For my current phase of stock accumulation I have narrowed down to the stocks I already have positions in which have a PEG ratio (when available) of between 0-2.33. Normally, following the advice of Jim Cramer, I would steer clear of a PEG ratio of greater than 2.00, but I saw that five holdings I wanted to accumulate in the next few months would have been excluded, so I bent the rule ever so slightly.
In a market such as we are in now, and have been in for almost two years, it is more imperative than normal to pick the right spots and stocks to make purchases--avoiding the age-old trap of buying high and selling low is the name of the game. A major market reversal could set in at almost any time, but there are certain steps that can be made to mitigate this possibility.
One tried and true method is to buffer a portfolio of holdings with a fair number of high-dividend yielding stocks. It is important to try and diversify these stocks so as not to inadvertently put too much concentration into one sector and make oneself in danger of a specific market event. A case in point would be that I have previously had too high a concentration of BDC's, which is something I have personally been unwinding even if the current Federal Reserve comments tend to suggest that the low-interest rate environment will continue indefinitely. Even so, in the below list of the five highest dividend yielders I am currently accumulating three of them are in the BDC/Specialty Finance category, but hopefully I have whittled my way down to the best of the bunch.
In the below I will extrapolate my metric based thesis on each of these five high yielders, as well as point out some of the risks, headwinds, and opportunities each are facing. All metrics are sourced from Yahoo Finance unless otherwise noted.
KCAP Financial, Inc. (NASDAQ:KCAP): The private equity and venture capital firm leads this list with a current dividend yield of 12.50 and a quite low PEG of 0.54. KCAP is trading slightly above book value at 1.06 Price/Book. The 1-Year target price for KCAP is 9.09, an almost 12% increase on the current price of 8.03. What makes KCAP even more attractive to me, like a few of the below stocks as well, is what I call "Inferred Run-Room", which is arrived at by adding the percentage below the 52-week high with the dividend yield. In the case of KCAP this would represent a 42.55% profit at current levels.
What gives cause for concern with KCAP is a short ratio of 11.3, which is quite an overhang (second most of all the stocks I own, behind GRMN), and may reveal market concern about the stability of the dividend. This may have a great deal of merit as the current Earnings Per Share is 0.53 and an annual dividend of 1.00 is probably unsustainable in the longer term, without share dilution or accumulation of debt. Earnings are due on May 5, so now would be the time to get in if you think that KCAP is going to beat the street. Otherwise it may be wise to wait until after May 5 and see how things play out. According to Seeking Alpha, KCAP has 28.9% insider ownership. In a true Zweig Screen, however, KCAP would be disqualified, because it has recent insider sales and a net insider transaction in the negative because there have been no recent insider buys reported. Analyst Opinion currently sits with a Mean Recommendation score of 2.7, so I am a bit more optimistic about KCAP's long term viability than other analysts right now.
Seadrill Limited (NYSE:SDRL): The offshore drilling contractor has a current dividend yield of 12.00 and a low PEG of 0.49. SDRL is trading a little bit over twice the book value at 2.07 Price/Book. The 1-Year target price for SDRL is 41.17, an increase of just over 20% on the current price of 32.75. SDRL has an even higher IRR, sporting an implied 43.9% profit potential. SDRL chairman, founder, and major shareholder, John Fredriksen is also the CEO/chairman of Frontline Ltd. (NYSE:FRO), the oil tanker shipping company, and chairman of Golar LNG (NASDAQ:GLNG), the liquefied natural gas shipping company, and along with his interests in other companies, making him the owner of the world's largest oil tanker fleet.
SDRL is 28% institutionally owned, according to Nasdaq.com, but insider ownership and transaction data was not available. In the most recent reporting period, 250 institutions had increased positions for a total of 29,344,698 shares, compared to 167 institutions decreasing positions by 14,227,560 shares, which is a bullish indicator. Another positive difference for SDRL is a short ratio of 4.5, which does not indicate any worrisome negative market sentiment. The dividend appears to be much safer than KCAP, with an EPS of 5.47 and a dividend payout of 3.92, which may mean there is room for this dividend to actually grow in the future. Earnings are due on May 14, so now could be the best time to stake a position or increase an existing position in SDRL prior to what will hopefully be a good earnings report next month. On the other hand, it may be prudent to wait until after May 14, as Bank of America Merrill Lynch downgraded SDRL last Thursday from "buy" to "neutral" due to concerns on a downturn in offshore drilling demand. Consequently, the Analyst Opinion Mean Recommendation of SDRL fell last week to 2.8.
Nordic American Tankers Limited (NYSE:NAT): The oil tanker shipping company comes in with a current dividend yield of 10.60 and a price/book ratio of .76, implying that it is trading at a significant discount to its actual book value. This is a classic Benjamin Graham value play if you believe the numbers as they sit. I admit that NAT first caught my attention with the appearances of their Chairman & CEO Herbjørn Hansson on Jim Cramer's Mad Money, where he quickly cemented himself as one off my favorite CEO's in the world today. I was impressed enough to foray into investing in international shipping three years ago, and while this has not panned out exactly well thus far, my conviction has not wavered yet. Maybe this is because Mr. Hansson is so convinced. Ironically with the close of business on April 17, 2014, NAT sits at the exact price point my average purchase price for my existing NAT shares is--8.67. Personally, I see this as a great opportunity to double down on my original thesis. The 1-Year target price for NAT is 9.47, a 9% increase from the latest closing price, and an IRR of 41.85% tells me there might be a lot more than that 9% if daily rates for tanker ships can stabilize in the healthy zone for NAT.
NAT has another large overhang, in this case a short ratio of 8.8, which could contribute to a short squeeze if those who are betting against the stock are caught by sudden good news. Lets not forget as well that those who are betting against the stock have to cover the dividend while they are short. Both NAT and KCAP make that very expensive for them to do so. The next earnings release is expected in Mid-May, so it could be a good time to add to or establish a holding in NAT. A recent jump in shares of Frontline (FRO), the troubled tanker company, happened when it was noted that daily shipping rates have been improving and this may be evidenced in NAT's upcoming release. My position is in pretty contrarian to the current Analyst Opinion Mean Recommendation, which sits at 3.2. In almost all cases I will avoid a number higher than 3.0 here. Obviously the elephant in the room with NAT, as it is addressed by Mr. Hansson on each of his high-profile appearances on Mad Money, is--how long can the dividend remain viable? While NAT lost 1.65 per share in the trailing twelve months they have continued paying a 0.92 per share dividend. NAT may be in a race against time but Mr. Hansson remains quite confident that they will turn the corner and end up on the right side of profitability.
Horizon Technology Finance Corporation (NASDAQ:HRZN): This specialty finance company makes the list with a current dividend yield of 10.50 and a 2.04 PEG, just a hair past my normal red line. The price to book indicates a value play as it currently sits at 0.93. The 1-Year target price for HRZN is 14.21, which indicates a 7% increase from the last price of 13.13. Unlike the stocks I have already covered, the IRR of HRZN is much lower, with a total of 21.54% as HRZN is sitting much closer to the 52-week high.
The market in general is much more positive on HRZN than my three previous stocks, as the Analyst Opinion Mean Recommendation score sits at 2.4 and the short ratio overhang is 3.1. This is despite the company having an EPS of 0.37 in the trailing twelve months and a dividend payout of 1.38 in the same period. Additionally the most recent quarter saw a decrease in the institutional shareholdings of HRZN which could be an negative indicator. On the contrary, however, for the last two years there have been a healthy amount of shares purchased by insiders and no insider sales reported. Mr. Zweig would love this.
Fifth Street Finance Corp. (FSC): The Business Development Company comes in last on this list with the still large 10.40 current dividend yield. The PEG ratio is a bit lower than HRZN at 1.81 and the short ratio is 0, while the Price/Book is infinity. Having less metrics to work with makes comparing apples and oranges a little more difficult, but with FSC the IRR is a bit higher than HRZN, the total currently being 25.58%. The 1-year target price is 10.33, a 9% increase on the last price of 9.39.
Again the market is positive with FSC, as the Analyst Opinion Mean Recommendation score is 2.4, mirroring HRZN. According to Seeking Alpha FSC has net positive insider buying and an institutional ownership of over 40%, both numbers increasing modestly in the most recent period. FSC is one of the older holdings I currently have in my portfolio and I can not remember having been disappointed by them yet. Lets hope this streak continues.
I have created a public portfolio at Reuters.com to keep track of the results of these 5 stocks over the course of the next few months. I hope that the results more than out-pace even my lofty expectations. I created the portfolio with $1000 of each of the above five stocks based on their 4/17/14 closing prices (KCAP 8.03, SDRL 32.75, NAT 8.67, HRZN 13.13, and FSC 9.39). You will need to have a reuters login to see the portfolio and create your own public portfolios, but this is a free service.
Disclosure: I am long SDRL, FSC, HRZN, NAT, FRO, KCAP, GRMN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.