Author: Andrew Fletcher, Fletcher Wealth Management
Covestor model: Fundamental Targets
Disclosures: Long FE, NRG, PFE, WLP, NGG, WOOF, EXC, RGC
May 2011 saw a slight decline in the S&P 500. The Fundamental Targets model outperformed that index, with a 0.26% decline vs. the index’s 1.35% decline, according to Covestor’s calculations.
Trades
No purchases were made in May, since none of the stocks on the watch list were attractively valued. However, with the markets stagnating, several stocks on the watch list are looking more attractively priced.
The portfolio maintained approximately 10% in cash throughout most of the month. Recent sale proceeds have been added to the cash position, bringing the cash total now (as of 6/10/11) to nearly 24% of the portfolio.
Two holdings (Weight Watchers International, Inc. and National Grid PLC (NYSE: NGG)) were sold when my target prices were exceeded during the month.
Update on some holdings
According to FirstEnergy Corporation’s (NYSE: FE) Q1 2011 earnings release on 2 May, company earnings are expected to fall between $3.20 to $3.50 per share for 2011 through 2013. For this time period, the company also expects operations to generate cash over and above planned capital spending and common stock dividends. Executive Vice Chairman Paul J. Evanson (formerly chairman, president, and CEO of Allegheny Energy before the February 2011 merger) will retire 1 June, but remain with the company as a consultant, allowing FE to continue to benefit from his knowledge of the industry. I believe this information, coupled with FirstEnergy’s continued diversification of it operations, positions the stock price for additional upside.
Weight Watchers International, Inc. (NYSE: WTW) completed the month with a gain. A pullback happened near the beginning of the month, followed by a strong rebound the next day. The remainder of the month was a little tamer, with another pullback occurring at the end of the month. My sell order was placed at the second pullback, not because I don’t believe the stock will continue to rise over time, but rather to limit the volatility that’s certain to manifest over the next few months.
On its 5 May conference call, NRG Energy, Inc.’s (NYSE: NRG) CEO David Crane announced a plan to refinance a portion of the company’s debt, with the intent of using the excess liquidity to increase existing shareholders’ equity. The plan proposes replacing current debt with new debt that has less stringent covenants. Using less stringent covenants may create negative impact on the credit rating, but given management’s history of rewarding shareholders and not taking on additional debt, I don’t believe this is an issue, and actually increases the stock’s upside potential.
Pfizer’s (NYSE: PFE) indicated dividend yield as of 31 May is 3.83% as compared to the S&P 500’s average indicated dividend yield on 31 May of 2.17%. The stock remains attractive for both its price appreciation potential and yield.
In May, WellPoint, Inc. (NYSE: WLP), decided to base its annual payment increases to hospitals upon a metric of quality of care, rather than quantity. This move is anticipated to lower the cost of care to what is necessary, while at the same time increasing profit margins for stockholders.
I sold National Grid PLC (NYSE: NGG) due to the stock reaching its target price. With the economy still struggling to gain a foothold, U.S. regulators will be less likely to allow rate increases, effectively putting a cap on revenue. Renewable energy legislation and outdated power grids require large infusions of capital, which in a difficult credit market are more expensive to obtain, effectively lowering the bottom line.
VCA Antech, Inc. (NASDAQ: WOOF) stock ended the month down, but I believe will continue to add to the value it already provides with over 22,000 independent animal hospitals in the United States. Since veterinary medicine is largely a cash business, WOOF has immediate access to funds after providing the service, instead of having to wait for an insurance company to approve and transfer payments.
Exelon (NYSE: EXC) traded in a narrow band last month. Illinois regulators allowed the company a rate increase late in May, increasing revenue and profits for the low cost nuclear plants. The merger with Constellation Energy (NYSE: CEG) appears to be nearing completion – the companies filed for approval by the Maryland Public Service Commission on 25 May.
Regal Entertainment Group, Inc. (NYSE: RGC) has launched an initiative to make its theaters more accessible by moving away from traditional film reels and toward a digital format. The new digital format offers captioning and other descriptive technologies and is expected to be in place by October 2013. This initiative should increase revenue by opening the doors to a previously neglected group of potential customers.
Steel is a cyclical industry, so I hope for a rebound in Nucor’s stock price as hurricane season approaches and infrastructure is repaired (and built) in both the U.S. and Japan.
Conclusion
I’ll continue to choose strong individual companies value-priced versus their industry peers.
I expect a sharp rebound for steel producers, and continue to watch for the energy bull market to slow. Most importantly, I don’t worry when quality stocks drop due to trader activity, as that helps move stocks on my watch list onto to the buy list.
Sources:
“FirstEnergy Announces First Quarter 2011 Earnings, Provides Outlook for 2011 Through 2013” FE Press Release, 5/2. http://investors.firstenergycorp.com/phoenix.zhtml?c=102230&p=irol-newsArticle&ID=1558137&highlight=
“FirstEnergy Executive Vice Chairman Paul Evanson to Retire” FE Press Release, 5/17. http://www.firstenergycorp.com/newsroom/news_releases/firstenergy_executivevicechairmanpaulevansontoretire.html
“NRG Energy, Inc. Reports First Quarter 2011 Results” Company Press Release, 5/5. [PDF] http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzk2MDgxNHxDaGlsZElEPTQyNTYzMnxUeXBlPTI=&t=1
“Indicated Dividend Yield Rankings of S&P 500 Companies” Bloomberg, 5/31. https://www.bloomberg.com/news/2011-05-31/indicated-dividend-yield-rankings-of-s-p-500-companies.html
PFE dividend yield from Yahoo Finance, 5/31. http://finance.yahoo.com
“WellPoint Ties Payment Boosts to Health Outcomes” Rocl Wartzman. Bloomberg, 5/20. https://www.businessweek.com/managing/content/may2011/ca20110520_028946.htm?campaign_id=yhoo
“Illinois OKs modernization bill for electric utilities” Reuters, 5/31. https://www.reuters.com/article/illinois-electric-rates/refiles-illinois-oks-modernization-bill-for-electric-utilities-idUSN3110850120110601
EXC 8-K, 5/25.
“Regal Entertainment Group Announces New Forms of Digital Cinema Access” Company Press Release, 5/4. http://investor.regmovies.com/phoenix.zhtml?c=222211&p=irol-newsArticle&ID=1559531&highlight=
