Thursday, July 20, 2017

DivGro Pulse: July 2017

Welcome to another edition of my monthly pulse article series.

Pulse articles are strategy focused and I monitor the health of DivGro, my portfolio of dividend growth stocks. I update the fair value estimates of 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 to see if any of them are performing poorly. If so, I need to take appropriate action.

Updating the fair value estimates for every stock in my DivGro portfolio is a process that takes several hours to complete. I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. I also consider fair value estimates and price targets available elsewhere, such as those from Morningstarfinbox.io, and S&P Capital IQ.

Position Sizes

I like to monitor the size of my positions to ensure that my portfolio is as balanced as possible. While having equal weights would be preferable, this is difficult to achieve because I sell covered call options on several of my positions. To sell covered calls, I need to own 100 shares or multiples of 100 shares. So those positions are larger than ones not involved in covered calls.



The red dashed line represents the average position size (1.76%). I consider stocks with weights less than 1% as underweight and suitable for further investment. 

Discounted Stocks

I prefer to buy stocks at discounts of at least 10%. To determine if stocks are available at a discount, I estimate the fair value of every stock in my portfolio. As part of the analysis, I also rank the stocks and assign a 7-star rating. 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 14 July 2017. In addition to the stock's discount and its 7-star rating, I include the stock's rank out of 50 stocks:

Gilead Sciences, Inc (GILD)• discount  12.4%• rank #31 • ★★★★
Ford Motor Company (F)• discount  10.4%• rank #33 • ★★★★
AT&T Inc (T)• discount    9.7%• rank #36 • ★★★★
CVS Health Corporation (CVS)• discount    9.4%• rank #  5 • ★★★★
Intel Corporation (INTC)• discount    9.4%• rank #19 • ★★★
Qualcomm Inc (QCOM)• discount    8.1%• rank #  9 • ★★★★
Pfizer Inc (PFE)• discount    7.6%• rank #44 • ★★★
Target Corporation (TGT)• discount    6.5%• rank #12 • ★★★
Walgreens Boots Alliance, Inc (WBA)• discount    4.6%• rank #24 • ★★★★★
Valero Energy Corporation (VLO)• discount    4.5%• rank #21 • ★★★★

Two stocks trade at least 10% below fair value, but those stocks are rated less than 5 stars presently. Further down the list, CVS, INTC, and QCOM look interesting. CVS is by far my smallest position of the three.

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):

 

Fewer and fewer of my stocks are trading below fair value. Only 15 of my stocks are trading at a discount to fair value. The same chart in last month's pulse article had 19 stocks that traded at a discount.

Quality Stocks

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

Hormel Foods Corporation (HRL)
• premium    23.0%
• rank   #1 •  ★★★★★
Nike Inc (NKE)
• premium    28.3%
• rank   #2 •  ★★★★★★
Altria Group, Inc (MO)
• premium  14.9%
• rank   #3 •  ★★★★★★
T. Rowe Price Group, Inc (TROW)
• premium    9.9%
• rank   #4 •  ★★★★★★
CVS Health Corporation (CVS)
• discount     9.4%
• rank   #5 •  ★★★★★★
General Dynamics Corporation (GD)
• premium   11.0%
• rank   #6 •  ★★★★★★
Cummins Inc (CMI)
• premium    4.9%
• rank   #7 •  ★★★★★★
Cisco Systems, Inc (CSCO)
• discount     3.6%
• rank   #8 •  ★★★★★
Qualcomm Inc (QCOM)
• discount     8.1%
• rank   #9 •  ★★★★★
Exxon Mobil Corporation (XOM)
• premium    2.2%
• rank #10 •  ★★★★★

None of the top ten ranked stocks earned a 7-star rating. Of the stocks trading at a discount to fair value, CVS is my smallest position and worth considering adding more shares.

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.

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:

 

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

Positions To Close

After pulling the plug on STAG Industrial, Inc (STAG), I don't have any positions I'm thinking about closing. This bull market seems to be getting quite old, though I think there's a good chance that we could grind even higher for even longer. 

Positions To Boost

Considering that CVS is one of my smaller positions, I'll be looking into adding shares. The stock is ranked #5 out of the 50 DivGro positions and is discounted by about 9%.

New Positions?

I'll be looking into Texas Instruments Inc (TXN) and TJX Companies Inc (TJX)the stocks ranked #3 and #5 in my top 10 ranked stocks for July:

 

Please refer to the linked article for fair value estimates for these candidates.

Thanks for reading and take care, everybody!

6 comments :

  1. Always a great list and very informative. Thanks for putting this together.

    ReplyDelete
    Replies
    1. You're welcome, Dividend Daze -- thanks for reading and commenting, and happy investing!

      Delete
  2. Hi FerdiS,

    not sure if you already wrote somewhere about it. For me it would be interesting, how you determine your 7-star ratings, i.e. which factors do you consider for each star? Would be glad, if you can direct me as this seems to be quite a useful approach.
    Thanks a lot in advance
    boekel

    ReplyDelete
    Replies
    1. Hi, boekel -- thanks for reading and commenting.

      I have not written extensively about my rating system, but I can tell you there is not a direct relationship between the number of stars and the factors I consider. The rating system is quantitative, and I consider many factors in the process. Each factor is assigned a weight, and the total score of each stock translate into a number of stars. Lately, I have not had 7-star stocks because one of the factors is fair value, and no quality stocks are discounted enough to earn 7 stars.

      I consider quality and safety metrics, as well as value metrics (price relative to fair value) in my rating system. Data sources include the CCC spreadsheet, Morningstar, S&P Capital IQ, Finbox.io, Fastgraphs, ValueLine, and Simply Wall St.

      I'm in the process of reworking my rating system with the view to separate quality and safety metrics from value metrics. I'll report on that later.

      Delete
  3. Nice information,i always wait for this kind of stuff to validate some of my stock picks,CVS was on my radar for sometime,didnt pull trigger yet.Once i am done with GWW.I will go pick up

    ReplyDelete
    Replies
    1. Thanks, desidividend -- I'm glad you find this article series worth following. Thanks for commenting and all the best on your investments. Take care!

      Delete

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