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Tax Advantage Portfolio
Old 09-16-2016, 11:29 AM   #1
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Tax Advantage Portfolio

After years of only touting dividend stocks, I put myself to the task of contemplating what a portfolio should be if I were to ever desire a portfolio of non-dividend paying stocks. Thereby in a Buffet-like manner shield a large income growth totally from the grasp of the tax man.

After some research I believe it is possible to develop a nice 10 stock $250,000 portfolio with all of the same investment criteria as my dividend stocks excepting no dividend payments are allowed in this portfolio, indeed declaring a dividend will require the sale of the security.

The universe I will be using to cull these selections from are all members of the 1700 stock family of the Value Line Index, for I need their unbiased analyticals for sell indications. To restate some of the investing rules: All stocks must be rated B+ or better for financial strength by Value Line and 2 or more in the Safety category. This ensures the selection is a company that will endure for a long time. Additionally upon purchase the Timeliness needs to be 3 or more for purchase and Price Stability Price Growth and Earnings Predicability all need to be 75 or higher. Companies subject to poor ability to judge earnings or wild swings in stock prices are not the kind of companies I want to hold for the long run. These are merely initial screens for review of purchase, after the initial screen a review of current business, future prospects the management team and a review of financial statements for items that would disqualify investment are also done.

Selling will happen immediately if a dividend is declared, if a stock falls to 5 in Timeliness if the Safety Rating or Financial Strength Rating is dropped. Further review is needed to see if a sale is warranted if Timeliness falls to a 4 or if one of the Price Stability — Growth Persistence or Earnings Predictability falls to 65 or lower. I am looking for companies growing at faster than the market and as such these companies should be holding their marks not dropping them. A drop in these rankings indicates other companies are doing better the company I am investing in and I need to determine a satisfactory explanation or else sell the stock.

There will be no FANG stocks in this portfolio. Google had their safety rating lowered in November 2016 and that disqualifies them from my investing screen. They were the best though of the FANG stocks for possible inclusion, the other 3 are not even stocks that I would consider Amazon has earnings predictability of 5 which means they are among the worst 5 percent of companies in terms of the earnings meeting expectations, and therefore your entire investing hopes are pinned on the CEO and the CEO alone. That is bad investing that leads you to investing in companies like Theranos, companies should be able to clearly spell out their expectations to investors. Netflix has a safety rating of 3 and a Price Stability of 5 meaning they are only average in the safety of the stock and just about the worst company in terms of it’s stock price being stable, it is subject to wild swings. FACEBOOK has a price stability of 20 which disqualifies them.

So the first stock of this portfolio is WATERS CORP - WAT who specialized in chromatography and spectrometry devices and supplies, you know the instrumentation they use on the show Bones to determine what elements are in the crevices of the bones so they can determine where the victim was murdered and by what type of weapon. Sales of slightly over 2 billion and growing at 7.5% per year. With interest coverage of 23 times and a PE of 25 long term growth of this company should be two to three times the growth in the economy at 7-8 percent per year over the next 5 years. At the recent quote of 154.26 I will take 162 shares for the portfolio.

The second stock ANSYS Inc, ANSS which is in the Computer Software industry developing and marketing software to engineers and designers in a multitude of industries including the rockets and wearable technology. It spends 18% of it’s revenue on R&D, revenues are nearing one billion dollars has no debt, no defined pension plans, no preferred stock and nearly a year’s sales in cash at 800 million. It is growing at a rate of eight percent per year, much the same as Waters. They have a new CEO Ajei Gopal from India originally who holds 23 patents and appears to be highly intelligent, the former CEO is now Chairman of ANSYS. At a current price of 92.06 the portfolio obtains 271 shares.

There will be no distributions from this portfolio and comparisons will be to VTI on a dividend reinvestment basis with implied holding inside a 401K so no tax implications. This is only to give the portfolio the toughest possible comparison as the best place to hold this portfolio would actually be in a aftertax account.

Stay tuned here for the remainder of the portfolio.
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Old 09-16-2016, 04:20 PM   #2
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This is why I bought some BRK.B as it appeared over time to do as well or better than VTI but without dividends which are taxed when a person is earning well.

I viewed it as an unlimited ROTH, since I could hypothetically put $2MM into BRK.B and after 10 years it's worth $4MM and I paid no taxes. Then when I'm poor and needing money I take it out and perhaps pay tax on the Capital Gain, but if I spread out the removal, I could end up taking it all out tax free.

I used the hypothetical $2MM as a theatrical prop because most folks would think it's a bunch of money when it grows to $4MM. Regardless the concept remains.
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Old 09-16-2016, 04:30 PM   #3
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This is why I bought some BRK.B as it appeared over time to do as well or better than VTI but without dividends which are taxed when a person is earning well.
Yup makes sense. You get a collection of great businesses wrapped under BRK.B which includes many from Running Mans Dividend portfolio except under BRK.B wrapper there is no dividend.

I would not call it equivalent of ROTH though unless you sell after 65..... ACA Subsidy Cliff... if you know what I mean
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Old 09-16-2016, 04:59 PM   #4
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I would not call it equivalent of ROTH
+1

Wouldn't you have to be kinda a po' boy over many years to make selling BRK.B tax free work? When some folks sell BRK.B, the LTCG is taxed at 20%. When I withdraw from my Roth for a little fun money (and momma don't know!), it is completely tax free.

I do like BRK.B as an estate builder. If I hold until death, likely, my son gets a stepped up basis and neither of us pay any tax as long as I stay below the estate tax limits (which will no doubt change 17 times).

I generally like Running Man's plan.
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Old 09-16-2016, 05:57 PM   #5
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I am not objecting to RunningMan's plan, as I think it will be interesting and informative, and I'm not as clever so I only came up with my plan using BRK.B to try to get to the same goal years ago.

You are correct it's not a ROTH, but it is in some ways better, as in no contribution limit so if you get a 1MM bonus then you can buy the stocks , whereas a ROTH limits you to a small number per year.
So it's a great idea when you are earning a ton.

I don't have any aca cliff issues, so didn't consider them.

I did say when poor as you do need to be a po'boy selling only enough capital gains per year to be 0% taxable (about 99K of Gains for a couple). In my example of course this means you sell $198,000 worth of stock, and 1/2 of it is taxable.

For most folks what they sell over that amount they will pay 15% LTCG, but it's true, if you are in the 39.6% tax bracket. then all LTCG and QD are at 20% at that tax rate.

Mind you, this idea does not stop a person from investing in a real ROTH, so you can have the best of both worlds.

I had not considered specifically the estate builder idea, as this applies to all stocks, and I'm overly optimistic
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Old 09-16-2016, 08:26 PM   #6
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My opinion is BRKA is not nearly what it was, from Nov 1 2008 VTI has returned 175 percent while BRKA has returned 105 percent, I’d rather pay the taxes. Warren is too busy discussing foundations with the Bills
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Old 09-16-2016, 10:32 PM   #7
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My opinion is BRKA is not nearly what it was, from Nov 1 2008 VTI has returned 175 percent while BRKA has returned 105 percent, I’d rather pay the taxes. Warren is too busy discussing foundations with the Bills
But if you look back 10 years , Oct 1, 2006 - to today it shows me BRK-B up 106 percent vs 61 percent for VTI.

Could this be a function of the timeframe shown ?
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Old 09-16-2016, 10:39 PM   #8
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Here I picked Dec 15th 2014 to today , I picked this because it was a high point for BRK and it shows VTI gains 6.84% while BRK loses 0.76%.

So it appears to me, the simple fact of where one chooses to look determines the view.
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Old 09-16-2016, 11:06 PM   #9
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We shall see I will add BRKA to compare against over the next 10 years I would expect I would double results Berkshire sees. That is my humble opinion
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Old 09-19-2016, 12:27 PM   #10
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The 3rd stock for the Portfolio is GRATNER INC - IT yes this stock I think is really “it”. This is primarily an information technology research company with 73% of sales coming from research on IT. It is a fairly expensive company at 31 times earnings. On the latest earnings call the CEO and CFO mentioned they are seeing major companies beginning to cut back on IT research spending as 4 consecutive quarters in negative growth are causing a pullback in expense spending by major companies and their retention rate has fallen recently to 83 percent from 85 percent. However growth in businesses held for over a year was 12 percent while acquisitions added another 5 percent for 17 per cent growth, which in the present environment of no growth for the S&P500 companies is very favorable and consistent with aVL price growth persistence at 100, as high as it can be.

Since they do not pay dividends one has to be confident that the money they take in does not get misallocated, as their CFO Craig Safian stated in last month’s earnings call:
Quote:
Consistent with the negative working capital dynamics that are a key characteristic of our subscription-based business model, we continue to generate free cash flow well in excess of net income on a rolling four-quarter basis. At the end of Q2, this equated to a rolling four-quarter free cash flow of $320 million. This represents a net income to free cash flow conversion of 142%.

Strategic acquisitions and share repurchases continued to be the primary uses of our free cash flow and available capital. Our number one priority remains executing on value-creating, acquisition opportunities and our M&A pipeline remains active.
So at this price between the commitment to repurchase about a million shares and continue acquisitions I believe the company will continue to grow faster than the economy.
IT has a return on total capital of 33 percent and around 50-75% on shareholder equity.

At current price of $89.25 I will take 280 shares for the portfolio.
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Old 09-19-2016, 01:52 PM   #11
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.....
At current price of $89.25 I will take 280 shares for the portfolio.
Is this an imaginary portfolio or are you putting real money on your research ?
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Old 09-19-2016, 06:23 PM   #12
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Good question Sunset,

In this case this is an imaginary portfolio as I require a dividend for my personal investments, however it will be a nice test against the income portfolio, which I believe should outperform this one over the long term. I did consider if I actually wanted to invest in this, but since I am already retired and the fact the market is at relatively high levels with interest rates so low, the non-dividend portfolio will be hurt much more if interest rates were to rise as PE’s would contract significantly.

But I am fairly confident in the selection criteria in avoiding stocks merely because they do not pay a dividend. By the way Berkshire Hathaway does not meet my investment criteria as even though they are one of the most analyzed company in the S&P500 they have a history of earnings both disappointing and greatly beating expectations and the Earniings Predictability rating for Berkshire will keep them out of my portfolio.
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Old 09-20-2016, 01:16 PM   #13
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The 4th stock of the Portfolio will be COPART Inc - CPRT
COPART does a good job in the salvaging of vehicles to sell at auctions to licensed buyers from primarily insurance companies. They have been growing at a 12-14 percent clip in the last 5 years. There are some downsides here as new technology could limit crashes and decrease the number of vehicles being scrapped so this stock will have to be monitored closely for signs of slippage in growth.

At present price of $50.97 I will take 490 shares for my 4th stock
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Old 09-23-2016, 08:59 AM   #14
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The 5th stock of the portfolio will be O’REILLY AUTO - ORLY which operates over 4,500 stores in 44 states. Earnings have been growing very quickly for this company at a 21 precent rate over the last 10 years and 26 percent over the last 5 and outlook is for 13% growth going forward. Share count of outstanding shares has been dropping quickly from 141 million in 2010 to 97 million today. They plan on opening a little over 200 stores in 2016. This stock is very fairly valued so the future increase in share price will be dependent on continued growth of the company, so I am looking for a 13% annual increase to share price over the intermediate term (3-5 years). Net profit margins have been expanding for each of the last 7 years and should expand further over the next two years based on their plans for future distribution centers and inventory cost considerations.
At the recent price of $281.91 I will take 89 shares for the portfolio
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Old 09-24-2016, 04:53 PM   #15
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Running_Man,
Inspired by reading your thread on Friday, I took a break from my McDonalds breakfast, opened my mobile Schwab app, and put in a buy for 4,500 shares of SCHG Schwab US Large Cap Growth ETF.

The imaginary buy went through for $55.55 per share, or $249,975.00. No commission was paid, as this is a Schwab Select ETF.

There is a smaller yield on this, approximately 1.2% currently. I avoided the next dividend, but expect approximately $3,000 in dividends on a yearly basis, for now. I will reinvest dividends as they roll in. Not expecting capital gains, but if they appear, I will reinvest.

My accounting is at:

https://drive.google.com/open?id=16D...XDvIKNLHD0-KUw

Sorry for this temporary hijack.
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Old 09-24-2016, 10:51 PM   #16
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Running_Man,
Inspired by reading your thread on Friday, I took a break from my McDonalds breakfast, opened my mobile Schwab app, and put in a buy for 4,500 shares of SCHG Schwab US Large Cap Growth ETF.

The imaginary buy went through for $55.55 per share, or $249,975.00. No commission was paid, as this is a Schwab Select ETF.

There is a smaller yield on this, approximately 1.2% currently. I avoided the next dividend, but expect approximately $3,000 in dividends on a yearly basis, for now. I will reinvest dividends as they roll in. Not expecting capital gains, but if they appear, I will reinvest.

My accounting is at:

https://drive.google.com/open?id=16D...XDvIKNLHD0-KUw

Sorry for this temporary hijack.

mmm interesting 25% Google, Facebook, Amazon, Apple and Berkshire, then it looks a lot like my dividend portfolio Amgen, Home Depot MMM, CVS, UPS etc along with small pieces of 400 other companies, thrown in no doubt to give analysts something to do….
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Old 09-25-2016, 06:34 AM   #17
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"The Schwab U.S. Large-Cap Growth ETF tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index, which selects growth stocks from 750 of the largest U.S. companies by market cap."
The criteria used are available on various sites. Probably there are purer growth ETF available. This one is more growth + a bit of income.
I'm far from expert, but have only invested 15 minutes in the execution. So I have preserved what little free time I have available. I can't manufacture or buy time.
It will be interesting to follow this thread in the coming years, and watch the results.
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Old 09-25-2016, 07:47 AM   #18
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Running Man thanks for starting this thread. Really like your analysis and the idea of no dividend stocks.
Thanks!
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Old 09-25-2016, 09:46 AM   #19
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has a return on total capital of 33 percent and around 50-75% on shareholder equity.
This is a metric that I've longed wondered "why?" While I'd love to see a good ROE for a value stock, if a company squanders its cash flow and keeps book value low (or perhaps even negative tangible book value alongside a low positive accounting book value), then its "return on equity" will always be high.

But why does it matter if its return on equity stays high, when that equity is a pittance compared to the share price? As an owner, I want either dividends (preferred), or a higher real, tangible value close to (preferably exceeding) the price per share. I realize that for high growth companies like this, they won't have a large book value as they grow substantially....but I know Warren Buffet and others love to brag about a holding's ROE that is high....but when you look at the balance sheet, that equity per share is insultingly low (sometimes the tangible book value is negative!), so of course the ROE is high.

To me, that says the management may be more focused on doing things that don't directly benefit me. If I own a business, I want some benefit. Quit screwing around awarding yourself millions in share packages and share the wealth!
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Old 09-26-2016, 08:44 AM   #20
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The reason return on total capital is important, is that is a measure of the profitability of a company is doing with the funds available to it, you cannot invest a stock price, the earnings are valued into the future based on how fast the earnings will grow. If you had a company with a return on total capital of 5% and a PE of 30 you’d be hard pressed to understand how that valuation makes any sense.

With the ZIRP environment many companies are borrowing money to buy back stock and or issue dividends, which inflates the return on shareholder’s equity, I have been very vocal that I believe companies that do this are not returning any true value but return on total capital takes into consideration the debt added to make this possible.

If you are looking to buy companies at close to book value in a zero interest rate environment you will be eliminating most companies from investment. A company that issues many shares to management and then uses profits to buy back those shares cannot maintain a very high return on capital for long.
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