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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 601 posts from scratch.

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Can You Hold an Investment for Too Long?

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, 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When a Business Model Becomes Outdated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 Then the digital era arrived and the Kodak business model was outdated.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.

Can You Hold an Investment for Too Long? PPT

Are We Seeing the Demise of IBM?

IBM was once the most admired company in the world. It was the main frame computer powerhouse. Then along came laptops followed by the internet and IBM has been in a recurring downward spiral. Nevertheless, the most successful investor, Warren Buffett, is the largest shareholder of IBM. And IBM has just completed twenty consecutive quarters of revenue decline. CNBC discusses Buffett taking a mega million dollar beating on IBM.

The billionaire Oracle of Omaha is the largest shareholder – through his Berkshire Hathaway – of the information technology behemoth, whose stock has been sliding since it recorded its 20th-straight quarterly revenue decline after the closing bell Tuesday.

IBM actually topped Wall Street expectations on the bottom line, earning $2.38 a share against estimates of $2.35. However, top-line revenue fell short at $18.16 billion compared with the $18.39 billion anticipated according to Thomson Reuters estimates.

“The portfolio will grow. I am confident that the IBM company will grow again,” IBM Chief Financial Officer Martin Schroeter told CNBC.

In the good old days IBM was the reliable source of computing power and a purchasing manager could never get fired for buying IBM products. But when Jobs and Wosniak invented the Apple computer IBM was caught napping. They were the reason that Bill Gates became rich as he provided the DOS operating system that IBM used on its personal computers. And as computing power of small computers multiplied IBM sold fewer mainframes. Today IBM is much more diversified. Google Finance describes IBM.

The Company operates through five segments: Cognitive Solutions, Global Business Services (GBS), Technology Services & Cloud Platforms, Systems and Global Financing. The Cognitive Solutions segment delivers a spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive Solutions includes Watson, a cognitive computing platform that has the ability to interact in natural language, process big data, and learn from interactions with people and computers. The GBS segment provides clients with consulting, application management services and global process services. The Technology Services & Cloud Platforms segment provides information technology infrastructure services. The Systems segment provides clients with infrastructure technologies. The Global Financing segment includes client financing, commercial financing, and remanufacturing and remarketing.

Although IBM’s earnings have fallen steadily over the last five years its stock has recovered from $120 a share to $160 a share in the last year and a half. And IBM pays a $1.40 dividend each year on each share. Are we seeing the demise of IBM or is this a unique buying opportunity? Seeking Alpha says to buy the dip.

IBM does trade at an attractive valuation. The company’s P/E is just under 13 at 12.9 and Forward P/E is 12. This implies some growth for the company. It is worth noting that IBM trades at 2x sales and 8x book value.
I believe that the case for IBM in the long run is solid. The biggest driver, in my opinion, is the cloud. Cloud offerings were up 35% this quarter; led by cloud as a service, which was up over 60%. I believe that growth will continue in all things ‘cloud’. I believe that multiple companies across multiple industries will begin to utilize the cloud more and more. IBM is the global leader in enterprise cloud and they’ll hold on to that, that is my opinion.

Alternatively The Street says to dump your IBM shares in the trash and set them afire. Their argument is that IBM is abandoning its former core business of hardware and operating systems.

Are We Seeing the Demise of IBM? PPT

Should You Invest in Defense Contractors as War in Korea Looms?

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.

Should You Invest in Defense Contractors as War in Korea Looms? PPT

Will United Airlines Survive Their Public Relations Nightmare?

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.

Will United Airlines Survive Their Public Relations Nightmare? PPT

Pros and Cons of Foreign Investment in Africa

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? 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.

Pros and Cons of Foreign Investment in Africa PPT

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