My Mad Method: What Next To Buy, And Why - August, 2012, Finale

by: J.D. Welch

Wow, what an active month August turned out to be, at least for me and all the trades I ended up making. I started out the month writing about what I was planning to sell and buy in the article here, and then ten scant days later, I felt compelled to write an update article to the first one, since some things had changed substantially from my original plans. This article will recap the action since the "Revised" August article through the end of the month. I won't re-hash everything that I reported in the first two articles, but I'll pick up where I left off after the second article and fill you in on the rest of the month.

My strategy at the start of this month was to shed stocks from my portfolio that were underperforming in terms of generating adequate dividends in favor of companies that are either Dividend Champions, Contenders and/or Challengers (which can be found on David Fish's CCC list), or are reasonably safe generators of high yield. Why? Because I've decided that my primary goal for my IRA portfolio is to generate as much yield as I can safely squeeze out of it, while I'm still in the Accumulation Phase of my investing life (to which I got a late start), and use that yield to open positions and/or buy more stock in CCC companies. My long-term goal is that by the time I retire, my portfolio is generating sufficient income in the form of dividends that I can swap that income out for my former paycheck, and so that I don't have to liquidate any of the shares I'm holding by then in order to meet my retirement income requirements.

What Happened Next

In the last article about this August, I reported that I'd placed a limit order to sell my entire position in Abbott Laboratories (NYSE:ABT) if it reached a price that was 1% higher than it had been at the start of the month. ABT got very close to that price, so I pulled the trigger and sold it rather than watch it get closer-but-no-cigar, and I'm glad that I did. ABT had been very good to me in the (relatively) short time that I'd held it, gaining 22% in share price since last October and still yielding a solid 3% in dividends. However, the company's plan to split itself into two entities doesn't sit well with my goals, so I would have sold it by the middle of this October in any event. (ABT has since dropped a bit in price since I sold it back on August 14th.)

On the evening before ABT (nearly) hit the limit price I had set for it, I was reviewing my portfolio trying to decide where else I could apply a healthy pruning, when I realized that Arch Coal, Inc. (ACI) had recovered to the point where it was just above where I'd picked it up via cash-secured puts back in June. Just before I got assigned the shares from the puts, ACI slashed its dividend, then the share price took a bit of a dive, so I'd held on to it, hoping for a rebound in coal. Now that the price had recovered, I reasoned that I should sell it and use those funds, which represented over 4% of my portfolio, to buy the companies that were ranking well in terms of My Mad Method [MyMM], and rid myself of the last vestiges of my flirtation with speculating in coal.

(Unfortunately, in order to sell the ACI shares, I needed to buy back the call options that I'd written in July on that position. I explained the details of that here, but the bottom line is that I ended up losing just under $20 on the whole experience, which I consider OK for only being in ACI for 60 days, and sleeping better at night now.)

I used the proceeds from the sale of ABT and ACI, plus what was left over from my previous sale of Corning, Inc. (NYSE:GLW) and Ford Motor Company (NYSE:F), to initiate a position in Vanguard Natural Resources, LLC (NYSE:VNR), which was clocking in at the #2 spot in terms of the MyMM Ranking at that time of the combination of my watchlist and the stocks in my portfolio. In addition, I was able to make my final (for now) purchase of American Capital Agency (NASDAQ:AGNC), bringing the allocation of that mREIT in my portfolio to just over 5%, which is my threshold for how much I want any one position to hold.

I had also reported in the last article about this month that I'd placed a limit order to sell my entire position in StoneMor Partners, L.P. (NYSE:STON). As I watched, STON got close to my limit, and after some quick calculations, I adjusted the limit price on-the-fly to ensure that it would sell with only a small loss, just over $100. I can live with that for the peace of mind and sleeping well at night that resulted from shedding this controversial MLP from my portfolio.

With the proceeds of the sale of STON, plus what was left over from buying VNR and AGNC, I was able to initiate a position in my new #1 candidate, BreitBurn Energy Partners, L.P. (BBEP) on August 17th. This was according to plan as of the last article. I also added to my new position in VNR that day at just a few cents over where I'd made my first purchase of that MLP. However, I didn't use up all of my dry powder with these purchases, but kept about half of the cash from the sales of ABT and ACI around to see how the rest of the month would unfold.

As it turned out, BBEP kept dropping in price, not by much, but enough for me to average my way down with two more smaller purchases the next week, bringing my allocation of BBEP to a comfortable 4.34% for a 9.73% Yield on Cost [YOC] as of this past Wednesday's close. At the same time, I made my third, small purchase of some more VNR, lowering my cost basis for it and bringing my recent YOC to 8.34%.

But Wait, There's More!

At this point, I didn't have enough cash left to do anything meaningful, so I decided to wait for more dividends to accumulate and set my sights on the end of September to make another substantial purchase. Well, that plan didn't last long, either.

In a comment thread of a June Seeking Alpha article by Robert Allan Schwartz on what he was planning on buying next, there sprang up a discussion of Staples, Inc. (NASDAQ:SPLS) this week and how it had taken a huge hit in price recently, but was generally observed to be one of the few brick-and-mortar companies that could not only survive but eventually thrive. I had looked at SPLS months ago, and decided that it was a well-run company with reasonably good prospects, but decided at that time that I didn't want to get into any Retail stocks.

However, by this time, I was pretty heavily invested in Energy-related stocks, and decided that I needed a bit more diversity in my portfolio, so I took another look at SPLS by adding it to the MyMM watchlist this past Monday. (I should also point out that, by this point in time, some more dividends had rolled in, plumping up my cash account to an amount that made the $1.00 in commissions that I typically pay for a trade through my broker, Interactive Brokers, very easy to swallow.) Staples immediately jumped into the #2 spot on the watchlist, with a Delta Ratio Reading of "Holy Cow!" and a yield of over 4%. It's also a Near-Challenger on the CCC list, and should graduate to Challenger within a year's time, so it had that going for it as well.

So I got up early this past Tuesday morning to see what was going on in the market in general and with SPLS in particular. Things were heading downward overall, which is a good time to go shopping, so I splurged with the last of my cash and initiated a very small position in this office supply stalwart at a penny above its 52-week low, and then watched as SPLS turned around and rose (slightly) for the rest of the day, and ever since (so far).

Conclusion (Really!)

And that, as they say, is that for August, 2012. I've scoured my portfolio, sloughed off all of the deadwood I could find, and feasted on companies with healthy yields that will help me accelerate my purchases of CCCs in the months to come. By the end of September, I will have enough in dividends to add to my fledgling position in SPLS, which is still doing very well on the combined watchlist/portfolio list. SPLS is, understandably, still Reading "Holy Cow!", and hopefully will still be by the time October 1st rolls around. Until then, I'm satiated for now, and am sleeping very well at night, indeed!


I am long AGNC, BBEP, SPLS, VNR. 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.

Additional disclosure: 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.