First off, just a quick FYI on the recently posted WMB (Williams Companies Inc) Growth & Income Trade setup: I had incorrectly listed the price target in the previous post. The typo has been corrected, please re-visit that post to view the corrected details of that trade setup if you viewed it earlier and are considering a position.
I also wanted to reply to a couple of questions that member @trgfunds had posted in the comment section under the WMB setup. His comment: “Hi Randy thanks for the idea. I’m curious with these income trades do you ever worry about the negative earnings and/or dividend being higher than the earnings? A sudden announcement of cancellation, lowering, or suspension of the dividend can take a stock into an entirely new lower range for years. Thanks again!”
My long reply, which also includes some additional suggestions on how best to incorporate the trade ideas shared on RSOTC into your trading or investing:
@trgfunds – Excellent question & I’m glad that you asked as I feel those are very important considerations in a trade like WMB. I’m always trying to strike a balance between posting concise, yet comprehensive commentary although I could talk of hours or type pages on all the nuances & variables that go into each trade idea. As there are just so many factors that go into my analysis, I often struggle to keep my video updates under 30 minutes and my front page posts limited to just a few short paragraphs.
The problem is that trading or investing isn’t simple, rather quite complex with numerous variables & factors that need to be taken into account with every trade or investment candidate beyond simply what to buy & when to buy it. Being successful in trading isn’t any easier than being successful in any other career or endeavor, be it a professional athlete, doctor, lawyer, general contractor or whatever. Go down the line… pick your profession & name one that doesn’t take a lot of hard work & experience under you belt to have learned the hard lessons that may have been told to you but can only be truly ‘learned’ once experienced.
What that being said, and again, as a way to further impress upon what I wrote regarding the WMB setup as well as give you a direct response to your question, let me start by pasting the closing comments on that post which I had hoped would encompass all the points that you mentioned & then some as to list every possible risk event on a company in one of the most devastated industries in years, if not decades, would be quite time consuming:
“WMB is a natural gas operator, which aligns this trade with my longer-term bullish outlook on nat gas. However, WITHOUT EXCEPTION, risk & return go hand-in-hand. There are obvious fundamental reasons as to why Williams Companies is yielding over 16% in a near-zero interest rate environment. Additionally, WMB recently became involved in a legal tussle with Energy Transfer Equity LB, a company they are involved in a pending merger with, which you can read about by clicking here.
Bottom line: Always DYODD and as with all positions, make sure to properly diversify among various sectors/asset classes and if you decide this trade fits your risk tolerance, objectives & trading style, consider making a downward adjustment to your position size to account for the above above gain & loss potential on this trade.” (end closing comments)
Now that you mentioned it, I realize that what might be obvious to me may or may not be so to others. Yes, first & foremost on that list would be an increased likelihood of a dividend cut & possible suspension. Add to that the legal woes which I mentioned that could derail the pending merger and cause previously unforeseen legal expenses and/or a $1.48 billion payment to Energy Transfer if WMB walks away from the deal. Again, those are just some of the issues, most of which stem from the fact that WMB is in an industry that has been devastated as the result one of the most vicious bear markets in the energy sector in decades.
Now to segue into a closely related point that is worth discussing in detail and that is how best to incorporate the trade ideas shared here into their own trading or investing. To do so, let me use the following analogy:
I live in S. Florida where a good number of people make a living, either part or full-time, flipping houses. Many of those “flippers” work with one or more realtors in which to help find the hidden gems in which to profit from. The realtor’s job is simply to show potential investment opportunities to the flipper, often providing a some relevant information specific to each listing such as any potentially positive selling points such as good schools nearby, low property taxes, home improvements/upgrades such as tear-downs & major renovations in the neighborhood which will increase nearby comps, etc… as well as any potential negatives such as a new prison, dump or highway planned to be built nearby which will have a negative impact on surrounding home values.
However, should the flipper decide to move forward on a property, he or she must then do their own due diligence and make sure that the beneficial factors that the realtor had pointed out are indeed accurate and more importantly, they need to make sure that they are aware of any potential pitfalls, both in the surrounding area as well as anything specific to the house such as structural damage, a bad roof in need of repair/replacement, Chinese drywall that needs to be replaced, mold problems, permitting/zoning issues, etc… that the realtor did not disclose. Essentially, I am like the realtor, filtering through dozens if not hundreds of potential investing or trading opps every week and then passing along only those that appear most promising. To take this analogy a step further, once a flipper decides to buy a property, they typically do one of three things:
1) Flip it as is, with little to no improvements other than maybe a fresh coat of paint & a few new plants in the yard to add curb appeal. Make a quick buck with cash in hand ready for the next opportunity that comes along.
2) Pour some money into the property to update the house (new flooring, kitchen & bath remodel, window treatments, etc..) which can take months, yet result in a considerably higher return on their investment, or…
3) If they think that the property is located in an area with great longer-term potential, such as new, trendy area that is seeing a lot of tear-downs & major renovations, then they might take a longer-term view and decide to rent the property out for an extended period of time with the intention of selling it many months or even years later at a substantial profit.
One of the main reasons that I list multiple price targets on many of the trade ideas here, especially the Long-term & Growth & Income Trades, is that some traders prefer a quick, hit & run trading style: Get in & get out as quick a possibly. These traders would most likely target T1 on the trade ideas with multiple targets, typically employing a more active swing trading style with holding periods often measured in just days or weeks. Those trades fit the first home-flipper profile listed above.
The second example would mesh with the typically swing trader that might preferred to give their trades a little more room, i.e.- using wider stops than those only targeting T1 as well as a typical time frame from several weeks to several months. This type of swing trader might prefer to book partial or full profits at the 2nd or 3rd price target on a trade with 4 price targets listed.
The final example meshes with the longer-term swing or trend trader as well as investors that are comfortable with allowing wider stops (but still likely within the same 3:1 R/R that I prefer to use) and expected holding periods measured in months and occasionally a year or more. Personally, I wear all three of the hats above. At times, for example when the market is trading range bound, I might prefer to take the quick buck & book all profits at T1. During a trending market I might opt to hold out for any or all of the higher price targets. I trade more actively in my trading account while using a longer-term, less active approach in my retirement accounts.
The bottom line is that every trader or investor should only take trade ideas that mesh with their own unique risk tolerance, objectives & trading style. Although I do my best to communicate my thoughts on important factors to consider on a trade, such as above average risk of loss, excessive volatility, suggested adjustments to position size, etc.., invariably I will miss salient fundamental details on a trade such as legal woes, upcoming earnings announcements, an upcoming FDA ruling on a drug in clinical trials, etc.. and as such, I always encourage each trader to DYODD on any trade idea they are considering. Keep in mind that all the due diligence in the world can’t uncover the many unknown & unforeseen pitfalls that can cause a sudden drop in a stock. While losses are an unavoidable part of trading, they are certainly manageable. One of the most effective ways to mitigate unexpected losses on a position is to diversify your holdings and never put too much into any one position and/or sector.
Just when I thought this reply couldn’t get any longer, I almost forget to answer the other part of your question: “I’m curious with these income trades do you ever worry about the negative earnings and/or dividend being higher than the earnings?”
While I wouldn’t use the word “worry”, I am certainly aware of the precarious fundamental situation that cause any one company’s stock price to become depressed to levels at which their dividend, if not reduced at that point, results in a yield well above the average yield from other dividend paying stocks in the same sector, industry or even the broad market. More precise, I may not be aware of all the specific fundamental issues that are resulting in a stock paying an above average yield but I am a firm believer that if a stock is paying out a dividend well in excess of the average dividend rate at any point in time, that there is a reason or reasons why the stock prices is depressed, resulting in the above average dividend.. i.e. – I might not be aware of what the fundamental issues are but I am aware that there are fundamental issues.
When finding these Growth & Income trade ideas, all of which have above average dividend yields, I have two choices: Either pass on the trade in fear of a possibly dividend cut, which by the way, may have already been fully priced into the stock before the cut is actually announced, OR… take the trade after doing at least some quick DD by scanning the headlines & fundamentals while employing prudent money management techniques, such as proper position sizing (don’t take an oversized position), using stops calculated ideally using 3:1 or better R/R based on my preferred target(s), avoid over-exposure to any one sector or industry (e.g.- energy stocks shouldn’t account for much more than 20-30% of one’s portfolio), etc…
More to the part above the negative earnings, here are just a few of the recent Growth & Income Trade ideas on the site that hit on or more profit targets in recent month, most of which had depressed or negative earnings:
PIR: Final target hit for a 44% gain March 7th
VHI T2 hit for 39% gain March 7th
MOS Final target hit March 4th for 16%
POT T2 hit March 3rd for 17% gain
ENLK T2 hit for 20% gain Dec 23rd
Simple put, risk & return go hand in hand. Just glance the charts and/or fundamentals on these stocks at the time the trade was entered & you’ll quickly see that the more risky the trade seems (and very well may be), the more profit potential if has if the trade is successful. As always, pass on any trades that you are not 100% comfortable with as the next trading opportunity is always right around the corner.