The year is almost over and this is the last edition of my monthly pulse article series for 2017!In these pulse articles, I focus on strategy and monitor the health of my portfolio of dividend growth stocks. I update the fair value estimates for every stock my portfolio and use the information to identify undervalued stocks suitable for further investment.
To estimate fair value, I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. My final fair value estimates also consider fair value estimates and price targets available elsewhere, such as those from Morningstar, finbox.io, Simply Safe Dividends, and S&P Capital IQ.
Recap
In November's pulse article, I mentioned the possibility of closing out my General Electric (GE) position for a loss to offset 2017 capital gains. That's exactly what I did! In fact, I also closed out my Target (TGT) position for the same reason. Taking large losses for the sake of tax-loss harvesting is not a pleasant affair, but, at least, I'll be saving some money at tax time.
As for new positions, I identified Lazard (LAZ), TJX Companies (TJX), and Cardinal Health (CAH) as possibilities, with TJX looking the most interesting. So far, I have not had the time for due diligence research on these candidates.
Instead, I opened a new position in the Schwab US Dividend Equity ETF (SCHD). While SCHD is a smaller ETF (based on assets under management) than my other ETF holding, the Vanguard High Dividend Yield ETF (VYM), I like SCHD's yield, ratings, very low expense ratio, and its recent performance:
Please see my analysis of the Top Holdings Of Dividend ETFs for November for more details, including a summary of key data and ratings of the ETFs used in the analysis.
Recent Performance
One way to assess a stock's recent performance is to plot the current price relative to its 52-week trading range:
Another way to look at recent performance is to compare recent returns to annualized returns over a longer time frame. The following chart compares 1-year returns to annualized 5-year returns. The returns exclude dividends:
Quality Stocks
To determine if stocks I own are trading at a discount, I estimate the fair value of stocks in my portfolio. A byproduct of the evaluation process is a 7-star rating for each stock and a score that I use to rank all the stocks in my portfolio.
Here are the top ten ranked stocks in DivGro for December 2017:
| CVS Health (CVS) | • discount 16.6% | • rank #1 • ★★★★★★☆ |
| Walgreens Boots Alliance (WBA) |
• discount 8.4%
| • rank #2 • ★★★★★★☆ |
| Hormel Foods (HRL) | • premium 17.6% | • rank #3 • ★★★★★★☆ |
| General Dynamics (GD) |
• premium 6.8%
| • rank #4 • ★★★★★★☆ |
| The Travelers Companies (TRV) |
• premium 11.7%
| • rank #5 • ★★★★★★☆ |
| Texas Instruments (TXN) |
• premium 20.4%
| • rank #6 • ★★★★★★☆ |
| Altria Group (MO) |
• premium 11.4%
| • rank #7 • ★★★★★★☆ |
| Cummins (CMI) |
• premium 4.7%
| • rank #8 • ★★★★★★☆ |
| Aflac (AFL) | • premium 20.4% | • rank #9 • ★★★★★★☆ |
| Chubb (CB) |
• premium 10.0%
| • rank #10 • ★★★★★☆☆ |
All but the 10th ranked stock earned 6-star ratings. Generally, stocks rated 5-stars or better are worthy of further consideration. Only CVS and Walgreens Boots Alliance (WBA) are trading at discounts to fair value.
Discounted Stocks
Here are the ten DivGro stocks with the largest discounts to fair value, as of 22 December 2017. In addition to each stock's discount and a 7-star rating, I include the stock's rank out of 49 DivGro stocks:
| CVS Health (CVS) | • discount 16.6% | • rank # 1 • ★★★★★★★ |
| Walgreens Boots Alliance (WBA) | • discount 8.4% | • rank # 2 • ★★★★★★☆ |
| Gilead Sciences (GILD) | • discount 8.5% | • rank #37 • ★★★★☆☆☆ |
| International Business Machines (IBM) | • discount 3.6% | • rank #23 • ★★★★★☆☆ |
| Ford Motor (F) | • discount 2.4% | • rank #40 • ★★★★☆☆☆ |
| AT&T (T) | • discount 1.1% | • rank #26 • ★★★★★☆☆ |
| Blackstone Mortgage Trust (BXMT) | • discount 0.1% | • rank #48 • ★★☆☆☆☆☆ |
| Hannon Armstrong Sustnbl Infrstr Cap (HASI) | • premium 0.1% | • rank #47 • ★★★☆☆☆☆ |
| Verizon Communications (VZ) | • premium 0.1% | • rank #36 • ★★★★☆☆☆ |
| National Retail Properties (NNN) | • premium 1.0% | • rank #45 • ★★★☆☆☆☆ |
I'm not really interested in adding to positions of stocks rated 5-stars or worse. So, like last month, the only candidates on the discount list are CVS and WBA.
The following chart shows the percentage discount to fair value of all the stocks in my portfolio. Green bars represent discounts, while red bars represent premiums (or negative discounts):
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Position Sizes
From time-to-time, I like to look at the size of my DivGro positions. Stocks that are underweight are good candidates for further investment. While I prefer to see a more balanced portfolio, I sell covered calls on a selection of my DivGro stocks. To do so, I need to own 100 shares or multiples of 100 shares, so several of my DivGro positions are larger than those not involved in covered calls.
The red dashed line represents the average position size (1.7%) in my portfolio. Stocks with weights less than 1% is underweight are good candidates for further investment.
Positions To Close
I have no positions to close at this time.
Positions To Boost
December's top ten list includes four DivGro stocks:
Unfortunately, none of these stocks are trading at discounts to my fair value estimates.
Looking at my top ten ranked stocks, only CVS and WBA are trading at discounts to fair value. Both stocks are trading at the lower end of their 52-week trading ranges, so I think they are good candidates for additional investment. As mentioned earlier, I recently doubled my CVS position. Perhaps it is time to take another look at WBA.
Looking at my top ten ranked stocks, only CVS and WBA are trading at discounts to fair value. Both stocks are trading at the lower end of their 52-week trading ranges, so I think they are good candidates for additional investment. As mentioned earlier, I recently doubled my CVS position. Perhaps it is time to take another look at WBA.
New Positions?
Not a single stock in December's top ten list is trading below fair value. Of the six stocks I don't own, TJX and Snap-On (SNA) are trading closest to fair value. TJX is trading at a premium of about 4%, while SNA is trading about 7% above fair value.
In last month's pulse article, TJX also made an appearance in this section. I have yet to do my due diligence research on TJX, but the stock looks quite promising. I'll try to find some time for a thorough stock analysis. Perhaps I can find a suitable put strike price and expiration date combination to enter into a position at or just below fair value.
Thanks for reading and take care, everybody!
And to all my readers, may you be blessed in this Festive Season!
And to all my readers, may you be blessed in this Festive Season!
The problem I have with fair value calculations is that by simply adjusting one of the variables, you can change the "fair value" by e.g. 10-20%. So at best it's an estimation.
ReplyDeleteMerry Christmas to you and your family and happy New Year!
Thanks, Troy -- seasons blessings to you and your family, too!
DeleteI never call what I do fair value "calculations", but rather "estimates". Having said that, I have a rigorous methodology that does not rely only on one way of estimating fair value. Over time, I've developed a fair bit of confidence in my estimates (except for REITs, MLPs, and BDCs, which are harder to assign FV's to).
Ferdis: Can you comment more specifically on some or all of the steps you use to estimate fair value? If not all, can you mention software or spreadsheets which do a reasonable job in your estimation.
ReplyDeleteYour whole approach is rigorous, complete, comprehensive. I am trying to model some of my approach to using some (as much as possible) of the data/charts you generate. I would also be curious to hear how "automated" your approach is to keeping the data current.
Many thanks,
Ken45140
Hi Ken45140 -- I apologize for not replying earlier.
DeleteI have a two-stage process. I focus on and use the CCC list and accompanying spreadsheet in the first stage. I use some screens to reduce the list (e.g. market cap > $500m) to a smaller number of stocks. Then I do preliminary valuations using the DDM and Gordon Growth models, along with a safety assessment using the CCC spreadsheet exclusively. The results provide an opportunity to limit the more manually intensive final fair value assessment, where I add data from many sources, like finbox.io, Morningstar, S&P Capital IQ and more. I end up with up to 8 fair value estimates and medium-term price targets, including my own. The final FV estimate throws away the lowest and highest of these, then averages the median and mean of the remaining estimates. I find this approach produces very good results. Do do this analysis, I use Google Sheets only. Hope that answers all your questions!