Sunday, December 12, 2010

Watchlist Changes

I've concluded, after analysis, that the concept of an income play as distinct from a capital gains play is invalid, not useful and a myth.

An "income play" in my lexicon is more than simply a stock or bond that pays dividends. It is rather a long-term parking place for funds, where money can sit like trees in an orchard, dropping dividends like fruit from time to time.

An engaging image, but, as my analysis showed, not in line with reality.

In fact, the concept of an "income play" is dangerous, because it allows the ex-dividend date on the calendar to over-ride technical indications of looming capital loss.

Those conclusions demand a change in my methodology. Where before, when selecting "income plays" to watch, I focussed entirely on the dividend and thought little of the company's financial underpinnings and only marginally of the chart, under the new system the financials and chart are paramount for any stock I consider for inclusion in my portfolio.

From being a primary selection criteria, dividends are demoted to being a secondary consideration, maybe nice to have but considered only in passing.

So, in the daily Watchlist filing and the Weeklies, I've eliminated the Income Plays section entirely, and renamed the Growth Plays section to better reflect what that group of stocks is all about.

The Earnings Plays section (formerly Growth) is stocks that I potentially want to hold in the weeks leading to an earnings announcement, in the expectation of an earnings surprise and sharp move upward in the price. These stocks have fairly rigorous financial requirements. I want very low debt as a ratio of equity -- zero is best -- and a return on equity of at least 20%. Moreover, the chart must be uptrending at the time that I enter. No "hope for a turnaround" charts allowed.

The Other Bull Plays section (which includes some former Income Plays stocks) is stocks and exchange-traded funds whose prices, I think, will rise. This is a grab bag of plays, with less rigorous financial requirements. Some of them I'm simply interested in. Others, I like the high dividend, but with the understanding that the stock be treated exactly like those without dividends, according to the maxim for cautious traders: "Be a turtle when entering, a jackrabbit when exiting."

I've modified the key table for these section to add in the financial information -- return on equity and debt/equity ratio -- and ensured that both sections show the earnings date and any dividend payouts and ex-dividend dates.

I've also added a key table, with the new columns, to the Zombies section.

I've removed from the Watchlist these stocks that were in the old Income Plays section: AGG, CCT, MRF, STON. Their financials were either inaccesible (as in the case of funds) or just too bad for my taste.

I've moved AOD to the Zombie section. I own shares, lost heavily when they sank, and have a deep dislike of AOD's very long term chart.

That's the changes. The first posting with the new layout will be the Weeklies, on Sunday, and the daily Watchlist posting will also show the new layout, beginning on Monday.

1 comment:

  1. Income plays along with value plays work for me.I too hold AOD,but also AGNC,ARR,CYS and NLY.It's nice to get those dividend pops. Apparently,Citicorp,Goldman Sachs and others agree. Thanks for watchlists and comments.