Wednesday, October 25, 2017

Home Run Number 9

It has been six months since I last hit a home run with DivGro. A home run describes any position in my portfolio that crosses the 100% mark in total return.

I announced my first home run in October 2014 after the San Francisco Giants beat the Kansas City Royals 3-2 in game 7 of the World Series.

Recently, the ninth stock in DivGro delivered 100% in total returns, just in time for the 2017 World Series between the Houston Astros and the Los Angeles Dodgers. I wonder how many home runs will be hit in this year's championship?

Anyway, this article is not about baseball, but about DivGro's ninth home run!

Here is a list of my previous home run stocks:
  • Home run #1: General Dynamics (GD) — up 234% (50% annualized)
  • Home run #2: Nippon Telegraph & Telephone (NTT) — closed for 125% gain (37% annualized)
  • Home run #3: Digital Realty Trust (DLR) — closed for 102% gain (44% annualized)
  • Home run #4: Altria Group (MO) — up 106% (29% annualized)
  • Home run #5: Reynolds American (RAI) — closed for 180% gain (53% annualized)
  • Home run #6: Main Street Capital (MAIN) — up 61% (28% annualized)
  • Home run #7: Microsoft (MSFT) — up 181% (41% annualized)
  • Home run #8: UnitedHealth Group (UNH) — up 149% (44% annualized)
Once a position reaches home run status, it retains that status, even if I buy more shares and the total return falls below 100% on the adjusted cost basis. That's the reason why MAIN is on the list even though it shows a total return of "only" 61%. 

Home Run #9


My ninth home run stock is Northrop Grumman (NOC), a dividend paying stock in my Roth IRA that I'm now managing as part of DivGro. NOC is a Dividend Contender with a streak of 14 years of dividend increases. The stock has a solid 5-year DGR (dividend growth rate) of 13%.

I bought a total of 16 shares of NOC in 2014 and 2016 at an average cost basis of $152.50. Recently, NOC set a new 52-week high of $299.33 per share, not quite double my average cost basis. However, I've collected $64 in dividends from NOC, which pushes the total return to 102% (or 42% annualized).

Here is a five-year price chart of NOC, along with my buy prices and average cost basis:
It is self-evident that NOC is a fantastic performer!

Updated Ratings


Here are some updated ratings of NOC from various sources:

DARS Rating
Neutral (2.5 to 3.4)
Rating for Stocks:
 ★★
STARS Ranking:
    Quality Ranking: A+
Quant Rating:

Analyst Consensus:
(6 Analysts)
Rating and Rank:
  Financial Strength:   Safety:
Rank and Style Scores:
  2-Buy
   †VGM Style:
†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

For a description of the various stock ratings referenced in the table, please see my Ratings page.

Fair Value Estimates


Morningstar's fair value estimate of NOC is $258, whereas S&P Capital IQ calculates a fair value of $242. According to Tipranks, based on 6 ranked analysts offering 12-month price targets for NOC, the average price target is $281. Finally, based on 11 different valuation models, Finbox.io estimates a fair value of $269. 

The average of these valuations is $262.50, which means NOC is trading at a premium of about 12% to fair value.

Conclusion


Home run stocks present an interesting conundrum. They've performed wonderfully, so now the question is, what do you do about it? Do you sell them to capture the gains, or do you hold them hoping for more gains? Do you determine if these stocks are overvalued or if they are suitable for further investment? Is it OK to increase your average cost basis by buying more shares at much higher prices? Is it OK to reduce your average yield on cost (YoC) when you buy more shares at lower yields?

A Seeking Alpha contributor, Chowder, advocates buying shares of a great dividend growth stock that continue to experience higher earnings expectations, even as the share price rises to meet fair value. He calls the strategy dollar-cost averaging up. He argues that fair value estimates will increase with higher earnings expectations and that the stock price will follow. The strong often gets stronger.

What do you think? If you get a home run, do you sell to capture gains? Do you buy more shares and dollar-cost average up? Or do you just sit tight and continue to collect dividends? Please let me know in the comments section...

14 comments :

  1. Divgro,i was about post something similiar,one of my stocks is at 111% with recent increase in price .

    ReplyDelete
    Replies
    1. Hi, desidividend -- congratulations on your home run! It is really nice to see an investment return 100% or more. Take care and happy investing!

      Delete
  2. That's amazing you've had 9 stocks surpass the 100% gains level. I've had a few but haven't really tracked and I keep averaging into them so it reduces the overall gains. Anyways, keep up the good work!

    ReplyDelete
    Replies
    1. Hi, All About Interest -- great to hear from you again!

      Yes, adding more share cuts the percentage return, making it hard to keep track of things. I added to MAIN after it reached home run status, and now it shows 60% gains overall.

      Take care and happy investing!

      Delete
  3. wow thats great!! I only had one homerun, but i have a ton of doubles.

    ReplyDelete
    Replies
    1. Thanks, FiscalVoyage -- in time, you'll have more home runs if you stick with the DGI strategy. All the best and happy investing!

      Delete
  4. I would definitely say that is a home run. Congrats on having another club join the three figure percent increase club Gotta love it! I've had a few real life baseball near home runs that either landed at the warning track or were robbed. I was at Game 7 of the World Series last year and had to stomach the Indians' late rally fall short and eventually see the Cubs celebrate in Cleveland. This year wasn't much better. Had the pleasure of seeing Indians come back and beat the Yankees in Game 2, only to watch them lose the next three.

    One year I will be able to enjoy a World Series victory like you!

    Take care,

    Bert

    ReplyDelete
    Replies
    1. Hi, Bert -- thanks for your comment, I appreciate it!

      I used to be a Cleveland supporter myself, as I spent 7-years in grad school at THE Ohio State University. So, I have a soft spot for Cleveland and I'm sorry they've fallen short these past two years. I'm sure you'll enjoy a World Series victory soon, though!

      My Giants are in the doldrums right now... they'll have to work out a bunch of issues before they'll be able to compete again. Fortunately, there's that championship basketball team that we can follow again this season! Is the Cavs ready to take back the trophy?

      Delete
  5. Congrats, FerdiS! That's an incredible number of home runs. Given those annualized return rates, it's probably safe to call them grand slams. Sadly, I hold just one of those stocks (MAIN), and not for long enough to enjoy the same return. Love the chart for NOC. Thanks for sharing.

    ReplyDelete
    Replies
    1. Thanks, Engineering Dividends! I like the "home run" analogy but can't claim to be the originator. There's a newsletter that I'm subscribed to called Home Run Investor, though it doesn't follow a dividend growth investment strategy.

      I'm thinking about reserving the term Grand Slam Home Run for a stock that returns 400%. It will be a while before I reach that milestone. By extension, GD is a 2-Run Home Run at over 200% and MSFT is getting close to being my second 2-Run Home Run!

      Delete
  6. That's awesome Ferdi. 9 home runs is great and if this bull market keeps chugging along then I suspect there's more on the way. We're well into double digits for home runs in our own portfolio including a handful of double home runs??? grand slams???

    The World Series game last night was probably one of the craziest games I've ever seen. Nothing really happened for the first 7 innings and then BOOM BOOM BOOM BOOM BOOM home runs everywhere. I'm just glad my Astros were on the right side of that one in the end.

    ReplyDelete
    Replies
    1. Thanks, Passive IncomePursuit -- hopefully the bull market has some legs yet and we can rack up some additional home runs! Congratulations on getting so many home runs in your portfolio! As mentioned above, I think Grand Slams should be reserved for 400% returns ;-)

      I missed the game you're referring to, but people who saw it said it was amazing! I'm with you on the Astros -- I hope the win Game 7 to win their first ever world series title. Good luck!

      Delete
  7. Great job with NOC and your other home runs. I have had a similar experience with another defense stock, Lockheed Martin. Thus far I have chosen to sit tight and collect my dividends. Tom

    ReplyDelete
    Replies
    1. LMT is also in my portfolio, but I'm at "only" 80% right now... I'm hoping to add LMT to my list of home run stocks one day! Congratulations and keep up the good work!

      Delete

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