Seeking Alpha

Harry Domash's  Instablog

Harry Domash
Send Message
Harry Domash publishes DividendDetective.com, a site specializing in high-dividend investing. He also publishes WinningInvesting.com, a free site featuring “how to” investing tutorials and other resources. His best selling book on fundamental analysis, “Fire Your Stock Analyst,”... More
My company:
Dividend Detective
My blog:
Dividend Detective
My book:
Fire Your Stock Analyst
View Harry Domash's Instablogs on:
  • Be Sure To Check Fiscal Fitness

    Regardless of which way the market is heading, you'll always do best holding financially strong stocks that won't need to raise additional cash to fund expansion. Here's why.

    Firms can raise cash either by selling more shares or by borrowing. Selling more shares increases the number of shares out, cutting earnings per share (NYSEARCA:EPS), the number used to value stocks. Adding debt increases operating costs, which also shrinks EPS.

    Here are four quick fiscal fitness checks. You can find the needed data on MSN Money (money.msn.com) as well as many other financial sites.

    To demonstrate the process, I'll check American Airlines (NASDAQ:AAL), Bloomin Brands (NASDAQ:BLMN), Cisco Systems (NASDAQ:CSCO), GoPro (NASDAQ:GPRO), Groupon (NASDAQ:GRPN), Intel (NASDAQ:INTC), JC Penney (NYSE:JCP), Sears Holdings (NASDAQ:SHLD) and Twitter (NYSE:TWTR) to demonstrate the process.

    For each of the four checks, award -1, 0, or +1 points as described below.

    Overall Debt
    The Leverage Ratio is a good overall debt measure. A ratio of one signals no debt and the higher the ratio, the higher the debt. Few firms have zero debt, so consider firms with ratios below 2.5 as low-debt, and ratios above 5.0 as high-debt. Award one point for ratios below 2.5, zero for ratios between 2.5 and 5.0, and subtract one point for ratios above 5.0.

    Here are the leverage values and point values for the nine stocks: American Airlines 21.7 = -1, Bloomin Brands 5.7 = -1, Cisco Systems 1.8 = 1, GoPro 1.4 =1, Groupon 2.9 =0, Intel 1.7 = 1, JC Penney 4.6 =0, Sears Holdings 126.4 =-1, Twitter 1.5 =1.

    Cash vs. Bills
    Next, determine whether a firm has enough cash in the bank to pay its day-to-day bills. We'll use the Quick Ratio, which compares available cash to current liabilities. Ratios above one signal excess cash, while ratios below one indicate a cash shortage. Score one point for ratios equal to or greater than 1.1, zero for ratios between 0.9 and 1.1, and subtract one for ratios below 0.9.

    American Airlines 0.7 = -1, Bloomin Brands 0.3 = -1, Cisco Systems 3.1 = 1, GoPro 2.3 =1, Groupon 0.9 = 0, Intel 1.2 = 1, JC Penney 0.3 = -1, Sears Holdings 0.1 =-1, Twitter 10.3 =1.

    Profitability
    Obviously, profitable firms are less risky than money losers. We'll check that using profitability gauge Return on Assets (ROA), which compares net income to total assets. Positive values mean positive earnings and vice versa. Score one point for ROAs above 10, zero for positive values below 10.0, and subtract one point for negative ROAs.

    American Airlines 6.7 = 0, Bloomin Brands 4.1 = 0, Cisco Systems 8.5 = 0, GoPro 16.4 =1, Groupon -3.4 = -1, Intel 12.7 =1, JC Penney -5.8 = -1, Sears Holdings -10.6 =-1, Twitter -12.9 =-1.

    Cash Flow
    Sometimes companies appear to be profitable when they actually lost money win terms of cash that flowed through their bank accounts. We can check that using operating cash flow, which is positive when cash flowed in and negative when a firm burned cash. Use the "price/cash flow ratio" and add one point for positive values and subtract one point for negative numbers. The actual values are not relevant

    American Airlines 12.8 = 1, Bloomin Brands 7.7 = 1, Cisco Systems 12.2 = 1, GoPro 50.5 =1, Groupon 6.8 = 1, Intel 7.6 =1, JC Penney -33.3 = -1, Sears Holdings -2.7 =-1, Twitter 344.8 = 1.

    Scores
    Adding up the fiscal fitness scores, we get: GoPro 4, Intel 4, Cisco Systems 3, Twitter 2, Groupon 0, American Airlines -1, Bloomin Brands -1, JC Penney -3, and Sears Holdings -4.

    Both three and four point positive scores reflect reasonably strong financials, but that doesn't necessarily mean that you'll make money owning a stock. Many other factors come into play. Consider the fiscal fitness score as another tool for your stock analysis toolbox.

    Mar 25 4:53 PM | Link | 1 Comment
  • Market Beating Selection Strategy Applied To Dividend Stocks

    Around 15 years ago, Joseph Piotroski, an accounting professor at University of Chicago, formulated a strategy for pinpointing value-priced stocks likely to outperform the overall market.

    In a nutshell, Piotroski's strategy involved defining a universe of cheap stocks, based on price to book ratios. From that universe, he pinpointed those with the best track records of improving fundamentals, which he defined as increasing profitability while at the same time cutting debt. Over the years, stocks meeting Piotroski's requirements have been shown to outperform other value-based strategies, as well as the overall market.

    I've been experimenting with adapting Piotroski's principals to high-dividend payers, but not necessarily value-priced stocks. I've maintained Piotroski's basic strategy, but tinkered with the details, particularly, putting more emphasis on cash flow growth.

    My version, which I creatively dubbed, High-Dividend Payers with Improving Fundamentals," has produced promising results over a variety of time periods. However, as you've heard; historical results don't necessarily predict the future. So, with that caveat, here's my current list.

    Name

    Recent Price

    Dividend Yield

    AGL Resources (NYSE:GAS)

    50.07

    4.1%

    Comtech Telecommunications (NASDAQ:CMTL)

    35.25

    3.4%

    Costamare (NYSE:CMRE)

    19.60

    5.7%

    DineEquity (NYSE:DIN)

    104.49

    3.4%

    Douglas Dynamics (NYSE:PLOW)

    21.90

    4.0%

    Duke Energy (NYSE:DUK)

    79.84

    4.0%

    Entergy (NYSE:ETR)

    79.12

    4.2%

    Schnitzer Steel Industries (NASDAQ:SCHN)

    17.19

    4.4%

    Targa Resources (NYSE:TRGP)

    93.93

    3.3%

    Waddell & Reed Financial (NYSE:WDR)

    49.94

    3.4%

    Wi-LAN (NASDAQ:WILN)

    2.71

    6.1%

    As is the case with the results produced by any screen, consider these stocks to be research candidates, not a buy list. My testing has found good results for holding periods as short as four weeks. So, I'll revisit the list in a month and report on the results

    .

    Feb 23 12:33 AM | Link | 1 Comment
  • 2014"S Hottest Closed-End Funds

    If you had purchased shares of Morgan Stanley India Investment (NYSE:IIF) a year-ago, you would have enjoyed an 80% return over those 12 months. MS India Investment is a "closed-end fund" or CEF, which is a special type of mutual fund. Here's why you should consider CEFs.

    Conventional mutual funds are technically "open-end" funds. When you buy an open-end fund, you purchase shares directly from the fund, even if you buy through a broker, The price you pay, the net asset value (NYSE:NAV), is the value of the fund's holdings (assets), expressed on a per-share basis, regardless of how many investors want to buy or sell its shares.

    The downside for open end funds is that the fund managers must find places to invest new money coming from newly created shares when investors are net buyers. Conversely, when sellers outnumber buyers, the manager must sell shares he or she might not want to sell to raise cash to redeem the shares.

    By contrast, closed-end funds sell a fixed number of shares via an initial public offering (NYSEARCA:IPO). After that, the fund trades just like a stock. Buyers must purchase from existing shareholders, and shareholders must find a buyer if they want to sell. Since the funds themselves are not involved in those transactions, CEF fund managers can execute long-term strategies without worrying about raising cash to redeem existing shares or investing unexpected new cash.

    Here's another advantage of closed-end funds. Unlike open-end funds, CEF share prices reflect the balance of supply and demand. They rarely trade at their net asset values. Instead, they trade either above (premium) or below (discount) to their NAVs. In practice, most closed-end funds trade at discounts, typically 5% to 10% below their net asset values. So, if a fund trades at a 10% discount, you can get $100 worth of assets for $90. The Morgan Stanley India Investment fund that I mentioned earlier recently traded at 9% discount.

    Here are four more high-performing closed-end funds trading at 8% or higher discounts. These particular funds also pay regular dividends.

    Morgan Stanley China A (NYSE:CAF): Holds a diversified portfolio of large-cap China-based companies. The fund returned 51 over the past 12-months. It's currently trading at an 11% discount to its NAV, and pays a 5.6% dividend yield.

    Cohen & Steers Quality Income Realty Fund (NYSE:RQI): Holds U.S. based real estate investment trusts (REITs) that own various types of commercial real estate properties. It returned 40% and is trading at a 13% discount. Dividend yield is 6.2%.

    John Hancock Tax-Advantaged Dividend Income (NYSE:HTD): Holds bonds and preferred stocks mostly issued by U.S.-based utilities. Returned 33% and is trading at an 8% discount. Yield 6.3%.

    Dreyfus Muni Bond Infrastructure (NYSE:DMB): Holds federal tax-exempt bonds issued to finance development of U.S. infrastructure projects. Returned 27% and is trading at an 8% discount. It's paying federal tax-exempt dividends equating to a 6.2% yield.

    Just because U.S. real estate investment trusts as well as India and China stocks were hot last year, doesn't mean that they'll repeat that performance this year. As always, past performance doesn't necessarily predict the future. Do your due diligence. The more you know about your holdings, the better your results.

    Feb 11 1:03 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.