Investing In Today's Market With A Bottoms Up Approach

Bottom's Up or Top Down.
You can view her from the top down or from the bottom up. Either way she's looking pretty snazzy these days. Corporate America that is. What is this top down or bottom up. They are simply two separate disciplined approaches used to analyze potential investments.
Utilizing a top down approach we could start with a macro approach or a view from ten thousand feet above. Beginning with the overall economy, monetary policy, consumer sentiment and consumption, which sectors look attractive and finally all the way down to an individual company and earnings, revenues and opportunity.

Now to the bottom up, we'd start from the "micro" or individual company then sector, growth opportunity etc. all the way back up to that perch ten thousand feet above. I don't mind a bit of both when I'm doing my personal research. It takes a bit more time but, it's worth the outcome.

I've looked at today's investment using both and no matter how I look at PPL I believe I have to own it. I wouldn't mind owning the common stock sporting an attractive 5% dividend yield. However, if I like 5% I have to love 9 1/2% which is what the convertible preferred pays. PPL is a diversifed electric utility with assets in the UK but primarily domiciled here in the US and founded in Pennsylvania. They are anything but a boring old utility. Their growth strategy lead to the most recent acquisition from EON of their Kentucky assets. This recent acquisition should have a negative impact on earnings for the next two years. Then the story changes and the growth trajectory should reemerge. The ROE remains attractive. As the economy even modestly improves electricity demand should increase and profits follow. In the interim, since we own the convertible preferred we'll be collecting our 9 1/2%. Even in a tepid recovery and incremental improvement in demand could see a 2-3% appreciation in the stock price for a double digit total return. That's before we see the full benefits of the recently acquired Kentucky assets.

In the current interest rate environment of 3% Ten Year US Treasury Notes and 1 5/8% 5 year Notes 9 1/2% is pretty snazzy no matter how you look at her.

In a note of full disclosure I may own for myself and my clients shares of PPL and PPl+U convertible preferred. Before making any investment decisions please do your own due diligence and contact your financial professional. Or you may contact me at Grand Street Advisors 816-510-9897.