Wednesday, March 9, 2016

2016 Strategy - Trimming MO, KO, adding QCOM

Looking at my sector weightings, shown below, my strategy for 2016 is to add more in healthcare and technology, and possibly trim my exposure to industrials.  Below are my recent valuations for the entire portfolio:

    Looking at this list, all of my industrials are fairly-valued or under-valued, so I'd prefer not to sell any of these at this time.   DOV and EMR had very weak dividend increases, but they are both facing energy sector headwinds, so a small increase was perhaps inevitable.  Both are dividend Champions, so I'm inclined to keep them for another year.  The others listed still have room to grow, and are all solid businesses.

    Using the valuation column, my consumer defensive names MO, PM, and KO are all trading at a steep multiple.  In the materials sector, BBL is over-priced, and in energy both XOM and CVX are over-priced, based on forecasted revenues and earnings growth.  In the real estate sector, O is over-priced.  These valuations are based on projected earnings for the next year, and historical PE ratios these past 5 years.   If today's blended PE is higher than the average PE the past 5 years, I tag them as over-priced.  

    The second valuation metric I have listed is ROR to 2019.  This is measure of estimated return on revenue based on earnings forecast from the company and analysts out to 2019.  A combination of higher than average price today, combined with declining or slow growth going forward, leads to a negative ROR to 2019 for 5 of my stocks:  MO, KO, XOM, BBL, and O (source:  FASTGraphs). Both PM and CVX avoided the negative return list, just barely, by virtue of higher forecasted growth in the future.

    Acting on the above information, I've decided to trim both MO and KO.  Good defensive stocks, but both have grown into more than full positions in the portfolio, especially MO.  Here is a FAST Graph for each:

    Again, trimming both due to overvaluation, not due to size of the holding.  If these stocks were at fair value or better, I'd let them run.  But as can be seen from the black price line, both are well above their historical average PE ratios, so I'll redeploy the $ from these trims to what I believe to be a better opportunity for growth in income, more income, and capital appreciation.

    As discussed earlier, I'm somewhat underweight in Technology, so I've been keeping an eye on Qualcomm (QCOM).  Here is a FASTGraph for QCOM:

    Qualcomm has been facing some headwinds with the loss of business last year at Samsung, and recent licensing disputes with the Chinese government.  However, the stock has been crushed the past two years, and now trades at a PE ratio that is historically low for this company.  Further, they have plenty of cash, have been paying a growing dividend for over 10 years, and recently announced a 10% dividend increase not reflected in the graph above.  The yield for QCOM going forward will soon be 4.1%, and if they can turn things around this year or next via new R&D breakthroughs, where they spend over $5B/year, or acquisitions, growth should resume driving some great stock price appreciation.  I'm happy to wait for this and reinvest the excellent dividend while I do.

    That's all for now,


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