Has anybody been paying attention to the stock market the past week?
Yesterday, October 10, 2018 the S&P 500 dropped 3% and in the past week the overall market is down about 5%. Did you jump out the cellar window?
If you’re new here you might be surprised the Smidlap portfolio is a blend of individual stocks (45% of invested value) in our IRA’s and index funds (40%) in my work 401k. The remainder is fixed income preferred stock ETF’s and cash. Here is exactly how the portfolio is constructed in case you enjoy details. Take a look while I wait. All kidding about the clickbait headline aside, I wanted to throw some valuable insight into how various parts of the portfolio performed during a little sell-off. I also want to demonstrate what a watch list of stocks is and how you might consider setting one up for yourself.
About risk, volatility, and growth stocks
We are pretty heavily weighted towards growth stocks like NFLX, NVDA, SHOP, and AMZN in our individual holdings. Many of these have lost 10% or more of their value in the past week while the SP500 has lost about 5%. This is the implied risk and observed volatility of growth stocks. Here’s the thing, though: a month ago our individual stocks were up by 25% year to date while the SP500 index was up 7%. Sure, it’s tough to watch all those red numbers that indicate 10’s of thousands of dollars as your money shrinks on paper in a short period. However, even with the lesser declines in the index and the blood bath for my tech heavy portfolio, our stocks are still beating the index 15% to 2% since the beginning of the year. This isn’t any kind of recommendation, but an observation. The other interesting part of the scenario is the reason these tech stocks make up so much of the portfolio in the first place: they have performed so well in the time I have owned them (more than two years in most cases) that these winners make up a larger percentage. It’s easier to look at a 20% pullback when some of these names have double or tripled or more and unless the story of the underlying business changes I’ll be holding them as predicted winners in the new and evolving economy. Have you ever heard the saying “sell your losers, let your winners run?” That is the Smidlap strategy. I should be selling this but y’all get that genuine gibberish for free!
Here is a snapshot of our watch list on Yahoo Finance
What can a watchlist do for you?
If you can’t read it very clearly, the left side of the watchlist is pretty typical day to day stuff like ticker symbols, price and percent and dollars gained or lost, and present value of holdings. The right side is the most useful and interesting part to me. It has the stocks percent above it’s 52 week low and percent below it’s 52 week high. Generally the higher the sum of those two numbers the more volatile the stock will be. Let’s look at an example of Shopify stock (SHOP).
As I write this the stock is 26% below it’s 52 week high of $176/share and it is down 14% in the past week alone. The psychology part of the list comes in when you see it is still 40% above its 52 week low. It also makes those 20% swings easier to take when your average cost was less than 50 bucks a share on a $125 stock. We’re playing the long game here in our house an buy and hold seems to work pretty well. It also helps your psyche to have been invested through a real recession like the one from 2008 to 2010. That was a bloodbath and took some stones to stay all in.
The last three important columns of the watchlist I use just for potential dividend stock holdings. The first is % forward yield, the second is dividend per share, and the third is predicted earnings per share for next year. I don’t own a helluva lot of stocks specifically for the dividends, but I recognize that steady dividend growers can seriously outperform the market when the underlying business are strong and have a competitive advantage. They also pay you cold hard cash that you can either spend or reinvest, and that can be significant. The % yield is useful for the obvious. You can get almost 2% in a savings account right now with zero market risk and 3.3% on a 10 year treasury note, but I like the upside of a 2% dividend stock that has steadily increased that dividend over time. The price appreciation of the shares usually comes along for the ride. I was fooling around with my watchlists (I have 2 for real holdings and about 4 more for different categories) to see which stocks fared best since this sell-off started a week ago. What I found was pretty interesting. With all the red numbers three dividend stocks are still within 4% of their 52 week highs (These Yahoo lists are easy to sort too). The tickers are OHI, MKC, and CME. OHI is a nursing home REIT with a huge 8% yield. MKC is McCormick spices, a defensive play. CME is Chicago Mercantile Exchange where you trade options and futures and shit that is too complicated for me. I don’t want to trade there. I just want to own the stock and make money.
I decided to take a closer look at CME group and I liked what I found and am considering buying more shares as I presently don’t own very much. I like that it held up so well during this sell-off, like it doesn’t correlate with the market too highly. The dividend yield only shows up as 1.54% but there’s a secret that doesn’t show up in the charts. Each December they pay a special dividend to toss extra cash earned back to shareholders. This year the quarterly dividend was 70 cents for a total of $2.80. Upon further review (like a football ref) the special dividend this past year was $3.50! That puts the yield at a juicy 3.5% with plenty of coverage. They have also raised the dividend from $0.45 to $0.70 over the past 5 years. That’s about 9% compounded dividend growth. Can I interest you in a business like that?
You can also utilize your watchlist to watch for oversold stable companies. I have a dividend list of companies I do not own that includes BUD, PETS, and MMM. These are stable business but I won’t buy any until I think they are done being beaten down. The beauty of your list is that if you set the thing up with way you can just scan it every few weeks to see what issues might have strange patterns. You might also look at the ones that look especially strong these days like TJX, WM, and ROST. I made the list up from dividend growers when I had some extra time on my hands and have I ever told you how much I enjoy this rubbish? I really do.
What about you Smidlappers? Did you panic and sell? Have you ever kept a watch list of stocks? Let me know.