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What Investments Do You Want to Own Next Year?

When you follow stocks in the news there is an element of breathless melodrama. Nellie has been kidnapped and is tied to the train tracks. The train is coming. Will the hero get there in time? One moment the answer is yes and the next moment it is no. If you fall for the melodrama of stock reporting you are caught in a gut wrenching never-never land of worry about next month, next week or even tomorrow. A healthy alternative is to pick investments based on a longer term view. What investments do you want to own next year and for years to come? Business Insider writes about recommendations from Morgan Stanley for stocks to own in 2018. These are based expected performance over at least the next two years. Here are the first dozen on their list.

  • Alexion Pharmaceuticals (AXLN), Current price: $126, Target price: $141
  • Bank of America (BAC), Current price: $24, Target price: $26
  • Cisco Systems, Current price: $31, Target price: $39
  • Citigroup, Current price: $67, Target price: $73
  • Constellation Brands (STZ), Current price: $197, Target price: $218
  • HP Inc. (HPQ), Current price: $18, Target price: $23
  • Jack in the Box Inc. (JACK), Current price: $96, Target price: $126
  • Johnson Controls (JCI), Current price: $44, Target price: $51
  • Schlumberger (SLB), Current price: $67, Target price: $90
  • T-Mobile (TMUS), Current price: $61, Target price: $72
  • Viacom (VIAB), Current price: $35, Target price: $48
  • DXC Technology (DXC), Current price: $78, Target price: $85

Read the article for the rest of list. Last year’s list came in with an 11.38% return which was one percent less than the S&P 500. The point is to pick solid investments which follow Buffett’s rules of investing one and two, both of which are not to lose money. How can you pick stocks that are likely to at least hold their value and more likely appreciate with perhaps a dividend thrown in? Pick stocks where you know how the company makes money and will continue to do so into the longer term future. And learn to do the intrinsic stock value calculation to pick stocks to buy, hold or sell.

Does It Have a Viable Business Plan?

When a new technology emerges it can cause spectacular profits. And when the next technology comes along the first can be relegated to the dust bin of history. A famous example of a business plan that died due to changes in technology is Eastman Kodak. They invented the personal camera and were the king of film until digital came along and demolished their business plan. Understanding how a company makes money and how it will continue to do so is critical to knowing what investments you want to own next year and beyond.

Intrinsic Value

To know what investments you want to own next year you need to pick companies where you have a clear idea about their future cash flow. Then you can calculate intrinsic stock value. The end goal is to determine the relative Graham value which is the intrinsic value divided by the current stock price. When the value is greater than one the stock will likely hold its value or go up in price. Thus it is a buy or hold. If the opposite is the case this is not stock that you want to be owning next year.

What Investments Do You Want to Own Next Year? DOC

What Investments Do You Want to Own Next Year? PDF

What Investments Do You Want to Own Next Year? PPT



Your Best Bet May Be the Gaming Industry

A lot of attention has been paid to the handful of high tech stocks that have been leading the market higher and higher. But are these really the best places to put your money? Your best bet may be the gaming industry which is up 50 percent this year. Likewise home builders, hotels and resorts, health care and even railroads have done better than the high tech darlings. Part of this appears to be investors rotating out of the high priced tech sector and part is that the economy is not doing all that badly and profits are being spread around. USA Today writes that it’s not just popular stocks that go up.

Wall Street’s most high-profile stocks – think Tesla, Facebook, Apple – get the most press coverage, the most PR, the most adulation. And the most “buy” orders from Main Street investors looking to bolster their 401(k)s.

But that doesn’t mean investors should overlook less-glamorous stocks. Quite often, it’s the stocks and industry groups investors aren’t watching that quietly rise in value, causing them to miss out on gains.

This year is a perfect example. While the S&P 500’s tech sector has posted a gain of 18% – the best of all 11 sectors – there have been a slew of winners that have gone virtually unnoticed. Many stocks that fly under the radar, and which are benefiting from stronger global growth, are posting bigger gains than the tech sector.

If you got into tech early in the economic recovery and have seen healthy gains it may be time to diversify a little. Business Insider writes that tech darling stocks could be derailed by the Fed.

The fate of the red-hot tech stocks dominating the US stock market could rest in the hands of the Federal Reserve.

The so-called FAANG group – consisting of Facebook, Apple, Amazon, Netflix, and Google – has traded inversely to 10-year Treasury yields for the better part of the past decade, according to data compiled by Credit Suisse.

So if the Fed continues to raise interest rates as planned, those high-flying tech stocks are likely to come under pressure, at least if history is any indicator. And that would threaten the torrid streak of gains that has led major indexes to new highs.

They comment that heavily exposed fund managers might be most at risk. We wrote recently about the herd effect. Everyone has been greedy at the same time and soon they may all become fearful. If that is to be the case it might be a good idea to rotate out or tech and diversify in other sectors like the gaming industry that are doing well.

Reassuring Words from the Fed

Although interest rates are going up they won’t go up forever. Market Watch writes about stocks and Yellen’s comments.

Federal Reserve Chairwoman Janet Yellen, in prepared congressional testimony, said interest rate increases would be gradual and that they wouldn’t need to rise much further.

Nevertheless, rates will go up and the tech rally won’t last forever. Meanwhile your best bet may be the gaming industry or other sectors in order to diversify and preserve your gains.

Your Best Bet May Be the Gaming Industry DOC

Your Best Bet May Be the Gaming Industry PDF

Your Best Bet May Be the Gaming Industry PPT


Should You Invest in Canada?

Warren Buffett just bought stock in a Canadian mortgage underwriter, Home Capital Group. Should you invest in Canada when the Oracle of Omaha does? An article in The New York Times discusses why you should not go where Warren Buffett invests in this case.

When Warren Buffett acts, investors notice. And after he took a roughly $300 million position last month in Home Capital Group, a troubled Canadian mortgage underwriter, some investors saw it as a vote of confidence not only in that company, but also in Canadian stocks over all.

Al Rosen takes a different view. A veteran forensic accountant and independent equity analyst who predicted the collapse of Nortel Networks, the Canadian telecom company, two years before its 2009 demise, Mr. Rosen has a message for people investing in Canadian stocks: be wary.

The issue according to Mr. Rosen is Canadian accounting rules.

International accounting rules followed by Canadian companies since 2011 are putting investors in Canadian stocks – not just Home Capital Group’s – at peril. Canada’s rules, which are substantially different from the generally accepted accounting principles (G.A.A.P.) governing American companies, give much more leeway to corporate managers when it comes to valuing assets and recording cash flows.

Inaccurate information about the financial health of companies was at the root of the 2008 market crash and financial collapse. We repeatedly suggest that investors learn to calculate and apply intrinsic stock value when deciding when to buy, hold or sell stocks.

Here is the original formula that Benjamin Graham suggested as modified in 1962 and again in 1974.

Preceding twelve months earnings per share, EPS
A constant of 8.5 representing an expected price to earnings ratio, P/E ratio, for a company that is not growing
g being an estimate of long term growth (five years)
A constant = 4.4, the average yield of high grade corporate bonds in the early 1960 decade
Y = The current yield of AAA corporate bonds
V = intrinsic value

The formula is as follows:
V = (EPS x (8.5 + 2g) x 4.4)/Y

Once the investor has determined the intrinsic value of a stock he compares that number to the current market price. Intrinsic value divided by current price is referred to as the Relative Graham Value or RGV. An RGV of more than one indicates a buy and an RGV of less than one indicates that one should ignore the stock or sell if it is already in one’s portfolio.

However, for this sort of fundamental analysis to work in your favor you need accurate information about the company whose stock you might or might not purchase. If you are considering investments in Canadian stocks read the Times article as it explains in depth some of the accounting issues that may make these investments seem more attractive than they really are.

An Alternative View

Seeking Alpha suggests twenty Canadian stocks that it says are high quality.

The S&P/TSX Composite Index in Canada is dominated by two sectors (financials and energy).

To combat this problem, one could create an equally weighted portfolio of 20 stocks (2 from each sector, excluding healthcare).

The resulting portfolio is well diversified and has significantly outperformed the index over the last 6 and 12 months.

Diversification is one way to avoid being fooled by faulty accounting info.

Should You Invest in Canada? DOC

Should You Invest in Canada? PDF

Should You Invest in Canada? PPT

Which Retailers Will Survive in the Era of Amazon?

Amazon.com has discovered a formula for success in the world of retail sales. They skip having a whole host of bricks and mortar stores and sell online. The cost of their success has been borne by retailers far and wide. Many have gone out of business and CNBC discusses large department store stocks heading for zero due to losing business to Amazon.com.

Retail could be one of the best contrarian plays out there, as long as investors steer clear of the nation’s department stores.

Eaton Vance chief equity investment officer Eddie Perkin is making that call.

“You have to be careful with the department stores. They’re struggling, and they’ll continue to struggle under the threat of Amazon and just general softness in retail,” Perkin said Wednesday on CNBC’s “Trading Nation.”

Earlier in the day, Perkin told CNBC that “department stores are heading to zero eventually.”

“The challenge is they have debt. They have a lot of assets that are losing money,” he added.

Retailers like J.C. Penney, Macy’s and Nordstrom are closing stores like mad. But which retailers will survive in the era of Amazon? CNBC writes that good quality malls still have lots of foot traffic and sales. There are two factors at work here. Building too many malls virtually side by side has caused a glut and until the excess is driven out of the market retailers are not only fighting Amazon but themselves. And there are reasons why people still go to the store in the era of Amazon. When you need information, need a product right now or simply find it an interesting experience you will go to a store instead of buying online. Companies that keep their footprint efficient and provide a useful and interesting shopping experience with decent pricing will survive. Which will these be?

Likely Survivors in the Era of Amazon

Money writes about stores that may actually survive the death of retail.

With the rise of e-commerce, news of massive store closures and bankruptcies for legacy retail brands have become business as usual in today’s economy.

But according to experts in the industry, the retail apocalypse will not lead to the desolate and abandoned brick-and-mortar landscape that many expect will come as a result of Amazon and other digitally native retailer’s continued dominance.

Which retailers are these any why will they survive in the era of Amazon?

Zara
T.J. Maxx
Dollar General
Sephora
Walmart
Nordstrom

In each case the company has combined strategies to offer competitive pricing, a unique shopping experience, customer service and an online presence as well.

Profiting from the Profitable

An alternative to trying to figure out which retailers will survive in the era of Amazon is to go with real estate investment trusts and pick and choose which malls to purchase. There are and will always be busy and profitable malls. Collecting rent checks from the survivors is a viable option.

Which Retailers Will Survive in the Era of Amazon? DOC

Which Retailers Will Survive in the Era of Amazon? PDF

Which Retailers Will Survive in the Era of Amazon? PPT

Will the New Mass Market Model Help Tesla?

The new Tesla Model 3 is intended for a mass market unlike previous models. The basic car will be listed at $35,000 although buyers who have already reserved their cars are reporting paying closer to $50,000 for various bells and whistles. Tesla is aiming to produce 240,000 cars a year, up from about 100,000 right now. You will have to take a test drive to see if you like the new model but how about the stock? Will the new mass market model help Tesla?

Will the Stock Go Down?

CNBC is skeptical that Tesla can make a profit mass producing this model at this price and says Tesla shares will plunge.

“On net, initial production ramp for the Model 3 looks like it may be better than expected – but investors should continue to focus on whether the Model 3 can be produced profitably and with strong initial quality,” Sacconaghi wrote in a note to clients Monday. “Specifically, we worry that if Tesla has struggled to make money (and produce GMs [gross profit margins] above 25%) on its $100,000 Model X and Model S sedans, that it may be difficult for it to make money on Model 3.”

The analyst reaffirmed his market perform rating for Tesla and price target of $250, representing 31 percent downside from Friday’s close.

A lot of quality car companies have gone away over the years. To profit in the auto industry you need to keep producing excitement, quality, competitive price and volume as needed. You need to avoid labor issues as well.

Tesla Share Price

Tesla has been an exciting stock, gaining from $223 a share a year ago to a high of $382 a couple of weeks ago. But in the last few days the stock has been going down, closing at $361.60 on July 3. Will the stock continue to go down? Is it time to sell Tesla? Forbes suggests selling your Tesla stock on the model launch, which is right now.

Issues in China’s Market

Carmakers sold 28 million cars in China in 2016. The USA had its best car buying year and came in at 17.55 million. In the EU the total was 15.6 million. To make money mass marketing cars today a carmaker needs a presence in China. Here is where Tesla might have a problem. Barron’s says Tesla might have a China problem.

Tesla wants to become something of a big-data play – less about cars and more about collecting all sorts of driving information from its customers.
That approach could help it compete in the U.S., not just with traditional car makers but also with Silicon Valley’s tech behemoths. But Morgan Stanley analyst Adam Jonas says the big thinking could cause Tesla to run into issues in China, an important region where the company has already struggled to break through.

In a note Friday, Jonas noted that Tesla could face a number of roadblocks as it tries to sell increasingly high-tech cars to Chinese consumers.

The Chinese communist government keeps a firm hand on information, information access and data transfer. Tesla could have a tough time breaking to China’s lucrative market.

Will the New Mass Market Model Help Tesla? DOC

Will the New Mass Market Model Help Tesla? PDF

Will the New Mass Market Model Help Tesla? PPT

Why Do People Make Bad Investments?

There are people who invested a few thousand dollars in Microsoft when it went public and saw their investments multiply in value 890 fold. And there are folks who invested millions with Bernie Madoff and lost everything in his Ponzi scheme. Ten thousand dollars in the initial Microsoft IPO would be worth $8.9 million today while ten thousand with Bernie would be long gone. Today we consider why do people make bad investments? Partly it has to do with the suitability of investments. CBNC features comments by Jim Cramer of Mad Money who says suitability is an investment concept critical to buying stocks. Cramer talked about when he was first introduced to the concept of suitability of stocks for a given person.

Did I ever consider that many people who called me and got my answering machine might not be ready for the stock of the hottest semiconductor company in the land, and that I was recommending it to them one-on-one without any sense of it was right for them?”

Cramer replied that he thought it was obvious stocks came with no guarantees, a “caveat emptor” situation. The executive explained the worth of knowing what an individual investor wants based on what he needs out of a stock and the risks he is willing to take while investing.

So, one reason people make bad investment is that they buy stocks that are not suitable for them and their degree of risk tolerance. In our recent article on tips on how to start investing we talked about having a rainy day fund so that you don’t need to cash out a volatile stock on its downswing. Risky stocks when you have not cash reserve are bad investments.

Knowing How a Company Makes Its Money

An all too common problem with new investors is that they buy a stock that has just gone up in price without assessing its intrinsic value. When you are buying a stock for the long term you want a company that has a sound business plan and a plan that will remain viable into the distant future. Intrinsic value is based on forward looking earnings and so you need to understand what a company does to make money and how it will continue to do so. A famous example of a great investment gone bad is Kodak which was the king of the photographic film business and then everything went digital gutting their business model. This brings us to the concept of paying attention as you go.

Too Many Stocks to Keep Track of

If you buy shares of 3M, Boeing or Microsoft you want to keep track of what the companies are doing and how they are doing. Since these are stable stocks built for the long term you can check every quarter when their report arrives in the mail. On the other hand if you just bought the newest and hottest biotech stock you need to pay closer attention. Is its growth being propelled by the assumption that its newest drug will pass all FDA tests? If the drug fails in testing the stock may plummet. Potentially volatile stocks should be watched at least weekly and when they have provided a profit a little should be taken off the table as you don’t have a profit until you take it. If you have loaded up with too many volatile stocks to keep track of you may be making bad investments.

Too Good to Be True

When people invested with Bernie Madoff they trusted his history and the results they were seeing. Anyone who cashed out early in the game actually walked away with a profit. When Bernie produced too good to be true results smart investors would have asked questions, taken at least part of their money elsewhere to diversify or just gone elsewhere.

Why Do People Make Bad Investments? DOC

Why Do People Make Bad Investments? PDF

Why Do People Make Bad Investments? PPT

Is Dr. Doom Right about the Markets?

There are contrarians who continually predict a fall in stock prices. The old joke is that even hypochondriacs get sick once in a while. Thus by analogy we might say that even the perpetual naysayer will be right about the market from time to time. One of these naysayers is Marc Faber also known as Dr. Doom. According to CNBC he predicts that stocks are set to plummet 40% or more.

If the man often hailed as the original “Dr. Doom” is right, the stock market could see another “lurch” higher – at which point investors may want to cash out quickly and run for cover.

Marc Faber, the editor of “The Gloom, Boom & Doom Report’ and a perennial bear, isn’t backing down from his latest dire prediction that would send stocks plummeting by 40 percent or more.

A drop of that size could take the S&P 500 Index down from Friday’s closing price of 2,438 to 1,463.

Mr. Faber is basing his prediction on the narrowness of the rally with so much capital thrown at so few stocks, namely the FANG tech stocks. The bright side, he says, is that when market bottoms out there will be plenty of bargains to pick up. So, what do others think?

Up, Down, Up and Finally a Crash

Investing.com writes about one possible scenario for a stock market crash.

After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely.

Few have taken the risk of projecting a date for the crash. Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months.

Read the article and follow his somewhat complicated graph and reasoning. A salient point in that he makes as that while the naysayers get rolled over with each successive market advance their warnings are remembered. Unfortunately everyone remembers at once at the top of the advance and massive selling becomes a self-fulfilling prophecy driving the market into a crash.

Who Else is Worried?

The Guardian writes that a steep rise in lending has caused worry at central banks.

World leaders have been warned to guard against another financial crash after a steep rise in risky bank lending over the past year that could threaten the stability of the global financial system.

The international body that represents central banks said a recovery in global trade this year and improving levels of GDP in most countries could create complacency and convince policymakers to ignore warning signs of excessive lending coming from the financial sector.

With only two weeks until the G20 summit of world leaders in Hamburg, the Bank of International Settlements (BIS) said politicians and central banks needed to keep financial markets in check to prevent another crash.

In the aftermath of the Great Recession it was China’s bet on growth and borrowing for expansion that helped support the global economy. Now that China has cut back on raw material imports many emerging economies are hurting and as China continues to pile on debt they may assume a role opposite the previous and drag the world economy down with them!

Is Dr. Doom Right about the Markets? DOC

Is Dr. Doom Right about the Markets? PDF

Is Dr. Doom Right about the Markets? PPT

Tips on How to Start Investing

The stock market crashed in 2008 and ushered in the Great Recession. Many who had investments in the stock market sold at huge losses and have stayed away ever since. And many have avoided investing in stocks because of the perceived risk of losing everything. But, the stock market has come back and is at an all-time high! If you missed out on the run up since the crash there is still hope but there are also pitfalls for beginning investors. Here are a few tips on how to start investing.

At What Point Should You Start Investing?

If you are putting money away for a rainy day or for retirement the sooner you start the better your eventual results will be because of the exponential growth that stock investments offer. But first take care of a few essentials. How to start investing in the stock market begins with putting your financial house in order. The high points are that the stock market outperforms other investments over the long term. And before you start putting money into stocks you need to pay off your credit cards because the interest you pay on those is more than a beginner can expect to make on his money in the market. Then you need a place to live and the mortgage interest deduction on your home is an excellent investment. And last before starting to invest you need a cash fund of three to six months income so that when you change jobs or have other expenses that you do not need to pull money out of the market just after a correction.

How to Start

Several years ago we wrote about how to invest $10,000 assuming that you inherit money or have put together that much.

In deciding how to invest 10,000 dollars let’s look at investment horizon, risk tolerance, growth versus income, and diversification as the first considerations on the way to deciding what is a good investment for our first stock. How we envision our investments will help us focus on the stocks that fit our needs. If we are looking to save money for retirement we may choose different investments than if we are saving for a down payment for a house and hope to have built up a substantial amount of capital in, lets’ say, five years. Our risk tolerance should be built upon our ability to absorb the loss of our investments in their entirety. Someone close to retirement may want to look at dividend stocks more closely than growth stocks and a younger investor will certainly want to cash in on the exponential growth of a strong growing company. Diversification is always important as it lets us benefit from growth in different market sectors and commonly cushions losses in one stock/sector with gains in another.

Once you have decided on what approach to take you need to pick stocks. Start with what you know. For example, physicians or pharmacists should be familiar with drugs and drug company products. That sort of specialized knowledge puts them at an advantage in picking stocks. Then a new investor needs to learn to determine intrinsic stock value. That is the value of a stock based on forward looking earnings. When that projected value is greater than market price the stock is a buy and when it is lower it is a stock to sell or avoid. No matter how great a stock tip may seem do your own homework before investing. Aim for a mix of dividend stocks that provide cash return as well as growth stocks with the potential for multiplying their value. And pay attention to your portfolio as you go because what was solid stock one month may be a sell the next.

Tips on How to Start Investing DOC

Tips on How to Start Investing PDF

Tips on How to Start Investing PPT

Which Supermarkets Will Survive?

Amazon.com shocked the investing world by acquiring the high end grocer Whole Foods Market. Which supermarkets will survive as Amazon enters the $800 billion a year grocery market? CNN thinks the move will not work and purchasing Whole Foods will be Amazon’s Waterloo.

The one sector of the retail market Amazon does not have a significant toe-hold in is the gigantic $800 billion a year grocery market. That is until now. With the deal to buy Whole Foods, the online retailer now has a small slice of the grocery market (about 1.2%), which is dominated by a handful of firms like Walmart (14.2%) and Kroger (7.2%).

Clearly the large players are worried. The shares of the biggest supermarket chains fell by about 6% when the deal was announced.

So far, the deal has been great for Amazon. Usually acquisitions lose money for big companies. But Amazon immediately gained over $14 billion on its market capitalization when the deal was announced – that is more than the $13.6 billion the Seattle based company plans to pay for Whole Foods.

Years ago they taught at Harvard Business School that if you could manage one kind of business you could manage any business. It was that kind of thinking that led Xerox to buy an insurance company and then lose billions of dollars when a hurricane hit the Gulf Coast. Amazon accounts for 42% of all online sales. They have caused the unrelenting demise of bricks and mortar businesses. How will this work out? Which supermarkets will survive the head to head competition between Amazon and the likes of Walmart? And will any smaller operations survive? Interestingly it was the founder of Whole Food, John Mackay, who said that the grocery market will be Amazon’s Waterloo.

Are There Good Investments in This Scenario?

Knowing where Amazon’s boss, Jeff Bezos, is going to take this project is difficult because what Bezos does is experiment until he finds out what works and then he does more of that while continuing to experiment. It may be that every Whole Foods store will be an Amazon distribution point. The eternal problem for those wanting to develop an online grocery business is the perishability of produce, the fickleness of customers and the labor intensive nature of the business. There will certainly be losers as Amazon takes on Walmart but knowing who and what right is difficult. The New York Times sees Whole Foods as sustainably sourced guinea pig.

Amazon almost certainly doesn’t know yet how exactly Whole Foods will fit into its long-term plans. You can expect it to make few dramatic changes to Whole Foods in the near future. Instead, Mr. Bezos and his team will most likely spend years meticulously analyzing and tinkering with how Whole Foods works. They will begin lots of experiments. When something works, they will do more of that, then more, and then even more. They may take over the world all the same – and, in the process, probably usher in big changes to large swaths of the economy, affecting everything from labor to urban planning – but they’ll do it in ways we won’t be able to predict now.

What we do know from past history is that Jeff Bezos tends to succeed over time. The stock market saw this when all major grocery chains took a price hit on news of the Whole Foods takeover. Perhaps the ones who should worry are the big stores where Amazon’s automation experience will make inroads. And perhaps the smaller, neighborhood-based chains will do just fine as economy of scale will not apply to their businesses so much as proximity and service.

Which Supermarkets Will Survive? DOC

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Which Supermarkets Will Survive? PPT


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