Let’s take a quick overview of the Valuentum processes for capital appreciation and dividend growth with a discussion of how we use the Valuentum Buying Index and the Dividend Cushion ratio.
By Brian Nelson, CFA
There is a lot behind the Valuentum processes for capital appreciation and dividend growth, respectively, and both the criteria for inclusion to either the simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio are different. Our best ideas at any time, however, are always included in the simulated newsletter portfolios. We use our research as a means to identify new ideas for consideration in the simulated newsletter portfolios, as well as to consider removing ideas from the simulated newsletter portfolios.
As it relates to the simulated Best Ideas Newsletter, for example, if a stock registers a 9 or 10 on the Valuentum Buying Index, we would consider adding it to the simulated newsletter portfolios. When the stock then/eventually registers a 1 or 2 on the Valuentum Buying Index in time, we might then consider removing it from the simulated newsletter portfolios. The changes in the “big middle” of the Valuentum Buying Index offer more tactical considerations, but we generally only consider the highest and lowest VBI ratings to be material. During times of market froth, however, as in arguably today’s environment, in the simulated Best Ideas Newsletter portfolio, we may relax some of the VBI criteria and consider undervalued stocks with neutral technical/momentum indicators, or fairly valued stocks with good relative valuation metrics and strong technical/momentum indicators. We may only consider removing ideas from the simulated newsletter portfolios when both their valuation and technical/momentum indicators point in the same direction (good/good or poor/poor), or if we’re making more strategic/tactical moves.
The criteria for the simulated Dividend Growth Newsletter is somewhat different. We’re looking for strong dividend growth stocks in this simulated Dividend Growth Newsletter portfolio (something that is not a part of the criteria in the simulated Best Ideas Newsletter portfolio), meaning that in addition to considering the VBI and fair value estimate range, the Dividend Cushion is also very important. We still look to add highly-rated stocks on the VBI and those that are undervalued to this simulated newsletter portfolio, but we may be more open to ideas that have strong dividend growth prospects, on the basis of the forward-looking Dividend Cushion ratio. After adding ideas to this simulated newsletter portfolio, we may continue to include them in the portfolio even if they have modest VBI ratings that are trading within our fair value estimate range, as long as they have strong dividend growth prospects (e.g. Microsoft). We’d only consider removing a stock from the simulated Dividend Growth Newsletter portfolio when we lose confidence in its intrinsic value support and its dividend growth prospects.
The way to think about our process is rather simple. In the simulated Best Ideas Newsletter portfolio, if a company registers a high rating in our coverage universe, we consider adding it (but we won’t consider adding all companies because of portfolio constraints). If we do decide to add the idea, then we watch its fair value estimate and technical/momentum indicators as it navigates the “big middle” of VBI ratings, and only consider removing the idea from the simulated Best Ideas Newsletter portfolio if it registers a 1 or 2 on the Valuentum Buying Index. In the simulated Dividend Growth Newsletter portfolio, we pay attention to the price-versus-fair value estimate range and the company’s Dividend Cushion ratio, as we’re looking for resilient equities with intrinsic-value support that have strong dividend growth prospects. Only when intrinsic-value support and dividend growth strength wane will we consider removing an idea from the simulated Dividend Growth Newsletter portfolio.
I think what might be perfect is if you have a read of the book, Value Trap. It hits on how we think about the concept of intrinsic value and how we use technical and momentum indicators to evaluate the likelihood of price-to-estimated fair value convergence. It also hits on a number of valuable topics with respect to the dividend.
Tickerized for holdings in the S&P 500 SPDR (SPY).
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.