BP Oil Spill Day 63

Everyone including myself is concerned about this oil spill.  How much oil is leaking into the ocean?  When is it going to stop?  What wild life/plant life has been affected?  This is a huge man made disaster.  It hasn’t gotten any better since the explosion on the rig on April 20th.  With that much oil coming out, I would have thought the well would be empty by now but it just goes to show that oil companies like BP know where the oil is.  

Investors want to know whether it’s a good time to buy BP.  This is a difficult answer with so many unknowns such as how much is BP liable for?  how much is it going to cost to clean up?  When is this well ever going to be capped?  I am not willing to invest in BP yet especially after they have cancelled the dividends for the rest of 2010.  It is also very volatile, yo-yoing between about $29 and $32. 

Here is what the analysts have been saying since the beginning:

Upgrades/Downgrades

Date Brokerage Firm Action From To Old New
21-Jun-10 Oppenheimer Reiterated   Outperform $55 $45
17-Jun-10 Barclays Capital Downgraded Equal Weight Underweight  N/A  N/A
27-May-10 Oppenheimer Upgraded Perform Outperform  N/A $55
26-May-10 Howard Weil Reiterated   Market Outperform $70 $60
03-May-10 Argus Downgraded Buy Hold  N/A  N/A
26-Apr-10 The Benchmark Company Downgraded Buy Hold  N/A

I particularly like Oppenheimer for giving their opinion twice since the spill started.

It is absolutely obvious that BP’s target price should be lower than whatever it was before because no analyst could have expected a disaster of this magnitude, and the cost to fix this both in the short term and the long term is tremendous.  Cutting the dividend alone should result in a proportional target price reduction.  I believe a lot of investors especially long term ones have lost a significant amount of money because of this kind of coverage that is not updated according to the most recent events.  Investors need to do as much research as possible and make their own decisions because they cannot count on timely updates from analysts.

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Virus Free Blog Reading

Have you ever caught a virus just from reading a blog?   I don’t know how it has become so dangerous to surf these days but I would never risk clicking on different sites from my Google/Bing search without an up-to-date virus scanner.

I read a lot of different financial blogs and in my research, I’m constantly hitting sites that have unsuspecting viruses.  I’ve found that this FREE virus scanner is doing a good job.  I’ve been using it for a month so far:

Avast!

http://www.avast.com/en-ca/index

You can download the free version or pay for other versions.

I’ve found few things more annoying than trying to fight viruses that pop up miscellaneous websites or tell you to provide a credit card number to buy a virus scanner that will fix the solution.  I don’t get anything for recommending this anti-virus software but I don’t mind recommending software that will help my readers.

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Buying, Catching, and Chasing Dividends

June 9, 2010 1 comment

Whether you’ve heard about these terms, “buying”, “catching”, or “chasing” dividends, they all mean the same to me. This is about buying a stock at the right time, for the main purpose of receiving a dividend payout. This is not an easy thing to do because everyone knows about it and there are drawbacks. The main drawback is that the stock usually drops immediately after the date that you have bought it.   First of all I must warn you that I haven’t been doing this for a long time but I’ve put together a summary of my strategy that I try to stick by.

What is the right time to buy?

You must buy before the Ex-Div date and you can only sell it on the Ex-Div date or later to be eligible for the dividend. Your purchase then settles by the record date and you are then on the list of owners to be paid.  As the date gets closer to the stock’s Ex-Div date, it may experience a run up in price.  For this reason, you may want to buy it on a dip as it is running up.  If you bought in really early, you may actually want to sell on the day before the ex-div date for those capital gains and forget about the dividend.

Pros?

  • Since not all dividend dates are the same amongst companies, the cash you use to buy one dividend can be used again for another dividend from another company. This effectively increases the number of dividends that you receive in a year with the same amount of money. Investors who do not trade regularly usually keep their money in dividend pay funds, or ETFS, or individual stocks for the entire year which means their money will usually be paid 4 dividends per year from each company.
  • Reduces your exposure to stocks
    In times where the market is going down or is very volatile, you won’t have all your cash stuck in the market because you’ll be instead waiting for the right time to buy that dividend and then you get out as soon as you can for about the same price that you bought at.
  • Tax purposes
    Dividend payments are taxed less so you get to keep more of it.
  • Short term investing

If you need your cash for something else, you can still get into the market and get out

Cons?

  • Risk of losing
  • Requires active investing

Here are the 7 major attribute that I would look for in a stock as a potential candidate for dividend buying:

  1. The stock doesn’t drop on the Ex-date or if it does, it should bounce back in the short-term(i.e. less than a month). If the stock drops and you have to hold on to it or sell it for a loss, there is no point in trying to buy its dividend. However, often times even if the stock does drop initially, it may bounce back quickly and that will be your opportunity to cash out.  There are also some stocks that occasionally go up on the ex-div date but that is rare
  2. Bull market – typically if the market is trending upwards, there is less of a drop, and more potential for capital gains in addition to receiving its dividend. This would especially be true for faster growing companies.
  3. A company with strong fundamentals
    If I’m going to be stuck keeping a stock in the short-term, at least I’d like to know that there good long-term potential for capital gains.
  4. Company has declared the dividend or you must be confident that dividend will be paid
    The company should have declared the dividend prior to the dividend being paid out and there is nothing in the air that would have you doubt that it will be paid if they haven’t explicitly declared it.
  5. Recurring dividend
    The dividend will be paid again in the next scheduled opportunity, i.e. next quarter, next month, etc. as opposed to a one time payout. One time payouts are too risky unless you’re planning on holding the stock for the long term in which case you’re not actually buying it for a dividend in the first place. Hot Topic Inc. as I mentioned is one example where a one time dividend payout did not work out well for investors who did not get out in time.
  6. Low commission fees and significant capital
    Don’t do this if you’re not going through a discount brokerage or you’re not using  significant capital. You might end up losing money due to commission.  It’s too much risk for too little.
  7. Significant dividend yield
    In my opinion, good dividends are ones that pay more than you can make on any interest investments such as high interests CDs/savings accounts at US banks( GICs at Canadian banks). Right now I’d be interested in any dividend yield more than 4% per year but I’ll always do the math to make sure it’s worth doing.

Here is an example to further illustrate a potential candidate.  As of today, the dividend yield for Verizon (VZ) is 7% and it pays quarterly so that works out to 1.75% per quarter.

You can review their history of dividend payouts:

http://investor.verizon.com/stockinfo/dividend_history.aspx

Then you can check what their historical prices are at Yahoo.

http://finance.yahoo.com/q/hp?s=VZ

Then you can look at the chart to see how the stock behaves after a the ex-date.

http://finance.yahoo.com/echarts?s=VZ+Interactive#chart2:symbol=vz;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

You can see that the stock drops on the EX-Date every time, but when you look at the chart, the price bounces back within a month to the price you can safely sell at or above the price that you bought it at before the Ex-Date.

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Stunning Target Price Changes

After more than 5 months at looking at analyst coverage news, this is the first time that I have seen so many target price reductions. Usually the majority of the coverage updates that I saw were upgrades and price raises. Is this good news?? Probably only to a contrarian. I’m afraid and I might look at reducing my exposure slowly. One of the advantages I have when I’m using a discount brokerage is that it only costs me about $4.95 per trade.

Based on 84 stock trading days this year, the average percentage of target price reductions was less than 10% which means 1 in 10 stocks had an analyst lowering the price target. Today, the percentage was almost 40%.

Here is the list of stocks that are affected:

Ticker / Company Name/ Target Price
NYX NYSE Euronext $34.00
NDAQ NASDAQ $22.00
ETFCD E*TRADE $17.00
TROW T. Rowe Price $60.00
LM Legg Mason $31.00
JNS Janus Capital $12.00
IVZ Invesco $24.00
FII Fed Investors $25.00
CNS Cohen & Steers $25.00
BLK BlackRock $185.00
BEN Franklin Resources $115.00
ART Artio Global Investors $22.00
MS Morgan Stanley $36.00
GS Goldman Sachs $205.00
TLB Talbots $18.00
AXP American Express $49.00
STX Seagate Tech $20.00
ATPG ATP Oil & Gas $10.00

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Where do you hide?

As an investor hoping to cut some of the volatility in my portfolio for more peace of mind, I’ve been looking for safer places to put my money.   I’m not talking about the obvious places where your money basically grows so little that it doesn’t make a difference.  I’ve now focused my attention on dividend paying stocks and of course I am matching these up with analyst recommendations.  Any dividend/distribution paying company will spark my interest because these stocks tend to hold their value better and there is potential for upside.  Dividends are also good from a tax perspective in that they are taxed less.  A lot of brave investors bought the high yielding dividend stocks during the market down turn.  The lower the stock goes, the higher the yield is so you’re getting more bang for your buck.  I don’t want to go into how dividends work as there is enough easily accessible information about this, but do be careful with the companies that you invest in as dividends can be  reduced or canceled.  BP is now under pressure to reduce or cancel their dividend so that uncertainty is an additional problem for their stock.  Sometimes stocks will pay a special dividend to spark some interest to their investors.  Hot Topic is an example of this.

On April 7th, the company announced a one-time cash dividend of $1 to be paid May 3 to shareholders of record as of April 19.  This immediately caused the stock price to raise because suddenly the stock was worth at least $1 more since investors would be getting that back.  Unfortunately, since it was a one-time dividend and a subsequent earnings disappointment, the stock has dropped dramatically from its peak.  The high in April was $9.96, and immediate drop was followed after investors were no longer eligible for the one-time dividend, and now it’s trading at about $5.41.  I had some shares of this company but sold out when things were not looking right which resulted in about a 10% loss.  It definitely could have been worse.

I was looking at the past 2 days to find which stocks were upgraded and from those stocks, which ones have a dividend and here is what I found:

Digital Realty Trust – DLR price target of $64, 3.4% yield, current price $59.80

Werner Enterprises – WERN  – price target of $28, 0.9% dividend yield, current price $22.68

Agnico-Eagle Mines – AEM – price target of $76, 0.3% dividend yield, current price $58.26

Deere – DE – no price target, 2.1% dividend yield.

Renasant Corporation – RNST , no target price 4.7% dividend yield, current price $13.88

Positive recommendation combined with a decent yield or a balance of the 2 make these stocks worth looking at.. Of course you’ll need to do more research for each stock especially in terms of the history of paying out and increasing dividends, whether it is downward or upward trending, financial statements, etc. etc.

I’ve never even heard of Renasant Corporation but apparently it’s a financial company.

http://finance.yahoo.com/q/pr?s=RNST+Profile

I’d also like to talk about chasing dividends for quick gains but I’ll leave it for another post.

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Tanking?

I haven’t posted in a while because I was on vacation on I wasn’t able to collect data during that time which threw of some of my numbers.

I’ve also lost enthusiasm for this market when it started tanking after Goldman Sachs got hit by the SEC.  It has been mostly down, day after day since then.  Billions of dollars of investors’  money has been wiped out and that may well be the catalyst.  It’s interesting how the SEC is supposed to protect investors but by doing so may have triggered the market dip that has no end in sight yet.

One of my stop losses was trigger for Apple stock yesterday when the stock bounced all the way down to $200 from more than $240+.  Normally this would have been a good thing for me if Apple stayed at $200, but since it bounced back up within 20 minutes, I knew there was something wrong and I immediately lost the gains that I had made from purchasing the stock at $192.50 a few months ago.  So far the popular explanation is that someone fat fingered a large sell and then there was domino effect afterwards.  The NASDAQ cancelled a lot of trades between 2:40pm and 3:00pm yesterday due to erratic behavior my trade didn’t count because the stock did not drop more than 60%.  I guess the people who were selling Accenture at 1 cent can breathe a sigh of relief.  Imagine selling all your stock for 1 cent/share when it was worth $44/share  just an hour ago or buying so many shares of Accenture stock that you’d a good percentage of the company.

There is never short of fear mongerers on tv who were trying to blame this blip on Greece.   It was one of the most disappointing days for me as an investor because so many people tried to make sense of it with the gloomy economic issues in Europe but no theory in economics could not make sense of this movement.  There was no declaration of war, no country defaulting, nothing drastic in the news that would have caused the DOW to almost drop 1000 points… yet television always finds someone who thinks he/she knows what happened.

I was also very disappointed that the prudence I had in setting a stop loss ended up costing me money.  My sell price was actually $226/share but by the time it automatically sold, it was $212/share.  That’s probably a few seconds or a split second that the price dropped which is impossibly fast for Apple stock.  Too bad there wasn’t a system that halted trading at the time to avoid this kind of erratic behavior.

What is the strategy going forward?  Take more profits, sell more losses, and keep buying safe dividend paying stocks.  There were a lot of stocks that were safe that barely moved and I will probably be buying more shares of those.  Perhaps stocks that do not belong to big ETFS are safer than those that do, at least safer from fat fingering.  However,  that means there won’t be much volume.  Maybe I’ll purchase some gold, GLD ETF, that seems to be the place where people are going but there is no safe place to go if people start liquidating and holding cash.  Not even gold is safe.

I hope we’re at the bottom now, there has been enough tanking, the correction is over, next week is going to be a better week I’m sure.    This is just me being optimistic.  I have no idea what will happen next week.

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Missing the Boat!

On April 12, 2010, JP Morgan upgraded CHRW – C.H. Robinson from Neutral to Overweight. The target price was revised from $24 to $32 but the strange thing was that the previous day’s closing price for CHRW (4/11/2010) was already more than the target price, at $56.45. That’s more than 43% above target price. Now how are investors supposed to interpret this? When JP Morgan says Overweight, it means: “Expects stock to outperform average total return of stocks in analyst’s or analyst’s team’s coverage universe over next 6-12 months.” This is a pretty strong signal to buy and their highest recommendation. However, they’re targeting the stock price at $32, so why would I buy if they are predicting it to drop 43%. This doesn’t make a whole lot of sense. I thought there was something wrong with my data but I double checked it and it was correct. Surely a global company like C.H. Robinson with more than $7 billion market cap and more than 7,000 employees deserves better analyst coverage from JP Morgan. Fortunately, opinions from other analysts were more reasonable and the stock price was not really affected that day and today closed at $57.74.

http://www.finviz.com/quote.ashx?t=CHRW&ty=c&ta=0&p=m

Analysts often upgrade stocks and revise their target prices but I’ve noticed on many occasions this information is too late because the price is already too close to the target for anyone to make significant gains. Investors don’t want old news because more than likely, we’ve missed the boat! In this specific case for JP Morgan, they are so late and so off that the current price is above the target price. After reviewing my data of stocks that were upgraded and had target prices set or raised, I found 866 opinions since 2/24/2010. Out of these, 91 opinions had a target price of 5% or less than previous day’s closing price. That’s 10.5% of the total. What does that tell us? 1 in 10 analysts are updating their opinions when the action is already over. There is little to no benefit for investors because of the timing of this information. I hope they’re not holding back this information for internal use first before releasing it to the public.   The worst performer was Credit Suisse where 14 out of 62 opinions were made when the price was 5% or less than the target price, that’s a whopping 22.6%. Close to 1 out 4 recommendations were worthless. Ok this is as negative as this post is going to get. Here comes the better news. Which analysts are providing us stocks that have more potential? I filtered out any analyst that had less than 10 upgrades/target price raises since 2/24/2010. Then I did an average calculation on all their estimates and filtered out any analyst that had an average target price of less than 25% from the current price of the stock and here is my list of analysts and their average:

I’m not saying that these analysts are correct but I am saying that their information is more valuable when it comes to timing. Some of these target prices could be very long term and some can just be totally wrong but my point is that there is no point in upgrading a stock to BUY, and setting the target price at the same price or very near to the price that it closed at on the previous day. The run up to the price is already over.

I can also see that these numbers might skewed a bit just because the amount of data is less than I would have liked but I do think that there is enough  beneficial info and these numbers that I’ve crunched can set some expectations.

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