On Black Monday, in October 1987, the market plunged over 500 points. It happened because the big trading companies weren’t able to shut down their computerized trading programs. And it could happen again. But thanks to much more powerful computers, it would be far worse. (more…)
No commodity has disappointed more than uranium. But don’t let that put you off. Now is the perfect time to become a uranium buyer. (I’m assuming that you’re not the head of state of either North Korea or Iran!)
Prices hit $136 in 2007 and then began a long pullback to around $40. They bottomed in April and have since rebounded to the $50 per pound level.
Can they go up from here? Based on market fundamentals, yes… and soon.
Nuclear power contributes 16 percent of world energy demand. In the U.S., it contributes 20 percent. And with 30 nuclear plants under construction and another 38 in pre-construction stages, with dozens more planned, nuclear’s contribution is sure to rise.
Meanwhile, there won’t be enough uranium to go around. The International Atomic Energy Agency recently said that Russia and the U.S. may cover only 5 percent of world demand by 2015.
The current shortage in production is being covered by uranium from dismantled weapons the U.S. has been getting from Russia. The government-created company USEC down-blends this uranium for use in nuclear power plants. But that agreement with Russia goes away in 2013.
The global nuclear power plant construction program isn’t going anywhere, though. With China and India leading the way, nuclear’s resurrection shouldn’t be ignored by investors.
The entire nuclear industry is revving up, including uranium exploration and mining. (It takes eight to 12 years to build a mine and get the stuff out of the ground.) One of the bigger companies that has been mining uranium for a long time is Cameco (CCJ). Its stock should grow right along with the sector itself.
[Ed. Note: Andrew Gordon shares his thoughts on the financial markets regularly in ETR's sister publication, Investor's Daily Edge. Get your free subscription here.
You can also check out Andrew's monthly newsletter,INCOME, for regular updates on how to grow your wealth with high yield and market-beating returns.]
De-coupling lives again, but I wouldn’t bet the farm on it.
Remember when it made the rounds over a year ago?
The idea was that even if the U.S. economy caught pneumonia, the rest of the world would at worst get a bad cough. It was argued that Europe and China were much less reliant on the U.S. economy than ever before. And China, with its massive import needs, would also keep economies from Brazil to Australia humming.
This gave governments, businesses, and investors hope. It was about as good as any other unproven theory – but it didn’t quite work out, did it?
America’s economic malaise quickly spread to other countries, including China in a very big way, and they caught much worse than just a cough.
Fact is, replacing the U.S.’s massive market is easier said than done. China’s quickest road to recovery is helping the U.S. recover. That’s why, despite a lot of moaning and groaning, China will continue to finance our growing debt and take their chances on a future devalued dollar.
China’s leaders understand better than most people in America that their heady economic growth was entirely dependent on our “borrow-and-spend” behavior.
With no replacement in sight, it’ll be next-to-impossible for China to turn around its economy. De-coupling has once again miscast China. China is no savior. The crisis began in the West and will end in the West. Only then will a recovery spread elsewhere.
Read my lips: A rescue is not around the corner. You should continue to invest defensively (in gold, for example) or bet the market short, because it still has another leg down to go.
[Ed. Note: You can read more of investment analyst Andrew Gordon's commentary on world markets and his advice for how to deal with them in these tough economic times in Investor's Daily Edge, ETR's free sister publication.]
Their profits are up. Their write-downs are lower. The government is riding shotgun for them. And the worst is over.
The banks are back, right?
Goldman Sachs, JP Morgan, Bank of America, Wells Fargo, and even Citigroup all reported profits for the first quarter of 2009. But a closer look under the hood reveals some “creative accounting”…
Most of the banks did extremely well in fixed-income, currency, and commodities trading this past quarter. So is this the new bank model? Making boatloads of money from Forex and bonds?
Not likely. It looks more like a one-time bonanza to me.
The Fed and European central banks were broadcasting their quantitative easing efforts. It’s not hard to make money when the government is telling you which way rates are going. But now that the run-up to quantitative easing is over, making those oversized profits will get a lot harder. So where else will the banks be getting their money?
A bank’s loans are only good assets if they get paid back. And the brutal recession we’re having is forcing more and more loans into default. When their loans go into default, banks go from earning money to spending money. Each foreclosure, for example, costs a bank about $50,000.
The banks still have some tough sledding ahead.
[Ed. Note: Andrew Gordon is an investment analyst with decades of experience watching the markets. Get his take on the economy, under-the-radar investment opportunities, and more with Investor's Daily Edge, ETR's sister publication. Get your free subscription here.]
The earning season is drawing to an end. But even before it began, we already knew that a lot of companies were in big trouble. Their dividends told us.
Historically, far more companies have raised their dividends as opposed to cutting or suspending them. But in the first quarter of 2009 – for the very first time since 1955 when Standard & Poor’s started tracking this – the ratio reversed. For every three companies that raised dividends, four cut them.
This is yet another red flag indicating how tight credit still is.
But how about those dividend hikers?
Many raised their dividends by 5 to 10 percent or more this past quarter. And you can even find some – including Shell and AstraZeneca – that have upped their dividend payments by over 10 percent.
Raising dividends in this period of tight credit and slumping demand is either a huge bullish statement on the prospects of the company in question or…
The biggest con job this side of the Madoff scandal.
Occasionally I find a dividend hiker I don’t like. For example, General Dynamics raised its dividend last month but also announced that it would be laying off 12 percent of its workforce. This is not a company confident about its future earnings growth.
But I’ve found that 98 percent of dividend hikes are legit – made because the company has deep reserves of cash and solid revenues.
Companies like that are good investments right now. You’d be getting a double bang for your buck: increasingly big dividend checks and share prices poised to go up.
[Ed. Note: You can read the investment advice and musings of Andrew Gordon every day in ETR's sister publication Investor's Daily Edge . ]
When investigating companies to invest in, I look at several margins – gross, operating, pre-tax, and net profit margin. But I focus on operating margin. Operating margin is the difference between how much you make and how much you spend to operate the business. If the “making” is at least 15 percent higher than the “spending,” I’m interested.
But there’s something else I need to know…
Was the operating margin lower or higher last year? And the year before? And the year before that? I like to see margins on an upward trend. It could mean several things, like…
• Strong and/or rising pricing power
• A shortage of products (Think Harley-Davidson, which deliberately makes fewer bikes than they could sell.)
• Technological leadership
• A transition from lower-end to higher-end products
• Rising productivity
• The ability to effectively manage costs
It takes more homework to figure out what is driving higher margins, but all of the above possibilities are good. So with an operating margin on an upward trend, even without doing the homework, you already know the company is running its business from a position of strength.
Profit margins go to the core of what makes a business successful. If you want a reality check, consider retailers.
Many retailers sold more product than ever during the 2008 holiday season. But because they had to slash prices to get customers to buy, their margins were squeezed to the max. So while sales were up, profits were down. That’s what happens when margins go in the wrong direction.
If you want to do the research yourself, the numbers are provided online by Reuters Finance. Just look up a specific company and click on “Ratios.”
[Ed. Note: This June, investment expert Andrew Gordon is just one of 9 investment experts who will show you exactly how you can make a fortune in today's market. Find out how to get their top recommendations for making 2009 the best year ever for your portfolio right here. ]
The PEG ratio compares a stock’s price (as measured by the price-to-earnings ratio or P/E) with its earnings growth. When used correctly, PEG can help you find great companies.
But I suspect that these days it’s misused more often than not.
P/E is one of several metrics that can help you get a handle on how expensive or cheap a company is. A PEG of 1 or less means good growth for the price. Above that, and the stock is probably overvalued.
I used to love PEGs of 1 or less. Whenever I saw one, I wrote in the margins of my notebook, “High growth expected.”
Two years ago, this notation always meant “Good. The company is on a high-growth trajectory.” When I write the same thing now, it means something entirely different. I think, “Gee, can this company meet its high-growth expectations?”
Let’s take a look at Coke.
The forward P/E (based on expected earnings for the next 12 months) for the entire S&P 500 index is 12.42. Coke’s is 13.02.
If Coke were expected to increase earnings at a rate of 13.02 percent a year over the next five years, its PEG (P/E divided by earnings growth) would be exactly 1.
With a 13.02 P/E, the last thing I want is a PEG of 1 or less. In such a case, the company would be expected to grow earnings by at least 13.02 percent a year. And in this global environment, that would be next to impossible.
But Coke’s PEG isn’t 1. It’s 1.69. That makes its projected annual earnings growth a very achievable 7.7 percent.
The stock market is all about expectations. When a company disappoints analysts and investors, it can lead to a decrease in its share price.
With a PEG of 1 or less, that’s a probable outcome these days. I don’t go there anymore – and neither should you.
[Ed. Note: Investment expert Andrew Gordon has mastered the art and science of value investing. He uses these skills to identify both undervalued and overvalued opportunities. And boy, are those short positions paying off! Just recently, he closed gains of 116%... 98%... 101%... 148%... 106%... and 103%. Find out how you can get the secrets behind these big plays right here.]
Two things will define 2009 for the U.S. One is the huge $787 billion economic stimulus package featuring “smart grids,” roads, and bridges. The other is the winding down of the war in Iraq.
Obama will begin withdrawing troops as soon as he can. That may not be until 2010, but much of the planning will be laid out this year.
But downsizing troops doesn’t mean downsizing our involvement. The goal is to save lives. And the quid pro quo will be spending more money.
So talk about reducing contractor levels in Iraq is just that – talk. The next stage will be a big increase in outsourcing reconstruction and security functions to the private sector.
Iraq will be getting loads of new stuff, including tow trucks, communications vehicles, hauling vehicles, aerial platforms for construction, fire and garbage trucks, and heavy-load hauling vehicles.
And Uncle Sam, of course, will be paying the bill.
The companies that can take advantage of both of Obama’s huge infrastructure programs – the one that will play out in the U.S. and the one that will play out in Iraq and Afghanistan – will be big winners in 2009 and 2010.
[Ed. Note: Investment expert Andrew Gordon is just one of 14 masters of making money who will be giving you the inside scoop on some very hush-hush secrets for turning a nifty buck in the next few years. Find out how to get your hands on these experts' SAFEST and most PROFITABLE income-generating and entrepreneurial opportunities right here.]
Auto companies are in horrible shape. Will GM survive? Has Toyota seen its best days? Is Ford’s funk temporary or permanent?
You should stay away from them. But why not invest in the next big technology the auto companies will need? All of them have plans to introduce or step up the production of battery-driven cars beginning around 2011-12.
The batteries being used today won’t be the batteries that will be used in a few years. Nickel-cadmium batteries are on the way out. On the way in are lithium-ion batteries, with twice the capacity and half the weight. Plus, they work fine in hot or cold weather.
This market is flying under the radar. From $9 billion today, it could reach $150 billion in the next 10 years.
There are about 30 car manufacturers around the world dying to get their hands on this new technology. And those companies that have already begun production have the best chance of becoming big players in this market.
[Ed. Note: Investment expert Andrew Gordon has mastered the art and science of value investing. He uses these skills to identify both undervalued and overvalued opportunities. And boy, are those short positions paying off! Just recently, he closed gains of 116%... 98%... 101%... 148%... 106%... and 103%. Find out how you can get the secrets behind these big plays right here.]
From rags to riches. Redemption. An exciting story. A happy ending. These are things that make good movies, not good stocks.
Were you tempted to buy Bank of America, GM, or GE? Or wannabe giant-killer American Micro Devices that had Intel on the ropes for a few shining months?
Human nature can be our worst enemy when we invest. We think a company “deserves” better, is “misunderstood,” is ready to “fight back”… as if the market cares about any of these things.
There are a lot of screaming bargains available right now. Lots of companies with compelling stories. Lots of companies in sexy sectors (like alternative energy). But, you’re not looking for romance. You’re looking for a good investment.
Usually, you can tell a risky stock when you see one. GM never looked good last year. Bank of America made headlines for all the wrong reasons. GE kept revising its earnings down. American Micro Devices is the classic underdog, but had serious money problems it couldn’t hide from anybody.
You know better than to invest in companies like these. Look for your thrills elsewhere – and remember that the biggest investment mistakes are stocks you bought, not the ones you missed.
[Ed. Note: Thousands of Americans are cashing in on a loophole for collecting up to $8,881 a month, backed by an "explicit" U.S. Treasury guarantee... and the next batch of checks is going out on March 27, 2009. Learn how you can get your name on the list by reading on here.]
Professional investors got taken to the cleaners by the former head of NASDAQ, hedge fund manager and scam artist Bernie Madoff. They should have known better. But before you point fingers at these supposedly sophisticated investors who lost billions to a cheat, ask yourself this: Do you do even the minimum due diligence before you invest in a fund? (I don’t care who told you about it. Trust no one except yourself.)
Go to the finance.yahoo.com site and look up a mutual fund. Then click on “Profile.” Here, you’ll see most of what you need to know…
• The fees and expenses. You can compare them to the average costs of similar funds for the current year and projected out as far as 10 years.
• The fund manager. You’ll see how long he’s been managing that particular fund and how long he’s been with the fund company.
Then click on “Performance” and look at the information under “Trailing Returns vs. Benchmarks” to find out how the fund did compared to its category and to the S&P 500.
If you spend more than 60 seconds on each of these pages, you’re spending too much time. Just two minutes’ worth of homework could save you a lot of headaches down the road.
If the fund does worse than the S&P, don’t invest. But also don’t invest if it makes the same great annual gains even in those years when the S&P is in negative territory. That’s the big lesson of the Bernie Madoff scandal.
[Ed. Note: Thousands of Americans are cashing in on a loophole for collecting up to $8,881 a month, backed by an "explicit" U.S. Treasury guarantee. The next batch of checks is going out on March 27, 2009. Learn how you can get your name on the list by reading on here.]
Your next big investing dilemma is right around the corner. Should you – can you – take advantage of the next big stock market pop?
History (since WWII) tells us that when the S&P 500 bottoms, it’ll go up about 32 percent over the following nine months. That’s been the average climb following a bear market.
Here’s the problem. It usually happens in bursts. And if you’re not in the market for the initial burst, you’ve probably missed snagging the biggest gains.
The solution? Market Index Target-Term Securities (MITTS). The irresistible feature of these investments is that you can’t lose money. They’re hybrid securities – part bond and part options. They go for $10 per share (when first issued), and are traded on the New York Stock Exchange and the NASDAQ.
You can buy MITTS that cover the S&P 500. If the S&P goes up, you get 100 percent of the gains. If, for example, the S&P goes up 40 percent during the life of the MITTS, your gain would be 40 percent. (They last 3-7 years, but you can get them maturing as soon as May 2009.)
What if the S&P loses 40 percent? Your loss would be zero. You automatically get back the $10 per share at maturity. And, right now, all the active MITTS are trading at a discount – for as low as $8.84.
It’s a zero-risk way of playing the next big market bounce. MITTS are easy to look up, because The Wall Street Journal tracks them. They’re also highly liquid. So if you’re interested, your broker can buy them for you. No problem.
[Ed. Note: Thousands of Americans are cashing in on a loophole for collecting up to $8,881 a month, backed by an "explicit" U.S. Treasury guarantee... and the next batch of checks is going out on March 27, 2009. Learn how you can get your name on the list by reading on here.]
Getting steady income from dividend-paying stocks is getting harder. During the entire year of 2007, only seven companies in the S&P 500 cut their dividends, and only three did away with them entirely. 2008 was a different story. 39 companies cut their dividends, and 22 suspended them. 2009 promises to be just as bad.
That means you have to be careful to pick dividend-paying companies that have the best chance of continuing to give you at least the same amount of money as they’ve given previously. So…
At finance.yahoo.com, you can look up a company and find its cash flow by clicking on “Key Statistics” or “Cash Flow.” “Key Statistics” will give you the company’s cash flow in the last 12 months. “Cash Flow” will show you a cash flow chart of the company, either by year or by quarter. You want the quarterly chart. What you’re looking for is to make sure there’s been no deterioration of cash flow in the last quarter or two.
With the steep drop in today’s markets, it’s a great feeling to get regular checks from dividend-paying companies. (They can pay you at least twice the interest you’d get from your savings account.) To avoid getting less money (or no money) from the income stocks you buy, simply follow the above two rules.
[Ed. Note: Finding strong companies with low debt and steady cash flow is a good way to prosper despite the market's condition. But you can also use the current financial crisis to get "insider deals." Thousands of regular Americans are cashing in on a loophole for collecting up to $8,881 a month, backed by an "explicit" U.S. Treasury guarantee. Investment Director Andrew Gordon can give you all the details in his FREE report, "How to Milk the System Like the Rich." Get your copy here.]
I don’t like the Wall Street bromide to “buy when there is blood in the streets.” It encourages inexperienced stock investors to jump into the market at the first sign of panic.
Little do they know what a bunch of Nervous Nellies occupy Wall Street’s trading desks. You can easily get caught up in one of their “the world is ending” tantrums and decide to buy, hoping to catch the next mega-rally on its way up. And the market can indeed go up at that point. But too soon it starts to fall again. Only this time it falls to new lows… and you’re sitting on giant losses.
These little rallies are called “sucker rallies,” and you can see why. Since the market peaked last October, there have been eight of them.
A better way to take advantage of the mini-rallies that occur during a bear market is to sell the stocks or mutual funds you don’t like when their prices get pushed higher. These rallies have been lasting 2-3 weeks. Getting rid of unwanted stocks 10-12 days into a rally is a good way to prune your portfolio while keeping your losses down.
[Ed. Note: You can make money on companies that are ready to crumble. Learn how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank.]
Andy Gordon (www.InvestorsDailyEdge.com) reveals the best thing about falling markets – and two companies you should consider investing in for 2009.
[ETRVideos]QpODOnr1QYc[/ETRVideos]
For many years, bankruptcy rates of companies on the major stock exchanges were so low you could count them on one hand.
Believe me, it wasn’t a sign that our business schools were getting better… or that our CEOs were getting smarter. Nor was it because of the salutatory effects of the Sarbanes-Oxley legislation back in 2002, which strengthened corporate accounting rules. Rather, it was because banks were lending to anybody and everybody. Such quaint notions as credit rating, future ability to pay, and current cash status were tossed out the window in a sea of greenbacks.
Banks had so much money to lend that even bottom-of-the-barrel borrowers were courted like princes.
And then – around October of last year – the credit crisis grabbed hold of the U.S. economy and hasn’t let go since. It is squeezing all the excess cash out of the financial system and then some.
Now, instead of banks begging for borrowers, potential borrowers go begging.
Need I say that money is the lifeblood of an economy? Bartering is popular along the China-Vietnamese border, from what I hear – but in this country, cash rules.
Show Me the Cash
If you can’t turn on the lights, you can’t make money. That’s the dark reality of a company unable to pay its bills. And without cash lubricating an economy, businesses dry up. I saw it happen in Asia (where I did a lot of business as CEO of a trading company) in the late 1990s. One by one, Asian currencies came under attack by aggressive currency traders. Local currencies quickly sank to one-half to one-fifth of their previous values.
Companies that had very manageable dollar-denominated loans were suddenly paying much more interest after converting their local currency to dollars in order to make the payments. Companies defaulted left and right as their debt burdens doubled… tripled… and quadrupled.
My customers were disappearing, and my unpaid receivables were piling up. It was a nightmare. I did the one thing I had to do for my business to survive. I found the biggest cash cow in Indonesia – Big Oil. Everything bought and sold in dollars… small debt… and lots of cash coming in daily from oil exports. I finagled a couple of small contracts… hung on for dear life… and eventually grew the business from there.
There weren’t many companies that had cash to spare in those days, but most of those that did survived and lived to see another day – and, a couple of years later, the country’s recovery.
It taught me a valuable lesson as a businessman and as an investor. Careful cash management is a critical tool in getting through an economic crisis. When hard times hit, those with cash have a leg up on those without.
Now that the U.S. is in the throes of multiple economic crises, I’m asking companies to show me the cash before I even consider investing in them. And for your financial security in 2009 and beyond, you should resolve to do the same.
Out of Cash, Out of Luck
GM is in dire need of cash. It was going to run out sometime early next year if it didn’t get an infusion from the government. Ford and Chrysler are standing shoulder to shoulder with GM in front of Congress, hat in hand. They got some money, but only enough to see them through the next three months or so.
Investing in cash-poor companies with a history of weak leadership and a demonstrated preference for making losses over profits isn’t my idea of smart investing. (Even if the auto companies get the $34 billion they’re asking for, who’s to say they won’t need another $34 billion a few months down the road?) But investing in the anti-GMs of the world is.
I’m talking about companies that make a lot of cash and have a lot of cash left over every quarter. Companies that also have demonstrated the ability to consistently produce profits over the years. And if these companies give dividends, all the better. You then get a tangible benefit as a result of their prudent cash-management ways.
The best thing about these companies is that their cash is your protection. As long as they have it, banks can’t force them into a premature foreclosure.
Finding the Corporate Deep Pockets
The best cash-protected companies are those that have no debt (like chip-maker Nvidia Corp.) or very little debt (like Intel, with $2.4 billion in debt compared to a market cap of $70 billion).
As you’d imagine, capital-intensive industries (like telecom and auto) rely more on debt than the high-tech industry (like chip and computer makers). Even well-managed capital-intensive companies will have higher debt numbers than most high-tech companies.
If that makes you uncomfortable, you’re in good company. The legendary investor Warren Buffett avoids capital-intensive companies even in the best of times because of their big spending needs and the extra risk that represents. And this is not the best of times.
We will see hundreds, if not thousands, of companies fail. It has already begun in the financial sector with Lehman and others going under. The “Detroit Three” could be next.
My favorite show-me-the-money metric is the price-to-cash flow ratio (P/CF). Cash flow should be at least 10 percent of price (the market capitalization of the company – share price times the number of outstanding shares available). For example, Verizon has a market cap of $87 billion and a cash flow of $27 billion. Its cash flow is 30 percent of its market cap. That’s very good. It beats the minimum cash flow I look for by three times.
Verizon’s total debt-to-equity ratio is 0.88 – quite low for a telecom company. This is a metric I use less frequently, but I mention it because financial search engines (like Yahoo’s) include it and they don’t include the P/CF. Just remember that the ideal debt-to-equity ratio varies from sector to sector and company to company. For high-tech, it should be below 0.5 (in general). For capital-intensive industries, a ratio above 2 isn’t considered high.
That’s why Toyota’s total debt-to-equity ratio of just above 1 is good. And so is Intel’s, with its miniscule debt and a total debt-to-equity ratio of 0.06.
Cash matters. But also notice that I’ve mentioned companies with very solid records of growing their profits. Verizon, Intel, Toyota, and Nvidia are taking their lumps now – but they all have smart management that has led them to the top of their industries.
Maybe that doesn’t make them the most exciting stock picks. But right now, the market is exciting enough, with its wild swings from week to week and day to day.
Investing in a company that has cash on hand and a nice cash flow doesn’t mean you get a company immune from those wild swings… or from seeing its markets shrink and its sales drop. But it does give you a company that won’t get ambushed by banks or its own excessive spending needs… so it can come out of the recession intact and primed for growth.
All you need to make this strategy work is an investing horizon of two years or more. If you’re under 60, such a horizon should be mandatory.
[Ed. Note: Finding strong companies that meet ETR Investment Director Andrew Gordon's criteria is a great way to prosper despite the market's condition. But you can also make money on companies that are ready to crumble. Learn how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank.]
Why do you buy a particular stock?
Check the choice you most agree with…
___ The stock has bottomed.
___ The stock is dirt-cheap.
___ The stock is offering a huge dividend.
___ A majority of analysts have rated it a “buy.”
___ It offers an attractive return in the long term.
Buying into a company because it has bottomed is a non-sequitur. You can’t really know when it has bottomed. Even if it has dropped 95 percent, you could see it drop another 50 percent.
Buying a cheap company just because its price is low is tempting… but not smart. Many companies are cheap for a reason. Some aren’t. The former you should ignore. The latter are much better investment opportunities. (More on that in a few seconds.)
Huge dividends lure many investors. But understand that some dividends are high because investors are fleeing the stock… lowering the share price… and thus raising the dividend yield. Before you buy, you have to ask yourself why so many other investors are selling the stock. It’s only a matter of time before many such companies reduce their dividend rates.
Highly rated companies are safe bets, right? Two things you need to know. First, many analysts engage in ratings inflation. If the company doesn’t stink to high heaven, it gets a “buy” rating from Wall Street. Second, if all (or most) of the analysts are rating the company high, there’s no room for them to upgrade it – and news of a ratings upgrade brings in new investors in droves. I prefer analysts to be lukewarm (at best) about a company. If the company is any good, ratings will rise, bringing in new investors who will drive up the price.
The only reason to buy into a company is if you think it will give you good returns in the long term compared to other investments. Such companies may go down some in the short term – but they have demonstrated an ability to grow profits, manage their cash prudently, are in pretty good sectors, and are reasonably priced. Getting a great price on companies like these is not necessary, although in this market it’s not hard to find them at 40-60 percent off. All the better.
[Ed. Note: Finding strong companies that meet ETR Investment Director Andrew Gordon's criteria is a great way to prosper despite the market's condition. But you can also make money on companies that are ready to crumble. Learn how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank.]
Splurging in the middle of a recession is a no-no by Wall Street’s lights. They’re very good at punishing companies that can’t rein in spending when the economy goes into a tailspin (like now). The thinking is, a company can’t increase sales in a recession and shouldn’t try. They can only hope to cut costs to sustain profits. But this particular piece of conventional wisdom doesn’t always hold true. In the recession of 1989 to 1991, many companies that dared to spend aggressively on advertising were amply rewarded…
At the same time, companies that didn’t spend on advertising suffered the consequences. Mickie D’s sales went down about 28 percent. Jell-O, Crisco, Hellmann’s, Green Giant, and Doritos suffered sales losses of 26-64 percent.
And there are studies that point to business-to-business companies getting good results from spending that supports sales during a recession. During the recession of 1981-82, companies that spent aggressively on advertising averaged significantly higher sales volume not only during the recession but for the following three years.
Investors looking for companies like these can search for them on Yahoo and other financial sites by “sales” or “revenue” (look for increasing sales in the last three or 12 months). Further research will most likely reveal that the money they spent on advertising also went up.
Search engines have no category that tracks spending in support of sales. But I like doing it “backward.” In the end, you don’t care why sales go up as long as they do. When you hear so-called experts on TV complaining about a company failing to cut back on costs and/or spending, take it with a grain of salt. Smart strong spending in support of sales can help a company grow – even in the worst of times.
This is a good lesson not only for investors but also for small businesses. It comes down to this: Smart spending is always smart, regardless of what the economy is doing. And stupid spending is always stupid. Companies seemingly get away with it when the economy is good. But when it stalls, stupid spending (think auto companies) catches up to them in a hurry.
[Ed. Note: Some of the smartest spending you can do is on yourself and your financial future. Start an Internet business, and you could end up making $100,000 to $25 million a year. Learn how to do it here.
Andrew Gordon, ETR's Investment Director, can show you how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank. Learn more here.]
Price-to-earnings ratio (P/E) is a popular measurement of a company’s true worth. I’ve always liked companies with a P/E below 10. But nowadays, I pay little attention to this number – for two reasons, and both involve the earnings part of the ratio…
1. The economy is slipping so fast, past-performance P/Es shed little light on what is in store for the company right now. Many companies that did well 1-3 quarters ago are now finding it hard to grow earnings.
2. Forward P/Es are just as bad. They’ve always been based on analysts’ guesses of how much they think a company will earn the following year. But now those guesses – never reliable in the first place – are lagging badly behind what is happening in the real economy. For example, analysts still expect earnings in the tech sector to rise 21 percent next year. That simply won’t happen.
As an alternative, look at the price-to-book ratio (P/B). It measures a company’s share price relative to its net asset value (NAV). If that number is below 1, it means you’re paying less for the company than its assets are worth. And it means you’re getting the business of the company (not included in the NAV) for free. A P/B of less than 1 also helps put a floor under share prices, especially for companies that are still making a profit but are getting punished by a falling market.
Buying good value is not only a good way to pick companies in a falling economy, it’s the only way. And with earnings so unpredictable, P/B is a good alternative to P/E as a measure of value.
[Ed. Note: Finding strong companies with a P/B under 1 is a good way to prosper despite the market's condition. But you can also make money on companies that are ready to crumble. Learn how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank.]
It’s official. We’re in a recession. So it’s a good time to explore how the stock market does when the gross domestic product (GDP) goes down.
Since we’ve had negative S&P 500 growth in every quarter of our current recession – which began a year ago this month – it may seem that a falling economy is always accompanied by a falling stock market. But this is not true.
The most recent examples of this not happening are the fourth quarter of 1990 and the first quarter of 1991. GDP dropped 3 percent and 2 percent respectively, but the S&P grew.
In the post-WWII period, there have been 36 quarters when the GDP has shrunk. During those periods, the S&P actually gained 1.03 percent.
One reason for this is that the markets tend to rebound 3-5 months before a recession ends. That very last quarter of a recession usually shows significant market growth. And the next-to-last quarter also often shows positive growth.
This recession will continue well into next year (at the very least). But that, by itself, doesn’t automatically mean the markets will continue to contract.
If there are signs of economic recovery in housing or retail or auto markets, for example, the S&P could very well rally. Unfortunately, I expect the economic news to continue to be bad. And as long as it is, it’ll be hard, if not impossible, for the markets to turn back up.
There’s no need to rush back into the market at this point, especially when you can get 6-8 percent interest on investment-grade bonds at very little risk. If you like tax-advantaged bonds, municipal bonds are also offering attractive interest rates.
[Ed. Note: The corporate world is having a tough time, but you can still make money if you pay attention to the "red flags" - signals that can predict (with as much as 92 percent certainty) when a company's stock is going to tank. Know that, and you could make a bundle. Find out how to spot these red flags right here.]
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When markets go down, not all companies go down equally. Some go down more than others. And some actually go up.
Picking companies that go against the market is hard. As a rule of thumb, only about 20 percent of them are able to swim against the tide. But when the market is falling (as it is right now), it makes more sense to invest in individual stocks than in indexes that go down with the market. At least with individual stocks, you have a chance of picking strong companies that can survive and even prosper in a bear market.
If you’re going to invest in individual stocks, here is what you should look for…
Wal-Mart qualifies on all four counts. And, not surprisingly, its stock has been doing much better than most. That’s the kind of company you should be focusing on in these difficult times.
[Ed. Note: Finding strong companies that meet all four of Andrew's criteria is a great way to prosper despite the market's condition. But you can also make money on companies that are ready to crumble. Learn how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank.]
I’ve never seen the market so ruthless and so volatile at the same time. Wall Street is pouncing on weaknesses in sectors and companies. And because of the huge swings the market is making on a daily basis, when it attacks it really ATTACKS. Companies that had been fairly stable are going down 5-10 percent in one day… 30-50 percent in one week.
Some investors like to swim in calm water but hate to swim when it gets choppy. Is that you? Then get out of the market. No need to put yourself through this if it’s ruining your sleep. But there are things you can do to protect your individual stock investments against all this white water.
• Independent due diligence. There’s more reason than ever for companies to hide the truth from you these days – because with the market falling on its face, the truth isn’t pretty. Instead of talking about dropping demand and lowering prices, companies talk about new and exciting products… or maybe upgrades they’ve made to their equipment… anything to distract you from the grim reality they’re facing. Rely only on your own research and the research of people/experts you’ve grown to trust.
• Periodic reviews. You need to review your portfolio not every spring… or every quarter… but every month. Are you invested in “dead-man-walking” sectors like the auto industry? Restaurants? Retailers (except Wal-Mart)? Even Google has lost its luster. Things are changing from month to month… not year to year. You have to adjust.
• Look before you buy. In the past, when you went into your portfolio to buy more of a company, you probably did so because its shares were rising. But if you want to buy more of a company now, you have to review its latest developments first. For example, most solar stocks had great quarters last go-around. This time, it promises to be a lot tougher. Again, markets are changing fast.
It all adds up to more work for you. That’s the price you pay for being in the stock market these days. Set aside one evening every month to review your portfolio. And pour yourself a glass of wine before you sit down. You may need it.
[Ed. Note: The corporate world is having a tough time, but you can still make money if you pay attention to the "red flags" - signals that can predict (with as much as 92 percent certainty) when a company's stock is going to tank. Know that, and you could make a bundle. Find out how to spot these red flags right here.]
I wonder if I should be telling you this…
It’s perfectly legal. And it could save you thousands – if not tens of thousands – of dollars. Well, I’ll just tell you what my sister-in-law did and let you decide if this is for you.
My sister-in-law is starting her own business. Using her home as collateral (it’s paid off), she got a business loan. But before she started to spend that money, she called up several of the credit card companies she held cards with. This is what she told them: “I’m starting a new business. I’m going to be spending a lot of money. I can’t guarantee how much longer I’ll be able to make my monthly payments. But I have some money right now. And I’m willing to pay off 80 percent of what I owe you today if you’ll cancel my card in return.”
Every credit card company agreed. And she used nearly $40,000 of her business loan to pay off $50,000 worth of debt.
Keep in mind is that this could slightly lower your credit rating. But if you’re in a position to pay off 75-85 percent of what you owe on a credit card right away, maybe you should make a call. If they accept the deal, you’ll not only be saving by not paying half the principal, you’ll be saving all the interest that would continue to pile up in the account until you manage to pay it off. My sister-in-law is a fast talker, but not that fast a talker. If it worked for her, it should work for you too.
She wasn’t lying to those companies. She didn’t twist any arms. In fact, she told me that they jumped at her offer – and here’s why…
Card companies put a value on your debt depending on your credit risk. Could be 40 cents on the dollar… or 60 cents… or 80 cents. If it’s 60 cents and you offer to pay back 70 percent of your debt, that’s a good deal for them, because they would be selling your debt on the secondary market for only 60 cents on the dollar. If it’s 60 cents and you offer to pay back 50 percent, that’s a bad deal and they would refuse.
The worse credit you have, the better deal you can negotiate. It’s not unethical, it’s a business deal. What’s unethical is when a credit card company raises your interest rate by 50 percent even if you have a perfect payment record.
[Ed. Note: The corporate world is having a tough time these days, but you can still make money if you pay attention to the "red flags" - signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank. Know that, and you could make a bundle. Find out how to spot these red flags right here.]
The world didn’t get sick all at once. And it won’t recover all at once either.
Without the ravenous Chinese maw gobbling up ores and coal and oil in great big heaping mounds, commodity-exporting countries are now feeling the pain. Welcome, Canada, to economic hard times. Welcome, also, Australia, Russia, and Brazil.
But it’s the U.S. – the pied piper of countries worldwide – that led other economies down the path to ruin…
Europe followed obediently behind us. Their economies began to sour 6-8 months after ours.
It was only then that China reluctantly fell into line. They had their first sub-11 percent quarter in the April-to-May period. Now they’re watching consumers from Peoria to Paris ratchet down shopping as hope of a short recession fades.
It has taken more than a year for the rest of the world to catch the slow-growth virus. In following us down the rabbit hole, they’ll also follow us back up. But it’s a process. If we’re 10-24 months away from the beginning of a recovery, our fellow travelers are 16-30 months removed.
This is not a quick journey we’re on. Companies will need lots of cash to see it through. More than ever, cash is king.
[Ed. Note: The corporate world is having a tough time these days, but you can still make money if you pay attention to the "red flags" - signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank. Know that, and you could make a bundle. Find out how to spot these red flags right here.]
When the clock-radio woke me up the other morning, the first thing I heard was the results of a survey on what people least want to give up during these hard times. The three winners were tobacco, alcohol, and chocolate.
The survey didn’t ask people what they are most willing to give up. If it had, I bet the stock market would have made the top three. Many investors have backed away from the turbulence of a market that is up 700 points one day and down 400 points the next (or vice versa).
Perhaps they’re not aware of a special group of companies that can offer them shelter from this storm. Companies that can give them steady and/or rising paychecks even in a rollicking market.
These companies give their shareholders dividend payments. The trick is to invest in big, solid, and growing companies or companies that do very well in a recession. The companies that do both, like giant cigarette-maker Altria (MO) – Marlboro is its best-known brand – are your best bet. These companies aren’t guaranteed to go up month after month. They may even have some down years. But as long as you keep holding on to their stock, you’ll have no actual losses… and you still get those checks in the mail. Right now, for example, Altria is offering a 6.9 percent yield to investors. That’s more than twice what you could get with any savings account.
[Ed. Note: You may be surprised to learn that dividends are the key to pinpointing solid investments... or cluing you in to companies you should avoid. ETR's Investment Director Andrew Gordon reveals how to use dividends to make serious money right here.]
As I read the Financial Times on the flight from Baltimore to West Palm last week, my worst fears were confirmed. The market meltdown is truly global. And several countries – including Turkey, Iceland, and Argentina – can sell their bonds to investors only by paying out double-digit interest rates to make up for the added risk of investing in them. Amazingly, these countries – plus Pakistan, the Ukraine, and Kazakhstan – have an over 50 percent chance of going bankrupt (according to how much investors pay for insurance on the bonds they hold from them).
The only market I could find that is going up? The Baghdad stock exchange. Do you want to invest in Iraq? Hmph. Didn’t think so.
Formerly soaring markets like China, Brazil, and Russia are down the most. But even strong economies like Korea, Taiwan, and Canada are tanking.
If I ran a hedge fund, I’d be shorting Turkey, the Ukraine, and a couple of other countries that I think are in big trouble – like Hungary and Latvia.
Hedge funds have a lot more options on how to invest globally than you and I do, yet this has been a terrible couple of months for hedge funds too – the worst on record, as a matter of fact. Hedge funds, it seems, took huge losses as oil and commodities dropped, and got caught betting against banks when they rallied after the Freddie and Fannie bailout.
Funds and institutional investors must be in big trouble, because they’re getting out of gold at a time when the global economy is falling apart – and in times of panic, investors usually rush to buy gold. It can only mean one thing. They’re selling gold to raise money to fund margin calls they’re getting on losing positions.
Surely, if the smart people running hedge funds are losing money, what chance do you have?
People are resigned to losses. Many have come to me with the question, “How can I protect my retirement account?” Nobody has recently asked me how they can profit from their investments – as if that’s too much too ask of the market. (Or perhaps too much to ask of me?)
Listen, your losses are a done deal. I am really sorry. I’m sure you worked hard to save. You depended on being able to continue to grow your savings. And in the past couple of months, you’ve lost critical ground. It’s the worst feeling in the world. I wouldn’t wish it upon anyone. But now I want you to do something investors have the hardest time doing. I want you to stay calm and not panic.
On the ride home from the airport the other night, my driver was telling me what happened to his and his wife’s savings six years ago, when the Nasdaq lost nearly half its value.
“We had both lost a lot of money. My wife took the rest of hers out and began tinkering with her investments. She did the best she could, but within a half-year it was all gone. I left my money in there. I wouldn’t have known what to do with it if I had taken it out. What do I know? I’m no expert when it comes to investing. Five years later, my money had doubled. This time around, I’m not touching anything. And neither is my wife.”
That’s not a bad approach. You’d be selling when prices are very low. And while you may avoid another 10-20 percent dip as the market searches for a bottom, it’s likely you’d also miss the initial swing up – which could be as fast and as furious as the market’s recent drop was.
The one thing you should remember about the market’s fall from grace is this: It’s forcing down all companies – the good, bad, and ugly. By “good,” I mean those companies with a track record of growing profits… being judiciously opportunistic with their cash… and with products that are sellable (without seeing their margins disappear) even when people have less money in their pockets.
Let’s start with what’s not sellable: commodities, materials, all forms of energy (including alternative energy), houses, autos, and big-ticket items.
Now here’s what is sellable: food, staples, beverages, tobacco, medical products, and services.
Then there’s another category: what we don’t know is sellable. Case in point is cellphones. This is the first recession we’ve had since cellphones have become the constant companions of practically everybody. Will people upgrade less often? Use fewer minutes? We don’t know.
Clothes, we do know. People will buy less and will buy cheaper. And that goes for things like jewelry, tools, and footwear.
That, however, does not completely explain why some stores – like Wal-Mart – are doing well and others – like Target – aren’t.
Or why McDonald’s is doing better than Wendy’s.
Or why Coke continues to grow and Pepsi continues to flounder.
These are companies in the same sectors selling the same kinds of products to the same people.
Does Coke taste that much better than Pepsi? You don’t have to answer that. All you have to do is pay attention to the numbers and the words.
Coke: “Our brands and our business were built for times like these. We are winning in the marketplace.”
Pepsi is cutting jobs and closing factories: “This will enable our competitiveness and give us breathing room to respond. It is no news to you the economy is turbulent and there are uncertainties and volatility in every part of the environment.”
Gee. What does this tell you about why Coke is doing well… and why Pepsi is reeling from the global recession?
In the next few weeks, hundreds of beaten-down companies will be reporting their third-quarter results. They will have a chance to step up and tell us why they are facing the future with confidence. If they’re not, you will hear it in their words or see it in the profits they report and in the guidance they give (for future performance).
Some CEOs will try to put lipstick on some ugly numbers. Don’t fall for it. If there’s a disconnect between the numbers they give and the words they say, believe the numbers and ignore the words.
Coke’s numbers were pretty good. Its profits rose 14 percent despite poor demand in the U.S. They have practically no debt. Their margins are over 25 percent. All these numbers beat Pepsi’s.
Unfortunately, most companies will be practicing the fine art of spin control to disguise some pretty disgusting numbers. There won’t be many companies like Coke – with a strong record of growth, little debt/good cash position, and products that people continue to buy – that will also be reporting impressive profits.
The few there are have been dying to tell their story to investors, the same investors who have been throwing out the baby with the bathwater. Now they’re getting their chance to rise above the crowd.
[Ed. Note: You could be one of the few investors who make money in this terrible market. Besides paying attention to fundamentals, you can keep an eye on one of the "red flags" that many companies are displaying. Learn what these "red flags" mean... and how they can help you profit.]
Does the bailout mark a bottom? Is the worst over? Is it okay to stop feeling nervous?
No, no… and yes.
The bailout is the equivalent of a dying patient taking aspirin. The relief is minor and temporary, but the outcome doesn’t change.
The economy is still heading into a recession. The markets will go down some more. But you shouldn’t feel nervous. If you read ETR, you should have a pretty good idea of what’s coming and what to do about it.
Why Wall Street hasn’t faced up to the seriousness of our economic problems is a mystery to me. Yes, Wall Street is a buying machine… and you can’t buy if you’re not optimistic. Still, we’re going to pay for their unfounded optimism. They still have high expectations of companies doing well next year. They won’t. They disappointed Wall Street this year. If anything, the Street is in for even more disappointment next year. And profits that don’t meet expectations are downgraded and sold off – driving the stock market down.
This is no time to gamble with your money. Gold is always safe. Silver would also make a good investment. Plus, there are plenty of investment-grade corporate bonds offering over 5 percent interest. And whether you’re investing in bonds or equity, stay away from the financial sector. If anything, the bailout has made financials even more unpredictable these days.
[Ed. Note: The economy may look bleak right now. But you still have opportunities to prosper - if you look in the right places. ETR Investment Director Andrew Gordon has pinpointed a method - which has been accurate 92% of the time - that you can use to make money on stocks as they fall. It all begins with a "red flag announcement." Learn what this "red flag" means, and how it can make you money, right here.]
The good news: The market is offering bargain-basement sale prices on many stocks.
The bad news: Prices got that way from falling these last several months.
Should you invest in falling stocks or not?
Fast-falling share prices didn’t prevent legendary investor Warren Buffett from taking big stakes in Goldman Sachs and GE. And Buffett is a cautious investor who loves undervalued companies with a penchant for generating consistent profits year after year.
But it’s risky investing in falling stocks unless you have a very good idea of what you’re getting into. With a portfolio loaded with financial and industrial companies, Buffett was treading on very familiar ground with his latest investments. And don’t think that he wasn’t aware that these companies were also leaders in their respective sectors. He invested in the cream of the crop.
In a falling market, you have to be extra careful. Cheap value isn’t always good value. Invest in companies with outstanding track records of growing profits and leading their industry. And don’t stray outside your expertise and experience. By doing these things, you can greatly reduce risk and end up with some great stocks in your portfolio.
[Ed. Note: The economy may look bleak right now. But you still have opportunities to prosper - if you look in the right places. ETR Investment Director Andrew Gordon has pinpointed a method - which has been accurate 92% of the time - that you can use to make money on stocks as they fall. It all begins with a "red flag announcement." Learn what this "red flag" means, and how it can make you money, right here.]
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The market is going for 30 percent off. Yet investors aren’t buying. It’s like that 48-inch LCD screen you’ve been dying to buy… someday. But why buy it now when you can probably buy it in December for an additional 5 to 10 percent off? Or why not wait for the post-December sale when you can buy it at an even steeper discount. Maybe you can do even better if you wait until March. Surely, stores will be desperate to clear out their old inventory by then.
But wait too long and the item will either go up in price (stealthily upgraded while you waited) or disappear from the shelves. The lesson isn’t that you shouldn’t buy a particular item at a good price. It’s that waiting for the perfect price or the perfect moment to buy it is a little bit like waiting for Godot. It’ll never arrive.
If you like a stock and it’s really cheap, buy it. If you think a stock is going for 25 percent off its true value, for example, your gain will be 25 percent once its true value is recognized. Don’t let a possible 5-15 percent detour down stop you.
[Ed. Note: The economy may look bleak right now. But you still have opportunities to prosper - if you look in the right places. ETR Investment Director Andrew Gordon has pinpointed a method - which has been accurate 92% of the time - that you can use to make money on stocks as they fall. It all begins with a "red flag announcement." Learn what this "red flag" means, and how it can make you money, right here.]
Unless you follow the market closely every day, you should have two stock-investing modes – as a holder of stocks and as a purchaser of stocks.
And what about selling? Selling now is not a good idea. The market has lost about 25 percent of its value since it peaked last October. That’s about the average loss during a recession. If we’re not at the bottom, we’re probably near it. The worst you can do is sell when stocks are cheap and buy when they’re expensive. That sounds easy enough… until a series of economic crises cause the markets to fall. In other words, exactly what is happening today. Then investors begin to panic. And panic is followed by selling.
If you are invested in sound companies, they will bounce back. In the meantime, the market’s decline has presented you with a wonderful opportunity. The market is on sale. It’s going for 25 percent off.
As a certain Warren Buffett said (in 1997): “Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
[Ed. Note: A nose-diving economy is nothing to panic about. You can make money in any kind of market just by making smart decisions about where and how to invest. Find a company with good fundamentals, and you'll be sleeping soundly for years. Investment expert Andrew Gordon can help you pick the winners. Learn how here.]