My Mad Method: Recent Additions To My Portfolio And How They're Doing

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Includes: AAPL, GLW, JNJ, MDT, MSFT, NLY, NOK, SDRL, WMT
by: J.D. Welch

A few weeks ago I wrote a 2 part article on how I narrow down the stocks on my watch list to help me decide where to spend my money next with a rating and ranking system that I've come to call My Mad Method. These articles were "The Method to My Stock-Picking Madness" Part 1 and Part 2. I followed those up this past week with an article called "My Mad Method: Ranking My Portfolio" that describes how I track stocks that have moved from my watch list into my portfolio. (If you haven't yet read this last article I mentioned, I highly recommend you do, so that you can understand the rankings in the first four columns of the table below.)

I've had great response and feedback to these articles, and thought I'd expand on the series by discussing the stocks that I've purchased most recently based on the Method and how they're performing so far. Since the market is somewhat down at the moment, don't expect all the numbers to be bright and cheery, but I will discuss the "gut" reasons that I pulled the trigger on these stocks after they ranked very highly on My Mad Method when they were on my watch list.

To kick this series off I'm only going to go back to the beginning of this year, which is when My Mad Method had really started taking shape as a set of metrics and, in turn, shaping my stock purchasing decisions. Since then the four new positions that I've added to my portfolio are (in order of purchase) off-shore drilling outfit SeaDrill, Ltd (NYSE:SDRL), software leviathan Microsoft Corporation (NASDAQ:MSFT), specialty glass manufacturer Corning, Inc (NYSE:GLW) and medical device maker Medtronic, Inc (NYSE:MDT).

The following table shows you data for these four stocks as of May 9th, 2012.

Click to enlarge.

If you're wondering why there is such a marked difference between the values found in the Shares Bought - % Share Change column and the % Gain or Loss column, well, that's the effect that having a high priced broker who is supposed to help you make investing decision can have on your returns. I've since moved most of my positions out of that brokerage house and into an online brokerage, with the exception of five stocks that are traded on foreign exchanges and which my new brokerage couldn't transfer over.

Those five are still doing fairly well, with only one of them reporting a loss in equity currently, and it would involve higher-than-normal commissions to sell them and move the cash into my new online broker, so for now I'm going to let the other guy keep them for me. As a group they yield 5.53 percent even after you take out the foreign taxes that are paid for most of them, so I think I'll leave well enough alone.

Getting back to the table above, the rest of the columns in the table should be pretty self-explanatory, but I'll point out two that may not be so clear. The last labeled column is "Alloc," which stands for "Allocation" and represents the percentage of my total rollover IRA (including the five holdovers at the old brokerage) that each position's current value takes up. The average percentage allocation across my portfolio is 3.33 percent, which is spread across 29 positions currently. I like to keep any one position less than or equal to 5 percent of my total portfolio, and when a stock goes over that I start evaluating it to see if it's time to take some profits and redistribute those funds across some of its brethren.

It has been noted that with so many positions I could possibly do just as well picking a few well managed ETFs or mutual funds to plop all my IRA money into, but where would be the fun of that? I'm a data hound, and I love crunching numbers and making the cells on my spreadsheet light up different colors and fonts when different things occur. Plus, my "pension" and 401(k) money are allocated to a few funds and ETFs, so I'm "diversified" in that sense. But this money in my IRA is my "wild card" in terms of how well off I hope to be by the time I retire, and this is where I'm practicing my own methods and honing my investing skills so that when I do retire I can continue to manage my nest egg in such a way that I don't end up working as a Wal-Mart (NYSE:WMT) greeter on the graveyard shift, or worse.

The last column in the table above, which has no header, is used to indicate whether a stock that has gone into negative territory in terms of its current value vis-à-vis its cost basis has had that negative amount offset by the total amount of dividends that I have collected on a cumulative basis from that company. In the case of Corning and Medtronic, this hasn't happened yet, so what is displayed is a lower case "v," which I use to represent a "down arrow," with Microsoft Excel Conditional Formatting that turns the cell pink and the text and border dark red.

If (or should I say, when) the total amount of dividends that I've accumulated for a given company exceed the amount by which its equity has fallen below zero, then this column would display a "caret", or "^" symbol, representing an "up arrow", and the Conditional Formatting would be a light green filler with dark green font and border, such as the following for Annaly Capital Management (NYSE:NLY):

For those of you playing at home, the formula for this little indicator is as follows:

=IF((Yield = 0), "", IF(AND((Yield > 0), (Amount of Gain or Loss < 0), (Amount of Gain or Loss + Prior Years' Dividends + Current Year's Dividend) < 0 ), "v", IF((Amount of Gain or Loss ) < 0, "^", "")))

Then use Conditional Formatting for "^" and "v" so that you get the appropriate color. Green up arrow: that's a good thing.

But what about the picks, you ask? Well, I know that SeaDrill wasn't actually #1 on my watchlist when I decided to buy it, but it was ranked very highly at the time, in the top 3 for sure. I firmly believe that we as a species will eventually do whatever it takes to suck every last drop of petroleum out of the Mother Earth no matter where it may be hiding, and SDRL is doing a fantastic job of providing deep water off-shore drilling ships to the exploration and development companies so that the latter can find the black stuff under the deepest waters of our Blue Planet, which, as you probably know, covers most of the surface of it. SDRL has a very strong commitment to returning profits to shareholders in the form of its 8.9 percent yield, presently, and it's even managed to grow their equity in the four months since I purchased it. This is definitely one that I'm holding onto, and will be adding to over time as well.

The remaining three picks from My Mad Method since the first of the year were all #1s at the time I bought them. MSFT was #1 when I bought SDRL, and as you can see from the table, I purchased them one day apart. MSFT has performed very well so far in 2012, and I expect even greater things from it with Windows 8 coming out in the fall, by all indications. I also like its chances with Nokia (NYSE:NOK) in trying to scramble up the smartphone food chain and scratch out a decent 3rd place position, and on top of that I'm pretty confident that Win8 tablets will finally give Apple's (NASDAQ:AAPL) iPad a decent contender to consider, especially in the enterprise space where there are so many legacy applications that need to run on x86.

At 2.6 percent MSFT has a very solid yield, and plenty of cash and prospects with which to grow that dividend in the coming years. I really was not surprised when MSFT came out as #1 the first time I put the My Mad Method spreadsheet together for real. You can also see from its current rankings in my portfolio that MSFT is still making a strong showing, coming in at #4 overall out of the total 29.

Then we have Corning, also a #1 pick once Microsoft left the watchlist. Since I got it GLW has not been doing very well, but I believe strongly in the company and its long history of innovation with all things glass. Gorilla Glass is reportedly in most smartphones and tablets on the market today; what's dragging GLW down is the flat screen TV market, which has softened considerably. If Apple does come out with an iTV, I would be very surprised if it was not made with Gorilla Glass. GLW is a long-term hold for me, and their dividend isn't too terribly shabby, either.

Finally my latest addition to my portfolio as a new position is Medtronic. It had and still has the #1 ranking on my watchlist, as I left it there to see if it would make sense to add more to my holdings after my initial purchase with everything else I'm considering. And the answer to that question is, Yes, I'm going to round out my position in MDT with a few more shares, especially now that it's dropped so much since I initially purchased it back in late March.

It's dividend is pretty decent, too, and it enjoys a strong position in the MMM Rank of the stocks in my portfolio. The only reason its overall Combined Rank number is so high is the amount of lost equity and the relatively low total annual dividend. But I think MDT is a strong player, and in the end I chose it over Johnson & Johnson (NYSE:JNJ) to add to my portfolio first. (I will get around to JNJ eventually, I keep telling myself, and in the meantime, it doesn't look like its stock price is going anywhere anytime soon, in either direction.)

So there are my most recent picks from My Mad Method, four very real stocks that I've backed up with very real dollars. I'll be writing periodic updates to this article as I add new positions from my watch list to my portfolio, and just to check in on a regular basis and let y'all know how the Method is working out for me. As always, please feel free to leave a comment or question below, and thanks for taking the time to read this article.

Disclosure: I am long AAPL, GLW, MDT, MSFT, NLY, SDRL.

Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.