Thursday, October 5, 2017

Recent Additions To Existing Positions (Part 3)

Today I'm presenting Part 3 of Recent Additions to Existing Positions about trades I executed last week. With these trades, I'm adding shares to existing DivGro positions rather than opening new positions.

In Part 1, I discussed adding shares to two Consumer Staples stocks, CVS Health (CVS) and Walgreens Boots Alliance (WBA) — two stocks that are trading well below fair value.

Part 2 covered Valero Energy (VLO)  and Omega Healthcare Investors (OHI). VLO is an Energy sector stock yielding 3.6%, while OHI is a REIT yielding about 8%.

In Part 3 I'm presenting the final pair of additions, two Information Technology sector stocks with great growth prospects.

Intel (INTC) – Added 30 shares of INTC @ $37.22 per share


INTC designs, manufactures, and sells computer, networking, and communications platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, Programmable Solutions Group, and All Other segments. INTC was founded in 1968 and is based in Santa Clara, California.

This buy adds 30 shares to the 540 shares of INTC in my DivGro portfolio. The average cost basis is $28.01 per share, while the average yield on cost is 3.89%. The buy adds $32.70 to DivGro's PADI.

Based on my most recent fair value estimates (as reported in September's DivGro Pulse), INTC traded just below my fair value estimate of $37.50 when I did the analysis. Meanwhile, the stock has jumped well above that level, now trading for $39.38 per share!

I use a multi-stage DDM (dividend discount model) with proprietary adjustments to determine fair value. I set a required rate of return of 10% and use estimates of the annual EPS growth rate for the next five years. After that, I taper growth to a constant rate of 3% after ten years. I adjust the calculated fair value based on various factors, including an assessment of dividend safety.

For comparison, Morningstar's fair value estimate is $34.00 and S&P Capital IQ's fair value calculation is $39.38. According to TipRanks, based on 27 ranked analysts offering 12-month price targets for INTC in the last three months, the average price target is $39.48.

The fundamental analysis tools available at finbox.io provide a comprehensive list of stock valuation models and a quick way to view the average fair value estimate with default settings. According to finbox.io, the average fair value of INTC is $43.22, implying an upside of about 10%.

Finally, the following earnings and price correlated F.A.S.T. Graphs chart for a 13-year period indicates an estimated price of $46.53 for the Normal P/E Ratio of 14.8 for INTC.


Excluding the highest and lowest of these estimates and using the average of the remaining values, I get a fair value of $39.89, a little above my own fair value estimate.

When analyzing my stocks for the September DivGro Pulse article, INTC is ranked #27 out of 50 DivGro stocks and earned five stars in my 7-star rating system.

The following table presents ratings of INTC from several sources, for comparison to my rating:

DARS Rating
Neutral (2.5 to 3.4)
Rating for Stocks:
 ★★★☆☆
STARS Ranking:
    Quality Ranking: B
Quant Rating:
   
Analyst Consensus:
(6 Analysts)
Rating and Rank:
  Financial Strength:   Safety:
Rank and Style Scores:
  3-Hold   †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.

INTC is one of the larger positions in my DivGro portfolio. The stock is experiencing a significant breakout and trading at levels not seen since November 2000. After freezing its dividend in 2014, INTC promptly resumed its dividend increases. The stock yields 2.77% at current levels. But I'm not only interested in INTC as a dividend growth stock. I see tremendous growth potential as the company diversifies into the autonomous vehicle market and solidifies its presence in the data center and IoT ("Internet of Things") markets.

NVIDIA (NVDA) – Added 10 shares of NVDA @ $173.56 per share


NVDA is a visual computing company with worldwide operations. The company’s GPU and Tegra Processor segments offer a variety of advanced processors and single-chip computing systems used in gaming, visualization, datacenter and automotive markets. NVDA was founded in 1993 and is based in Santa Clara, California. 

I added 10 shares to double my NVDA position. My average cost basis is $162.58 per share, and the average yield on cost is 0.34%. This buy adds $5.60 to DivGro's PADI.

I've done a discounted cash flow analysis for NVDA, resulting in a fair value estimate of $100.00. However, for a high growth company like NVDA, the estimate has a high uncertainty level.

For comparison, Morningstar's fair value estimate is $90.00 and S&P Capital IQ's fair value calculation is $141.62. According to TipRanks, based on 25 ranked analysts offering 12-month price targets for NVDA in the last three months, the average price target is $164.80.

According to finbox.io, the average fair value of NVDA is $115.73, implying a downside of about 35%.

Finally, the following earnings and price correlated F.A.S.T. Graphs chart for a 13-year period indicates an estimated price of $125.00 for the Normal P/E Ratio of 21.4 for NVDA.


Excluding the highest and lowest of these estimates and using the average of the remaining values, I get a fair value of $120.59, well above my fair value estimate of $100. Nevertheless, NVDA recently traded near $180 per share — a significant premium to fair value.

I rate NVDA as a four-star stock in my 7-star rating system. Normally, I wouldn't buy four-star dividend growth stocks, but my interest in NVDA is exclusively for its growth prospects. (Certainly, the anemic yield of 0.31% is not why I'm buying NVDA shares!)

The following table presents ratings of NVDA from others sources, for comparison to my rating:

DARS Rating
Neutral (2.5 to 3.4)
Rating for Stocks:
 ★☆☆☆☆   Credit Rating: NA
STARS Ranking:
    Quality Ranking: B
Quant Rating:
   
Analyst Consensus:
(25 Analysts)
Rating and Rank:
  Financial Strength:   Safety:
Rank and Style Scores:
  1-Strong Buy   †VGM Style:
†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

Valuations of NVDA have a wide spread, from undervalued by 8% to overvalued by as much as 80%. Furthermore, while NVDA only recently joined the CCC list as a Dividend Challenger, the stock's yield is almost negligible at 0.31%. So why invest in NVDA? Well, as with INTC, I'm interested in NVDA for its growth prospects. And, in my view, NVDA has tremendous growth prospects with its focus on four multi-billion dollar GPU computing growth drivers — gaming, virtual reality, artificial intelligence, and autonomous vehicles.

Conclusion


I added shares to six existing DivGro positions recently. This article discussed these additions and my reasons for adding shares. Part 1 covered CVS and WBA, two Consumer Staples sector stocks trading at significant discounts to fair value. Part 2 discussed VLO and OHI, an Energy sector stock and a REIT offering attractive dividend yields. Here, I covered two Information Technology sector stocks with great growth prospects.

With more than 50 positions in my DivGro portfolio, I favor looking to add shares rather than opening new positions. My monthly DivGro Pulse articles help me to identify appropriate candidates.

Thanks for reading! What you think of INTC and NVDA? Do you own either of these stocks? If so, are you looking to add to your positions? If not, are you interested in buying shares?

15 comments :

  1. DivGro,
    I'm long Intel. Thank you for the fair value analysis. I like it's favorable long term prospects too, and plan to continue to hold my position. Tom

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    Replies
    1. Hi, Tom — thanks for reading and commenting. INTC is a solid company and I'm happy to be a fellow shareholder. I think we'll should do well in the long run!

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  2. Great analysis. I like the buys. Have been looking at INTC for a while. Just haven't actually dove in yet.

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    Replies
    1. Thanks! Things are heating up in the markets, with several up days in a row now. I'm wondering how long this "ride" is going to last, but I'm having fun going up along with it...

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  3. Been a while since I have checked in FerdiS. Looking good! I just reviewed your portfolio and its nice to see >$500K! Mine just went >$300, and I have had three months this year with dividends >$1,000, and my average is pretty close to that.

    Of all the stocks you named here, I only own VLO. It's been great for me. My basis is $50.98, so I am loving the paper returns not to mention the dividends. That is a scary FG chart of NVDA..haha. Wow. Good luck on that one! Not my cup 'o tea. :-)

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    Replies
    1. Not sure why that says "unknown:, this is Mike A here.

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    2. Hi, Mike A -- good to hear from you again, and congratulations on going about $300k and, especially, starting to generate triple-digit monthly dividends. That's fantastic!

      About NVDA. Yes, that chart looks scary. However, it is less scare if you chop off the estimates for 2018 and 2019 and reduce the coverage period to 7 years (or less), which is not an odd thing to do for a growth stock. The earnings are conservative, and it is clear that NVDA is now in a different growth trajectory than prior to 2015/6.

      I think it is important to set aside a (small) portion of my portfolio for these types of growth stocks. The increased volatility may be scary, but the returns could be huge.

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    3. Yeah, been thinking about growth stocks some myself now that my foundation is built. BTW: I am still in EV, maybe we can do a lunch at some point as we discussed some time ago. Anyway, take care, you are still hands down the best DGI blogger out there. I have to figure out why this is labeling my "unknown:..lol...Mike A out

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    4. Haha, Unknown! Yes, let's figure out a way to connect for lunch!

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  4. Thanks for sharing! please have a look at my portfolio, I am very new to DGI... https://dgrowth.blogspot.de/

    ReplyDelete
    Replies
    1. Congratulations on starting your own blog, Khaled! It takes determination and discipline to stick with it, and if you do, you'll be very happy you did! All the best and happy investing!

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  5. Your analysis is great. Learning a lot from your articles.

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    Replies
    1. Hi, Pellrider -- thanks for reading and commenting... hopefully, you'll continue to find value in my articles!

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  6. I used to own NVDA,but couldnt stomach the swings,as i had close to 50 or more shares,i sold it few weeks ago. Will look into INTC

    ReplyDelete
    Replies
    1. Hi, desidividend -- 50 shares are quite a holding! No wonder you bailed... I just doubled to 20 shares and it is a small position, so I'll just hang on to the rollercoaster ride!

      Delete

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