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Thursday, February 2, 2017

DivGro Pulse: January 2017

With lots of new year hustling related to DivGro, my portfolio of dividend growth stocks, I'm a little late with my monthly pulse article in which I monitor DivGro's health.

Pulse articles are strategy focused and help me to identify undervalued stocks suitable for further investment. Additionally, if stocks in my portfolio perform poorly, they could be candidates for the chopping block. I use various charts to visualize recent performance.

To prepare for pulse articles, I update the fair value estimates for every stock in my portfolio. This is a process that takes several hours to complete, as I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. My final fair value estimate also considers fair value estimates and price targets available elsewhere, such as those from Morningstar,, and S&P Capital IQ.

Last month, I identified one position to close, The Gap, Inc (GPS). Despite the stock's high ranking and 6-star designation, GPS has performed poorly and I decided to harvest some tax losses, so I closed my GPS position in December.

I'm still holding onto a portion of my PennantPark Investment (PNNT) position even though the company cut its dividend. The stock still yields 9.16% and I'm not willing to let it go at the current share price. I'll see if it is possible to sell suitable call options on the shares and perhaps exit my position that way.

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:
Although I trimmed my largest position, The Walt Disney Company (DIS) is still the largest position in DivGro, by far. I own 200 shares of DIS and I'm short two call options with an expiration date in June. These options are in the money and my shares can be called away anytime.

Stocks with weights less than 1% are underweight.

Discounted Stocks

I prefer to buy stocks when they're discounted by at least 10%. To determine if stocks are available at a discount, I estimate fair values for every stock in my portfolio. As part of the analysis, I also rate stocks and assign a 7-star rating to each stock. In general, stocks rated 5-stars or better are worthy of further consideration.

Here are the ten DivGro stocks with the largest discounts to fair value, as of 27 January 2017. I, addition to the stock's discount and its 7-star rating, I include the stock's rank out of 43 stocks:

Gilead Sciences, Inc (GILD)• discount  29%• rank #15 • ★★★★★
Qualcomm Inc (QCOM)• discount  27%• rank #  1 • ★★★★★
Target Corporation (TGT)• discount  24%• rank #  2 • ★★★★★
Ford Motor Company (F)• discount  22%• rank #  5 • ★★★★★
AbbVie Inc (ABBV)• discount  21%• rank #29 • ★★★★★
Pfizer Inc (PFE)• discount  17%• rank #37 • ★★★★
Valero Energy Corporation (VLO)• discount  15%• rank #11 • ★★★★★★
PennantPark Investment (PNNT)• discount  14%• rank #43 • 
Wal-Mart Stores, Inc (WMT)• discount  12%• rank #  8 • ★★★★★★
T. Rowe Price Group, Inc (TROW)• discount  10%• rank #  3 • ★★★★★★

I won't add to positions of stocks rated 5-stars or less.

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):

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. January's list contained most of my DivGro stocks!

Here I'm repeating the ranking process on my DivGro stocks. Ranks are out of 43 because there are 43 stocks in my portfolio. (I also own 3 closed-end funds, but I don't rank those):

Qualcomm Inc (QCOM)
• discount  27%
• rank   #1 •  ★★★★★
Target Corporation (TGT)
• discount  24%
• rank   #2 •  ★★★★★★
T. Rowe Price Group, Inc (TROW)
• discount  10%
• rank   #3 •  ★★★★★★
Nike Inc (NKE)
• premium   3%
• rank   #4 •  ★★★★★★
Ford Motor Company (F)
• discount  22%
• rank   #5 •  ★★★★★★
General Dynamics Corporation (GD)
• premium 11%
• rank   #6 •  ★★★★★★
Cisco Systems, Inc (CSCO)
• discount    9%
• rank   #7 •  ★★★★★★
Wal-Mart Stores, Inc (WMT)
• discount  12%
• rank   #8 •  ★★★★★★
Johnson & Johnson (JNJ)
• premium   5%
• rank   #9 •  ★★★★★★
3M Company (MMM)
• premium 14%
• rank #10 •  ★★★★★★

Except for GD and MMM, all these stocks are candidates for further investment. As for NKE and JNJ, even though they're trading at a premium to fair value, I can consider selling puts to choose an entry price at or below fair value.

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 potentially 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. The returns exclude dividends:
In the past year, GILD, NKE, and VLO have performed poorly compared with their annualized 5-year returns. In contrast, Cummins Inc (CMI), PNNT, and International Business Machines Corporation (IBM) have performed quite well in the past year.

Positions To Close

As mentioned earlier, I'm still holding onto some of my PNNT shares. If the stock hits a 52-week high, I'll close my position. That's only 5% higher than the closing price on 30 January.

There's another position that I'm thinking of closing:

STAG Industrial, Inc (STAG)• premium   4%• rank #42 •  

STAG is rated 1-star and ranked #42 out of 43 stocks. With annualized returns of 26%, it may be good to close this position and capture those gains. I own two lots, one of which is still short-term. If I sell after 2 March, the gain would be long-term.

Here is a 7-year F.A.S.T. Graphs chart showing the stock price correlated with STAG's Adjusted Funds From Operations:

Based on the F.A.S.T. Graphs chart, STAG seems to be trading at about fair value. My own estimate of fair value is slightly lower, though not by much. So selling soon may be opportune.

Positions To Boost

Last month, I mentioned that I would be looking for an opportunity to add shares to TGT. I decided to add 100 shares and to sell two puts for a lower entry point.

This month, I'm focusing on consolidating my DivGro portfolios. When completed, DivGro will be distributed over five different accounts, one trust account at Interactive Brokers and four IRA's (a traditional and a Roth IRA for me, and a traditional and Roth IRA for my wife) at FolioInvesting.

As I take these consolidation steps, I'll be "transferring" stocks and cash into DivGro and recognize past dividend income, just like I did at the beginning of last year when I brought my Scottrade holdings into the DivGro fold.

New Positions?

I have no new positions in mind. One stock that looks interesting is Lowe's Companies, Inc (LOW), which is one of only two stocks in January's top 10 ranked dividend growth stocks that I don't own: 
The other, Texas Instruments Inc (TXN) is a stock I previously owned but sold to generate cash and to prepare DivGro for options trading. It is quite a bit overvalued right now!

Thanks for reading and take care, everybody!


  1. Looks like you have done a large amount of research on this topic. Good on you. I hope your investments go well in 2017.

    1. Thanks for the well wishes! I wish you all the best for 2017 as well!

  2. I love your ranking system Ferdi. I'm glad to see that the stock I just bought 200 shares of is at the top of your list ;-).

    1. Thanks, Investment Hunting -- over time I've made tweaks to the ranking system and I'll probably continue to do so going forward, but I'm quite happy with where it stands at the moment. QCOM is trading at quite a discount right now, especially after news broke of the AAPL lawsuit.

  3. I like my STAG shares. The monthly income they provide me is nice.
    Thank you for your analysis on your overweight versus underweight stocks. It is very interesting to read.

    1. Being a monthly dividend payer is one of the nice things about STAG. I'm a little concerned about the pace of STAGs dividend growth, though, so that's why I'm considering closing my position. But I'll wait at least another month until I can sell for long-term capital gains.

  4. Hi FerdiS,
    I love the detailed views on your portfolio's status and holdings.
    Best wishes for 2017,

    1. Hi Dividend Life -- thanks for reading and commenting! All the best for you in 2017 as well!


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