This post started as a rant against Morningstar Investor – a service I pay for, but the more I worked on the post, the more I realized it was my own laziness at fault.
Details first, I bought 10 USB June 16 Puts, strike price $30 at $0.55 to close out my USB cash secured put trade. Final tally with the original trade *($600.00), then the roll *($1,120.00), less the buyout today *(-$550.00) was a profit of *$1,170.00. Seems like a soft brag, but believe me – I am pretty embarrassed by this trade.
I use Morningstar to scan for targets for cash secured puts and covered calls – and their old scanner was my go to tool. It really helped me narrow my targets down, with a heavy emphasis on Margin of Safety. One of the metrics built into all my scans was Morningstar’s Financial Health Grade (A‘s and B‘s only) – which for some strange reason, is not available with their new screener – which they forced all their paying customers to migrate to this year – so I had to dumb down my scans accordingly. I have been searching for a new screener to use – took me a while, but I finally settled on Stock Rover – bought the service over the Memorial Day week-end and started playing with it – sure enough, the Morningstar Financial Health Grade was available for stock screens. I recreated my original scans but found that USB never came up in any of them. When I finally drilled down on USB’s Financial Grade I was astounded to find that is was a D! So, a stock that Morningstar rates as a 5 Star Value, Wide Moat, with Exemplary Capital Allocation, has a D for Financials?
Here is Morningstar’s own definition for this metric:
| Financial Health Grade Use Morningstar’s financial-health grade to eliminate companies on shaky financial ground. We base each financial-health grade on the strength of each company’s balance sheet and cash flows relative to other companies within its sector. Setting the minimum financial-health grade at a C, for example, would eliminate companies in worse-than-average financial shape. | |
| D E F I N I T I O N To get a high grade in this area, a company should have low financial leverage (assets/equity), high cash-flow coverage (total cash flow/long-term debt), and a high cash position (cash/assets). Also, companies with improving financial health are rewarded, while those with deteriorating health are punished. |
After doing a complete review of their financials, I found myself in a trade I would have never made if I had done the work – really, just lazy. Is there a lesson here? I believe screeners are great tools that help you narrow your target list when used correctly, but that should only be the start of your research before you put $$ at risk.
So the Market gave me an out today and I took it – not because I believe USB is going out of business or anything, just not a company I should be trading based on my own rules. The trade would probably have worked out fine if I left it alone, but that’s not the way I trade.
I hope Morningstar improves their scanner soon – it is useless right now. Not sure I love Stock Rover yet, the site is a little quirky, but with 650 metrics to play with I won’t be bored.
*Excludes transaction costs.
Leave a Reply