Saturday, March 31, 2007
Friday, March 30, 2007
2007 Portfolio Objectives
Entering 2007, I’m anticipating consistent growth in many sectors, but others will continue to struggle. The fourth quarter of 2006 saw a nice run that was driven by solid earnings and lots of activity in mergers and acquisitions. The Dow Jones has traded at all-time highs, while the Nasdaq has seen moderate gains. I see 2007 as the year where investors become a little more defensive, while still seeking solid growth. Therefore, I am looking to allocate the portfolio into a fairly diverse range of sectors, while still putting more emphasis on areas where I see potential for stronger growth. The decline in the housing market has moved a lot of money back into the market. People are putting lots of idle cash into money market accounts, and are becoming more confident in the markets again. One important factor in 2007 will be what the fed does with interest rates. If they are cut, then the market should perform well.
My overall portfolio approach is value investing, with a twist of looking for mid-cap, strong growth type names. The core of value investing is buying consistent, best-of-sector stocks that consistently produce lots of cash, consistent earnings pattern, and a strong dividend. These companies can weather a weaker economy, and can boom in a strong economy. The key to value investing is patience and discipline. These types of large cap stocks rarely put themselves on sale, so it is important to be patient and buy when the stock makes a move lower. Typical buying points for these types of stocks would be 1 to 3 percent below the 50 day moving average.
The growth portion of the portfolio is still held to strict standards. When screening for a growth stock, it has to be what I term a “game changer.” It has to be a company that can create a lot of buzz, but also is built upon a strong base of consistent earnings and generation of cash. These are companies where I see large growth in a particular sector, and the company is best positioned to take advantage of it. These stocks can typically be bought more frequently, as they tend to be more volatile, and can trade on news alone. Certain occurrences, such as earnings guidance, a somewhat weaker quarter, news in the overall sector, can cause these stocks to move 5 to 10 percent, and sometimes for no good reason. This provides some excellent buying opportunities if you can discern the reason for the drop, and determine that is won’t hurt the company long term.
Below are the criteria that I use when I'm interested in a stock.
Below are the criteria that I use when I'm interested in a stock.
“I’d rather buy a great company at a fair price, than buy a fair company at a great price.”
– Warren Buffett.
To begin with, I look at the sector as a whole. For example, a common sector for a value play would be the financial industry. Since their business is money, financial institutions are handling a lot of it. Their market caps (stock price x amount of shares) are typically very high. Initially, I’ll take a look at a company’s competitors to determine who is best allocating their revenues. Some things I’ll take into account here would be how high are their profit margins? How many people are they employing? How fast are earnings and revenues growing?
After that, I want to look at their profitability ratios, such as return on equity and return on investment. Here, I like to see double digits in each category on average. I’ll usually expect more from a larger company though.
I then want to look at their financial statements. I like to see current assets higher than current liabilities. The balance sheet will show me how much debt they have. I like to see where the debt is allocated, because sometimes debt is not at all bad. Maybe they just acquired another company, or are expanding rapidly. I like to note if a company is consistently raising its dividend (usually a good sign), and if they are buying back stock (also, usually a good sign). I’ll also take a look at their statement of cash flows to determine what they are doing with their cash. I like to see a large amount of free cash flow here (Cash flow from operating activities – Capital expenditures).
I’ll also look at the ownership. Who are the major holders of the stock? What percentage of the stock is owned by insiders? A high number is good, because if management owns a lot of the stock, they are sure to try to maximize returns. I also look at who the major institutional holders are. There are a few fund families that I like to see as owners of the stock. (Typically Vanguard, Fidelity, Legg Mason, T Rowe Price, Dodge and Cox are a few of the best that I like to see). Has there been insider activity? Typically if insiders are buying the stock, that is a good sign.
I’ll also look at the analyst estimates. The key numbers to look at here are this year’s earnings and next year’s earnings. Quarterly earnings can vary so much that they often aren’t useful. I like to see what I call the “analyst creep” or to see their estimates creeping higher within the last few weeks.
By this point, if I’m still interested, I go to the company website. Here I’ll take a look at who their management is. How long have they been there? I’ll also read at least last year’s annual report, and pay attention to their letter to shareholders. This is a great way to get a feel for what their core businesses are.
Finally, I’ll look at stock price. But this isn’t done until I’ve determined that it is a company that I want. Some things to look at:
-Price to Earnings (P/E) Ratio. This is probably the most commonly looked valuation tool. I like to see below 15 here, but not always.
-Price to Sales (P/S) Ratio. This is comparing market cap (price) to revenues. I love to see a ratio below one here, as it tells me that the company is bringing in the value of the entire company in revenues every year.
-Actual share price. Where is it in terms of 52 week highs and lows?
-Charts. The one year chart is most valuable here.
-Moving averages. I like to buy stocks when they dip below the 50-day moving average.
-Volume traded. If the stock is making a move, is it done so on higher than average volume? Typically low volume moves are moves that are predicated on anything strong and often the stock doesn’t hold them.
-Amount of short interest. How many people are shorting the stock? Over 10 percent of the float is usually a warning sign that the stock has been overbought.
In taking all of these items into consideration, I am able to filter out which companies to buy.
To effectively use your money market account, you need to funnel all unused money into it. I keep a local checking account to pay monthly bills, but anything beyond that gets deposited into the money market account.
There are many banks offering these accounts. I use Capital One. They offer no minimum balance, free checks, ATM ability, and it is easy to transfer funds when you link your accounts online. They offer a 5.0% APY, which is a nice yield. There are others who offer a little higher, but I feel they don't offer all the services Capital One does.
I'd be interested to know what results people have had with other accounts, or what different banks have to offer.
Thursday, March 29, 2007
I still think we could see a dip to the 12,000 range for the Dow, and that would signal a pretty decent buy point. The volatility is still up and down, so I'm still a little apprehensive on the market as a whole.
When I pitch a stock on the blog, I put it into the blog portfolio. This portfolio is meant for a general way to keep track of the stocks or funds that I pitch. It doesn't display how I have each position weighted in respect to the entire portfolio. It also doesn't take dividends into account, or gains that would occur on idle cash.
Here are the positions:
2008 Closed Positions:
Ultrashort Dow 30 ETF (DXD)
Bought August 10, 2007. Price 51.15
Sold February 13, 2008. Price 55.52
Net Gain/Loss: Gain 8.5%
Short Dow 30 (DOG)
Bought May 24, 2007. Price 58.75
Sold February 13, 2008. Price 62.73
Net Gain/Loss: Gain 6.8%
Short Financials ETF (SKF)
Bought: August 10, 2007. Price 87.50
Sold: February 13, 2008. Price 108.43
Net Gain/Loss: Gain 23.9%
2007 Closed Positions:
Frontier Oil (FTO):
Bought: March 1, 2007. Price 30.04
Sold: July 23, 2007. Price 46.24
Net Gain/Loss: Gain 53.95%
Bought: March 5, 2007. Price 51.67.
Sold: August 2, 2007. Price 95.85.
Net Gain/Loss: Gain 85.5%
Bought: March 1, 2007. Price 57.20
Sold: July 23, 2007. Price 73.13
Net Gain/Loss: Gain 27.85%
Apple (AAPL): Up 56.59%
Amgen (AMGN): Down 30.99%
America Movil (AMX): Up 5.46%
American Express (AXP): Up 5.37%
Bank of America (BAC): Down 18.77%
Best Buy (BBY): Down 7.97%
BHP Billiton (BHP): Up 25.50%
Biogen (BIIB): Down 2.75%
Caterpillar (CAT): Down 6.18%
CNOOC (CEO): Up 53.54%
Global Water Fund (CGW): Down 10.04%
Capital One (COF): Down 25.28%
Chevron (CVX): Up 23.00%
Cemex (CX): Down 21.03%
Echostar Comm. (DISH): Down 30.77%
Emerging Markets ETF (EEM): Down 2.88%
Japan ETF (EWJ): Down 8.30%
Mexico ETF (EWW): Down 9.70%
Brazil ETF (EWZ): Down 2.15%
Japanese Yen ETF (FXY): Up 8.44%
Granite City Food and Brewery (GCFB): Down 47.79%
General Electric (GE): Down 7.07%
Goldman Sachs (GS): Down 12.57%
Gilead (GILD): Up 11.98%
India ETF (INP): Down 9.26%
Noble (NE): Up 13.68%
Manitowac Corp. (MTW): Down 3.31%
Johnson&Johnson (JNJ): Up 6.16%
Coca Cola (KO): Up 22.84%
Altria (MO): Up 12.30%
Proctor&Gamble (PG): Up 11.84%
Nasdaq Short ETF (QID): Up 2.47%
Novartis (NVS): Down 5.31%
News Corp. (NWS-A): Down 7.97%
SAP Software (SAP): Down 6.33%
S&P 500 Short ETF (SDS): Up 7.77%
AT&T (T): Up 1.16%
T Rowe Price (TROW): Up 14.27%
Travelers Co. (TRV): Down 11.79%
Mac Gray (TUC): Down 16.71%
Ultrashort Russell 2000 (TWM): Up 1.91%
Textron (TXT): Down 13.56%
UPS (UPS): Down 3.29%
U.S. Bank (USB): Up 3.95%
Wellpoint (WLP): Down 29.93%
Industrials ETF (XLI): Down 6.95%
Wednesday, March 28, 2007
I'd love to hear ideas or input on what is a good looking investment under current conditions.
Thanks, and good luck!
Tuesday, March 27, 2007
This is why people have to invest their money in some form. Index funds, mutual funds, stocks, bonds, money market accounts. You can actively manage your money today, and if you're smart, you can keep up with trends and profit from them. Through the internet, people can get all the financial education they need, as well as the tools to invest their money at a low cost. The barriers to successful investing for the individual are much lower than they were 10 years ago.
The key to success is taking action. If you're not sure that your investing strategies will work, then set up mock portfolios, and track your potential results. But you've got to get interested in managing your money. The days of your employer and the government taking care of you forever are gone, if they ever existed to begin with. Take action and make some money!
Monday, March 26, 2007
They recently closed the acquisition of Pfizer's (PFE) consumer products division. This will add to their market share in an industry that always does well.
A couple of reasons for the drop in share price. 1) All pharma companies are getting hit right now. There has been the concern since last fall that the Democrats will go after the big drug companies. I've written lately about the opportunity in the drug company Amgen (AMGN) as well. I see this as a short term concern. Health care prices aren't going to be coming down soon. A very important factor for these companies is their pipeline of future drugs and products, and how much are they spending of research and development. Both of these companies are perennial leaders in R&D. 2) There has been some negative news coming out about the stents used for heart patients. This has been an area where investors had been hopeful for J&J to grow, but hasn't produced much thus far.
The bottom line is that this is one of the best companies in the world. They pay a nice (1.50) dividend. They are consistently buying back lots of stock (5.5 bil in 2006). The key to owning these companies is buying them when they fall out of favor or are forgotten about, which would be right now. It may take a little while for the recovery, but you can collect the dividend while waiting, and it is a company with very limited risk.
As a final note, this is a classic example of value investing. Warren Buffett has been buying this company in the last few quarters, and I'm sure he's picking up more shares during this drop. Jim Cramer on the other hand, has been selling his stake in J&J for a loss. I think this stock is a good buy.
Friday, March 23, 2007
Thursday, March 22, 2007
Amgen (AMGN) looks good as a trade and an investment. Their growth rate and margins are beating everyone else in the industry. They are consistently known for having a great pipeline of new drugs and management runs it well. I think their growth has slowed, which has been the reason for the drop, but things still look good for this company.
From a technical standpoint, both are trading well below their 200 moving average. Amgen looks good at 60. I'd look to start building a position in Johnson at 61, and buy additional shares on any dips.
Wednesday, March 21, 2007
There are some reasons to be bullish as well. We are still seeing strong growth throughout the world. The BRIC countries (Brazil, Russia, India, China) are all experiencing a form of industrial revolution, at least in terms of efficiency of their markets. This is positive news for investors, as it should carry over throughout many other countries as well.
Tuesday, March 20, 2007
To begin, a manager needs capital to work with. Once a fair amount is in place, he's chasing performance. Once a manager has a big year, or a couple of consistent years outperforming the market, the problems begin. The positive press circles, the manager becomes well-known, and you know what? Everyone wants in. Billions are thrown at him. Now he's in a predicament. He has to try and take all this new money and invest it with the same principles that made his previous returns. But he can't buy into the same positions as before, because they are all inflated. He can't buy into smaller companies because he moves the price too much and is regulated against doing so. So now, you have a manager that is forced into buying things he doesn't even want to buy anymore. He is forced to follow the trail of all big funds and buy the same companies: (Exxon (XOM), Citigroup (C), General Electric (GE)). Now you have a fund that basically moves right along with the broad markets, and is taking huge fees on either front or back end loads, and management fees.
So that fund manager with that great investment theory has now become one of the many. His old theories still work, but he can no longer use them efficiently enough to make you money.
So, I don't believe in paying up for a fund. There are a lot of great low-cost funds out there that beat the S&P 500. The Vanguard family of funds consistently do it. I'm also impressed with Dodge and Cox. Their main stock funds have been closed to new investors, but do nicely with their international fund. It performs well, and they have a great management approach, and charge much less than average.
So bigger isn't always better, and you don't always get what you pay for. Just keep your eye out when investing, and there are a lot of great funds out there.
Monday, March 19, 2007
Anyways, my point is that this company was a great buy five years ago, its a great buy now, and will be in five years. It trades at a premium to its competitors, but deserves to because it is the best out there. It is worth buying and holding just for the dividend (3.8%). Great management that has a clear focus as well. This is a great stock to sit on for 20 years.
Tuesday, March 13, 2007
Monday, March 12, 2007
-Stocks that were beaten up in the past week, or are in sectors that have been unpopular (for example, subprime lenders).
-Stocks reporting earnings soon. Like it or not, smaller companies usually move hard one way or another after earnings.
-Small cap stocks. They require a minimum of 500 mil market cap, so buy something with a low price per share, buy a lot of it, and try to find a few percentage points.
The way I approach it is, if I can make something hit good in the first few weeks, then I'll stay in the game. If your bet fails, then you aren't out much time or effort.
Good luck to anyone playing, and feel free to leave comments on your strategy!
Friday, March 9, 2007
So, it's matter of what side of the fence you're on. I'm holding true to my sentiment that I've carried over the past couple of days. I'm fairly bearish on the broad market in the near term, and bullish through the rest of the year. I am shying away from technology, and am positive on energy.
For example, I've been bearish on Microsoft (MSFT) all year. It's not that Vista is a bad product; its just that expectations are so high for them, and there is no way that Vista will meet expectations. Their mp3 product Zune hasn't done well. To me, they are continually losing a creativity battle to Apple (AAPL). Apple's iPhone is going to be huge as well. I've owned Apple through much of the past year, but am not happy with how the stock trades. They have too large of a trading range for a good investment. They get beaten down by news of the options scandal, and will have pressure to keep up with the current pace they've set for themselves with iPods. Apple is a much better buy than Microsoft, however.
I'm continuing to tout Frontier Oil (FTO). Since my initial recommendation, 8 days ago, Frontier has increased about 2 percent. I continue to like it at this price. I see another 3 to 4 dollars to the upside here.
Thursday, March 8, 2007
I continue to like energy for the near term. In all the markets out there, energy really is the one constant that continues to see increased demand. In terms of oil, I'm most interested in refiners rather than diversified names or drillers. My top pick for a refiner is Frontier Oil (FTO). They are a smaller company (3 bil), that is positioned nicely compared to some of its competitors. Higher profit margins, a 60% return on equity, and plenty of cash make it look good right now. Gasoline prices have been climbing, and should continue to climb as we hit the driving season.
To get in much heavier, I need to see some signs of stability. Tomorrow (Friday) should be a good sign as to where we are headed. If we see a sell off, I'd continue to stay cautious. If we see some gains heading into the weekend, it could be a sign that we are in good shape.
Saturday, March 3, 2007
They are reporting huge growth right now. Year over year quarterly revenue growth is 91%, they have nice profit margins at 31%, and have a forward P/E of 16.58. Add to that almost no debt, and a nice level of free cash flow, you've got a winner.
The stock is, however, pretty volatile. An earnings miss could drop the stock five percent in a day. The thing investors are worried about is can they sustain the growth? That answer appears to be yes. So if you hold on during the minor ups and downs, it appears the long term prospects for Garmin are great.
I'd use this pullback in the market to pick up some shares. If it dips below the 200 day moving average, which is right around 50, it looks like a good spot.
Thursday, March 1, 2007
I don't like many other sectors, but a few individuals. I like T Rowe Price (TROW). They are growing nicely, and just reported a good quarter. They have a great group of quality funds with relatively low costs. They have a great reputation for quality in the industry. I'd take advantage of any drops because of the overall market correction.
I'd also take a look at EchoStar Communications (DISH). They operate Dish Network Satellite. They just reported a nice quarter, which included 350,000 new net subscribers. They are facing stiff competition from what the cable companies are offering with bundling of tv, internet, and telehphone, but I'm still positive on them here. Good potential for a buyout as well.
That's all for now. Lets see what Friday brings.