Wednesday, May 3, 2017

DivGro Pulse: April/May 2017

I decided to combine the April and May editions of DivGro Pulse, as we'll be taking a vacation break in mid-May when I usually publish pulse articles.

Pulse articles are strategy focused. I update fair value estimates for every stock in my portfolio and use the information to identify undervalued stocks suitable for further investment.

Additionally, I review the recent performance of stocks in my portfolio to see if any of them are performing poorly. If so, I need to take appropriate action.

Updating the fair value estimates for every stock in my DivGro portfolio is a process that takes several hours to complete. I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. I also consider fair value estimates and price targets available elsewhere, such as those from Morningstarfinbox.io, and S&P Capital IQ.

Position Sizes

While I prefer to see equal weights for positions in my portfolio, it is difficult to achieve because of my desire to sell covered call options. To sell covered calls, I need to own 100 shares for each option sold. Quite naturally, therefore, my portfolio will not be ideally weighted.

 

The red dashed line represents my average position size (1.78%). I consider stocks with weights less than 1% as underweight and suitable for further investment. 

In April, I doubled my position in Ford Motor Company (F) to reduce my cost basis and to sell additional covered calls. Ford is a great stock for selling covered calls. 

My positions in The Walt Disney Company (DIS), Ford, and Qualcomm Inc (QCOMare the largest positions in DivGro. I have open covered call positions on each of these stocks. The DIS options, which expire in June, are deep in the money and my DIS shares can be called away at any time. 

Main Street Capital (MAIN) is the fourth largest position. The stock pays monthly dividends yielding 5.6% at $40 per share, but my average yield on cost (YoC) is 7.55%. I have unrealized annualized returns of 33% on MAIN!

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. 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 2 May 2017. In addition to the stock's discount and its 7-star rating, I include the stock's rank out of 48 stocks:

CVS Health Corporation (CVS)• discount  18.9%• rank #  2 • ★★★★
Gilead Sciences, Inc (GILD)• discount  18.7%• rank #25 • ★★★★★
Qualcomm Inc (QCOM)• discount  18.0%• rank #  3 • ★★★★★
AbbVie Inc (ABBV)• discount  13.5%• rank #32 • ★★★★
Ford Motor Company (F)• discount  10.9%• rank #33 • ★★★
Valero Energy Corporation (VLO)• discount  10.1%• rank #  7 • ★★★★★★
Pfizer Inc (PFE)• discount    8.3%• rank #42 • ★★★
AT&T Inc (T)• discount    5.2%• rank #39 • ★★★
Target Corporation (TGT)• discount    5.2%• rank #10 • ★★★★★
Verizon Communications (VZ)• discount    3.1%• rank #37 • ★★★★

The first six stocks trade at discounts of at least 10%. However, I'm not interested in adding shares to positions rated 5-stars of less, so only CVS, QCOM, and VLO are candidates. CVS is the smallest position of the three.

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 15 of my stocks are trading at a discount to fair value.

Quality Stocks

Here are the top ten ranked stocks in DivGro for April/May 2017:

Hormel Foods Corporation (HRL)
• premium   2.5%
• rank   #1 •  ★★★★★
CVS Health Corporation (CVS)
• discount  18.9%
• rank   #2 •  ★★★★★★
Qualcomm Inc (QCOM)
• discount  18.0%
• rank   #3 •  ★★★★★★
T. Rowe Price Group, Inc (TROW)
• discount    1.3%
• rank   #4 •  ★★★★★★
Nike Inc (NKE)
• premium   2.6%
• rank   #5 •  ★★★★★★
General Dynamics Corporation (GD)
• premium   6.3%
• rank   #6 •  ★★★★★★
Valero Energy Corporation (VLO)
• discount  10.1%
• rank   #7 •  ★★★★★★
3M Company (MMM)
• premium 12.7%
• rank   #8 •  ★★★★★★
Johnson & Johnson (JNJ)
• premium   5.0%
• rank   #9 •  ★★★★★★
Target Corporation (TGT)
• discount    5.2%
• rank #10 •  ★★★★★

None of the top ten ranked stocks earned a 7-star rating. MMM is trading at a healthy premium to fair value, so I'm not interested in adding at this time. Any of the other 6-star stocks are candidates for further investment, either by buying more shares or by selling puts at strike prices 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, CVS, TGT, HRL, and NKE have performed poorly when compared with their annualized 5-year returns. In contrast, Apple Inc (AAPL), Cummins Inc (CMI), Microsoft Corporation (MSFT), MAIN and STAG Industrial, Inc (STAG), have performed well when compared to their annualized 5-year returns.

Positions To Close

I have not yet pulled the plug on STAG Industrial, Inc (STAG), which remains my lowest ranked stock with only one star:

STAG Industrial, Inc (STAG)• premium   8.0%• rank #48 •  

STAG's annualized return is 34% (including dividends), so the stock continues to perform very well.

I'm starting to question my ranking system with respect to REITs (real estate investment trusts) and BDCs (business development companies), so I decided to hang on to my STAG position until I have a chance to revisit my ranking system.

Positions To Boost

Considering that CVS is one of my smaller positions, I'll be looking into adding shares. The stock is ranked #2 out of the 48 DivGro positions and is discounted by nearly 19%.

New Positions?

I'll be looking into Magma International Inc (MGA) and TJX Companies Inc (TJX), the stocks ranked #5 and #6 in my top 10 ranked stocks for April:

 

Of the two candidates, MGA seems to be trading at the largest discount to fair value.

Thanks for reading and take care, everybody!

16 comments :

  1. Ford makes me a little nervous. I fear all the subprime lending (led by GM) is going to roll over at some point. If that happens, used cars will be "cheap" and it will hurt new car sales. Used car prices are already falling. Disclosure: Short shares of GM. No position F.

    ReplyDelete
    Replies
    1. Thanks for sharing your viewpoint, Financial Velociraptor. It is entirely possible that subprime lending will "roll over", as you suggest, with the repercussions mentioned. On the other hand, the economy and businesses could get a healthy boost under Trump's tax scheme.

      My interest in Ford is mostly to skim the high-yielding dividend and to continue collecting the options income.

      Delete
  2. I just bought QCOM to day!! Great post. thanks for all the information!!

    ReplyDelete
    Replies
    1. Congratulations and all the best with your investment! Thanks for reading and commenting.

      Delete
  3. I own AAPL and owning QCOM too seems like a conflict of interest?

    ReplyDelete
    Replies
    1. Or hedging your bets? :-)

      But I don't see it that way. AAPL and QCOM actually have intertwined businesses. INTC are now providing technology to AAPL that QCOM exclusively provided before. That gives AAPL leverage. But AAPL benefits from having 2 suppliers instead of just one, and it is not in AAPL's interest to entirely replace QCOM with INTC.

      BTW, I also own INTC.

      Delete
  4. Same here. Bought 5 shares of QCOM. Maybe its not worth more for US/Canadian citizent but for me, living in Poland, its like ~45% of my salary :)
    Little by litte i build my portfolio (18 stocks for now...) and maybe someday it will pay more than my employer!

    Thanks for those updates FerdiS! Very helpful for beginner like me. I've been buying DGI stocks since 11/2016

    ReplyDelete
    Replies
    1. Megazord -- I'm impressed by your tenacity. Just keep working at it and you'll have a solid DGI portfolio that produces a significant income stream soon. If you reinvest dividends, like I do, the portfolio will grow faster and faster, like a snowball rolling down a hill, picking up more snow as it goes.

      Take care!

      Delete
  5. Megazord , accept my respect .
    Ferdi , what is your view of VLO ?

    ReplyDelete
    Replies
    1. I like VLO's yield (4.3%) and dividend growth rate (10-yr DGR is 24%). The stock is doing well for me. But the Energy sector is still in turmoil, and I hesitate a little to add to my position at this time.

      Delete
    2. I like writing calls for VLO to capture dividend , as an investment I preferred PSX . Currently I own both .

      Delete
    3. Thanks, Anonymous -- I don't own PSX and I'll take a look.

      Delete
  6. Awesome I picked up PFE earlier this year and I'm hoping to see the appreciation as I too felt it was undervalued. I also have STAG and I actually added O today because I feel that side of the market is still not fully understood. STAG to me is an entry level play into a long time grower. Thanks for the article!

    ReplyDelete
    Replies
    1. You're welcome, Duncan -- thanks for sharing your trades. PFE, STAG, and O are all doing well in my portfolio, with STAG the best performer of the three. I sold half of my O position at $71.28 and the time is almost there to buy those shares back...

      Delete
  7. I like Ford. Solid earnings and a very low P/E ratio. I just don't see how Tesla can be more valuable than Ford in the long run. Many other automakers are coming out with EV's as well, so Tesla isn't the only game in town.

    ReplyDelete
    Replies
    1. The auto industry is cyclical and they seem to be entering a (severe?) down cycle. Inventory levels are quite high. My investment in Ford is for the dividend and options income.

      As for Tesla, there seems to be a lot of hype around the stock, with lots of people "investing" in promise rather than profit. On the other hand, Tesla/Elon Musk seem to have a cult like following much like Apple/Steve Jobs had (have?). Thousands loaned Tesla $1,000 interest free as a "deposit" on a Model 3. Would that happen with other automakers. I don't think so!

      Delete

Contact Form

Name

Email *

Message *

Follow by Email