DivGro Pulse: March 2017

If you're wondering what happened to my DivGro Pulse article for February, the short answer is I never got around to writing one! Things were just too crazy at work with deadlines looming.

My preferred time to write the monthly pulse article is mid-month so you can see I'm already quite late with the March edition.

These pulse articles are strategy focused and help me to identify undervalued stocks suitable for further investment. Additionally, if any of the stocks in my portfolio perform poorly, I want to know about it so I can take appropriate action.

For pulse articles, I update the fair value estimates for every stock in my DivGro 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, finbox.io, and S&P Capital IQ.

Position Sizes

From time-to-time, I like to look at the size of my DivGro positions:

 

The red dashed line represents my average position size (1.95%). I consider stocks with weights less than 1% as underweight and suitable for further investment. 

In February, I doubled my position in Qualcomm Inc (QCOM), which is now the largest position in DivGro. My positions in QCOM and The Walt Disney Company (DIS) are, by far, the largest positions in DivGro. 

I'm short call options on both QCOM and DIS. The DIS options, which expire in June, are deep in the money and my DIS shares can be called away at any time. The QCOM options expire in July. If QCOM trades above $57.50 per share on or before expiration, the shares will be called away. 

Discounted Stocks

I prefer to buy stocks at discounts of at least 10%. To determine if stocks are available at a discount, I estimate the fair values for every stock in my portfolio. As part of the analysis, I also rank my 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 March 2017. In addition to the stock's discount and its 7-star rating, I include the stock's rank out of 45 stocks:

Ford Motor Company (F)	• discount  16%	• rank #35 • ★★★★☆☆☆
Qualcomm Inc (QCOM)	• discount  15%	• rank #  1 • ★★★★★★☆
Target Corporation (TGT)	• discount  12%	• rank #  3 • ★★★★★★☆
AbbVie Inc (ABBV)	• discount  11%	• rank #31 • ★★★★☆☆☆
Gilead Sciences, Inc (GILD)	• discount  10%	• rank #22 • ★★★★★☆☆
Pfizer Inc (PFE)	• discount    8%	• rank #39 • ★★★★☆☆☆
Valero Energy Corporation (VLO)	• discount    8%	• rank #  8 • ★★★★★★☆
Intel Corporation (INTC)	• discount    4%	• rank #20 • ★★★★★☆☆
Walgreens Boots Alliance, Inc (WBA)	• discount    4%	• rank #21 • ★★★★★☆☆
T. Rowe Price Group, Inc (TROW)	• discount    2%	• rank #  2 • ★★★★★★☆

I won't add to positions of stocks rated 5-stars or less, so I'm not interested in adding to F, ABBV, or PFE at this time.

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):
Only 11 of my stocks are trading at a discount to fair value, making it pretty challenging to deploy available cash right now.

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. The top ten for March contained five of my DivGro stocks.

For pulse articles I repeat the ranking process, but only for my DivGro stocks. Ranks are out of 45 because there are 45 stocks in my portfolio at present:

Qualcomm Inc (QCOM)	• discount  15%	• rank   #1 •  ★★★★★★☆
T. Rowe Price Group, Inc (TROW)	• discount    2%	• rank   #2 •  ★★★★★★☆
Target Corporation (TGT)	• discount  12%	• rank   #3 •  ★★★★★★☆
General Dynamics Corporation (GD)	• premium   5%	• rank   #4 •  ★★★★★★☆
Nike Inc (NKE)	• premium   3%	• rank   #5 •  ★★★★★★☆
3M Company (MMM)	• premium 15%	• rank   #6 •  ★★★★★★☆
Wal-Mart Stores, Inc (WMT)	• discount    2%	• rank   #7 •  ★★★★★★☆
Valero Energy Corporation (VLO)	• discount    8%	• rank   #8 •  ★★★★★★☆
The Travelers Companies, Inc (TRV)	• premium 14%	• rank   #9 •  ★★★★★★☆
Exxon Mobil Corporation (XOM)	• premium   2%	• rank #10 •  ★★★★★☆☆

None of the top ten ranked stocks earned a 7-star rating this month. TRV and MMM are trading at a significant premium to fair value, so I'm not interested in adding to those positions at this time. Any of the other stocks are candidates for further investment. I'll consider selling puts to choose entry prices 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 (those in orange) 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, TGT, NKE, and VLO have performed poorly when compared with their annualized 5-year returns. In contrast, GD, International Business Machines Corporation (IBM) nad QCOM all performed quite well in the past year.

Positions To Close

I sold my remaining PNNT shares in February for a net gain of 22%, or 40% annualized. As for STAG Industrial, Inc (STAG), I'm still considering closing my STAG holding. The stock is ranked #45 out and rated only 1-star:

STAG Industrial, Inc (STAG)

• premium   7%

• rank #45 •  ★☆☆☆☆☆☆

With annualized returns of 31%, now is a good time to close the position and capture the gains.

Positions To Boost

I'm still focusing on consolidating my DivGro portfolios, so I'm not looking to boost any of my positions at this time. Consolidation involves "transferring" stocks and cash into DivGro and recognize past dividend income.

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.

New Positions?

I'm looking into VF Corporation (VFC), Hormel Foods Corporation (HRL), and CVS Health Corporation (CVS), the stocks ranked #1 through #3 in my top 10 ranked stocks for March:

 

Both Texas Instruments Inc (TXN) and Franklin Resources Inc (BEN) are significantly overvalued right now, so I'm not interested in them at this time.

Thanks for reading and take care everybody!