you click on that link and actually use TurboTax, you'll get 20% as a referral from me for doing so!).  TurboTax makes everything easy by literally walking you through each step of your return, asking simple questions to help make sure that you file everything correctly - and maximize your return.  That's a huge selling point right there - TurboTax walks you through every possible means of saving money and increasing your refund - very cool.  It also can speak to your brokerage account, pulling in all of your transaction and dividend data - and let me tell you, that saves you a HUGE amount of time over doing it manually!    It also can pull in W2 forms from most large employers, and best of all, once you've put all your information in, doing next year's taxes becomes trivial - all of your information on home, filing status, dependents, etc. is already there and gets imported.  I kid you not, I finished my taxes in about 45 minutes this year, and TurboTax filed everything electronically for me and made sure the refunds were deposited straight into my bank account.  It couldn't be simpler!

There are many other tools that I've not talked about - and I'm sure many of them are just as good, or possibly even better, than the ones I've mentioned here.  I've focused on the tools I use - and have used for several years - because they're the ones I know best and have come to trust.  I'm not getting any sort of compensation from any of the companies above (although if you do end up using TurboTax through that link I'll also get an Amazon Gift Card, so think about it...).

That wraps up this special edition - hope you enjoyed it!


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Disclaimer - I am not a financial expert and I am not responsible for any losses - or gains - you may make if you make decisions based on the information posted here.  If you do make money, please feel free to let me know!

Disclosure - Wolfgang Rumpf owns shares in Apple (APPL), General Electric (GE), and Coke (KO).

Wolf's Stock Pick for March 7, 2016 - Centurylink (CTL)

Not a sponsor or an ad - but a company you might want to consider investing in....

Last week I talked about Utility stocks and how they can be a steady and reliable source of income through their typically high dividend yield.  This week I'm going to discuss one specific utility company that I think should be part of your portfolio - CenturyLink (CTL).  CenturyLink is a communications/data company providing telephony, internet access, and fiber television services to residential and business clients in 36 states in the US.  According to Wikipedia, they are the third largest telecommunications provider in the United States, after AT&T (T) and Verizon (VZ).

When shopping around for utility stocks, there are several attributes to pay attention to.  The size of the company (and by this I mean market capitalization, which is a reflection of how much market share they have as well as their overall income), their dividend yield, and the consistency of dividend payout.

There are plenty of utility companies to choose from.  One of the ways I use to screen potential investment companies is to look at Dividend.com and rank the companies by dividend yield.  I usually stay away from the absurdly high dividend payers - see my article on dividend investing for why.  In the 3% - 9% dividend yield range you'll find many different utilities - power companies, telecomms, etc.  Towards the upper end of this is CenturyLink, which at $31 a share currently pays a 6.9% dividend.  I also like Frontier Telecommunications (FTR), currently about $5.67 a share, for 7.5% dividend yield, as well as Verizon (VZ) and AT&T (T), both of which offer almost a 5% dividend yield.  I own shares in all of them, in fact - but if you're just starting out with investing, I would recommend CenturyLink as a good entry point, and here's why:

Market Capitalization

Or 17.5 Billion....

As the third-largest telecomm in the US, you would assume that CenturyLink has captured a large share of the market - and you'd be correct.  Accordingly to Yahoo Financial, CenturyLink has a market cap of $17.5 Billion dollars.  That's huge - this is not a company that is going to go away quickly, if ever.  For smaller companies, a bad year or some bad decisions can irreparably damage the company, even lead to failure.  Larger companies have a lot more leeway - and while CenturyLink doesn't have the $234 Billion market cap of AT&T, or the $210 Billion market cap of Verizon, it's not by any means a "small" company.


Profitability

Looking at their annual report for 2015, CenturyLink made a profit of $434 million from net revenues of about $18 Billion.  So while they have a very large revenue stream, and are in fact profitable, their profit is only 2.5% of their total revenue.  This doesn't seem huge, especially compared to AT&T's $75.59 Billion profit on revenue of $146.8 Billion (almost 50%).  So this is a warning sign - while they are profitable, their overall profit margin is fairly low.

Debt

At first glance, CenturyLink would appear to have an extremely high amount of debt - approximately $20 Billion, according to their December 2015 Investor Relations page.  That's more debt than their market cap, which might seem like a bad thing.  It's important to remember that most telecomms are really cash flow machines - they continue bringing in a large revenue stream, and use loans they take out to expand that machine by building more infrastructure.  So the high debt is a sign of CenturyLink's investment in future revenues.  This is not at all uncommon - even the "big boys" (AT&T and Verizon) fund expansion by taking on huge debt, with the knowledge that their resulting increased revenue stream will make up for it in the long run.  And compared to AT&T's $118 Billion debt and Verizon's $103 Billion debt, Centurylink's debt is absolutely paltry.

Dividend Yield

This is a no-brainer.  CenturyLink, at $31 a share, pays 6.9%.  And like all stocks, it's somewhat cyclical, so if follow it long enough you'll see the stock price dip far enough to bring that yield up to 8% (since the dividend is paid as dollars per share, not an actual percentage - you get more when the price goes down!).  While Frontier Telecommunications offers a larger dividend, they can't beat CenturyLink's on any of the other criteria in this list.


Payout History

The Payout History is just what it sounds like - a history of dividend payouts a company has made in the past.  The important thing here is to look for consistency - sometimes companies will "skip" a dividend payout, or even reduce their dividend, if they are experiencing financial difficulties.  By looking at the payout history, you can see not only whether or not a company has consistently paid its dividend like clockwork, but you can also see whether or not that dividend changed (see below).  The best place to look for this, IMHO, is (surprise!) Dividend.com's history section.  As you can see if you click here, CenturyLink's payout history is superb - they haven't missed a dividend payment since 1993, which is as far back as their record goes at Dividend.com.

Dividend Increase

Another piece of information you can get from that Dividend.com history table for CTL is the change in dividend over their payout history.  If you look at the data for CenturyLink, you'll see that their dividend has remained unchanged since February of 2013; immediately prior to that they actually reduced their dividend payout!  Is that a warning sign?  Not necessarily.  Looking even further back you'll see that prior to that, they actually raised their dividend every year.  The cut in 2012 was a blip - the dividend was cut so that they could reduce their debt, using the cash on hand for that rather than supporting the high dividend.  That's a sign that management knows what they're doing, in my opinion.  This is part of the game - there's always a risk that a company may reduce it's dividend; in the meantime, you are still enjoying one of the higher dividends available that's not in a dividend value trap.

While Verizon and AT&T are also good contenders in all of the above areas, CenturyLink's slightly higher percentage yield is what really tips them over the edge in my mind.  Do the math and see how quickly a 6.9% yield outperforms a 5% yield with even a small investment of just $1000:

As you can see, that 1.9% makes a huge difference over time.  The $1000 invested at 6.9% has doubled by year 11 - and in fact reached the same point that the 5% investment made in 12 years in just about 8 years.  The stock price will fluctuate over time, so of course your overall profit will depend on when you sell - if you ever do.  But the earnings you make - $1227 vs $795 - those don't change.  As always I'd recommend reinvesting your dividends and holding on to the stock for the long haul, and only selling at one of the "peaks" in the stock market cycles....

The other thing to bear in mind here is that the dividend yield will change as the stock price changes (I explain this in my article on dividend investing).  So keep an eye on the stock price and dividend yield of any stocks you are interested in buying as dividend earners - again, Dividend.com is a great asset here, but there are other tools you can also use that will make your life easier.  I'll go in depth on some of those next week.

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Disclaimer - I am not a financial expert and I am not responsible for any losses - or gains - you may make if you make decisions based on the information posted here.  If you do make money, please feel free to let me know!

Disclosure - Wolfgang Rumpf owns shares in Frontier Telecommunications (FTR), Centurylink (CTL), Verizon (VZ), and AT&T (T) mentioned above.