Challenger Dogs Got Real In January

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Includes: ABR, APTS, BKEP, CLDT, EEP, ENLK, GAIN, GEO, GME, GMLP, HASI, IRM, LHO, MIC, OLP, SBRA, SIR, SRC, SUN, TRGP, WDR
by: Fredrik Arnold

Summary

Forty Dividend Challengers (5 to 9 annual dividend increases) ranged from 4.4% to 12.38% in yield and represented seven of eleven Morningstar business sectors 1/18/17.

Ten top Challengers: HASI; OLP; SIR; BKEP; ENLK; ABR; GAIN; WDR; GMLP; SUN averaged 8.75% yield and rallied in just four sectors, energy, industrials, financial, and real estate.

Top ten Challengers rallied as Dow dogs fell after December, tripping on the way. Analyst 1yr. targets predicted average 3.5% upside and 9.1% net gain from top thirty Challengers.

Top 1-year gains were 11.7%-33.74% by GEO, SIR, GME, ABR, MIC, APTS, SRC, IRM, SUN and HASI, the top ten. January losers, SBRA, TRGP, LHO, & CLDT shed -3.7%-7.5%.

Ten Top Challenger dividend dogs ranked by yield projected 36.48% LESS gain from $5k invested in the lowest priced five than from the same investment in all ten.

The Dividend Dogs Rule

Stocks earned the "dog" moniker by exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs." More precisely, these high dividend low priced equities are, in fact, "underdogs".

New Year Challengers

Yield (dividend/price) results from David Fish's Dividend Challengers Index members listed as of 12/30/16 were paired with annual dividends and prices posted as of January 18 on YCharts. Results from that data showed the top ten members residing in just four of eleven Morningstar sectors: energy (3); industrials (1); financial services (2); real estate (4). Yes Challengers got real with real estate dogs leading the pack. Those ten stocks posted yields averaging 8.75%.

Top Challenger dog selections for January were reviewed, step by step, below to provide actionable conclusions by yield, target price upsides, and net gains.

Actionable Conclusion (1) 10 Top Dividend Challenger Dogs Showed 6.81% to 12.38% Yields as of January 18

Seeking Alpha reader requests prompted this series of index-specific articles reporting dividend yield plus price upside results for: Dow 30; S&P 500; S&P Aristocrats; NASDAQ 100; Russell 1000; Russell 2000; Champions; Contenders; Challengers; CCC Combined; and Global. Bonus reports cover Bad Boy AllStars, and Sector Leaders.

Forty For The Money

This article was written to reveal bargain stocks to buy and hold up to one full year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins' book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins' system works to find bargains in any collection of dividend paying stocks. Including analyst price upside estimates in the analysis expanded the stock universe to include popular growth equities, as desired.

Dog Metrics Found 40 Leading Challenger Dogs by Yield

David Fish's December 30 Challengers list contained stocks distinguished by paying increasing dividends for 5 to 9 straight years. These, ranked by yield as of January 18 closing prices, revealed the top ten.

Top January dog was energy firm, Sunoco (NYSE:SUN) [1]. A lone industrial firm, placed second, Golar LNG Partners (NASDAQ:GMLP) [2].

Two financial services firms placed third and fourth by yield, Waddell & Reed Financial (NYSE:WDR) [3], and Gladstone Investment (NASDAQ:GAIN) [4].

Two remaining energy stocks placed third, sixth, and seventh: EnLink Midstream Partners LP (NYSE:ENLK) [6]; Blueknight Energy (NASDAQ:BKEP) [7].

Finally, four real estate firms captured the fifth, and eighth through tenth slots on the list, Arbor Realty Trust (NYSE:ABR) [5], Select Income REIT. (NYSE:SIR) [8], One Liberty Properties (NYSE:OLP) [9], and The GEO Group (NYSE:GEO) [10] to complete the ten January Challengers top yield dog list.

Challenger Dividend vs. Price Matched Against Dow

Periodic strength of ten top Challenger dogs by yield was graphed below as of market closing prices through 1/18/2017 and compared to those of the Dow. Projected annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks and the total single share price of those ten stocks created the data points shown in green for price and blue for dividend.

Actionable Conclusion (2): Challengers Charged And Dow Dogs Dragged Into 2017

Challengers dividend from $10k invested as $1k in each dog fell while single share price for the ten continued to rise after December to maintain their bullish charge. Challengers top ten dog dividend dropped 7.9% while price inclined 2.4%. The Challengers moved ever closer to overbought status by narrowing their gap of dividend over price. Between December 21, and January 18, dividend from $10k invested in the top ten Challengers fell from 539% to 329% higher than their aggregated single share price.

Dow dogs backed into the new year, as aggregate single share price for those ten fell as dividends rose. Since December, price dropped 1%, while annual dividend (from $10k invested as $1K in each of the top ten) rose 1.4% according to IndexArb.

As a result, the Dow dogs overbought condition (where aggregate single share price of the ten exceeded projected annual dividend from $10k invested) backed off their record 2016 gap.

Actionable Conclusion (4): Dow Dogs Remained Morbidly Overbought

In January 2016, the overbought gap was only $224 or 56%. The gap grew in February to $246 or 59%. March put the gap at $293 or 73%. April expanded it to $400 or 104%, May brought the gap down to $350.

A July surge made it $414 or 114%. August pushed the gap to $418 but still 114%. September grew the gap to $471 or 128%. October rolled the chasm back to $378 or 101%. November barely changed at $374 or 98%. December pushed the record girth to $505 or 139%. January set the measure at $489 and 132%.

The Dow Dogs remain overbought and overpriced. Meaning, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend grew to $27.71 for January.

In marked contrast to the Dow, Challenger Dogs top ten average price per dollar of annual dividend was $11.23 as of January 18.

Actionable Conclusion (4): Analysts Recorded Ten Challenger Dogs With A 13.2% Average Upside And (5) Ten Showed Average -5.9% Downside To January 2018

To quantify top dog rankings, analyst mean price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metrics, analyst mean price target estimates were another tool to dig out bargains.

Actionable Conclusions: Wall St. Wizards Conjured (6) A 3.47% Average Upside & (7) 9.11% Average Net Gain From Top 30 Challengers As Of January, 2018

Top thirty dogs from David Fish's Dividend Challengers list were graphed below as of January 18, 2017 as compared to analyst mean price target estimates for the same date in 2018.

A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2018.

Historic prices and actual dividends paid from $30,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those thirty stocks divided by 3 created data points for 2017. Projections based on estimated increases in dividend amounts from $1000 invested in the thirty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 3 created the 20182 data points green for price and blue for dividend.

Analyst data, as reported by Yahoo!Finance, projected a 5.93% lower dividend from $30K invested as $1k in each stock in this group while aggregate single share price was projected to increase 3.6% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts had a better history of accurate estimates.

A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposite of market direction.

Actionable Conclusion (8): Wall St. Wizards Wished 11.75% to 33.74% Net Gains From Ten Dividend Challenger Dogs By 2018

Four top dividend yielding Contender dogs were among the ten gainers for the coming year based on analyst 1 year target prices. So this period the dog strategy as graded by Wall St. wizards was 40% accurate.

Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance into 2018:

Hannon Armstrong (NYSE:HASI) was projected to net $337.4 based on estimates from ten analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 5% less than the market as a whole.

Sunoco was projected to net $220.70 based on dividend plus mean target price estimates from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 39% less than the market as a whole.

Iron Mountain (NYSE:IRM) was projected to net $211.67 based on the lowest estimate from seven analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 15% less than the market as a whole.

Spirit Realty Capital (NYSE:SRC) was projected to net $189.01 based on dividends plus a median target price estimate by seventeen analysts less broker fees. The Beta number showed this estimate subject to volatility 89% less than the market as a whole.

Preferred Apartment Communities (NYSEMKT:APTS) was projected to net $180.72 based on a median target price estimate from eight analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 33% less than the market as a whole.

Macquarie Infrastructure (NYSE:MIC) was projected to net $170.34 based on dividends plus a median target price estimate from six analysts less broker fees. The Beta number showed this estimate subject to volatility 8% less than the market as a whole.

Arbor Realty Trust was projected to net $159.05 based on dividends plus median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 31% less than the market as a whole.

GameStop (NYSE:GME) was projected to net $127.63 based on dividends plus mean target price estimate from fourteen analysts less broker fees. The Beta number showed this estimate subject to volatility 14% more than the market as a whole.

Select Income REIT was projected to net $24.20 based on dividends plus five analysts less broker fees. The Beta number showed this estimate subject to volatility 24% less than the market as a whole.

The GEO Group was projected to net $117.46 based on a median target price estimate from three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 19% greater than the market as a whole.

The average projected net gain in dividend and price was 18.6% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 21% less than the market as a whole.

Actionable Conclusion (9): (Bear Alert) Analysts Showed Four Challenger Dogs With Losses Of 3.73% to 7.48% By 2018

Probable losing trades revealed by Thomson/First Call in Yahoo Finance in 2018 were:

Sabra Health Care REIT Inc. (NASDAQ:SBRA) was projected to lose $37.29 based on dividend and a median target price estimate from thirteen analysts including $20 of broker fees. The Beta number showed this more than the market as a whole.

Targa Resources (NYSE:TRGP) was projected to lose $40.83 based on dividend and a median target price estimate from nineteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 3% more than the market as a whole.

LaSalle Hotel Properties (NYSE:LHO) was projected to lose $43.98 based on dividend and a median target price estimate from eighteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 22% more than the market as a whole.

Chatham Lodging (NYSE:CLDT) was projected to lose $74.79 based on dividend and a median target price estimate from six analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 5% more than the market as a whole.

The average net loss in dividend and price was 4.92% on $4k invested as $1k in each of these four dogs. This loss estimate was subject to average volatility 12% more than the market as a whole.

Actionable Conclusion (10): HASI vs. CLDT 3 Month Price History Counters Analyst Upside Expectations!

Three month price performance of Chatham Lodging Trust, the Challenger portfolio "loser" red-lined by analysts, showed a 13.48% vertically inclined price history, while projections for analyst tagged upside leader, Hannon Armstrong plumbed the depths to -13.25%. The patterns are near-perfect inversions of each other.

Momentum makes mincemeat of broker brains again.

Dog Metrics Saw No Bargains From Small Challenger Dogs

As noted above, Ten Challenger dividend dogs showing the biggest dividend yields as of December 21 represented four of eleven Morningstar sectors: energy (3); industrials (1); financial services (2); real estate (4). Listed as of market close, January 18, Challenger dividend dogs arranged themselves by yield, thus:

Actionable Conclusions: Analysts Argue (10) 5 Lowest Priced of Top Ten Highest Yield Challengers Deliver 8.3% VS. (11) January, 2018

$5000 invested as $1k in each of the five Lowest priced stocks in the top ten Challenger kennel by yield threatened 38.48% LESS net gain than $5,000 invested as $500 in each of all ten. The sixth lowest priced Challenger dog, Hannon Armstrong , was projected to deliver the best net gain of 33.74%.

CHAL/10 (13) 10 CHALBYPR JA17

Lowest priced five Challenger dogs as of January 18 were: Blueknight Energy; Arbor Realty Trust ; Gladstone Investment; EnLink Midstream Partners LP; Waddell & Reed Financial, whose prices ranged from $7.30 to $18.77.

The higher priced five Challenger dogs as of January 18 were: Hannon Armstrong; Golar LNG Partners LP ; One Liberty Properties; Select Income REIT ; Enbridge Energy Partners LP (NYSE:EEP); Sunoco, whose prices ranged from $19.39 to $26.68.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. It also works sometimes for testing bargain Challenger dogs, as you almost saw.

The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

Annual Analyst Accuracy

You see below the one year result of ten analyst target estimates for Challenger stocks per YahooFinance data covering this Seeking Alpha article from late-January in 2016. These graded the "basic method" Michael B. O'Higgins employed for beating the Dow. The key shows: losses in a reddish tint; poor results tinted yellow; gains tinted green; no tint means no difference.

The "basic method" top ten annual analyst accuracy score for The Top Ten Contenders by yield between late-January 2016 vs. mid-January 2017 was ten gains. O'Higgins basic method completed this test at a 100% success rate for price. But seven dividends declined and three stayed unchanged. And all ten yield rations dropped. So in the past year contenders moved from dividend dogs to gains dogs.

The stocks listed above were suggested only as reference points for a Challenger dog stock investigation in January, 2017. These were not recommendations.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article and this instablog to aid your safe investing. --Fredrik Arnold

Three of these Challenger pups qualify as valuable catches! They are listed with the now 52 Dogs Of The Week I (DOTWI) found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information. The Dogs of the Week II portfolio is now building with 23 chosen and ten documented with quarterly reports.

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It's about time to make investing fun again. For a free copy of the monthly top dogs, the quarterly reports, and the dog of the year winner and runner-up underdog from the 52 Dogs of the Week I portfolio, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: fredrika120@gmail.com. Remember: E-mail, ticker, team!

Root for the Underdog.

Gains/declines as reported do not factor-in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from indexarb.com; YCharts.com; analyst mean target prices by Thomson/First Call in Yahoo Finance. Dog photo: core77.com.

Disclosure: I am/we are long APTS, CSCO, PFE, VZ.

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.