Wednesday, May 28, 2008

* This Sword Has Two Edges!

Last Saturday in my article "You Can't Beat the Herd by Following the Herd", I promised to share a MSN Stock Screen that helped me identify some exceptional stocks, and got me into some trouble.

The D4L High Yield Stocks is a screen that I have used in the past to find some real jewels Note: You will likely not be able to view this screen unless you are using Internet Explorer. Here are the criteria used in this screen:

  • Dividend Yield >= 5.2 (no magic to 5.2%, I usually set it to 2-3 points above the MMA rate)
  • Dividend Yield: 5-Year Avg. >= 3.5 (~couple points below the current yield - looking for a deal)
  • 5-Year Dividend Growth >= 0.1 (the company should be growing its dividend)
  • EPS Growth the Next 5 Years >= 0 (make sure the company isn't dieing)
  • Rating >= 6 (on a 10 point scale this is slightly better than average)
  • Return Expectation >= Average (expected return better than average)
  • Risk Expectation <= Average (expected risk below average)
  • Mean Recommendation >= Hold (make sure analysts don't know something we don't)
  • Avg. Daily Vol. Last Qtr. >= 50,000 (should be liquid enough to handle my volumes)
  • 12-Month EPS: Total Ops. >= 0 (looking for positive earnings)
  • Price/Cash Flow Ratio >= 0 (looking for positive cash flow)
As you can see this screen is geared toward finding stocks with a yield higher than its historical yield. In other words, a distressed stock. It is then our job dig deeper and understand why the stock is distressed and try to answer the tough questions.

Is this a temporary situation? Is the stock being unfairly penalized? Is the dividend at risk of being cut? If you can get to the right and desirable answers to these questions, then you have found a jewel in the rough. Some past jewels I have found with this screen include American Capital Strategies, Ltd. (ACAS), Commercial Net Lease Realty, Inc. (NNN) and Health Care Property Investors Inc. (HCP).

As indicated in the title to this article, this sword has two edges and can just as easily cut you if extreme caution is not exercised. It is easy to convince yourself that you are smarter than you actually are when things are going right. If you get sloppy or just make a bad decision stocks from this screen can go south very fast. Some of my past failures from this screen include Newcastle Investment Corp. (NCT), NovaStar Financial Inc. (NFI), and American Mortgage Acceptance Company (AMC).

Though the above failed purchases are long-gone, I look them each time I open my portfolio. As described in "How To Increase Your Portfolio's Return", keeping the sales/losses in my portfolio is a reality check for me and is really the only correct way of calculating a portfolios total return. You should have definite limits on the amount of risky stock in your portfolio. Greed and a downturn can hit you quickly. I learned my lesson the hard way, hopefully you won't have to.

It is important to note: This screen is NOT a buy list. It provides a list of stocks to evaluate further. It is not unusual for most, if not all, stocks on from this screen to be rejected for one reason or another.

At the time of this writing, I owned the following stocks ACAS, NNN and HCP.

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