August Transaction Summary – Week of 8/8/14

Another crazy week in the market. The week started and ended in the green with three red days in the middle.  Fortunately for me, I was able to benefit from a positive earnings release and stock for a lesser loss.   But the madness did not stop there, I used the proceeds of the sale to purchase another stock on the Diplomats Watch List!

Thursday August 7th, 2014- Sell My Position in Schweitzer-Mauduit International Inc. (SWM)

My purchase of SWM was the first time I really went out on a limb for a company.   I experienced some success with earlier dividend purchases and I wanted to apply my evolving stock screening skills to try to pick a diamond in the rough.  When I was screening SWM, I focused on the companies lower payout ratio, yield of >3%, the recent dividend growth (20% for the last increase), and the companies strong current/quick ratio and cash/share.   SWM passed the previously mentioned metrics in flying colors.  As I read a little about the company,  I learned that SWM was the leader in the tobacco paper company and was THE go-to company for many of the tobacco companies.  On paper it sounds like a decent candidate for a purchase right?

However, I missed two critical components of a solid stock analysis: the P/E Ratio analysis and a review of the industry.  Sadly, the P/E Ratio analysis is one of the three pillars of the Dividend Diplomats stock analysis.   While the P/E Ratio was not particularly bad, I did not properly compare SWM to other stocks in the industry.  If I would have, I would have found out that SWM was the only major player in its industry and that there was not another company I could compare the current pricing levels.  How was I able to determine if SWM was trading at a premium or a discount if I could not compare it to another company?    Besides for the P/E comparison,  if I would have pulled the layers back on the tobacco paper industry I would have found that I was investing in the leading stock in a declining industry.  Not only that, but the industry is facing some major pressure from e-cigarette companies as companies and consumers look for cleaner ways to consume cigarettes.   There were some major red flags with the company and I blew right past them.

Once I invested in the company, things quickly began to turn south.  I was in the red for 99% of the time I held the stock.  Many of my recent conversations with Lanny were about how much I wanted to sell the stock and use the capital to invest in other under-valued companies.  The market had created many opportunities in companies such as Aflac, McDonalds, Diagio, and others.  Why should I keep my capital in a stock I do not want to own when I could purchase one of these companies.   On 8/7/14, I had my exit opportunity and I ran with it.  The company released its earnings and beat on the bottom line.  At the beginning of the day, the stock increased as much as 5%!  I set a floor at a 4% gain and within 20 minutes the stock had triggered my limit order.  For the first time in my life, I watched my projected dividend income decline by $43!

I learned a lot with this investment, particularly the importance of performing an industry analysis and finding comparable companies for an investment.  While metrics are metrics, they are nothing without a comparison.  I knew better and I still ignored it because I thought the metrics were strong enough.  I will never under-estimate the importance of finding comparable companies and assessing the industry in which the company operates in while making an investment decision.  It sucks the lesson came with a $150 price-tag, but I am sure it will have a much higher payoff in the future.

Friday August 8th, 2014- Buy 11 Shares of Diageo (DEO)

Recently Lanny and I performed a stock analysis of Diagio.  While we concluded that we liked the company’s strong product offering and dividend history, we wanted to watch the company and wait for a lower multiple.  Well Friday morning presented that opportunity.  Before the late day rebound, the stock market had a pretty rough morning and a lot of companies were down.  DEO dropped below 2% for the day and Lanny and I both snatched up shares of the company.  It was exciting to capture the company at the lowest point of the day, especially a company like Diagio.  Did we also mentioned the company announced a dividend increase of 14.8% from the same period in the prior year?  This brought the dividend yield to 3%.   All the stars aligned and we decided to purchase a few shares.  I quickly replaced the income I lost with SWM almost dollar for dollar with my investment in DEO.  The investment brought me $38 in dividend income. 

It was a busy couple of days for me.  In the end, I learned a very valuable investment lesson and re-allocated my funds into a much stronger company.  Thanks for listening.  Hopefully you all can learn from my mistakes!

Bert

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7 thoughts on “August Transaction Summary – Week of 8/8/14

  1. Bert,

    Like the move with DEO. I see it’s been weak this year, and the dividend increase has finally brought the yield to a very respectable level. Gotta love their product offerings and dominance.

    I think this is a smart way to play this sector. I’ve been leery of investing in a beer company because I see more and more craft companies popping up. A little market share here and there adds up quick.

    Keep up the great work!

    Best wishes.

    • DM,

      Thanks for stopping by and your comments about my puchase. Hopefully you weren’t supporting my new stock too much while you were writing this comment haha Just kidding!

      As you mentioned, the big box beer companies are facing more pressure now from the local craft breweries than at any time in recent history. It is remarkable to me how much people love to support their local beer. I am sure some of it has to do with the pride that comes with the fact that your town producing a beer that outsiders crave. Luckily for DEO, their largeset beer Guiness might be the one beer that can fight this trend off. It is one of the most well-known beers around the world and has a pretty nice cult following of its own. Thats why I think DEO is the perfect play for the industry. It lets you dabble into the super competitive beer market while having the backing of one of the strongest companies and brand portfolios in the broader alcohol industry.

      This is not a technical analysis by any means. But this last weekend I was at a craft beer festival that had 25 breweries attending. Many of the vendors offered their own spin on pale ales, lagers, fruit beers, and IPAs. There were only a few places that offered their own take on stouts. Maybe Guiness might be able to hold off the craft beer movement better than the other big name beers after all!

      Thanks again for stopping by.

      Bert

    • Exactly. Alcohol is a product that people drink in a prospering economy and a recession. The brands that DEO own are very popular. There new pricing strategy in the US should make the drinks even more affordable as well. While I wanted to be careful investing in alcohol, I figured this company was diverse enough across the broad alcohol industry and not just one sector.

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