Investors Alley

Electric vehicle companies have come back to earth over the last year or so, with several high fliers taking it on the chin. Lucid (LCID) is an electric car company that may have a bright future but has seen its stock dive in recent months. However, lately, options traders appear to be selling puts in […]

Tesla’s stock has nearly doubled from December lows… Up 69% YTD.  When the markets do well, Tesla seems to lead the charge as money flows into risk assets.  Where Tesla goes from here could spell the direction of the stock market going forward.  I’m looking at the stock right now and I’m seeing some clouds

Last time, we covered one of the questions I get asked the most: when to sell a dividend stock. As you saw, I base that decision on the fundamentals of each stock.

Sometimes, that can be difficult – especially when a stock has gone up, and you have to decide between the possibility of more gains, or cashing those gains out. So today, I cover when to sell a stock to lock in a profit…

New Dividend Hunter subscribers often ask about my criteria for selling a stock. Most are looking for some percentage loss or gain on a stock as a trigger to sell. I stay away from any rules not based on the underlying fundamentals of each recommended investment.

Over the years, I have found that the annual portfolio turnover for the Dividend Hunter portfolio averages about 25%. To me, with a buy-and-hold investment strategy, that number seems high, but it is surprising how the investment outlook for companies can change. Over eight years of Dividend Hunter investing, there has been about an equal 50/50 split between stocks sold for a profit and those on which we took a loss.

The reasons to sell fall into three distinct categories. I will cover each reason in a separate article. Today I cover when to sell a stock to lock in a profit.

The Dividend Hunter strategy primarily focuses on generating a stable and growing high-yield income stream. I do not include capital gains in my return expectations. When I add a new stock to the recommendations list, I expect the investment to be a long-term position, paying quarterly dividends, year after year. As a result, it takes extraordinary circumstances for me to send a sell recommendation on one of the Dividend Hunter stocks that had previously performed well.

On occasion, one of our high-yield stocks will catch the attention of investors, and the stock price will significantly appreciate. One example was EnLink Midstream (ENLC). My subscribers loaded up on this stock in the summer of 2020, when it traded between $1.00 and $3.00 per share. During those days of the pandemic shutdown, EnLink remained committed to paying a dividend, and the shares yielded in the high-teens to low-20s.

The stock was a big winner for my subscribers, who stuck with the plan through the first years of the pandemic. I recommended selling ENLC in April 2022, when the share price topped $10.40, and the yield was just over 4%.

The low yield was my trigger for selling. When the yield of a dividend paying falls below what is typical, especially for a higher-yielding stock, I view the stock price as overvalued. When I recommended selling ENLC, its peer midstream stocks yielded 6% to 8%.

Although ENLC is a great little energy midstream company, selling the shares at a 4% yield and reinvesting the proceeds into a similar stock with a higher yield provided an immediate boost to subscribers’ income streams. With the sale of ENLC, I recommended the purchase of ONEOK, Inc (OKE), another high-quality midstream company. OKE yielded 7.5% at that time, so the exchange produced a 75% boost to dividend income.

Under the Dividend Hunter strategy, my reason for selling a highly appreciated stock is always to lock in the gains before the share price drops, resulting in a more historically typical yield. For the yield to rise, the share price must fall. At the same time, I want to invest the sales proceeds at a higher yield, giving an immediate boost to our portfolio income.
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Software company Fastly (FSLY) had a rough 2022, but things are looking up for the company so far in 2023. Analysts have recently upgraded the stock, which also posted better than expected earnings last week. At least one trader believes the positive momentum may continue. The trader purchased a 10,000-lot call spread tied to stock

New Dividend Hunter subscribers often ask about my criteria for selling a stock. Most are looking for some percentage loss or gain on a stock as a trigger to sell. I stay away from any rules not based on the underlying fundamentals of each recommended investment.

Here’s what I do instead…

Over the years, I have found that the annual portfolio turnover for the Dividend Hunter portfolio averages about 25%. To me, with a buy-and-hold investment strategy, that number seems high, but it is surprising how the investment outlook for companies can change. Over eight years of Dividend Hunter investing, there has been about an equal 50/50 split between stocks sold for a profit and those on which we took a loss.

The reasons to sell fall into three distinct categories. I will cover each reason in a separate article. Today, I will start with the easy one, and usually the most profitable. Unfortunately, it is also the rarest.

As soon as one of the companies in the Dividend Hunter portfolio gets a buyout offer, I recommend selling that stock.

When a buyout gets announced, there is always a nice gain for the share price. Then the share value typically goes “stagnant” while investors wait for the merger to close. It’s rare for anything good to happen during the waiting period, and it is possible for the deal to unwind, which would hurt the share price.

So, when there is a buyout offer, I am out of the stock and recommend the same to my Dividend Hunter subscribers. For example:

The 2021 buyout of MGM Growth Properties (MGP) by VICI Properties Inc (VICI) was one of our most recent sales. MGP was a very nice dividend growth stock, and I was sad to see it go.

One of my all-time favorite dividend growth stocks, Aircastle, Ltd., was taken private in 2019. This stock traded for less than $3.00 per share in 2009 and was bought out for over $32.00 per share. And the company had paid nicely growing (10% per year) dividends.

One other corporate action also usually deserves an immediate sell recommendation: when a company spins off part of its business into a new stock. One recent example was the spin-out of what became Warner Brothers Discovery (WBD) by AT&T (T). At the time, I recommended hanging onto both stocks. I was curious as to how it would work out. It didn’t work out well, and we ended up selling both at share prices significantly lower than those in effect at the time of the spin-out. The lesson learned is that waiting and hoping is not a good strategy.

Strange things can happen with corporate actions, such as mergers and spin-offs. History shows that your investment returns are unlikely to improve by holding on. When one of these announcements hits my inbox, I send a sell recommendation to my subscribers. The good news is that buyout offers usually provide a very nice pop to the share price, letting us sell for a profit.
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The global energy transition away from fossil fuels and toward low carbon sources is well underway.

In fact, investment in this transition is accelerating. In 2022, a little more than $1 trillion was plowed into new technologies such as renewable energy, energy storage, carbon capture and storage, electric vehicles, and more. Not only is this a new annual record amount, but—for the first time ever—it matches what was invested in fossil fuels, according to Bloomberg New Energy Finance (NEF).

As we seek to electrify everything, from power generation to transportation to heating (heat pumps), copper is the one material that’s used every step of the way. That’s a key reason why the International Energy Agency (IEA) estimates that global copper demand will increase by almost 40%, to 33 million tons a year, by 2040.

And this is the company that will benefit…

However, at the same time that copper demand is growing due to the energy transition, the global supply pipeline is running thin due to shrinking exploration budgets and a dramatic slowdown in the number of new deposits discovered, as well as the quality of those deposits.

The stark reality was laid out by S&P Global, which stated that most of the copper that’s being produced currently comes from assets that were discovered in the 1990s!

Peru Unrest = Opportunity

The world’s largest copper-producing countries are Chile and Peru, so it is relevant that anti-government protests and unrest in Peru are threatening copper supply from the world’s second-largest producer. (The country produces about 10% of global copper supplies.)

Freeport-McMoRan, which operates Cerro Verde—Peru’s largest copper mine—said in an earnings call several weeks ago that the company had reduced ore extraction by 10% to 15% at the site, to about 350,000 tons per day, in a bid to conserve supplies critical to keeping operations running.

Peru’s National Society of Mining, Petroleum and Energy thinks perhaps 30% of the country’s copper supply—approximately 2.4 million tons a year, or about 11% of the world’s mined total—is at risk.

The unrest in Peru highlights the fragility and risks to global copper supply, and only strengthens the long-term bull case for the metal. Or, as the Financial Times’ Lex team put it, “…a lot of copper comes from very few places.” Almost half of world supply comes from Chile, Peru, and China. The number-one copper producer—Chile—actually saw production fall in 2022, thanks to water and labor shortages, as well as a tax dispute with the government.

Global copper supply in 2022 suffered a disruption rate—the amount of supply lost versus forecasts—of 6.3%. That was well above the usual average of 4% to 5%, according to the commodity trading firm Trafigura. The rate in Peru was even much higher, at 12%.

With the latest flare-up in Peru’s longstanding issues with the mining industry, it seems to be more likely that we could see copper prices as high as $12,000 or $13,000 per ton in 2023.

Even over the short-term, we already have seen a rally of more than 20% (to nearly $9,000 a ton) in copper’s price since the late-September lows, thanks to China’s economy reopening. Mining stocks with copper exposure have done well in the past six months. The threats to Peruvian copper supplies will only boost their share prices further.

With that mind, let’s take a look at the mining giant that produces the most copper among the world’s largest mining companies: BHP Group Ltd. (BHP).

BHP Group

BHP engages in the mining of copper, silver, zinc, molybdenum, uranium, gold, and iron ore, as well as metallurgical and thermal coal. It also is involved in mining, smelting, and refining of nickel and potash production. Most of its revenues come from assets in the relative safe havens of Australia, North America, and Europe.

The company—the world’s biggest mining company, as measured by market capitalization—is doing quite well, to say the least. Adjusted free cash flow in fiscal year 2022 totaled $24.3 billion (a new record year) and up from the previous record in fiscal year 2021 of $19.4 billion, allowing BHP to pay down its debt. The current net debt of $333 million, as of June 30, 2022, is down from more than $20 billion in the 2016 fiscal year.

This puts BHP in a position of strength to weather economic cycles, especially since its generally low-cost, high-quality assets mean the company is one of the few miners that can remain profitable through the commodity cycle.

Despite weak output from its flagship Escondida mine in Chile, BHP management maintained copper guidance, given the strong performance of its other copper mines. BHP’s copper division accounts for about 20% of BHP’s forecast earnings.

BHP shares have rallied by a third since the start of November, due to surging iron ore and copper prices. I expect more to come.

And while its dividend will not be as massive as in the last year or two, BHP will still treat shareholders generously. The current dividend yield of 9.75% is nothing to sneeze at.The stock can be bought anywhere in the $60s per share.
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Natural gas has been on the decline for several weeks and it has taken natural gas producers down with it. One producer, Antero Resources (AR), may be set for a rebound, according to the options market. A trader purchased 6,000 of what appear to be bullish call spreads in AR that expire in March. It

The global electric vehicle market is projected to grow from just $287 billion in 2021 to a massive $1.31 trillion in 2028, forecasts Sustainalytics, a leading independent ESG and corporate governance research and analytics firm.

That nearly one-and-a-third trillion-dollar market is an opportunity few investors will want to miss.

However, many investors looking to hitch a ride on the electric vehicle boom think of only one company—Elon Musk’s Tesla (TSLA).

That focus may be a mistake… there are better, and safer, ways to get in on the EV boom than the wild ride Tesla shareholders have had to endure over the past year.

Let me show you…

Other Ways to Play the EV Boom

For example, one top rival has seen its stock fall by far less than Tesla’s 64% plunge in 2022. Hong Kong-listed BYD (BYDDY) was down by only 15% in 2022. Warren Buffett is still a shareholder and—if hybrid vehicles are counted—it is the world’s largest seller of EVs in 2022. BYD totaled 1.86 million in sales—the vast majority of which were made in China—and well ahead of Tesla’s total of 1.3 million overall sales.

But, as with the California gold rush, the obvious plays may not be the best route to profits. The reality is that the shift to electric cars is transforming the automotive industry, with automakers giving ground in terms of purchasing power to suppliers, including battery makers, mining companies and semiconductor firms.

One example of a company that I’m thinking about is Chile’s Sociedad Quimica y Minera de Chile (SQM). Its stock has risen over 68% the past 52 weeks, thanks to the 10-fold increase in the past two years of battery-grade lithium chemical prices to $75,000 a ton, according to S&P Global Commodity Insight.

Another company investors usually do not associate with electric vehicles is a manufacturer of semiconductors for EVs, Analog Devices (ADI), one of the world’s biggest analog chipmakers. Analog chips convert real-world signals, such as sound, temperature, and pressure, into digital signals that can be processed.

Let’s now take a closer look at Analog.

A promising investment

Analog Device’s key markets include: industrial (about 51% of sales in fiscal year 2022.); automotive (21%); communications (16%); and consumer (12%). Its customer base is fairly broad, with no one customer accounting for more than 10% of its revenue base.

Here is what the investment research firm CFRA says about Analog Devices:

ADI is benefiting from improving demand across the industrial and automotive markets (combined 71% of sales), with the most traction from higher semiconductor content areas like automation, instrumentation, and energy as well as for its battery management systems inside electric vehicles. Also, ADI should benefit from 5G adoption and demand for optical connectivity products from wireless carriers/data center providers.

In its last quarterly report (November 22), the real bright spot for Analog Devices was its automotive semiconductor sales. ADI’s revenue were up 28% year over year on a pro-forma basis, with automotive chip sales up 49% year over year thanks to strong positions in premium and electric vehicles.

Industrial sales were also strong, up 40% year over year. Management cited strength in digital healthcare applications.

With regard to the automotive industry, here is how Morningstar described the company’s strong position:

An especially promising end market for the firm continues to be the automotive sector. Semis are required to enable the sensors, active safety systems, and advanced infotainment systems added to cars today. Electric vehicles have even more chip content per car, and ADI is well positioned, with a market share lead in battery management systems for electric vehicles. 

Morningstar was also impressed with its industrial business: “We’re also seeing a similar trend of

increased chip content in industrial applications like robots, factory equipment, and medical devices.

ADI has tens of thousands of customers in these end markets. Further, ADI’s signal chain semiconductors continue to be prominent in 5G wireless network equipment.”

Why ADI is a Buy

Even though we currently face a lot of uncertainty right now with regard to the global economic situation, the energy transition is not going away, and electrification of vehicles is going to ramp up.

Analog Devices has outperformed most other technology stocks. In 2022, it was down only about 8.5%; over the past 52 weeks, it is now up about 11%.

Thanks to its position of strength in the automotive and industrial markets, analog chipmaker ADI is a buy in the low-160s to low-180s range.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

The 2022 bear market hit high-yield stocks (except for energy stocks) hard, and my subscribers sent me many questions about the status of their investments. One stock, in particular, moved relentlessly down, making investors wonder if the company’s big dividend was safe.

Last week, the patience paid off, and investors who averaged down are back to even, with a 25% lower share price.

Let’s take a look at how this approach really pays off for dividend investors…

My addition of OneMain Financial (OMF) to the Dividend Hunter recommendations list was not very timely. I first recommended the stock in November 2021, soon after it peaked at just under $60 per share. From the fall of 2021, the share price declined steadily for a year. This chart shows OMF from October 2021 until October 2022. You can see the near straight-line decline and the share price halving.

Through the year-long decline, I monitored OneMain’s financial results, and the company continued to pay a $0.95 per share quarterly dividend. Earnings came in each quarter as expected, and for 2022, the company earned over $7.00 per share.

The share price bottomed in late September 2022 at just under $29 per share. From October until the fourth-quarter earnings were released last week, OMF reversed course, reaching $42.30 the day before earnings were announced on February 7.

Those earnings were in line with Wall Street estimates, and the company announced a 5% dividend increase, to $1.00 per share. The share price popped higher by more than 10% on this news.

The moral of this tale is that through the year-long decline, I trusted the fundamentals and continued to add shares. I recommended the same to my subscribers, suggesting building up a position with small purchases as the share price continued to fall.

I bought my first shares in November 2021 for $59.20 per share. By averaging down, my cost per share is now $47.60. My position is now close to profitable, and I suspect it will soon turn positive. Over the last year, I also earned $3.80 per share in dividends, and my position has a yield on cost of 8.5%.

The averaging down of OMF to a profitable position happened because I understood that the OMF financial results were fine and that the share price decline was unwarranted.

Oil giant BP (BP) posted strong earnings last week, accompanied by a dividend hike and share buyback. The stock price jumped from $34 to over $38 in just two days. Judging by a block trade in BP options, the stock could remain elevated into March. A trader purchased 10,000 covered calls which collect about 1%