Vicariously Brookfield

Cover Story, by John Kimmel, Contributor May 1st, 2012

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Our cover story is excerpted from John’s Brookfield Digest -- an exploratory newsletter aimed at sharing lessons with people than he cares about. He clearly cares about a lot of people.

The joy is palpable. Some of my favorite blessings are the people I meet all across this country. Specifically, the educators … the leaders … the influencers and enthusiasts who know that “getting it right” in the realm of long-term investing can make a powerful difference in the lives and very futures of those who can be convinced to engage and embrace the journey. Wichita’s John Kimmel (pictured, left) and Brian Hayek (St. Louis) are two of those people. Our cover story is excerpted from John’s Brookfield Digest — an exploratory newsletter aimed at sharing lessons with people than he cares about. He clearly cares about a lot of people. Brian Hayek contributes this month’s screening feature sharing some of his favorite Dividend Divas.

“We teach what we like to learn and the reason many people go into teaching is vicariously to reexperience the primary joy experienced the first time they learned something they loved.” — Stephen Brookfield

To the legions of “Johns” and “Brians” out there — and you know who you are — WE THANK YOU. Although Stephen Brookfield has nothing to do with John’s Brookfield Digest, we’re fairly certain that his expressed sentiment does. The objective of Brookfield Digest is to present ideas that could help others build portfolios that seek to outperform the market over the long term. Any appearance of market timing is strictly coincidental as in the long term, good growth and good values, income or momentum stocks, are usually available for extended periods until competition wins, managements fail, stocks are overvalued, trends break down, or rising interest rates lead to capital loss. John hopes to present some of the best ideas from a number of top ranked newsletters screened by use of time-tested tools with opinion and commentary from independent (non-sell side) third party sources. We hope you enjoy the following segments from some of the past issues of John’s continuing exploration and commentary.

Growth At A Reasonable Price (GARP)

At times, GARP can be found in most any of the investment styles or disciplines. Investors often tend to favor one style: growth, value, income, momentum, turnaround, etc., and may be successful in any one of these.

[John Kimmel] is multi-disciplined and invests for multiple time ranges depending on style or market situation . Cycles (economic or business, market, interest rate) have a major input on some styles more than others. Thus there is a need for flexibility as to time in certain investments. John has been reviewing and involved with fundamental analysis for over twenty years, but only recently has learned of timing/technical tools and indicators.

It is said that investing (and specifically timing) is more of an art than a science.

Never considering himself much of an artist, John prefers his investments to be based in the logical, fundamental principles of Graham & Dodd and more recently Better Investing. So when Mr. Market goes manic-depressive, there is somewhat of a rock to anchor to, and anywhere in between, a GARP investment could be profitable if you have the time and patience, and don’t pay too much.

Starter GARP Picks for Today’s Economy and Market

The economy continues its feeble recovery after a flat year domestically. Market sentiment while improving, still sees cash on the sidelines, and significant (but declining) short positions which could fuel the market higher above ever nearer technical resistance levels. Near-term pullbacks should be viewed as buying opportunities for GARP stocks to start or add to a diversified, long-term oriented portfolio.

Early Spring Themes for Ideas:

· China contrarian – Policy changes will lead to positive growth and outsized stock price recovery.

· Risk on – Tech is an overweight. Find undervalued fast growers and market dominators starting to move.

· Healthcare for an aging population – The industry is seeing more regulation. Undervalued midsized companies make good acquisition candidates.

· Global infrastructure – Needs should lead to early cycle rebound in construction/engineering spending.

· Although investors have sought safety in consumer staples, a couple of quality growers still look undervalued.

· Finally, a financial that looks over-punished by past exposure to Europe debt.

Building Better Portfolios

One of the first things we do in building a portfolio that could meet our goals (or reasonable expectations), is to find the building blocks (companies) that can withstand the extreme weather (recessions, flash crashes, geopolitical surprises) that always come unexpected.

In the long term, the short term surprises should be expected, and in that light become opportunities to add to our holdings at even better prices. To find the best companies, the Manifest Investing StockSearch and Stocks website features have become my fastest and most used tool in finding good possible building blocks for my portfolios.

The “sweet spot” screen in March yielded 56 “possibles” that I might consider to then get Valueline, S&P, or other third party opinion on, as well as check simple technical criteria to possibly improve my chances of early success.

Not coincidentally, I see four companies from Brookfield Digest “starter picks” in this list. The “sweet spot” names come up sorted by PAR, which is Projected Annual Return. That’s what MANIFEST is about – the returns. If your goal is to beat the market, you better have a higher target. I like to set a target that is at least 5% over the market return and with MANIFEST and the market, prices change daily, so my target PAR adjusts accordingly. The “sweet spot” range is 5-10% above the Manifest database average of 2500 stocks covered, which is where I usually buy a stock.

However, if the quality rating of a prospective buy is high, occasionally I’ll go another point or two higher.

Back to those storms, studies have shown that portfolios of higher quality rated stocks hold up better in adverse economic and market conditions. Since most of us are not market timers, it makes sense to build with predominantly higher quality rated stocks.

A Note On Core Holdings

Motley Fool Stock Adviser probably says it as well as anyone: “our core stocks. . . they’re the companies we think you should hold for the long term as part of your portfolio’s foundation.”

A focus group of one of my clubs met and arrived at the following criteria for Core type stocks: a quality company (as exhibited by an excellent Manifest Quality Rating), a long history of steady growth, financially strong, pays a significant dividend or does stock buybacks.

To a lesser degree but important: well known due to wide moat or strong brand, better than average safety rating, good EPS stability.

Core holdings [generally] tend to be larger, more established companies, leaders in their industries. It’s still largely subjective, so it’s your call what type of companies you want for your portfolio.

Plymouth, Unmistakably Long-Term

Brookfield Digest examines a number of worthy sources from the likes of Navellier to the Investor Advisory Service and many others like The Prudent Speculator. Lessons are gleaned and ideas shared.

I had the privilege of visiting with a couple of John’s investment clubs during my stay in Wichita. Some of you may recall the Dashboard Diagnostics webcast with Plymouth circa Thanksgiving last year. We invite you to take a look back at the discussion. We’re fairly certain that exploration, sharing and joy reside there.