There's a lot to be said in support of those who practice a strategy of surrounding themselves with those that suffer by comparison of whatever attribute is under consideration.
Most of us intuitively know what needs to be done if we want to make ourselves or our actions look good when under scrutiny.
The mutual fund industry had done it for years. It's all about what you compare yourself to, although looking good raises expectations for even more of the same and most of us also know how that often works out.
As observers it's only natural that we make our assessments on the basis of comparison to whatever standard is available. Among our many human foibles is that we often tend to be superficial and are just as likely to forego deeper analyses when faced with pleasing circumstances. We also want to go with the perceived winners in the belief that they will always be winners. Certainly the investing experience doesn't bear out that strategy. Yesterday's winner isn't necessarily tomorrow's champion.
Fresh on the heels of a 31% gain in the S&P 500, 2014 is going to have a difficult time in comparison. While maybe hoping that 2015 is going to be an abysmal year in the meantime 2014 has to contend with the obvious stress of the obligatory comparisons.
For the individual investor 2013 has ended with so many stocks at or near their highs that it's actually very difficult to find that lesser entity for comparison purposes. Everything just looks so good that nothing really looks good, especially going forward, which is the only direction that counts. Looking at chart after chart brings up strikingly similar patterns with very little able to stand out on the basis of its own beauty. Comparing one "super-model" to the next is likely to be an empty exercise for many reasons, but ultimately it becomes clear that there are no distinguishing factors to make anyone stand out.
Without comparisons our own minds get numb. We need differences to appreciate the reality of any situation. When so many stock charts begin to look so similar it becomes difficult to discern where to start when looking for new positions.
While another human tendency is the desire to go with winners this time of the year introduces a traditional concept that looks in the opposite direction for its rewards. This is the time of the year when the "Dogs of the Dow Theory" gets so much attention. In a year that so many stocks are higher the comparison to those that have truly under-performed is really heightened.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and "PEE" categories this week (see details). With earnings season beginning once again this week attention must also be diverted into the consideration of those reports when adding new positions and when selecting the time frame for hedging options. For that reason I'm looking increasingly at option time frames that offer some buffer in time between expiration dates and earnings dates, perhaps making greater use of expanded options and forward month expirations, as well.
This week's potential selections varied widely in performance compared to the S&P 500 during 2013. While no "Dogs of the Dow" candidates are offered, some were dogs in their own right regardless of what they were being compared to at the time. But as always, since I like to hedge my bets and play on both sides of prevailing sentiment, there may be room for both out-performers and under-performers as 2014 gets underway.
While General Electric's (NYSE:GE) 33.5% gain for 2013 was laudable it essentially mirrored the S&P 500 for the year. An analyst downgrade on Friday had virtually no impact, although shares did fall nearly 2% the previous day to start the New Year. Increasingly shedding its dependence on financial divisions that helped to bring it to $6 just 5 years ago, GE may now be wondering if this wouldn't be a good time to emphasize that division, as interest rates are beginning to rise. But even a stagnant GE in 2014 when considered in the context of its dividend and option premiums offers a good place to invest if the aim is to out-perform the S&P 500.
Barclays (NYSE:BCS) is one of those in the financial sector that had greatly lagged the S&P 500 in 2013. With significant international exposure it shouldn't be too surprising that it might better reflect the lesser fortunes experienced by the European markets, among others. I already own shares and will consider adding more as it appears that there will be a move higher which I expect will be confirmed by improved earnings when reported during the February 2014 option cycle, which may also see a dividend payment.
Chesapeake Energy (NYSE:CHK) has long been a favorite stock upon which to sell covered calls or enter ownership through the sale of puts. It out-performed the S&P 500 by nearly the amount that Barclays under-performed for the year, but after some recent weakness that reduced shares by 7% its chart has started looking less like the crowd. While certainly not in the "loser" category it's potential looks better to me than those that haven't taken the time for the share price to take a breather of late.
As long as in comparison mode, last January Family Dollar Store (NYSE:FDO) dropped 12% upon earnings release, which followed a 9% drop the previous month. The option market isn't expecting a repeat of that performance, perhaps because shares are already down 11% since its September high. Instead a 5.9% implied move is priced into option contracts. The sale of out of the money puts at a strike price at the lower end of the implied move could return 0.9% for the effort. That is just below my typical threshold for making such a trade, but if looking for a relative "dog," this may be the one ready for a rebound.
Joy Global (NYSE:JOY) is one of those stocks that recently broke out of its reliable trading range. Once that happens I lose interest in re-acquiring shares, having already owned it on eight occasions in 2013. What I don't lose is interest in seeing shares return to that range. Following an earnings related share fall the price rebounded beyond where it started is descent. However, a recent downgrade has started nudging shares back toward the upper edge of the range that has proved to be a good entry point. While no one really has any good idea of what awaits the Chinese economy and by extension, Joy Global's fortunes, it has proven to be a resilient stock and offers an option premium to go along with its frequent alternations in price direction.
It has been a long time since I had own any communications stocks until a recent T-Mobile (NASDAQ:TMUS) holding. While both AT&T (NYSE:T) and Verizon (NYSE:VZ) were core holdings during the recovery stages in 2009, I haven't found them very appealing for much of the recovery. However, both do go ex-dividend this week and the cellphone services sector is certainly livening up a bit. But beyond that, for the first time in a long time there were glimpses of these shares offering meaningful option premiums during their ex-dividend week that seemed to warrant their consideration once again. In fact, I didn't wait until Monday and purchased shares of Verizon after weakness on Friday and may elect to accompany those shares with its rival's shares, as well.
Darden Restaurants (NYSE:DRI) was a selection just a few weeks ago but went unrequited as news broke regarding activist investor coercion regarding potential spin-off plans for its low growth Red Lobster chain. Shares go ex-dividend this week and earnings pressure is still two months away. Although a $55 strike would require challenging its 52 week high, this is a potential trade that I would consider using a forward month contract, such as the February 2014, in anticipation of some increasing pressure from the investment community and activists intent on re-engineering.
Finally, a study in comparative contrasts are Walter Energy (NYSE:WLT) and Icahn Enterprises (NASDAQ:IEP). While Icahn Enterprises was nearly 145% higher for the year Walter Energy dropped nearly 54%.
While Carl Icahn may get more done on the basis of brute force investing and schoolyard tactics, Walter Energy now relies on the power of redemption and grace, and maybe just a little on business cycles.
A quick look at the comparative charts shows what a difference time can make, as Walter Energy greatly out-performed Icahn Enterprises prior to this year and how Icahn Enterprises had been simply a market performer until the past year.
Interestingly in the past month Walter Energy has risen about 15% while Icahn Enterprises has fallen a similar amount.
This past year no one has received more attention for his investing and activism than Carl Icahn. This week yet another company Hertz (NYSE:HTZ) acknowledged that it was in the Icahn crosshairs, as it adopted a poison pill provision to keep him at bay. Icahn Enterprises, a tangled web of holding companies and investment activities shows little sign of slowing down as long as the market remains healthy. With the ability to raise stock prices with a simple Tweet, Carl Icahn may be more in control of his destiny than the market was intended to allow.
With a healthy dividend likely during the February 2014 option cycle and an attractive option premium, Icahn Enterprises may be a good choice for someone with a little daring to spare, as the ascent has been steep.
Walter Energy, on the other hand, has been slowly working its way higher, although still having a long way to go to erase its past year's loss. While there is certainly no guarantee that last year's loser will be this year's darling, Walter Energy certainly is the former. It has, however, for the daring, offered excellent option premiums even for deep in the money options, that do mitigate some of the risk inherent in ownership of shares.
Traditional Stocks: Barclays, General Electric
Momentum Stocks: Chesapeake Energy, Icahn Enterprises, Joy Global, Walter Energy
Double Dip Dividend: AT&T (ex-div 1/8), Darden (ex-div 1/8), Verizon (ex-div 1/8)
Premiums Enhanced by Earnings: Family Dollar Store
Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.
Disclosure: I am long BCS, CHK, VZ, WLT. 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.
Additional disclosure: I may buy, add shares or sell puts in BCS, CHK, DRI, FDO, GE, IEP, JOY, MDT, T, VZ and WLT