A Strategy of Splits

08/14/2013 10:00 am EST

Focus: DIVIDEND

Neil Macneale

Index Provider, 2 for 1 Index

Neil Macneale, of the 2-for-1 Stock Split Newsletter, shares details about his unique strategy revolving solely around stocks that have announced a split.

Steve Halpern: We're here today with Neil Macneale, editor of the 2-for-1 Stock Split Newsletter. How are you doing today, Neil?

Neil Macneale: I'm just fine, thanks Steve.

Steve Halpern: You've developed a unique approach in the advisory world, focusing exclusively on stocks that have announced a split. Could you tell us about this strategy?

Neil Macneale: Well, in 1996, Professor Eikenbury at Rice University came out with a study that showed that companies that have announced splits, as a group taken together, will outperform the market for up to three years, and I thought, gee, that is an interesting fact. I wondered why nobody's exploited that with a mutual fund or a newsletter. Then, of course, I decided that's what I would do.

So, I started the newsletter in 1996, and the factors that really drew me to this strategy, were simply that it was very easily understood. You were working with a small group of companies out of the huge universe that's available on the market.

You could focus on just a few companies a month. You could put together a portfolio of 30 stocks. I'll tell you about the number 30 later, but that would be very easily managed.

You could essentially keep the portfolio moving through time by buying and selling one stock per month, and that seemed a very simple way to manage an investment portfolio of common stocks, one that appealed to me because I think the average advisor newsletter is very complicated and a lot of them don't give real specific advice. I was trying to stay away from that.

Steve Halpern: Now when you look at the stocks that have split, you don't buy all of them. As you mentioned, you only add one to your portfolio. So, you put those potential portfolio candidates through some additional screens to narrow it down to one. Could you tell us what factors you look at there?

Neil Macneale: Well, of course, the proprietary algorithm that I use is, I'm not to disclose everything about it, but it involves about 12 factors that I look at. Some of them are weighted more heavily than others.

I think if you took it on the whole, it's coming down on the value side, rather than the growth, or momentum way to look at stocks and look at investments.

I also spend a lot of time thinking about the diversification of the portfolio. I want it to be basically what you might think of as an indexed fund, except it only has companies that have announced splits. So, I like to be diversified across the span of sectors and small- and large-cap stocks, etc.

The screen gives me a score essentially, and I look at that, and most of the time, I pick the company that…the companies that I'm looking at are, of course, the split announcements from the previous month. So, it's only usually a few, maybe a half dozen and sometimes only one or two.

Anyway, I pick the one that I think is the most likely to succeed over the next couple of years, and also, that fits well within the portfolio in terms of diversification.

Steve Halpern: Now, without giving away too much of your algorithm, I believe you consider the dividend as an important factor. Could you just elaborate on that?

Neil Macneale: Certainly. The dividend is...definitely I like stocks that pay a dividend. I believe that that indicates that the company knows who they're working for, basically. If they pay out a dividend, it's just a good sign.

I also look at the obvious things, the P/E ratio, the price-to-book ratio, and I try to stay away from very small stocks that are too thinly-traded, or not well enough known in the market that the trading is sketchy.

Steve Halpern: Perhaps to help listeners better understand your whole overall philosophy, perhaps you could walk us through the process with a particular stock, and what you liked about that, and the reason behind that, and why it's in your model portfolio?

Neil Macneale: Sure. Well, the most recent addition to the portfolio is Franklin Resources. The symbol is (BEN). Franklin was one of four stocks that announced a two-for-one split in June—Franklin is actually a three-for-one split. I don't look at three-for-two splits. Just the two-for-ones or higher.

Anyway, in June, we had four split announcements. There was BEN and there was Equity Lifestyle Properties (ELS). There was Flowserve Corporation (FLS) and Portfolio Recovery Associates (PRAA).

So, I loaded up the spreadsheet with all the factors that go into the decision-making and BEN came out on top. So, that's the first and most important item that I look at.

Then, I also like the fact that BEN, Franklin I should say, is really a well-known, big, highly-respected company.

It was formed by the merger of Franklin Templeton, John Templeton's company, and it really fit very well into the portfolio. I only had three other stocks in the financial sector, two banks and one insurance company. So, that was a plus.

The other companies, ELS was not far behind in its score on the screens, but it didn't appeal to me. It's a REIT and it owns a bunch of trailer parks, basically. The Equity Lifestyle Properties name is a little bit misleading I think.

It did score better in some respects. The volatility was lower than Franklin's, which would have been nice, and it pays a bigger dividend, but the P/E and the profitability, the balance sheet numbers, just didn't add up. So, I chose Franklin and it'll be in the portfolio now for the next 30 months.

Steve Halpern: I appreciate your taking the time to be with us today and thank you for sharing your ideas.

Neil Macneale: Oh, you're more than welcome.

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