How Bad Will It Get for Boeing?
The 737 Max was a hot-selling item for Boeing until its controls went haywire and two planes full of people died. Boeing profits are down by half as the 737 Max is grounded, sales have stalled, and 787 Dreamliner sales are slumping due to the trade war. Despite early talk that the 737 Max would be flying again by the end of the year, Boeing intends to halt production as of January of 2020. How bad will it get for Boeing as the 737 Max problem draws out?
How Bad Will It Get for Boeing and Its Investors?
CNN reports that Boeing stock continues its slide after the company announced plans to halt production of the 737 Max after the first of the year. As we noted above, profits are down substantially and Boeing is parking new 737 Max aircraft in the desert, awaiting FAA approval to fly the plane again.
Boeing said late Monday that it will suspend 737 Max production for an indefinite period of time starting at some point in January. The company made the decision because of the continued uncertainty about when the plane will be allowed to fly again.
Boeing’s (BA) stock was down more than 1% in early trading Tuesday. Shares have fallen 7% since FAA Administrator Stephen Dickson said last Wednesday that there was no way his agency would approve the plane to fly again by the end of the year. Up until then, Boeing had been hoping to get FAA approval by that target date. The company had warned that a shutdown of 737 Max line was possible if the approval was pushed to 2020.
But, despite being one of the two largest producers of commercial jet aircraft, along with Airbus, Boeing is a lot more than commercial aviation.
Boeing Business Divisions
These are the Boeing business divisions:
- Boeing Commercial Airplanes (BCA)
- Boeing Defense
- Space & Security (BDS)
- Engineering
- Operations & Technology
- Boeing Capital
- Boeing Shared Services Group
The company designs and manufactures rockets, airplanes, rotorcraft, telecommunications equipment, satellites, and missiles to customers across the world. It also has comprehensive product support and leasing services as one of the largest global aerospace manufacturers and the number five ranking defense contractor. According to the Boeing 2018 financial report, here are its profits by division.
- Commercial Airplanes: $7,879 million
- Defense, Space, and Security: $1,594 million
- Global Services: $2,522 million
The current list of jets that Boeing makes are these:
- Next-Generation 737
- 737 Max
- 747-8
- 767
- 777
- 777X
- 787
- Freighters
- Business Jets
And, the company makes money from support and services on all of its jets.
Although the majority of Boeing’s income is derived from commercial airplane sales, the 737 Max is only part of that picture. As Boeing loses sales of this aircraft, it does not necessarily lose jet aircraft sales to Airbus or any other manufacturer. Boeing has enough other jets to sell that they will be able to cushion the loss of 737 Max sales into the indefinite future.
Intrinsic Stock Value of Boeing
There is no question that Boeing stock is heading downhill as the 737 Max situation unfolds. There will likely be lawsuits that drag out for years. And, once the plane is OK’d again by the FDA, it will need to pass muster by aviation authorities across the world. A basic issue with the Max and the crashes is the complexity of the automatic controls and the need for experienced pilots and better training. This may be the biggest roadblock to selling the plane into expanding markets where pilot training leaves much to be desired. In the meantime, long term investors can look to the future and consider how the company will be doing in 5, 10, or 20 years. No one is going to step up and take their place. As such, we can expect a long term recovery after, hopefully, some painful lessons have been learned. Smart investors will wait as the story unfolds and aim to buy Boeing when its share price bottoms out.
How to Invest in Volatile Markets
The VIX “fear index” has been moving up as 2020 approaches. Many believe that a market slowdown is the best we can expect in the coming year while many others expected ever-increasing volatility and a major correction. The issue for long term investors is how to invest in volatile markets.
As the bull market ages, investors are not only worried about their investments next year, many investors are scared to death, according to CNBC Trading Nation.
Stocks may be at highs, but investors could be acting overly cautious heading into 2020.
Even more than that, they are acting as though they are “scared to death,” says Jeff Saut, chief investment strategist at Capital Wealth Planning. He says most of the investors he talks to fear what may come in the New Year.
While the analyst goes on to reassure readers that this secular bull market is likely to last longer, this is not the opinion of many of today’s investors. When uncertainty looms, volatility increases. Here are some thoughts about how to invest in volatile markets.
How to Invest in Volatile Markets
The first part of investing during periods of volatility is to reassess what you are investing in and the timing of your investments. Forbes offers their 5 best investment strategies for volatile markets.
Building a Cash Reserve during Periods of Investment Volatility
In our article about a silent warning for investors, we noted that Warren Buffett is accumulating huge stockpiles of cash at Berkshire Hathaway. Buffett is not finding his usual mix of the best stocks to invest in based on intrinsic stock value (forward-looking cash flow and low market price). This situation with Buffett is similar to the period before the dot com crash when he pulled money out of the stock market because he said it did not make sense.
Forbes also notes that building a cash reserve is a good idea as it lets you take advantage of a market downturn by buying again at a discount!
Investing in High Dividend Stocks
Dividend stocks should be part of any investor’s portfolio as they provide income even when their share prices fall in a market correction. And, such stocks are likely to fall less in a bad market because investors are buying them for the income as much as their growth potential. Read our article about choosing the best dividend stocks for a few tips on how to avoid pitfalls in dividend stock investing.
Value Stock Investing When Markets Are Volatile
The problem right now with value stock investing is that the market and the leading performers are overpriced. This is why Buffett is building up such a hoard of cash. Nevertheless, if you are investing for the long haul (until retirement and beyond) you can dollar cost average your investments with true value stocks and expect to see long term profits. As an example, the S&P 500 peaked in August 2007 at 1552 and bottomed out in April of 2009 at 826. Anyone who bought this index at the low point has seen their investment quadruple to 3168. However, even investments made at the high point have doubled by now. The point is that if you are in the market for the long haul, in well-chosen stocks, you will make money. And, if you invest steadily with a fixed dollar amount, you will profit in the long term.
Out-performing Sectors and REITs When Investments Are Volatile
We added these two of Forbes’ suggestions as one category. In these cases, you are looking for broad market sectors that are protected from the trade war and areas like managed-real estate that tend to keep making money no matter what the stock market as a whole is doing. In each case, you need to do a bit of homework in order to pick and choose the best investment. For the majority of investors, building a cash reserve, buying and holding solid dividend stocks, and buying value stock using dollar cost averaging are probably your best bets for how to invest during periods of volatility.
Where to Invest Outside of the USA
As 2019 comes to an end, our thoughts turn to investing strategies for 2020. With this issue in mind, we noticed an article on CNN Business, about it being time to dump U.S. stocks.
For all the concerns about slowing US economic growth, there’s consensus that stocks can continue to rise. But for the best returns, strategists and portfolio managers have indicated they’ll look elsewhere.
Neil Dwane, portfolio manager and global strategist at Allianz Global Investors, thinks that the heated run-up to the 2020 election is likely to weigh on prices.“While the United States has offered investors strong returns for many years now, the country will likely spend much of next year grappling with growing political uncertainty,” he wrote in an op-ed for CNN Business. “The real investment opportunities in 2020 may very well be found abroad.”
Our belief is that the very partisan election campaign will not adversely affect the stock market so long as earnings continue. However, the now-certain-to-be-long-term trade war, the ever-increasing US debt, and a generally slowing global economy are likely to affect the U.S. market. No matter why it will happen, the U.S. market is likely to slow down and well-chosen investments elsewhere will flourish.
Where to Invest outside of the USA
In our recent article about safe investments in an uncertain world, we published a map of the world from OECD, color-coded for expected economic growth. The only nation in the Western Hemisphere predicted to experience better than 3% growth is Colombia. In Europe, only Spain, Poland, and Turkey are likely to grow faster than 3%. And all of the 4%, 5%, and better growth rates are expected to occur in South and East Asia. India stands out with a predicted rate of economic growth greater than 6%.
The ABC (anywhere but China) movement is likely to continue and countries like Indonesia, Vietnam, and India are likely to benefit. A good place to look for cues about where the smart money is going is the World Bank’s yearly report on foreign direct investment. Although the world’s two largest economies, The U.S.A. and China receive the greatest cash inflows, the table that the World Bank publishes each year gives you a good idea of where else investment capital is going and if the trend is up or down.
How to Safely Invest Outside of the USA
Since you probably do not speak many foreign languages and do not have someone “on the ground” in Indonesia, India, or anywhere else in South and East Asia (or Colombia, Spain, Poland, and Turkey), you need a safe way to invest your money. And, you need to be able to do the same sort of fundamental analysis that you do when investing in stocks in the USA. The route that many investors take is to purchase American Depositary Receipts. As Investopedia explains.
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares or as little as one share investment in a foreign company’s stock. The ADR trades on markets in the U.S. as any stock would trade.
ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American investors and capital without the hassle and expense of listing themselves on U.S. stock exchanges. The certificates also provide access to foreign listed companies that would not be open to U.S. investment otherwise.
The best route is to only purchase level three ADRs. They are subject to full SEC reporting requirements so that you can just as easily analyze them as you would a US stock.
As an example, follow this link to see Indonesian ADRs. It is of note that only one ADR of an Indonesian company trades on the NYSE. As a fixed line Telecom Company this is not an internationally famous company but it is one that will grow as the Indonesian economy expands. You can also check out ADRs for any of the other nations with higher projected growth rates in you are wondering where to invest outside of the USA.
Choosing the Best Dividend Stocks
Dividend stocks are a great way to invest over the long term. If you are going into retirement, the dividends are a nice quarterly source of income. And, as you prepare for retirement, dividend reinvestment plans let you roll your dividends back into more shares of stock without paying any commissions. But, not all dividend stocks are created equal! All too often, companies that are struggling maintain their dividend. The stock price is down and the dividend yield is fantastic. But, some of these high dividend yields are dangerous. One day the dividends will disappear just as the struggling company goes out of business! Here are a few of our thoughts on choosing the best dividend stocks.
Finding Dividend Stocks to Invest in
It is easy to find dividend stocks. But, rather than looking first for stocks on Yahoo Finance or Google Finance, go to a site like Dividend.com for a huge list of dividend stocks and Macy’s on page 22 paying a 9% + dividend. They are preceded by stocks that pay for more than 100% of the share price. When you see a stock like Macy’s that is having trouble competing in the brave new world of online sales and Amazon.com, you can understand why they are keeping their dividend up to attract investors even as sales and income fall. But, when a company is listed as paying more than the share price, something is drastically wrong. You should think twice before buying Macy’s for the dividend but when you see stocks with ridiculously high dividends, it is time to run and hide! So, how do you go about choosing the best dividend stocks that reward you for investing while also being safe over the long term?
Choosing the Best Dividend Stocks
There are just a few rules to follow in order to find the “goldilocks” group of dividend stocks that provide excellent returns and are secure over time. The process looks a lot like assessing intrinsic stock value when investing in stocks.
Investing in Dividend Stocks with a Large Margin of Safety
Some refer to this a looking for a strong operating mote. Whether this is a “high cost of entry” business like a natural gas pipeline that has overcome numerous obstacles to get built, a utility that is licensed to serve a specific region, or a world famous trade name like Coca Cola, companies that these competitive advantages are likely to be secure investments and dividend cash cows for year and years.
When Investing, Stay with Dividend Yields That Match Those of the Competition
This gets back to the business of avoiding companies that are struggling and don’t want to reduce their dividend for fear that it will alert investors as to their dire straits. A healthy business in any given sector will typically pay dividends in a given range. When the dividend is higher or lower than expected, you need to check that out before investing.
Understand and Check Out the Payout Ratio before Investing
This is similar to being leery of too-high dividends. A company will typically pay out a set portion of its income in dividends every year. The dividend goes up as they make more money and the dividend should go down when they go through difficult times. The market may not have caught on that a company is having trouble or doing better than expected, but if you follow their payout ratio, you will have a good idea. Then you can make an intelligent decision to buy more of the stock, hold what you have, or sell before the bottom falls out. Likewise, if you are putting your money in a stock and want to sleep well at night, you want a company whose balance sheet is healthy.
Investing Companies with Increasing Dividends
Companies that have been paying in dividends for decades or even more than a century have typically been increasing their dividend over the years. This is a sign of a healthy business, a good margin of safety, and intrinsic stock value. Picking stocks whose business plans you understand and who dividends go up every few years is a good way of choosing the best dividend stocks without spending too much time looking at the details!
Don’t Be Scared Away from Profitable Investing
The stock market has been going up ever since the dark days of the Financial Crisis. And, many investors have done extremely well. Meanwhile, contrarians have been predicting everything from a market slowdown to a crash for years. Shorting stocks is popular with many who see the market and many individual stocks as ready to tank. The continual stream of market doom and gloom reminds of how the famous American author Mark Twain was reported to have died. He was later quoted as having said, “The report of my death was an exaggeration.” As we noted in our article about shorting stocks, the most-shorted stocks, as a group, went up instead of down last year! Don’t be scared away from profitable investing by the news media or individuals who invested unwisely and lost money. Over the years the U.S. stock market is the best way to grow your wealth. You simply need to know how to proceed.
Don’t Be Scared Away from Profitable Investing
We are not the only ones who have noticed that many potential investors are staying away from the stock market. Jim Cramer of Mad Money blames bears, media for the public’s low interest in stocks.
Don’t let the armageddonists and the negativists and the hucksters scare you away from owning stocks,” CNBC’s Jim Cramer says. “There are vast sums of money to be made here, and far too many people are missing out because they’ve been frightened away from the whole asset class.”
His opinion is that bad news, including bad investing news, gets higher ratings than good news. So, for most potential investors, what they receive is a constant barrage of news that discourages them from investing in stocks.
The other issue is that these folks do not have a clear idea of what to expect and how to find and invest in the best-performing stocks available. They may have invested before based on tips and lost money because they did not know how to assess intrinsic stock value.
Scared Away from Stocks and Investing in Bonds, Gold, or Bitcoins
One of Cramer’s gripes is that there are commentators who profit when their followers invest in asset classes like gold, bonds, Bitcoins, or real estate instead of stocks. While there are good reasons to diversify your investment portfolio, this should be done with a clear head and not be based on panic selling or fear or investing in the first place.
If you want investment advice, you need to stay away from the folks who routinely hype their favorite investments or those who will obviously profit because they are running a pump and dump scheme. This is indeed what happened with the Bitcoin rally and collapse of 2018. And this brings us back to what an investor should expect from investing in any given asset class. A good way to avoid being burned and scared away from profitable investing is to start by investing without losing any money, picking dividend stocks that have been paying dividends for a hundred years, and learning how to do fundamental analysis to find the best stocks to invest in.
Why Are Agriculture Investments Hurt by the Strong Dollar?
There is pain in farm country this year. The weather was awful. China quit buying soybeans. And, now corn exports are down substantially. The strong dollar is to blame in the latter case. Why are agricultural investments hurt by the strong dollar?
Why Are Agriculture Investments Hurt by the Strong Dollar?
The other day President Trump chose to restore tariffs on steel from Brazil and Argentina according to the BBC. He did this to punish the two countries for having weakening currencies. The weaker currencies make their agricultural exports more competitive. And, that has reduced U.S. agricultural exports.
US President Donald Trump has said he will place tariffs on steel and aluminium imports from Brazil and Argentina.He justified the move saying those countries’ weak currencies had made it harder for US food exports to compete.“Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers,” Mr Trump said.
Brazil’s President Jair Bolsonaro said he would seek talks with Mr Trump.“Their economy is not comparable with ours, it’s many times bigger. I don’t see this as retaliation,” Mr Bolsonaro said in a radio interview with Brazil’s Radio Itatiaia.“I’m going to call him so that he doesn’t penalise us. Our economy basically comes from commodities, it’s what we’ve got,” he said.
The culprit does not seem to be intentional devaluation by either Brazil or Argentina but rather the U.S. economy and strong U.S. dollar.
Bloomberg looks at the same issue in their article about the real foe for U.S. farmers.
President Donald Trump may have bewildered authorities in Argentina and Brazil by announcing on Twitter new steel tariffs as punishment for cheapening their currencies. But the measure does shine a light on how much the hardy dollar is hurting U.S. farmers.
There’s little evidence those countries have intentionally brought down the value of their currencies; in fact, they’ve both been grappling to stop the rout, which is fueled largely by the relative strength of the U.S. economy.
As they note, corn exports by U.S. agriculture are 60% lower this year because buyers can purchase the same quality corn for less from countries with weaker currencies. Orange juice is another commodity that is suffering as well.
Meanwhile, countries like Ukraine, Brazil, and Argentina are producing more and, due to weaker currencies, able to export for less.
U.S. Agriculture Needs Foreign Markets
We wrote some time back about how the trade war is hurting U.S. agriculture. In that case, we focused on how North Dakota farmers and the agriculture infrastructure had geared up to ship soybeans to China. But, soybeans are only part of the picture with U.S. agriculture. According to the USDA, agricultural exports in 2018 were about $140 billion. The leading exports are “grains/feeds, soybeans, livestock products, and horticultural products.”
Again, according to the USDA, in most years 50% of US soybeans are exported, 46% of wheat, 21% of corn, 55% of rice, and 76% of cotton. Overall, 20% of US agricultural production is exported. As a whole, U.S. agriculture is the largest US exporter.
In a nation that has to worry about its balance of payments, a healthy farm economy is a big deal. And, right now the strong US dollar is causing a lot of pain.
Beware When Shorting Stocks
Over the course of the longest bull market in history contrarian investors have again and again predicted doom and gloom and been burned again and again. As noted in the movie “The Big Short,” there are times when shorting a stock can be immensely profitable. But, choosing what to short and timing of when to do it are keys to making money with this approach. Unfortunately for contrarian investors, in the last year the “most shorted stocks” went up as a group more than twenty percent! So, you should beware of shorting stocks. But, many shorts in the last year were successful! How can you profitably pick and choose?
Beware When Shorting Stocks
Market Watch visited the issue of Wall Street’s most shorted stocks in a recent article.
With U.S. stocks up around 25% so far this year, it would appear to be have been a tough year for short sellers. But a breakdown of the most shorted large-cap stocks indicates Wall Street’s nabobs of negativity have enjoyed a somewhat more upbeat story.
In a Tuesday note, analysts at Bespoke Investment Group observed that Russell 1000 RUI, +0.24% stocks with more than 20% of their float sold short have seen total returns of 14.81% so far in 2019. That’s a solid gain, though it lags the returns of more than 25% posted by large-cap indexes, including the S&P 500 SPX, +0.22% , over the same time. That means shorts “have done OK on a relative basis,” the analysts wrote.
The least-shorted stocks in the index are up 31%, so there was some predictive value to looking at what was being shorted and what wasn’t as a group. But, within the “shorted” group there were some big losers! Here are some examples from the list of stocks that had more than 20% of their float shorted.
- US Steel, -22.68%
- Range Resources Corp, -59.50%
- Nordstrom Inc., -15.25%
- Macy’s Inc., -44.72%
- Wayfair Inc., -4.65%
- Bluebird Bio Inc., 24.65%
- Macerich, -32-97%
- AMC Networks Inc., -29.06%
- 2U Inc., -51.61%
- Grubhub Inc., – 44.15%
- Sarepta Therapeutics, -0,68%
- World Wrestling Entertainment, -18.93
Timing When Picking Stocks to Short
Although we repeatedly remind investors that fundamental analysis and appraisal of intrinsic stock value are essential for investing in stocks, that approach is best used for long term investing. The issue when shorting a stock is that you are borrowing money to buy the stock with the expectation that you can, rather quickly, buy it back at a much lower price. A good example is Match Group which was the most heavily shorted stock in this list at 59% of its float. The stock is up 61.37% on the year. But, it is down 19% in the last three months and 4% in the last month. If you shorted this stock at the beginning of 2019 you got burned and if you shorted it three months ago you are riding high. In short, you need to stay abreast of market sentiment and short term factors when shorting stocks because you cannot afford to hold onto a short and constantly pay interest for years and years while you wait for your predictions to work out.
How to Pick Stocks to Short
Those who are successful at shorting stocks track their target stocks and are fully aware of the intrinsic value of these investments. Then they decide what to look for, the trigger, that will make them short the stock. Although shorting stocks can be vastly more profitable than investing in them long term, timing and appreciation of market sentiment are crucial factors for success.
Are These Promising Investments?
In the business news there are always reports of investments that have done well. But are these promising investments for the future? This thought came to mind when we read an article in The Motley Fool about two stocks that “crushed the market” recently.
Are These Promising Investments for You?
Here is what The Motley Fool has to say in their article.
A good stock really distinguishes itself when its share price rises above that of a prominent market index. In some way, it hovers above the rest of the vast pack of equities.
With the depth and breadth of the U.S. market, there are always a few standouts. For this week, let’s take a look at two good ones, and see what made them rise confidently above the average.
The two stocks they look at are Splunk and Square. Splunk is a data analytics solutions provider. Square is described as a “next-generation” financial services provider. Splunk’s route to long term success is by providing companies with the tools to analyze and make use of great amounts of increasingly complex data. Square’s niche is the tablet sales registers that are increasingly common. They provide both the hardware and software. Both stocks went up based on strong quarterly earnings. Now our question is, are these promising investments for you either in the short or long term.
Finding and Evaluating Promising Long Term Investments
A company that is making money is doing something right. What you need to do is determine if the business plan that resulted in a strong quarter will continue to pay off. When investing in stocks, this is all about determining intrinsic stock value. The successful investor Warren Buffett has famously said that he tends to avoid tech stocks because the success of their products, services, and business plans are so hard to predict. That having been said, we like both of the stocks mentioned by The Fool because they follow the logic of selling picks and shovels when everyone else is digging for gold. Both of these companies provide tools that make businesses more efficient and potentially more profitable. Their place in the world of business is not one of inventing the tech but of effectively utilizing it to benefit their customers. Because, in each case their earnings are up, they seem to be doing something right.
Your job in deciding if these are promising investments for the future hinges on whether the type of services they provide will be needed into the distant future and whether they can continue to be top (and profitable) providers of services in that niche.
Comparing Promising Investments with Their Competitors
In the case of Square you will need to compare it with others who provide services in their niche which include Shopify, VISA, American Express, Apple, and Amazon.com. In the case of Splunk the competitor are ServiceNow, Salesforce, VMWare, Palo Alto Networks, and Workday.
Looking at Stock Prices Over the Years of Investments That Appear Promising
Then you need to look at how recent profits, and stock price, compare to how they have done over the years. Splunk popped up $30 a share to $147 on the strength of recent earnings but it was selling at $140 a share just three months ago before its price fell. This company has been listed for 7 years, started at $35 a share, and has never fallen below $31 a share. It does not pay dividends and has no P/E ratio listed. This is to a degree a “story” stock that requires your faith in its success if you invest long term or your willingness to buy and sell for short term profits.
Square has been listed for 4 years and started at $12 a share. It currently sells for $68 a share but is down from $94 a year ago. Like Splunk, it does not pay dividends and does not have a listed P/E ratio. Again, this is an investment that may be profitable for short term profits but requires faith in their ability to compete in their niche if you want to invest long term.
Stocks and other investments that are reported in the business news are always worth checking out as promising investments but you need to do your fundamental analysis to determine the best stocks to invest in.
Safe Investments in an Uncertain World
The market fell the other day on news that an early trade war deal is not likely. But, the trade war is only one symptom of problems with the world economy. This got us to thinking, what are safe investments in an uncertain world? In that regard, it is instructive to look at how major changes in the economy, technology, and other factors affect your investments over the long term.
Investing in Carriages When They Are Making Cars
Since we are thinking of long term issues with your investments, we thought that a little history lesson would be useful. At the beginning of the 20th century there were both horses and cars on the road. But, anyone who invested heavily in making carriages instead of “horseless” carriages lost their money. We believe that investors looking to the future need to consider which of today’s investments will be tomorrow’s carriages and which will be the cars. In this regard, a recent article published by Bloomberg is instructive.
Investing in a World with Big Problems Coming
Bloomberg writes that the world might have a Bigger Problem Than a Potential Recession. Their argument is that governments, markets, and investors across the globe are being shortsighted. They are focusing on next quarter’s or next year’s profits when there are factors in the works that could change the economy and investing forever. They discuss a recent OECD report.
The latest outlook and policy prescriptions from the Paris-based group mark a step beyond its repeated warnings about threats to growth from U.S.-China tensions, weak investment and trade flows. Those remain, but it also flags more systemic challenges from climate change, technology and the fact that the trade war is just part of a bigger shift in the global order.
For OECD Chief Economist Laurence Boone, the worry is that the world could continue to suffer in the decades to come if authorities offer short-term fiscal and monetary fixes as the only response.
They say that global growth will decline. But, the decline will be worse in some countries than others.
There are many issues that require basic, structural, changes and governments are focusing on short term stimulus measures such as the Trump tax cut. These measures generally make things worse in the long run and benefit only a few in the short term. We noted the fact that much of the tax cut benefit has gone into stock buybacks which have propped up stock prices but not helped anything over the long term.
Investing a World of Climate Change Chaos
The article touches on historic fires in Western Australia and Venice amid a heat wave in Europe that reached into the Arctic. They note that many of the effects of a warming world cannot be forecast but that we seem to be getting a taste of them already. The economic costs of fires California, Australia, and the normally-humid jungle of Colombia may be substantial. All of the resources that go into fighting fires, fixing flood damage, and dealing with other “natural” disasters takes away from funds needed for infrastructure and other necessary functions of government. Our concern is that Trump’s trade war is only the first retrenchment that will be seen across the globe.
Asia is signing a trade pact that was originally supported by the USA. In all likelihood, this pact will help Asian economies to the detriment of the countries in the West who have excluded themselves (USA).
Safe Investments in an Uncertain World
If you buy the argument that changes are in store and they will hurt your investments, what do you do? Our first thought is that trade will shrink as countries adopt protective measures. That means you need to look locally for companies that are not dependent on foreign sales. These are the same sorts of investments that would be appropriate for a permanent trade war. In addition, if market become more volatile, the sorts of investments we mention in our article about investing without losing any money would be appropriate. No matter how all of this works out, the best stocks to invest in will change as conditions warrant.
When Do Contrarian Investments Work?
A recent article in US News and World Report looked at eight potentially profitable contrarian investments. That got us to thinking. When do contrarian investments work and when are they just value traps? In a recent article we asked, are there any cheap investments left? In it we visited the same issue from a slightly different viewpoint. Here are the contrarian investments suggested Bank of America and reported by US News and a few thoughts about each one as well as contrarian investing in general.
Contrarian Investments to Check Out
In their article, US News writes about stocks that are “due to bounce.” They offer stocks that are down at least 35% year on year. They consider why the stock is down and why they believe it will recover and grow even more than before. Here they are:
CBS
CBS has spent heavily on content which has reduced its bottom line. It also just merged with Viacom. As we noted in our article about Disney, content is increasingly important. As such the investment in more content can be viewed as solid planning for the future. And the Viacom merger can be seen as another positive strategic move. As such, the folks at Bank of America and US News are offering a target price of $63 for this stock that currently goes for $38.
The problem is that this is a very competitive environment with more and more people getting their entertainment and news online instead via the TV set. The question is if CBS can prosper in a world dominated by Disney Plus and Netflix.
Mosaic
This is a large fertilizer company that is a leader in production of potash and phosphates. Its stock is down more than 40% from a year ago. We don’t see this stock so much as a contrarian bet but as a cyclical stock whose value goes up and down with the needs of agricultural producers. This last year has been terrible for US agriculture with too much rain, too much heat, and being cut off from markets for soybeans, especially, in China. As conditions improve, they will be selling more fertilizer and making more money. The issue is that they are not a long term growth prospect as the stock started 1994 at $20 a share and that is what it sells for today despite being as high as $150 very briefly in 2008.
When Do Contrarian Investments Work?
Back in the last 1980s Warren Buffett lots of Coca Cola stock when it was a contrarian bet. His investment, like all of them, was based on an assessment of intrinsic stock value. His Coca Cola investment turned out exceptionally well because the company has grown even more and not turned into a value trap. Our concerns about both of the investments we mention here, as well as others mentioned in the article, are generally reduced in price for good reasons and do not have a clear path to long term prosperity in excess of what they have demonstrated over the years. In short, when contrarian investments work is when they have the prospect of strong long term earnings.