Investors Alley

Waters Corporation (WAT), to describe this little-known company most simply, makes tools that help scientists and researchers analyze the safety, quality, and durability of science-based, consumer-facing products. Waters’s tools help its customers perform scientific research by providing them with analytical instruments, services, and supplies.

Nearly 90% of the company’s revenue comes from its Waters division, which produces mass spectrometry and liquid chromatography tools, as well as related products. These tools are used primarily by pharmaceutical firms to analyze a molecule’s structure during the drug discovery, development, and production processes. These tools can also be used in food and environmental quality testing, as well as other industrial applications.

About 60% of the Waters division’s revenues in 2021 came from the pharmaceutical market, a more significant proportion than its peers.

The remaining 10% of Waters’s overall revenues is generated by the company’s thermal analysis business, which provides measurement devices for thermodynamic experiments. This helps scientists examine the physical properties of various materials. Thermal analysis testing can be conducted on batteries, circuit boards, and more.

Waters’ Business and Outlook

The company’s strategy is centered around distributing its instruments (including pre-installed software) among scientists and researchers, then providing necessary services throughout the useful life of each system. Waters also sells related consumables, such as sample preparation kits and tools.

This may sound like a small, very niche business, but many of the Waters’s instruments are clearly in demand across a number of industries. That is why the company was able to deliver organic year-on-year revenue growth of 15% in the third quarter. On its latest earnings call, management said that the company’s order book was strong, and that orders were growing “faster than sales.” That is particularly encouraging, given the darkening economic outlook.

However, it won’t be an easy road for Waters.

Although the company recently raised full-year revenue growth guidance from 11.5% to 12% (up from 9.5% to 10.5% previously), it cut its earnings-per-share (EPS) forecast in anticipation of foreign exchange headwinds. Currency volatility—and a strong U.S. dollar—is a material risk for the company. That’s because Waters makes about 40% of its sales in Asia, and another quarter of its sales in Europe. The company now expects gross margins for the full year to decline by 50 basis points, to 58% for the full year, with operating margins remaining flat at around 30.2%.

Investors will be closely watching those margins and EPS numbers for signs that an in-progress “turnaround” initiative is yielding results.

This turnaround was needed because Waters’ growth had underperformed expectations in recent years. That resulted in a change in management, including bringing in Udit Batra—formerly CEO of the MilliporeSigma, the $7.7 billion life science tools business of Germany’s Merck KGaA—as the new CEO.

When Batra joined Waters in 2020, it had lost its anchor. The company was focused more on certain growing areas, and almost completely ignoring its core business, which started slipping away. Batra aimed to reinvigorate the company through an instrument replacement drive, as well as strengthening its technology and e-commerce offerings. The latter of these is especially notable because, when Batra started in September 2020, Waters sold only 20% of its consumables online. This is sharply below what its peers do—typically selling about 50% of consumables online.

Under Batra, Waters is now focused on upgrading older liquid chromatography instruments with newer systems, highlighting the lack of urgency in the selling part of the organization, as had been proposed under the previous management team.

Additionally, Waters trails its peers, like of Agilent (A), Thermo Fisher Scientific (TMO), and Danaher (DHR), in terms of penetrating the contract research organization channel in pharmaceuticals. It is now focusing on gaining share in that part of the end market.

The turnaround Batra is leading at Waters seems to be working. In the third quarter, it enjoyed impressive instrument growth of 21% in constant currency terms (14% reported). This should bode well for future recurring revenue growth from the sale of instruments and related services. About half of its sales are already recurring revenues.

And importantly, Waters’ analytical instruments remain the gold standard, especially in liquid chromatography and mass spectrometry for pharmaceutical firms. That is a firm base from which to launch a turnaround. It’s also why Waters enjoys profitability near the top of the life sciences market, with returns on invested capital over 30%.

Waters also has a major tailwind behind it—the expanding universe of biopharmaceuticals testing and the increase in food safety and environmental testing by various entities.

Add it all up and Waters is a buy anywhere in its recent range of $300 to $350, in anticipation of more progress in its corporate turnaround story.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

When a stock is trading in a range, sometimes a covered call strategy can be a good way to take advantage of the situation.  Sunpower (SPWR) has been range-bound for most of the year and is trading somewhere near the middle of its range. A trader is attempting to capitalize off the situation by making

I have never believed you can see the future by comparing current economic factors to the past.

The current economic conditions validate my belief: they are so different that making that type of comparison would not provide valid signals.

Instead of trying to guess the future based on history, let’s look at the last three years to start to get an idea of what the next phase may look like…

And the best income investment for what’s ahead.

The Crash. In early 2020, the coronavirus pandemic spread across the globe. The U.S. federal government ordered much of the economy to shut down. The stock market crashed by 35% (S&P 500) within a few weeks. For one day, crude oil traded for a negative $37 per barrel. Chaos reigned. No one knew if businesses would even be able to continue. Congress passed, and President Trump signed, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES), which paid hundreds of billions of dollars to businesses and individuals.

The Explosion. The 2020 stock bear market turned out to be the shortest in history. The CARES Act put cash in the pockets of stay-at-home workers. Online businesses saw sales take off. Trading stocks on apps like Robinhood became the thing to do. The Federal Reserve slashed the feds fund rate to zero percent.

The stock market recovered completely by late September 2020. The bull market continued through the rest of 2020 and all of 2021. From the March 2020 low, the S&P 500 gained 120%. The tech-heavy Nasdaq 100 stock index gained 140%. Meme stocks became a thing in 2021, with new traders making huge gains on near-bankrupt stocks like AMC Entertainment (AMC), GameStop (GME), and Bed Bath & Beyond (BBBY).

Many young, new-to-the-market traders believed that making money and getting rich was easy. There was no reason to go back to work if you could stay home and play the market like a video game, winning on every try.

Igniting Inflation. For January 2021, inflation came in at 1.4%. By May, it had topped 5.0%. The Fed and government officials called the rise in prices “transitional.” They were wrong. The government continued its spending pile-on with the $1.9 trillion American Rescue Plan Act passed in March 2021. In December 2021, inflation reached 7.0%.

Happy with their “transition” outlook, the Fed kept the fed funds rate at zero percent until April 2022. By then, inflation was at 8.3%, and the Fed board figured out they had been very, very wrong. At that time, the Fed started on the most aggressive trajectory of rate increases in its history. Inflation, however, has remained stubborn. The October rate of 7.7% was not far from the 8.3% average for the first ten months of 2022.

In 2022 we also learned that the dictators running Russia and China were not good guys and were not out to do what was best for the rest of the world. Who would have guessed?

As a result, 2022 has been a year of financial crashes. The stock market crashed, recovered, and crashed again. The bond market crashed. Bitcoin tanked. Crypto investors discovered that much of the crypto universe was (and is) a giant Ponzi scheme. Recently, Wolf Street shared a list of 1001 stocks that have dropped by more than 80% this year!

Investors and traders who jumped into the markets in 2020 and 2021 discovered that getting rich was not as easy as they thought and losing a large portion of their portfolio values was easier.

But as an aside, subscribers following the income-focused strategy of my Dividend Hunter service have done fine in 2022…

A New Normal. I think the disruptions of the three preceding years will have a lasting impact on the investment universe. There will be great opportunities, but it is unlikely that they will be the same ones that propelled the 2009-2020 bull market or the 2020-2021 bull market.

One easy prediction to make is that fixed-income investments will now pay attractive yields. A portion of a portfolio earning 7% to 10% with fixed maturities will bring some stability.

Different business sectors will lead the way. Business development companies (BDCs), which lend to small businesses, have already shown that they will thrive in a higher interest rate environment.

Real estate investment trusts (REITs) have been oversold this year. For example, this year, the SPDR Dow Jones RIET ETF (RWR) is down 25%. I like residential REITs as investments, and the new Home Appreciation U.S. REIT ETF (HAUS) gives excellent exposure to the apartment and single-family rental property markets.

A new normal means that in 2023, we need to watch and study to see which companies thrive and which left their better days in the 2010s.
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Here’s something interesting pointed out by the Financial Times’ U.S. financial commentator, Robert Armstrong: industrial stocks have done well lately—really well. Since September 30, the S&P 500 industrials are up 20%, nearly double the full index.

Armstrong noted that of the 71 S&P industrial stocks, 58 have outperformed the index since the end of September, and only one stock, Generac Holdings Inc. (GNRC), has fallen.

This is unusual, to say the least, because there is a widespread expectation that a recession is coming soon. Industrial stocks are cyclical, and therefore supposed to perform poorly heading into an economic downturn.

Many of those who expect a recession do so because the Treasury 10-year 3-month yield curve is very inverted. Yet shares in construction equipment company Caterpillar Inc. (CAT) and farming equipment firm Deere & Co. (DE) have both recently traded at all-time highs!

Let’s take a closer look at Caterpillar, which is up more than 40% since the end of September and has a decent dividend yield—in excess of 2%—as well.

Caterpillar Performing Smoothly

Caterpillar, founded in 1925, is one of America’s premier industrial companies. It is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

Caterpillar has three primary business segments: Construction Industries (approximately 41% of 3Q sales), Resource Industries (18% of 3Q sales) and Energy & Transportation (41% of 3Q sales).

The company impressed investors by delivering growth in both its top- and bottom-lines for the last few quarters, despite inflationary pressures and supply-chain snarls. In fact Caterpillar increased equipment sales in the third quarter by 22% year on year to $14.2 billion.

The company’s adjusted earnings per share were $3.95 in third-quarter 2022, surpassing Wall Street estimates. The bottom-line figure marked a 48.5% improvement year over year, and the adjusted operating margin widened by 280 basis points to 16.2%. For the first nine months of the year, the company has earned $10.01 per share on an adjusted basis.

Caterpillar’s backlog at the end of the quarter was an impressive $30 billion, up by $1.6 billion.

This bodes very well for its top-line performance in future quarters. Caterpillar did not give full-year earnings guidance, but management has indicated that sales in the fourth quarter should be the highest of the year and that it is expecting a “strong” fourth-quarter adjusted operating margin.

CAT: Dividend Aristocrat

Caterpillar’s cash and liquidity position remains strong, ending the third quarter of 2022 with cash and short-term investments of $6.3 billion.

In June 2022, Caterpillar hiked its quarterly dividend 8%, to $1.20 per share. This was a case of management signaling confidence in the near-term outlook, despite the supply chain and inflationary difficulties, and it maintained Caterpillar’s status as a dividend aristocrat. The company, which has paid dividends since 1933, continues its 28-year streak of paying increasingly higher dividends to its shareholders.

Caterpillar’s dividend yield and payout ratio are higher than its peers. Over the past four years, CAT has returned an average of 99% of its machinery, energy, and transportation segments’ free cash flow to its shareholders. This is in sync with its target of returning all free cash flow from these segments to the shareholders over time.

The estimated dividend for 2022 is $4.71, and it’s at least $5.08 for 2023.

Buy Caterpillar

Morningstar had a great summation as to why Caterpillar is such a great long-term investment. Here is what Morningstar said:

We think Caterpillar will continue to be the leader in the global heavy machinery market, providing customers an extensive product portfolio consisting of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. Caterpillar’s strong brand is underpinned by its high-quality, extremely reliable, and efficient products.

I would add that customers also value Caterpillar’s ability to offer the lowest total cost of equipment ownership in its market segment, as well as value-added services through the company’s extensive global dealer network of about 2,700 offices.

Also attractive: Caterpillar offers a wide range of products that enhance fuel efficiency, thanks to its diesel-electric and electric drivetrain product offerings. And more than one million of its two million machines in the field are connected to its digital platform.

I believe Caterpillar has a lot of strong structural tailwinds in its favor.

One of these tailwinds is the increased infrastructure spending in both the U.S. and emerging markets, which will boost sales of Caterpillar’s construction equipment. Plus, increased spending on energy—both oil and gas as well as renewable—will boost demand for the company’s mining equipment, in addition to its well-servicing equipment (pumps, engines, etc.).

Add it all up and Caterpillar is a buy anywhere in the low-to-mid $200s.
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While trading tends to slow down during Thanksgiving week, the weather doesn’t always comply. Freezing temperatures have caused a surge in natural gas prices, and trading has become brisk in the United States Natural Gas Fund (UNG). UNG is the most popular pure play ETF for natural gas. A sophisticated trader recently placed what looks

Along with a bear market for stocks, 2022 has, according to Morningstar, been the worst year ever for the bond market. Bond values have fallen up to 30% this year, putting a bigger dent in many retirement accounts that hold bond ETFs. Fortunately, in the current, higher interest rate world, you can invest safely in bonds with attractive yields and eliminate the potential for any losses.

But what goes down often comes back up. And 2023 is looking like a great year to invest in bonds.

So, let’s take a look at the best way to invest in bonds for growth and income in 2023…

In their recently released 2023 global outlook, Morgan Stanley said, “…we think that high grade bonds, one of the biggest losers of 2022, will be one of the biggest winners of 2023. Real and nominal yields have risen materially across a wide range of high grade markets. Less growth, inflation, and tightening make stable returns more attractive.”

But bond investing requires a different set of knowledge and skills than stock investing. Here is the short course on how to do it.

A bond will have a fixed maturity date and pay a fixed yield. For example, if you buy a $10,000 bond with a 6% coupon rate, the bond will pay $600 per year of interest and return the $10,000 when the bond matures. The important point is that if you hold a bond until maturity, you will get the face value back.

Bond prices change due to changing interest rates. If rates go up, bond prices go down, and the opposite for falling rates. Because of varying rates, a bond is unlikely to be priced at face value. Your broker will provide a yield-to-maturity rate, which takes in the current bond price, the face value, and the coupon rate. If you buy a bond and hold it until it matures, you will earn the yield to maturity as the annual rate of return.

An important concept: Bond funds and ETFs do not buy bonds and hold them until maturity. A fund constantly buys and sells bonds to maintain a targeted average maturity in the portfolio. Because of this, bond funds are more of a bet on the direction of interest rates and not stable income investments.

To invest in bonds safely, you want to be able to buy and hold until maturity. One way is to purchase individual bonds through your broker. U.S. Treasury Notes and Bonds are easy to buy for almost any face amount. If you have a seven-figure brokerage account, your broker will be happy to show you other types of bonds, such as corporate or municipal bonds.

I recommend getting bond exposure through the Invesco BulletShares series of bond ETFs for my Dividend Hunter subscribers. BulletShares are different than other bond investments. They are a series of funds with all of the bonds in a specific fund maturing in a single year. As far as I know, BulletShares are the only bond ETFs that hold bonds until maturity. As I noted above, this guarantees a return of the principal amounts, and you can count on earning the quoted yield to maturity.

For example, the Invesco BulletShares 2024 Corporate Bond ETF (BSCO) has a current yield to maturity of 5.19%.

Different BulletShares funds are available maturing from one to ten years. There are investment-grade bond ETFs, high-yield (“junk”) bond ETFs, municipal bond ETFs, and emerging market debt ETFs in the series. BulletShares pay monthly dividends, which will boost your final average yield if you put them on automatic reinvestment.

In this era of higher interest rates (thank you, Federal Reserve Board), you can put money safely to work and earn a reasonable yield. Just make sure you understand how the bonds or funds you choose function.
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You may have seen the quips about how this year the 401k accounts of many have become “201k” accounts this year due to the bear market for both stocks and bonds.

Hardly funny.

So if you want to be able to stop worrying about your retirement income, read on…

2022 has proven the traditional retirement planning model of a 60/40 portfolio of stocks and bonds, with 4% annual withdrawals to fund your retirement, doesn’t work. For a retiree counting on living off an investment portfolio, following the traditional plan means selling stocks or bonds at a loss and taking a 25% to 30% cut in their retirement income.

If you need to keep the same income, your retirement account will draw down much faster than the stock market losses plus withdrawals. Once you get behind due to a bear market, your account can never catch up, and your well-crafted retirement plan will go up in smoke.

Steep market declines come along about once a decade. Each time retirement savings are decimated. Yet financial advisors continue to use the same strategies. The retirement savings investment guidance from the financial industry has not changed since I became a Certified Financial Planner in the 1980s. Those strategies continue to get “blown up” every decade or so, and it’s not the financial planners who suffer the consequences.

For my Dividend Hunter service, I developed a different strategy. I believe a retirement portfolio should generate enough cash earnings to provide a retirement income and retain some cash to reinvest to provide a growing income.

Think about that idea compared to your current retirement savings. Do you earn enough in cash income to retire, or does your retirement plan depend on stock price appreciation to ensure a comfortable retirement? If you are counting on price appreciation, 2022 should show you how that strategy can fail at any time.

The 30 or so investments in my Dividend Hunter recommended portfolio generate an average yield of over 8%. That’s double the 4% withdrawal rate recommended by traditional financial planning guidelines. More importantly, the 8% cash flow will steadily continue, no matter what happens to stock and bond prices.

Many Dividend Hunter subscribers have told me how finding the Dividend Hunter service has helped them invest and plan for a worry-free retirement. If you worry about your retirement, it’s time to check out the Dividend Hunter below.But I like to share one good, income-focused investment idea with each article. The InfraCap Equity Income Fund ETF (ICAP) is a new (launched January 2022) fund that pays stable monthly dividends that should grow over time. ICAP currently yields 7.8%. This ETF would be a good starting point for building an income-focused retirement portfolio.
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For the holiday, I traveled to be with my elderly parents. They are at an age when medical issues start to catch up and make life challenging. Helping them for the last few years has taught me some lessons that we all should heed, whether we are still working or in retirement.

My parents are both in their early 90s. They retired at ages 59 and 62, meaning they have been retired for 30 years! When they retired, they had a financial plan completed that worked with a life expectancy of 75 years.

Obviously, they beat that by a wide margin. But just 30 years ago, 75 was considered about the max lifespan. Now, when we hear of someone passing before they are 90, it feels like they went early.

That’s why, for those of us in our 50s and 60s, we shouldn’t be looking at current life expectancy when we plan. It seems logical that we should be planning to live to well over 100.

Here’s what that means…

Retiring at 65, that would mean looking forward to possibly a 40-year retirement. Our society will eventually start pushing expected retirement out further, which makes sense.

Let’s look at some financial considerations. According to the Bureau of the Census, in 1992, the median household income was $31,553. In 2021, the median household income came in at $70,784.

If the same happens over the next 30 years, if you retire now with a $100,000 retirement income, in 30 years, you will need to bring in around $220,000 to maintain your standard of living.

The good news is that 30 years is a long time to let compound growth work in your favor. If we dig up a compound interest calculator, to go from $100,000 to $220,000 in 30 years requires about a 3% annual growth rate of your income. That’s a doable number.

Social security and most traditional pensions will adjust for inflation. My Dividend Hunter services show subscribers how to earn 8% cash yields on their investments. If they draw 5% of that income once in retirement, it leaves 3% to reinvest. The reinvested 3% will grow the portfolio income by a similar percentage, providing sure income growth for as long as your retirement lasts. I am personally counting on at least 40 years.

My point, which I have learned primarily from helping and watching my parents, is that I need to stay focused on the LOOOOONG term with my investment portfolio. I use dividend/income-focused strategies to ensure my investment income grows every quarter.

This Thanksgiving, I will give thanks that my folks are still with us. I am also thankful that they gave me a vision of the future and what I need to do to make it enjoyable and comfortable.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

Bond prices have rallied lately with the expectations that interest rates won’t go quite as high as originally expected. (Bond prices move opposite of yields.)  This includes government bonds, corporate bonds, and high yield bonds as well. A very large bullish call spread in iShares iBoxx $ High Yield Corporate Bond ETF (HYG) suggests there