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...