A few weeks ago I introduced Seeking Alpha readers to what I refer to as My Mad Method of ranking stocks that are on my watchlist to help me determine which one(s) I'm going to buy next to add to my growing list of stocks. My portfolio is anchored by some strong, stable dividend yielders that I refer to as my Dividend Divas, with a few very high yielders that I call my Dividend Monsters. Included in this mix of dividend growth stocks are a few speculative plays that I'm hoping will realize big returns in the years ahead.
As part of the process of picking which stocks to add to my holdings, My Mad Method seems to be working fairly well, but sometimes I end up with a tight grouping of stocks at the top of the list with which I need a bit more help to narrow the list down to the one or two (or three) that I'm comfortable pulling the trigger on.
This two-part article will address how I break what are essentially "ties" for the top spots, and I'm also going to tell you which ones I've chosen to purchase next, and why. I'll report back regularly to let you know how they're all doing so we can see whether My Mad Method really works, or just appears to works, or is just a set of 15 metrics that doesn't really tell me what I need to know in order to make informed choices for my investment dollars.
Recently one of my former Dividend Monsters, RWE AG (RWNFF) (a utility company in Germany that operates a large number of nuclear power plants), slashed its dividend and went from yielding over 13 percent to "just" 4.6 percent. That's a pretty big drop in the yield, and after the earthquake-damaged nukes in Japan ran into trouble, the German government decided to phase out its reliance on nuclear generating plants altogether, putting RWE in a tight spot. I'd also lost quite a bit of equity in the stock between the time I'd turned my nest egg over to my former high-priced broker and when I decided to get actively involved in managing my own investments.
With the slashing of the dividends I decided it was time to cut RWE loose, free up that capital and put it to work somewhere else. Since I'm now with my new broker and pay considerably lower commissions for all of my trades, I can afford to spread the money from the sale of RWE around in more, smaller increments than I could before when I was with the other guys. Naturally, I turned to My Mad Method of 15 metrics to help me decide where I should put these newly liberated funds to work.
Alliance Resource Partners, L.P.
Johnson & Johnson
Main Street Capital Corp
Wells Fargo & Co
General Electric Company
National Presto Industries
Annaly Capital Mgmt
Compass Minerals Int'l, Inc
MV Oil Trust
Lockheed Martin Corp
Proctor & Gamble
National Grid, plc
Ford Motor Company
Cheniere Energy Partners, L.P.
Apollo Residential Mortgage
Out of a refreshed list of 30 stocks on my watchlist, there definitely was some cream at the top. But sometimes I feel like I need a little more help in determining which stocks are the right ones to go with and which ones I might be better off holding off on until their price comes down. To help with that I look at where each stock's price is relative to its 52-week high and low, and generate a few more metrics with some Conditional Formatting courtesy of Microsoft Excel thrown in to give me visual cues.
For starters, I have to record the 52-week numbers for all the stocks on my watchlist, but that's a relatively simple task. Then, I calculate what I call the 52-Week Delta Ratio. Simply put, this takes the difference between the 52-week high and the current price and divides that product by the difference between the current price and the 52-week low, and expresses it as a percentage. (If there is a formal, academic term for this calculation and its application in analyzing stock prices, please let me know in the Comments section below. Not being a professional stock advisor or financial analyst, I'm aware that this could already have a more appropriate name, but I'm self-taught and still learning when it comes to investing, so bear with me and treat this as an educational opportunity for your dear author.) The formula for what I call the Delta Ratio works out to be the following:
=((52-Week High) - (Current Price)) / ((Current Price) - (52-Week Low))
The resulting number should always be greater than zero, but how far away from zero depends on how far the current price is from the high and the low. At 100 percent, the stock's current price is equidistant from its 52-week high and low. But this Ratio can get to be a ridiculously high number, making it challenging to read and to try to compare across all the stocks that are the leading candidates. This is where the next "metric" comes in, which isn't really a metric but a kind of scaling applied to the Delta Ratio.
In the next column of the spreadsheet, I evaluate the 52-Week Delta Ratio and assign a label, or "signal" to it depending on how low or how high the Ratio is. If the Delta Ratio is less than 15 percent, then that stock's current price is very close to its 52-week high, and I label it with the Signal "Screaming!". If the Delta Ratio is less than 80 percent, then it's still relatively close to its 52-week high than the low, so I label it "Too High".
Likewise, if the Delta Ratio is greater than 120 percent, then the current price is farther away from the 52-week high than the low, and I assign it the Signal "Falling". If the Delta Ratio is somewhere between 80 percent and 120 percent, I label that stock as "Stable"; in other words, it's not moving too far away from either the high or the low.
But what happens when the current price is really off from the 52-week high and much closer to the 52-week low? In that case, the Delta Ratio could be significantly greater than 120 percent. Delta Ratios that are greater than 200 percent I assign the Signal "Buy!", while those that are greater than 400 percent get the "Holy Cow!" treatment. (OK, I don't have "Holy Cow!" programmed into my personal spreadsheet, I have another, related phrase, but I've gotta keep this rated PG to get it past the Seeking Alpha Editors.)
Now, at this point there are probably a few (or more) readers rolling their eyes, either figuratively or literally, at these "Signals" that I flash onto my spreadsheet as a way of gauging the relative significance of my Delta Ratio. Frankly, I don't care. As you'll see in the table further down, when combined with Excel's Conditional Formatting, this visual Signal can cut through the clutter of what otherwise is a bunch of numbers swimming around on a spreadsheet.
While a current price that is less than 80 percent off the Ratio of its 52-week high and low may not seem "Too High" to some, it tells me that that current price might not be the best entry point at which to purchase a stock that otherwise ranks very favorably in My Mad Method. Likewise "Falling" may not seem appropriate for a stock that has a Ratio of only 120, as I'm actually not tracking and trending the price of the stock; it's just the term that tells me that the current price is not exactly stable and not really so low that the stock might currently be a bargain.
This Method works better if you're checking your numbers on a regular, if not frequent basis, but to each his/her own. I'm a data junky, and it just takes a few minutes a day to pull the numbers I need off of Google Finance while I listen in on one of the many business meetings that populate a typical day for me.
In case you're interested in the logic employed to display the appropriate Signal described above, assume for the time being that your Delta Ratio numbers are in column "AQ" on your spreadsheet, and the formula would then look like this, where "n" is the row number of the stock being evaluated:
=IF(AQn<0.15, "Screaming!", IF(AQn<0.8, "Too High", IF(AQn>4, "Holy Cow!", IF(AQn>2, "Buy!", IF(AQn>1.2, "Falling", "Stable")))))
Feel free to substitute whatever Signal labels tickle your fancy, and play around with the thresholds. I feel that if a stock's Delta Ratio is floating between 80 percent and 120 percent, then the price of that stock is relatively stable. Everything else is up for grabs.
Finally, there's one more metric that I employ to help me pick out the right stock to buy next and break any (relative) ties that may cause the top contenders to bunch up, and that is to take the Average of the 52-week high and the 52-week low, which is easily calculate as:
=AVERAGE((52-Week High),(52-Week Low))
This number by itself isn't very helpful, and can sometimes serve to add to the visual clutter of numbers and metrics that are accumulating on your spreadsheet. This is where Conditional Formatting in Excel really comes into its own (this and the Delta Ratio Signal). Using Conditional Formatting, I evaluate the current price against this 52-week high/low Average and format the cell that contains this Average so that it stands out when it is greater than the current price of the stock (I use green, which I equate with "Go"). With a little work, Conditional Formatting can also be used on the Delta Ratio Signal cells so that the different results stand out from each other, presenting a visual cue that's hard to miss, such as in the following table:
As you can see, I've also employed Conditional Formatting on the Delta Ratio, so that I know my 52-week high and low values are correct, or at least respectively above and below the current price. If the high is too low or the low is too high, then the resulting Delta Ratio will be below zero, in which case the cell is displayed with a light red fill and dark red font and border, indicating to me that I need to update either the high or the low, or both. Since the 52-week highs and lows don't change very frequently, they can get overlooked if you're tracking your watchlist over time and aren't aware that they might need updating.
I've also included Hatteras Financial and Compass Minerals International in the table above so that you can see examples of how I format the Signal values "Screaming!" and "Falling".
In Part 2 of this article, I'm going to focus in on the top six stocks from my watchlist, shown above, and explain which ones I'm going to purchase next, and why.
Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.