Okay, maybe the goal as stated in the title is a little too ambitious, but it is always good to set high goals. I can theoretically do it if I can manage a 38% annual yield. And if I can save $6,000 every year without losing it, that is $60,000 right there. Thus, the key seems to be save well, invest in stocks that can grow at least 38%, and do not lose money. That means risk management is essential.
I have and will continue to focus a lot on growth stocks as I have mentioned here. My main growth stocks are Hovnanian Enterprises (NYSE:HOV), Rite Aid (NYSE:RAD), and SunPower (NASDAQ:SPWR). However, I realized that income and cash flow is important, so I shifted my investment mix as I noted here. I have focused my income investments on Rentech Nitrogen Partners (NYSE:RNF), CVR Refining (NYSE:CVRR), and Newcastle Investment (NYSE:NCT). I have written about RNF and NCT in the past here and here.
I prefer making the least amount of trades possible to lower the transaction cost. Transaction costs will eat your profits if you do too many. For example, if your transaction cost is $10 per trade, that is $100 after ten buys (or $100 after five buys and five sells). That could easily add up to about $428 a month if you place one buy and sell order each day. And if you bought and sold once each day for a year, trading costs would add up to be $5,142. For me, that would be a big chuck of my savings.
Successful metrics I found for value investing were picking stocks with low beta and low EV/EBITDA, which I write about here. Interestingly, I picked Nokia (NYSE:NOK) and Research In Motion (now Blackberry (NASDAQ:BBRY)) near the bottom. I regret about selling Nokia , but there is always another winner in the market. I also like to look at the revenue per share. If a stock's revenue per share is greater than its share price, then the stock could be undervalued. For growth, I recommend my age-old strategy of using common sense, looking around, and seeing what is popular or what would be in demand in the future, which I pick on here. A high return on equity has tended to lead to stock outperformance.
Below is my current portfolio.
# of Shares
Percent of Total
I have about $130 in cash, so the total is about $10,000. Using the time value of money formula and assuming I add $500 a month to my portfolio, I would have to make just below 38% annually to reach $1 million in 10 years starting from $10,000. However, I take my starting point as last year, since that is when I starting forming this portfolio. Thus, I will need to make close to 43% annually.
So, now for the stock picks. I am not selling any of my stocks, since I don't see any of them dying in the foreseeable future.
CVR Refining :
The stock currently has a beta of 0.56. EV/EBITDA is 3.54, which is low enough for private equity to consider buying. Private equity often, but not always, buys companies with EV/EBITDA of 4 or less. Further, this is a refiner that will be able to take advantage of the fracking boom. Plus, billionaire Carl Icahn bought 2 million shares at an average price of $28.72 in the 3rd quarter. And lastly, I expect the WTI/Brent spread to reach its three-year average of about $17. It is currently at $12. It is also possible the rising WTI/Brent spread since July has not been factored into profits yet. This is an MLP that gives out distributions, which have ranged from 5% - 22%. I look to add the most to this stock.
Fortress Investment Group LLC (NYSE:FIG):
Anybody who has followed me lately knows that I have been talking about the private equity company and its fellow Blackstone Group (NYSE:BX). Why I like this stock over is simply because has underperformed over the last five years. And the numbers look better for .
Year-over-year Quarterly Revenue Growth
And recently is investing in creating an infrastructure fund in Japan. This will play off well, as it will take Japan a decade to fully recover from the March 2011 earthquake.
HCI Group (NYSE:HCI):
This was one of the stocks I wrote about for MomentumOptionsTrading.com back in July of 2012. It has climbed over 100% since then. But I still think it is a good stock, mainly because the fundamentals have not changed. It is still a highly profitable property and casualty insurance business in Florida. Its risk is low, because it transfers substantial portions of its liability and premium to reinsurers and the state-sponsored Florida Hurricane Catastrophic Fund. Plus, hurricane season is over, which could provide a boost. Beta is 1.88, and EV/EBITDA is 3.43. And return on equity is 47.16%.
Newcastle Investment :
The stock has been spinoff machine, having spun-off New Residential (NYSE:NRZ) in 2013 and plans to spinoff New Media (NYSE:NMA) in 2014. I think I may add to this holding, as you never know what else it will spinoff in the future. Fellow contributor Alpha Hungry has written an excellent article on why he thinks NCT is undervalued and could be about $11 by the end of the year, a nearly 100% gain from current levels. Its revenue/share is 1.06.
Rentech Nitrogen Partners
The stock is very close to its all-time low. If it bounces off this support line, that would be a technical bullish double bottom.
Return on equity is 50.25. I expect fertilizer demand to start picking up as summer growing season approaches, giving a good support for the stock.
Thus, I plan to make five changes (or adds) to my portfolio. Can I achieve 43% annual return? Below it my estimates with buys/adds based on current prices. I assumed a $2.90 price for NCT and NMA after a 1:1 stock split.
Total # of Shares
That would lead to a 56% gain for the year. So yes, it is possible.