HOT ARTICLES

Friday, July 3, 2009

Is It Time to Sell Boeing?

In case you couldn't guess from last month's test flight cancellation, or the subsequent cancellation of 15 orders for the 787 Dreamliner, all's not well at Boeing (NYSE: BA). The latest news, that Boeing is in negotiations to take one of its suppliers in-house, just confirms it.

On Wednesday, widespread reports pegged Boeing as closing in on purchasing Vought Aircraft, a South Carolina facility that makes sections of the 787's fuselage. Boeing bulls argue this is good news, with The Wall Street Journal this morning putting on a happy face, arguing that:

  • "Boeing... needs to take a more direct role in the manufacturing process of its marquee product."
  • Boeing erred in outsourcing too much 787 work to suppliers like Honeywell (NYSE: HON), United Technologies (NYSE: UTX), Spirit AeroSystems (NYSE: SPR) ... and Vought. "Bringing more of the production in-house could increase Boeing's ability to manage the complex project."
  • Buying the South Carolina operation "potentially paves the way for a second 787 assembly line."

I disagree.

The party line
Oh, I admit that the Journal's minor premises have merit. Boeing's troubles with its supply chain are well documented, and berthing suppliers at the mothership could help unkink the chain. Also, seeing as the 787 is already two years behind schedule, opening a second assembly line to accelerate production and delivery to impatient customers like AMR (NYSE: AMR), Delta (NYSE: DAL), and Continental (NYSE: CAL) may be prudent.

But while there's logic to the party line, for my part, I prefer to ...

Read between the lines
And what I see there is Boeing admitting that as bad a state as the 787 program appears to be in, it's in fact quite a bit worse than Boeing lets on. Up until a few weeks ago, we'd been led to believe that Boeing had generally gotten its problems under control. The Dreamliner's maiden voyage was on schedule. Actual delivery of the plane was just around the corner.

Investors who slapped the snooze alarm and dreamed happy dreams through last month's test-flight buzz, however, cannot afford to ignore the resurgent alarm bells today. You need to ask yourself: If all is well, the structural weak spots that forced the test flight's cancellation will soon be fixed, and production put back on track ... then why did Boeing feel it necessary to bring more manufacturing in-house today?

This Week in Solar

Canadian Solar (Nasdaq: CSIQ) kicked the week off on a positive note, with an announcement that the firm had "recently signed or reconfirmed sales contracts, contract extensions or received purchase orders for delivery of about 120MW of solar module products." Of course, that was too wordy for the press release's headline, which simply read "Canadian Solar Announces 120MW of Recent Sales Orders." Same difference, right?

Rather than slam CSI for this bit of spin, I will point out that this announcement follows the firm's decision a few weeks ago to restart its module expansion program. Further, one of CSI's customers, an integrator by the name of Systaic, spoke in the release of the improving financing environment in its native Germany, and the bankability of CSI-powered solar plants. That's more than PR fluff.

On Tuesday, Suntech Power (NYSE: STP) pulled down a $50 million loan from the IFC, a division of the World Bank. I'm not sure if it was this financing, or the rumors of a giant new solar project in the Sichuan province of China, but some analysts hiked their ratings on the solar slugger the following day.

By Friday, it was confirmed by Suntech reps that the firm had indeed entered into "a non-binding strategic agreement similar to our agreement with the Qinghai government," referring to an equally mammoth 500-megawatt project that came to light earlier this month.

Also seeing some Chinese love this week was Yingli Green Energy (NYSE: YGE), which pulled down a much more modest 10MW project. I'm increasingly getting the sense that hometown heroes are going to have a near-lock on the Chinese market for the foreseeable future, which poses an interesting medium-term challenge for outsiders like SunPower (Nasdaq: SPWRA) (Nasdaq: SPWRB) and First Solar (Nasdaq: FSLR).

The Best Stock to Own

Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years with dividend reinvestment? In terms of returns, Kraft has quite literally been the very best stock of the past half-century.

I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders like Oracle (Nasdaq: ORCL) are underserving their owners.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Procter & Gamble (NYSE: PG) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 3.4%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.

Speaking of companies with strong brands, I'm taking a hard look at Mattel, which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. Competitor Hasbro (NYSE: HAS) is generating a lot of press with its Transformers franchise. But I believe Mattel has the stronger position when it comes to products and is very well-situated to market them with A-list partners like Dreamworks (NYSE: DWA). The 4.7% dividend yield should make the wait that much easier.  

But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine StatoilHydro (NYSE: STO), a big name in North Sea energy exploration and distribution. The company has been battered by declining energy prices across the world, but remains well-positioned to serve energy-thirsty consumers in Norway, the U.S., and the rest of Europe. Like competitors British Petroleum (NYSE: BP) or ExxonMobil (NYSE: XOM), StatoilHydro should benefit from a long-term increase in fossil-fuel demand. Plus, you'll be collecting a healthy 3% dividend yield along the way.

Thursday, July 2, 2009

5 Stocks With a Bright Future

Investments that have been successful over the long term almost assuredly share at least one thing in common -- growth. You'll be able to find very few companies that have been unable to increase their earnings and yet still produce good returns for shareholders.

Think about it this way: Dividends aside, investors reap their gains when a company's stock price goes up. The stock price is typically driven by two levers -- earnings and the multiple that investors are willing to pay for those earnings. Since earnings multiples tend to fluctuate within a certain range, long-term investors should have a keen focus on the company's ability to increase earnings.

Does it seem too simple? Maybe keeping it simple is a good plan sometimes. After all, as Third Avenue's Marty Whitman has put it:

Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise.

With that in mind, I've kept it simple and dug up five stocks that analysts expect will notch long-term earnings growth of 10% or better. I've also pulled up the CAPS rating for each stock to show what the 135,000-member Motley Fool's CAPS community thinks of the company's prospects.

Company

Expected Long-Term
EPS Growth Rate

Forward P/E

CAPS rating
(out of 5)

Buffalo Wild Wings (Nasdaq: BWLD)

23%

16

***

Research In Motion (Nasdaq: RIMM)

23%

15

**

GameStop (NYSE: GME)

16%

7

***

Noble Corp. (NYSE: NE)

13%

5

*****

Wells Fargo (NYSE: WFC)

11%

14

***

Sources: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and CAPS. EPS = earnings per share. P/E = price-to-earnings ratio.

Wall Street analysts aren't known for being supernatural in their forecasting skills, so not all of these estimates may pan out. However, this list may be a good place to dig in for further research. I'll get you started with some thoughts on a couple of these stocks.

Cool to the touch
I imagine that most of you already know Research In Motion as the maker of the BlackBerry smartphone, which has the business market on lockdown. If you've somehow missed the BlackBerry phenomenon, let's just say it was one of the first mobile devices to make the "smart" in smartphone seem like more than a clever name.

A host of competitors have caught wind of the massive opportunity in the smartphone market though, and today RIMM faces increasing competition from folks like Apple (Nasdaq: AAPL), Nokia, and Palm (Nasdaq: PALM). Heck, even Google is getting into the mix.

The growing war zone in the smartphone market has spooked enough CAPS members to help sink RIMM's stock to a lackluster two-star rating.

Bringing the heat
But what about high growth and a high rating from the CAPS community? For that we can turn to Noble Corp.

The world needs oil, and the ocean floor has got it. Lucky for us there are companies out there like Noble, which provide offshore drilling services for sites that are anywhere from slightly underwater to thousands of feet below the surface.

While oil prices have been more volatile than an intoxicated Eagles fan at the Meadowlands, CAPS members by and large have stuck to their faith in the long-term potential of oil and related companies.

But why Noble in particular? Let's take a look at what CAPS All-Star MattH42004 had to say earlier this year:

Noble has a lot of things going for it, including a very strong balance sheet. With over 500 million in cash and only 180 million in debt coming due over the next five years, Noble clearly has the financial ability to maneuver through the difficult times ahead. Their [fleet] utilization is still strong, and looking into the future, their deepwater rigs will be able to command a premium when oil prices return back to a normal range.

Beware of These Cheap Stocks

Not too long ago, one of our Motley Fool Global Gains subscribers emailed me and asked me to take a look at a company called Orient Paper (OPAI.OB). Though the stock was Chinese, small, and traded over the counter, it had piqued his interest because it looked so darn cheap.

As I began my own research, I quickly confirmed that yes, this stock looked darn cheap. At $0.55 per share (its price at that point), it had a $25 million market cap and was trading for less than 1 times sales and 2 times EBITDA.

The story does not end there
After studying Orient Paper's SEC filings, however, I came away with five troubling questions:

First, until just last month, the company had a 25-year-old CFO who had worked in that position since she was 23 or so. That seems like an awfully young and inexperienced C-level officer for a publicly traded company. Given that so many small public Chinese companies struggle with internal controls even after they've hired qualified CFOs and auditors, one has to wonder if Orient Paper has the same issues.

Second, the company keeps extraordinarily low levels of inventory (just 2% of sales) while larger peers such as International Paper (NYSE: IP) and Boise (NYSE: BZ) keep 9% to 13% of sales in inventory. How can Orient Paper maintain such small inventories and produce such significant sales growth, and what does that mean for the sustainability of the growth story here?

Third, the company has a volatile customer list (with major customers appearing and then disappearing from one year to the next), yet has no advertising expenses and extremely low SG&A expenses. If the company is not keeping customers and not spending to promote itself to new customers, how is it getting business? The 10-K tells us that the company relies on its CEO for his "personal and business contacts." But while contacts are a very good thing to have in China, you don't ever want to be part-owner of a company that relies entirely on the relationships of one key individual.

Fourth, the company seems content to use its shares as currency, despite its seemingly low valuation. For evidence of that, note the 5 million shares the company issued to pay a $500,000 consulting bill in 2008. What does this mean for how it will treat outside shareholders going forward?

Finally, multiple insiders have loaned money to the company at charitably low rates to fund working capital. If this company is financially strong, why can't it source bank debt or, better, self-fund?

Nor does it end there
After posting these questions on my blog, I received a response from Orient Paper's new CFO, Winston Yen. While you can read his full response for yourself, he confirmed that the company is very good at managing its inventories, turning pulp into finished customer orders within days. He also noted that the company used the proceeds from its related-party loans to add a production line and that the company would not have been able to do so otherwise. And he asserted that the company's consistently low levels of accounts receivable show an operation that is legitimate and efficient.

On the other hand, we have to take his word that the financial compliance in place at the company is solid, he had no explanation for why the company can't get bank debt to fund growth, and he had "no comment" on the bizarre share issuance to former consultants.

The point of this story
Now, if you find Mr. Yen's answers to be satisfactory, then buy Orient Paper because, yes, it does look cheap. I, however, will be watching and waiting for at least a little while longer to try and verify the quality of the business.

See, high-quality businesses don't normally sell for dirt-cheap valuations -- note Google's (Nasdaq: GOOG) enterprise value-to-EBITDA ratio of 13. That's particularly true of high-quality businesses in a fast-growing economy like China's -- Baidu.com (Nasdaq: BIDU) trades for 46 times EBITDA. But it's also not impossible. Thanks to the recent market downturn, there are more than 100 Chinese companies trading on the U.S. exchanges today for less than 5 times EBITDA.

Are they all bargains? Of course not. But at Global Gains, we think there will be significant long-term rewards for investors who are willing to be patient and carefully study the likes of Orient Paper, SORL Auto Parts (Nasdaq: SORL), Noah Education (NYSE: NED), and Linktone (Nasdaq: LTON) among others.

The key, though, is that you don't just want to find a cheap stock. You want to find a cheap stock that aligns you with a high-quality, scalable business whose management team you trust to allocate capital effectively.

More on that last point
This is why we travel to China every year at Global Gains to investigate and meet a collection of promising companies and management teams. And while some scare us away, others make us that much more confident. In fact, during each of our past two trips, we uncovered a stock that's since more than doubled. (Read more about that here.)

This Week's 5 Smartest Stock Moves

If you're feeling good about the market, you're not alone. Take my hand as we go over some of this week's more uplifting headlines.

1. Amazon knows how to cross the state line
First it was North Carolina. Now it's Rhode Island and Hawaii. Amazon.com (Nasdaq: AMZN) is booting affiliates in states that are threatening to pass legislation that would force Amazon to charge and collect taxes at the state level.

The bills suggest that Amazon has a presence in their states, even if it's just a hobbyist train collector who uses Amazon ads on his free-hosted blog to earn a little commissionable revenue from the world's leading online retailer.

My heart goes out to members of the Amazon Associates program in North Carolina and Rhode Island, but the e-tailer is doing the right thing. Competition is cutthroat in cyberspace, and delivered pricing is everything. Besides, unlike smaller chains that live and die by affiliate marketing, Amazon has evolved over the years. Shoppers go to Amazon.com directly because they know it carries just about anything. It won't lose out on a whole lot of revenue. The only real losers are the states that figured they would fatten their collections, only to realize that they will actually shrink as web-entrepreneurs residing in their states earn less taxable income.

2. Netflix is one in a million  
Three years after daring data-hungry developers to top its proprietary Cinematch flick-recommendation platform, Netflix (Nasdaq: NFLX) may finally have a winner. A multi-national team has apparently topped the requirement to nab a $1 million award from Netflix, besting the Cinematch system baseline by 10% or better.

Thousands of teams have been trying to improve on the Netflix data-mining functionality that spits out DVD recommendations based on rental histories and star ratings. Whether it's the money or the academia, the challenge has generated a lot of publicity for Netflix.

For starters, the fact that it's taken roughly three years is a testament to the original Cinematch platform. If thousands of frenzied teams of brainiacs took this long to improve it, how will any other company rival Netflix for getting into the psyche of the couch potato and knowing just what they'll want to see next?

Well played, Netflix. It's a million bucks well spent.

3. Satellite radio: Born to run
You know you're nimble when you're able to launch a 24/7 Michael Jackson tribute channel less than two days after the iconic pop singer died. Sirius XM Radio (Nasdaq: SIRI) then kept the event-driven programming coming, announcing 4th of July content that includes a Bruce Springsteen concert (that will be recorded today in Germany), a live Jamie Foxx Independence Day show from Las Vegas, and a child psychiatry marathon on its health and medical channel.

Is it any surprise that the company also decided to extend CEO Mel Karmazin's term this week, bumping up his pay in the process? Shares of Sirius XM may be trading for jukebox change, but it's hard to fathom the merger between Sirius and XM even being attempted by anyone other than the bold Karmazin at the helm.

4. Let's go logrolling
After a dozen mostly successful IPOs during the second quarter, the third quarter got off to a strong start with yesterday's debut LogMeIn (Nasdaq: LOGM). The remote connectivity specialist priced its IPO at $16. It popped at the open to $20, closing at $20.02.

Is a market cap of nearly $430 million justifiable for a company that has posted annual losses in each of the past three years, clocking in with revenue of just $51.7 million last year? Mr. Market seems to think so.

It certainly helps that LogMeIn is growing quickly, with 22.1 million registered users and counting. It also began 2009 with a healthy first quarter profit. 

5. Gosh, Oshkosh
Shares of Oshkosh (NYSE: OSK) soared 27% yesterday, after the company was awarded a $1 billion military contract for its armored mine-resistant vehicles. It's not every day that a company wins an order that is roughly the size of its market cap.

Oshkosh beat out larger contractors like General Dynamics (NYSE: GD) and Navistar (NYSE: NAV) for the order, but it's willing to share the love. Oshkosh plans to subcontract some of the work to its disappointed rivals.

Another Day, Another Hot IPO

LogMeIn (Nasdaq: LOGM) became the latest IPO to be warmly received by the market.

Shares of the on-demand connectivity specialist opened at $20 this morning after pricing its offering of nearly 6.7 million debutante shares at $16.

LogMeIn claims that it connects 70 million devices worldwide, affording clients the luxury of logging in to remote PCs and servers. It oversaw 188,000 premium accounts as of the end of March, 54% more than it had on its rolls a year earlier. And it has a whopping total of 22.1 million registered users.

On the not-so-bright side, LogMeIn rang up revenue of just $51.7 million last year. It has also posted annual losses over the past few years. So, on the surface, this is an unlikely IPO candidate. With 21.4 million shares outstanding after this morning's offering, even the now-obsolete $16 price bestows a steep $342 million market cap on the company.

However, growth sells, and LogMeIn has it in strides. Revenue soared by 139% in 2007 and climbed by a healthy 92% last year. If the lack of historical profitability is a concern, take heart: The company was comfortably in the black during this year's first quarter. Pre-tax profit margins were nearly 15%, and Uncle Sam's bites should be minimal as the company works through years of tax-loss carry-forwards. Now that the company has apparently turned the corner on the bottom line, its scalable model should deliver healthy profitability in the future.

Growth is the key. A dozen companies went public during this year's second quarter, consisting mostly of names that are growing in this daunting environment. For the most part, those willing to take the risk to become an IPO's first investors have been duly rewarded.

Stock

IPO

6/30/09

Change

Changyou.com (Nasdaq: CYOU)

$16.00

$38.38

140%

Bridgepoint Education (NYSE: BPI)

$10.50

$17.00

62%

Rosetta Stone (Nasdaq: RST)

$18.00

$27.44

52%

DigitalGlobe (NYSE: DGI)

$19.50

$19.20

(2%)

SolarWinds (NYSE: SWI)

$12.50

$16.49

32%

OpenTable (Nasdaq: OPEN)

$20.00

$30.17

51%

LogMeIn is kicking off the third quarter in the same fashion.

The valuation still appears a bit rich. The moat doesn't appear as wide as we've seen with OpenTable and its mastery over online restaurant reservations, nor with Rosetta Stone and its language software. Remote connectivity will continue to be a competitive niche. However, until LogMeIn's torrid growth slows or its initial profitability cracks, it's hard to bet against this morning's red-hot debutante.

The important question is this: Do you think the IPO is a good buying opportunity? Or will the stock need to cool off from the IPO hype? Let our community know what you think -- head over to Motley Fool CAPS and share your thoughts with the other 135,000 members that are currently part of the community. Even if you'd prefer to pass on LogMeIn, you can check out a couple of the other stocks listed above or any of the 5,300 stocks that are rated on CAPS.

Wednesday, July 1, 2009

TOP STOCKS:Protect Your Portfolio From a Weakening Dollar

There's something lurking out there in the shadows that will likely weaken the dollar -- and your portfolio along with it. Fortunately, there's a way to defeat this dark force.

In March, British Prime Minister Gordon Brown promised to "bring the shadow banking system and tax havens under the regulatory net." What exactly is the shadow banking system, and why does it matter to you?

The Financial Times summarized it nicely: "A plethora of opaque institutions and vehicles have sprung up in American and European markets this decade, and they have come to play an important role in providing credit across the financial system." [Emphasis mine.] These opaque institutions and vehicles have names like "asset-backed commercial paper," "credit default obligations," "structured investment vehicles," and "derivatives." Their role in providing credit in the last decade was substantial. Bob Janjuah, a credit analyst at Royal Bank of Scotland, estimates that in the past two years, the shadow banking system accounted for half of all net credit creation in the United States.

Out of the darkness, into the light
When trust evaporated among participants in this hidden system, the current financial crisis was born. Ben Bernanke likened it to an old-fashioned bank run, telling The Washington Post, "We were seeing variants of classic panic behavior" in 2007 and 2008 when markets for certain asset-backed securities froze.

Having lost their appetite for products like mortgage-backed securities, it seems that everyone is trying to exit the system at once. Economist Paul Krugman points out that, "People aren't pulling cash out of banks to put it in their mattresses -- but they're doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills." This phenomenon drove yields on Treasuries down to historic lows, with the three-month T-bill briefly going negative (in effect, a guarantee that the purchaser would lose money on their investment). This flight to safety has led to the dollar's short-term strength.

Slow down -- you move too fast
However, the unwinding of this system means there are now a lot more dollars in the global financial system. Because the shadow banking system essentially found itself in a liquidity trap, the Federal Reserve has flooded the system with dollars to prevent a collapse. However, when confidence returns, investors will want to own something other than Treasuries. The flight out of safety and back into the market will mean a weaker dollar on the global stage.

Now that all these derivatives have come to light, what's the average American investor to do?

Light at the end of the tunnel
I recently asked Foolish colleague Tim Hanson, who heads our Global Gains advisory service, about this very conundrum: how to protect a portfolio against a weaker dollar. Should American investors be satisfied owning stocks of American companies that are seeing large growth from emerging markets, names like Deere (NYSE: DE), General Electric (NYSE: GE), and Yum! Brands (NYSE: YUM)? Or should investors weight their portfolios heavily with foreign companies that trade on U.S. exchanges and generate revenue in currencies other than the dollar?

Tim's answer was, of course, to do both. Own quality American companies -- like Intuitive Surgical (Nasdaq: ISRG), which has already begun to move into the Chinese market, and will see much more growth overseas. At the same time, U.S. names shouldn't be your only holdings in certain sectors like energy, and owning stocks like Petrobras (NYSE: PBR) or CNOOC (NYSE: CEO) can help you diversify your stocks away from dollars exclusively.

Feelin' groovy
But Tim got a serious look on his face and told me that I also can't afford to ignore foreign small- and mid-cap stocks. Sure, there's more risk investing in foreign countries where the rules, regulations, and business conduct aren't always well understood. But with their huge upside potential, foreign small and mid caps might be your best hedge against a weak dollar.

This is why Tim and his Global Gains team are taking a third trip to Asia, on July 5, visiting with business owners and seeing operations firsthand. These companies are operating in dynamic emerging markets and have the potential for super-sized returns, and this could be your best hedge against a weak dollar. If you'd like to learn more about them, sign up to receive all of the team's free real-time dispatches from the field.

It Isn't Too Late to Buy Oil

When my in-laws traded in their car for a Prius a few years ago, I initially wondered if they were trying to save money on gas or if my retired father in-law simply wanted a new toy.

I'm a sucker for gadgets and new technology too, so I certainly couldn't blame him if he did. But by 2008 it didn't matter if gadget lust had driven the trade, because they were saving $100 a month or more on gas.

Consuming more and more
Of course, oil and gas are quite a bit cheaper now than they were last summer -- when the world struggled to cope with $147-a-barrel oil. My in-laws aren't saving nearly as much now, but I suspect they'll continue to be happy with their trade in. Toyota (NYSE: TM) should be pleased with sales of the Prius, because as the world recovers from the recession in oil consumption, emerging markets should once again put pressure on global oil supply to grow.

The table below shows just how big a factor consumption growth in emerging markets has been in the last 10 years -- and how little developed market consumption has changed.

Oil Consumption � Millions of Barrels/Day

Country

1998 Consumption

2008 Consumption

Rank

CAGR

U.S.

18.9

19.4

1

0.3%

China

4.1

8.0

2

6.9%

India

1.8

2.9

5

4.9%

Germany

2.9

2.6

6

-1.1%

Brazil

2.1

2.5

7

1.8%

Saudi Arabia

1.4

2.4

10

5.5%

World

74.1

85.4

N/A

1.4%

Source: Energy Information Agency actual and forecast data; CAGR = compound annual growth rate.

Regardless of what happens to U.S. consumption, it's the emerging markets that are creating the need for additional supply. And China's consumption clearly stands out from the pack.

Expect more of the same from China
The Energy Information Agency expects China's consumption in 2009 to be flat, largely because the recession has pushed industrial use down. With most of its GDP tied to exports, an industrial recovery will take time. But transportation consumption is another story, as China continues to sell autos at a breakneck pace. Last month another 812,000 autos were sold in China, and the country is on pace to sell more than 10 million autos this year. That's on top of last year's 9.3 million autos sold, and higher than 2009 sales expectations for the U.S.

Volkswagen has announced that it expects its 2009 sales in China to exceed its sales in Germany for the first time. Volkswagen's probably not alone either, at least not for long, because only 20 out of 1,000 people have cars in China. That compares to 800 or so per 1,000 people in the U.S. With such little consumption per capita, there is plenty of room for additional growth over the next five to 10 years. As more cars hit the road, China's oil consumption will continue to increase.

That's good news, not just for PetroChina (NYSE: PTR), but for multinationals like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and BP (NYSE: BP), because they need steady cash flows to support the development of new fields. And it's even better news for Suncor (NYSE: SU), Petrobras (NYSE: PBR), and other firms with substantial oil sands and deep-sea assets, because these sources are substantially more expensive to develop.

All this means that despite the recession and the recent run-up in oil stocks, it's not too late to buy oil, because the long-term trends for higher demand are still in place.

China set to grow and benefit too
For its part, China needs to reduce its reliance on exports and deal with the inevitable cultural and political changes that come with economic growth and greater freedom. But because of its substantial currency reserves and infrastructure spending over the past decade, it is in a position to continue supporting the fastest economic growth story in recent history.

China's potential growth is one reason our Motley Fool Global Gains team is heading back to the country this July to meet with some promising companies we've identified through our research. If you're interesting in hearing about what we find, you can sign up to receive all of our free real-time dispatches from the field simply by providing your email address in the box below.

7 Stocks to Start You Off

Why should late-night DJs get to offer all the dedications? I hereby dedicate this article to newcomers to the investing arena, to people who've freed up some cash to invest, and to those who understand that this sluggish stock market presents them with a rare and exciting opportunity.

If you're ready to invest, you may be facing one big question: which stocks to start with. After all, there are thousands to choose from. You could take the easy (and quite reasonable) route and invest in a broad-market index fund. Even investing great Warren Buffett believes most people are better off following that strategy.

But to aim even higher, you may want to put some or all of your money in individual stocks. And in my opinion, healthy dividend payers could be the best place to start your search.

Start with reliability
To look for the cream of the crop in the dividend world, take a gander at Standard & Poor's list of Dividend Aristocrats. (My colleague Joe Magyer offers some other excellent dividend-seeking tips.)

The Aristocrats are S&P 500 companies that have increased their dividends every year for at least 25 years. Here are some Aristocrats you might consider for your portfolio, along with their dividend growth rates:

Company

Recent Dividend Yield

5-Year Average Annual Dividend Growth Rate

ExxonMobil (NYSE: XOM)

2.4%

10%

Automatic Data Processing (Nasdaq: ADP)

3.7%

18%

Coca-Cola (NYSE: KO)

3.5%

12%

Walgreen (NYSE: WAG)

1.5%

21%

Eli Lilly (NYSE: LLY)

5.7%

7%

Johnson Controls (NYSE: JCI)

2.7%

17%

McDonald's (NYSE: MCD)

3.6%

32%

Sources: Standard & Poor's, MSN Money.

When evaluating dividend payers, consider more than just the current yield. A company offering a yield of 5% might seem more attractive than a company of seemingly equal quality paying 3%. But if the former company features irregular and anemic dividend increases, while the latter has averaged 12% annual hikes, that 3% will become more than a 5% effective yield for you in just a few years. And over 10 or 20 years, that accumulation could really pack a punch.

What makes dividends so important?
It's not exactly a secret: Dividends accounted for 41% of the S&P 500's return between 1926 and 2006. And according to Ned Davis Research, between January 1972 and April 2009 (a period that included booms and busts), dividend payers returned 7.8% annually, crushing the 0.7% annual return of stingier stocks.

Even if their stock itself stalls, healthy, growing companies -- like the Aristocrats above -- will keep paying you their dividend. During 2008, many solid companies actually increased their dividends.

The seven stocks I've listed for you aren't formal recommendations -- just good starting points for your own due diligence. Nor are they the only dividend candidates for your portfolio. We'd love to introduce you to some other ideas, along with some valuable lessons in dividend investing, with a free 30-day trial to our Motley Fool Income Investor advisory service. On average, its picks are beating the market handily, even as they offer an average current yield of 5.5%. Nineteen of our recommendations sport yields above 6%! Click here to learn more about a free 30-day trial (there's no obligation to subscribe).

5 Unbelievably Solid Companies

Quick test: Which of the following is false?

  • The average American's lifespan is nearly 80 years.
  • The average large American corporation's lifespan is between 20 and 50 years, depending on the source.
  • Dinosaurs still exist and can be seen roaming throughout Kansas, Nebraska, Iowa, and Rhode Island.

You didn't hear about the T-Rex in Pawtucket?
Oh, OK, we'll fess up: Dinosaurs remain extinct. That means an average American outlives an average large-sized American corporation by a factor of 2 or more.

Two years ago, we wrote a column advocating that investors look for companies with the following four characteristics:

  • Built to last for 100 years or more.
  • Little-known, yet dominating their growing industries.
  • Steered by committed management teams.
  • Governed by the highest corporate values.

Little did we realize just how preposterous it is that companies would be built for "100 years or more"! In fact, according to Arie de Geus, author of The Living Company, "a full one-third of the companies listed in the 1970 Fortune 500 … had vanished by 1983 -- acquired, merged, or broken to pieces."

Professor Jeremy Siegel's meticulously researched book The Future for Investors studied the original companies of the S&P 500, which was put together in 1957. Of those 500 firms, Siegel found, just 25% survived intact to 2003! Over that 46-year span, the other 75% (fully 375 companies) went bankrupt, merged, or were taken private.       

That's our advice: Invest in unicorns and sasquatches
This doesn't invalidate our earlier advice -- that you should look to invest in businesses built to last for 100 years or more. If you can do that, after all, you'll align yourself with managers who are thinking long-term rather than short-term.

It does, however, make an elite group of U.S. businesses stand out even more -- for one shared trait that is almost as unbelievable as unicorns and sasquatches. Before we get to that trait, let's look at that List of Five:

  • Target (NYSE: TGT). Has been paying dividends every quarter since it went public in 1967.
  • Wal-Mart (NYSE: WMT). Has been raising its quarterly cash dividends since it began paying a dividend in 1974, not long after it went public.
  • SYSCO (NYSE: SYY). Has paid dividends for 158 consecutive quarters (roughly 40 years).
  • Emerson Electric (NYSE: EMR). Has increased its dividend every year for 52 years.
  • General Mills (NYSE: GIS). Has paid uninterrupted dividends -- when you include the cereal king and its predecessor company -- for 110 years!

These five businesses have shown remarkable track records. What's most impressive: Each has been paying a dividend for more than 35 years.

We've written a lot about global stocks lately, but if you're a gun-shy investor looking for stocks on which to build your retirement foundation, dividend stocks are a vital arrow in your quiver.

Here's why
The benefit of dividends to shareholders is clear: You get paid cash each and every year, regardless of whether the underlying stock is up, down, or indifferent. Furthermore, you can pocket that cash or use it to buy more shares of stock. Dividends, however, also have a benefit to the companies that pay them, and we think it's no coincidence that these long-lasting companies are all dividend-payers.

That's because dividends -- and the need to be consistent in paying them once a company starts paying them -- force companies to be responsible with their cash. In fact, a recent paper by Douglas Skinner and Eugene Soltes of the University of Chicago found that dividend-paying companies have better earnings quality than their non-dividend-paying peers, and that "dividend-payers are less likely to report losses" [emphasis added]. And because companies go out of business only when they start losing money, it's clear that companies that don't lose money won't go out of business.

So there's one little secret when you're seeking companies that are being built to last 100 years: Look for stocks that pay dividends.

It's not all joy in Dividend-ville
Of course, there are no sure things, and that's just as true with longtime dividend-payers as it is in sports. Even worse, the current economic downturn has forced a number of former "dividend dynasties" to cut or even do away with their dividend -- State Street (NYSE: STT) and Wells Fargo (NYSE: WFC) are two high-profile examples. Thus, it's as critical now as ever to carefully scrutinize any stock you choose to invest in and diversify your portfolio broadly across a collection of superior companies.

If you're interested in doing just that, click here to join our Motley Fool Income Investor service free for 30 days. The dividend-fiends there run a model portfolio of their top dividend-stock ideas, and with yields creeping up recently as the stock market has dropped, their hunting grounds are as fertile as ever.

Tuesday, June 30, 2009

Something Could Go Right in Banking

The name Dick Bove may not ring bells for many investors, but if you're sniffing around the stocks of U.S. banks, it's a good name to know.

It's certainly not the only name to know, as folks like Meredith Whitney and Mike Mayo, as well as some of my Foolish colleagues, including Morgan Housel, have had some interesting things to say about the financial industry. Bove, however, is particularly notable because of his persistent confidence in the banking and financial sector. Bove is senior vice president of equity research at Rochdale Securities.

In fact, the title of this article comes from something that jumped out at me in a recent interview Bove did with Steve Forbes. Bove said:

I think the people in my industry and people in your industry are having a hard time getting their mind around the fact that something could go right in banking. In other words, the whole driving force, so to speak, among analysts is, "Find that thing that no one else found yet that is bad about banks. The credit card thing is bad; the commercial real estate thing is bad. You know, they've changed the accounting laws. But find that thing and drive these stocks lower."

Where does he get his crazy pills?
Positive on banking? Isn't that like saying you'd like to buy Bernie Madoff a beer?

Now it's notable that not everything Bove says about banks is lollipops and unicorns. In fact, he just recently reduced his 2009 estimates on both JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS), partly due to the fact that both will face costs associated with their TARP paybacks.

But looking longer term, he seems to like pretty much all the big boys in the sector, from the two above to the more-troubled Citigroup (NYSE: C) and Bank of America (NYSE: BAC).

And he may not be all that nuts. Psychologists have found a wide array of forces that can color people's thinking and cause them to incorrectly interpret situations. The availability heuristic, for example, has shown that people often predict probable outcomes based on how easily an example of the outcome can be brought to mind.

In the case of banks, analysts could be overestimating the potential for future bad outcomes in the industry simply because they can so easily call to mind the recent devastating losses.

Or the good old bandwagon effect could be at play. As the name suggests, this bias causes people to believe something simply because many other people believe the same thing.

As more and more analysts seem to settle on the conclusion that financial institutions from Capital One Financial (NYSE: COF) to Wells Fargo (NYSE: WFC) are in for more tough times, it becomes increasingly difficult for folks like Bove to jump out of step and suggest exactly the opposite.

These two biases could also be working in conjunction, with recent events coloring future expectations and the preponderance of analysts coming to that faulty conclusion, making it much easier for additional analysts to jump on the same off-kilter bandwagon. That is, of course, assuming that Bove isn't simply dead wrong.

Is there an antidote in the house?
If he's right, the most obvious course of action is for those who are still shorting the financial sector to step aside to avoid getting hit by an oncoming train. Bove has suggested that Citigroup could eventually head toward $12 per share, a quadrupling that would deliver more than a flesh wound to a short-seller unlucky enough to be on the receiving end.

For the rest of us, though, it means that it may be worth revisiting the murky world of U.S. banking. If Bove is correct, the banking sector may continue to struggle through this year, but then find itself on the winning end of rapidly expanding earnings once loss provisions start to settle back down. At that point, investors are likely to flock to the sector.

The banks we could expect to pay off the most are those that have been beaten down the most and carry the lowest valuations. Citigroup and Bank of America would certainly qualify, but JPMorgan, Fifth Third Bancorp (Nasdaq: FITB), and M&T Bank are also among the financial institutions trading below book value.

But don't take his word for it
Relying blindly on an analyst -- whether it's Bove or anyone else -- for your investment decisions is a recipe for disaster. While the analyst's initial call may be well publicized, subsequent changes or a complete reversal may not be, and that could leave you out in the cold. So if you like the sound of Bove's conclusions, use them as a jumping-off point for your own research into specific banks or the macrofactors of the financial industry.

And if you want to get a few more opinions on which stocks look interesting in the financial world, check out what the 135,000 members of the CAPS investing community have to say about the industry.

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