Sunday, February 28

Month 116 - BUY LOW: Dogs of the S&P 100 for 2021 - February 2021

Situation: Building on last month’s blog about 6 A-rated “Dogs of the Dow”, I’ve widened the search to encompass 14 A-rated “Dogs of the S&P 100” by using the same methodology.

Mission: Analyze all 14 4-rated “Dogs of the S&P 100.”

Execution: see Table.

Administration: All 10 “Dogs of the Dow’ for 2021 had dividend yields higher than 2.5% in early January. Six of those met our requirements for being A-rated: 1) reliable dividend yields that are consistently higher than the S&P 500 Index dividend yield, as evidenced by inclusion in the Vanguard High Dividend Yield Index ETF (VYM); 2) S&P Bond Rating of A- or higher; 3) S&P Stock Rating of B+/M or higher; 4) 20+ year trading history on public US exchanges; 5) positive earnings over the Trailing Twelve Months (TTM); 6) positive Book Value for the most recent quarter (mrq). Those 6 A-rated Dogs (MRK, AMGN, CSCO, KO, MMM, IBM) were analyzed in last month’s blog (Month 115). NOTE: MRK and KO are no longer A-rated due to recent S&P downgrades to their Stock Rating. To uncover A-rated “Dogs of the S&P 100”, I’ve analyzed all 27 A-rated S&P 100 companies--including the 11 found in the Dow Jones Industrial Average (DJIA). 14 of those 27 had dividend yields higher than 2.5% in early January (PFE, AMGN, CSCO, DUK, PEP, LMT, UPS, USB, BK, EMR, MMM, MET, GD, IBM).  

Analysis: Warren Buffett’s favorite metric is addressed in Column Q of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is a good number. 9 companies (PFE, AMGN, CSCO, PEP, LMT, EMR, MMM) pass that test. His second point (that the company is being “run by able and honest managers”) is addressed in Morningstar reports (see Column AK in the Table) and by the propensity that managers have to capitalize the company with long-term bonds as opposed to common stock (see Column U in the Table). Four companies (PFE, LMT, BK, GD) have BUY ratings from Morningstar, and 7 companies have a ratio of Long-Term Debt to Equity (“gearing”) that is less than 1.0 (PFE, CSCO, USB, BK, EMR, MET, GD).  Warren’s third point (that the stock be available “at a sensible price”) is addressed by the 3-5 year estimated PEG Ratio (see Column M in the Table): 5 companies have PEG ratios of 2.5 or less (AMGN, UPS, BK, GD, IBM). 

Bottom Line: PFE is a BUY because of satisfying at least 3 of the 4 requirements. One of the most important activities for a stock picker is to keep a file on companies of interest whose stocks are selling below trendline. This month’s blog has 5 (see Column O in the Table): LMT, USB, MMM, GD, IBM. Any of those 5 that have good profitability and sustainability are worth close study, since their prices are certain to return to trendline. That is, prices will exhibit “reversion to the mean”

Risk Rating: 7 (where 10-yr US Treasury Notes =1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into PFE and CSCO, and also own shares of AMGN, DUK, LMT, USB, MMM, GD and IBM.

The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

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