Sunday, August 20, 2017

DivGro Pulse: August 2017

Welcome to another edition of my monthly pulse article series.

In my pulse articles, I focus on strategy and I monitor the health of DivGro, my portfolio of dividend growth stocks. I update the fair value estimates for every stock I own and use the information to identify undervalued stocks suitable for further investment.

Additionally, I review the recent performance of stocks in my portfolio. If any of them perform poorly, they could be candidates for the chopping block.

To update fair value estimates, 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 considers fair value estimates and price targets available elsewhere, such as those from Morningstarfinbox.io, and S&P Capital IQ.

Recap


Last month, I identified CVS Health Corporation (CVS), which is one of my smaller positions, as a candidate suitable for further investment. The stock was ranked #5 out of 50 DivGro positions and traded at a discount of about 9% to my fair value estimate.

Furthermore, I considered Texas Instruments Inc (TXN) and TJX Companies Inc (TJX) as good candidates for new investments, as the stocks ranked #3 and #5 in my top 10 ranked stocks for July.

While TJX did not interest me, I did sell two put options on CVS and TXN for $75 strike prices:

  • Sold to Open 1 Contract of Option CVS Aug 18 2017 75.00 P
  • Sold to Open 1 Contract of Option TXN Jan 19 2018 75.00 P

On Friday, the CVS put expired and so I secured about $221 in options income.

As for the TXN put, which expires in January 2018, the stock is trading near $80 per share and we'll have to see what happens in the coming months.

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. While I prefer to see a more balanced portfolio, I sell covered calls on a selection of my DivGro stocks. To do so, I need to own 100 shares or multiples of 100 shares, so some of my DivGro positions are larger than those not involved in covered calls.



The red dashed line represents the average position size (1.76%) in my portfolio. Stocks with weights less than 1% is underweight and suitable for further investment.

Discounted Stocks


I like buying stocks when they're discounted by at least 10%. To determine if stocks I own are trading at a discount, I do a fair value estimation pass. 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 18 August 2017. In addition to the stock's discount and its 7-star rating, I include the stock's rank out of 50 DivGro stocks:

CVS Health (CVS)• discount  16%• rank #  2 • ★★★★★
Valero Energy (VLO)• discount  15%• rank #16 • ★★★★★
International Business Machines (IBM)• discount  11%• rank #  5 • ★★★★★
Pfizer (PFE)• discount  10%• rank #42 • ★★★
Intel (INTC)• discount  10%• rank #21 • ★★★★★
AbbVie (ABBV)• discount    9%• rank #31 • ★★★★
Qualcomm (QCOM)• discount    9%• rank #25 • ★★★★
Gilead Sciences (GILD)• discount    9%• rank #37 • ★★★
Ford (F)• discount    8%• rank #32 • ★★★★
Cisco Systems (CSCO)• discount    8%• rank #  6 • ★★★★

I won't add to positions of stocks rated 5-stars or less, so I'm not interested to increase my position in PFE right now. Once again, CVS looks interesting, while VLO, IBM, and INTC are probably worth a look.

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):


Twenty of my stocks are trading at a discount to fair value, versus fifteen stocks that traded at a discount last month.

Quality Stocks


Here are the top ten ranked stocks in DivGro for August 2017:

Hormel Foods (HRL)
• premium  13%
• rank   #1 •  ★★★★★
CVS Health (CVS)
• discount   16%
• rank   #2 •  ★★★★★★
Nike (NKE)
• premium    4%
• rank   #3 •  ★★★★★
T. Rowe Price Group (TROW)
• premium    5%
• rank   #4 •  ★★★★★
International Business Machines (IBM)
• discount   10%
• rank   #5 •  ★★★★★
Cisco Systems (CSCO)
• discount     8%
• rank   #6 •  ★★★★★
Altria Group (MO)
• premium    2%
• rank   #7 •  ★★★★★
Cummins (CMI)
• discount     5%
• rank   #8 •  ★★★★★
General Dynamics (GD)
• premium    8%
• rank   #9 •  ★★★★★
Lockheed Martin (LMT)
• premium  10%
• rank #10 •  ★★★★★

Only four of the top ten ranked stocks are trading at a discount to fair value. I already mentioned CVS and IBM earlier. While trading at smaller discounts, CSCO and CMI are interesting, too. I can consider selling puts to choose better entry prices. Even NKE and TROW are trading close enough to fair value for consideration.

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. On the other hand, those are stocks that have performed poorly in the last year. Stocks like IBM, General Electric (GE), Ford (F), Exxon Mobil (XOM), and QCOM are trading near 52-week lows... which either warning signs or great opportunities...

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:



GILD, CVS, and HRL have performed poorly compared with their annualized 5-year returns. In contrast, NVIDIA Corporation (NVDA) and Apple Inc (AAPL) have performed very well in the past year.

Positions To Close


Currently, I don't have any positions under my radar for closing. As mentioned earlier, the poor relative performance of stocks like IBM, GE, F, XOM, and QCOM could be warning signs or great opportunities.

In the coming weeks, I'm planning to do a thorough analysis of my portfolio to see how it can be strengthened, especially given the increased market volatility. I'll be using portfolio analysis tools available at Simply Safe Dividends, TipRanks, finbox.io, and Simply Wall St for this purpose. Stay tuned!

Positions To Boost


CVS remains under my radar, and I'll probably sell another short term put now that my August $75 put expired.

I need to figure out what to do with IBM. I'll let the portfolio analysis drive the decision, so IBM might end up in the Positions To Close section. On the other hand, with IBM trading at a 52-week low, the yield looks very attractive!


New Positions?


I have no new positions in mind. One stock that looks interesting is Lowe's Companies, Inc (LOW), which is one of the stocks in Augusts's top 10 ranked dividend growth stocks that I don't own: 


As mentioned earlier, I sold a $75 put on TXN. As for Williams-Sonoma Inc (WSM), I'm not too familiar with the stock, so perhaps I should take a look! 

Thanks for reading and take care, everybody!

4 comments :

  1. I see your biggest holding is Ford. I'd like to wish you luck there...but I'm short F!

    Recommend you follow a strict trailing stop loss on that position. Auto sales are highly dependent on sub-prime lending right now and default rates are starting to climb. There could be a flood of used cars on the market soon that will wreck new car sales. Also, short GM.

    Just wanted to make sure you were aware of this risk I personally estimate for that ticker.

    ReplyDelete
    Replies
    1. Hi Financial Velociraptor -- thanks for your note!

      I really appreciate your perspectives on F and GM, and the challenges facing the auto industry.

      My investment in Ford is almost exclusively for yield and options income. It is not a dividend grower, that's for sure! So, in my mind, the question is if F is "safe" as a long-term, dividend-paying stock.

      Delete
  2. I'm a huge fan of VLO. It is doesn't get much coverage in the DGI blogosphere, but they have a stellar balance sheet and fantastic cash flow generation. Plus they hold a very enviable position in the domestic refining market. With a 4%+ yield...

    I just increased our exposure today with a SEP15'17 $62 PUT. That would top up our total position to 225 shares if assigned.

    ReplyDelete
    Replies
    1. VLO continues to impress -- the yield is now 4.33%! Thanks for sharing your options trade... that looks like an interesting option!

      I'm long VLO with 172 shares. Maybe I'll follow your lead and increase my exposure, too :-)

      Take care and happy investing!

      Delete

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