Over the past month, I've been trying out a new feature in my premium newsletter, High-Yield Investing. While past issues have introduced income stocks that simply beat the market's average yield, or even double or triple it, this new section is different.
This is for investors looking for really high yields -- those north of 10%. Sure, the quality of these names may differ -- and they may or may not merit inclusion into the newsletter's portfolio. But my mission is clear: to identify as many opportunities in the high-yield market as possible.
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In the first two editions of my double-digit-yielder stock screen (you can see them here and here), I ran a simple search and then evaluated price performance to weed out the duds. We ended up with some great picks, some that may even merit inclusion in my portfolio. But for this week's screen, I took a different tactic: letting Wall Street do the work for me.
Big Money's Favorite High-Yield Stocks
Computers are amazing tools. You can ask them to apply any search criteria under the sun (say, stocks with market caps below $100 million, operating margins above 20%, and projected earnings growth above 20%). And with the click of a button, the machine instantly checks the entire market to find those that match -- spitting out the names and tickers in the blink of an eye.
Can you imagine how long that would take by hand?
It's a great way to narrow 10,000 options into a manageable pool of maybe a few dozen to consider. But while they are blindingly fast, computers aren't that smart (at least not yet). You still have to select the right set of search parameters to separate potential winners from losers -- and that's the real trick.
Fortunately, there are thousands of highly-intelligent research analysts and money managers out there whose sole responsibility is to identify stocks that are poised to outperform the market. They are glued to macroeconomic reports, read every line of SEC filings, and even visit companies firsthand to ask tough questions about the state of the business.
Thanks to the marvels of modern technology, we can retrieve (and neatly summarize) their findings. How? By screening for stocks that have the enthusiastic buying support of mutual funds and other institutional investors. While any screen is, by definition, quick, the actual search parameter, in this case, represents countless thousands of manpower hours.
In other words, I'm screening for stocks that have already been pre-screened (and approved) by top money managers.
I looked for double-digit yielders with strong institutional ownership, specifically those whose top-five owners hold at least 10% or more of the outstanding shares.
Now, some of these owners will be passively managed index funds -- not exactly a ringing endorsement since they buy a little bit of everything, often in equal amounts. So I gave preference to candidates that are predominately favored by active funds.
While weighing absolute numbers, it's also smart to examine trends. After all, a position size of 500,000 shares doesn't mean as much if it used to be 2 million and the fund has been unloading it in recent weeks. Therefore, I also gave strong consideration to recent buying and selling activity.
Here's what came back.
|Company||Industry||Market Cap||Top-5 Ownership||Yield|
|NuStar Holdings (NSH)||Midstream Energy||$0.7 B||17.0%||12.6%|
|Plains GP (PAGP)||Midstream Energy||$11.0 B||16.1%||10.6%|
|Washington Prime (WPG)||REIT||$1.9 B||15.1%||12.1%|
|CenturyLink (CTL)||Telecom||$10.4 B||11.6%||11.6%|
As with any screen, this one isn't perfect. For instance, it doesn't distinguish between funds with good and mediocre performance track records. They are scored equally -- though we'd probably all prefer to see 5-star funds investing in one of our holdings than 1-star funds.
Nevertheless, in aggregate, the stocks in this table have caught the eye of dozens of reputable mutual funds and closed-end funds. And many of these funds have either just initiated new positions or made a sizeable increase in the number of shares held.
By itself, that's not an iron-clad reason to buy, which is why I always suggest doing further research. But it's certainly an encouraging starting point.
The Best Of The Best
I'm paying particular attention to NuStar (NYSE: NSH), a former High-Yield Investing holding from many years ago. The company owns 9,300 miles of crude oil and refined products pipelines. But it's the location, not the length, of those conduits that matters most.
NuStar has been expanding its footprint in the Permian Basin of West Texas, where 600 different oil and gas producers have congregated. This is a hotbed of drilling activity right now. In fact, of the 750 rigs actively hunting for oil in the United States, almost half are deployed in this one area -- in part because wells can be profitable at prices as low as $30 per barrel (oil has been trading around $52 per barrel in recent days).
With production now topping 2.4 million barrels per day (bpd), the Permian Basin ranks as the second most productive oilfield worldwide, trailing only the massive Ghawar field in Saudi Arabia. And more is coming, with Chevron (NYSE: CVX) recently unveiling plans to invest $4 billion in the Permian Basin, and Exxon Mobil (NYSE: XOM) shelling out $5.6 billion to double its acreage here.
Soon, more than 3 million barrels of crude per day will be gushing to the surface, spelling greater demand for pipeline transportation. When it happens, Nustar will be perfectly positioned to seize the opportunity and return its newfound profits to investors. I'll be keeping the company on the list of potential candidates for my High-Yield Investing portfolio.
There's Plenty More Where That Came From
The goal of this stock screen is to identify stocks that are worthy of a closer look. While they have already met the criteria of some of the top money managers, I haven't fully researched the companies in the table above. If I find a real gem within these screens, a stock that can actually maintain this level of yield through the years to come, my High-Yield Investing subscribers will be the ones who benefit the most.
So if you'd like to join us in our search for the best high yields the market has to offer, then I want to invite you to learn more about High-Yield Investing. You don't have to settle for the paltry yields offered by most stocks. The high yields are still out there. You just have to know where to look -- and my staff and I are here to help you along.
This article originally appeared on StreetAuthority.