Buy Zone Process and Coverage Universe
As we get closer to launching the new website, we wanted to provide you with an overview of what you should expect going forward with respect to our “Buy Zone” research. We are making several process enhancements that are focused on making our “Buy Zone” research more transparent, dynamic, and user-friendly for our Members.
What is a “Buy Zone”?
Once we have decided that we want to purchase a particular stock, we look for a low-risk entry point to open (or add to) the position. We scan the charts of our top-rated stocks looking for strong levels of support (both technical and fundamental). These levels of support form what we call our “Buy Zones”, which are points at which long-term dividend investors should feel comfortable starting to build a position in the respective stocks. We focus on four key levels of support when determining a “Buy Zone”:
- Technical – Support from short and long-term trend lines
- Volatility – Target correction levels based on historical volatility and draw down
- Valuation – Support levels based on historical valuation multiples
- Yield – Support levels based on forward dividend yield
If you are a new dividend investor and are building your DIY Dividend Portfolio from scratch, don’t feel pressured to have a fully diversified portfolio on day one. Dividend investing is a marathon, not a sprint. It’s extremely important to be patient when building a long-term portfolio…we can’t stress that enough.
“Buy Zone” Coverage Universe
Currently, we have over 100 stocks in our “Buy Zone” coverage universe. To date, we have focused primarily on stocks that were trading in or near their respective Buy Zones at the time the report was published. In other words, our process was to simply scan all the stocks in our dividend universe and issue reports on the high-rated stocks entering the “Buy Zone”. However, as many of you have noticed during the market rally over the past 6 months, the number of new stocks meeting our “Buy Zone” criteria has certainly dwindled. That said, this is a natural part of a market cycle. Stocks tend to oscillate around their true fundamental value based on prevailing market conditions. Right now, the Federal Reserve is essentially begging investors to buy risky assets with their “ultra low” interest rate policy. This has caused many of the dividend stocks in our universe to trade at a significant premium to their underlying fundamental value. Even though this “overbought” state can persist for quite some time, we simply can’t recommend that investors chase these stocks higher.
To adjust for this natural ebb and flow of the market (and to properly prepare our Members for an eventual market correction), we have decided to expand our “BuyZone” coverage universe to include up to 250 high-rated stocks that Members can use to establish their own “Buy Zone” watch lists. Obviously, most of these stocks will be well out of the “Buy Zone” initially…but the more stocks that you have on your radar, the more prepared you will be. By expanding our universe, you’ll have much more research available to help you build and manage your DIY dividend portfolio over time.
“Buy Zone” Process
To date, our Buy Zone process has been somewhat static and there have been very few adjustments made once a “Buy Zone” has been established for a particular stock. Going forward, we plan to make the process more dynamic. By its nature, the market is dynamic and your investment process should account for this. With regard to our established “Buy Zones”, there are two primary reasons that we would consider a change in our target prices over time:
- New 52-week high – When a stock hits a new high, a new target correction level is warranted as long-term levels of support are also increasing.
- New earnings estimate – If a company adjusts its future earnings guidance (higher or lower), a new target valuation range is warranted.
In general, our “Buy Zones” should be considered low risk entry points for long-term investors, but these levels need be monitored over time to ensure that they remain relevant for current market conditions. That said, going forward our goal is to review every stock in our “Buy Zone” universe at least once per quarter to ensure that all Buy Zone information is relevant and up-to-date.
Next Steps / What Members Should Expect
Over the next few weeks, we will start by refreshing the “Buy Zone” reports for all the stocks in our current universe. In addition, we are targeting to issue “Buy Zone” reports on 20 new stocks each month throughout the remainder of 2013, which will grow our total “Buy Zone” coverage universe to approximately 200 stocks by year end.
Request A “Buy Zone” Report
As you know, we respect and encourage Member feedback. That said, if there is a particular stock that you would like to see a “Buy Zone” report on, please let us know and we’ll do our best to add that stock to our coverage universe as soon as we can. Email us at firstname.lastname@example.org
We continuously strive to improve the value of our service and we hope that this revised “Buy Zone” process will help Members better track potential buying opportunities.
Please let us know if you have any questions.
The Parsimony Research Team