My Mad Method: Holy Cow Tipping!

by: J.D. Welch

I grew up in New Jersey but went to college in Ohio, where I was introduced to a charming pastime known as "cow tipping". Cows sleep standing up at night, and the ritual of cow tipping involves a group of drunken college students making their way to a nearby farmer's pasture where one or more of them sneak up on a sleeping bovine, push (or "tip") it over onto its side, and raucously run for the fence of the pasture and back to campus, chortling at the startled expressions of the tipped cows. While I never participated in such fraternal frivolity (truth), I do like trying to pick up stocks whose prices have dropped so low that they are within 5% of their 52 week lows and, therefore, register a "Holy Cow!" Delta (or "Difference") Ratio Reading on the combination watchlist/portfolio "super list" that I maintain in My Mad Method spreadsheet.

If you're unfamiliar with My Mad Method, or "MMM", it started off as 15 metrics that I capture and rank for all of the stocks on my watchlist. I then take the average of those 15 metrics and rank that number to come up with a final MMM Rank, where lower is better; in other words, we're looking for #1. MMM has evolved somewhat, but that's the essence of it. I then use the ranked results to help me determine which stocks to either add to my portfolio, or to which stocks already in my portfolio I should add more shares.

Last month I wrote two covered call option contracts against the 200 shares of Cirrus Logic (NASDAQ:CRUS) that I held, and last Friday they got called away at the $28 strike price, the details of which are covered here. That left me with $5,600 in proceeds to reinvest. I decided that CRUS had shot up to a point where I was no longer interested in getting right back into it, either by buying it outright or writing a cash-secured put at a more desirable entry price (the premium for which was, correspondingly to its current price, not so desirable at this time). So I turned back to my super list that combines my watchlist with the stocks in my portfolio, which I first described here, and using the same 40% weighting on the Yield metric of MMM that I used in that article, I checked to see which stocks were good candidates for purchasing.

Looking at the latest version of my super list, one thing I noticed was how many stocks were registering a "Holy Cow!" on their Delta Ratio Reading, which means that their prices have dropped so low that they are within 5% of their 52 week lows. Looking at the charts, it looks like we're coming out of a bit of a trough in terms of recent prices, and I wanted to pick up stocks that are truly bargains so I can hopefully realize some good equity growth to go along with the dividends that I expect stocks in my portfolio to generate.

I consider myself a dividend growth investor, and as such I'm always on the lookout for stocks that provide solid, stable and growing yields. However, these days I have been skating on the fringe of DGI philosophy and find myself focusing in on those stocks that are providing a high-than-usual dividend yield, and not necessarily adhering strictly to the guidelines that apply to true DGI Champions, Contenders and Challengers. While I still appreciate dividend stalwarts such as Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T) and Kimberly-Clark (NYSE:KMB), and in fact hold positions in all of those companies, I'm a little behind in my saving for retirement and am playing a game of catch-up to try to give my meager IRA a bit of a near-term boost with some current super dividends.

With that in mind, I set a few Rules up for myself for how I was going to allocate the funds that came to me from having my CRUS shares called away, similar to the rules I established in "The Next Evolutionary Step" article:

  1. Divide the $5,600 from CRUS into four equal parts of $1,400 and only spend up to three of them, and only up to that amount for each.
  2. Apply a 40% weight to the Yield ranking in My Mad Method. This is to give the overall average yield of my portfolio a boost above its new current level of 5.49%.
  3. Find stocks and the right number of shares in those positions that will yield at least 8% in dividends with the $1,400 per-position cost cap (in other words, produce at least $112.00 in dividends over the next 12 months).
  4. Only pick stocks that are registering "Holy Cow!" on their Delta Ratio Reading.
  5. Keep the number of possible shares in each position to multiples of 5.
  6. Place Good-Till-Cancelled, or GTC, Limit orders for the final selections below their recent prices before the close of the market Tuesday, June 19th.

Here's how the top 25 out of 46 possibilities lit up. The green highlighting is the Microsoft (NASDAQ:MSFT) Excel Conditional Highlighting I applied that means these stocks have met the criteria I set forth in the Rules above:

First place Hatteras Financial (NYSE:HTS) doesn't make the cut as its current price is so close to its 52 week high that it's registering a "Screaming!" Delta Ratio Reading. But literally right behind it is MV Oil Trust (NYSE:MVO), a bona fide "Holy Cow!". I just purchased 35 shares of MVO at $33.50 last week, but with the funds I've allocated to placing three more orders this week I can place another limit order for 40 more shares at $33.50 and, if it fills, only spend $1,341 of the $1,400 per stock allocation I'm allowing myself, including commission.

The next "Holy Cow!" on the list is Alliance Resource Partners, L.P. (NASDAQ:ARLP), but because I set the yield bar so high this time even ARLP doesn't make it into the Top 3. That's OK, as I've loaded up on some ARLP recently, and while I'm still bullish on coal in general and this supplier in particular, I want to spread myself around a bit more.

That leaves France Telecom (FTE) the clear winner of the second allocation of $1,400. I still have a limit order for 100 shares of FTE waiting to be filled from last week, but looking at its chart I realized I'd probably set my original limit price of $11.00 way too low. So I've upped that order's limit price to $12.50, which is still below yesterday's close, and increased the number of shares in that order to 200. That means an allocation of $1,211 from the CRUS funds to double-down on this global telecom and its nearly 15% yield.

Continuing down the list we don't get another combination of a "Holy Cow!" and Rules-meeting green highlighting until we hit National Presto Industries (NYSE:NPK). I really like this company for how it takes care of its shareholders with the annual special dividend it's been giving out in recent years; and I also love that its CEO owns so much the stock, over 23% by my last reckoning. Looking at NPK's chart, it looks like it has hit a bottom of sorts and could be moving back up. I was going to load up on some more NPK before next February's annual ex-dividend date, but I'm not sure when I'll have this much cash on hand again, so I decided to make my move now and nearly double my position in this eclectic manufacturer of pots 'n pans, bullets and adult diapers. I'm glad I did, too, because right after I placed my limit order for 20 shares at $67.50, NPK shot up and closed today at $69.47. I expect that its price will waffle around a bit more before next year, but with this purchase I've lowered my cost basis in NPK from $90.74 to $83.40. Not too bad.

All this good cow tippin', and I've still got a bunch of dry powder left to see if I want to pick up another bargain, or place a limit order for something like CRUS to get back into that again. I've got a bunch of funds coming into my cash holdings in the form of dividends and whatnot, so I should be good to go for a while; I just need Mr. Market to cooperate and pull back a bit so these outstanding orders can get filled.

Thanks for taking the time to read this, and stay tuned for more of My Mad Method and where it leads me!

Disclosure: I am long ARLP, FTE, JNJ, KMB, MSFT, MVO, NPK, T. In addition, I may initiate a long position in (HTS) and/or (CRUS) in the next 72 hours. Also, 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.