Yesterday I made an adjustment to the Portfolio, selling one stock, then buying another with the sale proceeds and a little extra cash.
Here are the transaction details…
Ensign Group (ENSG)
On 4/13/18, I sold my entire position, 201.611 shares at $27.38/sh. After the SEC fee, the sale total was $5,519.98.
ENSG is a small-cap company, thus many people might not be too familiar with them. ENSG in the health care sector, and the long-term care facilities industry. They operate mainly through 3 segments: Transitional and Skilled Services; Assisted and Independent Living Services; and Home Health and Hospice Services. They have over 230 healthcare facilities, 22 hospice agencies, 20 home health agencies, and 4 home care businesses, with nearly all of them in the western half of the United States.
I bought ENSG a little over a year ago, 200 shares at $18.465/sh. The additional shares I obtained were due to reinvested dividends. I bought ENSG for the potential growth, as it has a low yield, well under 1%. The stock performed well over the past year, rising almost 50%. However, the P/E ratio is reaching new heights, and the outstanding share count continues to rise as well. In addition, thanks to the nice gain, I thought most of the short-term upside had been captured, so I decided to sell, especially after crossing the 1-year holding period that allows me to realize a long-term capital gain (LTCG). In the end, I sold the stock so that I could use the proceeds to enter into another position that looked intriguing, and offered a higher yield. More on this below.
The sale resulted in a LTCG of $1,780.87, a short-term capital gain (STCG) of $9.50, and a reduction of $36.29 in annual forward dividend income.
Nexstar Media Group (NXST)
On 4/13/18, I entered this new position, purchasing 100 shares at $62.34/sh, for a total of $6,234.00.
NXST is the second largest owner of local TV stations in the U.S, and operates as a TV broadcasting and digital media company. NXST operates, programs, or provides services to about 170 TV stations, which covers nearly 40% of U.S. households, mainly in medium-sized markets, although they are in about 40% of the 50 largest markets. The station portfolio for NXST consists primarily of the big four network affiliates: CBS, NBC, FOX & ABC. About a decade ago, the company’s primary source of revenue had been the sale of commercial air time to local and national advertisers. However, more recently, revenue is evening out, with 40% now coming from re-transmission revenues, which is collected from cable & satellite companies in exchange for consent to re-transmit signals from NXST’s stations.
Acquisitions have been a consistent part of NXST’s strategy. A little over a year ago NXST completed a $4.6 billion dollar acquisition of Media General, which was significant in a couple of ways. First, it significantly boosted its local broadcast TV portfolio, as well as its audience reach. However, it also increased its debt load. Luckily, good cash flow has allowed NXST to pay down the debt and the company should reach more normalized debt levels this year.
I started watching NXST a couple of months ago in the mid $70s, and it’s been on the decline ever since, as media stocks in general haven’t seemed to fare too well. However, it’s gotten low enough that it appears to be a good entry point. The yield has crept up to 2.4% as well. I’m looking for ~15% sales growth, and ~20% EPS growth for the next few years.
This purchase results in the addition of $150.00 in annual forward dividend income.
Summary
The net result of my activity was a swap of a small-cap stock in the healthcare sector (ENSG) for small, mid-cap stock in the consumer discretionary sector (NXST).
NXST offers a higher yield, and what looks like better growth, too (nearly double). However, NXST will most likely provide a bumpier ride, as its Beta is around 1.75, and that of ENSG is about 0.50.
The two transactions resulted in a net increase of $113.71 in the annual forward dividend income. I continue to get closer to my $8,700 forward dividend income goal by the end of 2018, as I’ve reached nearly $8,302 after these transactions.
Any thoughts on these transactions? Have you heard of either of these stocks? Do you have anything on your buy or sell list?
Congrats on the profit ED. That was a nice play with ENSG, and you are following the lead of a lot of financial advisors in selling when the PE becomes unsustainably high.
Congrats also on the yearly yield increase. Is that net of taxes, or are you going to pay them separately?
I’ve been reading a lot about the profit potential of small and mid-cap stocks, but for the most part I’ve stayed away, mostly because I lack the time right now to research the stocks.
I noticed that analysts are predicting a 15 percent increase in sales for ENSG (same as NXST), and that NXST has a 19.6 PE (almost as high as ENSG). I know the yield on NXST will be much higher. Besides taking profits, was that the primary reason you made this trade? Or do you just like the media sector right now better than healthcare?
Always happy to book a profit, DF. I was glad to boost my yield in the swap as well.
I haven’t accounted for the taxes yet in the numbers I report. I’m sure I’ll continue to present the numbers that way.
The sales for ENSG have been consistently growing over the past decade, but in the past few years, their net income has dropped despite the sales growth. The lower net income coupled with the increased share count has resulted in a lower EPS. I think predicting 15% sales growth for ENSG is fair given their history, but I didn’t project anything more than ~11% earnings growth.
The decision to sell ENSG stemmed from a few things: 1) The price appreciation I had realized on ENSG did not seem to line up with their recent earnings trend, so I was worried about giving back some of the potential profits, 2) I liked the potential entry point on NXST, and knew I could use sale proceeds from an ENSG sale to fund most of the purchase, 3) I’d be getting a better yield due to the swap, boosting my forward dividend income, and 4) since I was projecting ~11% earnings growth for ENSG and ~20% for NXST, making the swap should result in better price appreciation, assuming their stock prices follow their earnings growth.
I can’t say I’m favoring media over healthcare as this time, the action was more just a result of the factors I outlined above.
Hope that answers your questions, DF. Thanks for the sharing your thoughts and asking some detailed questions!
Thanks for the summary ED. I am not familiar with either of those companies. Congrats on the nice gains with the first one and good luck with the second. Tom
Thanks, Tom. Indeed, the smaller companies are more likely to be unknown. I like to have a few in the Portfolio to help diversify by market cap.
As for the swap, there’s always the chance I make the wrong decision. But if I do, I’m sure there will be something to learn from it, and hopefully it makes me a better investor.
I think ENSG is a good idea. Healthcare is a high-growth sector primarily due to long term trends in demographics (aging of the population). I think it will continue to outperform the broad index in the coming decades