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:
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):
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| 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:
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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:
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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 rating. Value 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 64% | moat none | credit rating A | safety 1 | 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, finbox.io's comprehensive fair value calculation using 12 different valuation models, puts TGT's fair value nearly 24% above its current trading price:
New Positions?
Top 10
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10
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Dividend ETF Holdings
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T
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CVX
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VZ
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XOM
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PG
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PFE
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PM
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WMT
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MO
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IBM
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DivGro Holding?
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Rest of Top 25
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Dividend ETF Holdings
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MCD
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JNJ
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MRK
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MSFT
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QCOM
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KO
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CSCO
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AAPL
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WFC
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GE
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OKE
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CAT
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INTC
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MMM
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JPM
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DivGro Holding?
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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!
Great post. I love these charts you use to visual express value. I'm thinking of adding CSCO, QCOM right now.
ReplyDeleteThanks, Investment Hunting -- I'm slowly getting caught up after my trip to South Africa. CSCO and QCOM are solid stocks, in my view.
Delete"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."
ReplyDeleteYeah, definitely. I'm currently holding cash-secured puts for QCOM, actually.
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!
Delete