It's been just about a month since I first wrote about My Mad Method for picking stocks from my watchlist to add to my portfolio, and I'm very grateful for the number of Followers and great comments and feedback that I've received so far. I'm really quite stunned by the overall positive reaction to my writing, but having been a frustrated writer for years and finally finding what may be my best outlet in Seeking Alpha, I've plunged ahead and have been trying to put out at least one article per week.
I've also established some "baselines" of what's in my portfolio and watchlist, and in this article I'm going to review the activities that I've undertaken in my portfolio this past month based on My Mad Method, or MMM (not to be confused with 3M, which is a great company by all accounts). This will serve to continue the process of documenting whether MMM really works, or if I'd be better off just picking a couple of decent mutual funds and/or ETFs and finding something else to do with my spare time besides researching companies to invest in.
For starters, these are the stocks that were in my portfolio at the beginning of May, including their recent yields:
Central Fund of Canada
Cirrus Logic, Inc.
Crescent Point Energy Corp
Endeavour Silver Corp
Ford Motor Company
Freehold Royalties, Ltd.
Kimberly Clark Corp
Annaly Capital Mgmt
National Presto Industries
Peyto Expl & Dev Corp
RWE AG NPV
StoneMor Partners, L.P.
United Parcel Service
Also in this timeframe I completed the transfer of most of my positions from my dreadful old high commission broker to my new brokerage house, Interactive Brokers, or IB. IB isn't for everyone, but their commissions are incredibly low and with the activity that I've undertaken this past May I'm becoming more familiar with their tools and how to use them to execute my trades. Prior to moving my positions over to IB it was very costly for me to make any trades, as I had to wait until I was moving at least $2,500 to $3,000 or more in one stock to make the commissions bearable. This had been hindering my ability to nimbly react to the market and make small additions to my portfolio and grow them over time.
The Sold Ones
On the whole I am a "buy-and-hold" kind of investor, or at least I think I am, but sometimes it's necessary to "weed the garden" and sell off some stocks that are either underperforming or for which the business fundamentals, core products or management have changed dramatically, to the point that they no longer fit one's criteria for membership in one's portfolio. Such is the case with the following five positions that I sold during the course of May. The table below contains the stocks' MMM Ranking (out of 28) at the time they were sold, as well as their "Gain/Loss Rank", "Projected Dividends Rank" and overall "Combined Rank". For a detailed explanation of these metrics, please see my previous article, "My Mad Method: Ranking My Portfolio".
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I can hear it now: "What, you sold McDonald's?!", or "Some of those Ranks don't look too bad". And yes, I know you're supposed to buy low and sell high, but sometimes surgery is needed to keep the patient alive. In the case of MCD, despite having a yield of "just" over 3%, it just wasn't cutting it in my stable. MCD's was one of the first stocks I purchased when I took over managing my own portfolio, and at the time was the best performing member of the Dow Industrial Average in 2011, and I honestly think I made a mistake picking it up when I did. Time may prove me wrong, but I think I can replace it with something that generates more dividends than it promised to do. The rest were mostly what IB couldn't transfer over from my old broker into my new IB account, and as foreign stocks I had to pay foreign taxes on their dividends (except for PEYUF), which diminished them in my eyes. In the case of RWE AG and Statoil ASA I had collected their annually-paid dividends for 2012, so I felt better about cutting them loose, although I did leave PetroChina's dividend on the table; I am just not comfortable investing directly in a Chinese national company at this time.
So with almost 16% of my total allocation in my IRA liberated, it was time to do a little shopping, and seeing as the average yield of this lot was 3.98%, I think I did OK in replacing them with some new positions, as well as making some additions to a few existing positions.
The New Ones
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I added each of these stocks to my watchlist to derive their MMM Rank against those stocks that I was already evaluating for purchase. Alliance Resource Partners (NASDAQ:ARLP) and Johnson & Johnson (NYSE:JNJ) are the only new positions in this group, the rest are existing positions that saw their allocation in the total portfolio increase. The reason I added to CRUS was to give me a number of shares that was divisible by 100 so that I could write covered calls against it (see below).
I haven't spent all of the proceeds of my sales yet, as I'm trying to be patient and watch and see what the market does in the next few weeks, at least until we got out of May. That and some of my sales were in my old broker's account and I need them to settle so I can transfer those funds over to my IB account, which will take at least 4 more days, so in a way I'm forced to be patient. But that's OK.
As you can see the Average Yield of this group is significantly higher than the bunch I sold, and I still have more capital to work with, so that number may go up or it may go down a bit. But the "% of Total Projected Annual Dividends" number should be significantly higher than that of the sold stocks once I'm finished making new purchases. New stocks that are in my sights to add to my portfolio include Hatteras Financial (NYSE:HTS) and Main Street Capital Corp (NYSE:MAIN), which sport yields of 12.5% and 7.2% respectively. I'm also considering adding some more to my current positions in Freehold Royalties and StoneMor Partners, both of which are currently yielding over 9%, so look for my overall yield to improve next month from these moves.
The Option Writing - Puts
Some of the unspent capital from my sell-off this month is actually spoken for in the form of cash-secured puts that I've written for stocks that I'd like to go long on. As I mentioned in a previous article about my first time writing puts, for a mere $8.99 I picked up and read through (several times) fellow Seeking Alpha Contributor Rocco Pendola's eBook "Basic Options Trading: Options Strategies for Beginners". Short, sweet and to-the-point, and just covering the basics of options trading, this eBook and some time spent "paper trading" allowed me to build up my gumption to try my hand at writing real puts.
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As the month wore on, I liked what I saw and got the hang of placing the orders. I may have gotten ahead of myself, but I'm bullish on both Arch Coal (NYSE:ACI) and Nokia Corporation (NYSE:NOK) in the long term, and at their current prices it wasn't much of a commitment of cash to pick up these June puts and see what happens. As things stand, if all of the ACI puts expire in-the-money, or ITM, then my overall cost basis for 400 shares will be $6.95, which isn't fantastic at its current price, but it's not all that bad either. I'll make out better with the NOK puts if they expire ITM and near their current price, too, and if the third pair of NOK June $2.50 contracts gets filled at my $0.30 limit premium, then my overall cost basis for 600 shares of NOK will drop to $2.59. Whatever the case, I'm not going to try to buy any of these contracts back; I will just let myself be put the shares, and go long. This is, after all, a learning process, and these are both very speculative plays, something I didn't have much of in my portfolio, until now.
It's also very disappointing that ACI just recently (after I sold my puts) reduced its quarterly dividend from $0.08 to $0.03, as its yield was one of the things that attracted me to it over other beaten-down coal stocks. But it's better to slash the dividend and keep the cash to run the company, and I can hope for a surge in the price of coal in the near to mid-term future; dividend levels can always be re-established when profitability is more certain.
The Option Writing - Covered Calls
Along with writing cash-secured puts, I also took a shot at writing June covered calls on those positions that I could, and the premiums for which justified the time and risk of doing so, which I previously wrote about here.
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I'm OK with having any of these shares called away come June 15th, and until recently that was looking like a distinct possibility for Cirrus Logic, although there's still two weeks to go until I find out whether any of these calls will expire ITM.
That wraps it up for May. As I said, this is all a learning process for me. I now know more about what I need to do to capture the necessary information to report out my progress (or lack thereof) as the months roll on, so look for more articles on how I'm doing with My Mad Method and we'll see if it is truly mad, or actually a sane approach to managing my portfolio towards a comfortable retirement.
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.