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