Video Update: Should We Sell This Pick?

One of our recommendations has recently come under pressure.

Although it’s a Dividend King – meaning it’s grown its dividend for 50 years in a row – some are fearing recent disappointing earnings might mean a dividend cut in the future.

At Fortress Portfolio, we monitor our dividend payouts closely. And if a company cuts its dividend or breaks our original investment thesis, we reassess the entire holding.

Today, Chief Analyst Adam Galas will go through this stock in detail and share why we’re not rushing to sell out of it yet.

By staying disciplined and focused on the facts, we can keep our income growing with the best stocks in the world… and reach a stable and financially free future.

Click below to watch the video or scroll down to read the transcript.

Welcome Fortress Portfolio members to another weekly video update.

Today we're talking about some important concepts about bear markets, and we’ll be using Leggett & Platt (LEG) as our example.

Leggett & Platt recently announced earnings and they were a bit disappointing,

About 70% of its business, which is focused on premium furniture, is continuing to suffer.

I’ll show you exactly what that means and why we are downgrading the safety score to 60%.

So, let's take a look at what is going on with Leggett & Platt.

As you can see below during the pandemic they took a hit to earnings, as one would expect in a recession.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

Then of course, we had $9 trillion in government stimulus and fed money printing.

So we had the post-pandemic boom.

Everyone was locked down… Buying lots of furniture. So, they had a nice recovery.

But then, supply chains were all messed up.

We reopen the economy.

Now everyone wants to go traveling and go to concerts.

As some of you may know, Taylor Swift just had a billion-dollar concert tour.

And that’s where this fundamental deterioration comes in for Leggett & Platt.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

Now, unlike some of our other recommendations, such as our pipeline stocks… Where there is absolutely nothing going wrong with the fundamentals…

In this case, there is some significant fundamental deterioration.

That is why this is more of a speculative blue chip investment opportunity.

It is a Dividend King, which means it’s raised its dividends for 50 years in a row.

But as you may recall, VF Corporation (VFC) was also a Dividend King and we exited out of our position because it ended up slashing its dividend.

And as a result is no longer a Dividend King.

So should we get ready to sell Leggett & Platt because of its recent earnings?

What is the difference between Leggett & Platt and VFC?

Well, unlike VFC (which was doing several years of token 1% hikes), Leggett & Platt historically hikes their dividends at 5%.

And they have been delivering on that.

Their management team just gave us another 5% dividend hike.

And they came out and said that they have a solid plan to get their debt to cash flow (or their leverage ratio) down to a safe 2.5.

It's slightly elevated right now, which is why the S&P has downgraded them to a negative outlook on their BBB credit rating.

But still, that means a 66% chance that they will not be downgraded further.

Management is expected to keep delivering solid 5% dividend hikes, as you can see below.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

And of course, if they grow as expected with a nice recovery, then over the next two years they will have around a 50% total return upside potential.

Historically, we can see they grow about 75% of the time.

So the odds are certainly in our favor for a nice Leggett & Platt rebound.

At Fortress Portfolio we use a 3000-point safety and quality scoring system that is extremely advanced.

It's captures 95% of dividend hikes or dividend cuts before they happen.

And of course, our loyalty is only to you and to the truth.

Wherever the fundamentals lead, we always follow.

That is the essence of disciplined financial science, which is what we practice here at Fortress Portfolio.

So, you can sleep well at night while retiring in safety and splendor.

With this in mind, I want to also highlight some important principles about bear markets in general.

Now, you can see here that Leggett & Platt is trading around 18.4 times. That's a historical price to earnings ratio (P/E) for the last 20 years.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

According to Benjamin Graham, the father of value investing (and Warren Buffett’s mentor), the stock market is the weighing machine over the long-term.

The business moat, brands, management quality, long term risk management… Everything good, bad and ugly is priced into what a company is worth.

So about 18 to 19 times earnings is what tens of millions of income investors have determined over decades that this company is worth.

But notice how the price will periodically spend many years below fair value and many years above fair value.

This is where basically fear and fear of missing out (FOMO) come in.

Notice, up here in the pandemic craze, Leggett & Platt is significantly overvalued at almost 25 times earnings.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

It was priced for perfection as if nothing was ever going to go wrong.

Well, of course something went wrong. And so the price collapsed.

We did not recommend it when it was trading at 25 times earnings.

But as you can see below, we did recommend it at buying it when it was trading at 15 times earnings, a 20% discount.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

Now, how long can bear markets last?

Form a peak record high to a new record high, it can be anywhere from 5 to 8 years (even for blue chip quality companies).

And this is just one example of a company that we have in our portfolio that is in a bear market.

Other quality companies go through them to, such as Pepsi, and Lockheed Martin.

And during these periods, people said things like, “Well, Pepsi is a broken company.”

And, “Lockheed is dead money.”

But of course, they later became overvalued again.

And that brings me to a final important point – the impossibility of market timing.

According to JPMorgan (JPM), Bank of America (BAC), Recording Industry Association of America (RIAA), and Princeton Bancorp (BPRN), over 12 months or less (a very short term), just 5% of stock returns are explained by fundamentals.

95% is momentum or sentiment… Basically, luck.

But over ten plus years, it’s 90% fundamentals.

And over 30 years, retirement timeframe, according to Fidelity, it's 97% fundamentals.

In other words, in the short term, luck is 20 times as powerful as fundamentals.

But in the long term, fundamentals are 33 times more powerful than luck.

And fundamentals are a lot easier to track than luck and sentiment.

Because, of course, fundamentals are based on facts, logic, and reason.

And sentiment is based on irrational emotion.

So let me show you something remarkable.

If we take a look at the last time Leggett & Platt had this kind of significant fundamental deterioration, they bounced back… Just as we expect to happen in the future.

If we look at when Leggett & Platt was trading at fair value, we can see very solid, nearly 400% returns.

And here it was yielding nearly 8% in January of 2008.

(Source: FAST Graphs with Data from FactSet)

Click to enlarge

So it still fell 30%, not even close to the bottom.

But if you bought it here, you still bought a great company at a great price.

You still made Nasdaq like returns, but with an 8% yield.

And guess what?

The yield on cost, if you bought it back in 2008, is now 14%. That means for every thousand dollars you bought of Leggett & Platt at that time --- you'd now be earning $140 in dividends that are still growing at 5%.

So you'd be swimming in dividends.

Making Nasdaq like returns for the long term.

That is ultimately what Fortress is all about. That is the beauty of these ultra-high yield blue chips. And that is why we are still holding our position.

Our portfolio right now is yielding 7%. A sustainable and growing 7%.

So the point is, I can't tell you when some of these companies are going to turn around.

Sometimes they'll turn around right away, like with U.S. Bancorp. (USB) or ONEOK (OKE).

Or sometimes these bear markets can last months or even years.

But the point is, when you're earning that safe 7% yield and it's growing in all economic and market conditions, you truly have financial freedom.

You don't have to worry about the short term, which is 95% luck and irrationality that could drive you crazy.

Short-term stock prices are vanity. Cash flow is sanity… But it's the dividends that are reality.

Now I am going to answer a subscriber question from a new member asking about one of our most recent special reports.

Now, below is a screenshot from the Green Grid Millionaire: Claim Your Share of the Coming Solar-Grid Revolution special report. You can also click here to access it.

(Source: Wide Moat Research Green Grid Millionaire Special Report)

So Gail is asking where this data came from.

Below is a total return chart from one of Brookfield Renewable Partners (BEP)’s recent investor presentations since its inception in 1999.

(Source: Image 4: BEP Investor Presentation Total Return Chart)

But I think the confusion here is that Gail is looking at Brookfield Renewable Corp (BEPC) the version of the stock we recommend, not Brookfield Renewable Partners (BEP).

BEPC was created much more recently in 2020, specifically as a version of this stock that does not have a k-1 tax form.

A k-1 tax forms means that you have tax deferred distributions.

However, there is some tax complexity that a lot of people don't like. So Brookfield Renewable basically created two versions of the stock.

What we're recommending is the one that just has qualified dividends… Like any other dividend stock.

But it’s the same stock that has been trading on the Toronto Stock Exchange since 1999 and the U.S. stock exchange since 2011.

So since inception in 1999, Brookfield Renewable is pointing out they've earned about 16% annual returns, which works out to about 3,300%.

Now, just verify this, you can see this next chart showing basically very similar things.

(Source: YCharts Data Showing BEP Total Return Since 1999)

Now, we do have an update for 2023.

Because Brookfield Renewable has been in a bear market this year, we’ve been recommending it.

And as you can still see above it still absolutely smashed the S&P 500.

In fact, if the S&P 500 were to double its returns by flying into the worst bubble in history (worse even than the tech bubble) and Brookfield somehow got cut in half -- Brookfield would still be offering twice the historical returns of the S&P 500.

And that is the power of Brookfield.

They are the Warren Buffett of global hard infrastructure investments, hard assets, alternative asset management.

These guys are the industry leader.

They have been around since 1902, investing in global hard assets.

They have been around through inflation as high as 22%, and interest rates as high as 20%.

So right now, some people might be a bit worried… Saying things like: “Oh my God, interest rates are 5%. Will they be able to survive?”

Well, first of all, Brookfield Renewable has been around since 1999.

They've seen interest rates as high as 6.5%, which is 2% higher than they are today.

So, yes, they should be just fine.

But the overall company itself has seen far, far worse.

They are highly adaptable with an A rated parent company, and a BBB+ rating for our Brookfield Renewable (BEPC) holding.

There is nothing to worry about.

So, I want to thank you for joining us this week.

Please send in your questions and comments so I can respond to them in these videos and our monthly issues.

Just remember, I cannot provide personalized investment advice.

Next week, we will further demystify Wall Street with examples from the Fortress Portfolio.

This is Adam Galas, wishing you and your family safe investing and a healthy and relaxing weekend.