Jan-Feb Earnings Cycle Not Favorable to Greenfield Leaders

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This earnings cycle has been hard on the Greenfield Leaders -- and I suspect more is coming.

Greenfield Leaders have a common characteristic:  they have constant to increasing revenues and earnings per share (EPS) on a quarter-over-quarter (QoQ), year-over-year (YoY), and trailing 12-month (TTM) basis.  These characteristics reveal that management is dealing with corporate growth in a responsible manner -- they are controlling expenses as revenues increase (reflected by earnings) and that they are not performing a sleigh of hand through share buybacks, etc. (which artificially increase EPS irrespective of revenues).

When a company has a dropping revenue or EPS metric something is changing:  demand is decreasing (lower revenues and/or EPS), expenses are going up (lower EPS), or some mixture of the two.  Institutional investors have confidence when these values increase year over year -- and they lose confidence when things change.

While I can tolerate decreasing revenues and EPS compared to the last quarter (many products are cyclical), I cannot tolerate decreasing revenues or EPS compared to the same quarter one year ago, nor can I tolerate a decrease in the TTM revenues or EPS.  These are all variants on cracks in the armor, and it is a matter of time before the company resets, driven largely by institutional investors allowing the prices to reset.

A number of companies in the portfolio are in trouble from a longer-term perspective:

ABBV
AMTD
BK
EMR
IP
HLI
MDC
MC

Revenues continue to look strong, for the most part, in each of these companies, but EPS metrics on the QoQ, YoY, and TTM basis are getting hammered.  As I implied above, falling EPS, in the face of rising revenues, means that management is spending more per share of share value than what they have historically been doing, and while this is part of a growth/expansion cycle, it is impossible to know whether the spending will translate into improved REV and EPS metrics.  This means that value in the stock is topping (at best), and at worse, that money will outflow these stocks, lowering the prices. Good management teams succeed -- new or bad management teams fail at this.

Given this, and the fact that there are a number of companies that are doing so well in the REV and EPS area, the stocks listed above will be slated for sale (if they are not already -- BK, MC, MDC are already on the block).  These stocks will be replaced with good stocks with solid revenue and EPS, and that are part of the Dividend Champions series (link here) in due time.   There is no rush to get rid of these stocks, especially if we're looking to collect dividends:

• HLI is going to pay $0.20/share for record holders of 3/2.
• ABBV is going to pay $0.96/share after 4/12.  

Everybody else has already paid us or is going to within the next week or so, and I'll tally this up at the end of the month.

We have earnings reports coming up on CM and MGA (today, before the market open) as well as CWT (March 1, before the open), and the next reports aren't until after March 20th.  I'm expecting that CM will be added to the sell list (I'm anticipating that revenues are going to fall on the QoQ and YoY metrics), and I expect MGA to be flat to slightly positive, sparing it for another quarter.

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For those keeping track, here are the portfolio holdings:

ABBV 43
AMTD 23
BHP 82
BK 56
BLK 7
CFG 18
CFR 23
CM(HB) 20
CWT(1) 11
DRI 28
EMR 33
GRMN 16
HLI(0) 18
IP 16
KAR 45
LVS 37
MC(1) 4
MDC(0) 33
MGA(HB) 19
MNR(HB) 83
PAYX 84
PNC 30
RCL 27
WBS 69
WRK 68
XLK 569
XLK 180223C68.5 -5

Note that I added the covered call sale in XLK just to generate a few extra premium dollars and to make up for the low dividend payments associated with XLK (dividend yield is presently 1.31%, below the risk-free-rate (RFR) of 1.34%).  The call will most likely expire worthless this Friday, adding an extra $90 to the portfolio.  We have a 4% gain in XLK with a basis at $64.41, so we're guaranteed a gain no matter what happens.  I doubt that the position will be called away.

The portfolio is approximately 97% invested, so there is not a bunch of cash sitting around.  Total "all-in" portfolio value as of this morning is $102356.86, and I have $3.1K that I could deploy to a new position.  I'm going to wait until I free up a bit more cash as I'd like to get a round 100-share lot in something so we can generate some call/write premium.  This takes a bit more capital, and it has to fit in with the Greenfield Optimized Sharp Ratio screening process, which I won't get to until this weekend.

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As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing in this blog entry is to be construed as advice to purchase or sell any security -- you follow what I do completely at your own risk.

Regards,

Paul