Welcome to week 38 of my stock-picking throwdown with Mr. Market. Let's get right to the numbers the hot stocks:
| Company | Starting Price* | Recent Price | Total Return |
|---|---|---|---|
| Akamai (Nasdaq: AKAM) | $22.23 | $22.02 | (0.9%) |
| Harris & Harris | $6.22 | $4.84 | (22.2%) |
| IBM (NYSE: IBM) | $127.64** | $103.21 | (19.1%) |
| Oracle | $22.69** | $19.34 | (14.8%) |
| Taiwan Semiconductor | $10.34 | $10.57 | 2.2% |
| AVERAGE RETURN | -- | -- | (10.96%) |
| S&P 500 SPDR | $124.37** | $87.42 | (29.71%) |
| DIFFERENCE | -- | -- | 18.75 |
Source: Yahoo! Finance.
* Tracking began on Aug. 7, 2008.
** Adjusted for dividends and other returns of capital.
Welcome to yet another interesting week. Only this time, Mr. Market gave up a lot of ground in our three-year contest -- a whopping 365 basis points, specifically.
Swine flu fears didn't help. Which, frankly, is unfortunate. I agree with my Foolish colleague Seth Jayson on this one. As much as I sympathize with those who've been afflicted, and even more with those who have lost loved ones to the virus, it takes a special sort of cognitive dissonance to sell stocks based on nothing more than the unknown odds of a global pandemic.
On the other hand, it's creepy to watch stonehearted speculators load up on shares of GlaxoSmithKline (NYSE: GSK) and Gilead Sciences (Nasdaq: GILD), among others, just because of the possibility of increased demand for their vaccines. Yeah, I know, you can say it -- I'm a sissy, a compassionate capitalist.
You want to profit from the swine flu? Fine. Buy shares of quality businesses that have sold off during this week's manic market gyrations. Hold for the long haul. Rinse. Repeat.
The week in tech
In tech, an awful report from Sun Microsystems (Nasdaq: JAVA) confirms that the one-time server superstar had been suffering at the twin altars of intense competition and commodity pricing. Related stocks such as Dell (Nasdaq: DELL) were largely unaffected by the news, but tech, as a whole, remains an uncertain bet.
"Can the sector keep it up? I'm not convinced," wrote Pat Dorsey, Morningstar's director of research, in a recent Money column. "Large software companies, for instance, are likely to be hurt by corporate America's reluctance to lay out cash for big-ticket upgrades in such an uncertain economy."
The industry is also changing. Competition is fiercer. Just this week, Big Blue said it was preparing an intelligent indexing program called "Watson" that IBM scientists believe will compete successfully against human contestants on the game show Jeopardy!. Beneath the hyperbole is a system that could very well disrupt Google (Nasdaq: GOOG) in search.
Disruption is the coin of the realm in tech. Investors are therefore best served by exercising prudence in picking stocks -- stick to the very best -- and patience in waiting for gains. That's how David Gardner produced a decade of 20% returns in the real-money Rule Breaker portfolio. Tom Gardner's "simpleton portfolio" was also a 10-year winner. I believe that, with these five tech stocks, I will achieve similar success.
Checkup time!
Now let's move on to the rest of today's update:
- Akamai suffered a legal setback in its patent tussle with Limelight Networks. But then, on Wednesday evening, it reported expectations-shattering revenue and earnings. The stock is still rising as I write today.
- On Tuesday, IBM raised its dividend 10% to $0.55 per share, per quarter. This quarter's ex-dividend date is May 6.
There's your checkup. See you back here next week for more tech stock talk.
3 Steps to Start Investing Today
As April comes to a close, so does our series for Financial Literacy Month. Over the past two weeks, we've shared 10 essential money lessons to help shape up your finances and portfolio. To recap a few, you've learned how to save some extra money, visited a place to learn more about different companies, and gotten some clues on what type of investor you might be.
So now what? With the S&P 500 having risen 29% off its low in March, is now the time to get in? How do you go about it? And how fast should you move? Our 10 essential money lessons have readied you to dive into investing, and this bonus article will help you do just that.
How can I invest?
If you're brand new to investing -- and at some point, we all are -- that whole world of Wall Street is pretty intimidating. Terms like enterprise value, return on equity, even P/E, are extremely confusing, often turning potential investors away. And we want it that way!
No, just kidding. Actually, like any field of activity, investing has its own special vocabulary that requires some exposure to it, and practice with it, in order to become familiar. If you're a car buff who likes working on your Ford (NYSE: F) Mustang convertible, did you know everything about replacing piston rings when you started? (And what does a piston ring do, anyway?) I bet not, and it's the same principle at work here. Eventually, you learned about piston rings, or how to cook (what's the difference between beat and fold?), or play poker (five-card draw? Texas hold-'em?). You learned that the best way to learn is by doing.
So find yourself a discount broker (the ones who actually buy or sell the stocks on your behalf, following your directions), open an account (visit their website, or give them a call to find out how), and buy a few shares of your first stock (after some due diligence, of course).
You might want to start by thinking of companies and products that you're familiar with, like Coca-Cola (NYSE: KO) or Wal-Mart Stores (NYSE: WMT). It's much easier to understand their business models. Or you could start with a company that serves one of your interests. If you're into cooking and food, consider a restaurant company like Darden Restaurants (NYSE: DRI), operator of Red Lobster. Or perhaps culinary equipment company Williams-Sonoma would be to your taste.
But don't expect to get wealthy overnight. It takes time for companies to grow, and for your investment to grow with them. Plus, bad things can happen --the value of your investment can drop, as has definitely happened during this recession. So only use money you've saved and don't need for at least the next five years. Over that time period, short-term movements tend to be dampened out, letting the long-term success of companies shine through. Success is not guaranteed, but it's more likely to happen over a longer time frame.
How diversified should I be?
If you're at least passingly familiar with investing at all, you've probably come across the term "diversification." That simply means, "Don't put all your eggs in one basket." If something bad happens to one company you've bought into, you should also have money invested elsewhere, so that you aren't wiped out from that one event.
One easy way to get diversification is to buy a broad-market index fund, such as Vanguard's S&P 500 index fund (VFINX). That gives you a portion of the 500 companies making up the S&P 500 stock market index, including biggies like Johnson & Johnson (NYSE: JNJ) and not-so-biggies like GameStop (NYSE: GME). Then, you can add shares of individual companies in which you are particularly interested in, to provide an extra boost. This strategy is sometimes called "index plus a few," and it's a great way to start investing.
How fast should I make stock investment?
You may be concerned that if you put all your money into the stock market today, it will drop tomorrow. But if you let that fear rule you, you'll never start investing. Instead, try the following approach.
First, if you can, determine what your "full" position size is in any given company -- that is, how much you want to invest in total. Say you decided to invest $1,000 into Amazon.com (Nasdaq: AMZN) in early January at about $57 per share, because you think that on-line ordering will become even more a part of life than it is today, and you also happen to be crazy about the Kindle. Begin with one-third or one-half of that. If the price drops, as it did later that month to the $50 range, fine, go ahead and buy another third. If the price rises, as it did at the end of January, now you've got a stake and could get some more on the way up, too. We call this "investing in thirds" and we like it because it imposes some discipline on the process.
Second, invest your money no more quickly than about twice as fast as it would take you to replenish it. So, if you have saved $5,000 and can add to that at about $500 a month, don't put more than about $1,000 per month into stocks. That would take about five months, by which time, you'd have another $2,500 for a couple more months, and so on. By doing this, you again avoid the risk of going "all in" just at the market's peak or before a major downdraft. Plus, it slows you down, and decreases the likelihood that your emotions will rule your decisions -- a pitfall that can be harmful to your financial health.
Final thoughts
So there you have it -- three steps to help you start investing today. To recap:
- Start with a company you're familiar with, or have an interest in.
- Use the index-plus-a-few strategy.
- Invest in thirds, and spread your purchases over time.
By following these, whether you're a new investor or one who's been in the trenches for a while, you'll be well on your way to that golden retirement.
Don't Make This Life-Changing Mistake
With the economy struggling, promises of financial security look especially attractive right now. But now more than ever, you have to look at such promises with a skeptical eye -- before you make an irreversible mistake that could ruin the rest of your life.
Unfortunately, it isn't too hard to find disreputable professionals who are willing to go to great lengths to take advantage of people's lack of financial expertise. Although the Bernie Madoff Ponzi scheme case is an extreme example, less dramatic situations can cause just as much damage to unsuspecting investors.
Unreasonable expectations
One common way that unscrupulous advisors trick people is by using numbers that are simply too good to be true. For instance, the Financial Industry Regulatory Authority (FINRA) recently imposed a fine of over $7 million on Morgan Stanley (NYSE: MS). FINRA alleged that Morgan Stanley brokers in upstate New York targeted workers at Xerox (NYSE: XRX) and Eastman Kodak (NYSE: EK), recommending that they take early retirement and allegedly promising safe annual returns of 10% or more to finance living expense withdrawals that wouldn't require them to dip into principal. Of course, when the bear market came, they lost huge amounts of their life savings.
You might wonder how someone might get duped into believing that they could count on double-digit returns with no risk. Historically, going after such high returns would generally force you to put almost all your money into stocks -- something that's far riskier than most new retirees would ever want to do.
Desperate times, desperate measures
Yet to understand how someone could get tricked like this, consider the lack of investing background that many people have. If you're a long-time worker at a company that has a traditional pension plan, you may never have had to manage your retirement savings at all. Yet you might be tempted by the opportunity to take a lump-sum withdrawal at retirement -- especially with incentives for workers to take early retirement packages, such as severance payments or other perks to sweeten the deal.
And with big employers like General Motors (NYSE: GM) and Ford (NYSE: F) struggling to survive a tough auto market, you can imagine that their workers wouldn't need much enticement to take an early-retirement package. Those workers would be especially vulnerable to puffed-up claims from financial advisors, especially if those claims allowed workers to do what they already believed was their best option in a bad situation.
Protect yourself
The majority of financial professionals do their best for their clients. But given the rash of abuses lately, you won't offend anyone by taking some steps to verify any advice you get from an advisor. Here are some things to keep in mind:
- Watch out for historical returns. Because the stock market as a whole has performed so badly even when you look back 10 years or more, you're likely to see return projections that are either based on longer periods or taken from certain periods. If you see an optimistic return projection on an investment, make sure you find out how it has performed during the bear market -- and in the years preceding it.
- Know your time horizon. To invest in stocks, you should expect to hold onto your shares for a relatively long time -- 5-10 years is a good range -- before you need the money. If you expect to use it before that, you shouldn't invest in stocks, even if they might give you better returns. You can't afford the risk of an ill-timed downturn.
- Don't swing for the fences. As a new retiree, the lump-sum payment you just got may be the last money you ever get from your former employer. So if you're considering individual stocks with part of that money, you should stick with relatively conservative companies like Microsoft (Nasdaq: MSFT) and Johnson & Johnson (NYSE: JNJ). Don't bet your life savings on a stock tip, no matter how attractive it may sound.
Plenty of intelligent people have been taken advantage of by convincing pitches from people who turned out to be crooks. If you're careful, though, you don't have to become the next victim.
Buy These Stocks and Make Money
True story: The other day, I (Brian) received an email with this as a subject line: "Buy these hot stocks and make money."
Of course, the email ended up touting a $0.04 penny stock with an un-pronounceable name (it looked fake). Apparently, an "analyst" somewhere assigned a short-term "price target" of $1.10 to this hot stock.
We're liberally applying quotation marks here to reiterate the obvious absurdity of The Stock That Will Return 2,650% in One Month.
Back to real life
Ridiculous claims in the stock market are nothing new, of course, and ridiculous claims from analysts are especially old hat. (Just ask the analysts who pegged Countrywide Financial "outperform," with a $45 price target, in the fall of 2007.)
We'll even go so far as to advise you to fight -- violently, if necessary -- whatever urge you may have to click on the "analyst opinions" tab at Yahoo! Finance. While it may seem prudent to see what the "smart money" thinks of your stock, this page is one of the most dangerous places on the Internet -- truly NSFW, as the tech-savvy say. It's not even worth the five seconds it takes for your browser to load the page.
That's because (1) you get no context and (2) nearly every single stock -- surprise, surprise for an industry that makes money by convincing you to buy stocks -- is considered "undervalued." Here are a few notable examples:
| Company | Yesterday's Closing Price | Analyst Target Price (Mean) | Analyst Target Price (Low) |
|---|---|---|---|
| Chevron (NYSE: CVX) | $65.99 | $78.38 | $61.00 |
| McDonald's (NYSE: MCD) | $54.53 | $64.40 | $58.00 |
| Wal-Mart (NYSE: WMT) | $48.47 | $59.94 | $53.00 |
| PotashCorp (NYSE: POT) | $82.12 | $99.72 | $83.00 |
| Pfizer (NYSE: PFE) | $13.39 | $18.50 | $14.00 |
| Accenture (NYSE: ACN) | $28.91 | $35.35 | $31.00 |
Data from Yahoo! Finance.
While we each see the merits of an investment in Wal-Mart, McDonald's, and so forth, it's preposterous to assume that every single one of our random sampling of stocks is, on average, undervalued by some 20%.
Please.
But let's talk about you
You opened this article for the same reason Brian opened the email with the same headline: to see which stocks you should buy to make money.
After all, it is a good headline -- direct, relevant, practical, and appears to offer applicable advice. And it plays to a core human emotion: the quick, easy buck.
Yet if it's a quick, easy buck you're after, there are no stocks you can buy to make money. At least, not reliably. And that, to bring us full circle, is the problem with sell-side analyst research. While these five- to 20-page reports can often provide useful insights, they're not reproduced on Yahoo! Finance. Instead, individual investors who won't pay up for premium research are left to divine meaning out of useless, optimistic, one-year price targets.
Again, don't bother.
Buy these hot stocks and make money
If you're willing to change your mind-set, however, then there are stocks you can buy to make money. These are hot stocks in companies that ...
- Have a sustainable competitive advantage such as economies of scale, high switching costs, or network effects.
- Treat all of their constituents -- customers, employees, and shareholders -- as partners in the business.
- Are financially strong enough to take advantage of down economies like this one to expand market share, buy up valuable assets on the cheap, and enhance their competitive position.
And we'll add a new trait to that list amid this paralyzing downturn: Exposure to multiple foreign markets, which provide diversification and the potential for faster growth.
One hot stock to make money
Of course, we'd be remiss, after promising so much in the headline, not to give you at least one stock idea straight from our Motley Fool Global Gains investing service, so here it is: America Movil.
This company is the dominant cellular provider in Mexico and one that's actually seen subscriber numbers increase with new number portability (indicating a significant competitive advantage). It's also shown a willingness to repurchase shares and pay a dividend to shareholders. And it continues to grab market share in Mexico, Brazil, and elsewhere, given that it has a much stronger balance sheet than its competitors and has already established 3G networks in most of its markets. It even issued impressive earnings yesterday after market close.
The catch is that while America Movil looks like a promising long-term opportunity, we have no idea if it will make you a quick, easy buck. But if anyone tells you they can do that, they're lying.
In sum
When it comes to investing successfully, look for the four traits above in any stock idea and commit to putting money in the market for the long haul. And take seriously the opportunities abroad. As co-advisor of our Motley Fool Global Gains service (Tim) and a contributing author to the international investing chapter of our most recent book (Brian), we believe that the growth potential of many foreign stocks -- even some of the stalwarts -- could lead to multibagger returns at today's prices.
How Low Can Stocks Go?
Sure, the rally over the past few weeks has been a fun ride, but how quickly we forget: Between Feb. 9 and March 9, the Dow Jones Industrial Average dropped over 1,700 points. Repeat another of those plunges, and the "Dow's going to zero" camp might start gaining attention again.
Of course, we're not going to zero. No matter how ugly the markets get, the ferocity of what we've been through over the past few months can't continue for long.
But here's the bad news: That zero is out of the question doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.
And history agrees.
What goes up ...
The history of long-term market downturns is hideous. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear. When panic sets in, nobody wants to own stocks at any price. Investors' palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, things get really, really ugly.
Just how ugly? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:
| Period | Average S&P 500 P/E Ratio |
|---|---|
| 1977-1982 | 8.27 |
| 1947-1951 | 7.78 |
| 1940-1942 | 9.01 |
And while stocks have plummeted over the past year, so have corporate earnings: With Standard & Poor's predicting the S&P 500 will earn $28.51 per share in 2009, the index currently trades at almost 30 times earnings. Compare that with the above table, it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.
Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. For the Dow Jones Industrial Average, that could easily mean Dow 5,000, or worse. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.
But what if it did happen?
What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:
| Company | One-Year Return | Decline From Current Levels With P/E of 8 |
|---|---|---|
| Costco (Nasdaq: COST) | (36%) | (54%) |
| Cisco (Nasdaq: CSCO) | (26%) | (46%) |
| American Express (NYSE: AXP) | (50%) | (23%) |
| Google (Nasdaq: GOOG) | (31%) | (72%) |
| Procter & Gamble (NYSE: PG) | (26%) | (30%) |
| Baidu (Nasdaq: BIDU) | (39%) | (84%) |
| Johnson & Johnson (NYSE: JNJ) | (25%) | (28%) |
Look scary? It is. And it could easily happen.
But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a pitiful 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.
Be brave
As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.
Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.
And that's exactly where we are today.
Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.
Stock Investment: Should You Quit Buying Stocks?
More than 2 million people saw Jon Stewart clobber CNBC's Jim Cramer during his now-famous appearance on The Daily Show.
Stewart the comedian became Stewart the commentator -- and he sounded a lot like former presidential candidate John Edwards, who talked about "two Americas," one for the rich and one for the poor. Stewart said:
One [market] has been sold to us as long-term. Put your money in 401(k)s. Put your money in pensions and just leave it there. Don't worry about it. It's all doing fine. Then, there's this other market -- this real market that is occurring in the back room, where giant piles of money are going in and out and people are trading them, and it's transactional and it's fast. But it's dangerous, it's ethically dubious, and it hurts that long-term market.
Stewart and his righteous outrage were speaking for a lot of people that night. Most of us lost money in the market recently, and nearly every day brings new tales of outright deception, monetary malfeasance, and just plain unethical behavior.
It's enough to make you wonder whether you should just get out.
How about an Ethics 101 course?
Cramer is better than most. At least the guy admits he's bent (but not broken, he says) the rules for personal gain. Many of the Wall Street players at the heart of this mess still want to claim a measure of innocence.Ethics have never seemed to matter on the Street; apparently, they still don't. How else do you explain Goldman Sachs (NYSE: GS) deciding it's OK to calendar-shift December into 2009 when reporting results recently? Sure, it's legal, but it feels like a shell game.
Stupid really is as stupid does
Mind-numbing stupidity really does appear to be the coin of the realm when it comes to banking, brokering, and regulating. Consider the FDIC. Created to protect depositors after earlier meltdowns, we're now learning that the agency failed to collect premiums from Bank of America (NYSE: BAC) and its peers for a decade.So Stewart is right to at least question the fairness of the financial system as we know it. But is there really one stock market for those "in the know," and another for the suckers who aren't?
Ignorance is, in fact, bliss
Only the insiders can say for sure, but history paints a reassuring picture for those of us not "in the know" -- at least if you're committed to long-term investing:
Source: Capital IQ, a division of Standard & Poor's.
Year Index Return Market Beaters* Winners As a % of All Stocks 2008
(38.49%)
1,501
43.2%
2007
3.53%
1,223
36.2%
2006
13.62%
1,417
46.9%
2005
3.51%
1,340
47.2%
2004
9.13%
1,347
53.9%
2003
26.10%
1,107
57.7%
2002
(23.75%)
1,225
61.5%
2001
(12.36%)
1,175
64.1%
*Includes only those stock trading on major U.S. exchanges that began the year worth at least $250 million in market cap.Notice the pattern. In most years, those who held individual stocks saw an average of 40% of their picks beat the market. In two of the three worst years, six out of 10 were market-beaters.
Sometimes, the gains were huge. Ceradyne (Nasdaq: CRDN) doubled in 2004. Guess? (NYSE: GES) nearly tripled in 2005. And in 2007, Mosaic (NYSE: MOS) quadrupled. You didn't need to be an insider to get those gains. You only needed to examine the fundamentals and be brave enough to buy, and then hold.
There are risks to buying and holding, of course. Consider tax titan H&R Block (NYSE: HRB). Had you bought at the dawn of 2001 and held till today, you'd be up more than 80%. But you'd have more than doubled your money had you sold at the end of the year.
Either way, though, you'd have won. The market has lost more than 23% of its value over the past eight years.
Kick the market when it's down
The lesson? The way to beat a broken market -- the sort that Stewart so viscerally fears -- is still to bet on the best businesses over the very long term, businesses that resemble the best stock idea I've ever seen. These companies:
- Produce abundant free cash flow.
- Sustain high rates of revenue growth.
- Demonstrate sustainable advantages by way of expanding gross margin.
Marvel Entertainment (NYSE: MVL) is a good example. Combined, his picks and those of his brother Tom are up more than 39% on the market as of this writing.
Best Stock for 2009 to make you rich
Have you made the mistake of opening your retirement plan statements lately?
According to researchers at the Urban Institute, retirement accounts have lost a collective $3.4 trillion since October 2007. As a result, people are pulling money out of the market -- stock mutual funds lost $5.2 billion in the week ending April 15 alone.
It's understandable if you've been tossing those statements unopened. It's certainly ugly out there, but consider this: Where would you be right now if you hadn't been saving for retirement at all?
All the difference in the world
The thing is, the very act of saving money for your retirement matters far more than the rate of return you get on that invested cash. If you save a large enough chunk of your salary, even at very modest rates of returns, you can wind up with more money than if you saved a smaller amount yet enjoyed higher returns.
Over 50 years, for instance, saving 15% of a $50,000 salary but earning a 3% annualized return handily beats saving 1% of that same salary but earning a 10% annualized return.
| Save 1% per Year | Save 15% per Year | |
|---|---|---|
| 3% Annual Return | $56,398.43 | $845,976.50 |
| 5% Annual Return | $104,674.00 | $1,570,109.97 |
| 10% Annual Return | $581,954.26 | $8,729,313.97 |
Assumes smooth returns and no raises.
Saving a significant chunk of your salary across your entire career means you're practically guaranteed to wind up better off than someone who saved virtually nothing at all. And if you do manage to see returns that approach the market's historical long-run 10% per year, just check out how very large the difference can be.
So, if you're hoping to wind up wealthy, the first step is to start saving as much as possible as soon as possible. Without that strong foundation of savings, there's virtually no way the market will get you there. With it, you're simply that much more likely to amass a significant chunk of money.
If you don't happen to have your whole career ahead of you, you may still wind up wealthy -- but since you won't have as many years for compounding to work its magic, it's even more critical for you to save a larger chunk of your cash.
Is it safe to invest yet?
As the chart above demonstrates, the more you save, the more that compounds -- but the higher the rate of return that applies to that savings, the more you'll end up with in the end.
The stock market has been a tremendous tool for building wealth over the long term -- despite its abysmal performance since the end of 2007, or, for that matter, during the Great Depression.
But even if the market never again provides double-digit annual returns, the fundamental truth from that first chart still applies. The more you're able to save, the more you'll end up with, regardless of your returns. That holds true regardless of whether you wind up earning 10% annually or 3%.
Additionally, at some point, the stock market is going to reflect business realities. While the market and the overall economy may be contracting, not every company is on the verge of failing. Just take a look at these companies and how they've performed this year,they may turn out to be the hot stocks worthing to buy:
| Company | TTM Net Earnings |
|---|---|
| AT&T (NYSE: T) | $12,530 |
| Microsoft (Nasdaq: MSFT) | $17,230 |
| Wal-Mart (NYSE: WMT) | $13,250 |
| Verizon (NYSE: VZ) | $6,430 |
| McDonald's (NYSE: MCD) | $4,350 |
| CVS/Caremark (NYSE: CVS) | $3,330 |
| Kraft Foods (NYSE: KFT) | $1,850 |
With earnings like that amid a deep recession, there's good reason to believe they'll survive this mess and once again thrive as the economy recovers.
With the right long-term perspective and an investing strategy that's centered on a commitment to savings, you can still wind up wealthy over time.
The long term, one day at a time
Whatever your long-run returns, the most important piece is saving the money in the first place. Once you have retirement savings, you can make smart choices that will make sure you can retire in style -- but it won't happen unless you save.
top stocks as good as gold
At the very mention of gold, images of value, stability, and growth pop into my head.
It's not hard to understand why. For decades, the precious metal has been marketed as an attractive investment, and a great way to hedge inflation, recession, and almost every other economic bogeyman.
In spite of gold's allure in volatile times such as these, the true long-term performance of gold lags stocks by a significant margin. But investors don't need to give up the shiny lure of stability to earn better returns in stocks. Some hot stocks out there are as good as gold -- and many are even better.
Chasing shiny trinkets
As a new investor, I was drawn to growth. This led me to buy -- or seriously consider buying -- shares in tech darlings such as Juniper Networks (Nasdaq: JNPR) and Nortel Networks (NYSE: NT) in the 1990s.
But while these top stocks were shinier than gold for a while, the luster wore off after the bubble burst in 2000. Each stock shed more than 80% of its value in the ensuing years. Juniper is slowly coming back to life, but Nortel is still trading in the pennies.
These companies aren't necessarily poor businesses -- the fundamental conditions just didn't support the share price. I would have been far better off had I understood what demented guru Jeremy Siegel pointed out in his book The Future for Investors: Regular investments in stable, dividend-paying stocks are ultimately the best place for long-term cash.
You can have it all
Dividend payments to shareholders are a significant stabilizing factor in a stock's return. They help smooth out the ups and downs of the market over time, and they indicate that the company is generating cash. Just like gold, steady dividends protect investors from bear markets. But even better than gold, dividends also help boost returns.
For instance, look at the long-haul performance of these dividend-paying stocks:
| Company | 20-Year Performance |
|---|---|
| Allergan (NYSE: AGN) | 1,131%* |
| First American (NYSE: FAF) | 1,514% |
| 3M (NYSE: MMM) | 472% |
| Pfizer (NYSE: PFE) | 756% |
| Wells Fargo (NYSE: WFC) | 1,439% |
| S&P 500 | 182% |
| Gold | 134% |
*Return since May 22, 1989.
Now, lest I be accused of cherry-picking these examples, consider this: The Vanguard Windsor II (VWNFX) fund, our proxy for stocks with above-average yields, returned a market-beating 362% over the trailing 20 years.
Each company above had a long operating history in a relatively stable sector, providing investors a defensive edge with low long-term risk. Even with the dramatic increase in the price of gold in the past few years -- and the pummeling of banks like Wells Fargo -- the table above shows that dividend-paying stocks leave gold in the dust over extended time frames. And the difference is even more dramatic as you look at longer time frames.
Consistent dividend payments to shareholders, even during the sort of economic tough times we're enduring today, have made many of these companies long-term winners. This cash yield helps boost shareholder returns in the company, because more shares are purchased when the stock is depressed. One crucial point, though: To realize the full benefits these hot stocks provide, investors must reinvest the dividends.
Regain your luster
Dividend-paying stocks give investors the ability to survive years of market turmoil, and through reinvesting, to make more money along the way. That's about the best hedge imaginable against economic bogeymen.
May 1, 2009
Stocks worth watching again
Over the past year, we've been chronicling companies that seem mere inches away from going six feet under. As we've noted, not every company will give up the ghost. But since our original column, quite a few have either disappeared entirely, or seen huge drops in their share prices: Fannie Mae, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, and XM Satellite Radio (now half of Sirius XM Radio (Nasdaq: SIRI)), to name just a few.
To compile our ghoulish list, we check for hot stocks that have earned a minimum one-star rating from the more than 130,000 savvy investors in our Motley Fool CAPS community. Then we pair that information with various financial ratios that signal the Grim Reaper's approach as clearly as a pack of circling vultures.
Let's look back at some of the hot stocks we previously deposited at death's door:
| Stock | Price at First Appearance | Price Today | % Chg |
|---|---|---|---|
| Lee Enterprises | $2.87 | $0.39 | (86.4%) |
| MiddleBrook Pharmaceuticals (Nasdaq: MBRK) | $2.08 | $1.48 | (28.8%) |
| Nortel Networks | $6.15 | - | * |
| Standard Register | $9.35 | $5.51 | (41.1%) |
| Unisys (NYSE: UIS) | $3.82 | $1.17 | (69.4%) |
| CA | $23.89 | $17.35 | (27.4%) |
| Daimler (NYSE: DAI) | $59.54 | $35.95 | (39.6%) |
| Raser Technologies (NYSE: RZ) | $8.39 | $3.92 | (56.2%) |
| Knology | $9.64 | $6.83 | (30.6%) |
| Ryland Homes | $20.15 | $24.04 | 19.3% |
| Auxilium Pharmaceuticals | $39.86 | $23.51 | (40.1%) |
| Columbia Labs | $3.58 | $1.45 | (59.5%) |
| EMCORE (Nasdaq: EMKR) | $5.42 | $1.23 | (77.3%) |
| Empire Resorts | $3.41 | $1.50 | (56%) |
| Mentor Graphics | $12.48 | $6.86 | (45%) |
*Filed for bankruptcy on Jan. 24, 2009.
Over the months since these companies first appeared, Nortel Networks filed for bankruptcy, while newspaper publisher Lee Enterprises hangs on by the slimmest of margins, in the hopes that some new plan saves the industry.
Whistling past the graveyard
Living well is said to be the best revenge; similarly, successful proofs of concept could be the best retorts for critics of your company. Raser Technologies is hoping it can survive the credit crunch to show up those who mocked its geothermal-power efforts as no more than smoke and mirrors.
Raser has a couple of irons in the fire to stoke its future growth. It develops both geothermal power and alternative forms of energy to power extended-range plug-in hybrid vehicles. Its 10-megawatt geothermal plant in Utah recently began delivering electricity to power 7,000 homes in Anaheim, Calif. Utah's governor has also signed bills to help companies tap the state's vast geothermal resources, demonstrating that Raser has the potential to get things done.
The unveiling of a prototype plug-in hybrid version of General Motors (NYSE: GM) Hummer, however, is less remarkable. Sure, SUVs are a popular choice of car buyers (at least when gas isn't hovering at $4 a gallon), but the automaker is already doing away with the Hummer model and killing other next-generation big SUVs like the Tahoe and Suburban. When GM's already having difficulty selling low-priced fuel-efficient cars, allocating scarce resources to expensive, hulking machines like a Cadillac Escalade or a Hummer that will "go green" at just 20 mpg doesn't make any sense.
Yet much of Raser's business depends on access to capital, and the ability to finance construction of facilities. At the end of last year, it had only $1.5 million in cash available, while its operating activities consumed nearly $23 million for 2008. The dearth of credit in the market could make future successes for Raser tough to come by.
5 Cold Stocks Heating Up
Think of investor sentiment as a pendulum that swings in tandem with a company's share price. When investors begin to think highly of your company, its stock might also start heading in the right direction. Alas, you can rarely tell when investors are warming to a stock until after it has made that upward swing.
An astrolabe for investors
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 130,000-plus members, offer a great way to monitor investor sentiment. Like astronomers scanning the skies, investors can follow a stock's stars through its CAPS rating trend, tracking investor sentiment to help determine the best time to invest. So let's look at companies previously rated one or two stars that recently enjoyed a bump in investor confidence to see whether the stars are aligning in their favor.
here are the hot stocks in the near future:
| Company | CAPS Rating (out of 5 max) | Recent Price | Next-Year EPS Growth Estimate |
|---|---|---|---|
| Cenveo (NYSE: CVO) | *** | $4.87 | 50% |
| Hospitality Properties Trust (NYSE: HPT) | *** | $11.97 | (4%) |
| Ligand Pharmaceuticals (Nasdaq: LGND) | *** | $3.00 | 23% |
| PIMCO Corporate Opportunity Fund (NYSE: PTY) | **** | $8.98 | NA |
| Progenics Pharmaceuticals (Nasdaq: PGNX) | *** | $5.71 | 12% |
Source: Motley Fool CAPS.
Obviously, this is not a list of stocks to buy -- just a starting point for further research. Yet if some investors are taking notice of these stocks, maybe we should, too.
The sun's always shining somewhere
Ligand Pharmaceuticals has gotten a boost from a number of positive developments from its therapies. Its partner Pfizer (NYSE: PFE) received European approval for the osteoporosis treatment Fablyn, earning Ligand a $3 million milestone payment, and an alliance with GlaxoSmithKline (NYSE: GSK) earned Ligand half a million dollars after it identified something that could lead to a new drug being developed. It has earned more than $18 million in milestone payments thus far because of its collaboration with Glaxo.
Such achievements continue to attract investors like CAPS All-Star zzlangerhans, who follows drug stocks and notes Ligand's strong cash position.
I've been looking for a bigger pullback in Ligand given weak knees in the past but I'm getting tired of standing on the sidelines as the company continues to progress its pipeline. Mixed news on Fablyn since my last pitch-a Complete Response from the FDA but [European] approval. I was expecting negative news from the FDA which is part of the reason I kept my green thumb off the stock in recent weeks. They should start booking Promacta royalty revenue within the next quarter or two. … Despite positive developments the share price remains well below year-ago levels. A strong cash position gives the company time to prove they can book revenues and continue to make deals with large pharma on late stage pipeline candidates.
Stock investment: Make Money in Any Stocks Market
You may have noticed The Daily Reckoning has run several keen insights from Barry Ritholtz over the past few weeks, including his essay, "Downsizing America."
Barry's a regular on CNBC's Squawk Box, Kudlow & Company, Power Lunch, and Fast Money; as well as on Bloomberg, CNN, Fox, and PBS.
His blog, The Big Picture, has been read by over 40 million readers. But, that's not why we're writing to you today...
In his soon to be released book, Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy, Barry, among other scandals, uncovers the dirty truth behind the AAA ratings that Wall Street's agencies continued to give toxic subprime assets - even after the credit crisis began.
In an effort to quash the truth, McGraw-Hill - the original publisher - dropped Barry's book contract. McGraw-Hill, as it turns out, also owns S&P... one of the companies Mr. Ritholtz takes aim at in the book.
Who knows what kind of back room panic his insights caused up the ladder. Fact is, you'd be hard pressed to find in recent history a more blatant attempt to strong arm a writer into silence.
As soon as I heard what was going on, I knew Barry was our guy... this is information you can't afford to be without! I ran it up our own flagpole here at The Daily Reckoning and before you know it...we were in full on talks with Mr. Ritholtz.
Since our initial discussions, we've gotten to know Barry pretty well. He's a true "numbers" guy. His predictions have been amazingly accurate over the past few years. It's no surprise to me why he's become one of the most in-demand investors of our time.
Fortunately, Barry has developed what could be one of the most effective tools ever for an individual investor who feels mislead by all the noise coming out of the media during this most challenging market.
And that's the real reason we're writing today. As a result of our interest in his book and his story, we can now offer you an incredible side benefit: Barry's insight on the market at an extremely advantageous price.
In the report below, he'll show you all of his secrets to investment success and help you avoid the pitfalls of investing in this post- bubble environment. Hope you enjoy.
This is one tough market."
I hear that in the office every day - from individual investors, professional traders and money managers alike.
These markets are brutal, and the competition has been relentless.
For the individual investor, it's important to understand exactly who makes up your competition.
Your competition is everyone else who's buying or selling top stocks. They, too, are looking for ways to produce positive returns.
But it's not just people like you who make up your competition...
Consider what Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:
"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'
Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared - the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."
The "institutions" Ellis refers to are mutual funds, hedge funds, and program traders - and all of their professional staff, mathematicians, and researchers assisting them.
These pros deploy every possible tool they can to give them whatever edge they can get. And when even they are having a hard time, that means it's a very tough trading environment.
Despite the stiff competition, many folks step onto the playing field with the pros.
But they're not prepared. Not even close.
That's why we developed a powerful tool that places you on an even footing with the pros.
Here's One Simple Way to Beat the Pros at Their Own Game...
You see, it's an arms race between you and the big boys who have developed very powerful trading tools.
If you want to be a successful trader, you need to be as efficient and productive as possible. Often times, the guy on the other side of your trade is one of those pros. And you better watch out. Because...
I've seen the largest trading floors in the world. The tech the pros have at their disposal, the data they can call up; it's impressive. The pros have spent tens of millions. And they spend years learning their systems in front of a screen.
That's what you're up against. That's your competition
In short - we've found a way to prepare you for any outcome the market can spit out.
It's a software tool called FusionIQ.
It marries fundamental and technical analysis to help you trade better in any market.
FusionIQ helps manage risk. It can also help you find new trading ideas.
This is what Barron's had to say about FusionIQ:
"FUSIONIQ'S MODELS blend fundamental and technical metrics to determine the strength of some 8,000 publicly traded equities. They identify the most tradable issues and sectors with the lowest component of risk. FusionIQ also finds issues with unusual short-term strength or weakness, issuing Buy and Sell signals accordingly. In general, FusionIQ recommends subscribers hold a rolling portfolio of 15 to 20 issues for the intermediate term."
FusionIQ has you covered. Here's how...
The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a best stock or a commodity position.FusionIQ can get you thinking about selling, tightening up stop losses, or hedging positions long before they hit bottom.
If you are going to manage your own portfolio, then you have to learn to manage your risk. Finally, for the regular investor, realize that you are trading against thousands of people and funds that have tools like this. Putting a system like FusionIQ on your side is the least you can do.
Here are the details...
Your Independent Path to Protection AND Profits
I'm Barry Ritholtz. You may know me from my blog, The Big Picture, which has quickly amassed over 40 million visitors, or my upcoming book Bailout Nation.I've also been profiled in the Wall Street Journal's "Quite Contrary" column. Or, perhaps you have seen me on TV, where I've been appeared on numerous stations, including CNBC, Bloomberg, Fox, and PBS.
Working with my partner, we have been trading these markets for a collective 50 years, we looked at all the ways we can apply technology to tilt odds in our favor.
All the big proprietary trading desks - banks like Goldman Sachs, huge hedge funds like Pequot and SAC - spend tens of millions of dollars to assist their decision making.
We decided some time ago that if we wanted to compete on this playing field, we needed something to even up the odds.
During the tech wreck and dot com collapse of 2000-03, my partner Kevin Lane came up with an idea. What if we could create a database to track various indicators for hot stocks and markets?
The idea was to pull only the most important stock factors into one location. Not to merely screen the market, but to actually rank all of the most hot stocks from worst to best, based on both earnings and ownership metrics, as well as the charts.
This way, we would have a timely method to measure important technical AND fundamental metrics.
After years of brainstorming, we selected and, more importantly, eliminated a variety of stock metrics. Lots of back-testing went into the final product.
We found ourselves using the tool more and more. Kevin had famously recommended shorting both Enron and Tyco during the dot com crash, and the tool had a lot to do with that. (Business Week even wrote an article about it called, "Analysts Who Get It".)
With the goal of making smarter, more informed trading decisions, we sought ways to create better returns with less risk.
By combining good fundamentals and strong technical momentum characteristics, we found we could identify not only what to buy or sell, but when.
That's how FusionIQ was born.
In 2006, we formed Fusion Analytics Investment Partners LLC. We developed our algorithms and beta tested everything throughout 2007. The software was launched at the current site in late 2007.
How Does FusionIQ Work?
The software uses our unique combination of fundamental and technical indicators to rank over 8,000 top stocks, ETFs, and closed-end funds. The rankings range from 0 (worst) to 100 (best).
These provide insight into stocks that are more likely to outperform, as well as identifying what stocks price should be avoided. From there, we apply our proprietary algorithms, generating BUY, SELL, and NEUTRAL signals. For more aggressive traders, the system identifies breakouts and breakdowns, short squeezes, and other trading opportunities.
For long-term investors, we developed a way to help manage risk in your holdings by creating a Portfolio Watchlist. This allows you to enter all of your current holdings, which are automatically ranked and monitored. You can easily keep tabs on your portfolio holdings as their FusionIQ rankings change.
Stocks ranked 70 and higher are candidates to keep, while lower-rated best stocks should be reviewed for removal from a portfolio. For investors who do not like the buy & hold mantra, you can trim your portfolio using our BUY, SELL, and NEUTRAL signals. These signals are generated when specific conditions are met. It is both objective and neutral.
In 2008, the sell signals helped us avoid a lot of trouble. We recommended selling or shorting Bear Stearns when it was over $100. We very publicly said the same about AIG in early 2008 (and Bloomberg wrote a story about it called, "Fusion IQ's Ritholtz Expects More Writedowns at AIG").
We also told readers to sell Fannie Mae (over $40) and Lehman Brothers (over $30). While we caught some grief for these calls early on from fans of the companies, in the end our clients and investors thanked us. All of these calls were made using the FusionIQ system. And I'm sure you know how they ended up playing out...
Here are some recent signals and rankings from the FusionIQ software...
General Motors (GM)
Back in November 2008, we looked again at General Motors as it was under pressure with liquidity concerns. The only hope seemed to be a big-time government bailout, or perhaps consolidation with another automobile or truck manufacturer.
Using FusionIQ screens, however, kept us ahead of the curve.
As seen below on this yearly GM chart, our unbiased screening system has had GM ranked extremely low (an 18 Master, 10 Technical out of 100 as of that November date) with multiple sell Triggers.
These sell alerts would have woken an investor up that something was wrong with the underlying firm. That is something that will not show in the earnings or conference calls until it's too late.
Look at this GM chart on November 10th, 2008. We called it... and protected your investment!
Even more shocking than the GM chart is the AIG yearly chart. In addition to our ranking and timing indicators (see all the sells), Fusion Analytics published a sell on AIG for our institutional clients on 2/13/2008 at $46.14.
The first government bailout of AIG was not good enough, so they had to try, try again. In November, the US government announced that they would sweeten the pot in another attempt to save the firm.
This AIG chart shows the same story...we're safeguarding your assets!
It's not only the sells - we find many buys this way too.
FusionIQ Identifies the Time to Sell - AND The Time to BUY.
Recently Netflix Corp. (NFLX) caught our eye. As the chart below shows, NFLX had a new FusionIQ timing BUY signal in mid-December.
Since then, despite the market's overall softness, there was technical strength in the stocks market. As seen below, NFLX shot up almost 30% since that buy signal.
This Netflix (NFLX) chart shows how you have the chance to profit.
Active traders can use FusionIQ's short-term trading signals. These are mostly technically based, as opposed to the Fusion of technical and fundamental data used to arrive at our scoring system.
These trading signals can be used as a wakeup call that something may be changing and your analysts need to dig deeper.
Also, many clients use these signals as a way to trade around their core holdings (adding alpha).
These charts that follow ... if you were long these names in your portfolio, do you think these heads-ups might have helped? These charts are just a snapshot of what FusionIQ can do for you...
This ALCOA chart shows an early warning of danger lurking ahead!
This Mosaic chart shows you how you can avoid catastrophic losses!
As you can see, with FusionIQ on your side, you would've had the right information at your fingertips months ahead of time.
There's no way you would've experienced the huge down swings some investors saw on Alcoa and Mosaic.
You would've saved money. Saved time. That's why you need FusionIQ...and that's why you can:
Try FusionIQ Today - At 20% Off the Normal Price
Buys. Sells. FusionIQ can offer you both.
That gives you the same power as your pro trader competition.
Years in development - and years to test. Now it's ready.
FusionIQ is ready to help you beat the competition - and make healthy, competitive returns in this difficult market.
Plus, if you'd like to give FusionIQ a risk-free try, you can get it right now at a steep discount.
The special price for Daily Reckoning readers is $39.95 a month (regular price is $49.95 /month), and you will get the full FusionIQ system as part of this offer.
That's a 20% discount. Just to give FusionIQ a try.
It could be the edge you need to beat the competition - and turn 2009 into one of your best years ever.
Stocks rising on a raft of regrets?
Folks who couldn't sleep nights because of stock market worries -- and finally pulled out -- no doubt wish they'd waited. Their next moves could help determine when the bull storms back.
On a frigid Saturday afternoon in early March, I stood on the sidelines of a youth soccer game with a friend who was shivering for reasons that had little to do with the weather.
Stocks had just concluded another brutal week, closing down 56% over the past 17 months, and she could not get the market off her mind. A widow who depends on her investments to pay necessities such as the mortgage and health insurance, she was being forced to contemplate a major change of lifestyle.
A couple of days later, after the stock market had rallied a touch off those historic lows, she e-mailed to say her financial adviser, who had preached long-term investing for years, sent her the following e-mail: "I write with a recommendation that we sell your investment securities -- stocks and bonds -- and park the proceeds in cash. . . . I am ranking capital preservation a higher priority now."
You know what happened next. After the decision to keep her fully invested during the stock market had cost a fortune, the adviser managed to exit just before stocks rose 20%-plus. And so my friend's portfolio -- her livelihood, not a speculative plaything -- has been left in the cold.
Regret stirs the bull
Multiply this experience by tens of thousands and you will better understand what's happening these days in the market.
All those investors who sold heavily in February and March, when volume blasted to multiyear peaks and prices spiraled into the ground, now face the two most vexing investor maladies of them all: not the usual two-headed devil of fear and greed, but the fearsome pairing of regret and envy.
And oh, baby, is regret corrosive. Every day you see the market rise when you're out of stocks after taking a big loss eats at your mind like an acid. It burns at your psyche until you'll do anything to make it go away. And because there is only one thing that can make that happen -- buying stocks on the rise -- you can see why stocks have relentlessly jumped higher of late. Every little dip is met with buying, and every big dip is met with even more buying.
A flu scare in Mexico? Bring it on. That's just the sort of headline-creating event that bears lust for in an environment like this, hoping it will validate their point of view. Yet paradoxically, it's much more likely to create a vacuum into which regretful buyers will lunge.
Given the slightest spark, the psychology of regret can force fund managers and retail investors into the market almost against their wills, and so can begin the next big bubble and boom. And as cynical as I am about company fundamentals and government intervention of late, this realization has helped turn me positive on stocks in the past month. It's not a matter of being bullish or bearish on the economy but being opportunistic for stocks -- more like a hawk than a lumbering ground-bound beast, scouring the savannah from the air for sustenance.
Strangely enough, veterans will tell you this is actually how most bull cycles start: in disbelief and rage. You might think bear markets end when the economy begins to improve in a pervasive way and big companies start to report better earnings. But that's a fantasy, a children's fable. Just as bear markets begin when everything is great, bull markets begin when everything stinks.
The inflection point comes when emotions run so high that economic and investment decision makers overcompensate. The economy hits bottom, for example, when industrial and retail purchasing managers get so pessimistic about future sales that they stop buying stuff to move through their factories and stores. And the market hits bottom when stocks have been run down so much that there are basically no more sellers -- when the last holdout, like my friend's fund manager, throws in his chips.
Suddenly, then, on the factory floor, the mall and the Wall Street trading room, there is simply no more supply. And so the big market forces, the patient old families in Manhattan and London who end up with all the money decade after decade, recognize this change of mood and charge in to provide capital for industry, and buy stocks and property like mad. It's no wonder that Wilbur Ross, the greatest distressed-debt buyer and industry builder of our era, just announced that he'll form a fund to buy toxic securities from the banks so long as the government has his back.
Are the last now first?
Manipulation? You bet. Since time immemorial. I've been researching the investment climate of the 1860s to 1920s for a book, and trust me, it was no different back then. Industrial titans such as Jay Gould regularly created the illusion of panics so they could stampede the public into selling, and then they'd purposefully swoop in at the lows and make out, literally, like bandits before retreating back to their mansions and redeploying the proceeds into real estate.
The telltale sign of the move off an important bottom comes when the absolute worst stocks rise the fastest. And what have we here: Banks, which are nowhere close to making a real economic profit despite their claims, have risen 100% to 200% off the March lows in recent weeks. So have many of the small and midsized retailers that I've recommended in my columns and newsletter lately, such as Lululemon Athletica and Office Depot.
Same with the beaten-down techs, such as Quantum and Unisys, which I told you about a couple of weeks ago. Since then they've doubled, then pulled back a bit.
It's only at these really important turning points that the last shall be first, as short-sellers are forced to cover, and then the slightest improvements in results can spark the imagination of more fundamentally inclined buyers. On Tuesday, Office Depot rallied 30% in a couple of hours after reporting a massive first-quarter loss and the closing of 107 stores, as the results were better than pessimists had expected.
So has a bull market begun, or is this just a rally within a bear market? Maybe that's the wrong question, much as it was in the late 1960s and the 1970s, when the Dow Jones industrial average ($INDU) regularly bounced up and down between 650 and 1,000. There was never quite a long-term move in either direction -- just rolling cycles of pain, regret and envy that wore everyone out until they got the joke.
At this point, the key issue that all sides must recognize is that the U.S. government and Federal Reserve have declared war on depression and will do what it takes to win. They will let banks paper over insolvency, they will provide loans until kingdom come for bankrupt automakers, and they will print money until the presses wear out. They have decided that what's good for Citigroup and GM is good for America, and woe betide the bears who wag tut-tutting fingers of disrespect.
Green shoots and squeeze machines
Considering that at least half the economic cycle is about confidence, just shoring up the psyche is enough to get the ball rolling. Whether you call it green shoots or little green men, good stuff is happening out there in the real economy: Layoff announcements are receding, new unemployment claims are declining, U.S. business and consumer confidence is rising, Germany's business activity is quickening, South Korea's gross domestic product is picking up, U.S. existing- and new-house prices and sales are ticking up, Japanese exports are swinging higher, Taiwan's leading index is higher, and container exports at the Long Beach, Calif., harbor are rising.
More importantly, here at home, the Economic Cycle Research Institute's weekly leading index, which I explained a couple of weeks ago, continues to move higher, suggesting that a cyclical business upturn lies ahead.
This is not about hope or misperceptions. It's about both economic and investment activity having swung so far in one direction that it was time to swing back. Boom, bust, panic, crisis, depression, we've had it all -- and with central banks pumping money into the global financial arteries at a breathtaking pace, we're now likely headed back. Strap in. It'll be bumpy but exciting.
Michael Belkin, an independent analyst who has called the bull and bear cycles well since his days at Salomon Bros. in the early 1980s, said you should just think of the market as a "big squeeze machine" -- constantly forcing the majority to do the wrong thing at the wrong time, such as seeking safety when it should be taking risk. At the moment, Belkin, who was a bear's bear for most of the past three years, is encouraging his clients to buy out-of-favor industrials, financials and region-specific securities like General Electric the Financial Select Sector SPDR and the iShares MSCI Italy Index Fund for moves to their 200-week averages, all of which are more than 100% higher than the current quotes.
April 30, 2009
Making cash with the following best stocks
Had Jerry Maguire been an investor of best stocks making cash instead of a fictional sports agent, he might have become famous for yelling, "Show me the cash flow!"
Earnings come and go, and the green-eyeshade types can legally manipulate that metric to mask a company's true operations. Yet its ability to generate cash -- what comes in the register and goes out the door -- remains the preeminent indicator of company's worth. In short, cash is king.
Below, we'll look at companies that have proven themselves prodigious generators of free cash flow (FCF) -- the amount of money a company has left over that it could potentially pay to its investors. We'll find companies that have generated compounded free cash flow growth rates exceeding 25% annually over the past five years, then pair them with the opinions of the more than 130,000 members of the Motley Fool CAPS investor intelligence community, to see which ones might have the best chance of outperforming the stock market.
| Company | Levered FCF 5-Yr. CAGR, % | CAPS Rating (5 Stars Max) |
|---|---|---|
| Amazon.com (Nasdaq: AMZN) | 38.9% | ** |
| Chemical & Mining Co. of Chile (NYSE: SQM) | 40.3% | ***** |
| NetEase.com (Nasdaq: NTES) | 41% | **** |
| Take-Two Interactive (Nasdaq: TTWO) | 43% | **** |
| Terex (NYSE: TEX) | 33.5% | ***** |
Source: Capital IQ, a division of Standard & Poor's; Motley Fool CAPS.
CAGR=compounded annual growth rate.
Generating copious amounts of cash doesn't make a company an automatic buy. But having looked at Enron's cash flows instead of its earnings would have saved many investors a lot of grief. Warren Buffett understands that the value of a company today is calculated by its discounted future cash flows. Let's use this list as a jumping-off point to dig deeper into these companies and their piles of cash.
Ka-ching!
It's probably most exciting to discuss lithium battery production when considering Chemical & Mining Co. of Chile, or SQM for short. The company definitely stands to benefit from the push for alternative-energy vehicles, and the potential for plug-in cars like the super-sleek Tesla. However, SQM's lithium carbonate production accounts for only about 15% of its revenue. Its potassium production and other specialty plant-nutrition products are much more important, collectively generating half of the company's sales.
SQM's earnings report ought to give some hope to other fertilizer producers such as PotashCorp (NYSE: POT) and Agrium (NYSE: AGU). The potassium producer saw a 33% increase in earnings, with operating profits climbing 39%, despite a slightly lower level of sales volume. In contrast, analysts anticipate that in their current quarters, PotashCorp's profits will drop 47%, and that Agrium will post an 80% drop year over year. SQM was able to command higher prices while lowering costs, and it expects the fertilizer and industrial markets to recover by the second half of the year.
The lithium component of its business has been growing each year, and SQM is the world's largest producer of the mineral. For that reason, CAPS member strat91 thinks the mining company may have the inside track for growth:
If lithium battery technology becomes the favored technology for hybrid vehicles, sqm is in one of the best positions to fill the lithium demand. Lithium batteries weigh considerably less than the NiMH batteries currently used in the Prius. I'm not sure if the hybrid or the electric car is a viable long term solution, but it will be in demand for several years to come.
3 best Stocks Ready to Roar
There are plenty of strategies for picking stock winners. You can seek out low-P/E stocks, for example. Or you can find companies selling at a discount to their future cash flows. At the small-cap stock-picking service Motley Fool Hidden Gems, our analysts look for winners by staying ahead of the market and finding undervalued stocks that have gone overlooked.
Yet what if we could find a way to whittle down our list of prospects beforehand and find those whose engines are just getting warmed up?
Using the investor-intelligence database of Motley Fool CAPS, I screened for best stocks that investors marked up before their stocks began to rise over the past three months in a market that has headed south in a dramatic fashion. My screen returned 114 stocks when I ran it and included these recent winners:
| Stock | CAPS Rating 10/28/08 | CAPS Rating 1/28/09 (out of 5) | Trailing-13-Week Performance |
|---|---|---|---|
| Wyndham Worldwide (NYSE: WYN) | ** | *** | 46.2% |
| Nektar Therapeutics (Nasdaq: NKTR) | ** | *** | 33.6% |
| Century Aluminum (Nasdaq: CENX) | ** | *** | 0.3% |
Source: Motley Fool CAPS screener; trailing performance from Jan. 30 to April 27.
Wyndham Worldwide, in fact, was identified as a hot stock ready to run in January and has soared so far. But we want to know what hot stocks we ought to be looking at today. So I went back to the screener and looked for stocks that have just risen to a rating of three stars or better, carry valuations lower than the market's average, and haven't moved up in price over the past month by more than 10%.
Of the 41 the screen returned, here are three that still have attractive prices and that investors think are ready to run today:
| Stock | CAPS Rating 1/27/09 | CAPS Rating 4/27/09 | Trailing-4-Week Performance | P/E Ratio |
|---|---|---|---|---|
| Vail Resorts (NYSE: MTN) | ** | *** | 9.3% | 10.3 |
| Hatteras Financial (NYSE: HTS) | ** | *** | (5.9%) | 6.8 |
| CIBER (NYSE: CBR) | ** | *** | (1.3%) | 6.1 |
Source: Motley Fool CAPS screener; price return from April 3 to April 27.
Though the results you get may be different, since the data is dynamically updated in real time, you can run your own version of this screen. But let's look at why investors might think these companies will go on to beat the market.
Vail Resorts
With capital projects completed and real estate on new luxury resorts sold out, Vail Resorts didn't take a powder with this past quarter's results. But CAPS All-Star TSIF isn't too sure Vail can avoid a downhill course once the seasonally slow summer months arrive.
Vail resorts is a cyclical stock at best, with the bulk of earnings announced in the lagging summer quarter. The price per share is usually lowest in July. I really don't know what this mountain wonder will do going into this summer under such a negative outlook. Cash on hand is half of what it was a year ago. [Weathered] well on paper, but losing quarters the last two quarters sets things up to look pretty dismal. I suspect the next year will not be as pretty as their real estate and I believe it is down a steep hill from here with [slaloms] mixed in. Jump!
Hatteras Financial
A REIT created for the express purpose of investing in Fannie Mae and Freddie Mac mortgages, Hatteras Financial is attracting investors such as CAPS member normniner, who enjoys the "big dividend yield" that comes from investing in government-insured securities.
CIBER
As a pure-play system-integration consultancy that serves private- and government-sector clients, CIBER may benefit from the return to the U.S. of jobs that had previously been outsourced. Sallie Mae (NYSE: SLM), for example, is repatriating 2,000 jobs from India, Mexico, and the Philippines. The difficult economic environment may still make many companies want to do certain jobs in house. CAPS member perfectblues thinks that CIBER's low valuation may offset some of the negative factors surrounding the industry: "May not be your best long term play, but right now it is looking cheap."
These Are the Market's Best Stocks
The best stocks? Is that really what I'm going to write about, after a year in which the S&P 500 dropped by nearly 40%?
Yes, it is. You learn pretty rapidly in this business that the best way to make money in the market is to invest for the long term, and you recognize that volatility is part of the ride. And when you commit to the long term, you quickly discover that the stocks that offer the best returns today aren't well-known, widely owned names.
But I'm getting ahead of myself. Before I can get to the takeaway, I have to show you the data. This is a simple list of the top-performing stocks of the past 10 years. I compile this list at the end of every year, and every year it yields the same fascinating insight:
| Company | Return, 1999-2008 | Jan. 1, 1999, Market Cap |
|---|---|---|
| Hansen Natural | 4,891% | $53 million |
| Celgene | 4,214% | $252 million |
| Quality Systems | 4,130% | $26 million |
| Clean Harbors | 4,129% | $16 million |
| Green Mountain Coffee Roasters | 4,122% | $19 million |
| Deckers Outdoor | 3,551% | $19 million |
| Almost Family | 3,171% | $9 million |
| Southwestern Energy | 2,990% | $187 million |
| FTI Consulting | 2,879% | $16 million |
| XTO Energy | 2,839% | $343 million |
Data from Capital IQ, a division of Standard & Poor's. Includes only U.S.-listed stocks with verifiable stock price histories on major exchanges.
The trait that sets these stocks apart
What does an energy-drink maker (Hansen) have in common with a biotechnology leader (Celgene)? A home-nursing practitioner (Almost Family) with the makers of Ugg boots (Deckers)? A natural-gas driller (XTO) with some guys who sell java (Green Mountain)?
On the face of it, not much. But if you look closely, you'll see that these were all very small companies when their amazing stock market runs began.
To see just how important it is to start small in the stock market, take a look at the returns that the 10 best large caps offered over the same period of time:
| Company | Return, 1999–2008 | Jan. 1, 1999, Market Cap |
|---|---|---|
| China Mobile | 574% | $20 billion |
| BHP Billiton | 554% | $16 billion |
| Telmex | 546% | $19 billion |
| Royal Bank of Canada (NYSE: RY) | 243% | $15 billion |
| Southern | 237% | $20 billion |
| Bank of Nova Scotia | 232% | $11 billion |
| ConocoPhillips | 143% | $11 billion |
| Rio Tinto | 187% | $16 billion |
| Nike | 184% | $12 billion |
| ExxonMobil | 171% | $178 billion |
*Data from Capital IQ, adjusted for dividends.
Or the somewhat more dynamic mid-caps:
| Company | Return, 1999– 2008 | Jan. 1, 1999, Market Cap |
|---|---|---|
| Qualcomm | 1,071% | $3.6 billion |
| Occidental Petroleum | 851% | $5.8 billion |
| Teva Pharmaceutical | 781% | $2.5 billion |
| Apple | 734% | $5.5 billion |
| EOG Resources | 707% | $2.6 billion |
| POSCO (NYSE: PKX) | 706% | $4.8 billion |
| Canadian National Railway (NYSE: CNI) | 704% | $4.9 billion |
| Banco Bradesco (NYSE: BBD) | 666% | $6.1 billion |
| Apache (NYSE: APA) | 626% | $2.5 billion |
| PotashCorp | 623% | $3.5 billion |
The returns just don't stack up.
Here's what's special about very small companies
And although companies such as Celgene and XTO are big-cap market darlings today, tracked and owned by big institutions such as Goldman Sachs and TIAA-CREF, and the New York State Common Retirement System, the next Celgene and the next XTO are being ignored and undervalued -- just as Celgene and XTO were 10 years ago! That's because companies like these are too small and too obscure to be worth Wall Street's "valuable" time.
So if you want to buy the best returns, you have to look at stocks today that are:
1. Ignored.
2. Obscure.
And, most of all:
3. Small.
That was the case at the end of 2005, 2006, and 2007 as well.
They're out there
At Motley Fool Hidden Gems, these are precisely the types of companies we spend our time looking for. Rather than tracking $22 billion Celgene, we follow Natus Medical, a $240 million maker of health screening products for newborns, in the health-care space.
Though Natus is small, we believe it's well managed, cash-conscious, and poised to take advantage of enormous market opportunities. That last point, after all, spurs the best small companies to grow big, and that's what we believe our Hidden Gems recommendations can do for your portfolio.
Your to-do list
So take this lesson from the market's 10 best stocks, and put it to work in your portfolio this coming year by buying small caps.
Drink In These 5 Top Stocks
Whether in the corporate lunchroom, our cubicles, or the local watering hole after work, there are regular places we gather to discuss news, sports, or -- if you're like us -- stocks. Here at Motley Fool CAPS, we gather around the virtual water cooler daily to rate stocks and delve into their merits as investments.
Our 130,000-strong CAPS community -- where members give the thumbs-up or thumbs-down to some 5,300 stocks -- seeks out the businesses it thinks will outperform the market. Below we'll take a look at some of the highest-ranked, most talked-about top stocks in the CAPS universe, and whether you think they'll continue their winning ways.
| Stock | CAPS Rating (5 Stars Max) | No. of Calls | % Outperform Calls |
|---|---|---|---|
| LoopNet (Nasdaq: LOOP) | **** | 1986 | 97% |
| MEMC Electronic Materials (NYSE: WFR) | **** | 1843 | 97% |
| Phillip Morris International (NYSE: PM) | ***** | 1832 | 98% |
| US Steel (NYSE: X) | **** | 1859 | 94% |
| USG (NYSE: USG) | **** | 1961 | 93% |
A tall drink of water
Like country singer Billy Ray Cyrus's music, Phillip Morris International is a stock that everyone hates to admit they like. Investors just don't want to acknowledge they get an achy-breaky heart for a cigarette manufacturer.
Despite being a pariah here in the U.S., smoking is ascendant around the world, particularly in emerging markets, where Phillip Morris saw strong revenue growth in the first quarter of 2009. Latin America and Canada grew 28% over the year-ago period, excluding currency fluctuations, while Eastern Europe, the Middle East, and Africa saw 6% growth.
However, overall first-quarter sales were off 5.5%, and profit was down 12%, largely because of the volatility of the dollar. As order is restored to economies around the globe, currency stability will enable the cigarette maker to remain a smooth draw, fending off inroads from lower-priced-cigarette makers such as British American Tobacco (NYSE: BTI). Absent the dollar's drama, sales actually rose 6.3%, and earnings per share jumped 12.7% from the year-ago period.
Compare that to Altria (NYSE: MO) and its domestic profit declines, and there's more than one parallel here to Billy Ray Cyrus: Both have offspring that are faring better on the world stage.
Even if you don't smoke, there's no reason you shouldn't enjoy the healthy dividend and growth potential that foreign markets hold for the cigarette maker. CAPS member jigar34 thinks Philip Morris' cash-generating capabilities will ensure that this one doesn't go up in smoke:
Like my other pick [Diageo], I like this one for the great brands it holds and its high dividend yield (5.7%). [Philip Morris] generates a lot of cash and the growth prospects are robust, expecially as the emerging markets turn to brand name smokes. The debt level makes me uneasy, but as long as the sales (and thus cashflow) are there, I expect debt payment and even potential for dividend increases and share repurchases.
Gather 'round
The CAPS community is like trying to take a sip from a fire hose. With so many good opinions about today's top companies, why not grab a pointy paper cup from the dispenser and join us at the Motley Fool CAPS water cooler. Your input can help guide other investors to stocks with bright prospects for growth. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.
Top 10 Stocks to Avoid for the Rest of the Year
As a rational investor, I more or less need to be hit over the head with an opportunity before acting. That is, if I'm going to take action in the stock market, I do so because of the obvious.
That doesn't mean that I'm a buy-and-hold or buy-and-forget investor. Instead, I simply react to events that only the blind would miss.
Case in point was my urging of investors to sell shares in late September of 2008. In Why It's Not Too Late to Sell, I suggested that all indicators supported lower prices – not higher prices. In my opinion, reacting to the credit crisis was the most obvious course of action for investors.
The same can be said for why I suggested a long/short absolute return at the start of 2009. The only certainty in the market was volatility. And what was most uncertain was direction.
That's why it made sense to buy undervalued stocks in equal weight to selling short overvalued stocks. So far that approach, depending on how much collateral is used to support the short positions, has generated a double-digit positive return.
Leading the way higher in what was a down market for the first quarter were my Top 10 Stocks to Avoid in 2009. So far the aggregate return of these 10 stocks is -28.5% as of March 31 as compared to -11.7% for the S&P 500.
This performance includes a recommendation to cover four of the ten shorts in February when those positions were down even more than the aggregate return.
What does the future hold for these top stocks to avoid? Here is an update on all ten
Top Stock #1: Delta Airlines (DAL)
At the start of the year, the airline industry was enjoying a period of relative prosperity compared to the rest of the market. Coinciding with a significant drop in oil prices, investors had pushed values of airline stocks higher.
With my thesis that oil prices would be rising, avoiding airline stocks made sense. I was correct with that assessment.
Delta Airlines (DAL) lost nearly half its value in a little more than a month of action before I decided to cover the position at $6.35. Though shares fell beyond that level, they now trade above $7.
I remain bearish on the airline sector as I expect oil prices to trend higher and the economy to stay soft.
I would still be a seller of DAL given the recent rally.
Top Stock #2: Dupont (DD)
What is a core ingredient for most chemical products?
The answer is fossil fuels. As such, rising input prices pressures profit margins for companies that manufacture and sell chemical products. At the same time, a weak economy makes for a very difficult environment to pass higher oil prices on to the customer.
To me it is fairly obvious that profits for companies like Dupont (DD) will suffer as a result. So far, the damage in the market to DD has been similar to market performance.
If oil prices do increase as I expect, look for DD to perform worse than the market from here.
Top Stock #3: 3M (MMM)
A weak dollar does wonders for companies that sell products beyond our borders. It makes rational sense then that in an environment with a stronger dollar, multinational businesses like 3M (MMM) will pay a price as foreign currencies convert at a lesser rate.
Strong dollar, you say?
Yes, a strong dollar in the U.S. despite the fear in the market and so-called potential for inflation is still the most likely occurrence.
MMM is down more than the market due to the strong dollar that existed in the first quarter. That trend continues in my opinion.
Look for MMM to lag the market for the rest of the year.
Top Stock #4: Capital One (COF)
As I mentioned earlier, I like to follow the obvious. At the start of this year, the natural extension of the credit crisis within a weakening economy was to expect defaults and loan losses at the credit card companies to rise.
Avoiding Capital One (COF), a very aggressive credit card company with a questionable loan portfolio, was an easy call. It was even easier to cover the position when shares were down nearly 70% to start the year. I did just that at $10.47.
A huge rally has taken place since the market bottomed on hopes of a recovery in the financial sector. While that macro news is indeed positive, there is significant risk that COF will struggle as its customers continue to wilt under the weight of excessive debt.
I would still avoid COF at all costs.
Top Stock #5: Boeing (BA)
It cannot be a good thing for Boeing (BA) to hear that airplanes are once again piling up in the desert. With airlines cutting capacity and cutting orders, the boom for BA appears to be over. At least that was my opinion at the start of the year.
BA did not disappoint. Shares are down nearly 17% so far this year – way beyond the losses of the overall market. Being short, BA would have netted investors a nice gain to start the year.
Recently shares have recovered, but airlines have cut capacity. In addition, Federal Express (FDX) threatened Congress that it would cancel orders if the Free Choice Act becomes law.
The negatives outweigh the positives for BA, and I would view recent gains as being temporary.
For the long term, I would avoid BA.
Top Stock #6: Eastman Chemical (EMN)
Since bottoming in late February, shares of Eastman Chemical (EMN) have recovered almost all of the value lost so far this year.
At the end of the first quarter, EMN was down more than 15%. In my opinion, that move is too far too fast.
The cause for the recovery is the hope that economic activity would help EMN grow its business. Indeed the company requires a strong economy, but any strength is likely to be minimal, at least in the early stages of the recovery.
More problematic for EMN is the potential for oil prices to rise. If so, with the economy still unstable, profit margins are likely to be weak for some time.
I would still be a seller of EMN in the near term.
Top Stock #7: United Airlines (UAUA)
The biggest beneficiaries of falling oil prices are the airlines.
But the flip side is also true. As oil prices increase, airlines are likely to struggle. Even worse, a weak economy is causing more people to stay at home so much so that "stay-cations" are now becoming the norm. Business travel is no help either. With Wall Street in depression, traveling bankers and brokers are few and far between.
If the economy does recover, it will be some time before the airlines see the benefit. We're still a year or two away before I anticipate feeling comfortable owning stocks in the group.
I did suggest that readers cover a short United Airlines (UAUA) position at $7.53. That was a bit premature as the stock fell below $3. It has since recovered mostly due to short covering rather than a change in business fundamentals.
I would avoid UAUA.
Top Stock #8: United Technologies (UTX)
As of March 31, United Technologies (UTX) was down almost 20% – nearly double the loss of the S&P 500. The company is tied to the global economy and the aerospace industry, and so it's no surprise that UTX suffered in the first quarter. Also hurting the company during the period was the stronger dollar. None of those ingredients has changed much, thus there is no change in my opinion of UTX.
Though shares have recovered some in April, UTX still trails the market by a significant margin.
Companies that lag the market are great candidates for short portfolios, and I maintain my position that investors avoid UTX.
Top Stock #9: Eastman Kodak (EK)
Thus far, the companies on my stocks to avoid list are here mostly because of some theme or underlying industry concern that would ultimately lead to the companies lagging the market or worse.
Only one company on this list is here for reasons specific to that company. In other words, I expect this company to fail or exist in form only with current shareholders left holding the bag. That company is Eastman Kodak (EK).
Here, too, I had to be hit over the head before coming to this conclusion. For years, EK has been in decline as its mainstay film business collapsed with the advent of digital cameras. Attempts to adapt have proven ineffective.
Think of this company as you would the buggy whip. I suggested readers cover shorts of EK at $4.16 in order to lock in the drop of 37%. Though I expect more declines in EK, there's no sense to risk losing those wonderful gains.
That said, I expect shareholders to lose the rest of remaining value over time.
Top Stock #10: American Express (AXP)
Market timing is not a prerequisite for success with a long/short portfolio. Common sense, though, is.
As I expected, credit card companies including American Express (AXP) have been big losers so far in 2009. While I recommend a cover in Capital One, I left the AXP position open. That was wise as shares dropped precipitously in the first quarter. AXP was down more than 27% on March 31. Since that date, AXP has recovered on the heels of optimism for financial companies.
Today, AXP is now in positive territory for the year and ahead of the S&P 500. I would use the powerful rally to liquidate shares. There is still uncertainty regarding the health of the consumer.
Although spending may be increasing, adding debt via credit cards is likely to be limited. That does not bode well for AXP.
Avoid the stock.
April 29, 2009
5 hot tech stocks full of promise
Some of the best investing clues turn up in daily life. My personal radar has led me to these picks, but, in today's shaky stock market, I'm not ready to jump in just yet.
There it was. Sitting on the desk of my trendy hotel room in Seattle. Black. With a discrete Cisco Systems logo.
A telephone, of course.
But also a hot stock tip for anybody paying attention. And this phone isn't an isolated stock tip either. You can easily find stock tips in the technology sector just by keeping your eyes open as you run through life.
And it's certainly worth paying attention right now, since technology stocks are leading the market and the best of them look to be especially well-suited to profit from the new, post-recovery world.
In this column, I'm going to tell how you can find great technology buys by just paying attention as you live your life. And I'm going to identify the five to put on a watch list if, like me, you remain skeptical about the current rally -- or to buy if you're more optimistic than I am.
A way to focus your research
How does this work? What can you learn about investing by paying attention in your daily life?
Let's take the example of what you could have learned if you had simply paid attention to the phone you'd used over the past 25 years or so.
I'm old enough to remember the black, absolutely reliable -- and so heavy and solid that you could use them to crush walnuts -- phones produced by the Western Electric subsidiary of AT&T before the 1984 breakup of that company. In the intervening years, you would have learned:
- To stay away from AT&T as you saw more and more of the phones you and your neighbors used come from other companies.
- To pay attention to newer names such as Lucent Technologies and Nortel Networks (I've got a Nortel phone on my desk as I write this.)
- To invest in the rise of the cell phone companies when you noticed more and more of your friends using wireless phones at home.
- To invest in the rise of Internet protocol telephony (the Cisco phone on my hotel desk) as phone service over the Internet grabbed a bigger and bigger share of the traffic and equipment markets.
What you notice by paying attention gives you a way to focus your stock research. So, continuing my hotel phone example, with a little research you'd learn several things about Cisco, the 800-pound gorilla of the market for networking equipment and software:
- It recently pushed into new markets for Internet telephony plus home networking, Internet security and storage, and Web-based conferencing.
- Revenue is projected to fall 5% to 10% in the fiscal year that ends in July -- because of lower spending by telephone companies and other network operators -- before picking up to show 5% growth in 2010. (And you'd discover that 5% growth is still way below the company's target of double-digit revenue growth.)
- The company has remained profitable during this recession, produced $5.9 billion in cash flow from operations during the quarter that ended in January and was sitting on $29.5 billion in cash at the end of the quarter.
- Using that cash and its relatively valuable stock, Cisco continues to pursue its long-term strategy of using smaller acquisitions to acquire technology and products it can push through its superb distribution system. A good example was the 2007 purchase of Internet meeting and collaboration software leader WebEx for $3.2 billion.
After that research, you could spend some time thinking about how Cisco fits into the post-recession, slow-growth paradigm that I laid out in my previous column. You'd likely conclude that Cisco would actually gain an edge from that kind of economy, because many of its products -- from Internet protocol telephony to Web conferencing to its recent entry into the market for blade servers for data centers -- offer customers a way to cut costs while retaining or improving functionality. That's a solid value proposition in an economy where lots of customers will be looking for value.
Then you'd probably spend some time looking at the price trends in the market. If you did, you'd notice that technology stocks were showing relative strength by hanging above their January highs (in contrast to sectors that are fighting to get back to January highs). You'd also see from your study of the charts that Cisco shares were near resistance levels set by their 200-day moving average and their April high of about $18.50.
And finally, you'd likely take a look at the valuation on Cisco shares. Cisco's shares were trading, as of the April 24 close, at a price-to-earnings ratio of 14.1. That was lower than the 15.4 P/E ratio for the Standard & Poor's 500 Index ($INX) as a whole. The stock was also trading at a price-to-sales ratio of 2.7 versus the 1.7 ratio for the overall market.
The relative overvaluation of the stock on its price-to-sales ratio and its relative undervaluation on its P/E ratio could be explained by Cisco's higher-than-average profitability. With an operating margin near 26%, Cisco is better than the average company at turning sales into earnings.
None of that tells you whether the stock is reasonably priced. To figure that out, you might look at the average P/E ratio of the past five years. Because the average was 21.6, you could conclude that Cisco, at 14.1, was undervalued, since the price in the future will climb until Cisco trades again at something like 21.6 times earnings. Or you could conclude that the lower P/E ratio was a logical reaction by investors to the company's falling earnings. Wall Street analysts now think Cisco's earnings will fall 23.2% in fiscal 2009 and 6.3% in fiscal 2010.
Setting a target price isn't a science. Where your target winds up is a result of the assumptions you make going in. I like to check the range of price targets for a stock and compare that with its current price. For Cisco, the range for a 12-month target price now seems to fall between $16 and $31 a share. At a recent $18.50 or so, Cisco has been trading above the most pessimistic target, but not by a great deal. Depending on your read for the market as a whole, that means Cisco is toward the cheap end of reasonable but not a compelling buy if you think, as I do, that this rally will yield to a correction in the next month or six weeks.
4 more to track
By paying attention while walking around, I've come up with four other tech-sector stocks that I'd put through this course of study:
- hot stocks: Amazon.com . I've noticed three trends working in Amazon's favor: First, the two big CompUSA stores that I used to pass on my way to work are now shuttered and dark. A competitor's bankruptcy does wonders for your sales. Second, I've noticed that I've become way, way more price-conscious in buying electronics in the past six months. Best Buy prices used to be good enough but not anymore. Third, the more I've used Amazon's site, the more impressed I've become with the quality and quantity of the reviews from its customers.
I now frequently start my shopping at Amazon because I can get a truly deep review of the product I'm thinking of buying. As any student of the Net knows, once you've become the place where a knowledgeable group of users gathers, your site tends to attract more and more like-minded posters. That makes it even more attractive to users and posters.
- hot stocks: Apple . I don't own an iPhone yet, but I've been looking longingly at those full-page ads touting all the neat applications that you can download from the Apple store. A $5 application that tells me the nearest parking garages and compares their costs? How cool would that be in New York City?
Apparently, I'm not alone. In reporting first-quarter results, Apple said it had shipped 3.8 million iPhones, well ahead of Wall Street projections of 3.3 million. Sales of the company's Macintosh computers fell 3%, but that's a startling good performance in a year when personal-computer sales are projected to drop 12%. All this shows that Apple has found a compelling value proposition even in a deep recession. Consumers are willing to pay up for Apple's design, its ease of use, its software and its popularity because they think all that is worth the extra cash.
With Apple set to release an update of the iPhone software and a new version of its computer operating system, dubbed Snow Leopard, due in August, the odds are that Apple will keep its momentum and remain able to justify its premium prices.
- hot stocks: Johnson Controls . I drive just enough to know that gasoline prices have stopped falling. In fact, they had climbed for six straight days as of April 23. At a national average of $2.062, according to AAA, we're still a long way away from the record high of $4.114 set last summer.
But gasoline demand has started to creep up again despite the recession, and we're still months away from the summer driving season's peak demand. I don't expect gasoline prices to spike to anything like $4 a gallon this summer -- even $3 would surprise me -- but news that gasoline prices have stopped plunging is very good news indeed for any company contemplating an investment in hybrid or electric cars. Falling gas prices could have put the next generation of hybrids on hold and choked off investment in all-electric vehicles.
Steady gas prices mean that investment will go ahead in developing the most critical component of the technology: improved batteries. Johnson Controls is the world's largest supplier of conventional lead batteries to the auto industry, but the company has made a sizable investment to set up a partnership that will manufacture hybrid batteries in the U.S. In February, the company won the contract to supply Ford with batteries for its first plug-in hybrid, set for 2012. An end to plunging gasoline prices would remove fears that auto companies will abandon their plans for hybrids and electrics.
- hot stocks:Qualcomm. I recently went shopping for a portable DVD player -- hey, I like to travel, but I've got a 7-year-old who doesn't. My final decision came down to battery life, and I bought the player that the consumer reviews at Amazon said got the most hours between charges. The prices, reliability ratings (generally pretty crummy) and image quality were pretty much the same across all the units I looked at. Longer battery life was the key value when I made my decision, and something similar is about to happen in the hot new computer market segment, netbooks.
Qualcomm's new chip set, named Snapdragon, draws only 0.5 watt of power. That's so little that a Snapdragon netbook is projected to run for four to eight hours on a single charge. It looks like Intel's Atom chip, which consumes more power, is going to get some significant competition soon, with as many as 10 Snapdragon netbooks projected to hit the market in 2009.
Snapdragon is also set to start appearing in new models of smart phones to be introduced in the second half of 2009. Nokia projects that cell phone industry sales will plunge 10% for all of 2009 but that most of the damage will be done in the first half of the year. That's good news for a company such as Qualcomm, which is running out new products in the second half.
Developments on a past column
Because the Chinese have managed to do much of their buying from domestic gold producers, the move hasn't done much for the price of gold so far. But that would change if other central banks decided to follow China's lead and reversed recent policies of selling gold.
China's gold position has climbed by 454 tons since 2003, Hu Xiaolian, the country's top foreign-exchange regulator, told the Xinhua news agency April 24, with much of the buying, gold traders believe, taking place since 2008.
That still leaves China with plenty of room in the vault for more gold. The country is only the fifth-biggest holder of gold, after the United States, Germany, France and Italy. The additional 454 tons would be worth only about $13 billion, a pittance compared with the country's $2 trillion in foreign-exchange reserves.
On the other side of the gold ledger, the recent Group of 20 economic summit gave renewed life to proposals to sell 400 tons of the 3,217 tons held by the International Monetary Fund in order to finance lending to developing economies stressed by the global financial crisis.
How to choose a top stocks?
The worst thing you can do for your portfolio is to invest without digging into the numbers. There are five numbers you should know when to choose top stocks.
Seems like common sense. Sadly, some investors don't take the time to scrutinize those figures, much less understand the companies in which they invest.
In honor of financial literacy month, we're aiming to arm you with the tools to make smart money decisions. Today's topic is basic financial metrics and concepts. Spoiler alert: This isn't meant to be the definitive guide on financial metrics -- not even close. But the concepts that we highlight will help any investor examine companies with a critical eye.
Price-to-earnings ratio (P/E): One of the most basic valuation ratios, the P/E ratio does exactly what its name says: It compares the price of one share of stock to its earnings per share. In other words, how many years would it take before you'd recoup the cost of a share through its current earnings?
There are two main P/E ratios: trailing and forward. Trailing P/E compares today's share price to the company's earnings per share over the past four quarters, while forward P/E looks ahead to projected earnings over the next 12 months or fiscal year.
For example, Google (Nasdaq: GOOG) has a trailing P/E of 28.2 and a forward P/E of 16.1. Based on Google's expected growth, there is a significant difference between the trailing and forward P/Es. But now that you've calculated the ratios, you can determine just how comfortable you are with a high or low P/E ratio. Some investors have a strict cutoff point, while others welcome P/Es in the nosebleed section.
If you want to earn your gold star, try calculating the price-to-free cash flow ratio. Free cash flow is tougher for companies to manipulate than earnings.
Consistent revenue and earnings growth: We like to see companies steadily increase their revenues and earnings, and so should you. This might require a bit more number-hunting if you're looking over several years, but it helps to determine whether your investments have a track record of growth.
Let's look at Cisco's (Nasdaq: CSCO) revenue and earnings growth over the past five fiscal years.
| Growth over prior year | FY 2004 | FY 2005 | FY 2006 | FY 2007 | FY 2008 |
|---|---|---|---|---|---|
| Revenue growth | 16.8% | 12.5% | 14.9% | 22.6% | 13.2% |
| Earnings growth | 26.1% | 39.1% | 2.5% | 31.5% | 11.7% |
Based on this, investors would want to dig into the reasons behind the yearly fluctuations, and any disparities between revenue growth and earnings growth. For example, why was there a growth dropoff between 2007 and 2008? And why did earnings only grow 2.5% in 2006, while revenue grew 14.9%?
Margins: Gross, operating, and net margins help us see how efficient a company is run. These margins are defined in our Foolish Fundamentals on margins:
- Gross margin equals gross profit divided by sales. It indicates how well management is using labor and materials to support the business.
- Operating margin equals operating income divided by sales. This is one way to show how well management is running the business.
- Net margin equals net income divided by sales. This is the bottom line, the amount of money left after all expenses are paid.
Ideally, margins should be growing steadily, but that's not always the case. If there are any unusual movements, take the time to understand why.
Enterprise value (EV): Enterprise value is essentially the amount that you (or a really, really rich person) would need to purchase a company completely. It goes beyond market capitalization, adding in total debt and subtracting cash. Don't just take this number from a website; take the time to figure out how much debt and cash the company has on hand. That's useful knowledge for an investor. If the enterprise value is much higher than the market cap, the company's most likely carrying loads of debt, and vice versa.
| Company | Market Cap (in billions) | Enterprise Value (in billions) |
|---|---|---|
| Apple (Nasdaq: AAPL) | 111.8 | 85.4 |
| Boeing (NYSE: BA) | 28.3 | 33.5 |
| General Electric (NYSE: GE) | 125.3 | 603.3 |
Source: Yahoo! Finance.
Companies like Boeing carry a fair amount of debt (in GE's case, a ton of debt), while Apple has a healthy amount of cash in the bank. Acceptable debt loads vary by industry, but careful investors must evaluate whether their companies are properly weighing debt's favorable effect on return on equity (see below) against the increased risk brought by mandatory interest payments.
Return on equity (ROE): ROE is calculated by dividing a year's worth of earnings by a company's shareholder equity. In other words, it measures just how profitable a company is for its shareholders. As our Million Dollar Portfolio book explains, "A good return on equity is important because it indicates a company that can make a lot of money without a lot of continued investment. This metric generally indicates a company with a strong brand or dominance in its market; and it should mean that the company will hold up well if economic times get tough."
Let's look at the ROEs of several companies in the consumer goods space.
| Company | Return on Equity (Trailing 12 Months) |
|---|---|
| Church & Dwight | 16.2% |
| Kimberly Clark (NYSE: KMB) | 35.5% |
| Procter & Gamble (NYSE: PG) | 18.5% |
Source: Capital IQ, a division of Standard & Poor's.
Beyond the metrics
Got those terms down cold? Great! Here are a few additional tips:
- Never evaluate a company using a single financial metric. No, seriously, we mean it!
- Compare these metrics against those of a company's competitors for a better idea of the overall sector.
- And while all these metrics are important, how you use them is equally important.
Above all, never go just by the numbers. Make sure you understand the company's business model and how it generates revenue. If you can't explain it, chances are you shouldn't be investing in it.
Oh No! My Stock Has Surged!
Financial disasters happen all the time -- occasionally to you! That's why you need to be prepared. You may be carrying enough insurance to offset the costs of any sudden natural disaster, and investing in a diversified portfolio has protected you, at least in part, from losses and underperformance.
But there's probably one financial disaster you haven't anticipated: What if your stock holdings go through the roof?
The perils of portfolio pops
Imagine that you buy shares of Scruffy's Chicken Shack (Ticker: BGAWK) for $20 apiece. Within a year, thanks to some super earnings reports and bullish commentary from management and analysts, the stock tops $50. You've made more than 150% on the stock. That's good news! But here's the disaster:
- You've made much more than you expected to on this holding, in a short time frame. You'd aimed to hang on for many years. Do you keep holding, or do you sell? You don't know what to do next.
- Your portfolio is suddenly overweighted with this stock. Let's say that you originally invested $10,000 in each of 10 stocks. Suppose that in one year, nine of them averaged 10% gains, while Scruffy's grew by 150%. You'd end up with $11,000 in each of the other stocks and $25,000 in Scruffy's, increasing your initial $100,000 to $124,000. But Scruffy's would now represent 20% of your portfolio. Do you really want a full one-fifth of your holdings in this single stock?
- Your emotions are battling each other. Fear is telling you to sell before the stock falls, while greed is telling you to hang on, so that it can gain another 150% or more.
For someone who's made $15,000 on one stock in a year, you're in quite a pickle, no?
This isn't such an extreme situation, either. Even in this tough market, getting in at the right time could have produced some big gains. Take a look at some of the following recent year-to-date returns:
- Sun Microsystems (Nasdaq: JAVA): 139.5%
- Ford (NYSE: F): 123.1%
- Whole Foods (Nasdaq: WFMI): 103.5%
- Micron Technology (NYSE: MU): 76.5%
- Amazon.com (Nasdaq: AMZN): 62.1%
- Apple (Nasdaq: AAPL): 46.1%
Your stock-surge scenario strategy
So what should you do in this situation? Well, I've been there myself, many times. I wrote about one such instance in my article titled "I Turned $3,000 Into $210,000." I detailed my investment in America Online, which later became a part of Time Warner (NYSE: TWX). With a cost basis of about $1 per share (in split-adjusted terms), I watched the stock surge to around $70, and I didn't sell. Then I watched it fall into the teens.
Here's my advice if you find yourself in a stock-surge situation:
- Try not to think too much about the past. Focus on the future, and your estimate of the stock's intrinsic value. If the stock is at $50 now, and you think it's really worth $65, holding on might be smart, whether you bought your shares at $20 or $80. No matter where your entry point was, you're now at $50, expecting an eventual gain of around 30%. Look forward, not backward.
- When any holding becomes too uncomfortably large, consider selling some shares to rebalance your portfolio. If, say, a quarter of your portfolio rests in a single holding, you might want to sell some shares. I can't give you any hard-and-fast guidelines, but listen to your gut and gauge your own confidence in each of your holdings.
- Evaluate the holding regularly. Keep up with its progress. Assess its health. Is it growing briskly? Is debt under control? Are inventories growing no faster than sales? Does the company have some lasting competitive advantages? Do you trust management? Is the future bright?
- When in doubt, sell. Or at least sell some. Especially if you realize that you really don't know all that much about the company, and how it makes its money. If that's the case, you've really just been lucky. If you can't decide whether to sell or hold, just compromise by selling one-third, or one-half, of your shares.
And remember not to complain: Given how much people have lost lately, you won't get any sympathy!
5 Hot Stocks Bucking the Downtrend
Even on the market's worst days, buyout news and other short-term forces can send individual hot stocks up by 10%, 25% -- even 50%.
For example, shares in Pepsi Bottling Group rose 22% and PepsiAmericas 26% recently when PepsiCo (NYSE: PEP) announced that it wants to acquire its two biggest bottlers to gain control of its North American distribution.
But beyond less predictable events like that one are stocks with fundamentally compelling reasons for recent momentum. The trick is to find those stocks. That's where Motley Fool CAPS comes in.
The story behind the story
CAPS is no crowd of lemmings. Its best-performing members' opinions do more to shape each company's rating than the picks of their poorer-performing peers. Let's use the collective wisdom of more than 130,000 CAPS members to filter out the noise and find companies offering strong momentum.
We'll use CAPS' handy stock screening tool to quickly zero in on companies with a stock price increase of at least 35% in the past four weeks, a market cap of greater than $100 million, and a beta of less than 3. Below is a sample of hot stocks that our screen returned. If you'd like, run this screen yourself -- just keep in mind that results may change as the market does.
| Company | CAPS Rating | 4-Week |
|---|---|---|
| RF Micro Devices | ***** | 108% |
| Precision Drilling Trust (NYSE: PDS) | ***** | 58.4% |
| A-Power Energy Generation Systems | **** | 55.3% |
| Melco Crown Entertainment (Nasdaq: MPEL) | **** | 41% |
| MGM MIRAGE (NYSE: MGM) | ** | 113.3% |
Source: Motley Fool CAPS. Price return from March 27 through April 24.
Betting on drill bits
Precision Drilling Trust completed its acquisition of onshore drilling contractor Grey Wolf in December, helping to boost its top line by 31% in the first quarter and giving it an additional 123 rigs. But the company is also saddled with more debt amid a volatile market in which oil services companies like Baker Hughes (NYSE: BHI) are reporting big drops in demand.
Precision Drilling Trust has taken steps to get its unwieldy debt under control, suspending cash distributions to unit holders and acquiring additional debt and equity financing from AIMCo, an investment company based in Alberta. The new financing will painfully dilute the current share base in exchange for allowing the company to repay its high-interest bridge loan (a short-term loan) and help bring its blended interest rate, or average rate, down to 8.4% from about 10.8%. On the bright side, management expects to save about $70 million annually in interest expenses, which had eaten into earnings in the first quarter.
Even with the dilution, the vast majority of CAPS members think it's the best move for the company, and 97.5% of the 1,461 members rating Precision Drilling Trust say they believe it will beat the market.
Game on ... or not
Plain and simple: Gaming is in a world of hurt. Consumers are losing discretionary income and staying out of casinos, and Las Vegas has been hit particularly hard. The drop in gaming activity, coupled with the high debt of many operators, has prompted Las Vegas Sands (NYSE: LVS) to raise more equity and Wynn Resorts (Nasdaq: WYNN) to amend debt agreements. For MGM MIRAGE, its shares have swung wildly as it contemplates alternatives to deal with its debt.
MGM MIRAGE recently obtained a short-term waiver for a debt covenant that will buy it a few more weeks to work out funding on its giant CityCenter project in Las Vegas. It's using all resources necessary to keep the project moving forward, including fronting cash to contractors that was supposed to come from funding partner Dubai World. Government-owned Dubai World has withheld payments and even sued MGM MIRAGE, alleging mismanagement of the project, and pressure is ratcheting up because another $200 million construction payment is due at the end of the month.
The company is already trying to raise capital by selling some of its casinos, but there are rumors that its Las Vegas property may be put on the block, in a further bid to raise more capital and hold off one of its investors, Carl Icahn, who is pushing it to file for Chapter 11 bankruptcy protection. The path may even involve major investors pumping more money into MGM MIRAGE. At this point, many CAPS members are leery of putting capital into the company, with 25% of the 926 members rating MGM MIRAGE saying they are bearish on the stock.
Now Is the Time to Invest and Get Rich
Not my words. Those were Warren Buffett's. Back in 1974. He turned out to be right.
Earlier this decade, he warned about the insane valuations during the Internet bubble and the dangers of derivatives. Right and right.
In October, he wrote an op-ed piece in The New York Times urging investors to start buying stocks, specifically American stocks. Aside from his recent shopping spree on behalf of his company, Berkshire Hathaway, he has started buying up American stocks for his personal account.
Certainly, we should follow his lead, right?
Not so fast.
One dissenter stands out. Nouriel Roubini, the NYU economics professor famous for predicting our economy's current problems back in 2006, argued in November that "the worst is not behind us." He predicted this recession would last at least 18 to 24 months, with 9% unemployment, stag-deflation, and credit losses approaching $2 trillion.
According to his calculations, we could easily see the S&P 500 drop to 600, almost 30% below where it trades today.
And, oh yeah, since then he's upped his credit loss estimate from $2 trillion to $3.6 trillion. Yikes!
Who's right? Is now another time to invest and get rich? Or is the stock market a sucker's bet?
Buffett vs. Roubini
Before I answer those questions, let's be clear. This isn't a market-timing discussion. We Fools believe there's no proven way to consistently time the market. Even Buffett admits that he can't predict the short-term movements of the market. He thinks in years and decades, not days and months. After all, he's the guy whose favorite holding period is forever.
Back to the question at hand. Don't be surprised if both Roubini and Buffett are right. The economy and the stock market could get worse from here, but it could still be a great time to invest and get rich.
Huh?
Remember, since we can't time the market, we're talking only about money you can keep in the market for the long term. Unlike Jim Cramer, we Fools have always said that money you need in the next three to five years should never be in the stock market. As the last year has shown, it's just too darn volatile for money you need in the short term.
So, even if Roubini is right -- the economy worsens and the stock market drops even more over the next year or two -- we could be looking back three to five years from now thinking that 2009 was a great time to invest and get rich.
OK, but how bad could it get?
Before you start putting some of your idle cash into stocks, know that it could get a whole lot worse. Fellow Fool Morgan Housel showed just how much worse in "How Low Can Stocks Go?"
Long story short, the S&P 500 has had long stretches where it has seen average price-to-earnings ratios of around 8. Even after the freefall we've seen, the S&P 500's average P/E is still just shy of 13. Wow.
Of course, the trailing P/E ratio is an imperfect measure of cheapness. For example, consider that the massive negative earnings rampant in the financial sector are lowering the denominator, thus inflating that figure of 13.
Here's a place to start
Where, then, can we see some of this market cheapness that Buffett is seeing? Not in forward earnings -- Birinyi Associates forecasts the S&P 500's forward P/E ratio at 14.1. Of course, I don't trust analyst earnings estimates to begin with, and I certainly don't trust them in the current environment. (Roubini calls 2009 consensus estimates "delusional.")
No, it's at the individual-stock level where my eyes pop. We have big-time companies trading at minuscule P/E ratios. When I start seeing P/E ratios in the neighborhood of 10 and below, I get very interested. Take a look at these companies (including a couple of international plays):
| Company | P/E Ratio |
|---|---|
| Unilever (NYSE: UL) | 8.4 |
| Merck (NYSE: MRK) | 7.2 |
| CNOOC (NYSE: CEO) | 7.3 |
| Microsoft (NYSE: MSFT) | 10.5 |
| Chevron (NYSE: CVX) | 5.8 |
| Altria (NYSE: MO) | 11.1 |
| eBay (Nasdaq: EBAY) | 10.7 |
Source: Capital IQ, a division of Standard & Poor's.
Ah, but remember my warning earlier. P/E ratios are an imperfect measure of cheapness. They're just a place to start, because a company's future earnings can be very different from its trailing earnings. See the aforementioned losses in the financial sector. Investors looking at just the trailing earnings a year ago would have been tricked into a false bargain. Similarly, investors looking at retailers today should consider that their earnings just aren't going to be as strong in the next few quarters as they were in the past.
April 27, 2009
The hot stocks to power your portfolio
Investors are always hunting for the next big thing -- the dream stock which will soar into the stratosphere once the market discovers it.
MSN CAPS offers a variety of resources to help investors find tomorrow's leaders. The organizing principle behind the 130,000-member community is that collective estimates are often superior to the judgments of most individuals, and that a system that incorporates the knowledge, information and skills of the many can help the individual beat the market.
We used CAPS' handy stock screening tool to quickly find energy companies with a market value of at least $100 million, revenue growth of at least 20% over the past three years and shares trading at a price-to-earnings ratio of less than 25.
Then we tapped the collective intelligence of CAPS members to see whether the numbers tell the true story.
Here is a trio of stocks our screen recently returned:
| Company | 3-year revenue growth | Price-to-earnings ratio | 2009 gain | CAPS rating |
|---|---|---|---|---|
| ATP Oil & Gas | 60% | 1.88 | 9% | ***** |
| Atwood Oceanics | 38% | 5.73 | 49% | ***** |
| Chesapeake Energy | 32% | 18.02 | 27% | ***** |
On the (continental) shelf
Hot stocks 1 : ATP Oil & Gas operates in the Gulf of Mexico and the North Sea, typically buying tracts with proven but undeveloped deposits from bigger companies eager to move on to more strategically important fields.
The Houston company says it has a 98% success rate in extracting oil and gas from its acquired reserves. It reported record earnings in 2008 on revenue of $618 million, also an all-time high. Further, the company said it replaced 214% of its production with new reserves.
ATP in February received $150 million from GE Energy Financial Services, a unit of General Electric, to expand production from its floating oil and natural gas production facility in the Gulf of Mexico. ATP has been operating the facility since 2006, and cash from GE Energy will allow it to take on additional production from a third-party producer by 2010. ATP will control 51% of the limited partnership, with GE Energy owning 49%.
With ATP's solid track record and more production to come, 95% of the 427 CAPS members rating the stock expect it to outperform the market.
Drill, baby, drill
Hot stocks 2: Atwood OceanicsWhile ATP avoids the financial risk of drilling dry holes, offshore drilling contractor Atwood Oceanics is directly exposed to the vagaries of offshore oil and gas exploration.
The plunge in crude oil prices from $147 a barrel last summer to around $50 has curtailed exploration and forced rivals like Hercules Offshore to put some older rigs up for sale. Atwood Oceanics is looking for a new contract for its semi-submersible Southern Cross rig, which pulled in day rates of about $81,000 last year at work off the coast of Mauritania before being idled at the end of last year. Day rates are down more than 25% in some locales and could fall further.
The Houston company this month announced a new contract for its Richmond rig in the Gulf of Mexico. The contract was awarded by Applied Drilling Technology at a day rate of $52,500.
In February, Atwood reported fiscal first-quarter earnings that doubled and revenue that jumped 49% to $165.5 million. And though day rates are down dramatically, many CAPS members like the long-term deals that many of Atwood's rigs are locked into. An overwhelming 99% of the 1,829 CAPS members rating the stock expect it to beat the market average.
Hot stocks 3:Chesapeake Energy
Chesapeake Energy, the nation's biggest producer of natural gas, responded to plunging energy prices by curtailing capital expenditures and hedging production. Still, the downturn has provided new opportunities, including its acquisition at fire-sale prices of Texas natural gas reserves from Parallel Petroleum.
With energy majors like ConocoPhillips failing to completely replace what they're producing, some investors think it's only a matter of time before crude oil prices climb again, making alternatives such as natural gas more attractive.
Of the 6,655 CAPS participants rating Chesapeake, 97% expect the Oklahoma City, Okla., company to outperform the Standard & Poor's 500 Index.
5 things to know this week
The results of the bank stress tests aren't very important. A Fed meeting will have a big impact on bonds. And whom do you like in the Derby?
1. Something you actually DON'T need to know
It may be a touch unorthodox to lead off "five things to know" with "one thing you don't need to know," but remember, I am not like the others. So the one thing you don't need to know anything about to navigate the week ahead is these so-called bank stress tests.
Even though the results of the stress tests won't be known until May 4, the market is formally obsessed with the results. That is strange, because despite releasing the parameters for examination in mid-April, what difference can it possibly make whether any banks actually pass or fail the tests, since the government isn't allowing banks to collapse in the first place?
Through that lens, waiting for the results of bank stress tests is no different than standing around trackside in pitch-black darkness at 4:30 in the morning and asking a horse trainer how fast his horse ran. There is not an answer to that question capable of revealing anything truthful or important.
2. F-O-M-C, Fed, Fed, Fed!
The next meeting of the Federal Reserve's Federal Open Market Committee will be on Wednesday and Thursday. Truth be told, this barely made it on the list of things you DO need to know.
During the little over a yearlong stretch between September 2007 and December 2008 when the FOMC slashed rates from 5.25% down to near zero, what did the market do? The S&P 500 Index ($INX) plunged 40%. Since December, it's down an additional 3%.
This is what people mean when they refer to the Fed "pushing on a string." It's easier to pull a string toward you than to push it away. In Fed terms, that means it's easier to stop an expansion than reflate your way out of a contraction.
3. The action is in the bond market
Forget stocks for a moment. The big news that will come out of the Fed meeting this week will first affect the bond market more than stocks. Speculators, knowing which way the Fed is determined to move interest rates via outright purchases of Treasurys, have a virtually zero-risk playing field in which to operate.
Ultimately, this is deflationary. Why? Because this virtually guarantees a declining interest-rate structure. This causes the liquidation value of debt to rise. Meanwhile, and perversely, businesses and consumers will find that even as they try to pay down debt, the value of their assets is declining because of the decline in interest rates and the reinforcement of deflationary pressures. Unfortunately for the Fed, this only further increases both dollar hoarding and the hoarding of Fed-supported risk-free instruments -- hence, pushing on a string.
4. Exxon Mobil earnings
Only a year ago, Exxon Mobil was a company being blamed for record oil prices when crude was climbing into the stratosphere. As the largest company in the U.S. by market cap and the largest oil and gas company in the world, is it any wonder Exxon had record profits while crude oil prices where climbing?
On Thursday, the company will report its latest earnings. Why should you care? Because size really does matter. Exxon's market cap will ensure the company has an outsized impact on the S&P 500 later this week.
Current estimates call for earnings per share of 94 cents a share on revenue of $54 billion. Those are big numbers. However, last year during this reporting period, Exxon reported EPS of $2.03. What a difference a year makes.
5. Kentucky Derby week
An allegory: Almost two months ago to the day, just minutes after the running of the Fountain of Youth Stakes at Gulfstream Park, a 3-year-old prep race that, at least in my mind, unofficially kicks off the Run for the Roses, I was standing on a corner in New York City waiting for the light to change when a taxicab hit a pothole and splashed street water directly into my mouth. Not a little bit of street water either -- a lot of street water, like a Mason jar's worth. It was very salty.
Now, with the benefit of hindsight, liquor and mouthwash, I can see that it was nothing short of a grim warning: Be prepared for the bitter taste of salty street water if you stand around slack-jawed.
That is worth heeding on just about any given day, but especially this coming Saturday, May 2 -- Kentucky Derby day -- and especially considering that hundreds of thousands of people, many of whom don't know a Thoroughbred from a riding lawn mower, will bet millions of dollars as if they were the owner-breeder of the Byerley Turk himself, then, later, find themselves standing around slack-jawed wondering what happened.
Imagine an alternate reality in which your job is to bet money on horses. You make a living doing it, some years more successfully than others. Imagine that once a year this thing called the New York Stock Exchange has a big promotion called the "Most Exciting 6 1/2 Hours in Stocks." Now, suppose you know what a stock is, but beyond that, well . . . they shoot stocks, don't they?
Still, because it's exciting, you ignore your ignorance and take a day off from your job of betting on horses to "play the stocks." How do you think you'd do? Feeling a bit slack-jawed? Prepare for the salty taste of dirty street water.
But that's beside the point. As a former professional horseplayer and handicapper, I am here to help. Below, on the left, are my Kentucky Derby Dozen rankings, the horses I believe are the top 12 contenders, along with what I believe are their fair odds of winning the race. On the right are the most recent rankings of horses from voters at BloodHorse.com and the corresponding odds, a reasonable early look at how the public is valuing the entrants.
How should one use this list? Simple. Keep it handy, and on Derby Day, just make sure the horse you bet on is going off at odds higher than the odds I've listed here. Good luck. And remember, there's no crying in gambling.
April 26, 2009
5 Hot Stocks That Deserve a Place in Your Portfolio
The Market May Have Hit Bottom
In past recessionary periods, the best time to buy stocks has proven to be about 4-5 months before a recession ends.
Assuming that the stimulus and spending packages start to breathe life into the economy in the third quarter, then March 9 would be the market bottom in this recession.
That makes now an excellent time to buy stocks. Not just any stocks, mind you. But carefully selected stocks that are in the right positions to profit in this economic climate.
Hot stocks 1: Gilead (GILD) Will Give You a Hedge in This Recession
Gilead Sciences (GILD) is a biotech stock that makes a terrific recession proof pick for your portfolio. Best known for its treatments for hepatitis and HIV, Gilead is unique among biotech companies because instead of hoping to have marketable products someday, it already does.
During the last earnings season while gobs of companies were announcing huge losses, Gilead gave us another stellar earnings report. Let's just say that I don't think Gilead needs any economic stimulus programs.
Hot stocks 2: Southwestern Energy (SWN) Is a Great Commodity
As the Fed continues to pump money into the economy, inflation is sure to result, and commodity stocks will benefit.
Southwestern Energy (SWN) is one of my favorite commodity stocks. A major operator in Arkansas, Louisiana, New Mexico, Oklahoma and Texas, SWN just wrapped up a banner year. Oil and gas production rose 71%, and net income soared 157%. SWN is an excellent buy.
Hot stocks 3:Family Dollar Stores (FDO) Tempts Cost-Conscious Consumers
Family Dollar Stores (FDO) is riding the same crest of cost-conscious consumerism as other discounters like Wal-Mart and Dollar Tree.
The share price of FDO increased 30% in 2008 while the S&P decreased by 40%. In fact, FDO was the top-performing stock in the S&P for 2008.
All indications are that 2009 will be another stellar year for FDO. Conservative corporate leadership and a strong balance sheet, combined with an effective marketing strategy, continue to serve the company well. Family Dollar is a strong buy.
Hot stocks 4: Darden Restaurants (DRI) Makes Value Dining Pay
Just as value-priced retailers can enjoy gains in a recessionary environment, so can value-priced restaurants. Darden Restaurants (DRI) is a prime example. Through its Olive Garden, Red Lobster and LongHorn Steakhouse stores, Darden offers value-conscious consumers the dining experience they seek.
Though shares of DRI were pummeled in the fall sell-off, DRI is currently trading near 52-week highs. The reason for the recovery is increased traffic at low-dollar dining locations. That kind of success will continue to make DRI a strong buy.
Hot stocks 5: American Italian Pasta a Unique Commodity Play
American Italian Pasta (AIPC) is the largest maker of dry pasta in North America. As consumers eat out less and rely on inexpensive comfort foods at dinnertime, AIPC sales are booming. In the last year, the stock is up by more than 500%!
Because American Italian Pasta benefits from higher wheat prices, AIPC is also a commodity play. AIPC's consumer brands, such as Mueller's, Golden Grain, Heartland, R&R and Mrs. Grass, are staples on supermarket shelves throughout the U.S. and overseas.
American Italian Pasta is an outstanding buy.
April 25, 2009
Top 5 Small-Cap Stocks
These are stocks of companies that have market capitalizations of $50 million to $500 million that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.
The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.
Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments or market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.
Top stocks 1: NCI(NCIT Quote) is a provider of IT services and solutions to U.S. federal government agencies. The company focuses on designing, implementing, maintaining, and upgrading IT systems and networks. NCI has been rated a buy since February 2008 based on its healthy growth in revenue and net income, solid stock price performance, impressive record of EPS growth, and sound return on equity.
For the fourth quarter of fiscal 2008, the company reported that its revenue rose 15.2% year over year, slightly outpacing the industry average of 13.5%. This growth appears to have helped boost EPS, which rose 44% when compared to the same quarter last year. The company's EPS growth is a continuation of a pattern of positive EPS growth over the past two years. Net income also improved, increasing 48.2% from $3.3 million to $5 million. Return on equity improved slightly when compared to a year ago, and can therefore be considered a modest strength for NCI. In addition, NCI's stock price has surged 89.7% over the past year, due to strong earnings growth and other key factors.
Management stated that it felt NCI had great results for fiscal 2008, remaining on track with its strategic plan. The company expects further growth in fiscal 2009 due to new business won in 2008, such as the $173 million ITES-2S task order with the Army National Guard and Air National Guard awarded to NCI in December. Looking ahead, the company expects first quarter 2009 EPS in the range of 31 cents to 33 cents, on revenue of $102 million to $107 million. Although the company shows weak operating cash flow, we believe that the strengths detailed above outweigh any potential weaknesses at this time.
Top stocks 2: Diamond Foods(DMND Quote) processes and markets culinary, snack, in-shell, and ingredient nuts, which are primarily sold through two main product lines: Diamond of California and Emerald Nuts. We have rated the company a buy since July 2008 on the basis of the company's impressive record of EPS growth, increases in revenue and net income, and largely solid financial position.
For the second quarter of fiscal 2009, the company reported revenue growth that exceeded the industry average of 0.8%. Diamond Foods' revenue rose 12.5% year-over-year, helping boost EPS from 17 cents a year ago to 37 cents in the most recent quarter. We feel that the company's trend of positive EPS growth should continue in the future. Diamond's net income also improved significantly in the second quarter, increasing 129.8% from $2.7 million to $6.1 million. Net operating cash flow improved slightly, increasing 6.3% to $67.7 million. Additionally, factors such as Diamond's strong earnings growth of 117.6% helped drive the company's stock price higher by 44.3% over the past year.
The company announced that its second quarter earnings were a record for Diamond Foods, and was pleased with the success of its business strategy. On the basis of the second quarter results, the company increased its full-year earnings guidance, announcing that it now expects net sales of $535 million to $565 million, and EPS between $1.27 and $1.34 per share. The new EPS range represents an increase of 2 cents per share over previous guidance. While we see the company's low profit margins as a potential cause of concern, we currently believe that the strengths detailed above outweigh any potential weakness at this time. In addition, we feel that those strengths justify the higher price levels to which the stock has been driven over the past year.
Top stocks 3: American Physicians Service Group(AMPH Quote) is an insurance and financial services firm. Its subsidiaries and affiliates provide medical malpractice insurance, as well as brokerage and investment services to institutions and high net worth individuals. American Physicians Service has been rated a buy since May 2003. This rating is supported by several positive factors, including its largely solid financial position and good cash flow from operations.
For the fourth quarter of fiscal 2008, American Physicians Service Group reported a decline in revenue, which in turn impacted EPS. Despite the steep drop in EPS, our model anticipates a reversal of the company's negative EPS trend in the coming year. Net operating cash flow increased significantly when compared to the same quarter last year, rising 241.7% to $3.5 million. In addition, the company has a very low debt-to-equity ratio of 0.1, which implies that its debt has been successfully managed.
Management pointed out that 2008 was American Physician Service Group's first full year of operation as a fully integrated insurance company, as API was acquired in 2007. While acknowledging that the company did not escape the worldwide economic difficulties, the company was pleased with its full-year performance, particularly in terms of earnings, share price, and return on equity. Although the company shows low profit margins, we feel that the strengths detailed above outweigh any potential weakness at this time.
Top stocks 4: American Physicians Capital(ACAP Quote) is an insurance holding company. Its primary focus is medical professional liability insurance, which it writes through its subsidiary, American Physicians Assurance Corporation. Our buy rating for American Physicians has not changed since November 2004 and is based on the company's largely solid financial rating, strong cash flow from operations, expanding profit margins, solid stock price performance, and notable return on equity.
For the fourth quarter of fiscal 2008, the company's net operating cash flow increased significantly, rising 138.8% year over year to $15.7 million. A low debt-to-equity ratio of 0.1 implies that the company has successfully managed its debt. American Physicians Capital has a gross profit margin of 40.8%, which we consider strong, while its net profit margin of 29.3% significantly outperformed against the industry. Although the company's revenue dropped 9.7% when compared to the same quarter of last year, the company's bottom-line was not hurt, as evidenced by increasing EPS. EPS jumped from $1.19 to $1.24 in the fourth quarter.
Looking ahead, management stated that it expects the company to exceed EPS of $4.25 in fiscal 2009 if current trends in frequency, severity, and pricing remain stable in the company's book of business. Although the company has had somewhat weak EPS growth recently, we feel that the strengths detailed above outweigh any potential weaknesses at this time.
Top stocks 5: American Physicians Capital(ACAP Quote) is an insurance holding company. Its primary focus is medical professional liability insurance, which it writes through its subsidiary, American Physicians Assurance Corporation. Our buy rating for American Physicians has not changed since November 2004 and is based on the company's largely solid financial rating, strong cash flow from operations, expanding profit margins, solid stock price performance, and notable return on equity.
For the fourth quarter of fiscal 2008, the company's net operating cash flow increased significantly, rising 138.8% year over year to $15.7 million. A low debt-to-equity ratio of 0.1 implies that the company has successfully managed its debt. American Physicians Capital has a gross profit margin of 40.8%, which we consider strong, while its net profit margin of 29.3% significantly outperformed against the industry. Although the company's revenue dropped 9.7% when compared to the same quarter of last year, the company's bottom-line was not hurt, as evidenced by increasing EPS. EPS jumped from $1.19 to $1.24 in the fourth quarter.
Looking ahead, management stated that it expects the company to exceed EPS of $4.25 in fiscal 2009 if current trends in frequency, severity, and pricing remain stable in the company's book of business. Although the company has had somewhat weak EPS growth recently, we feel that the strengths detailed above outweigh any potential weaknesses at this time.
For the fourth quarter of fiscal 2008, Lincoln achieved record revenue, which soared 18.9% year-over-year. This growth was fueled by the acquisition of Briarwood College and an increase in average student population. Revenue growth appears to have helped boost EPS, which improved 32.4% when compared to the same quarter a year ago. Net income also increased, rising 32.7% from $9.6 million to $12.8 million. Gross profit margin improved 178 basis points to 67.5%, while operating margin expanded 95 basis points to 19.8%. Lincoln's cash and cash equivalents more than quadrupled to $15.2 million, improving the company's cash position. In addition, the company has a low debt-to-equity ratio of 0.1, indicating that it has been successful at managing its debt.
Management was pleased with both the fourth quarter and year-end results for fiscal 2008. Looking ahead to the first quarter of fiscal 2009, Lincoln anticipates EPS in the range of 5 cents to 7 cents on revenue of $112 million to $114 million. The company does face challenges from rising expenses, and any inability to attract new students could restrict the company's financials going forward. Overall, however, we do not see any significant weaknesses that are likely to detract from this company's generally positive outlook.
3 Hot E-Business Stocks to Buy Now
The dot com crash ended the dreams of millions of entrepreneurs. What did not end though was the viability of making profits on the internet. Indeed, as the economy slammed to a halt in recent months, the online space has proven to be better able to withstand weakness in consumer spending.
The same cannot be said of the brick and mortar stores. In fact, it could be argued that the growth of the last two decades resulted in saturation of most markets.
A prime example of stock market saturation is Starbucks (SBUX). In the past few years, you couldn't walk down some city streets and not run into several Starbucks coffee outlets. Today, Starbucks is scrambling to reduce the number of stores.
Online retailers, on the other hand, still have plenty of room for expansion. While adoption of the net for purchases is more widely accepted than ever, there is still a large percentage of the market that has yet to shop online. And online stores are aggressively promoting their business in attempts to convert those late-adopters.
Hot stock 1: Amazon Growing Strong
Amazon (AMZN) seemed to be the poster child for the dot-com bubble. The company had a slightly goofy leader and a business plan that seemed to be created out of thin air. During the peak of the net rally, Amazon exploded in value. When the market crashed, so did AMZN.
But behind the hype was a real business that has been slowly flexing its muscles out of those ashes.
The lynchpin in the entire story is Amazon's ability to sell product cheaply -- even more cheaply than Wal-Mart (WMT). Without the huge expense of store leases, AMZN has been able to beat competitors on price -- the average price of its products fell 8% in the fourth quarter of 2008. And sales of its Kindle book reader have met with rave reviews -- Oprah declared the online reader device her new favorite gadget, which can't be hurting sales.
As the economy recovers, I expect AMZN to be a leader. I rate the stock an A or Strong Buy.
Hot stock 2: Borders Is the Anti-Amazon
In stark contrast to AMZN, Borders (BGP) and its expensive retail space is a dying business. The giant book superstore enjoyed success in beating smaller retail competitors, but it is no match for AMZN. With the economy in a recession, the company is losing cash-strapped customers. There being no margin for error, BGP is in survival mode.
Its stock has dropped from $8 per share to well below $1 per share during the last year. Losses are mounting, and BGP cannot shutter non-performing stores fast enough. What will be left standing is unclear. Analysts do not expect profits to return in the near term, and with over $300 million in debt, look for a near-certain collapse in book value.
The stock has rallied here in the short term and now trades above $1 per share. But don't be fooled. I rate BGP a D, or sell.
Hot stock 3: Overstock Has a Sound Business Plan
Vultures can do very well capitalizing on the difficulties of others. That is the case with Overstock (OSTK).
The company buys excess inventory from struggling brick and mortar retailers and sells the goods online. By passing savings on to the customer, OSTK is positioned to beat the pants off the competition.
In the wake of the dot com crash, short sellers pummeled this stock without any regard for its real business prospects. Those prospects have only improved in the time since. Even though the company is losing money, I expect OSTK to beat estimates when earnings are released next week. The company has a strong balance sheet with more than $4 of cash and minimal debt. With the stock trading for just over two times that cash, I rate the stock a buy.
Costco (COST) Not Living Up to Its Promise
On the surface investors may think that Costco (COST) is a place to be in an economic downturn. In analyzing companies that are doing well during the recession, you'd think businesses offering the cheapest prices would be the leaders. And in some cases, as with Wal-Mart (WMT) and Family Dollar (FDO), they are. These companies are thriving because customers can get more for less.
But the same hasn't been true for COST. Its performance has been horrible during a time when conditions are ripe for its success. I blame management for the stumble, and I would stay away from this stock. It is likely that COST will miss current earnings estimates of $.54 in the current period when that number is released in late May.
I wouldn't wait for the news. I rate COST a D or sell.
Profit From the Nuts and Bolts Behind E-Commerce
It is not only the retail businesses that can make money online. Those businesses that cater to businesses selling goods electronically can do just as well. One of the names in that space is GSI Commerce (GSIC). The company provides e-commerce and interactive marketing services for business-to-consumer customers. GSIC is the nuts and bolts behind the online store.
These businesses may not need bricks and mortar, but they can certainly benefit from technology providers that help make them more efficient. With more companies attempting to carve out a space on the internet, especially given the weakness in brick and mortar, GSIC can be expected to enjoy healthy growth, irrespective of the economy.
Shares of GSIC collapsed during the credit crisis last fall, but have since recovered. If you like charts, you'll note a strong reverse head and shoulders pattern forming over the last year. Such a state is very bullish for the stock.
I rate GSIC a B or Buy.
For Rent Signs Are Bad News for Taubman Centers Stock
For rent signs are appearing at malls across the country. Such a state is bad news for Taubman Centers (TCO).
We have already lost big-name retailers like Circuit City and Linens and Things, putting more space on the market. With many more names likely to give up the fight, pressure on brick and mortar owners is growing by the day. In fact, just this week, fellow mall owner General Growth Properties (GGP) filed for bankruptcy.
Will TCO be next? I'm not sure, but I would not stick around to find out. The recession may be ending later this year, but the damage has already been done. With so much mall supply and retailers looking to cut instead of expand, cash flow at TCO is likely to suffer well beyond the date the recession ends.
Trading above $20 today, TCO would be a prime target to short for those willing to do so. I rate the stock a D or Sell.
America's Next Top Growth Stock
But for all their beauty, growth stocks are also the prima donnas of the market. They can be erratic, they don't always live up to their billing, and they tend to attract a shareholder base that's ready and willing to run at the first signs of slowdown. For those reasons, caution is certainly in order when you enter the world of growth investing.
Fortunately, the Motley Fool's CAPS service brings us the collective intelligence of a community of more than 130,000 investors and is a great resource for separating the Han Solos from the Jabba the Hutts. Each of the five stocks competing for this week's top spot has a market cap of at least $100 million and grew its net profit per share by an average of 20% or more per year over the past three years (you can run the screen for yourself). So let's go ahead and meet our contestants.
Top stocks 1: Biogen Idec
As we might expect from a player in the biotechnology sector, Motley Fool Stock Advisor pick Biogen Idec (Nasdaq: BIIB) has notched impressive growth by developing and selling drugs. More specifically, the company works with other drug companies such as Elan and Genentech to develop drugs for specialty markets that the company feels are underserved. Biogen's biggest haymaker is Avonex, a treatment for multiple sclerosis, but its Tysabri, a newer treatment for MS, has grown by leaps and bounds over the past couple of years and notched nearly $600 million in sales for 2008.
Top stocks 2: Copart
If a relatively obscure business model is what you're looking for, Copart (Nasdaq: CPRT) might be right up your alley. The company is a vehicle re-marketer, meaning that it helps auto insurance companies -- among other sellers -- find buyers for totaled cars. The company has used a combined approach of developing new locations and acquiring existing facilities to fuel its growth. And grow it has -- earnings per share more than doubled between fiscal 2004 and 2008.
Top stcoks3 :Baidu
If I wanted to keep this short and sweet, I could simply say that Baidu (Nasdaq: BIDU) is China's Google (Nasdaq: GOOG). The company is China's leading search engine; its main domain, www.baidu.com, is ranked the No. 1 most trafficked site in China and is No. 10 in the world. Like Google, the company brings home the bacon by selling advertising space tied to keywords. And by being the frontrunner in one of the fastest growing economies, it has managed to boost its revenue tenfold since 2005.
Top stcoks4: Aeropostale
The teen retail world may be a tough place to live these days, but Aeropostale (NYSE: ARO) has been making the most of it. While competitors like Abercrombie & Fitch are quaking under the pressure of the economy, Aeropostale has shown itself to be significantly more stable. For the near future we probably won't see earnings grow at the rapid rate of the past few years, but for now this retailer appears to at least have the ship moving in the right direction.
Top stcoks5: Suntech Power Holdings
You want growth? Suntech Power (NYSE: STP) has got it. In 2004 the burgeoning company logged just $85 million in total revenue, but managed to expand that to $1.9 billion for last year. The sun isn't shining for solar energy companies today the way it was a year ago, but the need for a long-term source of clean power hasn't disappeared. Suntech had a bit of a head start on many companies in this up-and-coming industry, but faces stiff competition from First Solar (Nasdaq: FSLR) and others.
The envelope please ...
The voting is in and CAPS community members have shared their opinions. Right off the bat, Aeropostale and its two-star rating is getting the heave-ho. Interestingly, many CAPS members have given the stock a thumbs-down precisely because the company has held up so well in the recession. Their logic seems to be that the gravity-defying performance can't go on forever and sales will eventually take a dive.
Baidu and Biogen Idec -- each sporting a mediocre three stars -- are next to go. While there are quite a few fans of Baidu on CAPS, there do seem to be some concerns about the company's conduct as well as its rich valuation.
Solar hopeful Suntech Power put up a good fight -- it has more than 4,200 outperform ratings on CAPS and many CAPS members see it as a best of breed among the Chinese solar manufacturers. However, its four-star rating wasn't quite enough to overcome this week's champ, Copart.
Copart is a solid five-star stock on CAPS and has raked in 1,501 outperform ratings versus just 37 underperforms. For the call on this remarkable auto remarketer, here's CAPS All-Star poinkie, who gave the stock a thumbs-up back in October of last year:
My daily commute takes me directly past the newest [Copart] location. As I wait at the stoplight, I get to count the cars. What began as 1 car parked out front has become a steady flow of vehicles of all sorts moving through the lots. I see more employees and the steady flow of increased new products. We can't finance new, let's fix up our used. Strong business model for the current economy.
April 24, 2009
Top 10 stocks of the Fortune 500
But certainly being large does have its advantages. Indeed, some people go so far as to only invest in Fortune 500 companies, so the list holds interest for investors.
The question is which Fortune 500 companies are worth your money? Clearly, investing in the biggest companies is not right approach. Had you bought General Electric (GE), Ford (F) or General Motors (GM) ten years ago, you would be looking at significant losses today. At the end of the day, huge revenues only translated to huge losses as poor financial decisions pushed all three of these companies to the brink of bankruptcy.
While the economy and an epic financial crisis contributed to these stocks' poor performance, the results clearly show you have to be more selective in your investment decisions. I prefer a fundamental approach, examining each stock on its own merits.
Here are my thoughts on the top 10 stocks of the new Fortune 500:
Top stocks 1: Exxon Mobil (XOM)
Up until the middle of 2008, oil prices were on the rise. The boom in crude resulted in the large vertically-integrated oil company becoming a veritable printing press of cash. At the top of the Fortune 500 list is Exxon Mobil (XOM). The good news is that the huge revenues have indeed translated into fat profits for shareholders. Unfortunately for investors, oil prices have collapsed, and demand for crude has been shrinking due to economic contraction. XOM may not be at the top for long. I rate the stock a D or sell.
Top stocks 2: WalMart (WMT)
For much of the past decade, discount retailing giant WalMart (WMT) saw its competitive position eroded due to inroads by Target (TGT) and other upstart retailers. The good news is that the company stuck to its focus on low prices. Such a strategy was timely, considering the pressures on consumers during a very strong recessionary period. As a result, WalMart has reinforced its competitive position and has fared relatively well compared to its peers. That said, the economy is still weak and likely to be stressed for some time. I am still cautious on the future. My rating on WMT is a C or hold.
Top stocks 3: Chevron (CVX)
No surprise here that Chevron (CVX) would be in the top 3 of the Fortune 500. This giant oil company is racing Exxon Mobil (XOM) for the top spot on the list. A retreat in oil prices resulted in shares of CVX losing value over the last six months. The easy days of fast money in oil appear to be over. Size then, should matter, as CVX can better deploy its cash flow to support future exploration and development. But it will be some time before the global economy heals. I rate CVX a C or hold as we wait for conditions to stabilize across the globe.
Top stocks 4: ConocoPhillips (COP)
Close behind Chevron is ConocoPhillips (COP). Investors in COP have to be disappointed that in a year of unprecedented moves in oil prices, COP managed to lose money. Write-downs of assets were the main culprit, and though these are only one-time events, the results reflect poorly on management's strategy of growth via acquisition. Warren Buffett called a recent investment in COP a big mistake. With the gravy train of high oil prices a mere memory, I expect COP to slip in the Fortune 500 rankings over time. I rate COP an F or Strong Sell.
Top stocks 5: General Electric (GE)
The great Jack Welch's legacy at General Electric (GE) is that the company is a global behemoth with gobs of revenue. Now ranked number five on the Fortune 500 list, General Electric finds itself in a fight for survival. Could it be that all that revenue growth was smoke and mirrors? At a minimum, it would appear that the company's finance unit may have been funding loans for purchases that could not be made otherwise. As those loans collapse, GE has been forced to endure massive write-downs. There are no sacred cows in this fight: GE's dividend was cut. It will be a long road before GE sees the end of tunnel. I rate the stock an F or Strong Sell.
Top stocks 6: General Motors (GM)
The auto industry as we know it is dead. The collapse in auto sales, combined with massive legacy costs for employees, crippled the industry. Paraded in front of Congress begging for survival, the big three automakers have fallen far quickly. The appearance of General Motors (GM) on the list of Fortune 500 companies may be a final curtain call. The company claims that bankruptcy is not an option. The government disagrees and is willing to support warranties should court-based reorganization be required. Put it all together and we have a train wreck for common shareholders. I rate GM a D or sell.
Top stocks 7: Ford (F)
The big winner in the auto sweepstakes will be Ford (F). The company has yet to take a dollar of government funding and is much better positioned relative to its domestic competitors. Even better: The company appears to be the closest to bringing to market products that fit the new agenda of alternative energy and fuel conservation. If indeed one or two automakers fail, look for F to be left standing. Eventually car sales will recover and the survivors will thrive. I rate the stock a B or buy.
Top stocks 8: AT&T (T)
Ma Bell has parlayed its monopoly standing and subsequent break-up into a top spot in the Fortune 500. The only problem for AT&T (T) is that the company still acts like a dinosaur that lacks innovation. For many years, while other rivals have performed better on an operating basis, T was lacking a vision. That is, until its partnership with Apple Computer (AAPL) and its game-changing product the iPhone. That deal alone reversed years of ineptitude. Unfortunately for AT&T, all good things must come to an end, as the contract with AAPL is set to expire. Until that issue is resolved, I rate T a C or hold.
Top stocks 9: Hewlett Packard (HPQ)
Computers are big business and generate huge amounts of revenue. One of the biggest companies in the computer selling business is Hewlett Packard (HPQ). Do computers have the same appeal they did while HPQ was clawing its way to the top? Not exactly. The device is becoming more of a commodity. Which means it's not so easy making money for shareholders by selling computers. In the case of Hewlett Packard, being the largest may have its benefits. As profit margins are thin, huge sales are needed to drive growth. The problem for HPQ in the short term is the economy. Until we see a recovery, requisite sales will be less than needed for maximum profit. I rate HPQ a C or hold.
Top stocks 10: Valero Energy (VLO)
The oil refinery business is very challenging. Even though there have been no new refineries built in the US in some time, the existing refineries have had a tough go of it on the profit front. The huge volatility in oil prices in 2008 was disastrous for the industry. Though sales are high, the price paid for crude and the lower selling price translated to smaller profits for the industry. Valero Energy (VLO) is one of the leaders in the space as evidenced with its top 10 placing in the Fortune 500, but that does not mean investors should own the stock. I expect the refinery business to remain challenging, even with lower oil prices. I rate VLO a D or sell.
In today's market, having a top 10 spot on the Fortune 500 list is no ringing endorsement for shareholders. There is only one stock on the top 10 that I currently recommend, and 5 of the 10 are clear sells. You might even say that blindly following a big-name list is a sure-fire way to underperforming the markets these days.
3 Hot Stocks in Ice-Cold Sectors
Are stocks higher? Are stocks lower?
Now every uptick or downtick in the market makes news. We are obsessed, swimming in information about stocks.
What often gets lost, though, is that the story of the market is a whole lot more than the major indexes and their daily or minute-by-minute movements. The market is a mosaic of thousands of unique stories.
While the aggregate direction is important, there can be positives in a market that is negative overall, or vice versa. To get the true story, we need to dive down deeper into the individual names that make up the market. Here we find individual companies that are doing well, regardless of what sector they're in.
The Best Stocks Are Found by Investing by the Numbers
My Portfolio Grader stock rating tool makes it simple.
I grade 5,000 companies on eight proprietary criteria, based on everything from earnings momentum to sales growth to my unique qualitative grade, which shows how well stocks perform on a risk-adjusted basis compared to the market.
The Market May Have Hit Bottom
In past recessionary periods, the best time to buy stocks has proven to be about 4-5 months before a recession ends.
Assuming that the stimulus and spending packages start to breathe life into the economy in the third quarter, then March 9 would be the market bottom in this recession.
That makes now an excellent time to buy stocks. Not just any stocks, mind you. But carefully selected stocks that are in the right positions to profit in this economic climate.
Retail Stocks Aren't All Dead
There are some interesting side stories to the main drama of this bear market. One theme is that any company that is tied to the consumer is dead money. Not true.
I have found a number of stocks that rely on the consumer for growth that rate very highly.
Take the retail sector. It's been a big loser in the market today. We have already lost Circuit City and Linens 'n Things. Other retailers are expected to close their doors, too.
But not every retailer is suffering. Buckle, Inc. continues to do very well.
Hot stocks 1: Buckle (BKE)
The retail customer is fickle. When it comes to fashion sense, what is hot one day can be not so hot the next. If you are going to own these stocks, you need to be nimble.
Though the recession impacts operations, a hot retailer, like Buckle, can do well irrespective of the economy.
BKE is a retailer of young men's and women's apparel. Shares of BKE have held up reasonably well during the bear market on the strength of growing profits. Imagine what the company would do during a strong economy.
Pacific Sunwear (PSUN) Is Not
On the flip side is Pacific Sunwear (PSUN) . Shares of PSUN have collapsed during this bear market, as sales slip. The very survival of the company is in question.
I rate BKE an A and PSUN an F. Not all retail is created equal.
Bright Spots Exist in Restaurant Stocks
The same is true in the restaurant space. Certainly consumers are dining out less, as budgets are tight.
But there are some restaurants that are thriving in this economy. Clearly, when consumers do dine out, they are looking for value.
Hot stocks 2: Darden Restaurants (DRI)
Darden Restaurants (DRI) offers the value that consumers seek in today's economy, with its Olive Garden, Red Lobster and LongHorn Steakhouse stores.
Though shares of DRI were pummeled in the fall sell-off, DRI is currently trading near 52 week highs. The reason for the recovery is increased traffic at low-dollar dining locations. That is right up the alley of DRI, and I give the stock an A rating, making it a good buy.
Landry (LNY) Is Not
Landry (LNY) has a similar stable of restaurants to Darden Restaurants, offering budget fare. Unfortunately the company is also tied to the casino and hospitality space that are both doing poorly at the moment.
The stock has been crushed during this bear market, losing more than 70% of its value. Now trading for $5 per share, LNY is still not cheap. I give Landry a D rating. Stay away.
Tech Stocks Can Do Well in This Market if You Choose Carefully
Technology is another sector worthy of exploration. Many investors are speculating that the technology group will lead us out of the recession.
That may be true, but not all technology is created equally. There is technology to buy and technology to sell.
Hot stocks 3: Apple (AAPL) ;
Yahoo (YHOO) Is Not
One company is an innovator, and another is stuck in the mud. One company increases market share while another loses market share. One has excellent management, and the other has a Chief Yahoo.
I think you get my point. Apple Computer (AAPL) is simply a must-own company. With a history of leading in the industry with superior products, AAPL continues to power forward even during these difficult economic conditions.
About the only thing you can say about Yahoo (YHOO) is that the company might be bought for a higher price. Even there, they screwed up a deal that would have resulted in shareholders receiving more than $30 per share. A potential acquisition is no reason to own a stock.
As for AAPL, shares have been depressed due to speculation regarding Steve Jobs' health. Such speculation is misguided and presents an opportunity to buy shares on the cheap. I give AAPL a B and YHOO a D.
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The next time I read a blog, I hope that it doesnt disappoint me as much as this one. I mean, I know it was my choice to read, but I actually thought you have something interesting to say. All I hear is a bunch of whining about something that you could fix if you werent too busy looking for attention. Lawn Mowers For Hills,
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