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Dividend stock picks and market outlook for 2016

I expect 2016 to be a bad year as we are heading towards a recession. I still believe FED had it wrong and raising rates was a bad move, although it was a minor hike, it will still do the damage.

Generally, higher rates is an economic brake preventing fast growing economy from overheating. We do not have fast growing economy. The growth is mediocre at best. Stepping on a break now is futile.

I have heard many saying that FED had to raise rates to save their credibility. What the heck is that? So are we saving our economy or FED’s credibility? We all know that FED has no credibility at all! All their economic predictions were always wrong in 70% of the occurrences.

I believe, FED actually lost the rest of their credibility by raising rates instead of saving it. Why? Yellen was always assuring us that she was data dependent. By raising rates now when incoming data are actually bad, GDP is slowing, PMI index is in recession (the index came in at 48.7 in November and 42.9 in December; any number below 50 is considered recessionary) proved she never was data dependent and she was actually lying! Or she increased rates just to please Wall Street’s expectations.

Yellen is truly a true Democrat dumb enough to raise rates into slowing economy. FED did this move in 1986, just to lower the rates again in 1987 as the recession hit the country. FED again didn’t foresee what was coming. They do not see it again today.

And once again the pundits on Wall Street are all optimistic and laughing at those who are warning about coming recession. I remember Peter Schiff warning about recession coming, warning since 2005 until 2008 about what FED, commercial, and investment banks were doing to the economy and mainly credit and housing market. Everybody laughed and mocked him.

I watched a video on Hedgeye website portraying a chief economist with BNP Paribas Senior U.S. Economist Laura Rosner predicting how great 2016 will be and that the growth will be driven by a consumer’s (thus us) spending. What spending was she talking about? All data on personal income and consumption point to slow growth (personal income grew only 1.7% annually during last seven years compared to 4.32% the pre-recession seven years, source FRED). In other words, people do not have enough income to spend these days! They do not feel comfortable spending (if they were spending their hard earned money, it would have had an impact on prices and consumer spending data).

I live in a region which sees economic growth and busy days in construction, yet I do not feel comfortable spending as I was before the Great Recession. It is also driven by the structure of jobs we are being told by this administration. Economists and FED are cheering about job reports, but when you take a look at the Labor Department, and see what was the jobs made of, the picture is actually sad and nothing to cheer about.

Involuntary part time workers increased, and most of the gains were in retail (15%) and healthcare (24%). The rest was construction (12%) and professional services such as book keeping or computer services (7.5%), etc. Most of the jobs are seasonal, part time jobs, and construction. The construction sector is quite related to the housing market growth which may actually be tampered by the recent interest hike and as a result slow down.

 

 · Dividend stock picks for 2016

 

Although, I am expecting 2016 year to be bad with either a major correction or a recession, it can be actually good for dividend growth investors.

A typical dividend growth investor does not look at the value of his portfolio. At least I do not look at it. I mean that it is not important to me whether my portfolio goes down or up. All I like to see is that my income from that portfolio is up and growing (or in bad years at least same). Then, I do not care much if my portfolio loses 15% in a a bad year. All what matter is that my dividend income is stable and growing.

The only time I look at the value of my portfolio and stock prices is when I can see an opportunity to buy my stocks cheap. If you are using DRIP and reinvest dividends, low stock prices are a blessing to every dividend investor. That’s the only reason why I would be concerned about stock prices and value of my portfolio.

Looking at the portfolio value also requires another perspective – time.

If you are at the beginning of the journey and started building your portfolio a few years ago or even starting this year, then every stock market collapse is actually your friend and you should welcome it with open arms.

It is easy said but gut wrenching to sit tight and watching your portfolio shrinking in front of your eyes. Many people panic and sell. If we see a blood bath in Wall Street this year, do not panic, take it as a great opportunity and invest into your stocks. Take your time consideration into account. Repeat to yourself that you are going to invest for the next 20 or 25 years and from that time horizon perspective any price collapse is insignificant. You can actually become very aggressive with your investing. You can even apply long term options strategies such as buying LEAPS calls or selling long term LEAPS puts (depends on your guts).

Just look at the market in 2008. When everybody was panicking, selling, and predicting end of the world, those who stayed calm and actually continued purchasing stocks at those beaten prices doubled or tripled their holdings.

SPX

The same goes with today’s energy stocks, mainly those involved in oil. They are beaten up, people are predicting more bad years to come, and end of the world. I even read a comment on Yahoo! from one commenter that oil is finished because of alternative renewable energy and that we will be using electric cars.

Quite laughable argument. Although cars are a significant segment using product from refined oil, it is not the only one. Military, large transportation (mainly maritime transportation – unless we go back using sails) will be using products made of refined oil; or can you imagine a large transoceanic carrier running on wind or solar panels?

Transocean

And what about other products which are made of crude oil? Our roads are made of by-product from crude oil (asphalt), lubricants, plastics, computers, paraffin vax, jet fuels (unless we start using hot air balloons again), and many pharmaceutical products. Yes, gasoline accounts for 46% of all crude oil consumption, but it cannot be eliminated whatsoever as the commenter assumed.

Thus I look at oil companies, mainly those dividend paying companies as a great opportunity to buy them cheap in 2016.

If you will be buying those companies, do not be however, discouraged by their price action. Remember, people will be panicking, selling them, running away, screaming, and predicting end of the world. When investing in those companies, consider your biggest friend – time. You are not investing for the next 12 months. You are investing for the next 20 years. No matter how depressive it may feel investing into crushing stocks today, you stay the course.

 
 
Here are my dividend picks for 2016 (not all are oil companies though):

Company Name Symbol Price Yield Growth Div. History (yrs)
Abbvie Inc. ABBV $59.24 3.85% 0.00% 2
Archer Daniels Midland Co. ADM $36.68 3.10% 13.52% 41
Ameriprise Financial Inc. AMP $106.42 2.50% 30.90% 10
BHP Billiton Plc BBL $22.65 10.90% 7.47% 13
Chevron Corporation CVX $89.96 4.80% 8.62% 20
Ford Motor Co. F $14.09 4.30% 48.33% 3
Cedar Fair LP FUN $55.84 5.50% 87.90% 5
GameStop Corp GME $28.04 5.10% 22.20% 3
Meredith Corp MDP $43.25 4.20% 15.30% 20
Magna International Inc. MGA $40.56 2.20% 28.22% 6
Potash Corp. of Saskatchewan Inc. POT $17.12 8.90% 69.84% 5
Southside Bancshares, Inc. SBSI $24.02 3.80% 8.33% 5
Targa Resources Corp. TRGP $27.06 13.50% 30.77% 4

 
 

I will not be necessarily investing to all of those stocks as I do not have enough cash, but they are my favorite list of stocks for this year to choose from. I think they can bring nice dividends and dividend growth.

What do you think about these stocks? Which would you choose to invest to?
 

Posted by Martin December 24, 2015

Santa, Bonus, Merry Christmas!

Merry Christmas

I just finished a trade which gave me a hard time a bit. I was expecting the market to be silent with a bias towards down, so I opened a bear call spread. However, although volume in the market was low, S&P 500 managed to push higher this week and endangered my trade.

Fortunately, it still closed below my short strike and even though I was completely wrong on this trade, I ended up with a profit. You can follow my trades for free at my Facebook Group I created in lieu of the newsletter (because the group is easier to maintain and manage). You can join. It is free and you will be able to track all my options trades and if you like them, you can even mirror those trades.

 

 · What’s next? Will Santa come or not?

 

Santa rally officially starts next week. Usually five days after Christmas and two days into the New Year are considered a Santa rally. But will Santa arrive this year? This week we saw markets recovering from last week’s losses and it pushed higher than I expected. This may be a good push and indication that we may see a Santa rally for the rest of the year.

We will see next week. If the market continues pushing higher, I will be adding some bull put spreads to my options trading account and ride the rally. If weakness persists, I will be adding more bear call spreads. Next week will be important to my next trading.

This will be also important to the overall trend. As I posted a chart of the current trend last time I pointed out that my outlook is bearish. Let me re-post that picture:

SPX trend
(click to enlarge)

And now, let me show you the same picture cleaned a bit without all the noise around. I removed everything which could be distractive and just left the regression channel I use to determine how the market would probably act.

I added big magenta arrows pointing to the upper channel trend lines and lower channel trend lines. Also, in between, you will see a median line. As of today, the market bounced from the median line heading upwards towards the upper channel trend line.

SPX trend
(click to enlarge)

And here comes the fruity part. Before August 2015 the channel was trending up. What changed it? Well the sudden drop in August made the damage. The premise of this charting study is, that the price tends to stay inside the channel as long as it breaks out. If it breaks out, however, it still means nothing to the trend. It must break the channel and stay there for some time. The longer it stays out of the channel, be it below, or above, the more likely the trend is going to change.

And that’s what happened in August 2015 and since then, we have a down sloping trend.

I also added dashed lines on top of each regression channel trends. They project the channel into the future as you can see for yourself, it also shows me how the channel is changing over time.

The channel lines are changing based on the price (I track 9 months time frame) but the dashed lines don’t. They stay static, they do not move. If the channel starts sloping down steeper than it is today, I will see it. If it starts turning upwards, I will also see it as a difference between the new channel trend lines and static dashed lines.

As you can see, as of now, there is no change in trend what so ever. The new channel trend lines are following my dashed lines in a perfect alignment (I put the lines on top of the channel at the end of September). This means, we are heading further down and if nothing changes the prices will be dropping in the near future.

So why is Santa rally important?

Santa can break this downtrend. If in the next 7 or so days the Santa pushes the price towards the upper trend line (somewhere between 2100 – 2110 level) and the price manage to stay there for longer time or will be bouncing at the top of the trend then we may see a reversal in trend and I will become bullish again. If Santa fails, we will again head down.

What’s also positive here is that we are bouncing from the mean level to the upper level and not opposite. This can also move the market higher. But as of now, do not expect much. Rather, expect the market trading inside that sloping channel.

 

 · Bonus, yay! But where to put it?

 

As many of the bloggers who blog about their investing we put some, or all of our yearend bonus towards our investments. I do the same. Part of my bonus goes to my 401k account automatically (it is deducted and saved in my 401 k by my employer before I even see it. The next part will go towards my debt and the last part will go towards my ROTH IRA account where I will invest it into a dividend growth stock.

As every year, I have a dilemma which stock will be that happy one and become my adopted baby. And this year, with prices falling, it is even worse to make a decision.

I will probably invest into oil involved companies as I see an opportunity in this sector. Although I will be overweight in this sector, I think it is OK since I am still building up my portfolio and thus allocation isn’t as much important to me. As oil starts improving, I will focus to other sectors which will depressed at that future time.

Here are stocks I am eyeing to purchase, but didn’t make my mind which one. Can you help me to choose?
 

If you can choose only one dividend stock to buy, which one?


View Results

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If you choose “other”, please let me know which stock you prefer to buy in comments and why.

 

 · Merry Christmas!

 

The year 2015 is almost over and we are heading to celebrate end year holidays. Let me take this opportunity to wish you Merry Christmas, success, health, and happiness to you and your families! I hope the next year will be better to all of you and that all your dreams will come through!

Merry Christmas!

 

Posted by TwillyD July 26, 2015

Want To Get In On Apple? Consider Its Suppliers as Investments

Apple (NASDAQ: AAPL) is still trying to recover from the negative reaction to its third quarter earnings report last week. While the reasons investors were unhappy varied, the main reason related to the recently unveiled iPhone 6. Worried that Apple may have reached its pinnacle in selling the high-end smartphone, investors sent the stock lower.

The leaner than anticipated iPhone 6 sales caused angst among investors, but how are Apple suppliers for the iPhone 6 faring? They include: Skyworks Solutions (NASDAQ: SWKS),  NXP Semiconductors (NASDAQ:NXPI), and ARM Holdings (NASDAQ:ARMH) chip design.

Apple Disappoints

Before getting into the details about how Apple’s suppliers were affected by its stock decline, let’s take a look at how the tech giant fared during its third quarter, ending June 27.

Company officials chalked up the quarter as having record sales of the iPhone and Mac, all-time record revenue from services and the successful launch of Apple Watch.

According to Apple’s earnings press release, the company posted quarterly revenue of $49.6 billion and quarterly net profit of $10.7 billion, or $1.85 per diluted share. These results compare to revenue of $37.4 billion and net profit of $7.7 billion, or $1.28 per diluted share, in the year-ago quarter. Gross margin was 39.7% compared to 39.4 % in the year-ago quarter. International sales accounted for 64 percent of the quarter’s revenue.

Luca Maestri, Apple’s chief financial officer, had the following to say about the quarter in the earnings press release.

“In the third quarter our year-over-year growth rate accelerated from the first half of fiscal 2015, with revenue up 33% and earnings per share up 45%,” said “We generated very strong operating cash flow of $15 billion, and we returned over $13 billion to shareholders through our capital return program.”

When the market opened for trading last Tuesday, Apple was trading around $131 a share. After it reported the Q3 earnings for the period ending on June 27, the stock dipped as low as $119.20. It closed at $120.33, effectively wiping out about $60 billion of its estimated $753 billion market cap.

Although smartphone sales are typically lower during the spring and summer months as consumers wait until the holidays to make purchases, partly due to holiday deals, the lower sales for Apple’s last quarter was different.

 

Super 8 Film to DVD
Advertising

 

The Wall Street Journal noted that the decline in iPhone sales dip to 47.5 million amounted to a drop of about 23% from Apple’s fiscal second quarter of 2015. Furthermore, that was a steeper rate of decline than the previous two years when quarter-on-quarter sales fell by 19% and 17% respectively, according to The Wall Street Journal.

Apple also briefly fell below its 200-day moving average Tuesday and Apple hasn’t closed below this metric since Sept. 17, 2013, according to news reports. At its lowest point around $120, Apple had lost $62 billion off its market cap, which had soared to $753 billion, making it the most valuable company the world.

What Apple’s Slump Means For Suppliers

Now that we’ve gone over Apple’s numbers for the last quarter, let’s look at the suppliers, specifically those whose parts power the iPhone 6.

There are two main we see you as getting in on Apple as investment.

If you are considering investing in Apple, there are viable options. First, buy now while it is trading lower because the stock tends to rebound nicely. It’s trading now around $125 a share, which is about $10 share of its 52-week high. Just keep in mind that the Q3 results may very well be a sign that the smartphone market is saturated and the good old days of record sales of the devices may be waning.

Another way to ride the coattails of Apple may be through its suppliers. The following is a list of some of the suppliers whose parts are in the iPhone 6.

Skyworks Solutions (NASDAQ: SWKS) had a good third quarter in terms of earnings. It supplied the chip for the iPhone 6’s 5.5 inch screen models. After beating the street’s estimates several analysts increased their price targets on the company. It closed Friday around $99.

Pacific Crest Securities raised the price target to $120 from $110. The analyst for the firm is banking on the increasing content on iPhone 6S and improving Chinese demand as reasons.

Skyworks reported earnings being up 61%, and revenue rose 38% to $810 million. Analysts had expected $1.29 and $801.5 million.

Then there is NXP Semiconductors (NASDAQ: NXPI). Apple uses its near-field communications technology in its mobile pay service. Following Apple’s earnings release last week, NXP’s stock fell 2.38% to $90.20.

The company produces several components for the iPhone, including a part required for the Apple’s new mobile Pay feature. Providing iPhone users a pay system is slowly catching on. Over the long term it’s likely that NXP could significantly benefit from supplying Apple with the parts for this feature.

Keep an out on the stock this week; it reports its Q2 earnings on July 29.

ARM Holdings licenses (NASDAQ: ARMH) its chip technology to several smartphone manufacturers, including Apple. ARM Holdings receives royalties from Apple and other smartphone manufacturers that pay royalties. While it performed

It reported earnings for its second quarter last week. While it missed analysts’ estimates, it did meet profit projections. Specifically, its revenue in the three months ended in June was up 15%, year over year, totaling about $357 million. Estimates were $359 million.

Its earnings per share were $.34, which met analysts’ estimates.

Do consider ARM Holdings for many reasons. One of them is the royalty revenue it receives when products using its licenses are sold. According to an interview ARM Holdings’ CEO gave to Bloomberg. Its chips are in 95% of the world’s smartphones.

He noted that the company is experiencing “very strong” growth in royalty revenue.

New buy in my ROTH IRA – RWX a commission free saving

When I started dividends investing in 2012 I had no goal or strategy and I was purchasing stocks with every penny I had. It was long before I realized how futile way of investing this was. Whenever I received a few dollars in dividends or contributed $50 to my ROTH IRA account, I immediately invested that cash into a dividend paying stock.

It was tempting as I hate my cash sitting in the account doing nothing. I wanted every penny to bring in the dividends.

I didn’t see how expensive that was.

For example, if I purchased a stock for $44.00 a share, I got hit by $9.95 commission. Such transaction got me into a staggering 22.61% loss! The cost basis of such transaction was immediately $53.95 a share.

The stock would have to move from $44.00 a share to $53.95 a share to just get break even. A horrible deal, right? And yes, I was doing that!!!

Over time I found that an acceptable amount to invest is at least $1,000 a transaction or of course more if you have more. But a picture of $800 sitting in my account waiting until I save another $200 to be able to invest and doing nothing was painful. To me this wasn’t acceptable. Mainly, at times when saving another $200 could take me a few months (at some point I could only save $50 a month!).

So, what to do if you can save only $50 monthly and you do not want your money sitting in the savings account, making puny 0.90% or in your brokerage account making 0.001% when you can make 3%?

A solution could be investing into commission free ETF paying dividends. To me, RWX REIT commission free ETF is the answer to that question. Of course, you need to verify with your broker whether they offer a commission free ETFs and which pay dividends.

RWX is one which does that. I can buy a single stock and pay nothing on top of my purchase price and the fund pays 2.9% annual dividend. Now, anytime I receive a cash or contribute to my ROTH IRA account I buy RWX. I do that as long as I save $1,000. Once the total market value of RWX in my portfolio is $1,000 or more, I sell shares of RWX and buy my desired stocks. A few weeks ago I used this strategy to purchase COP stock.

Dividends received

Last week, I received dividends from the following stocks:

AGNC American Capital Agency $31.02
MA MasterCard $2.56

These dividends increased my free cash in my account to a level allowing me to buy one share of RWX.

RWX new purchase

For tomorrow (Monday 11th, 2015) I placed a buy order to buy one share of RWX. After the purchase, I will own 14 shares and my current market value will be $579.28. I will be half way to saving the desired $1,000 limit for a new stock purchase. While waiting to save the rest, I will collect 2.9% dividend.

RWX is not a dividend investment to me. It is a cheap saving vehicle, since I do not use a DRIP.

Why I do not use the DRIP?

I want to be free in choosing my next stock purchase and use all collected dividends and contributions to do that. With a DRIP, I will be limited to investing contributions only. And I do not want that.

What do you think about this strategy? How do you deal with little cash in your account? Do you invest it or let it sit until you accumulate enough to buy a new stock?
 
 

Posted by Martin April 15, 2015

Kinder Morgan (KMI) increases its dividend

KMICurrently, this cutie (KMI) is paying 1.8 bucks per share annually. That translates it into nice income of 4.30% on invested dollar. Where else can you get such nice interest? No bank would pay you this. Not even bonds (they actually pay a negative interest). So unless you start your own consumer credit loans business where you will be legally allowed charging a usury interest of 20% or more you won’t get any better return on investment anywhere else.

KMI announced today after close that it is increasing its quarterly dividend to 48 cents a share, up from 45 cents in the fourth quarter of last year. The company plans to pay a full year dividend of $2 a share! And they are on track to meet this goal so far. Basically KMI plans increasing dividend by 50 cents every quarter.

The stock slipped about 1% in afterhours trading as the company announced revenue and earnings for the first quarter that were a bit light of analyst expectations. The stock closed Wednesday at $43.43. (Source Barron’s)

What can I say to this?

Yes baby, go down on all those anal-yst expectations so I can buy more!

Currently, I own 98 shares of KMI in my dividend growth portfolio and I am definitely LONG on this stock.

 

Stocks to buy in February 2015

If you bought the stocks I recommended at the beginning of January 2015 and held them until now, you would be up 2.0%.

After the volatile and wild month we just went thru, full of wild ups and downs I can’t believe, the stocks I selected for January ended up 20%. Although it wasn’t an easy road. I noticed that at some point those stocks were in a deep hole, yet they managed to dig themselves up and end profitable.

I just stopped their price actualization, so you can go back and check it out.

So can we repeat this next month? I do not know, so let’s put my screener back to work and see if we can be as successful in February as in January. Here is a list of stocks to buy in February:

 

 

You can decide to buy only a few of those stocks or all of them or just those which pay dividends. In the list, there are a few stocks which were a bit of a surprise to me such as Ford (F) which pays 4% dividend as of this writing. Ford was a stock I was thinking to invest in at some point and seeing it showing up on my screener makes me feel very strong about this stock.

So, let’s pretend we sold all of our January selections except those which showed up again in the list above and added new stocks from this list above. Let’s see how February will end up with those stocks.

What do you think, would you invest in those stocks, all of them, some of them, or not at all?

Good luck!

Previous selection:

Stocks to buy in January 2015
Stocks to buy in March 2015
Stocks to buy in April 2015
Stocks to buy in May 2015
Stocks to buy in June 2015
 

Posted by Martin January 26, 2015

Legacy Reserves LP (LGCY) bull put spread trade

Recently one investor asked me a question whether I would consider selling covered calls against my recently purchased shares of Legacy Reserves (LGCY) or not. He was also concerned about the stock and its recent fall in price.

I reviewed my holdings as well as my original reasons for the trade and I must say, nothing has changed. I am even more convinced that my stock purchase will pay big in the future. It will only take time before it happens.

What was a premise of my trade? Buying LGCY was a play which will have a twofold benefit for me and those investors who are purchasing at the current price level:

 

  1. Capital gains when the price of LGCY recovers.
  2. While waiting for the recovery, you will be collecting juicy dividends.

 

Of course, conservative investors would probably skip this trade, but I see it as a great opportunity. A same opportunity I could take in 2008 have I known what I know today.

Will history repeat itself?

Today, people are claiming that price of oil is doomed and that we will be undergoing a long and painful recovery and many energy & oil companies will go belly up. Really? Are we seeing oil prices low forever?

Our society is energy driven and there will always be demand for oil. And oil prices will go up inevitably no matter what others say or think. It is not that far away when Saudi Arabia’s king Abdullah was bragging about not minding oil prices dropping as low as $20 per barrel and stay there for a long time.

Today, when oil was trading around $48 a barrel, the Saudis announced that they see oil prices bottoming. And El-Badri (an OPEC’s Secretary General) even claimed today that oil price may go as high as $200 a barrel.

But such low price of oil is painful for everybody, even for Saudis. Are their claims a sign of them preparing the world for the end this price war? Who knows? Nevertheless you will still find a bunch of pundits predicting all sorts of oil price movement in upcoming months (mostly contradicting each other). But there is one thing for sure. Oil price will start going up. When exactly that happens, how fast, and how high, nobody knows. But what goes down, must go up.

And that happened in the past already may be a guidance of a potential future development. Let’s take a look at the oil price to see what happened and what may happen again:

 
Crude oil in 2008
 

Now, let’s take a look at today’s price action:

 
Crude oil price in 2014
 

Will history repeat itself and will oil recover? I bet it will. It may be different movement as far as its magnitude and speed of course. It may take longer time, smaller price recover than before, it can continue falling forever (as talking heads want us to believe), or it can shoot up like a rocket and recover even faster than before. The price can also continue lower to reach 2008 lows. But at the end, the price will recover. I already took my bet on this by purchasing LGCY shares.

 
Will history repeat itself?
 

Will LGCY history repeat too?

I believe it will. There are a few clues from the company itself which make me an optimist and believe that LGCY will not only survive this price oil turmoil but also recover its price in full extend and continue paying its distribution without cuts.

In 2008 LGCY also took a huge hit caused by oil price collapse. It was a price drop of the same magnitude as we see today:

 
LGCY price in 2008
 

Let’s compare this chart with a price action today:

 
LGCY price in 2014
 

If history repeats itself again, we may see a nice recovery and great capital gains by the end of the year 2015. The price may reach up to $17.36 a share. And the best thing is that while waiting for the price recovery, I will be collecting extremely, nice, juicy, great, super, excellent dividends.

But the best LGCY has to offer is that even during the oil price collapse in 2008 LGCY didn’t cut its distribution and continued holding on.

Before the crash in 2008 the company paid and increased dividends from 1.64 up to 2.08 a share (9.90% yield). When the price collapsed, the yield skyrocketed to 32%. The company held the distribution thru the bad times until the end of 2010 when the price of the stock fully recovered. Then the company started raising dividends again. It went from 2.08 (9.90% yield) to 2.44 (8.41% yield). Today, at $9.94 a share the yield went up to 24.55%

 
LGCY holds dividends
 

Will history repeat itself here again? We do not know. What we know already is that management of the company in a recent presentation at USB MLP One-on-One Conference declared their determination of sustaining this same level of distribution and avoiding its cut as they did in 2008. At a Wells Fargo Energy Symposium COO Paul Horne expressed the new trend in Legacy’s navigation thru this low oil price environment by cutting expenses and making accretive acquisitions while focusing on preservation of shareholder’s distribution.

Will we see the company to sustain their distribution or will they follow their peers who already cut their dividends? So far LGCY announced its next quarterly distribution at 0.61 a share which is in line with the previous rate. So far the company holds the course.

New LGCY bull put spread 10/12.5

This is a strong enough evidence for me to believe that history will repeat itself this time again, like in oil price recovery, like in LGCY price and distribution pattern. And that the price of the stock recovers this year (although it may not be a full recovery to pre-crash level).

To give the company time to recover I decided to open a long term spread with expiration in September 2015 and sell ITM (in-the-money) strikes. This means that I speculate for the price to go above the strike prices. I see the following benefits and dangers in doing so:

 

  • A long time spread gives the stock time to get above ITM strikes making the trade OTM.
  • Selling a long time spread gives me a lot of time value to decay later on.
  • I also sold an intrinsic value which will disappear as soon as the trade progresses into OTM state.
  • If the stock recovers faster the spread may become worthless and bought back earlier than until September 2015
  • There is a danger of early assignment of the short put should the stock perform bad. This is unlikely in early stages of the trade.

 

Trade detail

 
SELL 1 Jul4 14 345 call
BUY 1 Jul4 14 355 call

@ 2.00 DAY (credit)

With this trade, the risk is relatively low (I only risk $50 per contract and have a chance to make $200 per contract). That’s a nice 400% profit!

Let’s see if this trade opens tomorrow and how it will progress during its life span.

Good luck and happy trading/investing!

Armour Residential (ARR) Are Insiders Abandoning the Ship?

I once invested in Armour Residential (ARR) for high income. It was at the time when this stock traded at $8 – $10 range in 2009. Today, this company is down low at $3.40 a share and it looks like it is going to die after a long agony.

ARR

I invested in this stock excited about great dividends, but failed to see that this stock and company is a trap. At that time I didn’t know much about dividend sustainability. I didn’t know or ignored that high yield not always mean security and learned the hard way that dividend cuts may ruin your investment. The price drop will in all cases exceed your dividend income you received and you always lose in the end.

Although dividend investors do not care much about their portfolio value as they cherish income it produces, you still do not want to be sitting in a losing position and hoping that one day it may recover. Some investors even throw more money against their bad holding to cost average. But constant dividend cuts will catch them. Always.

I am not talking about stocks that are good dividend payers, increase dividends regularly and have a proven history of doing so. Then a large price drop of such stock is a life time opportunity. Unfortunately Armour Residential isn’t such a company.

In 2013 I decided to take a loss and walk away from ARR. Now, I am glad I did it. I closed my trades at around $6 a share at that time. Today, the stock is trading at $3.40 a share. Those who hoped for a recovery and great dividends are probably disappointed.

Although I do not invest in this company anymore, I still time to time look at it to see how my past assessment worked. Was I correct or wrong? I also time to time check discussion boards to see what other investors think. And I still receive news about this company into my inbox.

And today I received news that a company director Bell Marc (co-founder and member of the Board of directors) sold all his holdings in ARR on January 22, 2015:

ARR Holdings

When I was selling my positions in ARR, one of my reasons were that the managers showed in many occasions that they didn’t care about investors, but themselves only, unlike other dividend payers, compare it with Realty Income for example). If a co-founder and one of the directors liquidates all his position in the company, what does that tell you?

Are the rats leaving the ship?
 
 

Stocks to buy in January 2015

When trading options or investing into stocks I always wanted to develop a system which would tell me which stocks to buy and which to avoid. I wanted as manual and automated system as possible to avoid emotion in selecting stocks. I wanted something you can almost program into a computer and forget about it.

I tried many systems, but I was never satisfied with the results. Some were too tedious to work with and because I had to do most of the work manually I wasn’t able to eliminate the human factor which makes our decision making irrational and emotional.

And I didn’t like it.

I had a good system at some point. I called it a “Stock Picker Rank”. Based on selected criteria I assigned a rank to the stock and then based on the rank I could arrange stocks to buy or drop from my portfolio. I tested the system and it wasn’t bad. The results were nice and I last year my simulated account ended with 17% gain. Not bad, right?

But the work associated with the stock selection process, running it thru the filters and selecting the right stock was horrible and very discouraging. But I didn’t give up. I was looking for ways how to automate this system and also how to make my criteria focused more on the valuation to pick a stock which is deemed as undervalued.

I think I found a strategy which can do that. It is based on current price, current P/E, forward P/E, current EPS, and EPS forecast. Of course, there is slightly more to it, but this is all I am willing to reveal.

Then, I was able to code this into a Google Spreadsheet, insert my stock watch list in it and now the spreadsheet is screening all of my 150 dividend paying stocks as well as some growth stocks too.

Now I want to put this screener into testing, but I will do it publicly, so you can see yourself how that works and if it pays to follow it and invest. For the following year I plan to publish my selection of stocks and show results of the stocks what it would look like if you invested in it.

How the investing process would work?

 

  1. Every month I will publish new stock selection.
  2. You can buy those stocks (in your paper money trading account for example) and hold until next month.
  3. You place a stop loss 10% below your entry price. If you get stopped, get out of the stock and move on.
  4. Those stocks which remain in your portfolio let them run up holding them until they reach 25% gain. Then sell.
  5. At the beginning of the new month a new selection will be published.
  6. Buy only those stocks, which you do not have in your portfolio, avoid those you already have.
  7. Sell all other stocks which are not in the list anymore, and are showing a loss. Move stop loss to break even of the remaining stocks.

 

The procedure above may change over time as I will be playing with this strategy more during the year.

And here is the list of January 2015 stocks

 

I will use this screener to buy stocks in my ROTH IRA account. In my options trading TD account I will use these stocks (which are optionable of course) to trade bullish spreads. For example, if you are my newsletter subscriber, you have received an option trade alert to trade a bull put spread against Agrium (AGU). In fact, this trade was based on the screener above. And we opened a bullish put spread at 85/90 strikes. If the stock stays at these levels or even grow higher, this trade will end up profitable.

What if you do not have enough money to buy all selected stocks?

It is easy. Each stock has a rank added to it. The highest the rank the better, so just go and pick stocks with the highest rank and continue down the list. For example, if you can only invest $1000, then buy only 1 stock. With $2000 buy 2 stocks, and so on.

Of course the rank won’t guarantee a winning stock, but gives you a high probability of a winner.

And do you know what the best with those stocks is? Many of them are dividend paying stocks so while you are waiting for them to grow to give you nice capital gains, you will be also collecting dividends in the mean time!

Now let’s put this in test and see how that will work.

Happy trading and investing!
 

Previous selection:

Stocks to buy in February 2015
Stocks to buy in March 2015
Stocks to buy in April 2015
Stocks to buy in May 2015
Stocks to buy in June 2015

 
 

Which stocks to buy in 2015?

Which stocks to buy in 2015?

I trade mostly dividend paying stocks, but watch a few companies which I consider good companies although they do not pay dividends. These I use in my portfolio as growth play stocks (for example a few months ago I did buy Alibaba (BABA) for this same reason).

In my watch list I have approx. 100 stocks I watch. Some I trade actively, some I only invest in. For example in my ROTH IRA I only invest into stocks, I do not trade. But in my TD Account I trade stocks and options, but use those exact same stocks as underlying symbol for my trades.

Among the stocks I have in my watch list I try to find those, which are currently undervalued. I use the difference between current P/E, current EPS, EPS estimates, and current price. A formula I created tells me what stock has a bigger potential for growth compared to its current pricing at the market.

The result of my screener for an undervalued stock means, that there is a significant chance that investors are not investing in those companies yet, but potentially will in the future and drive the price of the stock higher. That would be the best time to sell them the stock you purchased at the time you spot it as undervalued.

Here is a list the stocks I believe will become winners in the next year of 2015. Let’s take a look at them.

Agrium Inc. (AGU)

Agrium is in Basic materials sector but in Agricultural chemicals industry. It is not thus beaten down that much as precious metals for example. It produces, retails, and distributes the crop nutrients, crop protection products, seeds, and agronomics primarily in North America, South America, Europe, and Australia. The company operates through two segments, Retail and Wholesale. The Retail segment supplies crop protection products, such as herbicide, fungicide, insecticide, and adjuvant products; crop nutrients, including dry and liquid nitrogen, phosphate, potash, sulfur, and micronutrients; seeds; and merchandise comprising fencing, feed supplements, livestock-related animal health products, irrigation equipment, and other products.

Agrium is a dividend paying company but it is not a true dividend growth stock. It was founded in 1931 but it paid dividends only since 1993 and increased dividends in only two consecutive years.

At its current price $95.91 a share it yields 3.30% dividend yield. Its dividend growth of 160.55% is impressive, but it is hard to say whether sustainable or not. I would say, it is not and as the dividend payment plan of the company matures over time, it will decline to a more standard level.

Morningstar provides a fair value at $96 a share with a very high uncertainty and a target to sell at $148.8 a share. My own calculated fair value is at $164.83 a share.

With that said, I would consider this stock a growth play rather than a dividend growth investment. If you buy at the current price and hold until it reaches $148.80 a share, you will collect a nice 55.14% profit and in the meantime you will be collecting a nice dividend. If you play this stock, I would use a stop loss at $86.32 a share. But, be also prepared for a long holding period as it may take quite a long time to get to the target price.

 
AGU
 

In my TD account I am taking this trade as an option play selling a credit put spread expecting this stock to stay above $90 a share at expiration. In my ROTH IRA account I am currently fully invested, thus I have to skip this opportunity.
 

BreitBurn Energy (BBEP)

BreitBurn Energy, as its name provides, is an energy stock and it was beaten hard in the last days. Many analysts predict that price of oil will stay down until 2016 and that the oil crisis is worse than ever and similar to 80s or as in 1997 – 1999, 2001 – 2002, or 2008 – 2009. It could be. But as of now, the stock got so beaten in price that it pushed its dividend yield to levels never seen before. It now yields a staggering 21%. The company pays dividends (distribution, since it is a partnership) since 2007 and it has been increasing dividends in 4 consecutive years by average 7.64%, which is not a bad rate.

The old adage says, when there is blood on the street be buying. I believe that this is an opportunity. Investors are panicking and selling energy stocks. Buy them. I bought Legacy Reserves (LGCY) for this same particular reason. Although everybody shouts sell, sell, sell, I would buy this stock. But it will be a long run and there is a risk involved. If the oil price war continues well beyond 2016, the portfolio hedging of BBEP (as well as LGCY) would be depleted and the company may cut its dividends. Even if that happens, however, it still will be at around 10% range rate and while waiting for price recovery (to get back to 20s) you will be collecting nice dividends. When the stock returns to 20s, which may take up to two years or more, you will see a nice capital gain too.

Saudi Arabia claims that they wouldn’t cut production of oil which sent prices lower. But with their current 17% budget shortfall, they too will not be able to sustain this war for prolonged period of time as their economy is fully dependent on oil. If they start pushing oil price back up, companies involved in oil will go up again (as they did many times in the past).

 
BBEP
 

If buying this stock, be prepared for nice profits, but accept increased risk. The risk is in dividend cuts and further price fall. Nobody knows how low oil and the price of this stock can go. I believe this will be a winner at some point, but it will take some time, even two or more years. I would also consider this trade as a growth play, rather than a dividend growth holding.

Baidu, Inc. (BIDU)

Baidu is not a dividend paying stock whatsoever, but the recent sell off from $250 to $225 sent the stock to undervalued territory. Some investors may not agree with me, but its growth rate is more aggressive than its current valuation. Its price to growth rate is very low making this stock an attractive growth play. Baidu’s growth rate is at 37% which is more than any other stocks in my watch list. There are only a few competitors competing with this growth rate such as Netflix (NFLX), Mosaic (MOS), Alibaba (BABA), Go Pro (GPRO), and some others (some listed below). All those stocks are in a category of young companies with a huge potential for growth, while mature companies (such as AAPL) are slowing down.

 
BIDU
 

Morningstar considers a selling price for this stock to be at $341 a share although their fair value is at $220 a share. I would be satisfied with $280 a share where I would sell this stock.

GameStop (GME)

GameStop is my favorite stock. I was able to make good profits with this stock in the past. A recent sell off of this stock, mostly based on fear and panic that they won’t be able to survive online shopping of the games and a new competition such as Walmart (WMT) entering into used games business, sent this stock again into undervalued territory.

Game stop is a dividend company, although it is not a true dividend growth stock. It yields 4% at its current price and it increased dividend once since 2012 when it started paying dividends.

 
GME
 

GME still may continue falling, however, there is a strong support at $30 a share. If the stock holds this level, we may see it marching back up towards my calculated fair value at $47.2 a share. Buying and holding this stock would be a growth play rather than dividend investment, but during waiting time for the stock to grow, you would collect a nice dividend. I also may use this stock for my options plays opening a credit bull put spread with around 30 strike.

Mosaic Company (MOS)

Mosaic is in the same category as Potash Corp. of Saskatchewan, Inc. (POT) producing and marketing concentrated phosphate and potash crop nutrients for the agriculture industry worldwide. Mosaic is a dividend company currently yielding 2.20%, but it only increased dividends for 2 consecutive years since 2008 when it started paying dividends. Also the dividend growth rate is quite low (only around 2%). That would make this stock a growth play too.

 
MOS
 

This stock’s growth may be a bit tricky when looking at the long term chart. Morningstar considers this stock’s fair value to be at $56 a share which would deliver 20% capital gain if it gets to that level. That would be my selling point although Morningstar recommends a selling price to be $86 a share. While waiting for this stock to grow, you would be collecting an acceptable dividend. There is a nice potential potash contract waiting in India and China and if that happens (expected early in 2015) that can lead to increased potash prices and Mosaic would benefit from it greatly.

Micron Technology (MU)

Micron Technology, Inc., provides semiconductor solutions worldwide. The company manufactures and markets dynamic random access memory (DRAM), NAND flash, and NOR flash memory products; and packaging solutions and semiconductor systems. It doesn’t pay dividends and therefore this would be a growth play. The stock recently ran up in 2014 due to expectation of more massive use of NAND – solid state drives (or SSDs) which could soon replace traditional hard drives. Although it will surely happen unless something better shows up on the scene, the price of SSDs is still prohibitive.

The target price for this stock is at $43.75 a share. At current price $34.91 a share this trade could provide a nice 25% profit.

 
MU
 

But there is a danger that the stock will exhaust its run up (as the volume is declining with the new highs), so I would play this trade with a stop loss at around $31.40 a share.

Old Republic (ORI)

Old Republic (ORI) is a dividend growth stock with 7 years of consecutive dividend increases. It is engaged in underwriting insurance products primarily in the United States and Canada. The company’s General Insurance Group segment offers automobile extended warranty, aviation, commercial automobile, commercial multi-peril, general liability, home warranty, inland marine, travel accident, and workers’ compensation insurance products; and financial indemnity products for specialty coverages, including errors and omissions/directors and officers, fidelity, guaranteed asset protection, and surety.

 
ORI
 

It currently yields a nice 5% dividend yield, but its dividend growth is only 1.43%. Recent sell off in August and October this year sent the stock to $14.59 a share. Yet this price is still below resistance at $15 a share and well below $17 a share of two year max price. I would also consider this stock as a growth play, but it will be okay to add this stock to a dividend growth portfolio too since the stock shows nice disproportion between the EPS growth and stock valuation. Therefore there is still a good potential to catch some capital gains while collecting high dividend in the meantime.

My expected sell target would be at $21.98 a share unless you decide to keep this stock longer or forever to collect dividends.

Qihoo 360 Technology (QIHU)

Qihoo 360 Technology provides Internet and mobile security products and services in the People’s Republic of China. Its core Internet security products include 360 Safe Guard, a solution for Internet security and system optimization; 360 Anti-Virus, an anti-virus application that uses multiple scan engines to protect users’ computers against various kinds of malware, as well as 360 Mobile Safe, a security program for the Google Android, Apple iOS, and Windows smartphone operating systems.

Qihoo is undervalued compared to its growth rate and makes it a good growth play as it doesn’t pay dividends. It, however, fell thru its long term support at $75 a share completing a head and shoulders pattern. Now it is marching towards $25 support. And it may get there.

 
QIHU
 

I recently played this stock on the downside and made money. There is unfortunately nothing to be seen what can stop this stock from further fall. Although this stock is now undervalued when comparing its price valuation vs. EPS growth rate, it still doesn’t mean the stock will rise again. If you decide to play this stock, I would do so with a tight stop loss and get out of this stock at $75 a share (target) or move the stop loss higher with the stock.

Amid the price fall QIHU has been under heavy accumulation since October 2014 and that may continue well in 2015 as China will stabilize their economy and the rest of the world will move its attention somewhere else. Their government has been encouraging the Chinese people to enter the equities market. Like the US during the boom, China wants to prove to the world that their system works. They know that in order to do so they have to be economically sound and financially seen as superior.

Tallgrass Energy (TEP)

It would be surprising if there wouldn’t be any other energy stock which wouldn’t show up as undervalued on my radar. Originally, I thought almost all energy stocks would be undervalued, but it doesn’t seem to be true – yet.

Tallgrass Energy (TEP) is one of the stocks which shows symptoms of discrepancy between price valuation and its growth rate. As is typical for partnership, this stock pays nice dividend and yields 4.30% at its current price at $42.75 a share. Surprisingly this stock wasn’t beaten down too much during the energy stocks sell off and so far it recovered quickly:

 
TEP
 

If purchasing this stock I would purchase it at this level as a growth play and sell $50 a share collecting dividend while waiting. Since the stock recovered nicely from recent sell offs while oil prices are still down, we may expect that the stock would grow fast with the oil recovery. Then we may capture nice capital gain and dividends.

Vipshop Holdings (VIPS)

I have this stock in my watch list for my options trading. VIPS doesn’t pay dividends, so it is a pure growth play.

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People’s Republic of China. It offers a range of branded products, including apparel for women, men, and children; fashion goods; cosmetics; home goods and other lifestyle products; footwear; sportswear and sporting goods; luxury goods; and gifts and miscellaneous products. The company provides its branded products through its vipshop.com and vip.com websites, as well as its cellular phone application.

 
VIPS
 

The stock may see a growth back to around $25 a share (after split) where I would sell realizing a nice 25% profit. However, the stock may continue its fall down to $17 a share support and if it breaks it, it can fall all the way down to $15 a share. Therefore I would trade this with a tight stop loss or wait how this stock moves in a couple of few days in January 2015. The entry point into a position in this stock isn’t clear. For this reason I would use a contingency order placing a buy order above previous day high so I would buy this stock only on its way up.

YY Inc. (YY)

This is my last stock in my watch list which is shown as undervalued. Why Why company operates an online social platform in the People’s Republic of China. The company engages users in real-time online group activities through voice, video, and text on personal computers and mobile devices; and enables users to create and organize groups of various sizes to discover and participate in a range of activities, including online games, music activities, education, live game broadcasting, and conference calls.

It doesn’t pay dividends and therefore I would consider this stock again as a growth play only. The stock recently bounced from $60 support. If it doesn’t hold, the next stop is at $50 a share. But the stock seems to be holding and marching back up. If we add its valuation vs. growth rate into an equation, we may see this stock marching up to $70 or even to $80 a share.

 
YY
 

These were the stocks which seem to be undervalued when taking into account their current price, EPS, P/E, and EPS estimates. Of course, as anything in the stock market, this doesn’t guarantee that those stocks will grow and make you money. I however see high chances of doing so. If trading those stocks which are not dividend growth stocks I would trade them with a stop loss, but those which pay and grow their dividend I would consider not using a stop loss at all and potentially keep them.
I take these stocks a good opportunity for 2015 investment.

Which of the stocks you would buy for the 2015 year?

Disclosure: I hold bull put spread against AGU (long). I do not have any positions in other stocks mentioned above. I may open new stock positions in my ROTH IRA or options positions in TD account against the stocks mentioned above. If I will be opening a new position I will post it on this blog.