Parsimony Investment Research

Dividend investing, portfolio strategy, cfa, research analyst
Parsimony Investment Research
Dividend investing, portfolio strategy, CFA, research analyst
Contributor since: 2011
Company: Parsimony investment research
berloe and dank - Believe you are both correct. Thanks for the comments.
Thanks for the comment, scapaflow. If you are comfortable trading options, we highly recommend that you get approval to trade them. Not only for the ability to buy protective puts, but it will also open the door to some great income strategies (like covered calls and cash-secured puts).
SPXS will definitely move inversely to the market, but beware of using it as a hedging tool. There is quite a bit of tracking error and you have to pay extra close attention to position size since it is a 3x levered product.
Thanks for the comments, rickevantodd. You bring up an excellent point. In our opinion (and as you point out), hedges are not economical to have on at all times. For example, when the market is in a confirmed positive uptrend, the hedge is less important and is probably a waste of capital.
At the end of the day, it comes down to each investors outlook for the market and their risk tolerance. We agree with you that the cost of the hedge is not super cheap right now, but if you really can't stomach another 10% drop from current levels (and you don't want to sell your stocks)...the price of insurance becomes less relevant.
Thanks for the comments, kovnat. Congrats on your success with MCD! You have seen the power of dividend investing first hand with a great stock.
As for the current prices of MCD and CLX, you are correct...both stocks are overvalued right now (even despite the recent pullback). You can see that both stocks have a Parsimony Value rating less than 20, which means that they are in the bottom 20% of all the stocks in our universe from a relative valuation perspective.
Thanks, zuesprune! A 0.3 delta is a good target and you are viewing it the right way regarding the prob of assignment.
Regarding MRK, we sent around a trade alert earlier this week to our Triple Income Portfolio subscribers suggesting the following trade (great minds think alike!):
- Buy stock around $50.00
- Sell cash-secured put (Mar16 $47.50 strike)
- Sell covered call on stock (Mar16 $52.50 strike)
The theory behind this "Triple Play" position is to buy part of of your position in a high-quality dividend stock to start collecting dividends right away and simultaneously sell a call and a put on the same stock to generate additional income from your position. The point of the cash-secured put is to set a downside limit order to buy more of the stock at a cheaper price and the point of the call is to set a short-term upside limit order to sell your position to take advantage of a short-term rally. Simply put, you receive additional income for your willingness to buy a stock (by writing a put) or to sell a stock (by writing a covered call). And the best part is...that you get to keep the option premiums no matter what happens to the price of the stock.
Hope this helps...PIR
IM55 - Take a look at these stocks for each sector:
- Materials: PX, CMP, SON
- Energy: HP, XOM, SLB
- Financials: TROW, AFL, IVZ
- Healthcare: JNJ, MRK, OMI
- Consumer Discretionary: GPC, DRI, LEG,
Thanks for reading, nafziger.
inside man - Thanks for the comments. We like both IBM and CSCO on the tech side...and both are great stocks for a cash-secured put strategy.
That said, we always encourage investors to diversify their holding in their dividend portfolio. If you have a portfolio with only a handful of stocks, its probably prudent to not have two in the same industry. As a high level rule, we recommend that you don't have more than 20% of your portfolio invested in any one sector.
Sounds like you are on the right track though...
Thanks for the comments, BA Man. Being caught "naked" is never a good thing...haha!
In all seriousness, selling cash-secured puts is actually a very conservative strategy (especially when you only use it for stocks that you want to own). Options sometimes have a stigma of being "risky", but it all comes down to how you use them...
Gary - Which calculations are you referring to?
When we say the bottom has been reached, we mean that the bottom that was hit on 8/24 will hold. We very well might retest those levels...but we do believe that that is the bottom and stocks will be higher than that by year end. Now is an excellent time to pick up some great stocks on sale...
pim69 - We said the correction is over...we didn't say that stocks are going to rally back to new highs. We think that the market will tread water for a few months before moving higher. You'll have plenty of time to read all 7 parts and react accordingly.
hingroyield - ETN rates pretty well and is also trading below fair value (Our Buy Zone is $56.00-$62.00. Here are the ratings for ETN:
Dividend = 77
Safety = 64
Value = 86
Momentum = 18
Agree, Archman. There are some real pockets of value out there right now...
Giofls - another great put to sell...
Why not own both? Why do you have to choose? Apple is a stock that haters love to hate. Not sure why though...
scapa - You have a realistic view of the world. XOM will continue to generate cash for you for years to come. The other moving part here is that XOM has a massive stock buyback plan in place and they will likely be loading up on the stock at current levels (which should help offer significant support). We don't see it dropping much further...certainly not 20%...
Gris - It is all relative. The junior gold miners could go out of business and could easily fall the other 10%. XOM, QCOM, and CAT are all great companies that are not going out of business and are already stretched beyond normal trading ranges. Its true they could always drop further, but the risk/reward trade-off at current levels is very compelling.
Thanks for the comment, Moon. While we agree that there are some longer term issues that could end catastrophically, we just don't see it leading to a major correction in the near-term. We think that the U.S. economy is healthy enough to chug along for the next few years and that should drive stocks higher from here.
Thanks for reading, Bruce. Appreciate the feedback...
Currytuck - we have seen conflicting information on this. One source we have says 1914 and another say 1945. Either way...WMT has been in business a long time!
@DOGS THAT BARK, @billinsd, @Bruce, @brent, @rhiannion, @Illuminatti
Thanks for all the comments and positive feedback!
Robert - Thanks for the comments. Yes, focusing on income in dollars is the main point of the article. Cheers - PIR
Agreed, George! Thanks for the comments.
Sunil - We talk about improving the "risk-adjusted" capital position of the portfolio (which certainly includes factoring in the "Safety of a stock). In fact, "Safety" is one of the four major categories in our rating system:
Thanks for the comments, Bart. Sounds like you have a realistic strategy in place...
excellent point, bionic!
HYI - Thanks for the comments. Investing is a business and you are ahead of the game by thinking of it in that context.
The danger of YOC is that you are only calculating yield on your original investment and not considering the yield on the entire capital you have exposed in that position.
Think about this example...
If you invested $10,000 in MCD 10 years ago at $30 (split-adjusted), your YOC would be ~11.3% today. While its true you are earning 11.3% on the original $10,000, your actual capital position in the stock is over $32,000. In other words, you are ignoring what you are earning on two-thirds of your position by looking at YOC. In reality, you are earning 3.5% on your current $32,000 investment in MCD.
This is where our points about focusing on dollar income and capital redeployment come into play. Can you earn more risk-adjusted income by redeploying all or part of your MCD position into a different stock with a lower YOC?
Jim - I think you bring up a good point with active vs. passive investor. All investors must deploy capital at some point. You may only do it several times a year and CPA may do it several times a month...but the concept of maximizing risk-adjusted income (upon deployment) is the same.
cpa - There are those that get it...and those that don't. You get it!
Hi Jim - Thanks for the comment. The point of the article was to encourage investors to focus on income growth in dollar terms and to place less emphasis on percentages. Focusing on dollar income will also help you tune out daily price fluctuations.
We also advocate that investors always analyze their income stream in dollar terms and to always look for ways to grow that income stream while maintaining or improving the risk-adjusted capital position of their portfolio (i.e., buying stocks with better relative valuations). This includes investing new capital as well as reallocating existing capital.
If you can increase your income without increasing your overall risk...why wouldn't you?
Pickin - Thanks for the comment. BMY has been one of the best performing stocks in the healthcare sector over the past few years (a sector that has a dearth of good dividend growth candidates). That said, we hear your point about its dividend growth history. We chose BMY for this analysis because the yield-on-cost wasn't so egregious or obvious. In fact, its yield-on-cost was almost equivalent to JNJ's current yield, which we think made a stronger point about focusing on dividend growth in dollar terms.