Best in Breed Dividend Stocks: Portfolio Check Up

Over the last week I received numerous emails regarding my last column on Seeking Alpha. Readers inquired why I was so negative on the market. Other than the macro elements that I laid out, the market had set itself up for a psychological correction.

Generally speaking, I am a firm believer in the efficient market theory. I believe most equities trade at, or near, their true market value. There is little to no money to be made when equities are fairly valued. Alpha becomes harder and harder to come by.

When markets are in a sustained uptrend, as we witnessed throughout the duration of QE2, they begin to trade with a sense of invincibility. We forget to worry or factor in risk. Riskier assets simply become conduits to greater returns. With the Bernanke ‘put’ in place, there was no downside risk. The only way to generate alpha was to chase greater risk. When this occurs, the efficient market theory quickly devolves into the ‘castle in the air’ theory, or more aptly, the ‘greater fool’ theory.

All equities begin to trade at multiples that are unwarranted, limiting upside while exacerbating downside risk. Who was buying Open Table (OPEN), Salesforce (CRM) and Netflix (NFLX) at these multiples? I guess there is always a greater fool waiting to carry your bag, so why worry?

Eventually this over exuberance comes to end. In our recent scenario, Bernanke took off the training wheels and we had the sudden realization that the US economy was not ready to ride on its own. We careened off the edge at full speed. Selling begets selling, and the market became increasingly irrational. Risk begins to rear its ugly head and the weak retreat to the security of their bank accounts.

This is capitulation. This is purely psychological, and it’s exactly the time to purchase equities. This is when real money is made.

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Stock Analysis ExxonMobil Corp. (XOM) Current Yield 2.2%

ExxonMobil Corp. (XOM) Current Yield 2.2%

Exxon Mobil Corporation was incorporated in the State of New Jersey in 1882. Divisions and affiliated companies of ExxonMobil operate or market products in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. ExxonMobil is a major manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products. ExxonMobil also has interests in electric power generation facilities. Affiliates of ExxonMobil conduct extensive research programs in support of these businesses.

Exxon Mobil is not only the largest Major Integrated Oil & Gas Company, it is the largest publically traded company in America.  It’s a low beta, safe investment. Because of its sheer size it has become increasingly more and more difficult for the management team to move the earnings needle. Nonetheless, the fundamentals of Exxon Mobil are superb:

ExxonMobil is part of the elite Dividend Champion list, increasing its dividend payments for 28 straight years. The yield of 2.2% is low, but with a payout ratio of 25.6% there is considerable room for growth. It has kept is Dividend Growth Rate steady at 8.7% for the last 7 years. The ROE and SGR numbers are well above average and best in breed. It has the best balance sheet of the group. It is currently trading at a premium to its historic P/E ratio.

Modeling ExxonMobil 10 year return using its EPS growth rate we arrive at a slightly above average return:

If you are looking for a safe and stable oil play ExxonMobil might be your best bet. Furthermore, with ExxonMobil improving fundamentals the market should soon begin to recognize these achievements. 

All the best,

C

The QE2 Cometh....

How I’m playing the QE2

First, I have learned to never fight the fed. This seems cliché, but it’s the honest to god truth. Bernake gave us a free ‘put’ on the market; it would be asinine to over think the situation. In the short term I think we head higher, in the long run my outlook is not so positive.

My trades for the last week have been fairly simple. I’m shorting the TLT via puts. Long term treasuries are going to be hammered. I’m long commodities via calls: CVX, NG, GLD. Dollar goes down, these go up. I’m long leaps on C, these were too cheap to pass up. I started a small position in PCL, another commodity play with a decent dividend. Short bonds, long commodities.

I also took a flyer on BIDU today at the close. POMO Is going to hit the market everyday for the next month. I think high beta names are going to pop.

The dollar is going to lose value fast. Make sure you put it too work in something that will sustain value.