In Part 1 of this two-part article, I provided you with my current watchlist, ordered by their rank using My Mad Method of 15 metrics to help me evaluate which stocks I should buy next to add to my expanding dividend growth-oriented portfolio. I also described three new metrics that I use when the members of the watchlist tend to bunch up around the top, or even somewhere further down: The 52-Week Delta Ratio (which may have a more conventional name that I'm not aware of); the Delta Ratio Signal; and the 52-Week Hi-Lo Average. As a recap, here are the 30 stocks on my recently revised watchlist in their My Mad Method rank order:
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
As you can see, there's a three-way tie for fourth place, as well as ties at 13th place and 19th place. I've included the average of the rankings of the 15 metrics in My Mad Method in the column with the header "Rank Avg" so that you can better see the distribution of these figures.
The Top Six
To help me focus in on the top six, which includes the three-way tie for fourth place, I turn to the three metrics that I described in the Part 1 article. The use of color, courtesy of Conditional Formatting available in Microsoft Excel, is key to helping me quickly determine what's going on with these top contenders.
Clearly, Alliance Resource Partners, L.P., is top dog. ARLP is a limited partnership that produces and markets coal, primarily to major utilities and industrial users in the USA. Coal is clearly controversial these days, but it is also one of the most abundant resources that we have in this country in terms of sources of energy, and countries such as China and India are becoming more and more desperate to acquire (that is, import) as much of it as they can to meet their burgeoning energy demands.
Fellow Seeking Alpha Contributor Mark Anthony has made several bullish calls on the coal industry as a whole, which he backs up with a good amount of data and research, but which in turn has garnered him a lot of bearish comments to his articles. I happen to believe that, while there are currently issues with our ability to export coal in the volumes that China and India (and Europe) will demand, we have proven historically that as a country, "where there's a will, there's a way", and I, too, am bullish on coal. Not necessarily all coal stocks, but ARLP is very appealing to me because of its 7 percent yield.
You can see from the table above that its current price is much closer to its 52-week low than the high. Checking the Delta Ratio, I've got a "green light" there telling me that my high and low are in order, and the Delta Ratio Signal is displaying "Buy!" Not as strong as a "Holy Cow!" signal, but checking the 52-Week Hi-Lo Average, it's also displaying green, indicating that the current price is below this Average. A quick check back at the MMM Rank Average and I can see that ARLP is well ahead of the rest of the pack there. On the basis of this, I've placed a GTC limit order for 35 shares of ARLP at $57.00, which is a price I'm comfortable with even if it slides lower in the near term. I want to collect the dividends from this limited partnership, and I believe that coal stocks will rise in the near-to-mid future as demand increases while supply has been cut back.
Right behind ARLP in the ranking is Medtronic, the medical equipment manufacturer, but its Delta Ratio Signal of "Too High" is a warning to me that now might not be the best time to try to add to my position in this stock. While slightly above the Hi-Lo Average, its current price isn't too far off, and I want to get my position up to an even 100 shares so that I can write covered calls against this stock should I so choose, so I placed a GTC limit order for 22 shares at $38.00, which got filled Tuesday, May 15th. MDT closed that day at $38.15, and it's generally been rising despite the drop off of the market overall these past days, so I'm feeling pretty good about that decision.
Next on the list is Ebix, Inc., a disruptive company that produces niche software for the insurance industry, and a stock that I've had my eye on since November. Ebix yields a very modest 1 percent currently, so it's not a great dividend growth candidate; it falls into my category of potential growth plays. With a "Stable" signal I'm not quite ready to execute on Ebix yet, despite its high ranking in MMM and the green light on its Hi-Lo Average. For now I'm going to pass on Ebix in favor of some other low-hanging fruit, but it definitely has my attention, and as more dividends roll in I might just add this to my arsenal. I'd like to write a single cash-secured put contract for it, but I'm not quite sure what strike price and expiration date I'd choose, so I need to do a bit more research here.
That brings us to the three-way tie of Johnson & Johnson, Main Street Capital Corp, and Arch Coal. Folks who have read the Comments on some of my previous articles know that I really want to add JNJ to my portfolio eventually and its "Stable" signal and slightly above Hi-Lo Average current price make it awfully tempting to start that process now. MAIN got added to my watchlist after I ran a screen that used the averages of most of the 15 metrics of My Mad Method that the stocks in my portfolio generate.
That screen only produced three stocks, one of which was MAIN, which is currently yielding 7 percent. However, its Delta Signal Ratio is flashing "Too High", and I need to do a bit more due diligence on this investment firm before I commit to them. Rounding out this trio is Arch Coal, which has clearly been beaten down in the overall pummeling of coal stocks this year, as attested to by its very high Delta Ratio and "Holy Cow!" Signal. I've already stated that I'm bullish on coal, and the current price of ACI is oh, so temptingly low. I selected ACI out of a slew of coal stocks because it was the only one, other than ARLP, that paid a decent dividend, or any dividend at all, for that matter.
We'll come back to JNJ and ACI in a moment, but first a few words about some dark horse candidates on my watchlist.
The Dark Horses
There are two stocks that fall in the middle of the pack of my watchlist that I view as really good potential growth stocks: MAKO Surgical and Nokia Corporation.
I really like MAKO's business model for its RIO robotic system, which allows surgeons to perform knee and hip replacements with significantly less trauma, recovery time and physical therapy for the patient. They just had a bad earnings report, and the stock took a major beating. I think MAKO is going to make it in the long term, and eventually perform as well as Intuitive Surgical (ISRG) has with its Da Vinci robotic system for soft tissue such as prostate removal. I'm very tempted to write a single cash-secured put contract for the June $20 strike price of MAKO with a limit order for around $1.50 for the premium, but should that get executed it would take a big chunk out of my available funds and would probably mean that I couldn't purchase JNJ at this time.
I think Nokia is a real contender for a solid third place showing in the smartphone wars. I know a lot of folks think they've missed the boat, but really the smartphone battle has just begun and there's still time for NOK and MSFT to make their mark. A friend of mine just told me that when he asked Siri on his Apple iPhone 4S "What is the best smartphone", Siri replied "The Nokia Lumia 900". It appears that Apple has "fixed" this response since then, but it's an amusing anecdote to my theory that there's room for a third operating system in the smartphone space, and my conviction that NOK has a long history of providing quality products and a loyal following outside the USA. One of the investment strategies that I've been studying these past few months is writing cash-secured puts as a way of generating a little extra income on stocks that I'd like to be long anyway.
As part of my "practice" at writing cash-secured puts, I've written two puts this week at the June $2.50 strike, but as a limit order at $0.35 per contract, which hasn't been sold yet. So if Nokia continues its slide and I get assigned those shares, my cost basis for what I think could provide a significant gain will be $2.10 (less commissions, which are pretty trivial in this case). It's not a lot of money to commit, and there's no guarantee that my $2.50 June puts will be bought, and if they're not bought I can't be assigned the shares. So, the option writing experiment continues…
But what about JNJ, MAKO and AIC, you ask? After careful consideration, and despite the fact that MAKO has moved up a bit in the last few days, I decided that the time has come to add JNJ to my portfolio, even though I'll only be able to add a small number of shares. JNJ has never held such a high ranking on my watchlist using My Mad Method in all the time I've been tracking it, so I really had no excuses for not buying some now. I've placed a limit order for 30 shares of JNJ at $63.00. This price doesn't get JNJ to a "Buy!" Signal, but it does result in a "Lower" Signal and is below the Hi-Lo Average. JNJ's price just doesn't move very much up or down, so I'm very comfortable with this entry point. I'll keep an eye on MAKO and if I accumulate enough dividends to write a cash-secured put for it, and the prices is as low as it is now or lower, I'll probably make that move then.
To continue with my options writing hands-on education, and because its price is so low and so close to its 52-week low, I took the plunge and wrote a single cash-secured put for ACI for June at the $8.00 strike on a limit order of $0.65 for the contract. That, too, got executed this past Tuesday, so we'll see if I get assigned those 100 shares come June 15th. If I do, then because I sold the put for the $0.65 premium and my commission was just $1.03 for the contract, my cost basis would be $7.36 a share, which protects me from some more downside in this shaky sector. This is purely a "practice" play with a very small amount of capital at stake and a lot of potential upside, so once again, I'm happy about how things worked out here.
To summarize the Top 6 from my watchlist:
- #1 - ARLP: Placed a limit order for 35 shares at $57. Waiting for it to be filled.
- #2 - MDT: Placed a limit order for 22 shares at $38. Order filled May 15th, 2012.
- #3 - EBIX: Wait for a better entry price, where the Delta Ratio Signal turns to at least "Buy!".
- #4 [Tie] - JNJ: Placed a limit order for 30 shares at $63. Waiting for it to be filled.
- #4 [Tie] - MAIN: Currently "Too High", and I need to do some more due diligence before taking any action here.
- #4 [Tie] - ACI: Wrote a single put contract for the June $8 strike with a limit order for the $0.65 premium. Order was filled, $65 premium collected, waiting to see if I get assigned the shares.
That leaves me with a small amount of dry powder, but I've got more dividends from other holdings on the way and an under-performing oil and gas exploration outfit from my prior broker days that I might unload after it pays its annual dividend. So at some point in the future, probably next quarter, I'll be in a position to make at least one additional purchase, maybe more if I close out that oil stock. Until then, I'll track these picks (assuming all of their orders get filled and I end up with their shares) and we'll see how they rank up within the portfolio using My Mad Method in another article.
Additional disclosure: In addition, I may initiate a long position in ARLP, JNJ and NOK within the next 72 hours. 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.