Hey There Income Hunters,
Biden Treasury Secretary nominee Janet Yellen kicked off the move into her new post just as we knew she would …
To borrow a phrase from our recently departed 45th President: Bigly.
How about these quotes from her confirmation hearing this week …
“But right now, with interest rates at historic lows, the smartest thing we can do is act big.”
“We should have greater cooperation between the Fed and the Treasury, with both the monetary and fiscal policy working together and supportive. This is a good backdrop for risk sentiment.”
Yellen also played up green energy and infrastructure spending.
That drove metals up, oil up, dollar down … as you would expect with at least $1.9 trillion in stimulus cash coming very soon.
And with Yellen at the helm, I see that number rising to as much as $5 trillion by year’s end.
On the Income Hunt
Everything that Yellen had to say was interesting …
ESPECIALLY because an energy stock I have been tracking just bought a stake in the world’s largest solar developer …
- Total (TOT) agreed to acquire a 20% stake in India’s Adani Green Energy, the world’s largest solar developer, for $2.5 billion.
- Total is a unique multinational oil and gas (and renewables) company with a market capitalization of more than $120 billion…
AND they weren’t finished with that deal…
- Total signed an MOU with Clean Energy Fuels (CLNE) to create a 50-50 joint venture to develop carbon negative renewable natural gas production facilities in the U.S. …
- These strategic moves will help them achieve net zero emissions by 2050, while still delivering near-term performance in the oil market.
I HAD to pull the trigger…
TOT trades at $45, which I have to be a 10% discount to my fair value. Morningstar has them at a 20% discount to their fair value …
I use a simple discounted cash flow analysis to calculate a fair value price.
Here is the data from Power Income’s valuation model:
Next Question … Does TOT pass the Quality Test:
- Dividend Safety: The $3.09 annual dividend payment only absorbs 48% of their net funds from operations… That works, as below the 60-70% range is good.
- Dividend Growth: 7% growth and 7% yield is excellent. You want the total of the two to be 8-10%.
- Total Debt/Equity: This shows their balance sheet strength and total debt is only 60% of equity. Anything under 100% is good.
- Return on invested Capital: TOT averaged 7.5% over the past 10-years. That could stand to be a bit higher, but is acceptable — especially if their recent investments turn out as expected.
Based on the four factors above, TOT looks VERY strong.
Let’s also take a quick look at the market technicals:
I like to use the 200-day moving average as a momentum guide. Here TOT is trending higher within a channel (marked by the blue lines). I am confident it will rally to the top of the channel before mid-year.
So I pulled the trigger and got my trade on for a $1.83 debit, which is a 2.7 to 1
reward /risk ratio.
I chose the August expiration because I think oil will be above $60 by then, which will easily get TOT above $50.
As I’ve discussed elsewhere, the Biden administration is going to be HUGE for oil, which has already risen from $39.84 when he was elected to nearly $53 today. I expect that trend to continue.
Bringing It Home
Today, I gave you more detail on the analysis I go through to pick quality stocks.
It’s really important to do your homework.
You can be right about the bigger picture but be wrong about a specific stock and end up losing money. That really stings.
Remember it’s a top down approach.
- Formulate your opinion on the big picture
- Analyze the stocks in the sector you favor for quality
- Analyze the technicals on the stock for optimal entry and exit points
- Let it rip…
Please keep the feedback and questions coming!
Also, I have an important announcement.
⇒ I am working on a model portfolio of dividend stocks with an option program overlay that will help you build “Power Income for Life”.
More to come.
Live and Trade With Passion My Friends,