Trades

As mentioned previously, one goal of this model is to slowly trim the amount of positions back closer to 20 after reaching 26 due to mergers and partial positions. Hence, the model sold the remaining holdings in Home Depot (HD) and added to existing small positions in Hartford Financial (HIG) and WellPoint (WLP).

Home Depot was unloaded as the stock finished a long run from October last year where the stock went from just over $30 to the selling price over $51. This considerable gain pushed the Net Payout Yield (NPY) down as the company dropped buybacks. Not to mention that competitor Lowes (LOW) remains a Top 5 holding.

The two purchases were of stocks with small positions in the model that needed to be added to or sold to reach the goal of reduced amount of holdings.

WellPoint consistently ranks in the top of any NPY reports with yields typically exceeding 15% and sometimes approaching 20%. Though the stock was added to in the low $60s after it plunged based on the Obamacare ruling, the timing was still off as it plunged even further to the lower $50s following a weak earnings report.

Hartford has been equally weak as well. The property and life insurance provider trades at roughly 35% of book value providing a unique opportunity as every buyback adds to book value.

These trades further highlight the benefits of a model that sells stocks after big runs and buys stocks after significant declines.

Bottom Performers

With a decent market in July, this model underperformed for two primary reasons: Lowes and WellPoint. Both companies had disappointing earnings outlooks that sent the stocks down considerably. Odd for large cap stocks with market caps both over $18B, but conversely each company has a buyback and strong balance sheets that will benefit from the stock price drops.

As mentioned above, WellPoint was particularly weak again following a disappointing earnings report for Q2 2012. This occurred after the weak June following the Supreme Court ruling upholding Obamacare. The stock fell over $10 during the month to end at $53.29. On top of that the stock was near $73 in the middle of June. Per the earnings report, the company expects to utilize $1.5B in the 2H of the year on repurchases and dividends. An incredible 8% return of capital to shareholders for a 6 month period.

Lowes dropped more than 10% in August as analysts continue to reduce analyst estimates for 2012 and 2013. The company is the 2nd largest home retailer behind Home Depot. It currently has an 11% NPY focused primarily on buybacks.

Top Performers

Several stocks in the model had a good month with retailers Gap (GPS) and Kohls (KSS) having the best months. In fact, the majority of stocks had positive returns for July, but with no stocks having outsized gains the losses from WellPoint and Lowes swamped the gains.

Dividends versus Buybacks

With a market hungry for yield, it has become increasing popular to own dividend paying stocks. Even to the point where dividend yields for certain sectors have been pushed down to multi year lows. With Treasury yields at all time lows, dividend stocks might not be in bubble territory yet though investors need to be careful.

This is where the concept of the NPY pays dividends (no pun intended). An investor isn't restricted to either the dividend or buyback discipline like most funds that focus on these concepts. As dividends become more popular, those stocks gain and push yields down automatically forcing this model into more buyback stocks. In essence, the cheap and ignored stocks rise to the top of the list.

So while investors are busy chasing the 4.5% dividend yields on AT&T (T) and Verizon (VZ), this model is chasing the 20% yields on ConocoPhillips (COP), Kohls, and Goldman Sachs (GS). Or grabbing similar dividends on Lorillard (LO) and Lockheed Martin (LMT) while also obtaining 8-10% buybacks. Signs that the latter stocks are much cheaper than the wireless giants loved by the markets. See our article on the subject here.

Conclusion

As speculated in the last couple of reports, as each day passes the market gets more and more comfortable with the ability to avoid a major financial collapse in Europe. As the market tires of the relentless headline risk that never comes to fruition, investors have been slowly moving out of cash into dividend stocks.

The main risk for domestic markets and stocks remains the fiscal cliff and pending election. Any inability to keep the markets calm regarding fiscal and tax issues in the US could lead to healthy losses. The most at risk stocks could be those of high dividend payers that have had an exceptional 19 month run. These stocks might face the headwinds of higher tax rates that pushed them down at the end of 2010.

Regardless of the markets, the average stock in this model yields greater than 10% with the majority of yields coming from buybacks. This provides huge support if the market turns weak again.

Disclosure: I am long [[HIG]], [[WLP]], [[LOW]], [[COP]], [[GS]], [[LO]], [[LMT]].

Additional disclosure: Please consult your financial advisor before making any investment decisions.

How does this impact the stock? Outside of political and regulatory noise, it shouldn't honestly have a huge impact. Utilities are complex businesses, but it only takes a solid operator to run them. Jim Rodgers will have no problem running the merged entity. In fact, Jim Cramer remained bullish on the stock especially considering the stock price drop.

2012 Post Merger Earnings Guidance

The bigger concern should be the lack of earnings growth and limited growth in the future. The combination created the country's largest utility as measured by enterprise value, market capitalization, generation assets, customers and numerous other criteria.

If that doesn't speak of industry low growth, not sure what else would.

The combined companies should be able to wring out overlapping costs, but the stock already trades at a rich valuation to the 2012 guidance of $4.20 to $4.35. At $66, Duke trades close to 15x the expected numbers for 2013.

Dividend Yield

In general the stock isn't that appealing as the 4.6% dividend yield is relatively low for a company expecting limited 4 to 6% earnings growth mostly coming from cost savings.

The sector as well isn't that exciting though several stocks offer either higher dividend yields or faster growth that would be more attractive over Duke. The below figure has a list of dividend yields over the last year.

(click to enlarge)

AEP Dividend Yield data by YCharts

Worth noting is that the typical yield in the sector has trended down over the last year from closer to 5% to the current 4.5%.

Conclusion

While investors are getting a better yield on these utility stocks than Treasuries, the general populace has become too complacent on the sector after strong total returns recently. These aren't risk free investments after all.

Considering the extra risks and scrutiny in Duke Energy right now and the inevitable slower growth of being the largest utility, investors will be better served in American Electric Power (AEP), Entergy (ETR), FirstEnergy (FE), or Southern Company (SO).

Disclosure: I am long [[ETR]].

Additional disclosure: Please consult your financial advisor before making any investment decisions.

Trade

No trades were made this month, but several stocks remain on the radar to sell as dividend stocks continue to outperform the market. Some of these stocks are reaching valuation levels were capital gains are likely to be limited for possibly the next few years.

Bottom Performers

With a strong market in June, it is always worthwhile to review the losing stocks to confirm the long term story remains intact. The model ended the month with 26 stocks, which is slightly higher than normal, and only two stocks had a negative price change.

WellPoint (WLP) was particularly weak following the Supreme Courts upholding of Obamacare. The stock had a nice gain for June until the ruling came out and caused the stock to plummet from near $70 to close the month at $63.79. The company has a significant buyback program that stands to benefit from the lower prices.

On the other hand, Kohls (KSS) was only fractionally down for the month. Not horrible, but considering the underperformance of the market the relative results were disappointing. The retail operator continues to struggle with weak sales. Fortunately the company remains in a strong financial position and has bought back over 20% of the outstanding float in the last year. This provides huge support to the stock. Once operations turn around, investors will see significant benefits from the continued reduction in shares.

Top Performers

Naturally numerous stocks in the model had great months with Ameriprise Financial (AMP), DirecTV Group (DTV), Lorillard (LO), Raytheon (RTN), and Time Warner (TWX) all reaching gains of roughly 10%.

Most of these stocks have significant buybacks and the interesting part is that most of them hit 52 week highs or at least approached such levels. The S&P 500 though remained considerably below highs hit back at the end of March. Unfortunately the media still ignores the buyback stories such as the above that work.

Conclusion

As expected the European issues continue to cause disruptions in the markets, but the impacts this summer aren't nearly as greats as in 2010 and 2011. As each day passes the market get more and more comfortable with the ability to avoid a major collapse.

The main risk for domestic markets and stocks remains the fiscal cliff and pending election. Any inability to keep the markets calm regarding fiscal and tax issues in the US could lead to healthy losses. The most at risk stocks could be those of high dividend payers that have had an exceptional 18 months. These stocks might face the headwinds of higher tax rates that pushed them down at the end of 2010.

Regardless of the markets, the average stock in this model yields greater than 10% with the majority of yields coming from buybacks. This provides huge support if the market turns weak again.

Disclosure: I am long [[WLP]], [[KSS]], [[AMP]], [[DTV]], [[RTN]], [[TWX]].

Additional disclosure: Please consult your financial advisor before making any investment decisions.

Per the press release, Casedhole is a leading multi-regional, independent provider of cased-hole wireline and other complementary services for energy producers in the United States. With 12 district locations, Casedhole provides premium services in the most complex and demanding operating environments focusing on oily and liquids-rich basins.

After hours the stock jumped 1-3%, but it still remains down for the day. When the sector turns, this would be the top pick. The company remains a cash flow machine with top of the line margins. The $22OM credit line being tapped to pay for this deal will quickly be paid off via profits.

Details on the deal:

• The addition of Casedhole to be immediately accretive to C&J's 2012 earnings and cash flow per share.
• The transaction is expected to close prior to June 8, 2012 upon satisfaction of customary closing conditions.
• An expanded geographic presence in 10 of the most active U.S. areas, including the Williston and Uinta Basins and the Marcellus, Utica, Avalon and Bone Springs shale plays where C&J currently does not have a presence;
• A loyal and expanding customer base of leading E&P operators which is largely non-overlapping and complementary to C&J's existing customer base;
• A seasoned management team with extensive large-cap oilfield services management experience, as well as a full roster of skilled engineers and field-level personnel that bring extensive technical expertise and domestic and international basin knowledge;
• Premium, custom-built assets, including 58 wireline units with an average age of less than three years, compared to an industry average of 10 to 15 years, and 11 pumpdown units that were added during the past five months;
• Industry leading EBITDA margins and significant revenue growth that since June 2009 has outpaced the U.S. land rig count growth by more than 8 times. Casedhole's trailing 12 month revenue as of March 31, 2012 was $156.8 million, with substantial equipment additions occurring throughout the 12 month period.
• C&J is funding the purchase of Casedhole through $220 million drawn from the Company's senior secured revolving credit facility, with the remainder paid from cash on hand. The credit facility was increased to $400 million from $200 million in connection with the signing of the definitive purchase agreement and was led by Bank of America and Wells Fargo.

Besides the obvious benefit of an accretive deal, the exposure to new basins and shales with new customers could be huge for CJES down the road. The company isn't much more than an Eagle Ford play now and expansion into the Marcellus, Utica, and Williston plays to name a few could be hugely positive.

The stock isn't likely to act all that well tomorrow with more follow up from the Haliburton (HAL) margin problems, but it remains one of the best deals in the market sub $20.

Disclosure: Long CJES. Please review the disclaimer page for more details.

Disclosure: I am long [[CJES]].

Additional disclosure: Please consult your financial advisor before making any investment decisions.

Shopkick is an interesting app for the iPhone and Android phones that makes shopping more delightful. Users are rewarded with points known as "kicks" for walking into stores or scanning products. These kicks can be redeemed for gift cards, Facebook (FB) credits, iTunes downloads, or donated to charity. Guests can also receive special in-store deals including coupons and discounts.

Brand Awareness

After trying the app at the local Target store, it struck me that no better advertising tool existed for brand products than having consumers locate an item, pick it up, and scan it. In this scenario, a vendor knows the consumer interacted with the product unlike a TV ad or an ad running on new media services such as Pandora (P) or Yelp (YELP).

After my experience at Target, I now know that Bounty, a Proctor & Gamble (PG) company, has three different types of paper towels after performing the scans for 30 extra kicks. Does it make me more likely to buy Bounty? That is questionable since it is an established brand already. The real benefit might be for new products or brands where getting the product in consumer hands provides a huge benefit. Just locating the latest soft drink or gum or toothpaste could provide huge benefits to an advertiser such as Proctor & Gamble.

Retailers

The retailer also benefits as it encourages shopper foot traffic which is potentially better than click traffic via internet searches. As mentioned above, Target just started using the service and Wal-Mart (WMT) already had been using it. Will both retailers just cancel out each other with this service? Regardless, it might be a cheaper and more productive way of attracting users than a circular in the local paper or mail.

Maybe this is the path that new CEO, Ron Johnson, at J.C. Penny (JCP) should've gone with his new promotions plan. Instead of reducing them to simple monthly promotions, he could've jumped head first into a technology solution that drastically improved the promotional process and lowered the expenses versus the costly process of continuously updating sales displays in stores.

J.C. Penny recently reported Q112 results that showed a stammering 18.9% loss in comp sales. Consumers clearly aren't on board with the reduced promotions as much as investors were originally with the concept of eliminating the wasteful costs.

Instead the retail guru from Apple (AAPL) has already allowed fellow department store Macy's (M) to outflank him in this technology area.

Though still early in the turnaround, it doesn't appear that reducing promotions works at J.C. Penny. Unfortunately the department store is probably backed into a corner on adopting a technology solution that would allow for frequent and efficient promotions. Such a shift would counter a plan just recently launched.

Private Company

This is exactly why shopkick appears to be an ideal solution though unfortunately the company remains private. The financials naturally are unknown, but it would appear that the concept of acquiring the revenue dollars commitment from retailers and brands first rather than the user is more ideal.

Monetizing Mobile

This concept does show how mobile traffic can and will be monetized. Maybe not by Google (GOOG) via search or by Facebook via display ads, but location based mobile traffic will be key to the future of mobile monetization.

In this case, customers are attracted to locations where they can use coupons and collect kicks for gift cards. The future potential still exists for locations to alert or contact nearby customers, but that theory still seems questionable.

What consumer wants to be barraged with ads while walking down the street? Does this make shopkick the ideal app? Let consumers find the nearby discounts when they are looking.

Conclusion

While the success of converting shopkick users into repeat customers is still unknown, the process of pulling in foot traffic probably can't be beat in the advertising world. Considering the success of the Target test, look for more innovative brands and retailers to join into the process. These companies might just gain a technological lead on the market.

Disclosure: I am long [[AAPL]].

Additional disclosure: Please consult your financial advisor before making any investment decisions.