John G. Ullman and Associates, Inc. provides clients with comprehensive financial services from financial planning to investments, tax preparation to tax planning, retirement to estate planning, and beyond. Our process starts and ends with YOU.
We at JGUA understand the complexity and the emotions that can come along with finding a financial advisor. You are putting a lot of trust and commitment into us, we understand and respect that. Our experienced advisors work with integrity and dedication to fulfill your financial needs, with the understanding that every client we speak with has their own story and is at their own individual stage in life.
We look forward to the opportunity to work with you through each stage in your life and help you reach your financial objectives. We welcome you to reach out and start the conversation to meet with one of our advisors at 1 (800) 936-3785 or by emailing
[email protected].
More about us, a glimpse into our story… In 1978 John Ullman saw the need for and possibilities behind creating a new kind of wealth management firm. One that would provide unprecedented service and support to meet all of a family’s financial needs. Almost five decades later, our business model is still intact. Our dedicated team of financial planners, tax professionals, investment researchers, legal professionals, and support staff work collaboratively to meet the individual needs of each client. Our firm is based out of Horseheads, New York, with offices in Corning and Rhinebeck, New York but we service clients all over the country.
Warmest Regards,
Jason Nickerson, CFP®, EA, Executive Vice President, Chief Operating Officer, President Elect
The True Cost of Do-It-Yourself Financial Planning Published: January 12th, 2023 Author: Darren Wilcox, JD, CFP®
There are many things in life that make sense to do on your own: driving a car, getting dressed, eating, brushing your teeth, shopping for clothes. There are also activities that always are best left to professionals such as filling a cavity, setting a broken bone, or preparing a legal defense to a criminal charge. Then there are a long list of gray-area activities that, depending on your skill level and patience, could be do-it-yourself tasks but also could be done by professionals: changing your oil, remodeling a bathroom, building a treehouse, or breakdancing, to name a few. Financial planning and investing falls squarely into that third category. There are plenty of people who choose to manage their own finances and there are many more who enlist a professional to handle it on their behalf. Those who do it themselves can often do just fine but is that what you want for your financial future, to do “just fine?” For example, you may know that you can save money for college in a 529 Education Savings Plan, take it out to pay for education expenses when your child goes to college and all distributions are tax free, including the growth in the account. But did you know that those expenses can include room and board, not just tuition/books? And if your child lives at home while a student you can pay yourself a reasonable amount for their room and board and take that out of the 529 as well, as long as it doesn’t exceed what their college reports on the financial aid disclosures? If you have money in a 529 that is one way to use it up and offset some of your costs. Further, did you know that some states will give you an income tax deduction for a contribution to a 529 plan? Even if you don’t have one created when your child is in college you can open a 529 (if your state allows a deduction), contribute at least as much as is required to max out the
deduction, and then immediately remove the funds to pay for the education costs. The plan allows it and you have received a tax benefit from your state that helps pay for a small portion of the education of your child. Those are just a couple of items around education planning, one small sliver of the financial planning universe. Having a financial advisor involved in your life gives you access to this type of knowledge multiplied significantly. You can’t possibly keep track of the changes that happen in the financial world, you have a job and many other responsibilities that keep you busy. For a financial advisor, that’s all they do, all day long, so they can fill that gap and provide value to you regularly by being a knowledge and strategy resource as well as handling as much as possible for you. In the end, life is about choices and time is a finite resource. Once it’s spent it’s gone forever. It takes time to properly manage your finances and for many who choose to do it themselves it can sometimes get pushed down the priority list. When you’ve had a long day at work do you really want to go home and spend an hour researching mutual funds for your retirement account? Or on the phone with the IRS (mostly on hold) to talk with someone about a tax notice? You can put those tasks off until the weekend but wouldn’t you rather plan a fun activity instead? This is where getting a professional involved can pay dividends. Problem with your tax return? Call your financial advisor. Received a notice from your life insurance company that doesn’t make sense? Call your financial advisor. Worried about the state of the economy or the way the stock market is trending? Call your financial advisor. This doesn’t mean that because you hire a financial advisor that you should completely ignore what’s happening. Good financial planning work really needs a lot of interaction between you and your advisor, a regular line of communication so that they understand your objectives and can help you develop your goals (at least financially) in life. Remember, an advisor cannot help you achieve your goals if they don’t know what they are. What it does mean is that with a professional advisor as your partner, you should not have to worry as much because you have someone in your corner, someone who will not only point out the potholes in your financial road but either fill them or navigate a detour to get you around a different way. That should leave you with more of that resource which is precious above all other, greater than silver or gold: time. If you are interested in talking further about this topic or any other relating to your financial present or future, you can reach out to an advisor at John G. Ullman & Associates, Inc. at any point (www.jgua.com). We are here to help you reclaim your time!
How to Gain From a Loss Published: November 15th, 2022 Author: Susan Ford, CPA, MST You may have heard of the phrase “tax loss harvesting” in the context of sales of stocks or other investments, and wondered exactly what it means. Tax loss harvesting generally refers to selling investments (i.e. capital assets) at a loss, specifically timing them so that they offset gains (both capital and ordinary) in the same tax year and therefore reduce your tax liability. The following discussion hits on just some of the reasons why someone may want to harvest losses and in particular a few of the complex rules around executing this strategy. However, it is important to consult your own tax and investment advisor to determine what may be the best fit for you. There are few people who wouldn’t welcome the opportunity to reduce their taxes. Tax loss harvesting is one way of doing this. Generating a tax deductible loss is one reason why someone may be willing to sell a stock that is worth less than what they originally paid for it. Many people hold on to a stock that has lost value because they keep hoping it will “come back.” But, if you have some investments that you believe may have reached their peak value, and the tax liability associated with selling them has you hesitating, then maybe now is the time to look for some of those investments that have lost value since you originally purchased them and “harvest” those losses (i.e. sell the security to make the related loss tax deductible). You can then use those harvested losses to offset the gain on the stock that you believe may have reached its peak, lowering your tax bill. Many people think they can use this strategy and then return to the stock market to buy that loss stock back still holding onto hope that it will actually recover its value. However, there are tax rules that prevent this type of re-investment. They are called the “wash sale” rules. These rules prevent one from deducting a loss on a stock, if the same or a substantially similar stock is purchased within 30 days before OR after the disposition that harvested the loss. The harvested loss is “replanted” so to speak and cannot be taken until the replacement stock has been sold. It’s important to note that this rule can apply even if the replacement stock is purchased in a different account than it was originally owned, as
long as both accounts are owned by the same person, and even if the re-purchase is in a nontaxable retirement account! Another very valid reason someone might want to lower their taxable income would be to prevent a temporary increase in their Medicare Premiums (Income-Related Monthly Adjustment Amounts or IRMAA) caused by reaching certain modified adjusted gross income levels as shown on their income tax returns. At certain levels of income (which includes both ordinary income and capital gains), Medicare premiums (those for Part B, which is regular medical doctor coverage and part D which is prescription coverage) increase. For example, the monthly premium in 2022 for Part B of $170.10 would instead be $442.30 if a single person had modified adjusted gross income in 2020 of $142,000. (Medicare looks back two tax years.) If they had modified adjusted gross income of $141,999, just $1 lower, their premium would be reduced by just over $100 per month, so $1,200 per year. When you only need to lower your taxable income by a few dollars to have such a significant impact on your health insurance premiums, harvesting capital losses may be an easy way to accomplish this goal. However, it is important when harvesting capital losses from investments to lower one’s taxable income, that you consider all of the tax rules. They are complicated and can, if not given appropriate consideration, reduce the effectiveness of your harvested losses in reducing your overall tax liability. For example, how long you have owned your stocks matters. Stocks held more than one year are considered long term and those held a year or less are short term. Gains from long term sales are actually taxed at lower rates (0%, 15% or 20% depending on your total taxable income) than gains from short terms sales or ordinary income from items like wages, or from a business on the side. So in the ideal world, it would be terrific if you could use long term losses against short term gains or ordinary income, and as a second choice, short term losses against ordinary income. Unfortunately however, you don’t get to pick and choose what types of losses are allowed to offset what types of income. The tax law requires first, that short term gains and losses are netted against each other, and then long term gains and losses are netted against each other. And then if you have an excess short or long term loss, it can go against ordinary income, but only up to $3,000 per year. Any excess loss then keeps its character as long or short term and carries over to the next tax year to be subject to the same ordering rules and $3,000 limit. And finally, be careful not to let the tax tail wag the dog! Your choices of which investments to sell at a loss should be consistent with your overall investment strategy, in addition to having a tax reducing result. For example, when deciding what to sell, be sure to consider how diversified you will be after the sale, especially if you are looking at selling larger holdings and generating larger offsetting losses. Consider the long term growth potential of the stock. If you want to buy back in, keep in mind the wash sale rules described above. Maybe you want to reduce your exposure to a particular industry. A stock in that industry may make a good loss harvesting candidate. Then use the proceeds to re-invest in another industry you view more favorably. Tax loss harvesting is just one, albeit very complicated tool that can be used to achieve both tax and investment objectives. Just be sure you don’t accomplish one objective at the cost of the other! A quarterly investment review is critical to keeping your investment portfolio healthy-and as you get closer to year end, doing that review with an eye on ways to reduce your tax liability by harvesting some tax losses, is a healthy add.
How Working With An Advisor is Like Having Financial Insurance Published: August 16th, 2022 Author: Todd Brost, CFP® Insurance is a peace of mind agreement – generally, it is something you need to have, but hope to never use. The purpose of insurance is to act as protection against possible negative outcomes and risks you cannot afford to cover yourself. Property losses, accidents, theft, liability, catastrophic loss… these are all risks in life that you want to prepare for with the hope that they never happen. Owning insurance will assist in managing your risk by transferring that risk to an insurance company, allowing you that peace of mind knowing if something were to happen, you are covered. There are numerous types of insurance: homeowners, automobile, personal umbrella policies, life, disability, health, long-term care… you can even insure body parts! You have to be someone whose profession revolves around one thing and it would be a career-ending loss if something negative were to happen. A prime example of this is Bruce Springsteen insuring his voice. If he were to lose his voice somehow, that insurance would kick in and assist him while he adjusted to a new life. Imagine if you could have peace of mind when it comes to your finances. If you could transfer that worry about your future in the same way you transfer the worry of how to pay for your house in case it burns down by purchasing homeowners insurance. Will I have enough to retire? When should I retire? How do I make sure I save enough for my kids to go to college? What happens if the stock market crashes; will I lose all my money if I invest it? How much will my family need to survive if something happens to me? These are all financial planning questions. It is common for one individual in the household to be in charge of finances, and while they may have a good handle on managing them, it is a difficult role for someone to step into if that individual passes away or becomes incapacitated. In this way, hiring a financial advisor is like buying a financial insurance policy. It can bring you that security, stability, and peace of mind. Allowing an advisor to proactively answer all those hot button questions and to help protect your dreams is a great sleep-at-night-factor. With all of the unknowns in life, the best approach is to prepare for the worst and hope for the best, rather than hope for the best and reactively repair the aftermath. Let us worry for you!
Through the different stages and transitions that life brings, John G. Ullman & Associates, Inc. provides you with services that can help you build a bright future:
Life Stages
Life Transitions
Starting Out (Starting a Family, Buying Your First Home), Family (College Planning), Retirement & Legacy
College, First Job/Loss of Job, Purchase of Home or Relocation, Change in Marital Status, New Parents, Career Change, Illness/Disability
Services We Provide to Add Value Through Life Stages & Transitions
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[email protected] or Call Toll Free: 1 (800) 936-3785
We are not practicing attorneys or licensed insurance sales professionals. We review these areas as an objective third party with our clients' interests at the forefront. We are in a good position to help identify any issues that need to be addressed due to our in-depth knowledge of our clients current situation, goals and feelings.
It's About Time... Our Model Since the Beginning Was Simple "The Concept of Having an Extremely Close Relationship With Clients Handling Essentially All Broadly Defined Financial Matters In One Organization.”
1978: John Opens 1-Person Office in Corning, N.Y.
1995: John Establishes Affiliate in Rochester, N.Y.
1980
1990
1980: Reagan Interest Rate Hike
1998: John Opens Office in Rhinebeck, N.Y.
1981: 1991: Gulf War and Mortgage Loan Savings Crisis Interest Rates Reach AllTime High
2008: John Expands Corning, N.Y. Location to 15,000 square feet
2000 2001: Dot.Com Bubble, Y2K, 9/11, Afghanistan War
2003: Iraq War Begins
2022: John G. Ullman & Associates Serves 950+ Clients with $1 Billion in Assets Under Management
2019: John Opens New, 19,000 Sq. Ft. Headquarters in Horseheads, N.Y.
2010 2008: Mortgage Crisis
2020 2018: Trump Tariff War, Political Unrest
2022
2020: COVID-19 Pandemic Begins
It's Time You Get to Know Us! For More Information Email:
[email protected] or Call Toll Free: 1 (800) 936-3785
2022: War in Ukraine Begins
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Utilities Offer Pricing Power in Defensive Sector JOHN G. ULLMAN is President and Founder of John G. Ullman & Associates, Inc. Earlier, he was President of USGM Securities, Inc., and at Corning Inc., he worked in financial management. He received a bachelor’s degree in economics from Johns Hopkins University. He received an MBA from the University of Chicago, with a focus in financial management. He was named the Corning Chamber of Commerce Small Business Person of the Year in 1997.
WILLIAM R. ARMSTRONG, CFA, is a Senior Equity Research Analyst at John G. Ullman & Associates, Inc. Previously, he worked at CL King & Associates, PMG Capital, Fahnestock & Co., and Salomon Brothers. He is a graduate of Montclair State University and received an MBA from New York University.
BRETT WINNEFELD, CFA, is a Senior Equity Research Analyst at John G. Ullman & Associates, Inc. Previously, he worked at Howe & Rusling. He received an MBA from Ohio State University.
MARK ABDALLA, CFA, is a Senior Equity Research Analyst at John G. Ullman & Associates, Inc. Previously, he worked at Strategic Financial Services, Manning & Napier, and BNP Paribas. A graduate of Carnegie Mellon University, he received a master’s degree in economics from Boston University and an MBA from Cornell University.
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MONEY MANAGER INTERVIEW ——————— UTILITIES OFFER PRICING POWER IN DEFENSIVE SECTOR
SECTOR — GENERAL INVESTING programs. Ten months ago, it appeared there would even be more TWST: How about providing an overview of the firm? government programs that would pass, but the gridlock in Washington, Mr. Ullman: Well, thank you. It’s a pleasure to have a chance D.C. resulted in some of these programs not getting passed. to share this information. Our firm was founded August 28, 1978, as a We continue to be optimistic about the economy over the next comprehensive financial management firm. We are managing a bit over few years. Also, and especially with the momentum stocks, but also in $1.1 billion in almost all states in the United States and several countries. the general market, we think more likely than not that some of the The concept is to be the family business manager in close cooperation valuation models, whether it’s price/earnings, relationships to book sales, with the clients. We provide broad-based financial planning, tax and other ratios, are likely to narrow. So those stocks that we could have preparation, reviews of things such as insurance and wills, special are relative to a very strong economy, and the stock markets may lag, projects that are all tied around our asset management. particularly in certain sectors. We think that selectivity of the industry The research that is done for equity and bond management is group and individual companies is always extremely important, but it is done in-house. We do portfolio management in-house. We do our trading even more so in this environment. in-house. We use individual securities. We are very much based on Longer term, we have higher levels of concern, and a lot of individual sectors that we think at a given time are relatively attractive, them are fiscal. We think that the deficit which the federal government is and overwhelmingly use individual companies within those sectors. maintaining is going to continue. Additionally, some of the programs that Our investment methodology is buying securities based upon have been funded are likely to use infrastructure banks and possibly our determination of good some liberal accounting to value. While there are certainly justify them, which will really growth stocks in the portfolios, add to the deficit. So, these Highlights we use fundamental analysis to programs are not going to be try to find stocks that we see as adequately funded. Medicare, John G. Ullman, William Armstrong, Brett Winnefeld and Mark undervalued, in sectors that we Social Security, the Affordable Abdalla discuss the investment approach at John G. Ullman & very much like. At this point, Care Act and Medicaid are Associates, which uses fundamental analysis to identify we are interested in health care, significantly underfunded, and undervalued stocks in sectors they favor, which currently includes infrastructure, technology, with these problems are not being health care, infrastructure, and certain areas of technology. They some of these technology discussed by either party. say they are optimistic about the U.S. economy over the next few stocks being ones that are in What adds to this years, but longer term, they are concerned about fiscal issues fields that we like. However, significantly is the fact that with that have been deferred for a long time. With regard to bonds, some of the firms have been $30 trillion of debt, every 1% they note that they are only holding conventional bonds that have somewhat out of favor, so the increase in interest rates that the two years or less to maturity. In addition, they are interested in valuations are much lower. federal government is paying inflation-protected bonds and step-ups that may have somewhat An area that over the for debt service will add gross longer maturities. They say they also find the utilities sector years has worked very well for $300 billion to the annual attractive because it has pricing power and can pass on some of us is value-based stocks, with a deficit. If we use an approximate the costs to ratepayers, in addition to having a relatively low beta. mathematical process tied to number of 20% of the interest, Companies discussed: Apple (NASDAQ:AAPL); PepsiCo their underlying values. We which will come back in taxes, (NASDAQ:PEP); Coca-Cola Co. (NYSE:KO); Dominion Energy also have foreign holdings in the $300 billion would end up (NYSE:D); Eagle Bancorp Montana (NASDAQ:EBMT); KB Home particular countries. Right now, being $240 billion. (NYSE:KBH); Horizon Therapeutics PLC (NASDAQ:HZNP); Taiwan that is very low, but in the If we had very Semiconductor Manufacturing Co., Ltd. (NYSE:TSM); Qualcomm reasonably near future we significant changes, which are (NASDAQ:QCOM); Advanced Micro Devices (NASDAQ:AMD); would like to look at adding likely in interest rates, and Nvidia Corporation (NASDAQ:NVDA); Samsung Electronics Co. back into some of the rates went up five percentage Ltd. (OTCMKTS:SSNLF); Globalfoundries (NASDAQ:GFS); Intel developing countries. points, the deficit would Corporation (NASDAQ:INTC); Crown Holdings (NYSE:CCK) and TWST: And did you increase $1.5 trillion a year Ball Corporation (NYSE:BALL). want to discuss some of the gross, and add an arbitrary strategies that the firm offers? 20% guesstimate for taxation, Mr. Ullman: At which we think is high — $1.2 present, our view is that the U.S. economy, over the next few years, is more trillion. That is not being discussed at all, and neither party wants to likely than not to be quite strong. Nearly 10 months ago, we were even more bring those things up because of the lack of political support. positive. However, that was prior to the issues with the Delta and Omicron In addition, there are $9 trillion of government holdings in bonds variants from the COVID-19 pandemic. Also, the tragedies, not only with that were purchased during the pandemic. A large percentage, as they the pandemic, but also with the war in Ukraine. Those things can cause unwind it and interest rates are higher, you’ll see that there will be losses that major variations on how the world is doing, and their economies, too. will be affecting the budget from those sales. The 30-year bond, that will be In general, we see the situation in the U.S. as one where there part of that approximation, depending on the coupon and some other details, is very low unemployment, plenty of jobs, pent-up demand, and there would depreciate in the neighborhood of 64%. If rates went up five will be large amounts of government spending for already approved percentage points, a six-month bond would appreciate by less than 2.5%.
MONEY MANAGER INTERVIEW ——————— UTILITIES OFFER PRICING POWER IN DEFENSIVE SECTOR
Our strategy on bonds, as a result, is what we call a barbell strategy, and virtually every conventional bond that we hold has two years or less to maturity, which is the shortest maturity range that we’ve had in our almost 44 years of operations. We do have, as part of our conservative investments, utility stocks, some of which are getting pricey, and we are starting to reduce those. But we think that this adds a favorable risk-adjusted rate of return potential, since if inflation and costs go up, the utilities have the ability that a fixed-rate bond does not — having that increase passed along to ratepayers over a period of time, but these stocks are getting more expensive. Additionally, in the bond arena, we’re interested in inflation-protected bonds that can go out 10 years, and certain ones that might be step-ups. Because of the concerns on the fiscal side, some of the bonds we hold are in certain foreign currencies; these can be government or corporate bonds, and are very high quality. Some are issues such as Apple (NASDAQ:AAPL) and PepsiCo (NASDAQ:PEP) and Coca-Cola (NYSE:KO), as well as government bonds in areas such as Canada, Australia and New Zealand. So, in the shorter term, we’re fairly optimistic with selectivity of issues. In the longer term, we have very major concerns. If we do see those events happening, which could very much impact inflation rates down the road, interest rates in the U.S. and the value of the U.S. dollar, with huge deficits, as well as the standard of living, we are likely to move to a more conservative holding. At the present, as part of our guidelines, we have no more than 50% of a client’s account in highquality and aggressive investments, the remainder being conservative, with many clients holding utility stocks.
There are many, many special projects that come up, really anything that has to do with any aspect of a client’s financial picture. We are working with a lot of executives, so we can advise them with their contracts with their employer, and even if they are departing, we can help with those issues. We work with our clients’ children. We’re even getting involved with things like credit card selection to get status with airlines and hotels and things of that sort. We also are doing other projects that have been requested with college counseling, and we are very blessed to have extremely high-quality and long-term relationships with clients and clients’ families — and we have the privilege, as a result, to work closely with them over very long time periods. On staff, we have MBAs, CPAs, CFAs, CFPs and a lot of people with master’s degrees. We’ve really become a think tank with a very long-term group of team members, and the hands-on approach has proven — for us — to be something that has been desired by a significant number of clients. Our trust is our most important asset, trust and competence, and as I said, we’ve been very, very thrilled and honored to have had extremely long-term relationships with our clients. TWST: Great. Maybe now we can turn to some individual holdings. Mr. Abdalla: John gave a great overview of what we like from a top-down approach. One of the sectors he mentioned is utilities. In fact, we’re overweight utilities. We like the sector partly because of what John mentioned, their ability to have strong pricing power and pass on some of the costs to ratepayers. The sector also has a low beta compared to other sectors within the stock market, and that offers diversification in terms of the overall portfolio.
“We do have, as part of our conservative investments, utility stocks, some of which are getting pricey, and we are starting to reduce those. But we think that this adds a favorable risk-adjusted rate of return potential, since if inflation and costs go up, the utilities have the ability that a fixed-rate bond does not — having that increase passed along to ratepayers over a period of time...” So we have a set of guidelines which are meant to be good matches for clients who are looking for balanced portfolios, a very analytical, value-based structure and individual portfolio management that we think has done very well over the last 43 and a half-plus years. TWST: Did you want to briefly discuss what services the firm provides its customers? Mr. Ullman: Yes. We have approximately 17 advisors, and they are very credentialed. Anyone who joined us after 1984, to be a full advisor, has to be a Certified Financial Planner. We go through cash flow studies with our clients as often as they are needed and build a financial plan. In most cases, we are doing their tax returns. We have a full tax department. Our advisors are all tax preparers as well, and among our entire group, we end up doing 1,500 to 1,600 tax returns a year. Any audit issues — we handle those as well. We advise in areas that clients request that we do so, in terms of general insurance, focusing on a large amount of liability protection in this crazy world, and to help our clients in any way where we have no conflicts of interest. We sell no products, no insurance or other products. We are there to help advise when clients request it.
In addition, it is considered a defensive sector. This year, we’ve seen how being defensive has led to a strong outperformance. The utility sector, just looking at the Dow Jones Utility Average Index, is up 8% year to date, while the overall market, defined by the Russell 3000, which has 3,000 large U.S. companies, is down 9% year to date. So, with all the volatility that we see in the market due to the Russian invasion of Ukraine, inflation is at a very high rate of 8.5%, which is a 41-year high. Companies with strong pricing power outperform, and defensive sectors also have done very well. So, with that, we find the utility sector overall to be favorable. We’ve been overweight the utility sector, and it’s paying off for our clients year to date. One specific company within the Utility sector that we like and own shares of is Dominion Energy (NYSE:D). The utility company sold off its midstream assets in 2020 for $8.7 billion, and it also cut its dividends. It did a little restructuring. The stock sold off at the time. Generally, investors do not like it when dividends are cut. The midstream assets were sold to Warren Buffett. It was seen as if Warren Buffett was getting a good deal in terms of value for the assets, but we liked the longterm strategic thinking of management at the time. We also liked the valuation of the stock price, it having sold off because of these moves. And with that, we increased our position in Dominion Energy.
MONEY MANAGER INTERVIEW ——————— UTILITIES OFFER PRICING POWER IN DEFENSIVE SECTOR
One of the strategic initiatives that Dominion’s management is taking is investing heavily in the renewable energy sector. Management plans to spend $37 billion in renewable energy growth capex, so that is capital expenditure in renewable energy projects that will be in offshore wind. The company plans to spend heavily in the offshore wind sector right off the coast of Virginia, in addition to onshore wind and solar farms. These initiatives are supported by tax credits, and the company is protected by semi-automatic rate increases. Therefore, we feel that this utility company is favorable in terms of a risk/reward scenario that would take place. In addition, we think the downside is fairly limited, while the company can grow along with these initiatives. One other reason why we see the Renewable Energy sector to be favorable is that it is being supported at the state level. States are now mandating certain renewable energy goals to meet their climate change endeavors. We view climate change as a long-term problem, and some of these solutions are being tackled by the utility companies themselves. So, many renewable energy stocks are priced very, very high. We stay away from those. But we found utilities such as Dominion Energy to be a safer way to invest in the renewable energy sector, given the reasonable valuation. The price of oil and natural gas is high right now; that is another reason to invest in renewable energy, given that it is an alternative source of energy. But that said, the price of oil and natural gas can come down. It is very volatile, and it is really determined by geopolitical factors, in addition to overall supply/demand. While climate change is a long-term problem, we see utility companies with their resources being a major player in tackling that problem. So overall, we like their management’s strategic thinking, their plans, their investments, in addition to the valuation of the stock.
interest rates. With that, the difference increases between the amount this bank borrows and lends out money. So we see this margin increasing with a higher interest rate environment. 1-Year Daily Chart of Dominion Energy Inc.
Chart provided by www.BigCharts.com
In addition, given that the bank is well positioned in Montana, it has grown organically and through acquisitions, and we find the regional trends to be favorable for the bank. If you look at the demographics of Montana, there are people moving to the state. COVID was a catalyst for people making life-changing geographic moves — and allowing people to move to Montana from other states. In addition, with that, housing prices are up. The loans are being paid back, and we find the overall health of the regional economy to be favorable for the bank as well. So Eagle Bank Montana is another stock that we like.
“We definitely like the valuation of the bank. It trades at a price-to-book ratio of 0.95 times. So the book value of the company is higher than the stock price of the company. We find some trends to be favorable for the stock as well. They have a net interest margin of 3.9%. We see this margin rising.” TWST: Any other sectors you’d care to mention? Mr. Abdalla: I am pretty excited about Eagle Bancorp Montana (NASDAQ:EBMT). They are a community bank. So, overall, very small, but one of the largest banks in the state of Montana. We have interviewed their management teams in the past. We have done due diligence on the company. We like the CEO and the COO. We think they have some good initiatives and a good strategy around managing the bank. The bank only has a market cap of $147 million — the stock market cap is quite small for the average public equity, and because of that it is not widely covered by the sell side. So we feel like stocks that aren’t widely covered may have more potential for pricing inefficiencies, and we see a pricing inefficiency here. We definitely like the valuation of the bank. It trades at a price-to-book ratio of 0.95 times. So the book value of the company is higher than the stock price of the company. We find some trends to be favorable for the stock as well. They have a net interest margin of 3.9%. We see this margin rising. If you look at the two-year Treasury bond, the yield has increased quite dramatically over the past year from 0.3% last year on average to 2.7% today, so we are seeing increasing
TWST: Do you want to talk about another stock? Mr. Winnefeld: Sure. Mark talked about utilities and why we like them as a defensive sector, as well as the bank. Another area that we invest in is what we call value. One of the best segments of value currently is housing stocks. It’s quite remarkable that the market has sold off on the housing environment, even though there is a critical shortage of housing in the U.S. right now. We have only six weeks of housing available for purchasers and 87% of all housing is sold within one month. You hear of stories — even last week, when you hear of a house in Los Angeles that listed for $1.2 million and sold for $2.5 million within a few days. So the stock I like is KB Home (NYSE:KBH). In 2021, KB Home finished 13,472 units, which makes it the fifth largest homebuilder in the United States, and the seventh largest by revenue, $5.7 billion in 2021. It operates in five markets across eight states. It has an estimated local market share of 7%. KB Home has a presence in Texas and Colorado, which is 36% their business; California and Washington are 28% of their closings; Arizona and Nevada are 20%; and Florida is 15%. The other reason why I like them is how the focus is on the entry level — the millennials. Millennials like buying cheaper entry-
MONEY MANAGER INTERVIEW ——————— UTILITIES OFFER PRICING POWER IN DEFENSIVE SECTOR
level homes, and we’re talking about people from 19 to 40, basically. With the shortage of housing, they need somewhere to stay. They can rent, but rent values have actually increased as fast as the home values have. So generally, most people would prefer — if they have the same location — to own a house rather than rent. Currently, the average price of a house that KB Home builds is $423,000. When you look at the stock, when we look at what we want for values, most analysts look at values like P/B — price-to-book — and price-to-earnings. The stock currently sells at a price-to-earnings of 3.4. This is based on 2022 earnings. Based on next year’s estimated price-toearnings, it is 3.0. And price-to-book, it’s selling at 0.8; in 2023, it’s projected to be 0.64. Therefore, basically, what this is telling us is that the market is pricing the stock as if the company would lose money on its houses and also its land holdings. This is very unlikely. The pace of housing may decline if we enter a slowdown or a recession, which is in our forecast. Even so, the value of their land — and especially in the Southwest and the markets they are in — it is very unlikely, especially for the entry-level dwellings, to actually fall.
Qualcomm (NASDAQ:QCOM), AMD (NASDAQ:AMD), Nvidia (NASDAQ:NVDA), etc., will design the chips and then foundries like Taiwan Semi will actually do the manufacturing. Most of the foundry business is in Taiwan industry wide. Taiwan Semi, as I mentioned, is by far the biggest, with close to a 60% worldwide market share. They have a lead in advanced technologies. Fifty percent of their revenues right now come from seven and five nanometer technologies. They’re now rolling out three nanometer technology, which really nobody has right now. Their biggest competitors are Samsung (OTCMKTS:SSNLF) and Globalfoundries (NASDAQ:GFS), and, to a lesser extent, Intel (NASDAQ:INTC). They are also working on two nanometer technology. Therefore, they have a great technological advantage. They are benefiting from a number of secular trends. As the world becomes more digitalized, and more data is consumed, every type of device that you can think of has more and more semiconductor chip content. Automobiles, for example, are expected to have five times the amount of semiconductor content by the end of this decade
“The second stock I like is Horizon Therapeutics. They basically have monopoly positions in two different drugs. One is called Tepezza. Tepezza treats thyroid eye disorder. The other is called Krystexxa. It treats untreatable gout. These two drugs are growing at 20% revenue growth forecasts for the foreseeable future...” So this is a very compelling value. We believe that you should be able to, at this price, maybe not next week or in a couple of months, but at some point in the future, you should have a substantial return on your investment. This population group is under-housed currently and so it should provide many years of needed development of new homes. The second stock I like is Horizon Therapeutics (NASDAQ:HZNP). They basically have monopoly positions in two different drugs. One is called Tepezza. Tepezza treats thyroid eye disorder. The other is called Krystexxa. It treats untreatable gout. These two drugs are growing at 20% revenue growth forecasts for the foreseeable future, and over 20% EPS growth over the next three to five years. With Tepezza, we believe that it could grow by 2030 from currently $2.1 billion to $5 billion, and they also have a meaningful pipeline. They have over 20 different pipeline programs in other areas like lupus. Furthermore, they have a solid capital structure right now, as they currently hold $1.5 billion in cash. There are very few stocks in biotech, currently, that you can buy that sell at about 19 times 2022 earnings, and which are expected to grow over 20% annually. The management has a solid track record from 2004, taking new drugs and getting them approved and taking them over. They also have a meaningful R&D budget. They are spending hundreds of millions of dollars trying to develop the new compounds. There are eight different tracks to early-stage development in drugs. So, if you buy this share, you quite possibly have a long track record of growth. TWST: And what about another stock? Mr. Armstrong: I’d like to talk about Taiwan Semiconductor Manufacturing (NYSE:TSM). Taiwan Semiconductor is the largest semiconductor foundry business in the world. They actually began the foundry model back in the 1980s. They don’t design the semiconductor chips, they manufacture them. So what the industry has increasingly migrated toward is a so-called “fabless” design. Companies like
as they have now. The major markets that they serve are highperformance computing. That can include artificial intelligence, cloud, data centers, gaming, all manner of industrial applications, automotive, electronics, Internet of Things, smartphones, of course. Those are four major platforms that they have. 1-Year Daily Chart of KB Home
Chart provided by www.BigCharts.com
Right now, they are experiencing some good pricing power. So, even though costs are rising in the overall worldwide inflationary environment, and there are some supply chain issues, Taiwan Semi has been able to pass on costs, and in fact, their margins have actually been increasing. They’ve got pricing power and they’ve got increasing margins. The thing we also like about them is valuation. The semiconductor industry is cyclical. It is a growth-cyclical business, because we’ve got these very powerful secular trends that are driving demand for semiconductors. Taiwan Semi has been labeled by many people as
MONEY MANAGER INTERVIEW ——————— UTILITIES OFFER PRICING POWER IN DEFENSIVE SECTOR
perhaps the most important technology company in the world. Valuation is quite modest. They’re trading at a forward EV/EBITDA of 8.7 times, and that’s actually a 15% discount to the rest of the semiconductor space. Now, the semiconductor space is actually in a bear market right now. If you look at the SOX index, it stands right now just over 3,000, it was over 4,000 back in the beginning of the year, so it’s actually sold off by about 25%. The reason is that investors are concerned that there might be a worldwide economic slowdown beginning next year. So many of them are looking past the current good times, and are positioning themselves for a possible float out. However, we take a longer-term view, so we’ll look right through the cycle. We’ll take a three- to five-year view. I think when you do that, you’ll see that Taiwan Semi is, I think, a very, very attractive company right now. The foundry industry worldwide is expected to grow 20% this year, and high single-digits compounded growth over the next five years. That compares with 4% compounded growth over the last 10 years, so we’re seeing an acceleration in growth. Again, that’s because of these mega trends of high-performance computing, smartphones, more content, more demand for semiconductor chips.
EBITDA basis. Crown has been narrowing the gap if you compare the two stocks. Since the beginning of the year, Crown is outperforming, and I think that is because they are becoming more of a pure play in beverage cans. As I mentioned, they sold off the European food can business. So Crown is another one that we like a lot. TWST: Great. We’ve talked about a lot of diverse companies. Maybe you could give some basic advice to investors given some of the trends that we’re seeing — be it inflation or rising interest rates. Just what they should be looking towards in the coming year? Mr. Ullman: First, I should point out we have buy and sell targets on each stock that we have in the portfolio. For some of the ones presented today, there are a couple that are in “buy” ranks. There are a couple that are close. There are a couple that we know what has to change in valuation, or our analysts would have to increase the expectations. As such, we’re not recommending any or all of those stocks, at any price. They are all subject to targeted levels. That is part of our discipline — and you miss sometimes when you are shopping at prices, and they run off. I think, over the years, that’s really helped.
“Taiwan Semi has been labeled by many people as perhaps the most important technology company in the world. Valuation is quite modest. They’re trading at a forward EV/EBITDA of 8.7 times, and that’s actually a 15% discount to the rest of the semiconductor space.” TWST: And is there one more company that you’d like to mention? Mr. Armstrong: Yes, my next stock is Crown Holdings (NYSE:CCK). They used to be called Crown Cork. Crown Holdings is the world’s second largest producer of aluminum beverage cans, and they’re nearly a pure play now, since they sold their European food can business. Why is this an attractive business? It is basically a duopoly between Crown and Ball Corporation (NYSE:BALL) worldwide. Aluminum is a material that is very green. It is infinitely recyclable. This is becoming a favorite among ESG investors. Seventyfive percent of all aluminum that has ever been produced is still in use. It has high recycling rates. It is taking share from plastic and glass in the beverage container markets. In developing markets, beer and soft drinks, where soft drink consumption is increasing, Crown Holdings is the number-one player in Southeast Asia, number one in the Middle East, number two in South America. They’re number two in North America, as well. This is a defensive stock with growth characteristics. Therefore, the beverage container space is clearly a defensive play, but aluminum is taking share within that mature market. There are high barriers to entry, a very small number of very large customers and very large suppliers. They have manufacturing facilities around the world, and it would be very difficult for anyone to break into the industry in any material way over the Crown and Ball duopoly. Crown historically has traded at a meaningful discount to Ball, and that’s why we have chosen Crown instead of Ball, trading at about a 30% discount to Ball on a p/e basis, 25% discount on an
Second, the trends we’re seeing in a few areas are interest rates, inflation and the dollar because of the fiscal situation in this country. We would also recommend that investors opt for conventional bonds with fixed rates and maturities, say, very short term. To us that is generally two years or less. Right now, that is pretty much the sweet spot in the market and the levels are fairly flat. 1-Year Daily Chart of Horizon Therapeutics PLC
Chart provided by www.BigCharts.com
Third, discipline. When markets are strong, people’s memories sometimes are not as strong. Markets can be extremely volatile, and there are times when such volatility has major impacts. Two recent times were in 2002, and again during 2007-2009. Early in 2020, when the pandemic
MONEY MANAGER INTERVIEW ——————— UTILITIES OFFER PRICING POWER IN DEFENSIVE SECTOR
hit, there was a short-term correction in the market, and the markets do not always rebound as quickly as people expect. So, to make sure that investors have balance and the amount of exposure in the equity markets is appropriate for their financial situation. And again, we’re balanced managers and we have at least 50% out of the general stock market in every individual client’s overall situation, because these are our clients’ life savings. I also think that people tend to get carried away with excitement and enthusiasm when a stock seems to hit a high point. I think that discipline is really important. In addition, as part of that approach, if a stock underperforms, all of us have passion, and if we like a stock, we want to be as objective as we can, dig down significantly, and we have our own metrics, we will tend to sell it, and then consider buying it back 31 days or later afterwards. Therefore, we don’t end up just following something straight down, because sometimes that happens; and certainly, over the last few months, some of the momentum stocks have been hit really hard, although some people probably have stayed with them overall. So, a few factors are discipline, having an asset allocation plan, having an appropriate risk strategy tied into one’s objectives and their financial situation, and a realistic view of the economy, which is likely to be strong in the next few years. However, the economy is also likely to have major problems, as we haven’t dealt with fiscal issues that have been deferred for a long time. I think that if people follow this approach, and don’t take unnecessarily high levels of risk, the investment market, over a long period of time, has been very positive for people who have participated. TWST: And from what I understand, too, the firm really stresses that financial planning is an ongoing thing and you try to make customized financial plans with your clients. Mr. Ullman: A lot of the decisions on asset allocation are tied to the financial plans. If people are looking at retirement and what kind of rate of return they would need to get to a level of assets that would sustain them on a high probability basis, that is one of the factors in deciding what level of risk tolerance is appropriate. All of our clients have their own guidelines, how much can be minimum conservative, how much can be high quality, and what is the maximum that would be in the aggressive segment. So the financial planning tool and the individual’s own objectives and personalities and risk tolerances become part of that.
Speaking to the earlier part of your question, if there are any changes that are going on with a client’s retirement plan, or a situation where someone has an adverse financial situation or circumstance, or a positive one, we then redo and update the programs and run different variations. Moreover, the whole idea is to have a complete program which ties financial plans with the investments themselves, and have the accounts looked at in detail, also including tax implications and insurance, and any other special projects that may be requested by clients. So, we think we’re different than almost everybody else, as the level of intensity and the comprehensiveness of the partnerships that we’ve had the privilege of establishing with our client base over all these years, in our opinion, makes a real difference. TWST: Thank you. (ES)
JOHN G. ULLMAN President & Founder WILLIAM ARMSTRONG, CFA Senior Equity Research Analyst BRETT WINNEFELD, CFA Senior Equity Research Analyst MARK ABDALLA, CFA Senior Equity Research Analyst John G. Ullman & Associates, Inc. (607) 936-3785 www.jgua.com
Disclosures: Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Past performance is no guarantee of future performance. Any information is for illustrative purposes only, and is not intended to serve as investment advice or as a recommendation since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Individual securities discussed may be held in accounts where JGUA and/or its employees have a beneficial interest.
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