AB Analytical Services

High Dividend Yields Screened for Safety

Many investors have been shifting out of bonds into income-oriented equities. I have favored this strategy, but it's very important to realize that dividends aren't the same as interest payments: They can be cut. In that case, not only will your income be less than you expect, but also your investment will most likely decline in value.

If you are employing an equity substitution strategy, it's essential to take steps to mitigate the risk of dividend reductions and consequent capital losses. Some of the factors that make a dividend-paying stock risky would include high levels of debt, high payout ratio (dividend relative to earnings), and a shrinking business (lower future earnings). You can minimize the risk of getting a dividend cut by investing in low-debt securities with lower payout ratios and underlying earnings growth. Another indicator of limited potential for dividend reduction is high insider ownership.

I set up a screen to identify stocks that meet the criteria. Here is what I did (using Baseline):

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Buy Dips not Plunges

Over the last few weeks I have explored severely depressed stocks, taking a look first at potential bargain S&P 500 stocks trading 50% or more below their 52-week highs, and then following up with "Mid-Caps Sliced In Half." As I suggested, often these names are beaten up for a reason, making investment somewhat of a long shot. While I have encouraged readers to resist the temptation to bottom-feed, I can appreciate the idea of buying a stock that has fallen "too much." Intuitively, a lower price seems to imply less risk, but this isn't necessarily the case.

So, if you are the type of investor who likes to snap up stocks with negative price momentum, how can you raise the odds in your favor? While there are still no guarantees, I believe that the chances of successful entry can be improved by applying certain technical and fundamental criteria.

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Sliced and Diced: 7 Mid-Cap Stocks Cut in Half

Folllowing up on last week's look at all of the S&P 500 stocks trading at less than 50% of their 52-week highs, I screened the Mid-Cap Universe of 45 names to come up with 7 that might merit further attention.  The results were spread out among several sectors, including an Energy stock, a Consumer Discretionary stock, a Materials stock and four Technology stocks.

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SHHH! (Quiet Breakouts)

In case you didn't notice, the bull is back. After a Q1 that left the stocks ahead of the pace I was expecting, the market, not surprisingly, consolidated. In my view, the market is no longer overextended or overbought, and hopefully it is on track to resume its rally towards 1600 on the S&P 500 that I described last October.

Recently, I shared one of my strategies that can work well in a bull market - buying good companies that sell off on earnings misses that don't materially reduce the longer-term outlook. Perhaps psychologically, buying stocks that dip is appealing, but as I said in the article, it doesn't always work. An even better strategy in my view is to buy breakouts.

Again, this can be tricky, and one wants to be very careful about timing a breakout, as sometimes they prove to be "false breakouts" and, even when not, chasing an extended stock can prove to be poor timing. Instead, I like to focus on stocks that aren't overly extended. Let's call them quiet breakouts, where the train hasn't fully left the station. These quiet breakouts should have big bases, good earnings growth and reasonable valuations.

In order to identify some potential quiet breakouts, I ran the following screen using Baseline:

• Russell 3000 member

• Within 5% of 52-week high

• One-year Price Return < 20%

• YTD Price Return < 12%

• Price > 2007/2008 High

• One-year EPS Growth > 20%

• 3-month Earnings Estimate Revisions >0%

• Forward PE < 20

 

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Looking for Yield? Here are 7 Under-the-Radar Dividend Plays

Investors have been transforming their portfolios over the past couple of years in response to historically low bond yields, substituting conservative dividend-paying stocks for bonds or cash in order to produce more income. Here at Seeking Alpha, there is tremendous discussion about this topic, but I have found that it tends to be focused on very large, well-known names, particularly in the Consumer Staples, Healthcare or other more "stable" sectors.

Last fall, I suggested that Dividend Growth Investors expand their horizons a bit and consider "High Quality Financials", a recommendation that was met with a lot of skepticism based on the comments I received. My point isn't to go back and say "I told you so", but there were some tremendous moves from the majority of the names discussed, with many outpacing the market and certainly outperforming the Consumer Staples and Utility sectors, for instance.

Today, I want to shift the focus towards small cap stocks with certain positive characteristics. After starting the year strongly, small caps are trailing larger companies in 2012. Over the past year, the S&P 500 price has increased 5%, while the Russell 2000 has dropped 2%. I spend a lot of time looking at smaller companies, and, while it's always difficult to generalize, I see all sorts of bargains these days. Among the bargains are names that should appeal to conservative investors. Sure, some of the names are relatively illiquid, with quality more difficult to judge than more familiar names perhaps, but, in the end, risk isn't eliminated by going with large companies.

In order to highlight some potential opportunities, I created a screen with Baseline. Here are the parameters:

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A Dozen GARP Stocks to Consider

The pullback in the market is giving investors a chance to either get in if they have been on the sidelines or to reposition their portfolios otherwise. Last week's 1357 print on the S&P 500 (SPY) may have been the low, though I anticipate that we could perhaps test a bit lower. I remain constructive on the market and continue to expect 1600 on the S&P 500 in 2012, a forecast I first shared last October and reconfirmed in February.

In trying to find some new ideas to consider, I decided to screen for cheap stocks that are growing but that have technically corrected already. This "growth at a reasonable price" (GARP) screen I designed using Baseline is as follows:

• Universe = Russell 3000
• Market Cap: Between $1 billion and $10 billion
• 50dma > 200dma (in an uptrend still)
• Price = 75-90% of 52-week high (corrected)
• 1-year price return > 4% (beating S&P 500)
• 2-year price return > 15% (beating S&P 500)
• Trailing PE < 20X
• EV/EBITDA < 12X
• Trailing Sales growth > 10%
• Trailing EPS growth > 14%
• 2013 Projected EPS Growth > 12%

Here are the 12 names that met the criteria, sorted by EV/EBITDA:

 

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Sell Apple to buy ???

I think AAPL is reaching an interim peak, with valuation now fair.  There are a few reasons to expect AAPL to pause or retrace.  In this article, I share 5 ideas to consider as replacements.

Read 4 Reasons to Sell Apple and 5 Potential Replacements

3 Retailers On Sale

3 retailers that have pulled back so far in 2012  but certainly aren't "broken" look interesting to me.  To read my article on Seeking Alpha, please click:  3 Retailers on Sale

7 Cheap Tech Stocks Breaking Out

Tech is hot in 2012.  Many people incorrectly believe that this is just an AAPL phenomenon.  In fact, if you take AAPL out of the S&P 500 Tech stocks, the sector would still be up more than 10%.

I decided to screen the sector for stocks that are close to their 52-week high and growing earnings but that aren't particularly extended.  To see which stocks made the cut, please read my article on Seeking Alpha

9 Stocks that Could Destroy the Shorts

Today's surge in Sears Holdings (SHLD) is yet another wake-up call to traders trafficking in crowded shorts. I think the company has horrible fundamentals, but I had highlighted it as an over-shorted value play in late January, when it was already off to the races. SHLD isn't the only stock burning the shorts. As of 2/22, over 5% of the Russell 1000 was shorted in excess of 15% of the float, and these stocks are up an average of 18% year to date.

As I have been sharing, I am quite bullish. In fact, I expect the market to surge to 1600 this year. In an environment where retail investors may finally be returning to the market as the economy rapidly skates from the thin ice of a potential double-dip recession, crowded shorts could prove especially painful. With this in mind, I wanted to design a "short-buster" screen using Baseline. Here is what I did:

• Member of the Russell 1000
• Short-interest > 15% of float
• Within 5% of 52-week high
• 2013 earnings growth vs. 2012 > 0

Here are the 9 that made the cut - (click to enlarge):

 

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