A while ago I wrote about what investors need to do in order be eligible for dividends so I’m not going to talk about that again. Instead, I want to talk about a new strategy that I’ve been trying when the opportunity presents itself and I have time to take advantage of it.
First, I look for high yield dividend paying stock that is very very stable. Some examples are Verizon, Vodaphone, and Telus. All 3 happen to be North American telecom companies. Price stability is very important in this strategy and they are usually stable because they pay regular dividends, increase regularly, and have a long history of paying dividends. Although they may fluctuate in price, they are much more stable than a lot of other stocks including the banks.
Second, look at the dividend ex-date. You must figure out how much time you have before this ex-date. We’re looking for at least 3 weeks time frame and no more than 8 weeks.
Third, look for market volatility. Lately, we have a lot of that so it’s very easy. However, going back to the first step, market volatility affects the higher risk stocks the most and the lower risk stocks the least. That’s why when the market is down a lot in the day, we call it a risk off day. Everyone is selling the higher risk stocks. The examples that I’ve chosen from the first step do fluctuate with the market but it’s relatively small.
For Verizon, they are a huge company in the United States but they have high growth in both wireless communications, high speed internet and television. Revenue is consistent every quarter because of their subscriber base that is mostly locked into contracts or have little turnover.
On the other side of the world, we have Greece and other European countries throwing a wrench or a grenade into global markets almost every few weeks but WHY would it affect the price of Verizon stock every time this happens? The reason is because Verizon stock is tied to a lot of other investment instruments such as ETFS, and mutual funds. When people sell these investments, they don’t care whether it includes Verizon or not. There are also a lot of traders that just dump everything as soon as the proverbial shit hits the fan because they’re traders, not investors. They’ll just buy back later or buy something else. They’re locking in their gains or limiting their losses.
The same goes with Telus. It’s a Canadian telecom company that has a growing smart phone subscriber base and a new television package that they are selling like hot cakes. How is company related to Greece, Spain, or Italy? It’s not at all but it is not immune from market volatility.
When a high yielding dividend stock approaches the ex-date, the stock will almost always move up if it has been oversold, and then move back down on the ex-date.
The fourth step is to buy the stock when you see that the stock price has gone down due ONLY to the market volatility and the ex-date is coming up in about a month. A month is the time that I try to use because it allows for enough time for the stock to bounce back but the range as I mentioned above is 3 to 8 weeks. Read all the available news for the company for the day that the stock has gone down before buying it. Since stocks like Verizon and Telus don’t really go down in price much, I usually scale in. I’ll buy a small number of shares first, and then buy again the next day to avoid buying it at price that is too high because we’ve seen how the market can drop almost 1000 points on the DOW in a week. We can’t know for sure when the bottom is but we are pretty certain that the stock price will bounce by the dividend ex-date.
The fifth step is to be prepared to hold the stock for more than 1 quarter. It might take longer to bounce back but at least you collect the dividend so you get paid to wait.
Verizon stock closed today at $38.35 but you can see that it has been in the $35.25 range quite often in the last 3 months. Telus stock closed today at $55.36 but you can see how it has fluctuated in the $51 and $53 range in the last 3 months. The dividend ex-date just passed on Dec 8th,2011, and you can see how the stock ramped up as expected as soon as the date got closer. Next time it goes there, maybe you can try this strategy. The capital gain is usually about 4 to 9%. The difficulty with this strategy is not only the timing but also the capital required. The more you put in, the more you get out of it. I usually invest at least $10,000, that will give me about 250 shares of VZ or 200 shares of Telus. If the stock goes up a few dollars, then I can have a gain of about $500. The key here is profiting from volatility with minimal risk and then escaping with your capital to invest in something else or at least not having it be at the mercy of this crazy volatile market.
If you’re still in the stock market then you’ll probably notice that almost all your holdings are down. This is where diversification comes into play. Not diversification of equities because that’s pretty useless.
You’ll need real estate, precious metals, high dividend paying stocks, bonds, and cash. That’s only to reduce your losses. As long as you are investing your cash, you are accepting inherent risk.
Lately I’ve seen the market over sell and over buy a lot. I’ve been trying to buy some on over sold days and sell on over bought days just to make a little bit of money with my free cash. Hope everyone is doing great!
Lululemon Athletica is back, alive and kicking. They had mostly been in the dog house last year and early this year with a slow recovery from the recession but after surpassing analyst expectations in last Thursday’s earnings report, the share price jumped 16%.
Now let’s review the analyst side of the story. Some analysts are ahead of the game and some are way behind. As an example, Taposh Bari who is an analyst at Jefferies and Co. is way way behind.
On Aug 30th, his comment on Lululemon was:
“We see [Lululemon] as one of the most compelling concepts in retail but also believe there is a disproportionate amount of risk to earnings and sentiment at this company.” and he cut the outlook for Lululemon to underperform. Soon after that, Read more…
I’ve been pretty bad at posting new blogs although I have been thinking about material to write. I just haven’t brought myself to doing so until now because once again, an analyst has really confused the outlook on Research in Motion (RIM). I’m very glad that this analyst isn’t from RBC Capital Markets this time. I don’t like to pick on just one institution.
First I’d like to say that I have no preference for any brokerage or analysts but I know that the last post I did about RIM pointed out how off the RBC Capital Markets analyst was. Once again I’m talking about RBC Capital Markets, albeit a different analyst because they released an update on 3PAR on 9/3. The recommendation was to buy, and the target price was raised to $33. For those of you who haven’t been watching the bidding war between HP and Dell over 3PAR, let me get you up to speed. HP had officially won the bidding war for $33/share when it started with Dell offering $18/share. It went back and forth several times before Dell gave up on 9/2. The next day, RBC releases this untimely information when the deal is pretty much done, recommending a Buy with a target price of $33. The stock was already at $32.88 with the remaining 12 cents due to the unlikely risk that the deal would fall apart. Exactly how does this information help investors? Perhaps when it was hovering around $10, indiciating that it was a take over target would be useful or even guessing how much the 3PAR would sell for would be helpful.
That’s why I say Thanks for NOTHING.
If you watch Jim Cramer’s Mad Money show on CNBC, he has a segment called Am I Diversified? This is where callers name their top 5 holdings in their portfolio and Cramer tells them whether they are diversified based on the sectors that the companies are in. For example, if you have two stocks that are in semiconductors like Intel and AMD, then you are definitely not diversified and the importance of this is that if people stop buying computers, then both of these companies will suffer severely and for the same reason. You want to be diversified so that even if one sector goes down, your other stocks will be little to not affected at all.
In the last epsiode that I watched, I took those same stocks that the callers had and charted them in Yahoo to compare the price correlation.
Here are the 2 examples from the show aired on 7/30 where both groups were considered “diversified” based on the sectors that the companies belonged to. I created the 6 month and 12 month chart and I included the DOW as well.
Kinder Morgan (KMP) – Pipe line
Omega Healthcare (OHI) – real estate investment company for health care
Pennantt Park(PNNT) – investment company
Windstream (WIN)- Telco
Linn Energy (LINE) – Exploration Energy
Altria (MO) – Tobacco
Vodaphone (VOD) – Telco
Abbott (ABT) – Pharma company
Yum (YUM) – fast food restaurants
Copano Energy (CPNO) – energy
You’ll notice that in both cases there is a lot of the same price movement for each stock. Look at how each of the stocks have their major dips and spikes at the same time. I realize that picking the best stock or the best of breed is the way to go, but if all the stocks move in the same direction, on the same days, then are you really diversified? If you look at longer term performance, the best companies will definitely succeed but if you’re a shorter term investor then I feel that diversification is much harder to come by using this strategy of trying to be in different unrelated sectors/industries.
One of the main reasons why I blame the similar price movement the introduction of ETFs. ETFs encompass encompass so many different groupings of stocks and their trade volume is huge. Some ETFS are matched to the S&P, the DOW, or the Nasdaq, others might be small cap, medium cap, country specific, growth, income generating, or based on different sectors. There’s even at least one ETF just for casino gaming, a very clever name too, BJK – as in Black Jack. When all these ETFs are being traded, the stocks within the ETF follow a closer correlation.
For example, one of the most popular ETFs is SPY which is tracks the S&P 500 index. The average daily volume is 260 million. Compare that with Apple (AAPL), the average volume is 26 million which is one tenth and Apple is already a very popular stock. The more ETFS we have and the higher the trading volume, the more closely the prices will correlate. Think about what we’re really doing here when we want to invest in the SPY ETF. We’re saying that the holdings within SPY are going to go up. If everyone agrees with this, as more money enters SPY, more money is distributed to each of the stocks and as a result, the price of these companies will go up. The opposite is true if investors want to sell SPY because they’re bearish. Some of the holdings in SPY include, Microsoft, Exxon, AT&T, etc. Here is where you can find the details:
Now think about what we’re doing if we ONLY buy Apple (AAPL) stock. We believe that Apple stock will go up. We’re not saying that AT&T, Exxon, Microsoft, etc. are going to go up too and therefore there is no price correlation between our purchase of Apple stock and any other stocks in the market. We might think that Microsoft will go up too but we’re not putting money into it unless we actually buy that stock as well individually. ETFs create the correlation and the more that investors or institutions trade these, the closer the correlation will be.
If you really want to diversify your stocks in the short term, pick stocks that do not have price correlation with each other and I think a good way to do that is by just drawing the charts in Yahoo Finance.
Here is a chart comparing the performance of the DOW and NASDAQ with the most popular Gold ETF, GLD.
My recommendation is to diversify using different asset classes and but I’d like to save this for my next post since it is a lot to talk about.
If you’ve ever been interested in purchasing Research in Motion (RIMM) stock, you’d probably be confused with all the different analyst opinions because they are all across the board. How is this company so unpredictable? RIMM is the maker of Blackberries which are incredibly popular.
They released their 1st quarter results last evening and the stock has dropped more than 5% today. In the past quarter, they added 4.9 million subscribers alone and with a net of 46 million subscribers, they generated $4.35 billion in revenue. Recently when I went to an Alicia Keys concert, it looked like half the people had blackberries. They were texting and trying to take pictures with them. It seems like people either have an iPhone or Blackberry. It’s amazing how dominant these 2 companies are in the smart phone market. However, the performance of this stock is based on the expectation of enormous future growth and from this point of view, they have disappointed analysts. There is a lot of action on this stock and from my own experience, I’ve taken losses and gains so I’m always looking to get back into it.
So what have analysts been saying? Read more…