Watchlist – June 2016

With the market at all-time highs, and dividend investing popularity at all-time highs due to a low yield environment, most popular dividend stocks are either fully valued or overvalued. It’s tough to find any great deals these days.

But as John Bogle said recently, pre-Brexit:

I think whatever your view of the world is, you have to invest. You can’t put the money in the mattress and in this day and age of low interest rates, you can’t put it in the money market fund or a bank CD, so invest, you must.

With that in mind, the following stocks are on my radar this month – where I’m either interested, or I feel like I would be interested, if the price comes into a range that I’d like to pay to own the company:

Nvidia (NVDA)

Company Description

Nvidia is a technology company based in Santa Clara, California. They manufacture GPUs (graphical proecessing units, which help PC gamers render beautiful graphics). They’ve also expanded into professional visualization, data centers, and automotive.

Why I’m Interested

I was first introduced to Nvidia many years ago, as I was a heavy gamer, so I’ve purchased many of their GeForce GPUs in the past. That said, my interest in them isn’t so much their GPUs as their work in the automotive space, and particularly their chips being used in the development autonomous vehicles, which, if you’ve seen the Jetsons, is the future we’re all headed in.

Moreover, they have a healthy cash flow and low levels of debt relatively speaking, which makes for a sustainable & growing dividend.

I already own this stock, and would like to own more, but this stock along with non-dividend payer Mobileye have seen massive runups in price over the past year. That isn’t to say that the momentum isn’t there, but the margin of safety just doesn’t seem to be there anymore.

Current Yield


Desired Entry Point

While a nice momentum play, the stock is somewhat overvalued, which increases the risk of capital loss. I’d like to see the stock come back down in the range of $21-$31 to buy more of this great company.

Starbucks (SBUX)

Company Description

Everybody knows Starbucks.

Starbucks purchases and roasts high-quality coffees that it sells, along with handcrafted coffee, tea and other beverages and a variety of fresh food items, through its company-operated stores.

I personally don’t drink coffee, but other people love it. It’s the closest thing to an addiction and start in the morning for people all over the world.

Why I’m Interested

In addition to being one of the best known brands, coffee is the closest thing to an addiction that there is, outside of cigarettes or drugs.

Global comparable sales growth has averaged in the mid-to high single digits per annum during the past few years.

The dividend is quite safe and supported by cash flows, and while relatively modest, has great growth potential.

It’s a great company, the only problem with it is the current valuation.

Current Yield


Desired Entry Point

Currently at $56/ share, I’d like to see the price come down to $47, although one could always make the argument it’s ok to overpay a bit for quality.

Omega Healthcare (OHI)

Company Description

Omega Healthcare is a real estate investment trust (REIT) that focuses on nursing facilities in the US.

Why I’m Interested

Honestly, I’ve always wanted to be a landlord and have dreams of creating my own Monopoly like real estate empire, but just been too lazy to do any of it. So REITs are really the next best thing – great for a lazy landlord who doesn’t want to deal with tenants or property issues – and I’d get to be able to do it for commercial property, which is definitely something I don’t have cash to even begin contemplating.

Moreover, I have almost zero exposure to this asset class as I’m currently overallocated to technology, so I’ve been wanting to get in with the right investments, and would like to set my target allocation at around 5%-8% or so of my portfolio for REITs.

But beyond all that, Omega is benefiting from some great long term trends, in particular the aging of the population in the US combined with a shortage of nursing facilities. Moreover, Omega’s occupancy rates have been relatively stable ranging from just over 80% in 2001 to ~85% more recently.

Finally, the issue here unlike most other dividend stocks isn’t the valuation, it’s that the company’s shares continue to get beat up on. Part of this appears due to the fact that no matter how great the business is, REITs will do poorly in a rising interest rate environment since they need to disburse most of their cash in the form of dividends and take on new debt to make acquisitions. Thus, in a rising interest rate environment, their cost of capital will increase, hurting their business.

Additionally, the reason why Omega is cheap is because many of their tenants are funded directly by Medicare, and Medicare is moving from pay-for-services to bundled services. This will reduce the patient’s staying time, since as more of the population ages, they’ll simply run out of beds. This is good for the government, and bad for Omega. It’s simply unclear at this time how all this will play out, but this uncertainty is part of the reason why the shares are so undervalued right now.

Current Yield

A juicy 7.17% yield

Desired Entry Point

I believe that these shares are currently undervalued substantially with a fair market value in the mid $40 range. However, as mentioned with increases to interest rates, it might be more prudent to wait on the sidelines to see how things play out. That said, at these low levels, there is a substantial margin of safety here.

Cracker Barrel (CBRL)

Company Description

Yep, Cracker Barrel are those restaurants you see on the side of the highway. A typical store serves 1,000 guests a day and employs 100+ people.The company generates ~20% of revenue from its
retail business, while ~40% of its customers are travelers.

Why I’m Interested

This is a company that has big plans for expansion – they are prototyping a new “fast casual” store and they are committed to returning value to shareholders. They just instituted another special dividend payment of $3.25/ share, and their dividend payments have a solid level of safety. With consumers with more money in their pockets due to falling oil prices, lower commodity prices, and a commitment to cost savings, their cash flow continues to increase.

Current Yield

A respectable 2.74% yield, with a history of special dividend payments

Desired Entry Point

$140-$170/ share

In addition to this, there are a few stocks that I have my eye on (and a few non-dividend payers that I want to round out my position on, FB in particular), especially with some Brexit volatility right around the corner, so we’ll see how things play out in the next few weeks in terms of buying opportunities bought on by some (hopefully) panicked selling in Mr. Market.

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