RD's Picks

... momentum buyers (APPL) vs. the bargain hunters (RIMM). Which approach do you favor, and why? Give us some examples from your portfolio.

A quick glance at my portfolio should make it pretty obvious that I fall in the bargain hunters camp. Nothing against momentum investors, I simply haven't got the experience to identify the momentum stocks early on or know when to jump in and out. Now that I think about it, I'm not sure I'm all that great at identifying bargains either.

My idea of a bargain stock is a good dividend payer with the yield above the historical average and/or trading at a discount to the market. In addition, there needs to be earnings growth potential to support future dividend hikes, bonus points if they have a long track record of annual dividend hikes. Stocks in my SLO portfolio that fit that template are RPM*, WFC, BAC*, BUD*, T, CVX, NVS, UL, and PSEC.
* - indicates over 25 years of annual dividend hikes.

My bargain highlight is Prospect Capital (PSEC), a closed-end fund functioning as a business development corporation in the energy area. PSEC does the annual increase one better, the payout has increased every quarter since the doors opened in 2004 and the guidance they released a few weeks ago indicates they'll continue that string later this month. Current yield is over 9% and that's without resorting to a payout ratio above 100%. If the guidance they issued a few weeks ago is accurate, the next payout will equate to over 10% annualized. PSEC doesn't rely heavily on the credit markets to raise capital, so a credit crunch shouldn't hurt them much - if anything it may be beneficial because it would limit competition for deals. There's been a lot of volatility in the share price lately, so it's been a good candidate for trading and has provided opportunities to steal shares with lowball limit buys, both in the SLO and in real life. Nearly all the assets are start-up company debt or equity, so this isn't a risk free investment by any means. However, management seems to know what they're doing and there's no sub-prime mortgage paper or housing exposure.

Portfolio notes

For the week, I did a little trading around the edges in Prospect Capital and took advantage of the run on Friday to scale back my overweight position in Global SantaFe a bit. That leaves Cisco as the only stock over 10%, and I'm comfortable seeing if it'll run before lightening up. That leaves me at about 6% cash, I'm debating whether to add a new stock or two to the portfolio or distribute among current holdings. Going to try practicing a little patience this time and see what the market offers.

P.S. I found an alternate way to get to SLO blogs. They also show up in the Marketocracy forums under InvestorPlace Blogs, not Strategy Lab Open Blogs. I tried a test and it looks like you can post replies in the forum, but they don't transfer over to the blogs. Now, I need to go get a life.

Disclosure: I have positions in RPM, WFC, T, CVX, PSEC and CSCO.

Comments: View Comments |  Saturday September 1, 2007