Tuesday, April 07, 2009

Nix the VIX

That pesky barometer of market volatility, the VIX, remains solidly above 40. While back off unprecedented levels in October and November 2008, a volatility measure under 30 would provide more comfort to investors considering equity positions in U.S. companies. Even after months and months of waiting on the sidelines, investors must remain cautious if the VIX is used as a valid signal.

For the impatient contrarian who is prepared to hold for a long recovery period, there are some incredible buys out there. Dividend paying stocks are available at bargain basement prices. Granted dividends have been in jeopardy over the last few months. It is easy to be disappointed, as I was back in January 2009, suggesting DryShips, Inc. (DRYS: Nasdaq) for its dividend yield just two weeks before management suspended dividend payments and cut the capital spending budget for the year. Since then the company got handed a “going concern” nasty-gram from auditors citing negative working capital and looming debt payments. Even after a recent equity infusion, DryShips will still need cooperation from its lenders.

I made three other dividend ideas four months ago. Back in January 2009, Technitrol, Inc. (TNL: NYSE) offering a dividend yield of 12.4%. The stock was trading near its 52-week low and is valued at a price/earnings ratio of 3.5 times. Since then the stock fell even further, rebounding slightly in the most recent market rally. The company is working on debt reduction and cut the dividend to $0.10 from $0.35. That had to have been painful for existing shareholders, but for the courageous souls who are accumulating now, the forward yield is still near 5.5%

Sovran Self Storage, Inc. (SSS: NYSE) was yielding 9.7% last January 2009. Management has not touched the dividend and with further deterioration in the stock price, the yield is now 11.6%. Self-storage is an old idea, but still appears to have legs in the current economic environment where downsizing is an option as rents and house payments exceed income.

A third dividend idea was Biovail Corp. (BVF: NYSE) which was yielding 13.9% back in January 2009. The stock has held up fairly well in the last four months and the forward dividend yield is now approximately 14.3%. Previous management fell into a bit of trouble over the way the company reported and characterized a fatal accident involving product shipments. The accident occurred one day after the close of the third quarter 2003. Management issued a press release suggesting the accident would negatively impact results in that quarter. Later it was determined that the lost shipment would impact the fourth quarter 2003. Shareholders sued over the discrepancy and the management team was routed, including founder Eugene Melnyk. Melnyk is still a significant shareholder and is petitioning for two board seats at the upcoming shareholder meeting. He disagrees with the strategic direction of the company toward treatment central nervous system disorders and wants to focus instead on generic drugs.

Nix the VIX and get back into the game with the dividend play? As you can see it is easy to drill a dry hole, but then three out of four is not bad for the current shaky market situation.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

No comments: