Top Dogs Hunt 15% To 56% Gains: M/Y Basic Materials/March

by: Fredrik Arnold

This YChart/Morningstar (M/Y) report series was prompted by Seeking Alpha reader requests and began last month. It complements my reports of possible buy opportunities from eight major market sectors as listed by Yahoo Finance which I've posted since the fall of 2011.

So, responding to both the Seeking Alpha reader request and migration to an eleven sector list, this report provided four actionable conclusions about top members of the Morningstar/YCharts (M/Y) sectors: basic materials; communication services; consumer cyclical; consumer defensive; energy; financial services; healthcare; industrials; real estate; technology; utilities. These sectors were all subjected to screening based on a once per year trading system triggered by yield supplemented with one year mean target price estimates from broker analysts.

An online investor primer, Investor Glossary, recently offered this brief description of dividend dog methodology: "...[I]nvented to find the 10 stocks of the 30-stock Dow Jones Industrial Average with the highest yield (dividend / price) and invest equally in each, [t]he Dow dividend theory also requires that you repeat this process once a year.

Below, the Arnold M/Y Basic Materials Selections for March were disclosed.

Dog Metrics Revealed Top M/Y Basic Materials Stocks

The top basic materials stock paying the biggest dividend by yield March 22 according to M/Y was Rhino Resource Partners (NYSE:RNO), one of four coal miners. The other three coal companies were Natural Resources Partners (NYSE:NRP), Alliance Resource Partners (NASDAQ:ARLP), and Yanzhou Coal Mining Company (NYSE:YZC) in third, fifth, and eighth places. Great Northern Iron (NYSE:GNI) an industrial metals and minerals trust expiring in 2015, showed the second highest yield. Alliance Holdings GP (NASDAQ:AHGP), another metals and minerals firm placed seventh. Two agricultural input firms, Rentech Nitrogen Partners (NYSE:RNF), and Terra Nitrogen Company (NYSE:TNH), placed fourth and sixth. One gold firm made the list in ninth place, Gold Resource (NYSEMKT:GORO). The final slot in the top ten by yield was claimed by Oil-Dri Corporation of America (NYSE:ODC)

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten M/Y basic materials dogs by yield as of market close 3/22/2013 compared to those of the Dow. Historic projected annual dividend history from $1000 invested in each of the ten highest yielding stocks and the total single share prices of those ten stocks created the data points shown in green for price and blue for dividends.

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Actionable Conclusion: M/Y Basic Materials Dogs Flashed Mixed Signal as Dow Got Bullish

March's M/Y basic materials collection of dividend payers ended a horizontal price course set since April, 2012 as price dropped 9.5% in the past month. Aggregate dividend from $10k invested in each of the top ten healthcare stocks also dropped 13.3% last month.

The Dow, meanwhile went totally bullish as price popped up 9.2% while dividend sank 3.1% last month. The Dow shows an overbought condition by 24% as aggregated single share price exceeded dividend from $1k in vested in each stock by $92.

Since sector dogs are not the blue chip high quality equivalents of the Dow list, an additional gauge of upside potential was added to the simple high yield metric used to sniff out bargains.

Wizards of Wall Street Weighed In

One year mean target price set by analysts multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2014 out of 20 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts was considered optimal for a valid mean target price estimate.

Actionable Conclusion Two: Analysts Forecast 20% Net Gain from Top 20 M/Y Basic Materials Dogs Come 2014

Top twenty dogs for the M/Y basic materials sector were graphed below to show relative strengths by dividend and price as of March 22, 2013 and those projected by analyst mean price target estimates to the same date in 2014.

A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock upsides to 2014.

Historic prices and actual dividends paid from $1000 invested in the ten highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 2 created the data points for 2013. Projections based on estimated increases in dividend amounts from $1000 invested in the twenty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 2 created the 2014 data points green for price and blue for dividends.

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Yahoo projected over a 10% lower dividend from $10K invested in this group while aggregate single share price was projected to increase by over 12% in the coming year. The number of analysts contributing to the mean target price estimate for each stock was noted in the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

Actionable Conclusion Three: Analysts Predict 2014 M/Y Basic Materials DiviDogs to Net 5% to 56.2%

Ten probable profit generating trades revealed by Yahoo Finance for 2014 were:

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Rio Tinto (NYSE:RIO) netted $582.09, based on dividends plus mean target price estimate from three analysts;

ArcelorMittal (NYSE:MT) netted $506.20 based on dividends plus mean target price estimate from eight analysts;

Gold Resource Corp (GORO) netted $459.84 based on a mean target price estimate from two analysts combined with projected annual dividend;

Vale S.A. (NYSE:VALE) netted $377.44, based on dividend plus mean target price estimates from twenty one analysts;

Newmont Mining Corp (NYSE:NEM) netted $306.69 based on estimates from twenty analysts plus dividends;

Rentech Nitrogen Partners (RNF) netted $290.44 based on dividends plus the mean of annual price estimates from eight analysts;

Alliance Resource Partners (ARLP) netted $260.95, based on dividends plus mean target price estimate from eight analysts;

Braskem S.A. (NYSE:BAK) netted $242.20 based on dividends plus mean target price estimate from four analysts;

Natural Resource Partners (NRP) netted $208.26 based on a mean target price estimate from four analysts combined with projected annual dividend;

Alliance Holdings GP (AHGP) netted $153.98 based on target estimates from two analysts plus dividends.

The average net gain in dividend and price was 33.68% on $1k invested in each of these ten dogs.

The above net gain estimates did not factor-in any tax problems resulting from distributions (not dividends and K-1s) from MLPs and any possible re-capture tax problems/rates that could suck projected gains out of some of these estimates at the regular tax bracket rate and not capital gain rates. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

The stocks listed above were suggested only as decent starting points for your M/Y sector dividend stock purchase research process. These were not recommendations.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Disclosure: I am long DD, GE, INTC, JNJ, MCD, MSFT, PFE, T, VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.