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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with InvestorPitStop.com's stock investing strategies
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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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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!
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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.
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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