Wednesday, October 31, 2012

Halloween Update, 2012

Well, the markets are back up and running after Hurricane Sandy.  I thought I do a screen on my holdings using FASTGraph, and see if there are changes I should be considering.  The quick screen snapshot is shown here:

Overall, I'm pretty happy with the holdings I have.  Only three names have a PE over 15; MCD, WMT, KO - all in my core, and I'm underweight all three right now.  

The one holding I have not listed is TIPs.  I have about 8% of the portfolio in these inflation protected treasuries.  These seems a good hedge, and good place to put cash.  If the market corrects, I can sell some TIPs for cash to redeploy.  My current cash position is almost NIL.  

That's all for now.

Monday, October 22, 2012

Portfolio Update for October 19, 2012

Here is the portfolio update through this past Friday, October 19, 2012.  The Dow was down over 200 points on Friday, so everything took a hit to end the week.  Here is the spreadsheet which contains all of my positions:

I've highlighted stocks in green that I'd like to add a bit to if the market continues to dip next week.  I've made several adjustments these past few weeks including:  Sale of NLY, adding new names ADM and GD.  Have strategically sold some TIPs to generate a bit more cash, and this past Friday added to several names including:  DOV, EMR, MCD, ADM, GD, TEVA, CMI, CSCO, AAPL, and MSFT.  Also received dividends from MO and CVX.

Here are the YTD performance metrics:

That's all for now,


Tuesday, October 16, 2012

Holdings Update - October 15, 2012

I haven't done a proper update to the portfolio in a couple of weeks;  I'll definitely get the performance numbers updated this Friday.

I took a snapshot of the holdings via FASTGraph for 10-15-12, and the summary is here:

A couple of comments:
  • Sold my position in NLY - started getting nervous about the long term prospects with QE infinity through at least 2015, and decided to move to cash and redeploy elsewhere.
  • Since my last update, I've added small positions in GD and ADM - both potential core holdings with decent valuation, and great dividend track records.
  • I've sorted the date by EYE ratio; earnings yield estimate.  I'd add shares to any name on the list "north" of MO.
  • I added to some existing positions over the past two weeks including TEVA, CSCO, DOV, CMI, HAL and AAPL
  • I remain underweight MDC, WMT, and KO - still seem a bit pricey to me at these levels.
Thats all for now.


Friday, October 12, 2012

Does Entry Point Matter to a DGI?


My retirement portfolio has another fifteen years or so to grow and develop, and is the key factor determining when or if I'll ever be able to retire.  I've been reading Seeking Alpha now for over two years, and have become convinced that owning great dividend growth stocks will be key for my retirement goals.  

Over the years, my investments have evolved (or devolved) from stocks of companies where I've worked (F, XOM, HON, etc.) to DRIP stocks through an investment club, to trendy mutual funds, to low fee index funds, to a mix of index funds and ETFs.  Like many here at Seeking Alpha, I've found some great advice from the likes of Carnevale, Knapp, Fish, and too many others to name, and have now converted my legacy mutual funds, miscellaneous stocks, and ETFs to a portfolio of individual stocks.

I've adopted a hybrid dividend growth (DG) strategy to building my portfolio;  core holdings comprised of dividend champions to hold into retirement, and what I call non-core (for lack of imagination) holdings that still tend to be dividend payers, but may have a higher risk and growth profile.  As I approach retirement, I'll continue to add to the core portion of the portfolio, and reduce the size of the non-core holdings.  I have some great core holdings, many of the usual suspects, but in smaller allocations than I'd prefer, and there are many more on my watch list that I've yet to buy.  Put simply, many of the best DG stocks that I'd like to own long term, are trading above what I consider to be fair value.

Reasons for conducting this analysis

This got me thinking about entry point for stocks we plan to hold for a very long time - does the purchase price really matter? If I buy COST today (figure below, courtesy of FAST Graphs), a great company on my watch list,  above fair value, reinvest the dividends, will it really matter in 10 to 15 years?  Perhaps in the end, time will wash away or help conceal today's bad decision to pull the trigger at a price too high?  Or perhaps not.  Maybe I should be patient and continue to monitor the stock for next year or more, and wait for a better valuation.

I'm sure that it matters (by low, sell high and all), but perhaps time will mute the effects of entry point prices.  I tend to be impatient once I decide I'd like to own a stock, so I went into this hoping to see very little difference in return over a ten year or longer hold period - then I could just load up on all my favorite stocks now, regardless of valuation!


In a "hat tip" to David Van Knapp, I decided to use real prices and dividends from an actual stock vs. artificial spreadsheet analysis (though I still found a way to use some cool spreadsheets).  With Chuck Carnevale's FASTGraphs tool, I started reviewing historical price trends for various stocks I own, with an eye out for a stock that clearly fluctuated above and below fair value, at least ten years ago.  I also wanted a dividend growth stock, and a stock valued by the market at roughly a PE = growth of 15.

I found a likely candidate in General Dynamics (GD).  Looking at a FASTGraph going back 18 years, GD's share price exhibited just the type of movement I was after:

GD's historical PE ratio paid by the market is 15.2, an almost perfect fit to the orange fair value line of 15 x earnings over the company's history.  Furthermore, during the area of focus in the circle, the price oscillated nicely above and below fair value over a five year period - great for my entry point analysis.

Zooming in on the area of focus, I've listed the prices and dates for five points of interest along the share price curve, each roughly one year apart:

Using the orange line as my fair value at each of the points, I then calculated a fair value for each of these points, and % of overvaluation or undervaluation that each exhibited.  The valuation % vs. fair value is shown in this figure:

For each case above, I created a dividend reinvestment spreadsheet using actual dividends, dates, and close prices on those dates.  I reinvested the dividends on the day they occurred, and continued the exercise until October 3, 2012, the date of GD's most recent dividend payment.  The spreadsheet for the "at fair value" case (case #3) is show here for reference (click to enlarge):

Running this analysis five times, once for each of the buy points discussed above, resulted in the following summary data which include total value of the investment, annual income, compound annual growth rate, and yield on original cost:

From these data, I make the following observations:

  • Entry point (price) does matter.
  • Buying below fair value really helped long term returns in this example.
  • Buying below fair value = more shares purchased = more dividends, growth and income!
  • In this example, buying above fair value didn't "wash out" over time - it depressed returns for the entire holding period.  If the stock were held for another 20 years, and the price appreciated 10 fold, then the differences in return would be very minor.  But for me, with a time horizon below 20 years, entry point really matters.
  • As a comparison of Case 1 to Case 5 shows, waiting several years for an undervaluation situation to occur seems to trump the time effect of buying above fair value sooner.
  • Dollar cost averaging into these positions was not considered (perhaps a future article).  It seems to me that DCA would work well as prices are dropping, but not so well while prices are rising.  I tend to avoid averaging into a position if I feel the stock is trading at a discount.  
  • The S&P return from the case 1 entry point to October 3, 2012 resulted in a compound annual growth rate below 1%!  So the GD purchase, even at a high valuation, still beat the S&P over the same period by a wide margin.

I believe in buying stocks only when they are below fair value, and this analysis reinforced my conviction.  Undervaluation leads to better total returns, less risk, more dividend paying shares, and more income down the road.

With advances in information technology; the internet, myriad financial websites, FASTGraphs, David Fish's CCC list, etc., it has become very simple to quickly identify stocks that are priced below fair value.  The next time I have my heart set on a particular stock - a "must have" for my portfolio, I'm going to take a deep breath and wait until the stock trades at or below fair value - years if necessary, or deploy the money elsewhere.   With the excellent tools available to individual investors today, there is no (logical) reason to overpay for a stock.

Tuesday, October 9, 2012

Analysis of General Dynamics

After having sold SPLS and boosting my cash position, I've been screening stocks, looking for another great pick for the portfolio.   As I posted in my previous blog, I screened the small cap 600, the mid cap 400, and the large cap 100.  The results from those screens yielded some interesting companies, but besides AAPL and QCOM, many were financial, apparel, or airlines.  Since I own AAPL, and I am heavily weighted already in technology (MSFT, CSCO, INTC), I decided to pass on QCOM.

I then went back to the David Fish CCC lists.  I own several of the top Aristocrats and Champions, so I screened Contenders next.  Here is the result:

I own of few these already (TEVA, MSFT), several are similar to existing holdings NSC = CSX, CAT = CMI, and the others had some warts (BBY = value trap).  GD caught my attention with a low PE, a nice yield, and respectable EYE ratio.  Here are some FASTGraphs on GD:

Nicely undervalued vs. its historical PE (15 years).  Historical growth in EPS is 11.6%.   Here is a graph of price vs. normal PE for the past six years:

Still below fair value by around 9%.  Even though the stock took a big hit in 2008/2009, earnings continued to grow at 6.6%, giving us the undervaluation today.  Looking at yield, nice at 3.1%, with a good dividend track record:

GD has a nice track record of increasing dividends.  CAGR for the last 5 years of dividend growth is a very healthy 10.72%, and the payout ratio has remained around 25% or lower consistently.  An investment in GD 15 years ago handily outperformed the S&P by 6.3% annually.

Price to sales is at historic lows:

Looking at future earnings estimates, this year and next forecast by the company.  Out years a consensus of analysts following the stock:

This reinforces today's undervaluation, and while the 7% future growth is not all that exciting, I think this could change depending on the upcoming election.  GD has managed to sustain growth during 4 years of the Obama administration, and I suspect future growth estimates assume the current administration stays in power.  This could be viewed as a worse case future growth scenario.  Low debt, good payout ratio, nice yield and annual dividend increases all point to a well managed firm.  I ordinary would not like a stock that derives over 60% of its revenue from one customer (US Government), but because its the government, I don't view that nearly as risky as a major corporate customer.

While I'm skeptical of analyst opinions, I like to at least see what they are saying.  Here is a summary my Fidelity account (published without permission, hope this is legal :) :

GD is trading down today, I'm going to initiate a position, and build it over the coming few weeks.


Wednesday, October 3, 2012

Some New Screens I'm Running 10-3-12

I'd like to identify another stock to add to my non-core portion of the portfolio; a stock that may only be paying a small dividend, or gasp, no dividend (yet).  Growth (second gasp) is the theme for this next selection.

I sure like FAST Graphs.  I'm using it to screen various groups of stocks to find my next great company, undervalued, with incredible growth potential.  I'm using PE below 15, EPS historical growth of at least 15%, and forecasted EPS growth for the next 5 years of least 15%.  To put it simply:  Good growth history + good growth prospects + undervalued.  This narrows the field pretty quickly, and yields some interesting names for further investigation.  Maybe I should dubb this the "triple 15" screen?  Someone probably already has...

My first population screened was the Large Cap 100.  Applying the screen above yielded the following tickers:

 Only four names qualified, and I cheated a bit to get QCOM in the mix (I'm just interested in their stock, and wanted to evaluate them).

The next population I screened was the MidCap 400, here are those results:

This time the screen let through 12 companies.  I cheated again, this time with Foot Locker (PE of 15.5) because I was attracted to the dividend.

My last screen is on the Small Cap 600, here are the results:

This group produced 15 companies (actually 14, but I cheated again and added SKYW - look at that EYE ratio!) for further evaluation.

Now I'll spend a few days looking through these graphs and companies, then winnow the list still further.

That's all for now.

Portfolio Update Through 9-28-12

Here is a summary of the portfolio positions through the 28th, and some performance metrics follow:

As discussed in my previous blog, I decided to sell SPLS and increase my cash position.  Additional shares were added during the week to the following holdings:

  • WAG
  • EMR
  • HAL
  • CSX
I reduced the TIPs position slightly during the week to generate a bit a cash for the purchases above;  this prior to the sale of SPLS at week's end.  Now that SPLS is gone, the cash position in the portfolio is back up to 6.81%.  My TIP ETF balance is 9.82%, so combined with the cash position, I have around 15% available to invest in smaller % current holdings, or to add a particularly attractive new holding.

Some of the stocks on my attractive list include:  FDO, ADM, more WMT, MSFT, and TEVA.
Valuations on FDO and WMT are too high at this point.  Need to just wait on these.

Here are the summary performance stats for the portfolio through 9-28-12:

That's all for now.