Seeking Alpha

chowder's  Instablog

chowder
Send Message
My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
My blog:
Market Strategies
  • New Purchase - ROST 26 comments
    May 12, 2014 11:14 PM

    A new purchase is going to be made in the Project $3 Million Portfolio which belongs to a 29 year old person, and I manage the fund for him.

    That portfolio, which is a real portfolio, can be seen here.

    project3million.blogspot.com/

    A check was placed in the mail today and should arrive at the brokerage firm for posting by Thursday. At that time, the new purchase is going to be ROST.

    Going into 2014 we established some company goals we wanted to achieve with the funds going into the Roth Ira. The portfolio is already established with a series of core positions and we wanted to expand on the core positions.

    It was our goal to add a technology and financial company, as well as a railroad and a couple of speculative positions where the yields would be below our normal acceptance criteria, but hopefully we wanted to offset that with high dividend growth and capital gain appreciation.

    We wanted to purchase these companies with a discount to fair value. We wanted a 10% discount, 15% would be even better. We decided that we would confirm the double digit discount with at least two firms.

    If we were unable to find a high quality company selling at a discount, we would simply add to one of the core positions at fair value.

    The first thing I look for in a company is its financial strength rating. If a company doesn't pass this criteria, I go no further with my due diligence, regardless of how sexy the story sounds.

    I look for companies that rate a 1 or 2 for safety by Value Line, or a BBB+ credit rating by Morningstar, or a B+ quality rating by S&P Capital IQ.

    S&P gives ROST a credit rating of A- and an A+ rating for quality. ROST qualifies for purchase once the valuations and company fundamentals line up.

    When I look to purchase a company, I'm looking for a dividend and dividend growth. Normally I look for an initial yield that is 50% above the yield for the S&P 500. I use SPY to determine the yield for that Index.

    The current yield for SPY is 1.85% and when you multiply that by 50% I get a yield of 2.78%. That would be my minimum yield under current market conditions unless I was looking to speculate. I am considering ROST a speculation play due to it's low yield which means I must count more on capital appreciation over dividend income in the near term.

    Since I am looking to speculate, I expect higher earnings rates than I would with my blue chip core positions. My minimum earnings growth expectations for growth and spec companies is 10%.

    My minimum requirement for estimated earnings on a growth or spec company is 10% as well.

    During my research, of the 50 plus companies I have on my watch list, ROST was the only company that qualified with a 10% discount to fair value by both Morningstar and S&P Capital IQ, and had 10% estimated earnings growth rate.

    In looking at price discounts a few companies came close. It came down to four companies. ROST, MA, TGT and BAX.

    Here are the price discounts as of May 9.

    ROST ... S&P says ROST is undervalued by 13.6%. M* says ROST is undervalued by 15.7%.

    MA ... S&P says MA is undervalued by 10.3%. M* says MA is undervalued by 9.3%. ... This was close enough to a double-double to consider for purchase.

    TGT ... S&P says TGT is undervalued by 7.7%. M* says TGT is undervalued by 12.7%. ... TGT was close, but not close enough for consideration at this time in this portfolio.

    BAX ... S&P says BAX is undervalued by 8.8%. M* says BAX is undervalued by 10.6%. Again, this one was close enough to consider but I decided to pass as BAX is expected to spinoff a part of their business and I want to wait until the dust settles on that one.

    So it came down to ROST and MA for this portfolio.

    In looking at estimated earnings growth, ROST is expected to grow earnings at a rate of 12.2%. MA is expected to grow earnings at a rate of 17.7%. Both companies passed the double digit earnings growth criteria.

    One aspect that is important to me when investing other people's money, is that I want to get their position off to a fast start. If I can select companies that are expected to beat the market over the next six to twelve months, it provides them with the confidence to hold during market corrections. I try to provide them with a little peace of mind if I can.

    With this in mind, I look for undervalued companies that look to have upside price momentum. I look for companies that most analysts can agree on that the company in question is expected to outperform in the near term.

    In order to determine who qualifies under this criteria, I turn to Fidelity and a rating service they call Starmine. This system rates the accuracy of the firms participating in the system. Fidelity assigns each covered company with an Equity Summary Score.

    The Equity Summary Score is an accuracy-weighted sentiment derived from the ratings of independent research providers on Fidelity.com. It uses the past relative accuracy of the providers in determining the emphasis placed on any individual opinion.

    These scores range from 0 which is Very Bearish to 10 which is Very Bullish. Anything above a 7.0 is a Buy.

    ROST carries an ESS rating of 8.4 Buy. ... MA carries an ESS rating of 8.1 Buy. ... Both companies are expected to outperform the market over the next six to twelve months.

    In looking at earnings, I want a company to have increased earnings in at least 7 of the last 10 years. ROST has raised earnings in 9 of the last 10, which also includes the years of the Great Recession.

    MA hasn't been trading for 10 years but they have increased earnings in 7 of the 7 years they have been trading.

    In looking at revenues, ROST has an impressive record of revenue growth. Over the last 10 years they have a 15.11 CAGR of revenue.

    MA has a 7 year record of 9.77% CAGR for revenue growth.

    It's at this point that ROST is edging ahead and the rest of this analysis applies to ROST.

    I don't know how to accurately read a balance sheet or income statement so I have to outsource that task. I use Jefferson Research to help me with this.

    Here are their findings:

    Earnings Quality ... Strongest

    Cash Flow Quality ... Strongest

    Operating Efficiency ... Strong

    Balance Sheet ... Strong

    Valuation ... Least Risk

    I was impressed with the fundamentals here.

    Return on Equity has been rising each year for the last 5 years.

    2008 ... 27.8%

    2009 ... 31.1%

    2010 ... 41.1%

    2011 ... 44.6%

    2012 ... 46.5%

    2013 ... 48.3%

    ROST had a couple of years where cash flows were declining, but they are rising again. Over the last 10 years the cash flow per share has a 24.36% CAGR. This is what helps support the dividend growth.

    McLean Capital Research says that ROST is not only growing ROE, but it is also growing what they call economic profit. They say ROST is creating shareholder value.

    According to McLean, cash flows from operations are 1.2 times that of operating income. Cash Flows from Operations have grown another 4.3% year over year. This company is generating significant amounts of free cash flow and is clearly self-funding, which brings us to the yield and dividend growth.

    The current yield is just 1.2% which means I need significant dividend growth to offset the low current yield.

    ROST has grown the dividend for 20 consecutive years according to the CCC list put out by David Fish. What I find impressive is not only the high CAGR of the dividend, but the consistency of that high growth over all time frames.

    1 year ... 21.4%

    3 year ... 28.6%

    5 year ... 29.0%

    10 year ... 27.9%

    In summation, I was looking for a growth company whose estimated earnings were predicted at 10% or more, with a high quality company that was selling at a 10% or more discount to fair value. The company had to pay a dividend and had to have exceptional dividend growth, and a record of paying a high dividend growth rate over many years.

    Additionally, not only was valuation important, but the timing of the purchase was of importance as well.

    From November of 2013 to the current date, the price for ROST has been declining. While price has been declining, On Balance Volume has been rising. This is known in the technical world as a bullish divergence. Volume usually confirms price direction. It's not this time.

    This is an indication that Institutional Investors are accumulating shares of ROST on small price pull backs.

    When you look at the following chart, note how price has fallen since November, but the indicator below the volume chart has been rising.

    This is very good news from a timing standpoint. In my opinion, value and timing are on the same page together.

    On Thursday of this week, when the funds hit the account, I will be purchasing ROST.

    stockcharts.com/h-sc/ui?s=ROST&p=W&a...

Back To chowder's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (26)
Track new comments
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3177) | Send Message
     
    Thanks for the blogpost.
    Good luck!
    13 May, 01:35 AM Reply Like
  • Eric Landis
    , contributor
    Comments (708) | Send Message
     
    Thanks for sharing your thought process on stock selection. I'm long ROST as well and agree that its an impressive looking growth stock.
    13 May, 02:12 AM Reply Like
  • rosenose
    , contributor
    Comments (1445) | Send Message
     
    Chowder,
    Wonderful Post. Thank You.
    I got MA last month @70 and won't look back.
    Now I might consider ROST, but I don't know if I want another new position growth stock.
    Best, Rose.
    13 May, 08:02 AM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » Rose, if the cash were available last month, MA would have been the selection. Price started to get away from me and ROST moved into first with MA in second.

     

    If the cash were available today, I would have purchased MA and ROST.

     

    I still haven't filled that financial position yet and when I do it's going to be a credit card or insurance company. I'm not interested in banks or investment firms no matter how solid they seem to be, or how sexy the story sounds.

     

    I don't care if the credit card company is MA, V or AXP. One of them will be in this portfolio one day, but not all of them.
    13 May, 11:26 AM Reply Like
  • rosenose
    , contributor
    Comments (1445) | Send Message
     
    Chowder,
    Thank You for the comment.
    I was also comparing TJX with ROST.
    Can't decide. I want TJX @ 58, it's close. Any opinion?
    Good Luck when you fill the position.
    Rose.
    13 May, 04:32 PM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » TJX actually looked pretty good to me Rose. It was close but ROST had the edge in most categories.

     

    Keep in mind, yield had very little to do with my selection. A lot of people place more importance on the yield, and it's why they are willing to settle for less quality.

     

    Anyway, S&P said TJX was undervalued by 7.7% and M* said TJX was undervalued by 12.7%. It was close to a double-double on discount to fair value, but not close enough to go further with it in my case.

     

    It was rated highly by Starmine, an 8.1 buy rating and estimated earnings are 12.2%. All good numbers but ROST edged them out and is why I went with ROST.

     

    I wouldn't see anything wrong in going with TJX if someone wanted to enter that sector or add another position in it.
    13 May, 04:42 PM Reply Like
  • rosenose
    , contributor
    Comments (1445) | Send Message
     
    Totally Appreciate your Opinion and I am grateful you think I wasn't on the wrong track with TJX. Now, I must decide.
    Thank You.
    Rose.
    13 May, 04:47 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (7775) | Send Message
     
    chowdah:

     

    <<I don't care if the credit card company is MA, V or AXP. One of them will be in this portfolio one day, but not all of them.>>

     

    Aw, come on ... put 'em all in there and let 'em fight it out, just as you do with KO and PEP, T and VZ, etc.

     

    Mike
    25 Jun, 10:54 PM Reply Like
  • maybenot
    , contributor
    Comments (3362) | Send Message
     
    Thanks chowder. ROST is a great one. Such impressive growth and dividend growth over the years.

     

    I've noticed with Ross that people seem to always talk about, "Hey, check this out, I got it at Ross, it only cost..." -- and then you sense jealousy from others in the group. Just my perception.

     

    Thanks for sharing.
    13 May, 09:37 AM Reply Like
  • astarr66
    , contributor
    Comments (189) | Send Message
     
    Wonderful description of your evaluation process. Thank you. Bought ROST last year c. $55.75 and MA last month. Will buy TJX to complete the best 2 players in their niche market!

     

    Question: why don't you use Fastgraphs?

     

    Thanks
    13 May, 07:25 PM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » I do use F.A.S.T.Graphs. Some of the stats (revenues, ROE, etc.) were taken from F.A.S.T. Graphs.
    13 May, 07:53 PM Reply Like
  • jrepasch
    , contributor
    Comments (776) | Send Message
     
    Thank you very much for posting your new purchase of ROST. I did a quick check re: S&P's lengthily report via my broker for quality ranking and FAST Graphs for credit rating, but could find no Morningstar Credit Rating. Checked the bond tab but nothing there either. Wonder why?

     

    Guess I can assume you also got a 1 or 2 rating from Value Line?

     

    I also noted that S&P gave a 12 month target price of 80.00 and M* a fair value of 82.00

     

    Guess I'll spend some time this evening reading the entire S&P report and the M* articles.

     

    Thanks again, chower, for doing much of my homework.

     

    joni
    15 May, 05:22 PM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » joni, thanks for the kind words, but I would expect everyone to consider their own goals and objectives before thinking about buying anything I write about.

     

    I simply state what I'm buying and what I look at in making that decision. People don't know the why.

     

    I explained this in a private message earlier today to someone else and perhaps I should explain it here as well.

     

    ======================...

     

    Here is part of what I wrote:

     

    I don't know if I made this clear or not, but I don't own ROST. I purchased ROST in Project $3 Million, what I sometimes refer to as a "young folk" portfolio since the owner of that portfolio is only 29 years old.

     

    Being an "old folk," I would prefer the higher yields myself.

     

    I manage a portfolio for my best friend who is 67 years old. I purchased TGT is his portfolio yesterday, what I sometimes refer to as an "old folk" portfolio. ... Ha!

     

    Back to ROST. Here's some insight which I haven't shared in any comments referring to ROST.

     

    Project $3 Million was designed to create $10,000 per month in dividend income by the time my son is 65 years old. In order to achieve that income number, I was targeting a portfolio yield of 4%. That means I needed a portfolio value of $3 Million.

     

    So, total return is important to this portfolio.

     

    The total return is ahead of schedule, five years after the objective was initiated. Total return has exceeded the target by 31.1%.

     

    The yield on the portfolio has dropped down to 3.7% as finding high quality companies in the current market environment has been a little difficult.

     

    The income at this time is ahead of schedule as well, but only by 5.1%.

     

    I had a decision to make. Lower the quality of my selections and continue to seek the higher yield, or stay disciplined and continue to focus on high quality. I decided to stay focused on high quality and that meant I would need more cap appreciation to offset the lower yield.

     

    I thought the "young folk" portfolio would benefit more from cap appreciation potential.

     

    In my portfolio, the "old folk" portfolio, I over-weighted positions in T, SO and MO to keep the yield up. I have no problem in my mind in having double-sized positions in these long-time paying dividend companies.
    15 May, 08:26 PM Reply Like
  • jrepasch
    , contributor
    Comments (776) | Send Message
     
    Chowder,

     

    Oh dear, I think I might have given you the wrong impression in my statement "Thanks again for doing much of my homework."

     

    I am quite aware that you never give advice about what others should purchase, hold, or sell. You only state what you purchase, for what reason, and for whom.

     

    Although I fall into the "old folk" category, therefore usually purchasing blue-chip companies that pay a high dividend, I do, on occasion consider growth stocks with might pay lower dividends. Besides the usual suspects of an old folks portfolio, in the past several years I have added COST, SBUX (1/2) position), QCOM and a few others. I would not have considered any of these companies had I not filled the portfolio with blue-chips beforehand that met my income criteria at 3%.

     

    Fortunately, even at our ages (75 & hubby 81, I am able to reinvest 66% of the income. 10% of total I hold in cash to purchases more shares or new shares (companies). The remainder I take as cash on an annual basis, a good portion of which to pay the taxes on the income. :-(

     

    Guess what you should know is I read all of your blogs, and comments to articles. I think I understand your philosophy on investing and admire your rules on buy/hold/sell. As I said in a recent response to one of your comments, I don't always follow what you do but I'm aware of your standards and respect them.

     

    All of the money I now have invested comes from 50 or so years of my own savings plus my parents. My goal is to use the income, if needed, but never the capital. That capital is invested for the next generation.

     

    Sorry to go on at such length about "me" but wanted to insure you that I would never consider purchasing shares in a company that didn't fit my own needs.

     

    Thanks again for this great post and all you do for us DGIers.

     

    joni

     

    16 May, 04:41 PM Reply Like
  • maybenot
    , contributor
    Comments (3362) | Send Message
     
    chowder -- thanks for the above comment. Sure do appreciate your thoughts and honesty.

     

    I was wondering about myself at times regarding buying more T & MO, the past several months. We all have our reasons. It is just nice to see you have done much the same.

     

    Wish I was younger, there are some real low yielders I would like to have for the cap gains and growth of yield.

     

    Thanks again for sharing. It sure helps me in my personal thought process.
    15 May, 10:26 PM Reply Like
  • rosenose
    , contributor
    Comments (1445) | Send Message
     
    Chowder,
    I recently had purchased 2 growth stocks: V and MA and I have a small recent holding in VFC, I will stick with.
    After reading about ROST & TJX , I decided NOT to buy them.
    They , like you say, are great holdings for a younger investor and I believe I am covered in what I already own. It was fun looking and discussing this with you. Appreciate your thoughts. Just an update on what I didn't do.
    " I Love shopping" and many times I Don't Buy. IMO: Rose.
    16 May, 07:28 AM Reply Like
  • Sun Rising
    , contributor
    Comments (36) | Send Message
     
    Hi Chowder,
    Thank you for your sharing. I totally understand about ROST, which you bought for your son.
    I just wanted to ask you a general question.
    Today I was re-reading your (and my) favorite book” The single best investment”. In chapter “What About Higher Income” Author writes:
    "As I write, the overall stock market is at valuation levels among the highest ever seen….Likelihood of higher-yielding stocks outperforming lower-yielding stocks is higher when the market is more risky and vulnerable, as it is today.”

     

    It was written in 1999 edition. Chowder, do you think it might have some bearing on current market environment, even though valuations are not as high, as were in 1999? Thank you
    19 May, 09:47 AM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » I don't know the answer to your question. I don't look into what the market is doing, I'm only concerned with the companies I own or wish to own.

     

    There is always a market somewhere and I look for the companies that show a rising trend in earnings growth and dividend growth. If this isn't present, then I'll look to see if the headwinds a company is facing is temporary or permanent in my opinion and then make a decision from there.

     

    I don't concern myself with market valuations. I focus on company specific valuations.

     

    I saw where JNJ was overvalued prior to 2008 but earnings were still rising. The earnings growth had slowed, but the earnings were still growing in 2008. In 2009, the same thing. Low earnings growth, but the earnings were still rising.

     

    JNJ was still showing healthy dividend growth in 2008 and 2009.

     

    So, although price was declining with the overall market, I was encouraged by the rising earnings and dividend growth and never lost faith in JNJ. I was able to add to my position and felt comfortable in doing so.

     

    The only thing that changed was consumer sentiment, but that allowed better valuations, the company simply continued doing business as they have always done.
    19 May, 10:36 AM Reply Like
  • dendv
    , contributor
    Comments (286) | Send Message
     
    Chowder you never cease to amaze me in your research, goals, and attention to detail. I started in DGR investing just a few years back and commented to you on a comment you made. I asked you a question and you took the time to give me a great answer and a long response. ( I am in the older crowd also (75). My portfolio is set now and I just have to adjust now and the (according to my plan). I do not comment much but I try to read every comment and everything you write. I thank you very much for getting me off a bad track and on to good portfolio. You help so many of us and we are grateful.
    DENDV.
    19 May, 11:08 AM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » Thanks for the kind words.
    19 May, 12:00 PM Reply Like
  • scubastevo80
    , contributor
    Comments (203) | Send Message
     
    I initiated a ROST position today at $67.50 on the retail weakness. Within my "growth account", I sold a 2% position in AAPL when it crossed $600 (was 5% overweight) and was looking to rotate into TGT, ROST or SBUX to enhance my portfolio diversification. All 3 had sufficient safety ratings when checking S&P and Morningstar, and all three were trading a short-term discount to what I believe to be fair value.

     

    ROST ended up being the winner based on my model (blend of S&P FV and Tgt Px, Bloomberg analyst target Px, and Fast Tgt Px one year out) with 15% upside. I also liked the fact that their projected EPS growth rate over the next 5 years is ~12% and that they have a low beta ~0.7.
    20 May, 11:21 AM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » I would like to see SBUX in the Project $3 Million Portfolio, but I need a better discount to fair value than I've seen in awhile. I'm still hopeful though.

     

    TGT may make it as well.

     

    I did purchase TGT this month in the old folk portfolio, but went with ROST in the young folk portfolio.
    20 May, 01:43 PM Reply Like
  • astarr66
    , contributor
    Comments (189) | Send Message
     
    I purchased TJX today (after it dived 7.5% lower ) to complement my ROST. Like the international growth component of TJX, which ROST is missing.
    20 May, 07:32 PM Reply Like
  • Chajan90
    , contributor
    Comments (27) | Send Message
     
    hello everyone nice articel thank you chowder.
    what about petm for your 3million project? increasing ROE undervalued at morningstar also by calculating with the FAST Graph, Div y. 1.4% near challenger oder challenger already. petm dipped hard last month. i will start a 1/2 position these week. what do you think about PETM? cheers Chajan
    3 Jun, 04:45 AM Reply Like
  • chowder
    , contributor
    Comments (7284) | Send Message
     
    Author’s reply » A company's quality rating is the first thing I look at when doing my due diligence. A company must rate a 1 or 2 for safety by Value Line or a BBB+ or better credit rating by Morningstar and S&P.

     

    I will take S&P's Quality ranking into consideration under certain circumstances.

     

    Based on my high quality rankings, PETM has never made my watch-list.

     

    VL gives them a safety rating of 3. I can't get a M* rating as no information is available at this time. S&P gives PETM a BB+ rating.

     

    This information would disqualify ownership of PETM in my portfolio unless I were looking for a speculative position.

     

    S&P does give PETM an A rating for quality and the other ratings are firm enough for me to consider PETM if I were looking for a spec position. I don't want to own too many spec positions, but from what I've seen so far, PETM is worthy of more research and I will place it on my watch-list.

     

    Thanks for sharing.
    3 Jun, 12:21 PM Reply Like
  • surplusmarketing
    , contributor
    Comments (315) | Send Message
     
    Chowder is brilliant and awesome.

     

    Thank you.
    2 Aug, 03:31 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
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.