Data Mining The CCC List: Part 3 - The Champions

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Includes: ADP, APD, ATO, BDX, BMS, CL, CLX, CVX, DOV, EV, HP, JNJ, KMB, LOW, MMM, MO, T, TROW, VFC, XOM
by: Passive Income Pursuit

Summary

Can the CCC list give us any insight into ideal portfolio sector allocation?

Which sectors have the highest representation on the Dividend Champions list?

Which one has the highest dividend growth rate?

Highlighting some Champions that look appealing as potential investments or further research candidates.

This is Part 3 of my series examining the CCC list in regards to portfolio allocation. This article will cover the Dividend Champions as found on the CCC list provided by David Fish that was downloaded on January 12, 2016. Once again, thank you to David Fish for maintaining this vital resource.

Part 1: The Challengers

Part 2: The Contenders

The Champions are the creme de la creme. In order to reach Champion status these companies had to raise their dividend payouts each year for the last 25 years. That's a huge feat as these companies have been able to consistently raise dividends through all sorts of market and economic cycles. A 25-year streak encompasses the financial crisis in 2008/9, the dot-com boom and bust of the late 1990s/early 2000s, September 11th and a whole assortment of other economic catastrophes of the day.

All charts/images reference data found in the CCC Spreadsheet downloaded on January 12, 2016.

Sector Breakdown

The Champions list is currently comprised of 107 companies across all the sectors. That's a healthy list of options although it's a far cry from the 396 Challengers and 250 Contenders.

The Champions have historically been some of the best companies to invest in as there's no way to fake your way through 25 consecutive years of dividend growth. That means each company on this list of Champions is a best of breed within their niche. Here's the breakdown of the Champions by sector.

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Just as with the Challengers and Contenders, the Financials lead the way again as the largest representative of the Champions. There's a total of 24 Financials, which account for 22% of the entire Champions list. I can honestly say I was shocked to see how represented the Financials were on all three lists.

The second-largest sector representation are the Industrials, which account for 18% of the Champions with 19 representatives. The Industrials hold onto their second place holding as they did on the Contenders list. Utilities account for 16% of the Champions with 17 representatives.

The top 3 sectors were the exact same compared to the Contenders list and combined they account for 56% of the Champions population.

There is a much better distribution of sector representation for the Champions compared to the Contenders. The Champions list has 6 of the 10 sectors with a 9% or greater weighting compared to the Contenders with only 4 of 10 sectors at that level.

The sectors with the smallest representation were Telecommunications and Information Technology with 2 representatives each followed by Energy with 3.

Aside from the concentration of Financials being a surprise, I have to say I expected that Health Care companies would have carried more weight here. Health Care companies only account for 4% of the Champions with just 4 companies that have reached the vaunted Champion status.

They have a rather inelastic demand since you aren't likely to decline health care services just because the economy is in the toilet. Given the aging population, I expect more of the 13 Health Care Contenders to move into Champion status as the years go on.

Consecutive Years of Dividend Growth

The Champions are remarkable stories of business with obvious moats that have led to outstanding rewards for shareholders.

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While the cutoff to be considered a Champion is 25 years, it's pretty enlightening to see that every sector is well above that mark. Energy and Financials are the only sectors that don't have an average streak of at least 35 years, which is a full 10 years higher than the 25-year requirement. The average streak is 41 years for the Champions as a whole.

Consumer Staples really shine here as they boast the longest average streak at just under 45 years. Health Care is just behind them by about 0.2 years on average. Although there's 4 times the number of Consumer Staples compared to Health Care companies, which makes a stronger case for the power of the Consumer Staples.

Energy companies have very low representation with just 3 Champions and also boast the lowest average dividend growth streak at just 34 years. Given the rout in the price per barrel of oil it wouldn't completely surprise me to see the Champions list lose 2 or maybe even 3 Energy companies.

How's the growth?

A lengthy dividend growth history is wonderful, but it doesn't mean much if the dividend increases can't even keep up with inflation over the long haul. Let's see how the average growth rate has worked out among each of the sectors.

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The following table shows the sector with the highest average 1-, 3-, 5- and 10-year dividend growth rates.

Dividend Growth Period Sector
1-Year Information Technology
3-Year Information Technology
5-Year Energy
10-Year Energy
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The fastest growers are concentrated in the Information Technology, fastest 1- and 3-year growth rates, and Energy, fastest 5- and 10-year growth rates. Although both of these sectors don't have much representation at just 2 and 3 companies, respectively. So outrageous growth from a company or two can really skew the average.

For example, the Energy sector representatives are Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and Helmerich & Payne (NYSE:HP) with 5-year growth rates of 8.5%, 10.6%, and 65.7%, respectively. That works out to an average growth rate of 28% although HP largely skews the results.

Utilities and Telecommunications companies have the slowest average growth rates with 10-year growth of 3.5% and 4.4%, respectively. That's not too surprising given the nature of these two sectors that typically have more government oversight/control of their profitability and generally higher dividend yields. These two sectors are also very capital intensive, which limits the amount of capital available to expand the business and grow dividend payments in the high single digits.

Six of the sectors show declines between their 1-year and 10-year dividend growth rates. Although I'd only consider two of them to be significant declines, Consumer Discretionary and Energy, with declines of 4.5% and 12.8%, respectively.

I expect to see declining growth rates over time especially among the Champions as these companies are likely quite large and meaningful growth is harder to come by. In the early years of their dividend growth streaks, these companies could easily afford to grow the dividend at the rate of earnings growth as well as expand the payout ratio, but that gets harder to come by as the payout ratio expands.

A declining dividend growth rate could potentially signal that further slowing could occur in the future or that management is unclear on future growth plans.

The opposite is true as well. An accelerating dividend growth rate could signal that management is confident in the company's prospects over the coming years and want to reward shareholders with faster growing dividends. The only sector with a significant acceleration in their dividend growth rate is Information Technology which has a 1 year growth rate that is 5.0% higher than the 10-year, 5.7% higher than the 5-year and 3.3% higher than the 3-year growth rates.

As I mentioned earlier, 6 sectors show declines between their 1-year dividend growth rate compared to the 10-year growth rate. However, the promising thing is that there's only 2 sectors with what I would consider significant declines. The rest could be a function of the fact that we're dealing with a 1-year dividend growth rate compared to a 10-year dividend growth rate. Eight of the sectors have a 1-10 dividend growth rate difference that is -1.2% or better, i.e., -1.2%, 0%, 0.5%, 1.0%.

Dividend Champions Company Spotlights

The list of Dividend Champions consists of 107 companies, which is still more companies than any one person can realistically stay up to date on. Even though these are some of the best companies in the world, there's still a limited number of companies that I follow.

I wanted to highlight some of the companies that are Dividend Champions that I currently track and consider excellent companies. I also wanted to highlight a few companies that look good from the peripheral numbers and intrigue me as possible investment candidates but need more research to determine their investment candidacy. I've included some valuation metrics as well as my thoughts on the companies and their respective outlooks.

The metrics that I will include are:

  • TTM P/E Ratio - To get a sense of the current valuation based on the last 12 months of earnings.
  • 2016 Forward P/E Ratio - To look at the valuation on the expected earnings announced for a fiscal year ending in 2016.
  • Current Yield - Many investors have a minimum yield requirement for their investments and yield is a vital data point for dividend growth investors.
  • Forward Payout Ratio - Current dividends divided by 2016 EPS estimates for a quick look at the "safety" of the dividend.
  • 5-Year EPS Growth Estimate - To get an idea of the medium-term growth projections using the consensus analyst estimate for 5-year earnings growth as compiled by Yahoo Finance.
  • Forward Chowder Rule - The "Chowder Rule", current yield plus 5-year dividend growth rate, is a quick estimate of the total dividend return potential of an investment. The downside to the "Chowder Rule" is that it's a backward-looking measure. To look at the returns with a purchase at current price levels, I've modified the Chowder Rule into the Forward Chowder Rule by using the 5-year EPS growth estimate as a proxy of future dividend growth. This assumes that management would maintain a constant payout ratio.

Valuation and yields are based on the closing price from January 29, 2016.

Lowe's Companies, Inc. (NYSE:LOW) - Consumer Discretionary/53-year dividend growth streak

TTM P/E Ratio 22.6
2016 Forward P/E Ratio 18.0
Current Yield 1.56%
Forward Payout Ratio 28.2%
5-Year EPS Growth Estimate 17.0%
Forward Chowder Rule 18.6%
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I looked at Lowe's Companies back in October and the valuation didn't quite make sense for an investment at the time. However, the share price has declined since then, coming down to much better levels. Growth is expected to be phenomenal for the home improvement store and shares of LOW could make for an attractive addition to ones portfolio as a low yield/high growth option.

V.F. Corporation (NYSE:VFC) - Consumer Discretionary/43-year dividend growth streak

TTM P/E Ratio 26.0
2016 Forward P/E Ratio 17.9
Current Yield 2.36%
Forward Payout Ratio 42.3%
5-Year EPS Growth Estimate 10.8%
Forward Chowder Rule 13.2%
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I've been eyeing V.F. Corporation over the last few months as an investment candidate as the share price has been declining (Valuation Analysis Here). There's still value at the current price level, although a couple weeks ago you could have added shares in the low $50s or a 2.8% initial yield.

Altria Group Inc. (NYSE:MO) - Consumer Staples/46-year dividend growth streak

TTM P/E Ratio 22.9
2016 Forward P/E Ratio 20.0
Current Yield 3.70%
Forward Payout Ratio 74.1%
5-Year EPS Growth Estimate 8.5%
Forward Chowder Rule 12.2%
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Altria Group is a staple in many dividend growth portfolios and it has one of the best long-term return performance of any company out there. The big issue, as it has been for decades, is declining cigarette volumes year after year. Earnings and dividend growth has been maintained through price increases and share buybacks but that gravy train could eventually stop in the future. The valuation looks a little bit high for my liking as I would prefer to purchase shares at a 4.0% starting yield.

The Clorox Company (NYSE:CLX) - Consumer Staples/38-year dividend growth streak

TTM P/E Ratio 26.9
2016 Forward P/E Ratio 26.4
Current Yield 2.39%
Forward Payout Ratio 63.1%
5-Year EPS Growth Estimate 7.3%
Forward Chowder Rule 9.7%
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The Clorox Company doesn't appear to be at an attractive valuation at this time as was the case in September when I analyzed the company (Full Analysis Here). That's no indictment on the company but rather the market as a whole valuing shares at a premium. While the premium is deserved given the history of the company, the premium is currently too much to provide attractive returns. The Forward Chowder Rule looks pretty strong at just under 10%, but given the likelihood for valuation compression over the medium term there's better opportunities out there.

Colgate-Palmolive Company (NYSE:CL) - Consumer Staples/52-year dividend growth streak

TTM P/E Ratio 25.0
2016 Forward P/E Ratio 23.0
Current Yield 2.25%
Forward Payout Ratio 51.7%
5-Year EPS Growth Estimate 6.5%
Forward Chowder Rule 8.8%
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Much like The Clorox Company, Colgate-Palmolive is an excellent company, but the current valuation leaves a lot to be desired. The valuation isn't exorbitant but at the current levels, CL seems more suited as a dollar cost average addition rather than a larger one time purchase. I would consider it on the very high end of fair value if not slightly into overvalued territory.

Kimberly-Clark Corporation (NYSE:KMB) - Consumer Staples/43-year dividend growth streak

TTM P/E Ratio 46.5
2016 Forward P/E Ratio 21.0
Current Yield 2.74%
Forward Payout Ratio 57.5%
5-Year EPS Growth Estimate 8.1%
Forward Chowder Rule 10.8%
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The Forward Chowder Rule is approaching 11% and the current yield is strong above 2.7%. Add that to a valuation that likely has shares on the high end of fair value, and Kimberly-Clark looks to be attractive as part of a defensive position that will hold its own throughout difficult times.

Chevron Corporation - Energy/28-year dividend growth streak

TTM P/E Ratio 18.8
2016 Forward P/E Ratio 46.2
Current Yield 4.95%
2016 Forward Payout Ratio 228.9%
5-Year EPS Growth Estimate -23.9%
Forward Chowder Rule -18.9%
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I'll add my discussion on Chevron below with Exxon Mobil.

Exxon Mobil Corporation - Energy/33-year dividend growth streak

TTM P/E Ratio 16.4
2016 Forward P/E Ratio 28.6
Current Yield 3.76%
Forward Payout Ratio 107.8%
5-Year EPS Growth Estimate -14.8%
Forward Chowder Rule 11.0%
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Neither Chevron nor Exxon Mobil looks good based on the metrics above. There are very real concerns of possible dividend cuts due to the ongoing slaughter of oil prices, however, this appears to be a situation of recency bias gone bad. The following chart shows the diluted earnings per share that the two companies have been able to deliver over the last 20 years.

XOM EPS Diluted from Continuing Operations (Annual) Chart

XOM EPS Diluted from Continuing Operations (Annual) data by YCharts

Over the majority of 5-year rolling periods earnings per share for both Exxon Mobil and Chevron have been higher. If your investment horizon is at least 5 years, then now is an excellent time to consider both of the companies for investment. There are serious cash flow issues stemming from low oil prices, however, both companies have plenty of levers to pull including cutting capital expenditures and increasing debt to ride out the low oil price environment because eventually oil prices will rise. I would consider Exxon Mobil to be the safer play; but Chevron to offer the high potential returns. While both companies should do well over the long term, the rout of oil prices makes both of these companies candidates for further research.

Eaton Vance Corp. (NYSE:EV) - Financials/35-year dividend growth streak

TTM P/E Ratio 14.9
2016 Forward P/E Ratio 12.5
Current Yield 3.70%
Forward Payout Ratio 46.1%
5-Year EPS Growth Estimate 6.9%
Forward Chowder Rule 10.6%
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I like the business model for asset managers. What can be better than making money from other peoples money every year? Even better is that fee is paid whether the markets/funds increase or not. I've never examined Eaton Vance before but the compelling current yield, valuation and forward Chowder Rule have me interested. Dividend growth has also been consistent ranging from 9.0% to 11.6% across the 1-, 3-, 5- and 10-year periods. Eaton Vance is being put in the candidate for more research pile.

T. Rowe Price Group, Inc. (NASDAQ:TROW) - Financials/29-year dividend growth streak

TTM P/E Ratio 15.5
2016 Forward P/E Ratio 15.5
Current Yield 2.93%
Forward Payout Ratio 45.3%
5-Year EPS Growth Estimate 7.3%
Forward Chowder Rule 10.3%
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Much like Eaton Vance above, T. Rowe Price Group has a very attractive business model skimming a little bit off the top each and every year. I own shares of TROW and think the current valuation and yield is attractive. Dividend growth has been very strong over the last 1-, 3-, 5-, and 10-year periods with annualized growth rates of 18.2%, 15.2%, 14.0% and 16.3%, respectively.

Becton, Dickinson & Company (NYSE:BDX) - Health Care/44-year dividend growth streak

TTM P/E Ratio 42.8
2016 Forward P/E Ratio 17.3
Current Yield 1.82%
Forward Payout Ratio 31.4%
5-Year EPS Growth Estimate 13.6%
Forward Chowder Rule 15.4%
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Becton, Dickinson & Company is one of those companies that gets overlooked due to its low dividend yield but investors would be wise to add this company to their portfolio. The earnings and dividend growth of the company has been phenomenal and will continue to be so if the estimate earnings growth of 13.6% plays out over the next 5 years. During 2015 I had the unfortunate circumstance of being in a hospital (not for my own health reasons) for the majority of the first 8 months of the year and I can say that BDX products were everywhere and used very often.

Johnson & Johnson (NYSE:JNJ) - Health Care/53-year dividend growth streak

TTM P/E Ratio 19.0
2016 Forward P/E Ratio 16.0
Current Yield 2.88%
Forward Payout Ratio 46.3%
5-Year EPS Growth Estimate 5.2%
Forward Chowder Rule 8.0%
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You'd be hard pressed to find a dividend growth investor that isn't invested in Johnson & Johnson and rightfully so, a 53-year dividend growth streak is mighty impressive. The valuation looks to be pretty solid, although it was much more attractive a week and a half ago when shares were trading in the mid-$90s. However, as far as stability and consistency goes, very few companies match Johnson & Johnson.

3M Company (NYSE:MMM) - Industrials/57-year dividend growth streak

TTM P/E Ratio 19.9
2016 Forward P/E Ratio 18.3
Current Yield 2.72%
Forward Payout Ratio 49.8%
5-Year EPS Growth Estimate 8.1%
Forward Chowder Rule 10.8%
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3M Company is a huge industrial conglomerate that provides products used in just about every industry imaginable. The valuation looks fairly attractive here with a forward P/E ratio slightly over 18, yield of 2.72% and expected earnings growth of 8.1% per year. All that combined means the Forward Chowder Rule of 10.8% should be achievable for investors at current prices. Dividend growth has been accelerating with 1-, 3-, 5- and 10-year growth rates of 19.9%, 20.2%, 14.3% and 9.3%, respectively. However, much of the above average growth has come from expanding the payout ratio so dividend growth is likely to more closely track earnings growth unless management guides to a higher payout ratio norm.

Dover Corporation (NYSE:DOV) - Industrials/60-year dividend growth streak

TTM P/E Ratio 15.6
2016 Forward P/E Ratio 15.5
Current Yield 2.87%
Forward Payout Ratio 44.4%
5-Year EPS Growth Estimate 9.9%
Forward Chowder Rule 12.8%
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Dover Corporation provides a wide range of products for a variety of industries. However, their exposure to the energy sector has been an anchor on the share price over the last year. Considering the depressed earnings related to the oil and gas division I think it's rather impressive that the forward payout ratio only sits around 44%. A forward Chowder Rule of 12.8%, especially when you factor in the likelihood of higher growth from a return to a normalized energy environment, makes Dover look attractive here. Dividend growth has slowed with a 10-year growth rate of 11.5% compared to a 1-year growth rate of 5.8%. However, prior to the recent lackluster raise the dividend growth rate had been accelerating. Dover Corporation is a candidate for further research.

Automatic Data Processing, Inc. (NASDAQ:ADP) - Information Technology/41-year dividend growth streak

TTM P/E Ratio 27.7
2016 Forward P/E Ratio 25.6
Current Yield 2.55%
Forward Payout Ratio 65.2%
5-Year EPS Growth Estimate 10.4%
Forward Chowder Rule 13.0%
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I've been following ADP for a couple years now in search of a good time to buy shares but have yet to find one whenever I had capital available. ADP is likely a company that I won't be able to add to my portfolio until the next recession or unless there's a bear market that brings the shares valuation down. The Forward Chowder Rule and historic 10%+ dividend growth rates look attractive here, but I just can't bring myself to pay over 25x 2016's expected earnings. A price of $71.50, 22x 2016 earnings, looks attractive given the same growth profile as the starting yield would be just under 3.0%. ADP is a candidate for further research in order to take advantage of temporary price declines.

Air Products and Chemicals, Inc. (NYSE:APD) - Materials/33-year dividend growth streak

TTM P/E Ratio 21.5
2016 Forward P/E Ratio 17.2
Current Yield 2.56%
Forward Payout Ratio 44.0%
5-Year EPS Growth Estimate 12.1%
Forward Chowder Rule 14.6%
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The valuation for Air Products and Chemicals looks a bit rich on a TTM basis, but attractive on 2016 EPS estimates. APD announced a stellar earnings beat on Friday but is still facing several headwinds due to foreign exchange issues and a decline in energy related products. The valuation and Forward Chowder Rule both look attractive and make shares of Air Products and Chemicals a potential buy at current prices and as a candidate for further research.

Bemis Company, Inc. (NYSE:BMS) - Materials/32-year dividend growth streak

TTM P/E Ratio 19.5
2016 Forward P/E Ratio 17.5
Current Yield 2.34%
Forward Payout Ratio 40.9%
5-Year EPS Growth Estimate 8.1%
Forward Chowder Rule 10.4%
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I love the companies that have products/services that you use and have no idea about it. Bemis Company provides packaging for everything from foods to health care supplies and is one of those behind the scenes companies that just keep chugging along. It's been a while since I examined Bemis Company so I'm putting it in the candidate for further research pile. The yield is a bit low at just 2.3% but expected growth is solid around 8.1% giving a Forward Chowder Rule over 10%. Combine that with a reasonable valuation and investors should be happy over the next 5 years. Just looking at the surface numbers, I have a concern regarding management and their willingness to reward shareholders with adequate dividend growth. The 1-, 3-, 5- and 10-year growth rates range from 3.7% to 4.5% and even worse it's decelerating. The slow and decelerating growth could be due to a wide variety of reasons, such as getting the payout ratio in line or a desire to reduce debt or save capital for acquisitions. That's why more research is needed to see if dividend growth should improve over the next 5 years.

AT&T, Inc. (NYSE:T) - Telecommunications/32-year dividend growth streak

TTM P/E Ratio 42.1
2016 Forward P/E Ratio 12.8
Current Yield 5.33%
Forward Payout Ratio 68.3%
5-Year EPS Growth Estimate 6.1%
Forward Chowder Rule 11.5%
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AT&T is a "widow and orphans" stock and could potentially be a solid value if the 6.1% annualized growth materializes given the high starting yield of 5.3%. While I like the prospects of AT&T after the DirecTV acquisition more research is needed. Dividend growth has been disappointing but those $0.01 increases come like clockwork. The debt load is high and given the large infrastructure they've built out cash flow is a better basis to determine it's value.

Atmos Energy Corporation (NYSE:ATO) - Utilities/32-year dividend growth streak

TTM P/E Ratio 22.4
2016 Forward P/E Ratio 21.0
Current Yield 2.43%
Forward Payout Ratio 51.1%
5-Year EPS Growth Estimate 7.0%
Forward Chowder Rule 9.4%
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Atmos Energy is a company that I've heard of in passing but never knew it was a Dividend Champion. They operate in distribution, transmission and storage of natural gas with over 70,000 miles of underground pipelines. Natural gas continues to grow in both electric and heat generating capacities due to its relative abundance from the increased domestic drilling as well as its cleaner, "greener" properties. Dividend growth has been accelerating with a 1-year growth rate of 6.0% compared to a 10-year growth rate of 2.5% and could continue to do so if the 7.0% estimated growth is realized over the next 5 years.

In my next article I will examine the whole universe of dividend growers found on the CCC list as well as the relationship to my portfolio's current makeup in search of sector allocation optimization.

A full list of my holdings can be found here.

Disclosure: I am/we are long CVX, XOM, VFC, TROW, BDX, JNJ, MMM, APD, T.

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 am not an investment professional. Investing involves risks. Please consult a financial professional prior to investing and perform your own due diligence. I may add to or initiate a long position in all companies mentioned within this article within the next 72 hours.