Titanium Leads Basic Materials Dogs By Yield In May But Upside And Gains Go To Diamonds

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Includes: AGU, CCJ, CF, CMP, DDC, DOW, HUN, KRO, KS, LYB, MEOH, POT, SHLM, SQM, TX, UFS, WY
by: Fredrik Arnold

Summary

Annual yields of ten Basic Materials Sector leaders averaged 5.64% and charged bullishly after April as Dow dogs retreated bearishly.

Yield from WY, AGU, CF, UFS, SQM, TX, POY.TO, POT, RUS.TO and KRO ranged from 4.02% to 10.49% as of May 13.

Analyst 1yr. targets pegged average Basic Materials Sector price upsides at 29.28% with net gains at 31.75% for DOW, LYB, KB, SHLM, CF, KRO, HUN, MEOH, CCJ, DDC.

Thirty Basic Materials firms averaged 12.9% upsides and 14.07% net gains. Top ten predicted gains ranged from 16.38% to 56.69%.

Analysts of ten Basic Materials sector stocks by yield forecast 4.77% LESS net gain from $5k invested in the lowest priced five than from $5K put in all ten.

Basic Materials SML Dogs In May

Yield (dividend/price) results from here verified by Yahoo Finance were calculated as of May 13, 2016, for Small, Mid, & Large cap Basic Materials sector stocks. Small-cap firms were valued at $200M(illion) to $2B(illion); Mid-cap firms were worth $2B to $10B; Large-caps were valued above $10B. Those yield results led to the actionable conclusions discussed below.

Fifty For the Money

Since late 2011 this report series has applied dog dividend methodology to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance: basic materials (BasMats), consumer goods (ConGo), financials (Fins), healthcare (Heal), industrial goods (IndiGo), services (Svcs), technology (Tec) and utilities (Utes). In the past two years the series expanded to report (1) dividend yield; (2) price upside; (3) net gain results based on analyst 1 yr. target projections.

Now the series is being revised to report on eleven sectors as defined by Morningstar and tracked here: Basic Materials; Communication Services; Consumer Cyclical; Consumer Defensive; Energy; Financial Services; Healthcare; Industrials; Real Estate; Technology; Utilities.

This article intended to reveal bargain stocks to buy and hold up to one year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired.

Dog Metrics Traced Basic Materials Stocks by Yield

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Actionable Conclusion (1): Chemicals Boast Top Yields As Steel, Paper & Lumber Dogs Watch

The specialty, agricultural and basic chemical industry firms sourced six of the top ten basic materials stocks showing the biggest dividend yields for May, while two steel mills, a paper maker and a lumber dog joined the chase.

Top yield dog was the specialty chemical stalwart, Kronos Worldwide (NYSE:KRO) [1]. Two steel making firms placed second and fifth, Russel Metals (RUS.TO) [2] and Ternium (NYSE:TX) [5].

Third and fourth were occupied by the same agri chemical firm listed on two exchanges, Potash of Saskatchewan (NYSE:POT) [3] and (POT.TO) [4]. Two more agri chemical outfits placed eighth and ninth, CF Industries Holdings (NYSE:CF) [8] and Agrium (NYSE:AGU) [9]. The basic chemical firm came in sixth, Sociedad Quimica y Minera (Chemical & Mining Co. of Chile Inc.) (NYSE:SQM) from Chile [6].

Finally the paper mill placed seventh, Domtar (NYSE:UFS) [7] and the lumber and wood grower, Weyerhaeuser (NYSE:WY) [10] placed tenth to complete the top ten Basic Materials sector dogs by yield list as of May 13.

Basic Materials Top Ten Price vs. Dividend Results Challenged The Dogs of The Dow

Relative strengths of the top ten Basic Materials sector dogs graphed below by yield were plotted as of market close 5/13/2016 and compared to those of the Dow. Projected annual dividend history from $10,000 invested as $1k 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 dividend.

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Actionable Conclusions: (2) Basic Materials Top Ten Charged Bullishly As (3) Dow Dogs Retreated Bearishly

Dividend from $10k invested as $1k in each of the basic materials top ten dogs fell steeply into May, while the aggregate single share price of the top ten increased. Dividend dropped at a rate of 80% while total single share price rose 210%. This pattern was a consequence of transitioning this Morningstar-based basic materials sector list from the Yahoo basic materials collection. The chart of this action looks like a child's drawing of an elephant on a skateboard.

Dow dogs retreated bearishly after April. Analyst-projected annual dividend from $10k invested as $1K in each of the top ten increased 0.5%. At the same time, aggregate single share price tumbled 19% to sound that bearish growl.

The Dow dogs overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each) constricted in May.

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Actionable Conclusion (4): Dow Dogs Shrank Their Overbought Status

The overhang was $392 or 106% in June. The Dow bubble deflated big time as Dupont (NYSE:DD) replaced IBM (NYSE:IBM) in the ten slot of the top ten for July to peg the gap at $237 or 63%, then inflated again as IBM replaced Pfizer (NYSE:PFE) to widen the gap to $343 or 89% for August. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases in price by CVX and XOM pushed the gap to $334 or 85%.

November changed out MCD for WMT and GE for KO. The resulting price over dividend gap went to $303 or 78%. As of December 4, the gap stood at $302 or 78%. Come January 12, prices of the ten Dow top dogs fell and dividends rose, as Boeing (NYSE:BA) replaced General Electric (NYSE:GE) to push the overbought gap down to $215 or 53%. February moves put the gap at $208 or 48%. March put the chasm at $293 or 73%. April saw JPMorgan Chase (NYSE:JPM) replace Merck (NYSE:MRK) in the top ten to widen the gap to $394 or 102%. May's retreat was triggered by Intel and Merck returning to the top ten in place of JPMorgan and Proctor & Gamble (NYSE:PG). So, the overbought gap shrank to $357 or 93%.

This gap between high share price and low dividend per $1k invested defines the Dow over-bought condition. Meaning these are low risk and low opportunity Dow dog stocks. The Dow top ten May average price per dollar of annual dividend is $26.21.

Compared to the Dow dogs, the Energy top ten, while volatile, are far from overbought, narrowing their "normal" pattern of dividends above price.

In marked contrast to the Dow, Basic Materials Dog top ten average price per dollar of annual dividend came in at $20.59 as of May 13, that is about 21.5% less than the price of an annual dollar of Dow dividends.

Wall Street Wizard Wagers Distinguished Upside From Downside Dogs In May

One-year median target price set by brokerage analysts multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2016 out of 30 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts were considered best for the most accurate mean target price estimate.

Actionable Conclusions: (4) Ten Basic Materials Sector Dividend Dogs Cast Upsides of 14.74% to 54.93% per Analyst 1 yr. Targets & (5) One Showed A 7.48% Downside

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Dog Metrics Measured May Materials Stocks Basically By Yield

To quantify top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metrics, analyst mean price target estimates provided another tool to dig out bargains.

Actionable Conclusions: Wall St. Brokers Reckoned (6) Average 12.9% Upsides; (7) & 14.07% Net Gains from Top 30 Basic Materials Dogs By May, 2017

Top thirty sector dogs were graphed below to show May 13, 2016, closing prices compared to those projected by analyst mean price target estimates to the same date in 2017.

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 2017.

Historic prices and actual dividends paid from $1000 invested in each of the thirty highest yielding stocks and the aggregate single share prices of those thirty stocks divided by 3 created the data points for 2016. Projections based on estimated increases in dividend amounts from $1000 invested in the thirty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points green for price and blue for dividends.

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Analysts as reported by Yahoo Finance projected a 10% lower dividend from $10K invested in this group while aggregate single share price was projected to increase by 9% in the coming year (May to May).

Notice the crossing pattern of the dividend and price vectors in the graph for the coming year. Analysts thereby predict Basic Materials dogs will join the Dow dogs in an overbought condition.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts were considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock's movement opposite of market direction.

Actionable Conclusion (8): Analysts Alleged 10 Basic Materials Sector Dogs Could Net 16.38% to 56.69% By May, 2017

Two of ten top yielding Basic Materials sector dogs were verified as being among the top gainers for the coming year, based on analyst 1-year target prices. So this month analysts graded the dog strategy as 20% accurate.

Ten probable profit generating trades were revealed by Thomson/First Call as reported in Yahoo Finance for 2017:

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Dominion Diamond (NYSE:DDC) was projected to net $566.85 based on estimated dividends plus mean target price estimate from eight analysts less broker fees. The Beta number showed this estimate subject to volatility 38% less than the market as a whole.

Cameco Corporation (NYSE:CCJ) was projected to net $412.15 based on dividends plus the median of annual price estimates from eight analysts less broker fees. The Beta number showed this estimate subject to volatility 28% more than the market as a whole.

Methanex (NASDAQ:MEOH) was projected to net $410.06 based on the low target price estimate from twelve analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 87% more than the market as a whole.

Huntsman (NYSE:HUN) was projected to net $313.81, based on dividend plus median target price estimates from ten analysts less broker fees. The Beta number showed this estimate was subject to volatility 198% more than the market as a whole.

Kronos Worldwide was projected to net $308.67 based on the median of estimates from three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 113% more than the market as a whole.

CF Industries Holdings was projected to net $289.22 based on a median target price estimate from ten analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 10% more than the market as a whole.

A. Schulman (NASDAQ:SHLM) was projected to net $241.94 based on the median target price estimate from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 60% more than the market as a whole.

KapStone Paper and Packaging (NYSE:KS) was projected to net $241.94 based on estimates from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 207% more than the market as a whole.

LyondellBasell Industries (NYSE:LYB) was projected to net $189.37 based on dividends plus the median target price estimate from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 1% more than the market as a whole.

Dow Chemical (NYSE:DOW) was projected to net $163.78, based on dividends plus a median target price estimate from seventeen analysts less broker fees. The Beta number showed this estimate subject to volatility 30% more than the market as a whole.

Average net gain in dividend and price was 31.75%. The average Beta number showed these estimates subject to volatility 98% greater than the market as a whole.

Actionable Conclusion (9): (Bear Alert) Analysts Predicted One Basic Materials Dog To Show A Net Loss of 5.86% By May, 2017

One probable losing trade revealed by Thomson/First Call in Yahoo Finance in 2017 was:

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Compass Minerals Intl (NYSE:CMP) was projected to lose $58.574 based on dividend and a median target price estimate from seven analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 49% less than the market as a whole.

A Graphic Display of Basic Materials' Past Year Price Histories Show Contrarian Broker Projections

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One year price plus side performance of CMP & MDU, the two Basic Materials "losers" red lined by analysts, is in mighty contrast to the marked negative annual price history for analyst tagged upside leader, DDC. Momentum is not on the side of the forecaster predictions, except for CMP which is showing a negative result on the year.

Dog Metrics Found 4.77% LESS Gain From Five Lowest Priced Highest Yield Energy Sector Dogs

Ten small, mid and large cap energy equities were culled by yield from 50 common stock choices from here. Yield (dividend/price) results verified by Yahoo Finance did the ranking.

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Actionable Conclusions: (10) Analysts Project 5 Lowest Priced of Ten Highest Yield To Fetch 12.60% vs. (11) 15.23% Net Gains From All Ten Energy Dogs as of May 13, 2017

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$5000 invested as $1k in each of the five lowest priced stocks in the top ten basic materials dividend kennel by yield were predicted by analyst 1-year targets to deliver 4.77% LESS net gain than $5,000 invested as $500 in each of the top ten. The very lowest priced basic materials dividend dog, Kronos Worldwide, was projected to deliver the best net gain of 30.87%.

Lowest priced five basic materials dividend dogs for May 13 were: Kronos Worldwide; Potash of Saskatchewan; Ternium; Potash of Saskatchewan (POT.TO); Sociedad Quimica, whose prices ranged from $5.72 to $21.02.

Higher priced five basic materials dividend dogs for May 13 were: Russel Metals (RUS.TO); CF Industries Holdings; Weyerhaeuser; Domtar; Agrium, whose prices ranged from $22.87 to $86.49.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. It mostly works here too.

The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.

A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

Stocks listed above were suggested only as decent starting points for a small, mid and large cap Basic Materials equities dog dividend stock investment research process in mid-May, 2016. These were not recommendations.

See my instablog for specific instructions about how to best use the dividend dog data featured in this article.

Gains/declines as reported did not factor in any tax problems resulting from dividend, profit or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

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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.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from ycharts.com/screener; dividend.com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: I am/we are long CSCO, INTC, PFE, 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.