It’s Obama’s Economy Now! How Do I Invest?
By: Bob O'Brien at MyWealth.com
Well the first 100 days of the Obama Presidency have come and gone.
Regardless of your political leanings you have to give the Obama
administration some credit. We will avoid the next Great
Depression!
After a scary start in which the Obama administration did not
appear to have a real handle on the economic crisis, the
administration has settled in and has thrown every piece of
stimulus that they could find at this economy in order to avoid a
really severe economic meltdown.
Give Ben Bernanke a lot of credit for supplying most of the oxygen
for all those sighs of relief out there, his fearless printing
press has really made the big difference.
Unemployment is slowing, the stock market has stabilized, and the
Nasdaq is up 10% on the year. In addition, consumer confidence has
increased and that light we see at the end of the real estate
market tunnel is not an incoming train. That’s the good news!
The bad news is that major inflation and/or stagflation signs may
be starting to appear. Oil is up nearly 50% off its lows, the
dollar is starting to weaken, and interest rates are starting to
rise. These will be the major hurdles in this economic recovery,
and we cannot go on printing money forever.
We are still a long way off from a Healthy Economy!
What
can you do to protect yourself? Our Stock Investing
Advice is:
Be
careful in this stock market. Realize that this rally is a “government
generated rally” by historical amounts of stimulus. This is not the
time to go back on automatic pilot with blind optimism. There will
still need to be real economic growth and real profits from a lot
of sectors. This is where the education that you get in our
investing course really pays dividends.
Favor
small/medium cap stocks. Smaller companies tend to have more flexibility
than larger companies stocks and can bend much easier in the storms
ahead. Heavy inflation and new regulations will require a lot of
flexibility that the larger companies generally do not have.
Lean
towards emerging markets. China will most likely lead the world out of this
global recession, and there is a lot of money being poured into
these economies. The BRIC countries are loaded with opportunities
and having some money in the ETF’s EEM) and (VWO) should make for
great long term plays in your discretionary portfolio.
Protect yourself with
TIPS. Treasury Inflation
protected securities, (TIP) will be very popular when the heavy
inflation starts to hit, and we have already seen them jump when
Ben Bernanke revs up the printing presses. The inflationary threat
is very real, and on its way!
The longer term investor has seen the majority of carnage already
in this stock market, but there may be another big stock market
tumble around the corner. This recent rally has really been about
government stimulus and not about long term profits and economic
growth.
It’s easy to say that these profits and real economic growth will
be there in time, but only time will tell for certain as to how
quickly this economy will re-invent itself.
Bob O'Brien
Head Instructor
bobrien@mywealth.com
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What To Do In This Stock Market Rally?
Contributing Writer
instructor@mywealth.com
I wrote recently about the stock market and ETF’s. At the time of the first post (3/23) the S&P was around 750, and I recommended that the long term investor get back in the market. At the time of the second post (4/6) the market was at 820, having surged almost 10% in a matter of only two weeks. My comment on the market back then was: “At this level, I think the market is still relatively a good value”.
Now the market is up even more. Currently the S&P is at 870. That means it is up about 30% from its bear market low of 670 on March 9. Quite a rally and the question is:
Is this sustainable?
You can’t get a straight answer to this question from anyone. Some people will tell you to get out and others will tell you that we are in the early phases of a major bull run. What this illustrates is how hard it is for the average investor to “beat the market” and time when to get in and out of stocks.
Many active money managers will claim they have superior skills and magic crystal balls that tell them when to buy and sell. But the fact is
For those who like to study the market in a historical perspective, one of the most prominent valuation tools is the so-called 10-year Shiller P/E, named for Professor Robert Shiller at Yale. This measure smoothes out the earnings cycle over a 10-year period and this way avoids the bumps that the 12-month trailing or forward P/E has. The 10-year Shiller P/E is around 60 on S&P operating earnings.
So with the market at 870, you have a P/E of 14.5 That is a quite reasonable number; in fact it is slightly under the 200-year average of 16.
Historically, for those who invested at times when the Shiller P/E is below 16 the returns have been good. Professor Shiller ran the numbers and in this respect “good” means a 7-10% yearly return, which is what you can probably expect in the long run.
Make sure you have a Financial Plan and the Personal Finance Course will help you do just that!
Some investors sold out in a panic around the beginning of March as the market tanked. Those people are now sitting on heavy losses and on top of that have missed a 30% market rally. The lesson is age old and yet investors keep missing it: Do not let the market’s mood swings dictate your investment strategy!
The market is like an irrational drunk who stumbles along in the alley trying to get home from the pub. He will make wild swings back and forth but he will eventually get home. Keep that in mind as you grow your own investments!
For developing a sensible investing strategy make sure you check out our investing course.
If you put money in the market at regular intervals (so-called “dollar cost averaging”) and stay properly diversified (by using ETFs) and stay away from expensive active managers and mutual funds who promise to “beat the market” you are well on your way to a sensible investment strategy.
This brings us back to the initial question:
What to do with the rally? I can tell you what I have done. Mostly, I have done nothing. I simply do not believe I have superior market timing skills so I am not going to bet my portfolio on that assumption.
As you know, I recommend the average investor (with a million or less in liquid assets) use low cost ETFs to diversify. For those who like to speculate in individual stocks I recommend you limit this to a very small part of your portfolio. I have a small portion set aside myself for individual trades and here I have sold a little bit.
I had one stock which I thought was getting thrown out with the bathwater during the mayhem in the beginning of March. Whether due to luck or skill (probably luck), this stock has now quintupled and I sold it all. But it only represents about 5% of my portfolio and that is the only trade I have made.
I sold the particular stock because it is a financial stock and I am still uncomfortable with the health of the US and European financial sector. I also think the housing market has another nasty leg down (more on that in my next article) and banks will suffer in that scenario. In the rest of my portfolio I stick to ETFs which are low cost, diversified and let me sleep at night.
Overall I keep buying a diversified basket of stocks in my 401(k). Every month I max out the contribution to get the tax deduction and employer contribution. This is money that I won’t touch the next 20-30 years and with the market at a current P/E of 14.5 I am confident it will provide a nice return. This is my way of staying disciplined and following the three rules:
1. Use dollar cost averaging (add a fixed amount every month or so).
2. Diversify by using low cost ETFs.
3. If you look at valuations, use the Shiller 10-year P/E and buy when below trend
Do you have an opinion about the current market or don't agree with the author? Send us your stock investing articles.
Office Depot Stock Gains 177% in Three Weeks and There's More to Come!
A few weeks ago I had my eyes on Office Depot, Inc. (ODP) priced at nearly $0.70. On April 16th, 2009 the price is $1.94. That's a 177% RETURN!
Take a look at the stock chart from early March to mid-April:
The great thing about this stock is that it still has a lot of
upside potential left, even in the short-term because it has been
knocked down so far.
The reason why Office Depot's stock was (and still is) so cheap is
because they took a huge write-down on impaired assets four Q4
2008. I would bet that they decided to take these write-downs in
the midst of all of the financial company write-downs. This way
they look really good when things start to turn around in both the
stock market and the real economy.
The only problem with this stock is that the company and the office
supply industry as a whole has reached a high saturation level, and
it is not expected to grow significantly in the next two
years.
However, this stock is way undervalued for a solid household name
like Office Depot. Compared to its competitors, Staples and Office
Max, it is very undervalued, and has huge price discovery potential
for the future.
The investing advice to take from this stock analysis is that
Office Depot (ODP) can be a great short term play if you expect
earnings to be dismal for the Q1 2009 results that will be reported
on 4/28. It could also be a long-term (2-4yrs) investment; the
stock could potentially go back up to its 52 week high of
$14.40!
How
would you like to have a 640% return on your investment in 2-4
years?
There are very few
investments in the world that exist with this kind of return. As I,
Warren Buffett, and many other investors believe, this market has
presented opportunities of a lifetime.
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account, try TradeKing or Zecco.com. They are both great services, so give one a
try.
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Honda Will Benefit from GM, Chrysler in Trouble
While there’s nothing wrong with that, my mind always has “the wheels turning” and wondering how I can profit from what’s going on in the media. So many people watch the news for everything from “entertainment to information”. However, I watch it to derive an investing idea out of it.
As the auto industry got hit from the global slow down, GM (GM), Ford (F) and Chrysler took it on the chin the worst. However, Honda, Toyota and Mazda had something haunting them too…it was the strong yen. As the yen rose, it eroded their profits even more.
However, lately the Asian automaker stocks (symbols: HMC, TM) have stabilized. Why? If your main competitors aren’t “breathing down your neck” and they are “licking their wounds” and trying to just stay afloat, that gives you an advantage that you didn’t have before.
If the yen was unusually strong before (USD/JPY exchange rate was at 87.00 but is now closer to 99.00 on a weaker yen), and it’s much weaker now…then that helps them as well.
So coupling a weaker yen with a potential GM/Chrysler bankruptcy....that equals great advantages for Honda and its shareholders.
Therefore, it doesn’t even matter whether GM and Chrysler go into bankruptcy for Honda to keep that advantage. Either way, it’s going to take them time to regroup and to get back on track. All the time that it takes them to do this (and it will take a while with a new CEO, etc.), will give Honda a great “lead time” over Detroit once again.
As stocks stabilize and turn upward as we come out of the recession (finally) in the upcoming months, the yen will weaken materially. This will give Honda and Toyota a “wind to their back”.
All of this combined will get the Asian automakers a boost in the next 12 to 36 months. Those that realize this now and buy stocks like Honda while its price is still cheap could see gains of 50% or more in that time. See the chart below.
Honda could gain 50% in the next 1-3 years from these levels!
Keep in mind that this is an “investment idea” and so it shouldn’t
be a “margined trade”. I say that because it will take “time” for
this to occur and margin interest would eat you alive. Also, if the
stock did retest its lows in the short run, it would eat up your
account balance. If you have bought with cash and plan on holding
for years, then this won’t matter.
Bottom line: Detroit’s loss is Asia/South Korea’s gain. The
weakening won in Korea and the recently weakening yen in Japan will
also work in these automaker’s favor.
An investor can take advantage of this in a couple of ways. They
can buy Asian automakers that trade on U.S. exchanges like Honda
(HMC) and Toyota (TM) and they can also buy currency pairs in the
forex market that take advantage of a weakening yen (like USD/JPY
and EUR/JPY).
If buying USD/JPY or EUR/JPY, it might be best to allow them to
solidly trade and close above their 200 Simple Moving Averages.
(Find out more about moving averages and other technical/chart
reading techniques here).
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What Stocks Are Prospering In these Sluggish Times?
It’s no secret that credit is tight right now and loans are hard to come by. It’s also no secret that car sales are diving off across the board. In fact, it’s been no respecter of persons. It’s punished Detroit as well as the Japanese auto makers a like.
Not only has this been a credit issue but it’s been a “jobs” issue as well. The unemployment rate has grown so much lately (currently 7.6%), that either you’ve lost your job or you know someone who has. This frightens the employed and hinders the unemployed from new purchases. So both parties hold back in new “big ticket” purchases.
This has been a night mare so horrid for the auto industry that unless the government bailed them out, we probably wouldn’t have an auto industry left. That would be sad since (as Obama put it last night) we invented the automobile. (Did the US really invent the automobile?)
However, there is a bright spot in all of this for the investor to consider. If you and I are holding on to our cars longer and we’re not making any new purchases, then we are more likely to repair the ones we’ve got in order to make them last longer.
Therefore, this has caused the auto parts industry to soar recently, as Americans all over the place repair their vehicles rather than get new ones.
3 Auto Parts Stocks That Are Flying High Right Now!
So with that thought in mind, I’d encourage you to look into a few auto parts stocks like:
- O’ Reilly Automotive (ORLY)
- AutoZone Inc (AZO)
- Advance Auto Parts Inc (AAP)
In fact, check out the chart below. AutoZone is on top. O’Reilly is the middle chart and Advance Auto is the bottom chart.
These Stocks are Thriving in
this Recession!
As we heard from Obama’s speech last night, the recovery will be
gradual and slow. It will not happen quickly. Knowing this, there’s
a great chance that individuals and corporations alike may be
repairing their cars and “fleet” instead of new purchases until we
get out of this recessionary slump.
Bernanke told us yesterday that it may take until the end of 2009
or into 2010 until the recession has ended and we’re out of the
woods. Therefore, these stocks could still “have legs” for quite
some time knowing that things aren’t getting better tomorrow. So
since things aren’t getting better in the short run, investors
might as well seize the opportunity to help their ailing portfolios
by buying companies that are prospering NOW.
There are other industries and companies that are doing well in
these tough economic times. We go over things like this in more
detail in our online investing course. To get more information
about this online
course, click here.
It's only
$25.
Stock investing may be as difficult as ever right now, but there
are always opportunities. You just have to work hard to find stocks
that are and will be prospering.
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How I Called the Breakout in Gold Three Weeks Ago
Head Course Instructor
www.mywealth.com
Back in early January, I wrote an article that focused on a bubble forming in the Treasury bond market. Back then I saw money getting ready to jump from one seemingly safe asset to another gold. (I wrote about this on January 2nd. I’ll include the links to all of these stories at the bottom so you can check it out for yourself.)
This was my first tip off that money was about to start flowing elsewhere and gold was the next logical choice since it has held up fairly well in this bear market downdraft.
So when bubbles form, you have to ask yourself, Where will this money go once it starts flowing out of U.S. treasuries? Money was still in defensive mode and I knew that it still wanted to run for cover but was getting uncomfortable in being in the treasury bubble. Therefore, the next stop off that seemed stable to many investors would be gold. That’s how I came up with my thoughts for the January 2nd article.
Then on Jan 22nd-23rd, I wrote a two part article about why gold was going to break out to the upside soon. At the time, gold was trading at $853 an ounce. Yesterday, gold was $100 an ounce higher, piercing the $950 level.
In the second article, I provided a chart of gold before it broke out and gave some reasons why it would break out. Aside from the bond bubble, I saw the money supply exploding and a stimulus package coming that would eventually flood the market with money (once the government got the Drain-o out and unplugged the banks). So that is a bullish thing for gold as huge sums of dollars are printed, it eventually dilutes the value of the dollar and boosts gold.
However, in the mean time, while we’re waiting on that to happen, I also see that fear was dominate in the markets as we had a new administration coming into office (with the uncertainties that it brings) and a bear market in stocks and a global slow down. All of this would take time to work itself out, and that is bullish for gold now even before the eventual inflationary story kicks in.
South African mines; the icing on the cake!
Also, I noticed that South Africa (one of the biggest gold miners/exporters in the world) was having electricity problems that were causing a 14% slow down in gold production, which hasn’t happened since the 1800s. That slow down in production was also bullish for gold (less supply, yet growing demand).
Then on top of this, we have U.S. interest rates, which are right at zero. That will unleash its inflationary effects at least by latter 2009 to early 2010.
I noticed that gold has held up relatively well even though the dollar has rallied strongly in the previous months. I also noticed that gold has held up better than most other commodities out there. So there was quite a bit of relative strength that I saw with gold. Imagine what it will do when the dollar does actually start to crumble once again?
So what do smart investors do when they see all of this? They position themselves AHEAD of the move like a surfer that looks for his wave to come. The investors ride this fundamental wave for quite some time to come.
This is exactly what they did. The smart fundamental investors positioned themselves just ahead of the breakout while the technical investors (chart readers) bought in right after the break upward. Both are enjoying nice gains right now.
In fact, gold is one of the few investments out there breaking higher right now. Check out the chart above.
Gold consolidated multi-year gains and then broke higher! How you can get in on this gold rally?
For the investor: You can buy the Gold ETF (GLD) through your stock brokerage account. I encourage the purchase of ETFs over the commodity contract because you can buy with cash, no margin and you don’t have to worry about expiring contracts this way either. There are other gold ETFs out there but most do not have the volume that this one does and so they would have wider spreads to overcome and possibly may not have quite as good of fills on your orders due to there being less liquidity.
For the trader: You can use the Gold Double Long ETN (DGP). Remember, that this will be much more volatile and therefore carries more risk. However, for a near term trader that wants to trade the newly formed uptrend, this could be one way to do it.
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Former Articles to Reference:
Get Ready for the Transition from Bonds to Gold
Gold will shine once again in 2009
Gold will shine once again (part 2)
A Little-Known Small Cap Stock Ready for Huge Growth
One company has maintained relative stability, even in rough times,
and it has been able to stay under the radar. 21st Century Holding Co.
(TCHC) is a property and automobile insurance company
based in Florida. 21st Century has just started a new marketing
campaign to gain new customers. You may have seen the television
ads on CNBC and a few other channels advertising 21st Century
Insurance.
21st Century Holding Co.
(TCHC)
Price 2/2/09 :
$4.28
Market Cap: $34 million
Shares Outstanding: 8 million
This is a great stock for the more speculative side of your
portfolio. They have a Market Cap of only $34 million and only 8
million shares outstanding (less than 7 million not held by
insiders). With such a low number of outstanding shares and a small
market cap, any kind of public interest/demand for the stock will
cause this stock to rocket straight up.
This is something that both William O'Neill
(founder of Investor's Business
Daily) and Jim
Cramer(Mad Money, etc.) agree is great for small cap investing.
Small cap stocks with a low number of outstanding stocks (usually
< 15 million) shoot way up when it is discovered.
If 21st Century gains a large number of new customers with its new
marketing initiative or improves their business strategy, this
company could enjoy a ride up to a $250 million+ Market Cap. At
that market capitalization, the stock price of TCHC would be
$31.25! At market close on Feb.2, 2009 TCHC's stock price was
$4.28. That's a theoretical gain of
630%.
7 Best Mutual Funds for 2009
As our economic outlook continues to be poor and as the stock
market is in turmoil, stock investing has become increasingly difficult. Maintaining a
solid investment portfolio can be hard work. One alternative to the
difficult work of stock selection is to invest in mutual funds.
With thousands of mutual funds to choose from, how can you tell
which ones are the best?
That's why I have compiled a list of the 7 Best Mutual Funds for
2009. After researching the
performance, stability, and income of hundreds of top-rated funds,
I found the best mutual funds to invest in for 2009 and
beyond.
Income-Dividends
One part of my selection process was to find mutual funds with cash
flow, either through dividends or bond interest payments (in the
form of dividends for mutual funds). This factor is becoming ever
more important during a time when stocks continue to decline.
Through dividends you can know that you will have an income of the
yield percentage.
Future
Trends
Another selection criteria was to find mutual funds that are going
to perform well for years to come. As you will see, I have included
a mutual fund that invests in stocks of alternative energy or
"green" companies. The whole environmentally-friendly, green
movement is just getting started and will be a boon to the economy
for the next 10-20 years. One aspect that is somewhat more of a
near-term strategy is the gold focused fund because of the
predicted rise in the price of gold over the next year or
two.
Long-Term
Performance
The last and most important selection criteria was the long-term
performance of the mutual fund. Any one stock or mutual fund can
perform well over one or two years by luck, but it takes true skill
to manage a portfolio that has good returns over a ten year period.
A major failure of many investors that buy mutual funds is that
they chase the fund that is currently performing the best or just
recently had its best year. If the mutual fund is having an
unbelievably great year, then either stay away from it because it's
too late or sell it if you own it.
The 7 Best Mutual Funds for 2009:
1. American Century High-Yield Fund (AHYVX)
- With the current state of the economy, your best bet for making
money is finding an investment with a stated income (i.e.
dividends, bond interest payments). American Century's High Yield
Fund has a dividend yield of
9.38%, which is much larger
than most high yielding mutual funds or stocks.
2. The
New Alternatives Fund (NALFX)
- this is the perfect
mutual fund for times when people and companies are looking for
environmentally-friendly ways of doing things. This mutual fund
invests in companies that focus on renewable energy sources, as
well as companies that are concerned with energy conservation and
environmental protection. Over the next decade green and
alternative energy stocks will most likely sky-rocket with gaining
popularity and necessity.
3.
Franklin Utilities Fund (FKUTX)
- A utilities fund is
also a great way to get a flow of decent income during a time of
poor stock performance. This mutual fund has a dividend yield of 4%
and a 10-year annualized return of
5.17%, which is very
impressive. Utility companies are a solid investment for having a
stream of dividend income.
4. ING
Corporate Leaders Trust Fund (LEXCX)
- Although its 10-year
annualized return has been hurt by the recent stock market downturn
putting it at 3.67% (which is better than all but two main value
strategy mutual funds), ING's fund has performed
10% better than the
S&P 500 over the past
year. It also has a dividend yield of
2.46%.
5.
Franklin Gold and Precious Metals (FKRCX)
- This mutual fund has
been a top performer over the past decade with a
10-year annualized
return of 14.42% and a
current dividend
yield of 8.34%. This mutual
fund has performed amazingly, and it will continue to perform with
gold becoming more of a flight-to-safety investment for
investors.
6. Vanguard Energy Fund
(VGENX)
- although the
commodities boom of earlier this year has faded, oil prices will
come back. It is only a matter of time. Vanguard's Energy Fund has
had a 10-year annualized return of
14.81%, which is better than
most mutual funds of any kind. It is positioned to perform well
over the next few years.
7.
Municipal Bond Fund (of your choice)
- municipal bond rates
have gone up in recent months and continue to be a great source of
extra income. For example, some bonds in Florida are paying 6% a
year in interest. Remember with municipal bonds that interest
payments are tax-exempt; just make sure you pick a bond that is
within your state (otherwise interest payments become
taxable). How does a tax-free income of
5% or 6% on your investment sound for 2009- with the U.S. still in
recession?
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This Stock Will Make Your Portfolio Healthy
Get The Wall Street Journal for 75% off!
With the
economy the way it is, it's hard to find any company that is even
somewhat sheltered from being beaten down. There is a company,
however, that is defying the market's gravitational pull.
eHealth Inc.
(EHTH) is an internet based health insurance provider
for families and small businesses. Their headquarters is based in
the same city as Google in Mountain View, CA, and was established in
1997. Despite the downturn, they have doubled the number of
policies from nearly 500,000 in 2007 to presently over 1,000,000.
The potential for US subscribers is much larger still.
They also have a partnership with Alltrust Insurance Agency Co. in
China that gives them access to the extremely vast and developing
market for health insurance in China. Having a foothold in China
gives eHealth the opportunity to grow many times its current
size.
eHealth's financial condition
is outstanding:
- They maintain a profit margin of 31% and have very minimal liabilities.
- With no long-term or short-term debt, the only significant liabilities eHealth carries are Accounts Payable.
- Their year-over-year quarterly revenue growth is at 24%.
- The stock price has a PE of 10x, which is low for such a high growth company.
I believe eHealth is one of those rare, undiscovered great companies that will skyrocket when investors realize the value in it. This stock has a market cap of less than $350 million and about 25 million shares outstanding. If you asked William O'Neil, founder of Investor's Business Daily, he would say that this is the type of stock that will generate returns into the 1000%'s over time because it fits his time-tested, but strict investing formula.
Although the "buy and hold" stock investing strategy hasn't been working in this wild-swing market, eHeatlh's stock has the potential to yield huge returns if you hold it for 3 to 5 years.
Value Investing Basics Part II
Historical research shows that stocks with low P/Es have performed better over time than high P/E stocks. The P/E ratio is the multiple of earnings per share (EPS) that the stock price currently is (Ex: Stock A has EPS of $3, and P/E of 10x; the stock price= $30). However, to find really solid stocks there are lot more aspects to look at than simple P/Es, because the P/E ratio doesn't paint the whole picture of the company.
After you have read Part I - Value Investing Basics for Beginners, you should know what type of companies to look for. You now need to follow these guidelines for making sound value investments. You can input these requirements into stock screeners to find undervalued stocks. Most of these ratios are readily available in Yahoo! Finance information for companies.
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Value Investing Guidelines
Screen:
1.
PEG Ratio less than 1.
2. Net profit margin more than 15%.
3. Return on Equity more than 15%.
4. Return on Assets more than 10%.
5. Earnings growth of 10% or more over the past 5 years.
6. Growing Cash Flow from Operating Activities.
7. Low Debt relative to Gross Profit- Total Debt should not exceed
3 or 4 times Gross Profit.
Although these are not hard, fast rules, these are guidelines that
will sift out great companies from the not-so-great companies. If
the stock has a low PE with all of these requirements, it is an
attractive stock.
These requirements make the PEG Ratio important. The PEG ratio
equals the PE ratio divided by the expected EPS growth rate for the
next 5 years (Ex: a stock has PE of 9 and a five year EPS growth
rate of 15%; so 9/15= .6 PEG ratio). Many value investors buy
stocks from just the PEG ratio. Although it adds an important
element of profitable growth to the PE number, you still have to
look at factors other than the PEG.
Now you understand the fundamentals of how to Value Invest. This
list and Part I allow you to find sound value investments. There
are more details that some investors use, which I will post later
about. Happy Investing!
Suggested
Reading:
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3 Rocking Stocks to Buy for 2009
My mission was to find three consumer-based stocks that are largely undervalued and will do well in the next 9-18 months. Although many analysts have knocked down companies' stocks because they expect weak 2008 holiday sales, the magnitude of these drops in stock prices has been greatly overstated.
When the market rebounds, so will these stocks. Also, when the individual companies begin to beat earnings estimates again, the stocks will go even higher. This process will take a long time, but if you have patience, investing in these stocks will make your portfolio shine.
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3 Rocking Stocks to Buy Before Christmas 2008:
- Bare Escentuals (BARE)- This natural cosmetic and skin care company has all of the right stuff. They are well positioned in a number of cosmetic stores like Sephora; they also have their own retail and catalog sales. Being natural gives them the eco-friendly and healthy image that so many consumers are looking for. Since they only have a market cap (market value) of $412 million, they have a lot of room to grow compared to Estee-Lauder (EL) with a $5.6 billion market cap. At $4.50 a share, BARE's stock has an extremely low P/E of 4.2x earnings. Once the economy picks up again, this company is poised to take some serious market share.
- Harry Winston Diamonds (HWD)- The famous, ultra-luxurious jeweler has suffered recently because even the wealthy are feeling the pinch. The name of this company carries a certain prestige that I believe will last forever. At $4.02 per share, this stock has a P/E of 1.3x earnings! That's almost as cheap as stocks can get. To make the stock a little more attractive, HWD has a nice dividend as well.
- Macy's (M)- Macy's has struggled with this market like most department stores, but this 150-year-old store is still in excellent financial shape. They are not riding on tons of debt like many of its peers do. Macy's stock price has a P/E of 4.2x earnings at $7.03 per share. They will come out of this economic crisis just like it did in the past.
It's hard to lose when you buy stocks that are priced at rock-bottom prices and have great potential in the future. Remember that you must be willing to wait out the storm with these stocks, and you can thank yourself later.
Current Merger Arbitrage Spreads, M&A Deals
The area you can make money in is the difference between the current stock price and the buyer's purchase price (if cash deal). It must be paid in cash, because in this market if a buyer offers a stock for stock deal, then the buyer's stock price is likely to fluctuate. That can eliminate the premium if the buyer's stock price drops significantly.
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Here's a list of likely
Mergers / Acquisitions:
>Constellation Energy Group
(CEG
)-
in September this energy giant accepted an offer from Warren
Buffett's MidAmerican Energy
Holdings for $4.73 billion.
Constellation filed for a shareholder proxy to vote in favor of the
acquisition.
Premium offered: 13.2%
or $3.10
Cash offered per share: $26.50
CEG current price: $23.40
Expected closing: within 7 months
>Rohm & Haas Co.
(ROH)-
to be bought by Dow Chemical Company
(DOW).
Premium
offered: 9% or $6.45
Cash offered per share: $78.00
ROH current price: $71.55
Expected closing: Jan. 2009/ Very early
2009
>Foundry Networks Inc. (FDRY)-
to be acquired by Brocade Communications Systems
Inc. (BRCD) for $2.6
billion.
Premium offered: 10.59% or
$1.58
Cash offered per share: $16.50 cash
FDRY current price: $14.92
Expected closing: Fourth quarter 2008
>Puget Energy Inc. (PSD)-
this deal is pending Macquarie
Bank's ability to borrow $7.4 billion, which is not easy
in these rough economic times.
Premium offered: 15.25%
or $3.97
Cash offered per share: $30.00
PSD current price: $26.03
Expected Closing: End of Dec. 2008
I will
be following more mergers and acquisitions, so stay tuned for more
money making opportunities.
There are chances that these acquisition deals might not go
through, so these gains are not guaranteed, but
likely.
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Make Money on Mergers and Acquisitions
What happens in a typical acquisition is the buyer (acquirer/bidder) makes an offer to buy a company (seller/target) for more than the seller's stock price currently is (premium). This provides an incentive for the target company to accept the offer. As long as the offer is in cash and the deal is successfully executed, there are guaranteed gains for the target company's shareholders.
For example, the popular InBev acquisition of Anheuser-Busch presented a huge profit opportunity. InBev offered $70 in cash for each share of (BUD) stock. If you bought shares of Anheuser-Busch (BUD) on Oct. 29, 2008 (long after the acquisition announcement) at $59.83, you would be almost guaranteed a profit of 17%, or $10.17 a share. Now, with the stock at $68.50 as of Nov. 14, the merger presents only a 2.2% return. Annualized, that return is 13%, so it's still not a bad deal.
Opportunities like this exist more right now than in a more normal stock market because investors are fearful of stocks in general and are just protecting their money. This takes the focus away from situations in mergers as there is a "flight to safety". It is usually hard to find merger opportunities because the market is efficient enough that investors usually buy the stocks up to the offer price as soon as the announcement comes out. Now times are different, and you can take advantage of that.
Like Warren Buffett says, "Be fearful when others are greedy, and be greedy when others are fearful." Now is the time to be greedy when people are fearful.
Making money on acquisitions depends on a few main contingencies:
- The deal must be very likely to go through- research news and shareholder reactions to offers.
- A premium must be presented to the shareholders- the offer should be significantly higher than the current stock price.
- Cash offers are best and easy to value- stock deals can change value because of fluctuations in buyer's stock prices.
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Value Investing Basics for Beginners Part I
The most famous value investor in the world is Warren Buffett, who has generated over 20% average annual returns since the 1970's. He has prided himself on finding "good deals" on good businesses. This stock investing strategy was mostly created by one of Buffett's teachers, Benjamin Graham. He wrote a book on value investing called The Intelligent Investor. This 600+ page book, much like a textbook, gets into the nitty gritty details of his investing strategy and how he came up with it.
Basics of Value Investing
1. Find a Great Company- Whether it's a company you buy products from, buys products from you, employs you, or if you just love the company, check it out. Also, if it's in an industry that you know very well than you should look into it. You want to love the company you are going to own. It has to be GREAT, not just good or okay.
2. Proven Business- How long has this company been around? It's hard to value a company when it has only been in business for a year. Usually a company that has been successfully in business for 10 or 15+ years makes a good candidate. The companies must be proven, successful businesses to be considered for investment.
3. Survivability- Ask yourself, "Will this company be around in 10, 20, 30 years?" If you cannot see the company being around in ten years, you have no business investing in their stocks; after all, you are buying a piece of that company. Say you and three of your friends want to buy a new $1200 HD-TV. Would you want to pay $400 for your stake if you thought the TV was going to die in two years? I hope not.
4. Uniqueness- What is unique about this company? Do they have some kind of competitive advantage? Are they better at some aspect of the business versus the industry? Are they the first in a market? Do they have any special patents, copyrights, or trademarks? These are the kinds of questions to answer when finding out about a company.
Suggested
Reading:
This article should give you something to work on for a little
bit. Stock investing can be confusing and difficult. Just slow down
and think of some really great companies that you'd be willing to
OWN not just hold the stocks of. Remember, value investing is all
about finding good, solid companies that are priced below their
true value.
Stay tuned for Part II because
I will be posting more on Value Investing Basics. Congratulations!
You now know the groundwork that value investing in stocks is all
about. Making you a better, more informed investor is my
goal.
5 Best Dividend Stocks
Even some of the best investors in the world are getting crushed over and over on their investments in this cruel, erratic stock market. Stock Investing can be very confusing, and it seems someone is suggesting one stock pick when the other says to sell that stock.
One way to ensure a return on your investment is investing in stocks that have a dividend. Some companies pay dividends that overshadow our recessionary market. My mission was to find high-yielding dividends from good companies for independent investors like you. If you want returns in this market, my stock investing advice to you is to consider dividend stocks.
After scouring the stock market for the best dividend stocks, I found:
5 Best Stocks for
Dividends:
1. Frontline Ltd. (FRO)-
this shipping company moves oil,
bulk, and metal ores and continues its earnings growth and dividend
growth year after year. This stock currently yields a
39% yearly
dividend (or $3.00/share
quarterly) at a price of nearly $30. Standard and Poor's estimates
the 12-month target of FRO stock to be $59. Even though the yield
in a year may be closer to 15-20%, that is a huge dividend! Also,
if you buy stock of FRO now, then you can enjoy the gain from $30
to almost $60 and have the 15-20% dividend. With a P/E of 3x
(average stock P/E is 10-14x) this stock is a money making
machine.
2.
SunTrust Banks Inc. (STI)- Suntrust's stock dividend yields 7.5%.
This large regional bank has held up
well compared to other banks during this stock market crisis. This
stock is well off of its 52-week high of $73.80, so it has a lot of
potential upside gains in the future. This is a solid company with
strong growth prospects in the future.
3.
Pfizer Inc. (PFE)- This drug company has a household name and
7.5% dividend
yield at its current price of
$17.10. With revenues of nearly $50 billion a year, you know this
company is going to be standing strong for a very, very long time.
Buy stock in Pfizer if you think a 7.5% dividend and a discounted
stock price looks like a great investment.
4.
AT&T Inc. (T)- Another stock with a household name, At&t,
has a dividend yield of
6.33%. Standard and Poor's
gave At&t stock the highest rating, 5 stars. This company
enjoys the exclusive right to sell the iPhone, which has boosted
its revenues. Realize that this stock is also priced low compared
to it's historical highs.
5.
Duke Energy Corp (DUK)- What would a dividend stock list be without a
utilities company? This stock yields a 5.9% yearly
dividend based on the Oct. 24,
2008 price. This large utility company has a market value of $20
billion. Duke Energy has been paying dividends on their stock since
1926. That should tell you how reliable this company really
is.
There are still ways to make money during this gruesome bear
market. Stock dividends can be a addition to your portfolio
strategy for stock investing. Realize that the dividend yields are calculated
as a percent of current stock market price and may fluctuate. In
rough times, buy stocks with higher constant dividend payments for
a stream of income or reasonable gains.
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Why Buy Stocks Cheap Like Warren Buffett in this Bear Market?
While you may be worried about what to do with your investments in this recessionary stock market, you have to open your eyes to the opportunities out there.
Courtesy of About.com
Warren
Buffett has noted that this is a time for great opportunities, and
he made a statement to the world about it when he bought $5 billion
worth of Goldman Sachs
(GS) common stock and $3 billion worth of
General Electric
(GE) preferred stock. He also made a $4.7 billion
investment in Constellation Energy Group
(CEG) a few weeks prior to the GE and Goldman deals.
It's no question that this man, along with his Berkshire Hathaway
company, has enviable investing
talent. He has produced a 22% compounded return over the past 40
years! Not even the savviest investors on Wall Street can keep up
with that kind of return.
Stocks on the whole have taken a beating; some deserved it because
they were over-leveraged and run into the ground, but most stocks
that have suffered precipitous losses have been oversold. Investing
in stocks can be very tricky, but if you understand that stocks can
be undervalued because of fear and panic, then you can take
advantage of those prices.
Strong companies that you can see doing well for years to come have
been underpriced in this market; it is your job to find the best
undervalued stocks and let them take you on a profitable ride for
the years to come. One thing stock investors have a hard time doing
is being patient. With value investing in stocks, you have to be
patient because other investors in the stock market may not realize
the real value of a stock until next month, next year, or five
years from now. Do like Buffett does; wait and let it
appreciate.
The Dow Jones Industrial
Average is down over 26% for the past year
(trailing 12 months) and the S&P 500 is down around 29%!
With stocks down this low and this
widely spread. You could actually make big investing gains over the
next several years by simply investing in an index fund or ETF of
the S&P 500 or Dow. Right now you can't go wrong; the market
will get better over time and things will look up again. Why not
get a piece of the market while it's still down?
Stock investing advice is all over the place and when it comes down to
it, you are the one that ultimately has to make the decision. It is
good to get different viewpoints, but make your own strategy. Trade
stocks your own way; that is how you will make money investing in
stocks.
If you are interested in learning more about value investing, I
will be posting about value investing methods soon. Also, stay
tuned for value stock picks. I will find you some great bargains
out there to make you money...
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Opportunity on Samsung - SanDisk Deal
Samsung offered a $26 a share offer, which The Wall Street Journal
SanDisk rejected the offer saying it "undervalues" the company. Their reason for saying $26 is too low is because SanDisk's price has dropped over 75% since last October, and they believe Samsung is trying to take advantage of SanDisk's depressed price.
As of 1:33PM on Wednesday, September 17, SanDisk's shares stand at $21.00 as investors wait to see if negotiations continue. There is still a $5.00 premium on Samsung's original offer if that was the accepted price.
Samsung can do one of three things at this point:
- Make a tender offer to SanDisk shareholders at their $26 or more offer. This allows shareholders to make the decision rather than management. This situation would give investors a profit by the premium amount (say the $5 more than if you buy at $21 now).
- Increase their offer to buy. If SanDisk gets a higher than $26/share offer, they could accept. Investors would also profit from the premium, which would be higher than the premium $26 would provide.
- Samsung could also just walk away. Typically, when a buyer walks away, the target/seller's share price drops dramatically. This is the potential downside.
As far as Investing Advice goes, I would structure this situation as follows:
- Buy SanDisk at the near $20-$22 price per share.
- Protect my losses by setting a stop at $18.50-$19.50 depending on your risk tolerance.
- Wait for more word on the deal. If another offer or hostile offer is presented, set a limit price closely below the offer price to ensure profit is kept regardless of any deal complications. (ex: $28/share offer- set limit at $27.50)
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Lehman Goes Bankrupt, Bank of America Buys Merrill Lynch
With emergency meetings happening with the Federal Reserve and
major Wall Street banks over the Sept. 12-14 weekend, much has gone
down.
Lehman
Brothers, the over a century
old investment bank, has filed for bankruptcy. Bank of America
(BAC) was seen to be a potential buyer, but they went
after the bigger fish. Bank of America made an offer to buy
Merrill
Lynch for $29 a share.
Both Lehman and Bear Stearns
have fallen in the past year. Merrill
is no longer Merrill. This signals a major change for Wall Street;
who will survive in the 21st Century?
Almost all of the big investment banks forgot about risk management
when they realized that they could get away with borrowing more
than they could handle, and make obscene profits out of it. The
market will not allow them to hold that type of liability during
these troubled times. Many of their bets counted on real estate
which have taken huge price discounts, essentially eating away the
value of their holdings.
Goldman Sachs
and Morgan Stanley
are the only big stand-alone
investment banks to survive. Both banks have handled the credit and
real estate crisis considerably well, but the market is waiting to
see what their earnings announcements reveal. Goldman Sachs is to
announce earnings on Tuesday Sept. 16th and Morgan Stanley is to
announce earnings on Wednesday Sept. 17th.
This is an opportune time for either these two banks to be the
shining light of Wall Street (as if they aren't already), or the
slimming can allow room for smaller banks to come out on top in the
next couple years.
Bank
of America just gained one of
the most important assets they may ever get: Merrill Lynch's
investment bank. BofA has had a
struggle making a name for itself in investment banking, and now
they own the largest broker in the world.
Keep an eye on who may be coming out on top and in better shape.
This could be a huge investment opportunity!
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Michael Dell Buys $100 Million Worth of Dell Stock
This is a large insider buy, which usually signals that the inside buyer of the stock believes that the stock is either undervalued or going up in the near future. It could also mean both scenarios are the case. Regardless, following insider transactions (or insider trading) have been a trading strategy that many investors use.
Another indicator that Dell might be a good investment is that on September 3, 2008 Dow Jones News quoted Michael Dell saying that we will most likely see a "rapid" turnaround for Dell in Western Europe. He admitted that no one was happy with Dell's performance in Europe recently and is ready for a change.
Two key things happened in this announcement:
- The CEO, Michael Dell, admitted that they were doing something that wasn't working.
- There is a plan in place to improve conditions.
Warren Buffett is known for admitting the mistakes he's made throughout the year in his annual shareholder letter. He also provides that a plan is in place to improve the conditions of the problem, thus improving performance. Mr. Buffett says that a CEO that can admit mistakes of himself or the company and then provide a plan for improvement is a CEO worth keeping. CEOs that deny there are problems or that they were caused in any part by them run the company (and its investors) into trouble.
The single most important aspect about insider trading is that executives that have more of their money invested in their company are more likely to run the company better. It sounds like simple common sense, but you would be surprised at how many investors forget that and how many minimally invested execs perform poorly.
If you put all of the pieces together about the Dell story, it is painting a picture of a rebound in Dell stock. My investing advice on this trade would be if you are going to buy this stock based on this recent news, put a stop to limit your losses should something go wrong with the tech industry or the stock market as a whole.
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Stocks to Buy On Weakness (Update!)
(Look for update in Google section)
As you may or may not know, The Wall Street Journal
Money flows of block trades (10,000 shares) are usually generated by large institutions: banks, mutual funds, and hedge funds.
Although they try to invest at a slower rate than an independent investor so they don't pump up the price quickly and cause unrest in the market, their investment ultimately means that the price will go up.
The price may go up for two reasons:
1. Their high capital inflows to these stocks causes a chain reaction; other investors will begin to see the inflows and start to buy it themselves.
2. These institutions have a strong conviction that the price of these particular stocks will go up in the near future.
Money flows are a great way to derive stock investing advice for one large reason, "If you can't beat 'em join 'em." The money flows are calculated by the dollar value of composite uptick trades minus the dollar value of downtick trades, which in lay terms translates to net asset flows. The best bets for stocks that will do well and had high money flows on Tuesday (September 2nd), and Wednesday (September 3rd) are the following:
- Exxon Mobil (XOM)- had highest single-company stock flow on Tuesday. Over $40 million flowed into Exxon on the recent weakness. Exxon will continue to report record profits for the next couple years because of high oil prices and a turn to dwindling production and supply. The oil sector still has yet to see the high stock prices it deserves.
- Google (GOOG)- [UPDATE: Money flows into Google on Thursday hit $148 million. This shows further interest in Google, and that the stock is most likely overdue for a bounce to the upside.] as of 1:00PM on Wednesday, Google has had net asset flows of $30.4 million due to block trades (most likely institutions). Google has a lot of room still to grow. They just released Google Chrome, the new web browser by Google. At a price of $461.80 a share, there is a lot of upside back up to its 52-week high of $747.
- Chesapeake Energy Corp. (CHK)- had Wednesday net flows of block trades of $23.5 million. Energy companies have not performed well even with high energy prices, but that leaves room for value realization.
- Coca-Cola (KO)- with $13.8 million net big trade flows. Coke can avoid downturns of the US Economy because so much of their business is abroad. Although Coke is a discretionary item, people act like it is a staple. People will always drink their Coke products. Investor can share in Coke's profits.
This is a different perspective on investing. Many investors make money by following where the money is flowing. Riding the coattails of large institutions allows you to emulate the gains they realize on particular trades. My only warning is to make sure you don't wear out your welcome and stay invested after the institutions sell off their share.
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Has the Stock Market Bottomed?
The infamous host of CNBC's "Mad Money" show and
CEO of theStreet.com, Jim
Cramer, has called a bottom on the stock market this past
week. He said that the
pain and negativity in investors have been so high things just have
to change. Also, this last drop in the market
brought financials to decade (and longer) lows. Although the banks and broker-dealers have some
rough times ahead, the worst of the writedowns is most likely
over.On the other hand, many economists say since we have not yet experienced negative GDP growth, we have not come to a recession. A few economists on CNBC and Bloomberg believe that the worst has not come yet.
Ask any average person in the US and they will tell you that we are in a recession; that is how you know if we are in one or not. Ask an economist living in a theoretical bubble, and you will get a theoretical answer (not a real life answer).
The market, however, has already priced in a lot of pain. For many stocks, their prices have dropped below what they should have. This has been and continues to be a bear market, but I do believe the worst is over.
The best stock investing advice I would suggest is to start buying now if you didn't buy on the extreme lows of last month. Since we are still in bear market territory, there will be some steep drops to come from time to time; that is your buying time.
Don't get caught up in the rallies and try to buy into them. The market will come back down and let you buy low. Go to Google Finance, and do some research: Buy good company stocks that have been beaten down by the bear market while prices are still cheap.
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Earnings Week for Wall Street
Some of the featured earnings reports for the week are:
- Anheuser-Busch, Bank of America, AT&T, Boeing, ConocoPhillips, McDonald's, PepsiCo and Pfizer, Amazon.com, Ford, 3M, and Wachovia.
This next week will determine much of what direction the stock market will go for the next couple months. As far as stock investing advice goes, do not try to predict what the earnings will be and where the stock market is headed.
Investors will try to get a feel for the market by assessing the collective earnings reports, and they will react as they come out. What you should do is:
- Wait for a couple of weeks after most of the earnings reports are out.
- Decide what type of sentiment major company reports created in the market (negative, positive, so-so).
- Watch the stock market indexes to see their initial direction.
- Think back on the earnings numbers and make a judgement on whether the market priced in the news already or if there is more to come.
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The Number One Rule for Stock Market Investing
Image courtesy of blog.wired.com
If you are putting on new positions or have old ones that are losing their value, put a stop limit on each position. Although it's not a wonderful thought, you need to decide how much you are willing to lose before you buy any stock. Generally anywhere from 5% to 10% is a good limit to put on your investment losses. That brings us to the:
Number One Rule for Stock Market Investing:
1. Don't lose money!
I know it sounds obvious, but many investors lose focus of keeping losses to a minimum. That simple rule can mean the difference between a great investor and terrible investor. Keeping investment losses as minimal as possible will allow you to win big on the trades that go your way. Losing trades or investments usually continue to be losing trades or investments.
Even top hedge fund managers like in Schwager's Stock Market Wizards book repeat how important cutting your losses on trades is. If you can't cut losers, you will never win in investing. Everyone makes bad trades, but good investors don't let them eat up their capital.
Stock Market: Stay Long-Term or Stay Out!
Image courtesy of
www.dkimages.com
Even some of the best investors of our
time are getting hurt with this relentlessly bearish stock market.
As soon as you think the market is going to turn around and go up,
stocks take another plunge across the board. So what should I do
about investing in the stock market now?
I could just leave you with the title of this article; "Stock Market: Stay Long-Term or Stay Out!" is
self-explanatory, but further explanation is needed.
Many times in the stock market you can invest in stocks, sell them,
and make a quick profit. Trading stocks in this bearish and
volatile market can rob investors of their hard earned money. For
most investors, there are only 2 bits of investing advice
that will keep your money safe:
- Stay Long-Term- for long-term investing, this is a great stock market. Stock prices for many companies are already low. Financials, retail, and real estate/ homebuilde are among the sectors that have taken the biggest price cuts.
By investing in stocks that have already been hit hard by the bearish market, you are creating a very high probability of great returns once the market becomes bullish.
*(Think of a house on a lake for sale. There is a drought so the lake is mostly dried up, making the home dirt-front not lakefront. You buy the house for 40% less than it would be if there were actually a lake. After a year and a half goes by, the lake is full. You can now sell it for over double the price you bought it.)
- Stay Out!- for those investors that do not want to go through the pain of watching your stock investments potentially drop in price before they go up again, sitting on the sidelines with cash is never a bad idea.
By not losing any money, you could be doing better than many active investors out there. The only problem is deciding when you will enter the stock market, because if you wait too long stock prices could be at a premium.
Trading in the stock market right now is very risky. Even highly skilled stock trading experts can attest to the difficulty in making money in this economy.
If you follow one of these two pieces of investing advice, you will much more likely be better off than trading this market. You will also get to enjoy the bull market with big gains rather than trying to figure out how much money you lost during the bearish times. Good luck and enjoy the profits of the coming years!
What 3 Stocks Are Still Making Money?
Stock investing may seem too dangerous during these times of volatility and price declines, but there are always stocks that are going up in the stock market. It is my mission to find 3 Very Good Money Making Stock Investments just for you:
- One stock that you may have heard of is the ever-gaining fertilizer company, Potash (POT) priced at $236. Analysts just raised price targets from $300 to $340. A 100 point gain on this stock pick would be a helpful investment addition to your portfolio. They are profiting from worldwide demand in fertilizer for farming/landscaping in developing countries. Beware of the high P/E ratio though, a P/E of 52 is much higher than most companies that are similar. It is a fast-growing company, so it deserves a high P/E, but when its run is over the P/E will come down, bringing the stock price down. Great investment for the next 1-2 years!
- El Paso Corp. (EP) is a natural gas transmission, exploration, and production company. The stock keeps breaking through its high prices, and the demand for natural gas (as well as the price of natural gas) will continue to go up. Priced at just above $21, this stock will continue to go up for years to come.
- A Mexico-based cellular and fixed-line phone company is profiting from their Central and South American market share. American Movil (AMX), currently priced at $53.50, has a one year price target of $73.64. This is a stock holding by William Landers' BlackRock Latin America Mutual Fund (MDLTX) that I featured in The Five Best Mutual Funds.
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The Next Big Investing Trend
How do you know what a developing trend looks like? Will you invest in it when you find a wave beginning? Why can't you make money off of these huge opportunities? Well... you can...
There has been research upon research, more studying, and more books written than you can imagine on how investing waves / trends develop and how to identify and invest in them. So how do we find them? What is my magical stock market investing advice?
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There is no magic secret. However,
there are many ways to foresee a possible trend. You could spend
weeks learning different ways to find these market waves, but I
will give you some significant clues to discover them.
Clues for Developing Investing
Trends
- New or Reinvented and made public
- More frequent findings in trade journals, magazines, and newspapers
- Haven't been exploited already by Wall Street
- A Hype or following begins to develop
What you should be looking for:
-There are trends on small scale all the way to colossal scale (all
of which can make you colossal amounts of money).
-Micro-trends are similar to what happened with the iPod- it
affected one company (Apple) and a few other mp3 player
manufacturers.
-Colossal trends are like oil, it has been making boat loads of
money for people for over 100 years!
The next colossal trend will be a mixture of smaller trends
all working together, and that is GREEN! Everyone wants to
be green. Green this, green that; it's on TV. There are magazines
just for green: Green living, cooking, cleaning, building, organic
food, etc. Everything that being green incorporates will make
money, so you have to think about what green means.
Clean energy will be the massive breakthrough, and General Electric
(GE)
has already invested billions in creating alternative energy. Who
knows if that energy source will be hydrogen, solar, or a mixture
of every possible alternative. Either way, institutional investors
will be pouring billions into these stocks over the next decade or
two. So find companies that are going green, and especially
find companies that are carving out a niche in our new "Green
World." Invest and let these companies bring you loads of green
(cash)!
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Buy Financial Stocks That Are Ripe
Although we hear so much bad news from every news source out there, investing in the stock market right now could could be one of the best investments you make. Once we pull out of this recession, valuations are going to go back up and beyond what they were before. These low priced stocks will not stay forever. Take this piece of investing advice as a 3-5 year path to great wealth. If you heavily invest in stocks, especially financials, right now; you will become much richer than you are today.
Some of the best stock picks for the financial sector are:
- Citigroup (C)- one of the most beaten down, highest potential for returns. Today priced around $20-21, in three years could be priced at $60-80!
- Merrill Lynch (MER)- with a stock that almost hit $100 a year ago, $36 is not a bad price at all. The stock can easily double once they cleanse their hands of all bad debt.
- Bank of America (BAC)- one of the strongest banks in the sector. They had much smaller subprime losses than most banks, but the price has dragged down alongside the rest of financials
- JP Morgan (JPM) and Goldman Sachs (GS)- these two stocks have not gotten hit as hard as other financials because they made smarter investments, and they are the cream of the crop. Goldman is probably the best investment bank in the world, whereas JP Morgan received the special blessing of financial backing from the Federal Reserve. Bottom line: safer, strong investments, with good earning potential, but not as high as more risky bank stocks.
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1 Bullet-Proof Money Making Stock
If the stress of this volatility is too much for your body to handle, stick to a more constant stock that will yield good returns year after year. The stocks recommended in 3 Stocks That Can Make You Rich are more vulnerable to the ups and downs of this market even though there are much larger potential gains, so I'm offering you a more conservative investment for those who don't want to deal with the unpredictability of the markets.
We all know that Warren Buffett has an impeccable talent for investing (hence being named the richest man in the world by Forbes at an estimated $62 billion), but how can you make returns like Mr. Buffett year after year? You can hardly imagine matching his 60+ years of investing experience. It's hard enough just to track all of the investments Buffett makes in a year. He really is somewhat of a fund manager, so don't just try to chase down all of the same stocks Buffett has.
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An answer to this is to buy into his investing strategy. Warren Buffett's Berkshire Hathaway is a holding company for the companies that Buffett finds great value in and invests in. Berkshire owns a number of companies including Geico, Helzberg Diamonds, Fruit of the Loom, and many others. They also have major holdings in Coca-Cola (KO), American Express (AXP), Anheuser-Busch Companies (BUD), and the list goes on.
The only problem is Berkshire Hathaway (BRK-A) is priced around $134000! Not many people can pay that much money for one share of a stock. There is an alternative that is an equivalent in earnings and growth because it's the same thing;
- Berkshire Hathaway B (BRK-B) priced near $4490. Although that is still a lot of money for one share, it is a great price for a stock that will earn you great returns. Out of all the stock investment tips, this is truly a stock pick of a lifetime. This is a perfect stock to have and to hold, and to buy more when you can. The B shares of Berkshire offer a more affordable way to get a solid, recession-resistant, constant earning investment. The only difference between A and B is B has less voting power for shareholders, which will make no difference in what you make from the stock at all.
How would you like to have the world's richest man and arguably the most intelligent investor managing your money for free?
The average annualized return of Berkshire has been above 18% for almost 20 years! This is probably one of the most valuable pieces of stock investing advice you can find. Do your own research and check out other companies, but Warren Buffett has one of the greatest minds for investment ideas. He has a clear investment strategy, and you can learn more about his strategy by reading his annual shareholder letter if you want to really get inside his mind.
This article should be found also in the Carnival of Personal Finance.
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3 Stocks That Can Make You Rich
The latter is probably only a good idea when you are focused on a longer term horizon. Waiting and holding will almost always payoff if you are looking 15 to 20 years into the future. Sitting on the sidelines with cash is a safe but cautious approach. Many investors are doing just this and are completely fine with no return.
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If you want returns, and substantial returns at that, you must seek out the best investments for the near to mid-term future. These stocks you want to hold for 2-5 years, and you can hold them for longer if they are still fundamentally strong after 5 years.
Here are 3 Stocks That Can Make You Rich:
1. General Electric (GE)- GE recently posted lower than expected earnings which Jeff Immelt mostly blamed on the current economic status and troubles with GE's financial business segments. This is more than likely a cyclical price decline, and the stock could realistically bring you 15% returns by the end of 2008. Also, CEO Jeff Immelt is under the gun for the next couple of quarters to perform or he could be ousted. Either way, if Immelt improves the company improves, and if he gets fired then the new CEO has a good chance of bringing more to GE's bottom line. Another great part of GE is the alternative energy pipeline, a part of the Eco-magination realm. GE has invested billions into alternative energy production including wind turbines, which will become increasingly significant for energy independence and sustainablility. It's a win-win.
2. Merrill Lynch (MER)- Although the financials will probably not come back to 2006-2007 values until well into 2009, that allows for a lot of buying up of financial stocks for you and institutional investors. Merrill Lynch is fundamentally sound. They will probably come up as a top performer in the next 2-3 years allowing the stock to double or more. Mother Merrill won't fail you, especially if you are looking further than just 2008.
3. PetroBras (PBR)- CNBC has been talking about PetroBras a lot lately and about the massive oil field discovery they had recently. PBR has been an emerging market favorite for years. William Landers' Blackrock Latin America Fund (MDLTX), which I discussed in The Five Best Mutual Funds, has taken a large share of the Brazilian oil company. It is now the 5th largest company in the world, and they could also be sitting on the world's largest oil field. The great thing about PBR as an investment is that it will continue to highly perform for the next 5+ years. The reason for this is while they are currently producing a large portion of world oil, it will probably take 5 or more years to fully utilize the recent discovery. This ensures future profits for PetroBras.
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Weak Dollar is Good for These Stocks
How can you capitalize on the tourist influx? Go to the two main theme park stocks Disney (DIS) and NBC Universal which is owned by General Electric (GE). Both companies have outstanding underlying companies and tend to be less affected by recessions. Although they will both benefit from this tourism effect, Disney will benefit more from it simply because theme park revenue is a much larger percent of company revenue for Disney than it is for GE.
I would recommend buying both of these stocks even if there wasn't a weak-dollar effect, it just makes those stocks look that much more valuable.
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A Vital Stock Trading Secret
Traders are always trying to find the next big wave or trend, but how can you make money by speculating when and what will boom? Why not just trade something that has certainty? You can make a lot of money on something you are more confident in, and you can lose a lot of money betting on something you have no idea if it will really take off.
The stock discussed here is (CME) the Chicago Mercantile Exchange or more recently the CME Group. The CME is a trade execution and clearing company for mostly derivatives such as options, futures, interest rate futures, real estate, and more. What makes CME special is that the volatility is close to 4.26x the volatility of Proctor and Gamble (PG). In other words it is quite a bit more wild than PG. Why would you want to touch something so volatile though?
The volatility in CME is what will make money. About a week ago I bought CME at $466 and it is now hovering close to $500. That may not sound like a huge gain, but with leverage through margin or options, that can mean a nice chunk of change in your pocket. Without leverage it is a good trade, with leverage it is a great trade. The key is knowing that the stock will move.
For the past 3 months, CME has stayed mostly in the $450-$530 range. Every time it goes down to below $470 is a good time to buy until it goes above $500. It also works on the short side; when CME hits $520 it can definitely be shorted until below $480. Be careful on shorting, because CME has been low compared to the past year and has been given analyst estimates of $631 in 12 months, so don't short it for too long.
On top of the technical-type factors, derivatives are growing in popularity and trading volume. That goes directly to their bottom line. Derivatives exchanges will not slow down or stop any time soon, just as stock exchanges have not slowed or stopped since they began. CME just bought the NYMEX (NMX) which owns the New York Mercantile Exchange. NMX is another clearing and trade execution company that will greatly enhance the value of CME for years to come.
CME will continue being volatile because that is the nature of the CME, so as long as you get in at the right point you can expect some great returns on this stock.
Bottom Line: When you trade a strategy that you are confident in, stick to it, don't deviate from it, and exit when it no longer makes you money.
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5 Great Investing Books That You Should Read
I will give you a list of recommended reading for beginning and intermediate investors, but that doesn't mean you can't become an expert on the styles presented in the books. They simply explain their particular style in an easier way to start out, and then they go into depth about it.
1. Rule #1- by Phil Town
In this New York Times bestseller, Phil Town describes a different twist to traditional buy and hold. He mixes aspects of value investing with some technical aspects that are important to recognize. His book really opened up doors for me.
2. Real Money- by James Cramer
I know some of you are going to say, "You want me to read a book by that nut Jim Cramer who screams on TV!" The answer is Yes. It is not because everything he says is right or he is the absolute best, but he has some really valuable knowledge on fundamental investing. Mr. Cramer is a former Goldman Sachs employee, hedge fund manager, and much more. I guess 14 years of managing a 24% average return after fees, $450 million hedge fund gives him some authority on investing.
3. Invest Like a Shark- by James "RevShark" DePorre
The shark brings a whole different aspect of investing than Jim Cramer, but he also acknowledges DePorre's book by writing the foreword in it. For those of you that like to analyze charts and technicals a little more, this is the book for you.
4. The Intelligent Investor- by Benjamin Graham
Benjamin Graham is one of the most renowned investing authors in history. He taught Warren Buffett how to invest, and he is quoted by saying, " [It is] by far the best book on investing ever written." This is THE book on investing, and if you want proof this method works, take a look at Warren Buffett's net worth (by the way he is the Richest Man In The World!). I will warn you that this book is much thicker than any other book I recommended and the concepts are quite a bit more advanced.
I will continue to tell you about books that can help you make lots of money in investing in equities markets as well as real estate. For now, you have plenty of reading to get done. Also, take notes on the methods explained in the book, so you can come back and refer to it when it comes to testing out the strategies. These books are a great way to learn investing, and they're great material for investing ideas.
Are Banks Out of the Water?
As I talked about in my article Financials Maimed, Pick 'Em Cheap, the financial stocks have been beaten and beaten again. Financial stocks have started to rise with sentiment about banks rising, and there is a movement of institutional money (mutual funds, insurance companies, hedge funds, and pensions) into financials as well. The prices of financial stocks have risen significantly in the past few weeks:
Bank of America (BAC) has risen over 8% from about $35.50 to $38.38 since April 14th. Merrill Lynch (MER) has risen over 15% from $43 to $49.50 in the same time period. Even struggling private equity giant, Blackstone (BX), has gone from $17.20 to $19.40; That's a 12.7% increase.
Don't feel like you've missed out on the good opportunities here though. These financials have fallen hard, so they have a long way to go up. If you would have looked at a quote on Merrill a year ago at $90 and asked yourself if you'd like to buy that same stock for $50, would you take it? Absolutely.
Banks won't see the same kinds of earnings they saw in 2006 and 2007 this year, but just as any industry in the stock market, it fluctuates. 2009 and 2010 may see those outstanding earnings numbers, and this time they could be bigger than ever. Stocks go up, stocks go down. Buy them on the way up, and you have no reason to frown.
The Five Best Mutual Funds
The key to these is to invest in these funds, put more money in them as time goes by, and you will watch a fortune grow. Before you do decide to invest in a mutual fund, make sure you have the means to do so. Make sure your debt is done with, which is what I talked about in Get Personal Finances In Order, and then you can go on your way to making a bundle for retirement.
The List of Mutual Funds is not in any particular order:
Top 5 Mutual Funds
1. Blackrock Latin America Fund (MDLTX)
2. CGM Trust Focus Fund (CGMFX)
3. Fidelity Advisors Utilities Fund (FUGAX)
4. John Hancock Large Cap Equity Fund (TAGRX)
5. T. Rowe Price Value Fund (TRVLX)
1. One mutual fund that I have owned is the BlackRock Latin America Fund (MDLTX). This fund has exceptional returns, much of which is coming from booming Brazil. William Landers, the manager since 2002 has been able to produce annualized returns of about 50% for the past 5 years. That is almost unheard of for a mutual fund. Landers follows the macroeconomic conditions of the countries he invests in. That provides an extra bit of protection from bubbles in different economies.
2. Another mutual fund with rather high returns is the CGM Trust Focus Fund (CGMFX). This fund is managed by Ken Heebner and he has produced an annualized 5 year return of 38.5%. That is another outstanding return. Since his management of the fund began in 1997, he has focused on mid-cap growth stocks in the U.S. This fund is a no-load mutual fund with a .99% expense ratio, so they don't take a percentage of what you put in the fund or what you take out. A .99% expense ratio is low enough that it won't hurt your returns at all. CGMFX also has a five star rating by popular mutual fund analyst Morningstar.com.
3. I found that Fidelity has quite a line-up of good-return mutual funds. The Fidelity Advisors Utilities Fund (FUGAX) has had a more than 20% average annual return for the past five years by investing in public utility stocks. It yields a 1.55% dividend each year, which is a nice bonus to 20% returns. Utilities seem to be almost always a good bet for either constant growth or dividends, so I don't think this fund could ever be in trouble.
4. The John Hancock Large Cap Equity Fund (TAGRX) is an impressive diversified portfolio with mostly large cap stocks. It has seen a 20.29% average annualized return for 5 years, and it is team managed. That creates more evaluation in each pick for the fund. Teamwork works. John Hancock also provides a number of life cycle retirement funds; they are funds that are aimed to provide you with the capital you will need when you retire in 2010, 2020, 2025, etc. They have many retirement years, however, I think they go in blocks of 5 years.
5. John D. Lineham manages the T. Rowe Price Value Fund (TRVLX). The 5 year annualized return is 13.8%, and it has produced a 12.4% return annually since 1994. That is impressive. Value investing reminds me of the Tortoise and the Hare story; slow and steady wins the race. I am a big fan of value investing, and it can do great things for your retirement. So, if you want a fund that you know will perform well over time, it's Lineham's value fund.
Invest in Large Cap, Mid Cap, or Small Cap?
If you believe in having a diversified portfolio, you will probably have at least one of each market cap size. If you don't have a diversified portfolio and want sizable returns, small cap stocks can yield greater returns. Historically, the average annual return for a portfolio of the smallest 20% (market cap) of stocks listed on the NYSE is 17.4%. The 17.4% return of small stocks clearly outperform the 12.3% average annual return of the S&P500. Of course, the volatility of a small stock portfolio will be higher than that of the large cap S&P 500.
The common definition for small cap is from $250 million to $1 billion in market cap. Set up a stock screener for Small Cap or Market Cap= $250 million to $1 billion with reasonable growth rates. EPS growth rate should be 10-25% annual. ROE should be 10% or larger. Be weary of companies with abnormally large growth rates, and always check the financials of the company to make sure they are stable. Some stocks I got from the stock screener were ULTI, HNR, and ESEA; a diversified group of companies. The companies are The Ultimate Software Group (ULTI)- a business software company, Harvest Natural Resources (HNR)- an oil and gas operations company, and Euroseas Limited (ESEA)- a Greek dry bulk shipping company, respectively.
Sit On Cash for a While
Again, if you are a long-term investor, many stocks that have already been beaten up are going to look very good in a year or two. For a value investor, this is a developing feeding ground, so go ahead and nibble a little. Just wait a few weeks, and start in if you see some good deals after earnings season.
