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Friday, December 23, 2016

DivGro Pulse: December 2016

The goal of my monthly pulse articles is to monitor the health of DivGro, my portfolio of dividend growth stocks. I provide various charts to visualize recent performance. I also provide updated fair value estimates and compare those estimates to current market prices. My goal is to help inform investment decisions.

These articles are strategy focused. I consider undervalued stocks to see if they are suitable for further investment. Underperforming stocks, on the other hand, could be candidates for the chopping block. Additionally, I may analyze a handful of stocks not yet in my portfolio to see if any of those pique my interest.

Last month, I identified three positions I wanted to close. I closed two of these positions at the end of November. The third, PennantPark Investment (PNNT), will remain in DivGro until the end of December or possibly into January 2017.

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:
By far my largest positions are The Walt Disney Company (DIS) and Qualcomm Inc (QCOM). I have shares of both of these stocks in two different accounts, one at FolioInvesting and one at Scottrade. I'm planning to sell the shares in my FolioInvesting account to reduce my exposure.

The red dashed line indicates my average position size of 1.92%. I consider stocks below 1% to be underweight.

Quality Stocks

Every month, I rank a selection of David Fish's CCC stocks and publish an article of the top ten ranked stocks on Seeking Alpha. December's list contained two of my DivGro stocks, Qualcomm Inc. (QCOM) and Target Corporation (TGT).

It is informative to repeat the ranking process on my DivGro stocks. Here are the top ten ranked DivGro stocks for December:

Nike Inc (NKE)• premium    6%• rank   #1 •  ★★★★★★
General Dynamics Corporation (GD)• premium  11%• rank   #2 •  ★★★★★★
3M Company (MMM)• premium  12%• rank   #3 •  ★★★★★★
The Gap, Inc (GPS)• discount   18%• rank   #4 •  ★★★★★★
Qualcomm Inc (QCOM)• discount     8%• rank   #5 •  ★★★★★★
Target Corporation (TGT)• discount   10%• rank   #6 •  ★★★★★★
T. Rowe Price Group, Inc (TROW)• premium    3%• rank   #7 •  ★★★★★★
Chubb Limited (CB)• premium  14%• rank   #8 •  ★★★★★★
Johnson & Johnson (JNJ)• premium  10%• rank   #9 •  ★★★★★★
Walgreens Boots Alliance, Inc (WBA)• discount     5%• rank #10 •  ★★★★★★

All ten stocks have 6-star ratings, but only four are trading at a discount to fair value. I like to see a discount to fair value of at least 10%, so GPS and TGT are candidates for further investment.

Sometimes it is appropriate to add shares to existing positions even if the stocks are trading near fair value or at a small premium to fair value. Alternatively, one could sell puts on stocks and so set a preferred entry price. WMB, QCOM, TROW, and NKE are potential candidates for this strategy.

Discounted Stocks

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):
As mentioned, I prefer to buy stocks when they're discounted by at least 10%. Only six stocks qualify at this time, but are these stocks suitable for further investment? As a first pass test, I rank the stocks and assign a 7-star rating to each stock:

Gilead Sciences, Inc (GILD)• discount  31%• rank #20 • ★★★★★
AbbVie Inc (ABBV)• discount  19%• rank #12 • ★★★★★
Ford Motor Company (F)• discount  19%• rank #16 • ★★★★★
PennantPark Investment (PNNT)• discount  16%• rank #44 • ☆☆
Pfizer Inc (PFE)• discount  13%• rank #40 • ★★★
The Gap, Inc (GPS)• discount  18%• rank #  4 • ★★★★★★

Only ABBV, F, and GPS have 6-star ratings and are suitable for further investment.

Recent Performance

One way to assess a stock's recent performance is to plot the current price relative to its 52-week trading range:
Stocks that trade below the 50% mark are possibly undervalued.

Another way to look at recent performance is to compare a stock's recent returns to its annualized returns over a longer time frame. The following chart compares 1-year returns to annualized 5-year returns for all DivGro stocks. Dividends are not accounted for in this chart:
GILD continues to be the worst performer of all my stocks. In contrast, Cummins Inc (CMI) and QCOM have performed quite well over the last year.

Positions To Close

Since my last pulse article, I've closed my positions in BHP Billiton (BBL) and Helmerich & Payne Inc (HP). I'm still hanging on to my shares of PNNT, but I plan to sell those in the new year. PNNT announced a cut in its distribution starting with the March 2017 payment.

I'm also considering selling my shares of GPS, despite the stock's high ranking and 6-star designation:

The Gap, Inc (GPS)• discount   18%• rank #4 •  ★★★★★★

The reason I'm considering selling my GPS shares is to do some tax loss harvesting. I'm sitting on a loss of about 22%, which I can use to offset some of my 2016 capital gains.

Here is an 8-year F.A.S.T. Graphs chart showing the stock price correlated with GPS's Adjusted (Operating) Earnings Growth Rate:

At $27, my fair value estimate is somewhat higher than the F.A.S.T. Graphs chart would seem to indicate. So selling at this time may be opportune.

Positions To Boost

Last month, I listed three positions that I wanted to increase, namely TROW, QCOM, and Cisco Systems, Inc (CSCO). 

Instead of buying shares of TROW, I decided to sell put options instead. I'll provide details of the trade in an upcoming options update article. Additionally, I added 100 shares of CSCO and 200 shares of QCOM. At the same time, I sold call options on these shares. Again, see my upcoming options update for details.

I'll be looking for an opportunity to add shares to just one more DivGro position. Please note that I'm not recommending this stock. Readers should do their due diligence!

In the following description, the yield is calculated on closing prices on 22 December 2016, payout is the EPS (earnings per share) payout ratio, and debt is the stock's debt to equity ratio. I also include Morningstar's moat rating and Standard and Poor's credit ratingValue Line's safety and financial strength ratings round things out.

• Target Corporation (TGT)
streak 149 years 5-year growth rate 21% yield 3.25% @ $73.74 payout 445% debt 64moat none credit rating safety financial strength A

I own only 40 shares, so my TGT position is quite small at 0.82% of portfolio value. I'm considering executing a covered call trade.

TGT is trading at a discount of 10% to my fair value estimate, although the 8-year F.A.S.T. Graphs chart above shows that the stock is trading in line with its correlated Adjusted (Operating) Earnings Growth Rate. On the other hand,'s comprehensive fair value calculation using 12 different valuation models, puts TGT's fair value nearly 24% above its current trading price:

New Positions?

Last week, I wrote an article in which I analyzed the Top Holdings of Dividend ETFs. In the article, I compared the top 25 stocks held in dividend ETFs with my own stocks, noting that I owned 7 of the top 10 stocks and 16 of the top 25 stocks:

Top 10
Dividend ETF Holdings
DivGro Holding?

Rest of Top 25
Dividend ETF Holdings
DivGro Holding?

Below, I've ranked the stocks I don't own and assigned star ratings to them:

JPMorgan Chase & Co (JPM)• premium  31%• rank #  1 • ★★★★★
Wells Fargo & Co (WFC)• premium    6%• rank #  2 • ★★★★★
Verizon Communications (VZ)• premium    8%• rank #  3 • ★★★★★
ONEOK, Inc (OKE)• premium    8%• rank #  4 • ★★★★☆☆
Philip Morris International Inc (PM)• premium    1%• rank #  5 • ★★★
Chevron Corporation (CVX)• premium  23%• rank #  6 • ★★★
Merck & Co Inc (MRK)• discount     4%• rank #  7 • ★★
Caterpillar Inc (CAT)• premium  20%• rank #  8 • 
General Electric Company (GE)• premium  17%• rank #  9 • 

None of these stocks interest me at this time, as the highest ranked stocks earned only 5-stars each and all trade above fair value.

Thanks for reading and take care, everybody!


  1. Great post. I love these charts you use to visual express value. I'm thinking of adding CSCO, QCOM right now.

    1. Thanks, Investment Hunting -- I'm slowly getting caught up after my trip to South Africa. CSCO and QCOM are solid stocks, in my view.

  2. "Alternatively, one could sell puts on stocks and so set a preferred entry price. WMB, QCOM, TROW, and NKE are potential candidates for this strategy."

    Yeah, definitely. I'm currently holding cash-secured puts for QCOM, actually.

    1. Hi, Lyn -- thanks for your comment. QCOM is a great stock and having the opportunity to "choose" your entry price is good, especially since you get paid a nice premium!


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