Friday, January 30, 2015

FIk Value Strategy

Thesis: A value strategy should be part of anyone's retirement oriented portfolio. I am finally ready to take this on, (1/30/15). The rules that comprise the strategy of this basket, (Version 1.0) are:

  • Do not limit purchases/sales to the advice from Motley Fool Deep Value, but pay close attention to them. Ron Gross made Kathy and I some serious dinero with MDP and that opened right as the great recession hit.
  • Seek out as much value advice as possible, run screens, take a peek at top holdings of value oriented ETFs and mutual funds. 
  • After initial build out of 10 equities no equity should comprise more than 10% of the basket, 
  • Avoid equities with dividend yield > 4%, that might not be sustainable
  • Factor debt and P/E into decisions, but the most important factor is underpriced, or unfollowed stocks
  • Use limit orders to buy and trailing stops to sell
  • This is not a dividend reinvestment play, use the cash to buy more equities
  • After initial buildout, up to 25% cash on the sidelines is fine, we are looking for buying opportunities. 
  • If there is enough cash on the sidelines, consider aggressive limits (10% lower than last close); bluebirds are rare, but they do happen.

1/30/15 First pick: Horsehead Resources:
ZINC 185 Limit 13.35 LC 13.44 NOTE: Beta is 2.19 consider a more aggressive limit, we might be in for some chop.

Round one of a watch list, I am using the top 5 holdings of SCHV (which I hold).

XOM EXXON MOBIL CORP               3.7%
MSFT MICROSOFT CORP                    3.4%
JNJ         JOHNSON & JOHNSON             2.8%
WFC       WELLS FARGO & CO                2.5%
GE         GENERAL ELECTRIC CO         2.4%

( potential bonus #6) PG           PROCTER & GAMBLE CO        2.3%

Let's do the good ol red/green analysis, keeping in mind that past performance is not indicative of future results and this is only a relative measure constrained to this small, (diversified by sector), group of equities.
                       30       90       180     1     5      10
XOM                                                      5        2
MSFT                                              3     4        4
JNJ                                                  2     2        3
WFC                                               1      1        1
GE                    1                                    3

WOW! I am truly amazed. The blanks are where the companies are negative for that time period, would not have expected this in a bull market that favors the big guys. I think the path of prudence is to proceed carefully. I have a position with each of the equities, but opened those positions years ago. Where to start looking for purchase #2 in a value basket?

Historically Wells Fargo has done well. Let's look at a few numbers starting with debt ratios:
D2Equity 134.20 Interesting, guessing this is leverage? Pot calling the kettle black?
D2Assets   14.67 (In terms of assets they are the 4th largest bank in the US)
P/E 12.67
Beta 1.09
Last close 51.92
They just had a banging quarter, so let's drill down on them solo as opposed to comparing them to other sectors. They are up 14% for the year, but down a bit recently. Let's try a limit order and see if that Beta and some market jitter will help us open up a reasonable position:
WFC 60 Limit 51.00 Last close 51.92

This is far from an aggressive bid, they dropped $0.81 on 1/30/15, now let's see if we can set something more aggressive up.
WFC 80 Limit 47.00 Last close 51.92

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