Silver Still Looks To Have More Downside

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Trade Setup In Oracle

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Successful Dividend Investing In Target

Target Corporation(NYSE:TGT) is a proven dividend aristocrat which means it has raised its dividend consecutively over the past 25 years at least (40+ years in fact). At the time of writing, its share price trades around the $59.30 handle (September 21-2017) which means its dividend yield currently is coming in at 4.18%. New investors come to this website every day and look for ideas and strategies that can help their financial situation. If the respective investor is income orientated, I believe Target is a logical choice where dividend investing can be employed especially when you consider its present valuation and strong dividend yield.

Dividend Investing In Target Stock

Target’s present earnings multiple is just under 12 whereas its long time average multiple is 17.6. Low valuations in proven dividend aristocrats are excellent vehicles to get that monthly passive income really moving north through the reinvesting of quarterly dividends. Why? Because the yield spikes as the the shares get cheaper. For example, Target’s shares topped out in mid 2015 at $85 a share. At that time its dividend yield was under 2.5%. So a $10,000 investment in Target shares back then would have netted $250 in yearly dividend income. This is $21 in monthly income when rounded off. Nevertheless the same $10,000 invested today would net the investor $418 in yearly income because significantly more shares could be accumulated due to the lower valuation. A sizable gain to say the least.

Nevertheless $35 a month on a $10,000 initial investment just doesn’t cut it for many and I get it. $10,000 is a sizable amount of cash for many. $35 a month in passive income is not going to change anyone’s opinion about dividend investing overnight. This is why we need to see bigger figures sooner rather than later to keep our income investor interested. By the way, let’s call our investor Tom for simplicity sake. Tom’s goal is to get his passive income from dividends from his initial $10,000 investment in Target up to $100 a month as soon as possible though aggressive dividend every quarter.

This article is more psychological than anything. Tom knows deep down dividend investing (where quarterly dividends are reinvested) works if his investment is given time. However this doesn’t mean Tom will succeed. How does he set this thing up to make sure he doesn’t quit?

Getting to a round number like $100 a month in passive income builds positive reinforcement. Positive reinforcement is why the rich get richer and the poor get poorer. When one is emotionally connected to their goal, the chances of attaining the goal are proven to be much higher. Therefore with respect to Tom, we need for him to get a few early wins in this new investing game. Why? Because to him, this dividend investing growth lark is still very much unproven in practice. This is why it is said that success is 80% psychology and 20% mechanics. We all know the mechanics work in dividend growth investing but how do we convince Tom of this which means essentially keeping his emotions out of the way.

Why do I say this? Because (especially at the outset) the minute a better opportunity comes across his desk whether it be a high flying growth stock, a business venture or whatever, that $10,000 could be withdrawn as quickly as it was wired in. That’s the power of emotions or fear of loss to put it more succinctly. Therefore with respect to Tom’s $10,000 worth of shares in Target, we need him to see progress through his own eyes, a pat on the back as you were, which will demonstrate to himself that he is doing the right thing for both himself and his family. Here is how those perceived early wins are accomplished.

Dividend Investing Works When The Stock Is Heavily Oversold Which Is What He Has Done With Target

When one buys a dividend aristocrat that is heavily oversold, the chances of the stock bouncing increases meaningfully. I accept that this is counter-intuitive for dividend portfolios as dividend based portfolios want to accumulate as much cheap shares as possible. Nevertheless new investors like Tom straight away receive positive reinforcement once he has a paper gain on his shares. This will result in him staying in the game much longer. Target shares were almost $9 a share cheaper two month ago when its earnings multiple almost dropped to single figures.

If Tom was lucky enough to buy Target anytime over the past two months, he is now sitting on a paper gain in his account. Even if he buys today, Target shares should still head north to some respect due to how oversold the stock is compared to historic valuations. I believe a rise in the price of the shares is important psychologically although it does Tom little good with respect to getting that income up

Tom Now Needs To Take Advantage Of This Momentum By Buying More Shares Monthly – (Aggressive Dividend Investing)

To go from $35 a month in dividend income to $100 a month as quickly as possible, Tom will need to start adding more capital to the $10,000 preferably on a monthly basis. When one can look at the situation objectively and break down every extra cent added, the numbers over time become clearer. For example, a $200 monthly investment on Target shares today equates to roughly $8 a year extra in passive income going on the present dividend yield. Assuming we are dealing with at least a 4% yield, those are the numbers. So Tom with 12 monthly payments of $200 ($2400 annually) is guaranteeing at least $96 in annual income which is $8 extra in monthly dividend cash flow.

So assuming all things remain equal, that initial $35 in monthly dividend income that he started out with now becomes roughly $43 ($32+$8) in monthly dividend income after year 1. Remember that positive reinforcement can be built beforehand when you know your expected numbers. With Tom knowing roughly what his income will be in the future, this gives him determination in the present which is crucial. If Tom can keep on siphoning away that $200 monthly, he can keep this dividend investing machine going indefinitely.

For example, despite Target’s recent concerns, its 12 month dividend per share annual growth rate is 7.1%. Its 3 year number is 13.7% and its 5 year number is 16.7%. Suffice to say that over the next 5 years, if Target can announce at least an 11% annualized average dividend per share growth rate, then Tom’s passive dividend income will reach roughly $100 after 60 months or so. This will only happen if he can sustain adding $200 worth of Target shares every month (or $600 per quarter to save on commissions). Those are the numbers which can be easily calculated by dividend growth calculators. This illustrates dividend investing works but there is even more..

The figures discussed above don’t mention about what the actual balance in the portfolio would have ballooned to. It wasn’t included in the exercise as income was the goal. Working out the future portfolio is tricky as we don’t know what return the actual shares will produce over the next five years. However in 2012, Target’s price to earnings ratio was trading around the same number we have at present – around the 12 mark.

Target’s share price is down over 8% over the past 5 years. I think it would be a good exercise to see what $10k invested in January 2012 ( with the regular $200 monthly savings) would have ballooned to 5 years later through dividend investing. In fact, in January of 2017, the cash balance would have reached $27,414. This equates to a total annualized return of 10.03%. Therefore investing back in 2012 over 5 years would have still generated Tom roughly $100 a month in passive cash flow 5 years later even with a negative stock return over that period. Nice..

So my question is this to any potential dividend growth investor who wants to get his or her feet wet in the markets. Do these potential numbers (whether income or portfolio balance) give you the positive reinforcement necessary to stick to your plan when the going gets tough? Many times, investors over-complicate issues. Dividend growth investing is a proven strategy. By not pulling the trigger today, you may lose another 5 years – years you can never get back.. If Tom can make it to the 60 month mark and achieve his income goal, what do you think his chances are of going another 5 years, 10, 20, etc.

This is why the rich get richer. They live off positive reinforcement which essentially means their wins fuel more wins. Therefore even if you start from a low base, work out your numbers beforehand and keep them firmly in front of you. Once you start “feeling” your small wins (which could be imagined future ones), your dividend investing career will be well on its way to success..

Conclusion

Starting with the end goal in mind is a great way to start you off in your dividend investing career. Many investors get faked out by the sheer amount of time they believe they need to be invested to see any type of meaningful dividend income. Its all about discipline. Can you find an extra $50 a week ? If you can, you can build that passive income stream now. Sow seeds today so you and your family will be able to reap tomorrow. Great works are performed not by strength but by perseverance. So what are you going to do ?

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Trade Earnings By Selling Option Premium

Method 3 – Selling Option Premium Just Before Earnings Announcements

 

Trading earnings announcements is an excellent one to add to your arsenal for a number of reasons. Option premium inflates right before companies report their earnings numbers. This means option sellers stand to gain if they trade earnings on quality dividend growth companies. Let’s go through a few examples where traders can trade earnings announcements. One can either scale into a stock, sell a position or just make stand-alone income.

Disney announces its quarterly earnings on the 8th of August 2017 after market close. The volatility chart below was downloaded a day earlier (08-07-2017) which confirms why the stock currently has high implied volatility. Let’s say for arguments sake, one currently holds the stock as its a quality dividend growth stock with strong competitive advantages. However the company’s present earnings multiple is 18.8 (current share price around $107) which is only slightly below Disney’s five year average of 19.6. This means a spike up in the share price to $112+ post earnings brings Disney back to its average earnings multiple over the past 5 years. We calculate this by multiplying 19.6 by Disney’s current EPS of 5.74 which works out to be $112.5. This is only a 4.6% move from the stock’s current price which is definitely achievable with an earnings trade.

Sell Premium Aggressively When A Stock Is Becoming Overvalued

Therefore all one has to do (if they want to potentially have their shares called away) is to the sell some calls in the front week. I favor the front week as implied volatility is higher. This is when implied volatility should be at its highest and where you can eke as much premium as you can out of the call options. This strategy is basically the same as a covered call but over a much smaller duration. Anything from 1 to 4 days. The shorter duration of this strategy and the volatility crush that takes place once the numbers are big advantages. They enable options sellers to put on more high probability trades over the long term.

Just sell the strike price you would be comfortable with. Earnings announcements can sometimes cause a big move in the underlying shares depending on the magnitude of the earnings beat/miss or guidance changes. This strategy is a win/win scenario in the sense that if the stock sells off, you still hold a quality dividend growth stock after the announcement. One which trades below its average valuation but you still pocket the option premium. On the other hand, if the shares get called away, they do so at a respectable valuation. One can then seek out cheaper alternatives and rinse, wash & repeat.

Trade Earnings – Implied Volatility of Disney 1 Day Before Announcing

Image of Implied Volatility of Disney 1 Day Before Earnings

Trade Earnings – Call Options Chain in Disney. Stock Trading Around The $107 Mark 1 Day Before Earnings

Trade Earnings - Image of Call Options Chain in Disney Before Earnings

Trade Earnings Also To Scale Into Cheap Dividend Growth Stocks

Furthermore what if one could trade earnings announcements to buy quality dividend growth stocks also? Well one can by selling put options again just before the respective company in question announces its numbers. In fact there are fewer strategies that are more powerful than selling puts on quality stocks. Why? Because you can pick up the respective company for a cheaper price than it currently trades at. For example in Disney at present, if one didn’t hold the stock, by selling the $104 put that expires in 4 days, one collects $67 per contract plus the possibility of stock being assigned at that very strike price.

Assignment of shares at $104 constitutes an earnings multiple of around 18. Remember at the time of writing, Disney‘s 5 year average earnings multiple is 19.6. Selling puts (as long as they are being sold on quality underlyings) is an excellent strategy in a high implied volatility environment. Trade earnings both to scale into stocks or to liquidate holdings. You will be pleasantly surprised with the results.

Option Put Chain Prior To Earnings

Trade Earnings - Image Of Put Chain In Disney Prior To Earnings

The Hybrid Approach To Investing

The approach in these examples is a hybrid approach to investing and trading. Many times both traders and investors under-perform their expectations. The reason being they stick too rigidly to a given system. The philosophy in these examples is to trade earnings rigorously around quality stocks to maximize income. Yes sometimes one will be either assigned stock or one will lose stock on earnings plays. This though is the name of the game with this strategy. It is all about scaling into stocks when they trade on the cheap and look to exit when they become too expensive from a valuation perspective.

For example, if I am put stock ( after selling put options), I may hold this underlying for years. I will then simply collect the dividends until the position comes back into the black. This is why you have to focus your efforts on companies with strong competitive advantages. One must have their fundamental analysis done on the given company before entering the trade. The goal in your portfolio should be to never have “weak positions” because they are the ones one invariably sells first when the going gets tough.

Remember Success Is 80% Mindset & 20% Mechanics

Some investors can have a 30 year horizon or more. With traders it can be anything from a minute to 6 months. With strategies such as these, it is a hybrid of both short & long term investing. One can hold stock indefinitely but one can also take profits on an option position within days. Don’t get tied into the “monthly income” mindset as some of your positions will take far longer than a month to work themselves into profit. Do the right things. Trade earnings with the end in mind and remain ultra patient. The market has to participate but ultimately this is a game against yourself which over time is yours for the winning if you consistently do the right things.

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Long Term Diagonal Spread On Steroids

Method 2 : How To Setup A Bullish Long Term Diagonal Spread

This strategy is known also a poor man’s covered call and definitely deserves a place within your trading arsenal. The long term diagonal spread strategy simply replaces the long stock positions in your portfolio with deep in the money call options. Furthermore we chose call options usually that don’t expire for a number of years and their delta (the change in an option’s value for a change in the price of the underlying product). is usually above 0.8.

This strategy is a no-brainer for the investor/trader who has a small account but still wants heavy diversification. Furthermore if we return to Gilead for example from the last post, here is how a potential long term income trade could be set up. With the move Gilead had after its second quarter earnings announcement, adopting this strategy is smart play as it puts far less capital at risk compared to owning stock outright. Here is how would set it up.

1. We look for a liquid long term in the money call option.

If we pull up an options chain again and go for the longest expiry we can find (January ‘2019 or 534 days out), we can see that we can buy the 80% delta in the money call option (60 call) for around $17.60. What does this mean ? It means we can control 100 shares of Gilead through a long term LEAP call option for $1,760. Buying 100 shares on the market this very minute would cost over $7,500 so this is already a saving of almost $6,000 already. This option’s value will move roughly 80% of what the stock will move.

Image Of A Long Term (Leap) Call Option Chain In Gilead

This long call essentially now plays the same role as long stock does in a traditional covered call strategy. That’s the long component sorted out. Now its time to sell call(s) against this long position

2. Sell 30 to 45 day calls against this long position

Now all we have to do is adopt the same trading strategy as we did in the last example. We sell out of the money calls ( 30 to 45 days away) and buy them back we when have at least a 30 to 50% gain on the calls. As the option chain illustrates below, the most likely candidate at present would be the September $77.5 call which currently is worth around $1.13. As we can see the delta of this particular call is 37%. However if this call were to get in the money, its delta would change pretty quickly which is why this trade has to be set up properly from day 1. Here is how we do it.

Image of a 30-45 day call option chain in Gilead

 

3. How To set up a long term diagonal or “Poor Man’s Covered Call” trade from scratch

The one thing you have to be careful with in the long term diagonal spread strategy is that there is sufficient long deltas in your call because if the price of the underlying goes up (which means the short call goes in the money), we still want to make sure that we have a profitable trade on our hands. Here is how we do it. The formula I use is the following

Price of the LEAP long call < Width of the Strikes + Price of the short call
(Gilead Example)         $17.60 < (77.5 – 60 = 17.5) + (1.13)
$17.60 < $18.63 – We Are Good to Go

Doing this work beforehand ensures that if the price of Gilead spikes up, the long call will rise in value quicker than the short call. Management of the trade is the exact same as the traditional covered call strategy when the short call remains out of the money. We just take profits when they present themselves (only on the short-dated short call) and the wait for Gilead to rally once more so we can sell more out of the money calls (30 to 45 days out) against our long fixed LEAP option. Trade management though is different if the price of the stock gaps through our short call. Here is how we do it.

4. Trade Management of a Diagonal Spread when the short call is deep in the money.

Firstly you need to watch the specific deltas of your trade. For example, if the short call gets deeper and deeper in the money (stock gaps through your short strike aggressively), the price of the short call will eventually rise in value faster that the long call. This is always my cue to exit the trade which will always be a winner. Let me explain by showing you a screenshot of a similar trade I have on at the moment in (NYSE:GDX) which is a diagonal spread

Image of how one can control deltas in a long term diagonal spread

As the screenshot shows, GDX is presently trading at the $22.85 mark. I am short the $23.5 call in September and long the December $21 call. One does not have to be worried about closing this diagonal in full until the short call goes in the money (above $23.50). When it does, I really get clued into the deltas on both the long and short components of the trade. As you can see from the screenshot, the “Delta Dollars” of the long call is still much larger (1,675) than the (873) we have on the short call. If GDX keeps rallying the difference will get smaller. Ultimately when I see only a marginal difference in delta dollars between both sides of the trade, I would close the whole trade out for a winner and move on to the next trade.

The second area to watch is the dividend. Be mindful of dividend dates and take the trade off (in full before 4 to 7 days before the ex-dividend date) if the call is well in the money. If you don’t, you could wake up one morning and find that your short call has now become short stock which means you will be on the hook for payment of the dividend. Its just not worth the risk. Remember, the whole trade should be a winner if the short call is in the money. Take your profits and move on. Don’t try to get too greedy here by hoping your short call finishes out of the money by the expiration date.

Summing The Strategy Up.

The long term diagonal spread or poor man’s covered call is an excellent strategy to use in low volatility environments as the long call at the outset of the trade will invariably gain value quicker than the short call. Furthermore the long term diagonal spread strategy is excellent for traders with limited capital as one can spread their capital across a larger range of stocks and ETF’s which increases diversification. Whereas strict option traders normally only monitor volatility and liquidity, I would encourage you (before picking your underlyings) to also monitor sentiment, valuation and momentum indicators. Here is how things would shape up with one of the stocks currently on our watch-list – L Brands.

1. Momentum Indicators Oversold

Image showing how momentum indicators become oversold
2. Sentiment On The Floor In L Brands.

Image of how sentiment becomes excessively pessimistic
3. Volatility High As Earnings Approach

Image of high implied volatility in a stock as it approaches earnings

In an earlier post, we went through how cheap L Brands is when compared to its historic valuation. The issue here though is implied volatility. As earnings are expected to be announced shortly, this explains why implied volatility in the stock is over 40% which is well above its 12 month average. One could wait until earnings have been announced before adopting the long term diagonal spread strategy as a post earnings “L Brands” would have far lower volatility levels which would suit this strategy. However by waiting, the trader runs the risk of missing a big move after earnings are announced. This is why in the stock market, no matter how much you follow a mentor, ultimately the buck stops with you when it comes down to decisions like this.

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Trading Gilead For Income

METHOD 1 – Selling Covered Calls Against Long Stock

We touched on this method in are earlier post. There are many complex option strategies out there. This in one of the simplest but yet the best for long term income generation in my opinion. Why? Because it combines robust fundamental analysis with an option strategy that forces you to take profits. Some investors reading this will not agree with this strategy as it invariably means selling stock at one time or another. However please now revert back to the Walmart example I outlined in an earlier post this year. Holding a stock indefinitely doesn’t make sense if the stock is not performing. Utilizing covered calls forces you to take profits. It is a strategy where you give up upside potential in return for a greater probability of success on the respective trade. Traditionally, investors were recommended to sell these every month but there are ways we can put this strategy on steroids in order to achieve better returns. Let’s go through a few examples to explain.

In the Gilead chart below, we can see that the stock has moved into overbought territory as its momentum indicators ( RSI on a setting of 5) are well above 70. In saying this, the stock despite its strong rally still only has an earnings multiple of 8.25. Gilead’s average earnings multiple over the past 5 years is 20. This could imply that this stock has plenty more upside but when that potential upside takes place is the million dollar question. In these types of scenarios, I believe the prudent approach is to sell covered calls against maybe half of your shares. So if one was holding 600 shares of Gilead, one could sell 2 call options when the stock becomes overvalued which would mean 200 shares would be at risk of eventually being called away. Long term investors may not agree with this approach but here are the advantages of adopting this strategy.

1. You are forcing your portfolio to take profits

In fact, theoretically, the best way to manage this trade over multiple months and quarters would be to sell covered calls all the way back up until Gilead reached its historic average valuation once more. My aim for this setup would be to be totally rid of this stock once its price to earnings reaches 20. Furthermore I would have no problem selling covered calls early in this setup as long as I had another ripe undervalued opportunity to deploy the potential capital that would come off the Gilead trade. Selling covered calls forces you to take profits and gets your portfolio working for you this minute as “theta decay” now works in your favor.

2. Improve returns even more by selling covered calls when implied volatility is high and/or when the stock is overbought

Gilead reported earnings at the the end of July so its implied volatility at present is not elevated. This means the prices of its options are not that expensive compared to their 12 month averages.

Source : Interactive Brokers

You see the four spikes in the chart above? This was when Gilead announced each of its quarterly earnings numbers over the past year. Just before these announcements would have been ripe times to sell covered calls as the call options prices would have been inflated. ( We will go through a pre-earnings example in posts that follow). Just remember to not give up your shares for nickels on the dollar. The time to sell covered calls aggressively is when the stock has high implied volatility and/or when the stock is overbought on a short term basis. The perfect combination of both high implied volatility and overbought conditions may not show up at the same time though so ultimately you will have to make a decision as to which way you want to play this. My preference is to sell covered call contracts in the monthly expiration cycles (30 to 45 days out) as that is where there will be more liquidity.

So presently, Gilead’s RSI momentum indicators are in overbought territory which will be reason enough for many to keep the foot to the floor and keep selling covered calls. Here is the state of play at present. Gilead’s next ex-dividend date is on the 14th of September ( time of writing – 2nd of August – Gild shares at $75.70) The next monthly cycle that will interest us with the cycle ending on the 15th of September. Below is a screenshot of the price of the calls from that given cycle.

Source : Interactive Brokers

With the stock trading at $75.70, the $77.5 call (trading for around $1.10) sticks out as the most obvious strike price to start selling calls on. The next way to supercharge this strategy is to take profits early which we will discuss here

3. Don’t let the call option expire worthless if this are healthy profits to be achieved

This is a crucial step in the management of your portfolio and one that should not be overlooked. For example, after you sell the above mentioned call for $1.10, the stock could easily gap down to the $74 or $73 level ( remember – it is overbought momentum wise) which could easily decrease the value of the call option down to the $0.70-$0.75 level. Personally, I would be taking profits here and here is why. If there is 30 to 35 days left to go to expiration and $0.70 for example is the maximum I can make on this call option, it doesn’t make sense to hold it until expiration. The stock could easily turn around and rally again which would increase the price of the call. Why would I then hold it if I have already made a 30 to 50% paper gain? It just doesn’t make sense. I usually take profits when they get presented and wait for the stock to rally once more so I can sell more calls against my long stock. Rinse, wash, repeat. Yes this strategy requires more management but you are going to make so much more money this way. In that 44 day cycle for example, you could easily sell 5 to 10 different covered call contracts whereas if you only sell one, the maximum you could make is the initial credit received – $110

Now what if Gilead keeps on rallying aggressively and spikes above our initial strike price of $77.50? Well if the price of the shares are above $77.50, then 100 shares per call option will be called away and you will have made full profit on the call option plus the capital gain appreciation of the stock. This is going to happen from time to time. You need to be ready for it. However this doesn’t mean you will never enter into this stock again. Furthermore as long as you have other ripe opportunities, I see no problem in letting your shares go. Remember, covered calls force you to take profits and nobody ever went broke making profits consistently.

The one thing though you have to watch is when your call is in the money ( strike price below the price of the shares) as the buyer of the call will exercise the option to collect a potential dividend. For example, Gilead has just announced a $0.52 quarterly dividend that will go ex-dividend on the 14th of September. Recipients of this dividend will have to be holding shares 2 to 3 days before this date to ensure they will indeed collect this dividend. Therefore our shares could be at risk of being called away early if the call buyer feels he will benefit more by exercising the call option ( which is to take possession of the shares instead of leaving the call option run). Traders ( who don’t usually hold stock) will usually attempt to avoid these circumstances as a naked call exercised would result in the respective trader who is short the call end up being short stock if the option were to be assigned. There are rolling strategies also one could undertake to ensure the collection of the dividend but here is my stance on this. If Gilead was trading well above $77.5 or $80 at expiration, there is a very good chance that call options will be exercised.

Don’t worry about it. Remember the calls are covered. What simply happens is that you transfer your shares over to the call buyer ( which happens automatically) between your brokerage account and his. Remember the shares were going to be called away anyway. Furthermore missing the dividend is not a big deal and here is why. When you tot up what you make from the capital appreciation of the shares plus the call option, the dividend payout will only make a very small percentage of the total profit you made here. I just wanted to mention this in-case you see your shares being called way before the expiration date. Shares will still be called away at the strike price you have sold the covered calls at plus you now have capital freed up earlier to sell more premium against quality dividend growth stocks.

 

 

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Companies With Strong Competitive Advantages

First off, I believe it is important to have a watch-list of stocks with strong competitive advantages. By simply buying these stocks when they get cheap and selling them when they get expensive is a strategy in itself. Why? Because the downside is protected to a large extent with these companies. They all have solid financials, a strong balance sheet and a growing dividend. Therefore it is quite common to see these stocks being snapped up quite quickly when they become excessively oversold. Here is a present typical watchlist that I pick from when trading companies with strong competitive advantages. Some of these stocks will be slightly overvalued at present whereas others will be undervalued. However from the research I have done on these companies below, their long term financials and forward looking fundamentals entitles them to be on this list.

L Brands (NYSE:LB)
General Electric Company (NYSE:GE)
Microsoft (NYSE:MSFT)
Emerson Electric (NYSE:EMR)
Procter & Gamble (NYSE:PG)
VF Corp (NYSE:VFC)
Visa Inc (NYSE:V)
Walmart (NYSE:WMT)
Chevron (NYSE:CVX)
Exxon Mobil (NYSE:XOM)
Gilead (NASDAQ:GILD)
McKesson (NYSE:MCK)
Pfizer (NYSE:PFE)
Starbucks (NYSE:SBUX)
Twenty First Century Fox (NYSE:FOX)
CSX Corporation (NYSE:CSX)
Coca Cola (NYSE:KO)
Costco (NYSE:COST)
Deere & Co (NYSE:DE)
Intel Corp (NYSE:INTC)
McDonald’s (NYSE:MCD)
PepsiCo Inc (NYSE:PEP)
Novartis AG (NYSE:NVS)
3M Corp (NYSE:MMM)

Before we get into trading examples, let’s see how these stocks’ valuations are shaping up at present. Straight away we want to zone in on the companies which are trading below their 5 year averages with respect to the key valuation metrics. Many companies in the table will actually be trading above their historic valuations as stocks have been in a roaring bull market since 2009 ( information recorded – 07/31/2017). However many of these will one day become undervalued once more which is why they remain on the watchlist for the long term. Presently though, the stocks that stick out from a valuation standpoint are L Brands, McKesson Corp, CVS Health Corporation and Gilead so we will be focusing our attention to these stocks in upcoming posts

First though, lets go through some long term strategies for the dedicated income investors. Many investors prefer a hands off approach with their portfolios due to time restraints but still obviously want a portfolio that will perform well over the long term. Believe me, I totally get it. Therefore if you are an investor who just wants to set up a portfolio from scratch, buying all these stocks today and reinvesting the dividends every quarter would be a solid long term strategy. My recommendation would be to deploy the quarterly dividends ( annual in the case of Novartis) into the stocks which have been beaten up the most ( the 4 we have earmarked above). This will increase the long term returns over time.

Income investors need to understand that their portfolio may go down in value over time but the “income” element should always tend to increase to the upside as long as significant capital is not being withdrawn from the portfolio. Remember that the annual or quarterly gains are much more important than the overall value of the portfolio. Long term income investors should never sell their stock to ensure their income grows over time.

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Portfolio Update – July 20

The NASDAQ (INDEXNASDAQ:.IXIC) has had a pretty good day today despite the S&P500 and Dow finishing slightly down for the day. I believe that’s where we will most probably put the rest of our capital to work for the remainder of this cyclical top in equities – either the tech sector or the biotech sector. The biotech sector probably holds more potential because it is still nowhere near it’s all time highs of 2015.

Nevertheless you have the whole regulation cloud continuing to hang over the sector so it is riskier. If you look at something like (NYSE:LABU) which is the triple Bull leverage biotech ETF, it has gone up by 100% over the last few months alone. There is serious potential in biotech but the safer place probably to stay is tech through the likes of the Q’s (NASDAQ:QQQ) and maybe (NASDAQ:TQQQ).

As we enter this bubble phase, cycles and sentiment are going to come far less useful so it’s just going to be a matter of getting in and holding on. I would warn traders that buying call options or trading on margin is very risky. Not too long ago, I was talking about this sector probably undergoing an intermediate decline which just didn’t happen. Now that doesn’t mean it’s never going to happen so we have to make sure that if we are long in this sector with a substantial position, we need to be able to weather a potential draw-down at any stage. Just keep this in mind when you are deciding on the size of your positions. Position sizing is so crucial so open any trade with the end in mind.




With respect to the other sectors, I wrote an article recently on whether gold has printed an intermediate low or not. There are some variables that are not answered such as volume not being there at the moment, such as miners still continuing to lag and sentiment not dropping to levels where it should have dropped. I don’t know yet if we have a daily low or an intermediate low in gold and silver. We will know fairly soon though because both gold and silver after recent market action, have their sentiment at optimistic levels on a short term basis. Their RSI levels are also overbought so if this isn’t the start of a brand new intermediate cycle, they should have no problem pushing through short term resistance. If not, they’re going to come back down fairly soon.

Source : Sentimentrader.com

We also got a few emails with relation to some of our energy positions Chevron (NYSE:CVX) and (NYSE:ERX), Long term, I think these positions are fine because oil rallied again today resulting in crude oil being above $46 a barrel so the probability that the intermediate low is in is very high. Crude oil has been forming a solid base now for a good few months & I think it’s only a matter of time before energy stocks catch up. Therefore we will hold our energy positions because I do see them coming good over time.

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Novartis On Its Way To $100

Novartis (NYSE:NVS) announced its second quarter earnings report there this week and I don’t think there was anything in the announcement that should make long investors doubt their current position. Why? Well if we look at the fundamentals of the company, its apparent in my opinion that there are still far more growth triggers than potential headwinds. There was an array of approvals and results in the second quarter and some important phase III trials definitely impressed when you dig down into the actual results.

For example CTL019 could easily become a blockbuster in the cell therapy segment as it’s a huge market and there is nothing currently approved to treat cancer in this area whether it be in the U.S or Europe. Other compounds in the pipeline this I like the look of at present are RTH258 in Ophthalmology & ACZ885 in the cardiovascular area. There is a good chance that both compounds will get approved. The former helps patients maintain their vision and the latter reduces inflammation for patients who have suffered a previous heart attack. These are markets where approved drugs should gain traction quickly. The next few quarters will be interesting.

 

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Too Dangerous To Short McDonald’s

McDonald’s (NYSE:MCD) is closing in on $160 a share and I see a lot of commentary online stating that the stock is overvalued at these levels. From an earnings standpoint, the company’s present price to earnings ratio is well ahead of its five-year average of 27. However, the company’s price to earnings ratio actually surpassed 30 before the Great Recession. The present price that we have, is definitely not the highest price McDonald’s has traded at from an earnings standpoint.

Basically, if you look at what happened McDonald’s in the Great Recession, when its earnings multiple came back into sync through drastic improvements in earnings, then there is every reason to say that McDonald’s could do the exact same thing again if equity markets, or even if its own restaurant sector, came down anytime soon. McDonald’s has proven it can gain market share in markets where money is tight or where there is a contraction taking place. I think this is something that investors miss. They always think that just because a company is trading a little higher than normal with respect to an earnings multiple, then it’s overvalued. That’s not necessarily so.

Just look at how the company is looking to increase its earnings. It’s radically digitizing its operations with regard to delivery and with regard to getting food into its customers’ hands as quickly as possible. I think overtime all of these initiatives are going to pay dividends. The company’s also bringing fresh meat into its restaurants. This may in the near term slowdown cooking times to an extent but this point is being over-exaggerated by the bears.

But I do think that, as I’ve said, all of these initiatives eventually will pay dividends. I think McDonald’s is a smart play here, because as the chart above shows, it has rallied aggressively with the S&P 500 (NYSE:SPX) over the past few years. I do think the stock, as it has proved in the past, will hold up very well when the downturn eventually comes. 

There has been a lot of question marks raised about its debt which it’s using to buy back shares and the like. Again, all of these symptoms and problems can be sorted out through increased earnings. That’s something that I think is missing from the analysis online at present. Even though the company will probably trade through $160 a share in the near term, McDonald’s remains a very risky short, and I would not be entertaining any idea of shorting McDonald’s here.

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