Out Fox The $treet

Summary Lorillard and Reynolds American merger approaches FTC decision. Lorillard hit new highs over $70 this week. With a high PE multiple, the downside risk appears to far outweigh any benefits from holding the stock to collect the merger discount. After years of owning Lorillard (NYSE: LO ) and benefiting from high dividends and stock buybacks, the recent stock action presented the opportunity to exit the stock. In addition, the current stock price faces risks from any issues with the Federal Trade Commission blocking the Reynolds American (NYSE: RAI ) merger or requiring further divestitures beyond those already proposed in the transaction. Read the full article on Seeking Alpha. Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

The cigarette stocks remain hot as high yields and steady growth have led to strong stock gains. Many an investor has overlooked the sector due to perceived negatives of the industry, but for an investor looking for yields and growth the sector should not be ignored. Right now the leading domestic cigarette stocks of Altria (NYSE: MO ) , Lorillard (NYSE: LO ) , and Reynolds America (NYSE: RAI ) all maintain dividend yields of more » Disclosure: Long LO. Please review the disclaimer page for more details. 

--> This model was up 2.1% in September versus a 2.4% gain for the benchmark S&P 500. The model slightly under performed the market in September, which can happen in solidly positive months. The model is now up over 20% for the year. Trades As mentioned in the last several monthly reports, one goal of this model is to slowly trim the amount of positions back closer to 20 after reaching 26 a few months back due to mergers and partial positions. The position count remained at 24 at month end, but a partial position in Vale S.A. (VALE) was increased in order to fill out the position. The Gap, Inc. (GPS) was sold, as the position became the largest one in the portfolio after an incredible gain by the stock. After a 100% gain for the year, the Net Payout Yields (NPY) declined to the point that Gap was no longer attractive for this model. Read our Seeking Alpha article for more details. With the cash from the Gap sell, Motorola Solutions (MSI) was purchased ...

--> This model was up 4.8% in August versus a 2.0% gain for the benchmark S&P 500. The model rebounded sharply from a weak performance in July. Trades As mentioned previously, one goal of this model is to slowly trim the amount of positions back closer to 20 after reaching 26 a few months back due to mergers and partial positions. Hence, the model only made a sell during August to reduce the position total down to 24. Express Scripts (ESRX) was sold as the merger with Medco Health (MHS) led to the reduction of share buybacks. Considering the company doesn’t pay dividends, it left the Net Payout Yield (NPY) heading towards zero. The stock was sold at $62.49 on the spike higher following strong earnings. This sell further highlights the ability of the model to be opportunistic when a position no longer meets the set criteria. Instead of having a rigid sell point at a quarter end, the model is able to trade positions when the market presents an ideal time. ...

This model was down 0.5% in July versus a 1.3% gain for the benchmark S&P 500. Oddly the model has fluctuated a lot in recent months with large cap stocks in the model moving up or down 10% on earnings reports. While typical of smaller companies this usually doesn’t happen in companies with market caps exceeding $10B. Trades As mentioned previously, one goal of this model is to slowly trim the amount of positions back closer to 20 after reaching 26   due to mergers and partial positions. Hence, the model sold the remaining holdings in Home Depot (HD) and added to existing small positions in Hartford Financial (HIG) and WellPoint (WLP). Home Depot was unloaded as the stock finished a long run from October last year where the stock went from just over $30 to the selling price over $51. This considerable gain pushed the Net Payout Yield (NPY) down as the company dropped buybacks. Not to mention that competitor Lowes (LOW) remains a Top 5 holding. The two purcha...

This model was up 5.2% in June versus a 4.0% gain for the benchmark S&P 500. As expected the model jumped back after a weak May as investors jumped back into high yielding stocks. Trade No trades were made this month, but several stocks remain on the radar to sell as dividend stocks continue to outperform the market. Some of these stocks are reaching valuation levels were capital gains are likely to be limited for possibly the next few years. Bottom Performers With a strong market in June, it is always worthwhile to review the losing stocks to confirm the long term story remains intact. The model ended the month with 26 stocks, which is slightly higher than normal, and only two stocks had a negative price change. WellPoint (WLP) was particularly weak following the Supreme Courts upholding of Obamacare.  The stock had a nice gain for June until the ruling came out and caused the stock to plummet from near $70 to close the month at $63.79. The company ha...

After about 14 months of running a Net Payout Yields Model on Covestor, I'm still stunned how few people understand the concept or even incorporate it into investing. Net Payout Yields are the combination of the ever popular dividend yield and the always controversial net stock buyback yield. Or another way, the yield a company pays out to shareholders. No preference is given to whether the yield is obtained via dividends or buybacks. It seems that most investors are in love with the dividend paying stocks, but hardly anybody can get behind stock buybacks. Oddly though, very few investors take advantage of the combination. Read the full article at Seeking Alpha.  Disclosure: Long DTV, LMT, TRV, LO, WLP. Please read the disclaimer page for more details. 

October was an excellent month with a 9.41% gain for this model, but the relative performance was lacking with the benchmark up 10.77%. This was the reverse of the results during the summer swoon, but mostly inline with what would be expected in this large cap model. Stocks with market caps over $10B typically underperform when the market soars. Trades The model had three trades in October. FirstEnergy (FE) was sold as the stock saw decent gains during the summer months hence reducing the net payout yield below normal levels in the model. Typically the model looks to sell when a stock hits 52 weeks high and either buybacks tail off and/or the dividend yield slumps if the company doesn't raise the rate. The other sell was Microsoft (MSFT) since it has reduced buybacks over the year making the stock less attractive. Possibly this was due to the Skype purchase or other potential deals that could be in the pipeline. Regardless the yield dropped to an unappealing level for a cons...

Many experts claim that buybacks don't work. To the contrary, just about everybody pounds the table on dividend yields. Why don't investors look for a high buyback yield? When reading over the Lorillard (LO) earnings released on Monday, I was shocked to read that Q3 earnings were increased by $.18 due to the share buyback plan. Wow! That's real earnings for each remaining stockholder. And to top that off, stockholders aren't paying taxes on these earnings gains. Read the full article on Seeking Alpha. Disclosure: Long CB and LO. Please review the disclaimer page for more details. 

August was a decent month for this model with an active return of 1.02% (Portfolio was down 4.66% versus the benchmark S&P500 down 5.68%). Naturally on an absolute basis the results are disappointing, but this model is not designed to time the markets. The goal remains to outperform on the way down and remain even on the way up producing superior returns over time. Trades After several semi active months of trading especially in May and July, August saw no trades executed. Typically the model trades more in good markets as companies outgrow yields making them less attractive to keep. While down markets normally lead to higher yields and a improvement in the decision for keeping a security in the model. Largest Weights Lorillard (LO) remained the largest stock in the model as the tobacco stock was able to post a nearly 5% gain in the month. CSX Corp (CSX) remained a top weight even though the stock plunged. The railroad operator remains tied to a cyclical business and was the ...

March was another solid month for this model, as it beat the benchmark (up 1.95% versus 0.10 loss for the S&P 500). The model also wrapped up a solid first quarter with a 6.57% gain. For a Risk Score 1 model, the goal remains to outpace the benchmark by a slight amount eac month with greatly reduced volatility as opposed to models in higher risk scores. Trades For the month, the model sold Walt Disney (DIS) and United Parcel Service (UPS) as their net payout yields dropped below acceptable levels. Those two stocks were replaced with Gap (GPS) and Entergy (ETR). GPS maintains a modest dividend of 2%, but has made significant buybacks in the last few years. On February 24th, they announced the Board of Directors approved an additional $2 billing share repurchase authorization and a increase in the annual dividend to $.45 for 2011. For Q4 alone, they repurchased $598M of stock or an annualized rate of nearly 18% making them a top 4 net payout yield stock . ETR is another top ...