A recent article from The Motley Fool about 3 stocks to buy and never sell got us thinking. Can you hold an investment for too long? The three stocks they mention are Walt Disney, Amazon.com and Activision Blizzard. Each is a strong brand in its respective market. We wrote recently about how many years are required to make an investment long term.
Just how many years are required to make an investment long term? We can get a hint from the so-called Oracle of Omaha who says that he cannot outguess the market in the short term but has a pretty good idea of what will sell well ten years hence.
So, you need to stay in the market for longer than 5 years and perhaps even longer than 10 years to see the benefits of long term investing.
The point is that it can very hard to outguess the market, so you often need a decade or more in a stock to see the best benefits. But, can you hold an investment for too long?
When a Business Model Becomes Outdated
Eastman Kodak was founded in 1888 and prospered for decades as the inventor of the personal camera and maker of film. Although Kodak had a chemical division its success was based on the fact that in order to have a photograph of something you needed film. Then the digital era arrived and the Kodak business model was outdated. A stock that grew in value year after year and provided dividends year after year filed for bankruptcy protection in 2012. In the case of Kodak the issue was the business model that was great for years and then antiquated. Yes, you can hold an investment for too long if you don’t pay attention to whether or not the business model for the company provides strong intrinsic stock value.
An inherent weakness in this concept is that too often the medium and long term prospects of a company and its stock price are not clear. So, what is intrinsic stock value of a company if the future is uncertain? The ability to see into the future to see how well a company will manage its assets, products, costs, R&D, and marketing is of utmost importance in calculating intrinsic stock value as a means of deciding whether or not to purchase a stock.
When The Motley Fool suggests Disney, Amazon and Activision blizzard as stocks you never want to sell make sure to think of Kodak or for that matter the whale oil business or prosperous carriage and saddle makers of the 19th century.
Clorox and Building on Core Competence
Clorox Corporation has been around for over a century. It started by making bleach, liquid chlorine which still accounts for 12 percent of its revenue. However the company has added other cleaning products as well as water filtration equipment and filters. All of their products revolve around keeping things clean and keeping the consumer happy. So long as this business model works the stock is one that you cannot hold for too long.
Defense stocks have outperformed the broader market by 15% to 10% since Trump was elected. These companies are in the news after the USA attacked a Syrian air base with cruise missiles and dropped the MOAB (Massive Ordinance Air Blast) bomb on an ISIS mountain tunnel complex in Afghanistan. Many believe that the weapons were used to send a message to North Korea regarding its nuclear and missile programs. The end result has been a huge elevation of tensions on the Korean peninsula while the US sends an aircraft carrier group to cruise off of Korea. Meanwhile Trump wants to increase military spending by 10%. Market Watch discusses why defense stocks outperform the rest of the market.
With U.S. military strikes top and center in the news, readers have been introduced to some of the most advanced and powerful weaponry built by aerospace and defense companies.
Because of the complexity of government procurement processes, the use of certain missiles doesn’t necessarily mean the makers of those weapons will benefit from near-term increases in sales. But it’s helpful for investors to know which contractors have been most successful recently, and which are most favored by analysts.
Tomahawk cruise missiles, manufactured by Raytheon Co. RTN, +0.64% were used against a Syrian airfield on April 6. The Massive Ordinance Air Blast (MOAB), or “mother of all bombs,” is made by Boeing Co. BA, +1.43% and was used against Islamic State terrorists in Afghanistan last week. Raytheon is the fourth-largest U.S. defense contractor, with a market capitalization of $44.5 billion, while Boeing is the biggest player, with a market cap of $106.8 billion.
There are twenty-eight defense and aerospace companies in the S&P 1500 composite index. The five largest are Boeing, Lockheed Martin, General Dynamic, Raytheon and Northrop Grumman. These stocks have an EPS range based on projected 2017 earnings of 17.1 for Boeing to 19.1 for Lockheed Martin. These stocks have been bid up on the expectation of more defense spending and the possibility of increased armed conflict, especially in Korea.
Which Should You Buy?
24/7 Wall Street lists aerospace stocks to buy before first quarter earnings are announced.
In a new Deutsche Bank research report, outstanding analyst Myles Walton makes the case that Wall Street in general remains more positive on the defense stocks, and overall more neutral on commercial aerospace companies. The analyst likes three top stock picks from both areas into the first-quarter earnings, and all are rated Buy at Deutsche Bank.
Their picks only include one of the top 5, Lockheed Martin. The other two are Rockwell Collins which does design, production, integration and support of communications and aviation electronics for military and commercial customers worldwide. The other is Transdigm which is a holding company for businesses that offer a diverse array of products including ignition systems, pumps, valves, motors, actuators, controls, water faucets and systems, quick disconnects and couplings, batteries, chargers and power conditioning, cockpit security systems, composites and elastomers, audio systems and lighting and displays. This later stock is a recovery play on top of being something you might invest in as tensions mount across the globe.
The point of investing in defense contractors is not that their profits will go up greatly from the use of a handful of cruise missiles or from dropping one really big bomb. Rather the logic is that when the nation is worried about war it funds defense spending on projects that take years and provide a cash stream to the recipients along way and this cash stream translates into higher stock prices and dividends for you the investor.
Airline stocks were doing so much better and airline stocks were better investments than they used to be. Then a paying passenger was dragged from a UAL flight to make place for 4 United employees who wanted a ride. The video that another passenger took of the incident went viral and the whole world knew what rats the United Airlines people were. The stock fell three dollars a share and then recouped half of its losses. Will United Airlines survive their public relations nightmare? Market Watch thinks they will.
PepsiCo Inc. and United Airlines have recently come under fire from consumers, but investors seem to have already forgotten their public-relations nightmares.
After a couple of days of outrage over a video showing a passenger being dragged from an airplane, shares of United Airlines parent United Continental Holdings Inc. UAL, -0.41% looked as though they would erase all the losses suffered following the incident. That is to say, while consumers may choose to pull their dollars from the brands, investors aren’t expecting that to hurt the company, at least not at this stage.
United’s stock erased all of its post-scandal losses early Wednesday, advancing as much as 1.4% in intraday trade Wednesday, briefly rising above its 50-day moving average. This came on the heels of Tuesday’s early stock plunge, which wiped about $255 million off the company’s market cap.
Despite a lot of people being made angry by UAL the same factors that make airlines better investments than they have been for years are still in play. Fuel prices are low and competition is less after many mergers and acquisitions. And airlines have become more efficient than they used to be. If you fly out of the UAL hub in Chicago your best choice for the most flights is still United Airlines. The LA Times looks at the incidence from the view of toxic corporate cultures from the CEO on down and compares it to the Wells Fargo account scandal. In the case of UAL it was the CEO’s choice to back his employees before he got the full picture, thus upsetting paying customers.
In two statements Monday, including an internal letter to employees, Munoz chose to see the incident entirely from the workers’ point of view. He depicted the airline staff as having treated Dao “politely” and “apologetically” and Dao as “disruptive and belligerent.” He said the airline agents “were left with no choice but to call Chicago Aviation Security Officers to assist in removing the customer from the flight.”
He added, “While I deeply regret this situation arose, I also emphatically stand behind all of you. Treating our customers and each other with respect and dignity is at the core of who we are.”
In a third statement issued Tuesday, Munoz finally made the right noises. “I deeply apologize to the customer forcibly removed and to all the customers aboard, he said. “No one should ever be mistreated this way.”
The difficulty that the guy in charge had in coming to the aid of a humiliated and injured passenger will rub a lot of frequent flyers the wrong way. It remains to be seen how long the bad feelings will last and if eventually United Airlines will survive their public relations nightmare or suffer damage.
As populations grow in developing nations, infrastructure investment follows. This is especially true in parts of Africa. We wrote about the risks of foreign investment last week. What are the pros and cons of foreign investment in Africa? Wbug.com writes that booming populations are attracting lots of foreign investment.
Chinese President Xi Jinping is in the United States this week for his first face-to-face meeting with President Trump.
One thing that could come up during those meetings is foreign investment in Africa. The continent’s population is expected to double to 2.4 billion by 2050. Both China and the U.S. are investing heavily in emerging markets across the continent.
Countries getting the most attention are Nigeria which is expected to pass the USA in population by 2050. Ethiopia and Kenya in East Africa are also growing and potential investment destinations as they have more diversified economies than many other African nations. South Africa was one of the BRICS nations and expected to rise to the first level of nations by midcentury but the Great Recession and bust in commodities has hurt them.
South African Junk Bonds
Economic problems have resulted in a South Africa junk rating for bonds and other investments according to Bloomberg.
South Africa’s rand and dollar bonds fell after Fitch Ratings Ltd. became the second company to cut the country’s credit assessment to junk, triggering sales by some investors tracking investment-grade debt indexes. JPMorgan Chase & Co. said it would remove South Africa from gauges tracked by $59 billion of funds.
President Jacob Zuma plunged South Africa into a political crisis when he fired Finance Minister Pravin Gordhan in a cabinet purge just after midnight on March 31, prompting a drop in the rand and triggering a downgrade to junk from S&P Global Ratings. The move by Fitch means the country’s foreign-currency debt will now be considered sub-investment grade, and brought the local-currency assessment to the cusp of junk.
If foreigners are going to invest in a country they need to trust the system and the people running it. When the local president, premier or prime minister starts acting like a dictator it scares investors. Be careful who is running the country and make sure that the government is not only investor friendly but also that Western trained and respected individuals are in positions of authority.
Cheap Currency, Good Opportunities
Egypt is attracting more investment as its currency has weakened according to the Financial Times.
It was the nettle that successive Egyptian governments had consistently shied away from grasping but could no longer avoid: the full float of the currency. Finally adopted in November 2016, the Egyptian pound halved in value against the dollar overnight, catapulting the country into a new era of risk and potential.
The flotation of the pound – long overdue, according to analysts and businessmen – was the most radical of politically-sensitive measures implemented by the Egyptian government to clinch a deal with the International Monetary Fund for a $12bn loan.
The pros here include a cheap currency and cheap labor costs. The cons include the factors such as government stability that made the Egyptian currency weak in the first place.
In our last two articles we asked why aren’t you investing offshore and wondered about a coming European economic boom. But if you are thinking of putting your money to work outside of the USA, what are the unique risks associated with foreign investments and how can you avoid them? Investopedia writes about the three biggest risks that international investors face. These are transaction costs, currency risks and liquidity risks.
The Cost of Investing Offshore
Likely the biggest barriers to investing in international markets are the transaction costs. Although we live in a relatively globalized and connected world, transactions costs can still vary greatly depending on which foreign market you are investing in. Brokerage commissions are almost always higher in international markets compared to domestic rates. In addition, on top of the higher brokerage commissions, there are frequently additional charges that are piled on top that are specific to the local market, which can include stamp duties, levies, taxes, clearing fees and exchange fees.
Currency Fluctuations and Worse
When investing directly in a foreign market (and not through ADRs), you have to exchange your domestic currency (USD for U.S. investors) into a foreign currency at the current exchange rate in order to purchase the foreign stock. If you then hold the foreign stock for a year and sell it, you will have to convert the foreign currency back into USD at the prevailing exchange rate one year later. It is the uncertainty of what the future exchange rate will be that scares many investors. Also, since a significant part of your foreign stock return will be affected by the currency return, investors investing internationally should eliminate this risk.
Buying stocks as ADR’s is a simple solution for someone who wants to invest only in foreign stocks. Otherwise you need to know how to use the Forex market to hedge your currency risk. Because currency futures, options and forwards are relatively complex for beginners an alternative might be to use a currency ETF. Of course the worst risk is if a country goes bankrupt, its currency becomes worthless and assets get frozen.
Another risk inherent in foreign markets, especially in emerging markets, is liquidity risk. Liquidity risk is the risk of not being able to sell your stock quickly enough once a sell order is entered. There are some common ways to evaluate the liquidity of an asset before purchase. One method is to simply observe the bid-ask spread of the asset over time. Illiquid assets will have wider bid-ask spread relative to other assets. Narrower spreads and high volume typically point to higher liquidity.
This one is our own take on foreign investment risk. If you owned assets in Libya before Gadhafi took over in the 1970’s you lost everything. The same thing happened in Cuba with Castro and to a degree in Venezuela first with Chavez and now Maduro. Unique risks associated with foreign investments can include having a strongman take over and nationalize all private assets. Make sure you have a clear sense of how stable the country is before investing there.
The equity markets always look ahead and right now they are growing tired of waiting for the Trump boom and looking to Europe. According to CNBC Europe is the hot new trade in the stock market.
Amid the political uncertainty of Brexit, mounting social turmoil over immigration and barely there economic growth, Europe has improbably emerged as the hot stocks trade this year.
The postelection rally in U.S. equities is looking tired as gridlock has sapped momentum in Washington. Investors have been looking for a better place to grow cash, and the European market is quickly becoming the favorite target.
“We believe that the underlying performance of European equities is potentially misunderstood by market participants,” Henry McVey, head of global macro and asset allocation for private equity powerhouse KKR, said in a lengthy report for clients. “We also believe that European equities, financials in particular, are poised to perform well in 2017.”
The market has begun to take notice.
Last week we asked why aren’t you investing offshore. And we showed where the smart money is going.
The United Nations World Investment Report for 2016 shows which countries investment money is flowing into and in what amounts. In 2015 money flowing into Asia and Europe each exceeded that flowing into North America.
All of the hype about the Republican White House and Congress stimulating the economy is wearing thin. The Affordable Care Act repeal debacle is being read as a sign of things to come. The Trump years may end up like the Carter years when the same party holding all of the keys to power was unable to work together on a coherent agenda. Tax breaks, offshore corporate cash repatriation and infrastructure spending all seem unlikely at least in the near term. In the meantime why is Europe looking so attractive?
Buy Low, Sell High
A lot of money is moving out of US stocks and into European stocks simply because the US market is priced too high and European stocks are comparatively cheap. The Brexit hurt European markets but investors have adjusted and the EU does not appear to be going away. And Europe has not had to deal with the hype of a return to Reaganomics that has been inflicted on US markets.
The State of Europe
China is inaccurately referred to as the second largest world economy. The first and second largest world economies are the USA and the European Union. The USA’s gross domestic product is $18 Trillion a year while the EU has a GDP of $17 Trillion. China’s is around $11 Trillion. The Euro is the second most traded international currency after the greenback. And like the USA, Europe’s stock markets are open and transparent making it safer to invest than in the emerging markets of Asia. The shock of Britain leaving the EU is wearing off and the pain that Britain will suffer for its decision may well deter other nations from leaving the fold. As such Europe is a viable alternative to investing the USA and currently a better idea.
Buy low and sell high is the age old mantra for investing. With all the hype about bringing jobs back home, reducing taxes and spending on infrastructure, the best deals in stocks today are not in the USA but in foreign markets. Why aren’t you investing offshore? USA Today says investors should look outside the U.S.
With U.S. stocks trading in overvalued territory after their long rally, investors are likely to reap better returns going forward in places like the eurozone, and in emerging markets like Brazil, and Central and Eastern Europe. These foreign markets now have characteristics that suggest future gains will outpace U.S. returns. Working in their favor? They’re selling at more affordable prices, and are home to economies on the upswing and companies poised to post stronger profit growth.
The United Nations World Investment Report for 2016 shows which countries investment money is flowing into and in what amounts. In 2015 money flowing into Asia and Europe each exceeded that flowing into North America.
This situation is a turnaround from foreign direct investment in the early days of the Great Recession when the USA was far and away the beneficiary of foreign investment.
Follow the money is age old advice for knowing why something is happening. In this case we would like to follow the money that goes into foreign direct investment. Foreign direct investment is done by folks with lots of money and the intention to stay a course and make a profit. If you are looking for offshore investment ideas, take a look at where foreign direct investment goes year after year after year.
The UN study is updated every year and provides a good picture of where the smart money is going.
You Don’t Need to Speak Japanese, German or Chinese
If you have avoided offshore investments because you don’t know how to communicate with stock brokers in Tokyo, Berlin or Shanghai forget that. The way for American investors to buy foreign stocks is via American Depositary Receipts. Investopedia explains.
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are listed on either the NYSE, AMEX or Nasdaq but they are also sold OTC.
Your best bet is to buy only level 3 ADRs. The companies that sponsor these must adhere to reporting requirements similar to those of American stocks listed on the NASDAQ or NYSE. Thus you can invest offshore with the ability to examine fundamentals and find stocks with high intrinsic value and prospects for long term profits.
Investors like predictability. Markets may be volatile but so long as they have a means of predicting where the market is going investors are generally happy. Such has been the case with the Trump bump, the stock rally based on the expectation of lower taxes, less regulation, repatriated corporate offshore cash and infrastructure spending. After all the USA has the same party in control of the White House and both houses of congress. Unfortunately, when the same party has all of the control they tend to fight among themselves such as happened in the Carter years when Jimmy Carter referred to congress as an albatross around his neck. The Republican controlled congress was going to repeal the Affordable Care Act, better known as Obama Care but they could not get the votes to do what they have been promising for seven years and what Trump promised to immediately upon assuming office. Now we need to watch out for the Trump economic slump as investors wonder if the Obama Care repeal debacle is a hint of things to come when congress addresses Trump’s economic agenda.
The stock market rally after Trump election has been referred to as the Trump bump. Now Reuters writes about the Trump slump of the dollar and stock prices.
The dollar and share prices tumbled on Monday, as investors worried that U.S. President Donald Trump’s defeat over healthcare reform foreshadowed difficulties delivering other key campaign promises, in particular fiscal stimulus.
Trump’s failure to rally enough support from his own Republican party – which controls both houses of U.S. Congress – to repeal and replace Obamacare spurred a rush to safe haven assets such as gold XAU=, the Japanese yen JPY= and the Swiss franc CHF=.
Bets that pro-business policies promised by Trump would boost growth and consumer price rises after years of very low inflation, leading to a faster pace of U.S. interest rate rises, took stocks to record highs earlier this year and the dollar to its highest levels in 14 years.
But those “reflation trades” have since come under selling pressure as Trump has concentrated his efforts on areas other than economic reform, and that selling intensified after the healthcare bill’s failure late on Friday.
The markets have suddenly become much more risk adverse and that could intensify the downward trend so watch out for the Trump slump as you consider your portfolio.
What to Sell ASAP
CNBC looks ahead to congress considering a corporate tax cut and expects an impressive market correction if congress and the president do not deliver.
The market is already pricing in a corporate tax cut, which means there could be trouble if those cuts don’t get done, expert Robert Luna told CNBC on Thursday.
President Donald Trump has promised to slash the corporate rate from 35 percent to 15 percent, while the House Republican plan calls for a 20 percent corporate rate.
“If that’s something that doesn’t get passed, I think watch out below. A 10 to 15 percent correction is definitely something we’re preparing our clients for,” the chief investment officer for Surevest Wealth Management said in an interview with “Closing Bell.”
What goes up can certainly come down. Bank stocks have had a nice run up and may suffer as investors anticipate a Trump economic slump. Health care stocks may be able to breathe easier as any further adjustment of the Affordable Care Act will require the sort of due diligence that comes from both parties negotiating seriously for an optimal solution. Gold mining stocks anyone?
The Trump bump stock market rally is fizzling out. The market is asking what happened to Trump’s economic agenda as the new prez and House Speak Ryan promote their version of an Obama Care replacement. CNBC says that there will be a Trump tantrum looms on Wall Street if Trump’s first legislative push fails.
The Trump Trade could start looking more like a Trump Tantrum if the new U.S. administration’s health-care bill stalls in Congress, prompting worries on Wall Street about tax cuts and other measures aimed at promoting economic growth.
Investors are dialing back hopes that U.S. President Donald Trump will swiftly enact his agenda, with a Thursday vote on a health-care bill a litmus test which could give stock investors another reason to sell.
“If the vote doesn’t pass, or is postponed, it will cast a lot of doubt on the Trump trades,” said the influential bond investor Jeffrey Gundlach, chief executive at DoubleLine Capital.
While health care stocks will be affected by how the health care bill turns out investors are more interested in the lack of progress on economic issues. After all the reason for the Trump post-election rally is the promise of tax cuts, repatriated offshore corporate cash and money poured into infrastructure repair. And if Trump and the Republicans who control congress cannot deliver on their first promise to repeal and replace the Affordable Care Act how will they do on the economic issues?
Is the Market Overpriced?
The concern about Trump’s economic agenda is that investors are pricing stocks based on perfect performance of the new prez and his Republicans. If these guys don’t deliver how painful will it be? That depends on how overpriced the market is. Forbes asks is the market expensive? They offer two sides of the argument.
“Frothy.” “Pricey.” “Stretched.” These are among the adjectives used to describe the stock market-and they’re not even the most ominous.
Nobel Laureate Robert Shiller recently told Bloomberg he believes the market is “way overpriced” and that the current elevated CAPE ratio of 29 is a “bad sign.” John Hussman, president of the mutual fund Hussan Investment Trust and a Ph.D. in economics from Stanford University, argues that the market may be due for a hefty correction. In Fortune this month, he was quoted as saying that the current market environment is in “the most broadly overvalued moment in market history” and that investors shouldn’t expect much in the way of equity returns.
Interestingly Warren Buffett disagrees.
Warren Buffett not only believes that the U.S. stock market is a good bet, he declared in a recent CNBC interview, “If there’s a game it’s very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-is a terrible mistake.” Buffett is steadfastly confident in our country’s economy and its ability to overcome adversity.
How is it that Buffett who famously says to buy when everyone else is leaving the market and sell when everyone else is buying is jumping into stocks so heavily right now? It has to do with the time frame. Buffett gets into stocks for the very long haul. Recently we asked how long does it take to make an investment long term. Ten years and longer is the answer. So Buffett trusts American business and the stock market and says that staying out is mistake. Nevertheless he is a firm believer in intrinsic stock value. What will happen if the market corrects on the basis of Trump’s failure to deliver on his economic agenda? Buffett will probably buy more stocks.