Equity Armor Advisors (EAA) uses 3 different quantitative models - GARP, Dividend and Defensive Earnings - in building each month's portfolios. Each model selects the top 10 stocks delivering 30 equities to each month's portfolio. EAA weights these 3 models differently in each of the 4 lifestyle portfolios shown below to provide investors with Growth, Absolute Return, Dividend and Income options. Lastly, EAA uses a proprietary volatility overlay, which is always long volatility. The exposure to volatility protects the portfolio in times of high volatility to provide better risk-adjusted returns.
November 2018 Series
10 Dividend Stocks
Duke Realty Corp. (DRE) - 2.85%
Verizon Communications (VZ) - 4.12%
CVR Energy (CVI) - 7.5%
Altria Group (MO) - 5.05%
Las Vegas Sands Corp. (LVS) - 5.76%
Sonoco Products Company (SON) - 2.98%
Dominion Energy (D) - 4.55%
Procter & Gamble (PG) - 3.09%
Tapestry, Inc. (TPR) - 3.21%
Ford Motor Co. (F) - 6.4%
10 Defensive Earnings Stocks
FLIR Systems (FLIR) - 1.32%
Sysco Corp. (SYY) - 2.16%
Silgan Holdings (SLGN) - 1.62%
Xylem, Inc. (XYL) - 1.19%
Amphenol Corp. (APH) - 1.01%
CDK Global (CDK) - 1.18%
BorgWarner Inc. (BWA) - 1.79%
Steven Madden Ltd. (SHOO) - 1.73%
Rockwell Automation (ROK) - 2.29%
PolyOne Corp. (POL) - 2.34%
10 GARP Stocks
Primerica Inc. (PRI) - .85%
Freeport-McMoRan (FCX) - 1.76%
Interpublic Group of Companies (IPG) - 3.52%
W.R. Berkley Corp. (WRB) - .77%
Textron, Inc. (TXT) - 0.14%
GAP Inc. (GPS) - 3.53%
Packaging Corp. of America (PKG) - 3.29%
HP Inc. (HPQ) - 2.23%
Leidos Holdings (LDOS) - 1.96%
ITT, Inc. - (ITT) - .95%
EAA is proud to share the November 2018 equities used in the 4 lifestyle portfolios overlayed with a volatility hedge. As with every month, I would like to discuss in more detail one stock from each category.
This month I would like to highlight Sonoco Products Company. It manufactures and sells industrial and consumer packaging products in North and South America, Europe, Australia and Asia. The company operates through four segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. The Consumer Packaging segment offers composite and thermoformed plastic round and shaped rigid containers and trays; extruded and injection-molded plastic products; printed flexible packaging products; brand artwork management; and metal and peelable membrane ends and closures. The Display and Packaging segment offers point-of-purchase displays; supply chain management services comprising contract packing, fulfillment, and scalable service centers; retail packaging, including printed backer cards, thermoformed blisters, and heat sealing equipment; and paper amenities, such as coasters and glass covers. The Paper and Industrial Converted Products segment provides paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal, and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper, and material recycling services. The Protective Solutions segment provides custom-engineered, paperboard-based, and expanded foam protective packaging and components; and temperature-assured packaging products.
Sonoco has beaten estimates in the first 3 quarters of 2018 by 2.8%, 8.1% and 6.2% respectively. On the heels of this, analysts have raised earnings targets for the 4th quarter in the last 30 days to $.78/share. As we look to 2019, analysts see a 4.5% rise in sales and a 5.7% rise in earnings. Additionally, StockScouter has a score of 8 for SON, citing a very positive lower enterprise value-to-sales ratio compared with other similar companies and a positive technical indication of the stock trading above the 50- and 200-day MA. One other point I would like to raise related to the StockScouter report is that SON scores an A for valuation. It is important in these dividend stocks that we acquire them at proper valuations so we don't see an erosion in our yield from a valuation reset.
UBS initiated coverage of SON in April 2018 with a Buy. Bank of America downgraded it from a Buy to Neutral, also in May. Lastly, Vertical Research raised the stock from a Hold to Buy in March. All in all, I would consider this favorable, as the more recent recommendation is a Buy and the net for SON is 2 Buy and 1 Neutral.
Sonoco should provide a decent dividend of 2.98%, and earnings should provide a catalyst to move the stock price higher in 2019.
Xylem Inc. engages in the design, manufacture and service of engineered solutions for the water and wastewater applications. It operates through three segments: Water Infrastructure, Applied Water, and Measurement and Control Solutions. The Water Infrastructure segment offers various products including water and wastewater pumps, and controls and systems, as well as filtration, disinfection and biological treatment equipment under the Flygt, Godwin, Wedeco, Sanitaire and Leopold names for the transportation, treatment and testing of water and wastewater applications. The Applied Water segment provides pumps, valves, heat exchangers, controls and dispensing equipment systems under the Goulds Water Technology, Bell & Gossett, A-C Fire Pump, Standard Xchange, Lowara, Jabsco and Flojet brand names for residential and commercial building services, and industrial water applications. The Measurement and Control Solution segment provides smart metering, communications, measurement and control technologies and services that allow customers to use their distribution networks for the delivery of critical resources, such as water, electricity and natural gas.
XYL has been on an acquisition binge, and in doing so, has become a tech-driven leader in equipment and services for water and wastewater utilities. On 9/25/18, Raymond James initiated coverage with an Outperform. On 10/12, Credit Suisse followed suit by initiating coverage with an Outperform, and lastly, on 10/18, Vertical Research upgraded XYL from a Sell to Hold. Margins could improve materially in 2019, and if we get a significant federal infastructure bill, the upside could be even higher. Analysts expect sales to grow at 5.5% in 2019 and earnings at 17.3% before any infrastructure bill.
The company pays a dividend yield of 1.19%. As I like to discuss with Defensive Earnings stocks, XYL has free cash flow of $695 million and levered free cash flow of $430 million. It is also worth noting that the current operating margin is 12.77%, which should increase in 2019 following the acquisitions, and the return on equity is 15.42%.
StockScouter has a score of 8 on XYL. It cites a lower forward P/E compared to its peers and an increasing earnings growth rate in the last year relative to its past 3 years' earnings growth rate. The technical score is an A and fundamentals a B, which again is a key variable in targeting Defensive Earnings stocks.
ITT Inc. manufactures and sells engineered critical components and customized technology solutions for the energy, transportation and industrial markets worldwide. The company operates in three segments: Industrial Process, Motion Technologies and Connect & Control Technologies. The Industrial Process segment designs and manufactures industrial pumps, valves and plant optimization systems; and centrifugal pumps, vertical centrifugal pumps, twin screw and positive displacement pumps, and water systems, as well as aftermarket solutions, such as repairs and upgrades services. It serves various customers in industries, such as chemical, oil & gas, mining and other industrial process markets. The Motion Technologies segment manufactures braking pads, shims, shock absorbers and energy absorption components; and sealing technologies primarily for the transportation industry, including passenger cars, light- and heavy-duty commercial and military vehicles, buses and rail. The Connect & Control Technologies segment designs and manufactures a range of engineered connectors and specialized control components for critical applications supporting various markets, including aerospace, defense, industrial, transportation, medical and oil & gas.
There is a lot to like about ITT at this point. In the 3rd quarter, ITT's sales were higher than analysts expected, an organic year-over-year increase of 7%. Analysts had anticipated 3-5% for 2018, and are now looking at 5% for 2019. ITT has delivered earnings surprises in 2018 totaling 5.72%, and the company raised its earnings forecast for 2018 to $3.13-3.15 from $3.05-3.15. Analysts currently project earnings to continue to grow in 2019 at a 13.9% clip. ITT is currently trading at a forward P/E of 15.48, which makes it a nice setup for a GARP stock.
StockScouter scores ITT a 9. The report notes that ITT is trading above both its 50- and 200-day MA with meaningful short-term price movement. StockScouter goes on to report that the enterprise value-to-sales ratio is lower than most of its peers. The company is also producing $248.01 million in levered free cash flow, so this isn't a company that will be negatively impacted by rising interest rates, with total debt of only $156.2 millon.
Lastly, I would comment on ITT being an innovator. The company recently rolled out 2 important products, i-ALERT and an upgraded ITT Smart Pad. Both have become widely popular in the market and should drive earnings higher in 2019.
As in every month, EAA overlays a portion of the portfolios with a volatility hedge. You can now track the hedge, VOL365, under the index symbol ^EAVOL.
Have a wonderful Thanksgiving, and I will return in early December to discuss the Equity Armor Advisors December 2018 portfolio.
Disclosure: I am/we are long MOST ALL STOCK MENTIONED. EAA TENDS TO INVEST ALONG SIDE ITS CUSTOMERS.
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.