Our portfolio has gained 18.8% this month, almost tripling the Dow's performance. General Motors and J.P. Morgan are finally getting some respect. Ford's recent price drop was good news for investors, but the change in price messed up our yield calculations. We've adjusted the yield in an imperfect attempt to cope with an unusual situation.
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I wonder how it would do if I went to England....
General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> has been the star performer this month, gaining 31.5% since August 1. Carl Icahn, Mr. Corporate Raider himself, has announced that he intends to buy up to 15% of GM's stock. That will give any company a boost.
The boost works two ways. First, a major increase in the demand for shares will raise the price of any stock. If Mr. Icahn has been actively buying shares since his announcement on August 18, that would certainly explain the increase. But that's just part of the story. By announcing that he considered GM severely undervalued and worthy of investment, Icahn may have caused a lot of investors to take a second look at the company, including a few who habitually buy anything he invests in.
Finally, GM is getting some respect!
J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> has also done really well this month. It's up 25.2%. News stories have given credit for the rise to the proposed buyout of investment bank Donaldson, Lufkin & Jenrette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> by uber-bank Credit Suisse Group. The deal, which promises DLJ shareholders a 37% premium (based on share price the day the deal was announced) on their shares based on the share price when the deal was announced, seems to have had something of the same effect on financial stocks that Carl Icahn's GM deal had on GM. There's nothing like having other people want something to make you want it too.
Even poor, beleaguered Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %> and Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> have beaten the market this month. The Dow is up 6.6%, while Kodak is up 9.8% and Caterpillar managed to crawl up 7.9%. Neither have moved out of the hole they are in for the year, but they are certainly going in the right direction.
GM's main competition, Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>, is one of our Beating the S&P portfolio stocks. (We will have a report on how that strategy is doing next Wednesday when Ethan Haskel gets back from Canada.) Ford has certainly been in the news lately. The recall of Firestone tires on its Explorer SUV hasn't helped its stock price, but it hasn't caused it to tank either, since Bridgestone/Firestone is bearing the brunt of the recall. Ford's price took a nosedive a few weeks ago, but that was good news for investors. The company paid a special dividend of $20 per share in an effort to get rid of some of the excess cash that has built up over the past decade. Of course that meant that each share was then worth $20 less so the price dropped, but the drop didn't hurt shareholders who got ether the cash or its equivalent in stock.
It did cause considerable confusion regarding the Ford dividend, though, especially for LiveCalc, our online stock calculator. Ford has been paying $0.50 per quarter, a nice, fat 4% dividend. Now, when a price drops, if the dividend doesn't change, the yield goes up. Ford's yield shot up to almost 8% when its price dropped because, officially, the dividend hasn't changed yet.
Our policy is to change the dividends in LiveCalc only when a change is announced by a company's board of directors. Trouble is, Ford's BOD hasn't announced what the new dividend will be. A number of folks wrote to us about this problem, which caused a crisis of sorts.
We try to be consistent. When the historical returns of a strategy are the basis for using the strategy, one had better implement the strategy exactly like the historical tests did. Our historical test of the Foolish Four strategy tracked dividend declaration dates. When yields were calculated, we very carefully used only the dividend that an investor at that time would know about, the "most recently declared dividend." We made sure we avoided using foreknowledge.
So my first reaction to the Ford situation was to leave the dividend as it was. Well, darn it, that didn't work either. A yield of 8% is absurd. No one buying Ford stock right now expects to get that kind of yield on his investment. So two days ago we changed the dividend to $1.14, which gives Ford a yield of around 4%. This is what the board of directors says it plans to use as the target yield when they set the new dividend. It's not a perfect solution, but it's better than leaving the yield at 8%.
Ford had been in the top spot on the BSP lists with the 8% yield, and fortunately it stayed in that spot even when the yield dropped to 4%. We lucked out there. If the order had changed, I expect there would have been a few irate customers clicking their e-mail buttons. As it is, Ford's high yield and low price are warning signals that indicate it might be better to avoid right now. Personally, I expect that this is not a case where low price and high yield are an indication that the company may be in trouble, and that Ford will recover nicely, as some of the number-one ranked stocks do.
Let's talk some more tomorrow about that whole "skip the first stock" thing. Judging from many comments I've seen, that part of our strategy is rather misunderstood, and tomorrow would be a good time to explain it a bit better.
In the meantime, drop by Fool Survivor and put the castaways in the order you think they'll get booted. You could win $2,000, a Handspring Visor, or other Foolish prizes.
Fool on and prosper!