Saturday, January 14, 2012

Ranking my stocks

I've heard a lesson once that it's good to take a look at your stocks when the markets are closed and rank them once a week.  The purpose is to be able to look at your holdings without the stresses of a moving market to influence your stance on things.  I haven't been able to make this a personal habit yet and even if I do, I don't think I'll post it all here every time, but I'm looking to do it today and want to post it because I think it has some additional merit.  In today's news, a number of things have come up which have the potential to change the general feel of the market compared to the first couple weeks of the year.  First, a number of EU countries have been downgraded by S&P, second Greece is announcing it is having difficulties coming to agreements with its bond holders to prevent the country from defaulting.  In 2011, Greece and the EU as a whole was a huge impact on the markets in a negative fashion and after 2 weeks of the stock market on a general tear to the positive, it becomes more important to assess the risk in front of us so we can protect our capital.

First, I'm going to describe the grading scales.  Then I'm going to go through each of my current 7 holdings I've discussed in previous posts and try to assess the score.  I may even go so far as to place some buy or sell points.

Grading Scale:
Here is the scale I've learned to rank my stocks.

1 - These are the stocks you have the most conviction on.  You'd buy more even at current prices
2 - Stocks you like, but feel are overly priced to buy currently.  Typically you'd be looking for at least a 5%-8% drop from these levels
3 - Stocks you will sell if they rise another 5% - 8%.  These will be stocks nearing your exit points on gains or stocks stocks proving to be bad bets and you need to start getting rid of them before you take too much for losses
4 - It's time to sell these stocks - either they've gone up too much and the risk is too great, or you hate them, they've performed poorly and you need to get out before you get hurt more.

Keep in mind that when you rank your stocks, just because you say buy doesn't mean you buy everything at once and just because you say sell you don't sell everything at once (there are very few exceptions, but I won't go into them here).  Also remember, it's important to be honest with yourself.  It's not easy to admit failure or that you have done well and it's time to start lightning up despite the fact that things could still go higher, but not doing so can cost you a lot of money.

Ranking My Holdings:
I'm going to list each holding, give it my grade, then provide the reasons for it.  I already know I'm going to waffle a little bit more than I care for, but I hope my explanations will help support my thought processes.

Broadwind Energy (BWEN) - 2 - I've stated before that I held onto this stock too long.  Now the stock is in the doldrums with current prices well in penny stock territory.  The company itself is also turning things around. In the last 6 months, it's announce a number of large contracts for or gearing components for major companies.  They've been going through some reorganization and have diversified their portfolio to help them through the cyclical downturns and are looking to start turning profits again.  For these reasons, I'm thinking that I might increase my position if the stock pulls back to $0.62 or less - preferably before they announce their 4Q results.  Currently the stock is too low to sell, my current price target is $1.50  Note that the EU fears could hurt BWEN only if the EU hurts US GDP or lending gets so tight that the company cannot easily refinance long term debt.

Citigroup (C) - 4 - This one is difficult, but I'm calling it a 4.  The truth of the matter is that this bank has a lot of risks that are getting harder and harder to ignore.  JP Morgan just announced their fourth quarter results today - earnings were down, but they met estimates.  This bank has been considered one of the best for large banks since before the 2008 crash.  When you see these kinds of results, you realize there are a lot of risks for this company who makes their own announcements next week.  In addition, this is one company that could be hurt the most when it comes to fears from Europe.  Today the stock managed to recover some of its losses after the big announcements - meaning someone is interested in buying on dips - but how long will this last?  C is also up over 14% in the last month.  That's a strong, quick gain on virtually no positive news.  I will say I think the stock was once over sold and the price is still below book value, which is somewhat hard to comprehend, but with looming risks and defaults in Europe, it's hard to say everything on their book is guaranteed to maintain value too.  I hope the fact that the stock didn't close on its lows is a sign we could get some increases next week.  If we do, it would be wise for me to sell a little into it.  I should also get some sold before it dips below 30, if that becomes a true possibility.  This weekend's news on Europe could be key to that.

John Deere (DE) - 2 - Deere has a lot going for it on the positive side, actually.  If the EU falls into a recession, it's possible that DE will see a reduction in sales, however, the first reaction typically for the markets is that commodities will go up if it looks like stocks will go down.  As I said the other day, I think commodity price is a major driver behind DE's results.  So the stock price may end up breaking that correlation, but it would be a buying opportunity more than a selling one.  Also that hot, dry weather in South America is still a potential to make prices jump as well.  Deere has some technical support for its bullishness as well as it recently surged past the 200 day moving average and that is now going to be the floor that prices would likely test.  Those are the prices I'm willing to buy some more at too - around $77.

Encana (ECA) - 3/4 - This one I can't help but waffle.  This stock is down hard over the last year and even when the rest of the market performed well over the last week and last month, this one has squandered.  The reason - Nat gas commodity prices.  Wow have those fallen hard - below $3 now.  There's so much supply of the stuff and not near enough demand.  Also, coming from someone that's supposed to be experiencing a brutal winter, it's been anything but.  These low prices are going to mean lower returns for Encana.  Sure, the company does have some hedged bets to help protect them, but they're still going to get hurt going forward. And that's where this becomes difficult.  As of today, ECA is Yielding over 4.5% - a huge yield - as the company pays out $0.80 a share per year or approximately $150 million.  In terms of earnings, this isn't good as unless something big happened in the fourth quarter, I doubt full year earnings will be $0.80/share.  I'm expecting full year results to be in the range of $0.57 - 0.67 per share with analyst expectations averaging at $.62 per share.  That's less than their dividend which isn't good, however, compared to the company's free cash flow (around $1.4 Billion) they have more than enough to continue to pay out.  It just becomes a dangerous proposition if the company doesn't think they'll be able to get earnings higher in the next year or two.  If that becomes the case, this stock will drop further.  So for now, I want to hold it, maybe sell it on a jump, but I'm cautiously awaiting their earnings announcement because it might be time to unload despite the high yield.

Honeywell (HON) - 2 - This one seems pretty clear cut to me.  HON has been surging for over the last month and I've already sold some profits expecting a pullback I haven't received.  Now if the problems in EU come to a head again, it's likely you'll see industrial stocks like Honeywell pull back some.  If it pulls back enough, I'll pick some more up.

On Semiconductor (ONNN) - 2 - I've talked about how tech has some serious repetition when it comes to cyclicality.  I don't think this year will deviate much from protocol at this point, however, it's not time to jettison tech yet.  This name is a "Sell in May and Go away" kind of stock and it's been on the rise over the last 3 months.  I anticipate a pullback coming which can provide a buying opportunity.  Current floor is at $7.68, I think.  If it breaks through this because of Macro concerns, I think this is a huge buy.  Their fourth quarter report should prove interesting as well.  They've been saying that due to the floods in Thailand, things would bottom during the first quarter as inventories are pretty much used up as other analyst reports have been indicating in other semiconductor companies in the space.  This should help get an idea if things really are getting stronger and if we might want to hold tech through the summer this year.  Currently my target on ONNN is $9.

Pepsico - (PEP) - 1 - Pepsi has been brought down in the recent last couple weeks.  I think part of this is a shift from safety stocks to the industrials and other cyclicals.  Part of it might be due to speculative reports that the company may soon shed 2000 jobs.  Financially speaking, shedding jobs should help earnings and therefore help the stock but if there truly is growth in the markets and the US, you can see Pepsi under performing the S&P500 index.  My take?  Although right now we're seeing Pepsi under perform, I don't see this as a permanent trend yet.  The yield is still quite enticing considering it's over 3% and this company has been increasing their dividend yearly for a very long time now.  Yield still seems to be the safe place to be until many of the unknowns get ironed out, so I'm ready to work on completing my position as the market continues to pull this stock down.

So this is how I rank my current holdings.  Took a bit of work and a few gut checks, but I've gotten through it and have basically set some rules I should be following and can validate against.  Have some thoughts?  Disagree and have some stats to back it up?  Love to hear your thoughts!