DGI Adventure – 02-11-2016 “Consumer Staples” Watch List

For those of you following along at home, you may have
noticed a pattern developing that I try to come up with a watch list every
month. So far, I’ve been using David Fish’s CCC list
as the initial universe of stocks. Then I filter down based on different
quantitative criteria.

Starting last
month
, I decided to keep each new list in a single google sheet that is published back at the
mothership
. The idea is that these lists are functional for the whole year.
After I’d posted it, I realized I wasn’t super happy with last month’s list:
the second step of my filtering process eliminated any stock whose payout
ratio, in terms of earnings per share, was 60% or higher. 1) I don’t care as
much about EPS payout ratio as I do FCF payout ratio, and 2) both payout ratios
change throughout the year. So last month’s watch list, like so many before it,
was just a “one time list” rather than one that could last the whole year.

For this month’s list, I happened to calculate my own EPS
payout ratio, using the annual dividend and the “live” EPS that google looks
up. It was mostly the same as the value on the CCC spreadsheet…but not always.
Some of them were pretty different (for example Colgate-Palmolive’s payout
ratio was listed as 56.3%, but the “live” calculation is over 100%.) Upon
closer examination, the diluted TTM EPS for CL is $1.52 if you use data through
December 2015, but $2.70 if you use data through September 2015. The
googlefinance function to look up EPS returned $1.51 when I was first building
the list. I’ve long suspected David Fish’s spreadsheet probably goes out of
date quickly after it’s published. I was surprised how quickly I guess.

So while payout ratio is something I definitely look at it’s
not how I want to filter for a watch list that’s supposed to last the whole
year.

I still used the CCC list as the starting universe, but I
decided to make a sector list this time. Out of all of our individual stocks,
we don’t own very many consumer staples. Seems like something we could use more
of. Plus, the market is going bananas. Is a recession looming? I’m skeptical,
but just in case, there’s nothing like some good ol’ fashioned low beta consumer
staples stocks when shit hits the fan…right? I don’t know, man, I’m not super
impressed with these stocks. Also several of them are not actually in the
consumer staples sector. I have less and less faith in the spreadsheet every
day. WTF D. Fish?

Sorry, I guess this was kind of a bust of a watch list. Well
at this point in the month it’s too late to change tack, so here we go.

The
2016 Consumer Staples Watch List

Remember, there is just one watch list page with all the
lists as separate tabs in the one sheet.

Quantitatively, I’m still most interested in payout ratio, DGR,
debt/market cap, dividend
cushion
, etc . In case you’re wondering, I use conditional formatting to
highlight cells that “pass” the target metric. Nobody passed every single
metric…and I lowered the target DGR to 8%. Now to be fair, a challenger can’t
pass every metric since it doesn’t necessarily have a 10 year DGR. Mead Johnson Nutrition CO (MJN) fell
short on this technicality. They make baby formula apparently.

Also passing all but one of the metrics, we have our runner
up: Nu Skin Enterprises (NUS). You
may recall they technically squeaked by to make the December
Watch list
. But The Wizards have a rule: Don’t invest in pyramid schemes. It’s
a pretty important rule. Also, how is anti-aging cream a consumer “staple”?

I’m also curious how Coca-Cola
Enterprises (CCE)
is in so much
better shape than The Coca-Cola Co (KO)?
As an Atlanta GA based, Coca-Cola bottling partner for Western Europe, you’d
think they’d be having difficulties with currency exchange rates, right?

Sorry Tootsie Roll
Industries, Inc (TR)
, but sub-6% dividend growth rates for the 3, 5 and 10
year periods make a 1% yield pretty unattractive.

Just about every stock that is compelling in one way has a
red flag or otherwise unimpressive metrics in another way. I guess that’s
probably what a watch list that’s designed to be “low beta” looks like? We’ll
keep an eye on these stocks throughout the year…maybe they’ll look better down
the road? That’s sort of the point of an all year watch list.

I can’t get over the fact that as a group they have an
average current PE of 26+ compared to a 5 year average of 21. And that’s after
the carnage we’ve had to start this year…maybe Mr. Market isn’t crazy after
all.

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