Top Five Watch List Performance Review
In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from April 19, 2013 and have checked the performance one year later. The top five companies on that list can be seen in the table below.
|Symbol||Name||2013 Price||2014 Price||% change|
|FDS||FactSet Research Systems||90.19||105.77||17.3%|
|FRS||Frisch’s Restaurants, Inc||16.39||23.61||44.1%|
|DJI||Dow Jones Industrial||14,547.51||16,408.54||12.8%|
Our top five continued to outperform the market by a good margin. We commented specifically on Cato (CATO) and Caterpillar (CAT). We didn’t go into specific about Cato other than the fact that revenue declined. Now that time has past, it’s interested to look back and note that earning (TTM) actually fell 12% ($2.11 to $1.86). Based on this information, you would automatically think that stock should fall by similar margin. However, one can see that the opposite occurred because of multiple expansion. One year ago, Cato was trading at just 10x its earning compared to today at 14x. We can’t conclusively say what drove the price up but we will speculate that reversion to the mean is the key aspect to this story. If we look at historical average, stocks typically trade at 13x its earning.
As for Caterpillar, we state the following:
We highlighted this CAT’s bullish technical pattern on December 6, 2012 (found here) and the stock took off to trade close to $100, a gain of +16% gain. Those gains, however, were short-lived and the shares are now trading 6 points lower than our December write-up. Fundamentally, the stock is very interesting at less than 10 times earnings and a 2.4% yield.
We spoke about reversion to the mean above and this concept can be applied to Caterpillar trade over the past year. Let’s take a step back and look at earning from one year back. The company had net earning of $8.48/share. Fast forward to today and you will note that earning fell to $5.75/share or roughly 32%. That’s a large drop in profit in any business. However, one year ago the stock was trading at less than 10x multiple when shares on average trade at 20x multiple. Buying shares at 50% discount to its historical average provide a wide margin of safety one should look for when investing. Incorporating the concept of reversion to the mean with margin of safety and one can see how these trade turned out profitable despite profit contraction.
We also highlighted IBM (IBM) last year but shares have literally gone no where. Going back to the where shares traded one year ago at 13x multiple, this is essentially the same as their 5-year average.
U.S Dividend Watch List: April 18, 2014
Below are 31 companies that are in our watch list this week.