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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 626 posts from scratch.

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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? 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

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?

T.J. Maxx
Dollar General

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

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