Saturday, June 18, 2016

What to buy list : My fair value targets

I did some homework today on stocks that I can look to purchase in the coming week. Some of the fair values in my head are now perhaps out dated since earnings have gone up or guidance has changed due to macro factors such as the weakening dollar and lower oil prices.

I have done some research on Morningstar and S&P to get some fair value estimates. I also use the Jefferson Research to analyze the quality of the companies. On top of that I have the Valueline and S&P credit ratings and safety ratings on my Portfolio page. Some of the companies listed here may not have the VL/S&P Financial score or Safety rating since I don't have them in my portfolio, but you can be guaranteed this list will only contain very high quality companies. In today's market with high valuations and uncertainty (Brexit anyone?) I will only purchase the most financially secure blue chips. Speculation is not for me right now.

I like to categorize my picks into dividend paying dates (when I receive the check).
1/4/7/10 months
2/5/8/11 months
3/6/9/12 months

Note that Pepsi (PEP) and Coca Cola (KO) have some strange month paying schedule.

The analysis is quite simple. They will all follow the format.
STOCK_NAME    CURRENT_PRICE
Jefferson Research: Earnings / Cash flow / Operating eff / Balance sheet / Valuation
S&P:  12month Target,   Fair Value
Morningstar: Fair Value

I highlight companies I think that are good deals in Green Bold. Those in just regular Green are so-so buys I might consider. Note that I want to balance high yield buys with low yield buys since I want to average around 3% yield. So I may add high  yield picks into my Green buy list even if they are a bit overvalued.


**********1/4/7/10 Payday Month Watchlist****************************

KO 44
STRONGEST STRONG STRONGEST STRONG LOWRISK
45,31.2
43

PM 100
STRONGEST STRONGEST STRONG STRONG LOWRISK
99,80.9
92

MO 65
STRONGEST STRONGEST STRONGEST STRONGEST LOWRISK
67,56.5
59

ADP 87
WEAKEST STRONG STRONGEST WEAKEST LOWRISK
90,67.3
79

NKE 53
STRONGEST STRONG STRONG STRONGEST LOWRISK
73,51.9
57

**********2/5/8/11 Payday Month Watchlist****************************

HRL 34
STRONGEST STRONGEST STRONG STRONGEST LEASTRISK
38,30
31

PG 83
STRONGEST STRONGEST STRONG STRONG LOWRISK
85,64.3
90

T 40
STRONGEST STRONGEST STRONG STRONG LOWRISK
42,40.1
33

VZ 53
STRONGEST STRONG STRONG STRONGEST LOWRISK
51,51.5
50

SBUX 55
STRONG STRONGEST STRONG WEAK LOWRISK
68,47.4
65

ABT 37
STRONG STRONG STRONG STRONG LEASTRISK
46,43
44

APD 143
STRONGEST STRONGEST STRONGEST STRONGEST LOWRISK
154,138.6
149

CLX 132
STRONGEST STRONGEST STRONG STRONGEST LEASTRISK
119,96.3
115

LOW 78
STRONG STRONGEST STRONGEST STRONG LEASTRISK
82,78.1
83

**********3/6/9/12 Payday Month Watchlist****************************

PEP 103
STRONGEST STRONGEST STRONG STRONG LEASTRISK
118,80.1
100

HD 127
STRONGEST STRONGEST STRONG STRONGEST LEASTRISK
134,128
125

XOM 90
WEAKEST STRONG WEAKEST STRONGEST MEDIUMRISK (note the weakest are earnings and cash flow due to the oil price crash)
97,83.5
79

MMM 168
STRONGEST STRONGEST STRONGEST STRONGEST LOWRISK
175,132.1
160

UTX 101
WEAK WEAK STRONG STRONGEST LOWRISK
124,109.9
120

JNJ 115
STRONGEST STRONGEST STRONG STRONGEST LEASTRISK
133,109.6
109

MCD 122
STRONGEST STRONGEST STRONG WEAKEST LOWRISK
140,106.5
130

CVX 101
WEAKEST STRONGEST WEAKEST STRONG LOWRISK (note the weakest are earnings and cash flow due to the oil price crash)
103,99.9
95

PX 112
STRONGEST STRONGEST STRONGEST STRONGEST LOWRISK
116,94.6
118

BDX 165
WEAK STRONG STRONG STRONGEST LOWRISK
170,180.9
165


In conclusion, there are still some picks that are decently interesting for buys right now. Although the deals are not spectacular, these companies can still provide average entry points into high quality companies that provide consistent earnings and dividend growth. It is very hard to "predict" and time the market. For a person like me in the accumulation phase, I prefer to acquire companies every month continuously. I want to see my monthly income grow and grow. If the share price drops because I overpaid, oh well, I still will get the same annually increasing paycheck every month. Since I am long term I do not really care for temporary drop of 10-30% in share price. As a result, I will average in my contributions when the market is high and when it is low. When the market is high, I will try my best to find the best value. I believe that in the next 30 years, many of these companies will provide spectacular returns in dividends and capital appreciation. One must also be aware that some companies are no longer valued as they once were 3 years ago. For example, Altria (MO) continues to beat and grow earnings. I have bought shares in MO 3 years ago but I am afraid that those past prices are no longer possible unless there is a severe market correction. As a result, it is important to continue to move one's price targets upwards (no matter how difficult it is) when it is appropriate and accept that companies grow and that one must pay more to acquire them.

1/4/7/10 buy list:
I think Nike has taken a severe beating here. It is in correction levels and all of the fair value indicators indicate that this company is now below fair value. Since NKE's yield is low I will likely have to "pair" it up with a higher yielding stock when buying. I am considering dipping some PM, MO or KO to offset this low yield. These latter three are not such good deals but I consider them a bit premium to fair value and I am willing to pay premium for high quality which these 3 are. In terms of quality ratings I will rate these 4 from highest to lowest as KO, NKE, PM, MO. PM and MO are lower due to their higher debts.

2/5/8/11 buy list:
Hormel (HRL) has pulled back a lot! Makes me very happy to see it breathe a little. It's in correction levels and I will be dipping in some more since I think it's below fair value. Starbucks (SBUX) has also pulled back a lot and it is now below fair value indicators. Same with Lowe's (LOW). These 3 all have rather low yields (below 1.7%) so if I were to buy any of them I would pair them up with higher yielders.

For higher yielders I think VZ is a so-so deal now. It yields 4.2% and has a safe dividend. Next one I'm watching is APD, a aristocrat with a 2.4% yield. And also worth mentioning is ABT with 2.78%, another aristocrat (before the spinoff of ABBV) that has corrected quite decently and is way below my fair value target.

In terms of quality rating with best first I say: ABT, APD, HRL, LOW, VZ, SBUX.
I consider SBUX more speculative.

3/6/9/12 buy list:
BDX is my favorite low yield high growth. This company just won't stop performing well. It yields 1.6% and is on my fair value target.

To pair low yield with a higher yield, I am looking at JNJ, UTX, and maybe CVX.  CVX has a risky dividend because of the low oil price so I'm not really comfortable with that. I really want to own Home Depot one day (HD). It's around fair value right now and it yields 2.2%.

For quality ratings with best first I rate it as: JNJ (by and far the winner), UTX, BDX, CVX.
CVX is a high quality business but the cyclical nature and unpredictable price of oil makes me uncomfortable even with its AA S&P credit rating, Value Line A++ financial rating, and Value Line 1 safety rating (the highest). I do feel that CVX and XOM can offer good values in the coming weeks as there is a chance oil may break down below the $40-50 area that it seems to stabilize around nowadays. CVX around 5% and XOM close to 4% make me very happy :)

1 comment:

  1. Thanks for the list and your thoughts. I also like how you categorized them by pay schedules. Good work.

    ReplyDelete