Graham Value Stock Portfolio Update

In January 2012 I announced a new portfolio, a Benjamin Graham “inspired” value stock portfolio.  The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a variety of valuation metrics. I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio it is now updated quarterly.

I have also added an additional criteria to limit turnover in the portfolio (see below). The Graham portfolio is an attempt to add a value strategy to Scott’s Investments, which is otherwise focused on momentum, trend, income and market timing strategies.

The criteria used to select the stocks are listed below.  The tool used to perform the screen and backtests are courtesy of  Portfolio123 (“P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
  • Current ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  • Trailing 12 month EPS most be above EPS in the latest annual period
  • EPS in the latest annual period must be above EPS in the prior year and five years ago
  • The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

  • Valuation – 60% of total
  • Trailing 12 month P/E (15% of this category)
  • Price-to-Book (15% of this category)
  • Price-to-Tangible Book Value (35% of this category)
  • Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
  • Earnings – 40% of total
  • 5-year EPS Growth Rate (50% of this category)
  • EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

Stocks will now be sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell/turnover rule from previous updates.

I began tracking this portfolio real-time on January 13th, 2012. As of April 15th, 2014 it is up over 43%. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results, all positions are bought and held until rebalancing.

Below is a 14+ year backtest results for this screen  using a quarterly rebalance and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):

(test data courtesy of Portfolio123)

Graham

graham2
The stocks being sold 4/15/2014 are listed below:

Symbol Name Purchase Date  Percentage Gain/Loss
AGU Agrium 1/15/2014 -1.72%
AGI Alamos Gold Inc 4/15/2013 -9.38%
CVI CVR Energy 1/15/2014 13.08%
HP Helmerich & Payne Inc. 7/17/2012 145.17%
CVX Chevron 1/15/2014 0.94%
TESS TESSCO Technologies Inc 7/17/2012 62.17%
CF CF Industries Holdings Inc 1/15/2013 10.99%

The current portfolio is listed below.

Symbol Name
BGFV* Big 5 Sporting Goods Corp
BWC* The Babcock & Wilcox Company
HFC HollyFrontier Corp
CHRM Charm Communications
CLMS* Calamos Asset Management Inc.
CSH* Cash America International
CTCM* CTC Media, Inc
HUM Humana
JST Jinpan International
SWM Schweitzer-Mauduit Intl Inc
WMK Weis Markets Inc.
RCKY Rocky Brands
SCVL Shoe Carnival Inc.
DDS* Dillard’s Inc.
KALU* Kaiser Aluminum Corporation

*new position as of 4/15/2014

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Monday Readings

From ETF.com – Faber: Own Most-Beaten-Down Stocks, Swedroe: Quality Factor in Global Scope, Destroying Smart Beta: Part 1

Quant Tools Field of Dreams – Turnkey Analyst

A Study in Diversification – Following the Trend

PIMCO’s Bill Gross Picks Up the Pieces – Businessweek

Every Central Bank for Itself (pdf), Risk On, Regardless – John Mauldin

Cluster Shrinkage – GestaltU

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Like what you read? Consider a Paypal donation.

Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Dual Momentum ETF Portfolio

In February 2013 I created a  “Dual ETF Momentum” spreadsheet. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott’s Investment’s here. The objective of the spreadsheet is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″).  The test results were posted in the 2013 Year in Review.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity Representative ETF Signal based on 1 year returns Signal based on average returns
US Equities VTI Invested Invested
International Equities VEU
Cash SHY
Credit Risk Representative ETF Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG Invested Invested
Interm Credit Bond CIU
Cash SHY
Real-Estate Risk Representative ETF Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ Invested
Mortgage REIT REM
Cash SHY Invested
Economic Stress Representative ETF Signal based on 1 year returns Signal based on average returns
Gold GLD
Long-term Treasuries TLT Invested
Cash SHY Invested

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future

More on this topic (What's this?)
Cloud M&A: Momentum Adds Twist
Can Cyclicals Breakout And Provide Momentum For Higher Equity Prices?
Read more on Momentum at Wikinvest
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Like what you read? Consider a Paypal donation.

Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

April High Yield Dividend Champion Portfolio

The High Yield Dividend Champion stock portfolio has been updated for April. The portfolio is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments.

The High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, “Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.”

Looking for a Hedged Version and a larger pool of stocks? Visit Portfolio123

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

To date the portfolio is up over 85%.  I mentioned in the 2013 year in review that valuation of high yield stocks was a concern. In January’s update I noted that “I have lowered my expectations for future returns of US equities and high yield stocks.”

I added a valuation filter to the portfolio starting in 2014.  We still begin with the Dividend Champion list, which is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a relatively “high” yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and price-earnings (P/E) ratio.  Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

There is turnover in one position this month.  Helmerich & Payne Inc. (HP) was sold for a capital gain of 63%+ and an original purchase date of 7/5/13. The yield for HP has dropped below the minimum threshold as a result of its significant price increase in recent months. Old Republic International (ORI) replaces HP. It is currently ranked fourth using our ranking methodology.

The portfolio has now grown to a point where rebalancing positions is a concern.  The sale of HP generated over $30,000 in a $187,000+ portfolio.  The question becomes whether we put all of the proceeds into the new position, ORI, making it the largest holding, or allocate to both ORI and existing positions for a more balanced allocation.  The original portfolio allocated evenly among 10 positions. It is intended to be a real-world example of a mechanical investing system, so I have not rebalanced to this point to keep potential real-world fees and taxes to a minimum.

Given the size of the HP transaction, now would be an optimal time to balance the system.  To keep commissions and taxes to a minimum, I will not be selling any other positions in the portfolio. Rather, we will  use cash generated from HP to allocate approximately 10% of the portfolio to ORI, and we will purchase additional shares of the portfolio’s 4 smallest holdings – CVX, MO, UVV, and TMP.

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are March month-end):

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.36 36.10 11.15 10.73
AT&T Inc. T 5.25 54.12 2.33 10.31
Universal Corp. UVV 3.65 39.08 2.08 10.71
Old Republic International ORI 4.45 47.40 1.43 10.65
Eagle Financial Services EFSI 3.30 36.19 3.27 10.95
Tompkins Financial Corp. TMP 3.27 46.11 5.03 14.11
McDonald’s Corp. MCD 3.31 58.38 11.35 17.66
ExxonMobil Corp. XOM 2.58 34.19 12.24 13.25
Altria Group Inc. MO 5.13 84.96 8.23 16.56
Community Trust Banc. CTBI 3.09 44.44 1.49 14.40
Wal-Mart Stores Inc. WMT 2.51 39.59 15.27 15.76
Cincinnati Financial CINF 3.62 56.23 1.19 15.55
Target Corp. TGT 2.84 55.84 23.44 19.65
Weyco Group Inc. WEYS 2.66 44.44 4.13 16.68
PepsiCo Inc. PEP 3.14 60.65 6.39 19.33

The current re-balanced portfolio is below:

 

Position Shares Average Purchase Price Initial Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends
CVX 138 108.06 12/6/2012 $14,912.28 $16,394.40 9.94%
MCD 167 96.54 1/3/2014 $16,122.18 $16,344.29 1.38%
ORI 1145 16.22 4/4/2014 $18,571.90 $18,571.90 0.00%
UVV 332 46.47 4/5/2012 $15,428.04 $17,781.92 15.26%
TGT 321 55.07 2/5/2014 $17,677.47 $19,625.94 11.02%
CINF 375 47.1 2/5/2014 $17,662.50 $18,071.25 2.31%
XOM 196 89.01 4/5/2013 $17,445.96 $19,082.56 9.38%
MO 449 34.64 3/5/2013 $15,553.36 $16,868.93 8.46%
T 663 32.34 3/6/2014 $21,441.42 $23,569.65 9.93%
TMP 362 50.16 1/3/2014 $18,157.92 $17,759.72 -2.19%

$3613 will be kept in cash in case rebalancing is needed in the near future.

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