Monday, April 30, 2007

Great Blog Post

Here's a nice article that discusses the market possibilities over the next year. It has many quotes from respected investor Ken Fisher.

Market Outlook

Stocks seems to be losing a bit of steam the past couple of sessions. They have been driven by strong earnings and M&A activity, and this will start to slow now. As we head into the slower part of the year, I think that oil will continue sliding up as we enter the summer driving season. I also am intrigued by the pharmaceutical sector. There has been some positive news coming out, and many companies have been looking good. I still am a fan of Amgen (AMGN) even after its recent rebound. Some sectors that I see under performing would be financials, tech, and construction related stocks.

I think inflation will become a concern as the year goes on, and that could hurt the markets some. But overall, with corporate profits strong, there still should be some good performance ahead.

Thursday, April 26, 2007

Portfolio Update

I updated the portfolio results today, which I try to do at least once a week. With the Dow surging, and most of my names being in larger companies, the performance has been good. As expected the oil stocks, particularly the refiners, have done well, both returning over 20% in the past two months.

We might see some profits taken today, which could cause us to trade sideways, or even a little down. But there are some pretty big names reporting, and that could spur an afternoon rally.

Wednesday, April 25, 2007

Dow 13K

The Dow finally broke through the 13,000 barrier today, and has since responded by moving even higher. Positive earnings continue to be the major catalyst as it seems almost no big company is missing on their quarter results. It has been predicted that the health of the consumer is deteriorating, but then you see positive news from Amazon, which surprised me.

It is a pretty broad rally right now, but oil stocks in particular are doing well. All of the drillers that I've mentioned have moved up significantly. Noble (NE) is advancing higher than the others, and this is probably due to the fact the others haven't reported earnings yet, and Noble reported a great quarter. I look for the entire offshore drilling industry to be good, especially the international names.

I think that the market could trade even higher throughout the rest of earnings season. We will probably give up some of the gains heading into May and June, which tends to be slower months.

But for now, things are looking strong. Not many buying opportunities on the long-term side, but there are some trades to be made.

Monday, April 23, 2007

Some Good News

Barron's just put out an article talking about the opportunities in the Offshore Drilling Sector. That's good news for the companies that I profiled in yesterday's post. They mentioned that they are cheap, and are good buyout targets. They all traded higher today, specifically my favorite, Noble (NE). It didn't totally help, because I was looking to pick up some shares at a little lower price, but it is definitely a positive.

Disappointment From Capital One

I am really disappointed with Capital One (COF). They announced a bad quarter, with an even worse outlook for the year. Although they appeared not to have a ton of exposure to sub-prime mortgages, they clearly have a bad loan portfolio, and are being bit because of it. With the acquisitions of North Fork and Hibernia, I thought that they were going to show some positive synergies that would help the balance sheet. This stock is going nowhere for a while. I still think that long term Capital One will offer a nice variety of services, and will be extremely profitable. If the stock drops too far, I might be interested in picking up some shares. Until then, I'd stay away from this stock.

Sunday, April 22, 2007

Finding a Driller

My efforts in the past week or so have been to find an oil driller to invest in. I learned the hard way in 2006 that oil companies are investing in offshore drilling rather then land drilling. So I have been doing the usual research. Comparing fundamentals of the bigger names, reading research reports, annual reports, mid-quarter status reports, seeing which companies they contract out to, seeing where they drill, looking at how long their contracts are good for, comparing their day rates, etc. Here are the four companies that I was comparing:

Transocean (RIG)
Noble (NE)
GlobalSantaFE (GSF)
Diamond Offshore (DO)

Transocean is the largest, and has been getting the most praise. Jim Cramer owns it, T Boone Pickens owns it, etc. I liked transocean, and they do a lot of business with my favorite of the big boys, Chevron, but I think they are too concentrated in the Gulf of Mexico. Their margins a somewhat lower than the others as well. The are the most polished, in terms of image, and name recognition, which should bode well for it it when the entire sector does well. Because of their popularity, they trade at a premium, about 19 P/E, to the others, which is around 15 P/E.

The other three are similar. Each has about half the market cap of Transocean. Here, I'm just going to talk about the one I picked, and that is Noble. I like them for many reasons. The biggest is that most of their drilling activity is taking place in areas outside the gulf, and particularly the Middle East and Africa. They have great growth, profit margins, and are managing their company well. They also have room to grow, which is important.

In closing, I'd say you'd be good in either Transocean or Noble. Transocean is going to get pumped by Cramer, and will get the most publicity, but you have to pay up to get that. I lean toward Noble in this battle. I like their long term prospects, and the way they have run the company in the past. I think they have more room to grow, in terms of mergers and acquisitions, as well as organic growth. They just reported a good quarter, and I'd be a buyer on any pullbacks in price.

Some Thoughts

A lot of sectors have shown instability this year. The financials have been hurt because of sub prime mortgages, Alt-A loans, and the inverted yield curve. Home builders and construction-types have been down, and look to continue that. Tech has also been tough, particularly semiconductors. I think that we are in a commodity-driven market. Gold is on a tear, as well as all the mining and metal stocks. Copper as well. Look at the performance of Freeport-McMoran (FCX) since their merger with Phelps Dodge. Look at Southern Copper Corp (PCU). Gold is doing well because of the weaker dollar. Copper is doing well because the expansion in China has increased its demand.

My favorite commodity though, as most readers have probably picked up on, is oil. I am a believer in that so-called "peak oil" theory. There is just too much demand, and I see that continuing. It is great that we are looking for alternative energies, but lets face it, there is no viable source that will take oils place, at least for another 10 years. The oil stocks fluctuate somewhat when the price of crude drops. I don't see that as a weakness, but as a great buying opportunity. In the next few posts, I'm going to be breaking down different ways to play the oil boom, and which stocks I recommend for each area.

Saturday, April 21, 2007

Recent Rally and Future Outlook

The strong performance of the stock market last year was driven by a lot of Mergers and Acquisitions activity. That activity has yet to slow. It seems each week there are one or two purchases announced of companies for many billions of dollars. I think the recent strong performance, during the past week, has been driven by strong corporate earnings. Almost all of the big companies are reporting to the upside, with fairly strong future outlook. I think that this trend should continue throughout the rest of earnings.

I am interested in how the oil stocks come in, and they will start reporting this week. I have recommended a lot of oil companies on this blog, and they have all performed well in the past few weeks.

I think that we still are at risk for a pretty good correction though. On Feb 27, we showed that we can be at mercy to overseas market performance, particularly Chinese. There are also a couple of other things to be concerned about: the weak dollar and inflation. I think a lot of this rally has been in part to steadily increasing inflation. The money we are making now isn't worth as much as it was just a couple of years ago. Corporate profits have increased because of this, and thus the stock market has increased. But the salaries of most Americans doesn't seem to be increasing at the same rate, and this could be a problem for our economy as a whole. I think this has been the cause for poor credit and mortgage defaults that have been the issue as of late.

Tuesday, April 17, 2007

Can't Slow the Bulls

This market continues to move higher amongst mostly solid earnings announcements. Johnson & Johnson (JNJ) announced numbers that beat expectations and the stock has jumped a couple of percent. It appears that Capital One (COF) will also report a nice quarter. Their stock has been moving higher in the days approaching the announcement, and most financial companies have reported good quarters so far. It appears that the subprime worries haven't affected them as much as anticipated.

Citigroup (C) announced that it will cut a lot of jobs, and it was well received because they have just gotten too big. It is difficult to compare them with Bank of America (BAC), because their focus is a little different. Citigroup has a strong exposure to international markets, while Bank of America is more domestic and deposit driven. From a value standpoint, Bank of America is the better investment, because they are leaner, and are growing faster. Their negative would be their lack of exposure to growing international markets. If you're looking for a combination, I would recommend Bank of America for the domestic side, and Goldman Sachs (GS), which would give you exposure to hedge funds, M&A activity, and international growth.

Friday, April 13, 2007

Portfolio Update

I updated the portfolio this morning. The strong market has helped quite a few of my recommendations, particularly the energy stocks. Here are a couple of the big gainers:

Chevron is up 12.10%
Echostar is up 14.76%
Frontier Oil is up 15.13%
Valero is up 19.88%

To see the full results, check out the post on the right hand margin, or click here.

Thursday, April 12, 2007

Correction in Sight?

It seems that investors are going to see what happens with earnings before pushing the market one way or the other. Consumer confidence finally seems to be waning with recent mortgage and credit troubles. I think that earnings will still be fairly solid, and this will be the driving force to hold stocks up. Most other indicators are looking downward however. The Fed is getting concerned about inflation. The real estate and homebuilding markets still haven't shown they will turn. I'm looking for a correction to bring the Dow back near 12,000. After that, I think we will have some stability.

Looking ahead to the summer months, I think you have to stay with recent trends. Energy stocks, particularly offshore drillers, refiners, and oil services should stay strong. Metals and miners probably won't continue their torrid pace, but should still be solid. Beyond that, I don't think financial stocks will rebound until later in the year. The summer should provide some good buying opportunities for these types of stocks.

Here are a couple of financial names I would look at if we see a correction:

Capital One (COF)
Bank of America (BAC)
Goldman Sachs (GS)

Some oil related stocks to watch:

Chevron (CVX)
Schlumberger (SLB)
Transocean (RIG)
Noble (NE)
Valero (VLO)
Frontier (FTO)

Metals:
Freeport McMoRan (FCX)
Southern Copper (PCU)

Tuesday, April 10, 2007

Why I'm Short on Short Selling

I'm not a big fan of selling a stock short. This is mostly because I try to invest more long term than short. In the long run, there are too many things stacked against you. The general trend of the stock market is up, so unless you have reason to believe a company is going in the tank, you can't short a stock for very long.

Shorting is dangerous, but not for reasons you may think. Stocks do indeed go down quicker than they go up (look at Feb 27 for example), but you have the danger of the short squeeze. When a rumor flies, or a stock is upgraded, often times the people shorting the stock all rush to cover. This along can really drive a stock up, especially if it is large hedge funds doing the covering.

I also am against shorting because you are limited in what you can make. A stock can only go as low as zero, and the odds of that happening are very low. But there is no limit on how high a stock can go. If you go in long on a great company, you can often make well over 100%. That opportunity simply doesn't exist when selling short.

In conclusion, I must say that there is a time and place for selling short. Large money managers have a good use for it to hedge their bets in case of a market downturn. But to the average investor, you are much better off building a well-balanced portfolio on the long side of stocks with great future earnings prospects.

Monday, April 9, 2007

Finding Good Advice

In my experience in following the market, the toughest thing is knowing when to sell. Out of all those "experts" on television, none will really tell you when to sell. There are two major opinions that people take, and they are 1)people that are always pesssimistic on the market, and 2) people that are always bullish. A majority of the people you see on television are in the second group.

The pessimists' view goes something like this. It's much safer for them to be negative because they can't really be wrong. These are usually what I'd call "Wall Street Outsiders." If stocks go down, they were right. If stocks go up, people don't get mad at them because stocks went up and people are happy. If stocks have been going down, they will continue to go down because of poor performance, bad economy, etc. If stocks have gone up, then companies can't continue their pace of growth, and are due for a decline. It's a viewpoint that doesn't allow you to get hurt, but doesn't make you much money either.

The optimists are most people you see on television. They buy into the Wall Street money machine. The more excited they get the general public on investing, the more everyone in the industry makes. So for example, if CNBC tells people to buy, buy, buy, and has shows like "Mad Money", and "Fast Money", people are likely to follow that sentiment. People get excited about the idea of making easy money. So CNBC gets people to buy stocks and mutual funds, and the brokerages and fund managers pay them millions in advertising dollars. When the market is strong, you have to be invested because you can't afford to miss out. When the market is weak, you better buy in because stocks can't stay this cheap for long. This isn't as safe of a theory, and it can cause you to lose money quicker. It's a classic example of risk vs. reward.

These are examples of why it is hard to consistantly beat the market. You have to learn how to sift through all that you hear in the media. Now nobody can be right every time, but if you learn how to balance the bulls vs. the bears, the pessimists vs. the optimists, and take the best advice from both, then you're ahead of most investors.

Thursday, April 5, 2007

Investing Psychology

The most important facet of investing, and one that many people can never learn, is discipline. You can have all the financial knowledge in the world, including understanding economics right to it's core, but if you don’t have discipline, it’s very difficult to make money in the market.


Some things to remember if you want to be a disciplined investor:

1) Don’t get in the habit of chasing a stock if its moving. Set up your plan for buying it, and if your terms are not met, then pass on it.

2) Don’t think that you’re missing out. There will always be another chance, many times with the same stock. So don’t let your emotions lead you into buying a stock at the wrong price.

3) Try to avoid the “noise” coming from Wall Street and on television. The latest IPO or up and coming company may be a great one, but don’t forget to stick to your investment criteria before buying in. There are plenty of examples of “can’t miss” stocks that missed.

4) A disciplined investor does not get shaken out by a short-term drop in the market. The proper time to sell is when the conditions taking place in a company that caused you to buy, have changed. This principle can differ somewhat if you are a trader rather than investor. If you are a trader, it’s important to cut losses quickly, because you aren’t concerned with the long-term prospects of a company.

5) Make a plan, and stick to it. As simple as that sounds, it is difficult for many investors to follow. If you’re serious enough to spend the time on investing, then you’re probably smart enough to succeed. If you can complement discipline with your plan, then you should enjoy a lot of success in the long term.

Potential Short Squeeze

Amgen (AMGN) is moving much higher this morning. It looks like the shorts are being squeezed. People on the short side have ridden this stock down about 20 points in the past few months, and on the first hint of a bottom, are covering. I wouldn't say that this is a turnaround, but a short move. There is some potential to catch a point or two, but I'd want to see it hold a base of 58 for a few days before I'd jump in.

Wednesday, April 4, 2007

A Great Company

Best Buy (BBY) reported earnings today, and they beat estimates. Typically, I'm not a huge fan of retailers. Smaller margins, very competitive, and sales can cycle based on health of the consumer. Especially this type of retailer, which relies on consumers' discretionary income. But Best Buy defies all of this typical logic, and performs well. They are continually growing, while at the same time rival Circuit City(CC) is losing money. Best Buy has a lot of cash, and according to the conference call, they will look to either up their buyback of stock, or make some acquisitions. I think this company is positioned well right now.

Two additional things that interested me in the conference call:

1) They will carry Apple Computers in 200 of their stores this year

2) Sales of flat-panel televisions continued double-digit growth

The concern out there is that margins will shrink as larger retailers like Wal-Mart (WMT) are trying to capture some of the flat-panel television market. This is one of the reasons that the stock declined today.

I think Best Buy is a good investment, and would be interested in scooping up some shares if we see any short-term drops in share price.

Also, here's a great article about Best Buy written by The Street.com's Marc Lichtenfeld.

Positive News for Dish

Echostar Communications(DISH), a company I've recommended here earlier, got some positive news yesterday. They announced a partnership with Google (GOOG) in which Google would sell and choose advertisements to be shown on Dish Network. Google really spiked on the news, and Echostar has continued its nice run, up 10% from where I recommended it a few weeks ago. Dish Network competes with DirecTV, but has carved out a good niche in the market, and couple see potential of a merger or buyout in the future.

To view the complete announcement, click here.

Observations

Markets are trading mostly sideways today. One interesting note is that my health care stocks both have finally made a move. Johnson and Johnson (JNJ) and Amgen(AMGN) have both traded upward today. Now I'm trying to figure out if it is just a bounce because they were oversold, or if they have bottomed. I think in the case of Johnson, it basically has bottomed. I was looked for a buy point a little under 60, and it has since moved up to near 61. It is looking like it will begin its climb from here.

Amgen, on the other hand, I'm still a little cautious on. I think that todays advance could be a quick bounce and it could still head lower. There hasn't been much positive news out of the Amgen camp lately. I'm sure management is trying to figure out how increase the stock price. They could institute a dividend, or buy back more of its stock. The earnings estimates have steadily dropped, and if they surprise to the upside when they announce, the stock could advance 10%. In the mean time, I'm paying close attention to its trading patterns relative to the broad market, as well as trading volume. I'll continue to update as things progress.

Tuesday, April 3, 2007

Nice Rally, But Will it Hold?

Todays gains have looked pretty impressive so far. They are spanning across most sectors, aside from, believe it or not, oil. I think oil will continue its upward trend, but had to had to cool off for a day after its recent run up. Johnson and Johnson (JNJ) has finally reversed its trend and is a one percent gainer after an upgrade this morning.

I think Capital One (COF) looks like a great value here. They don't have a lot of exposure to the sub-prime area of mortgages, but is being treated like it does by Wall Street. They are a major player in the credit card industry, and are in the process of becoming a diversified bank, as it made two major acquisitions in the past year and a half. It trades at a low valuation (about 8.5x forward earnings). If it continues its quest and becomes a full scale bank, it should deserve the multiple that other banks are getting (which is 11 to 12). And if you compare it to two major credit card companies, it is especially cheap. American Express (AXP) trades at around 15x forward earning, and newly public Mastercard (MA) at 22x.

So, we'll keep on the lookout. I'm still fairly bearish on the market near term, but there are always good stocks to buy.

Monday, April 2, 2007

Looking Ahead

I'm interested in what this first week of April will show us. I think that the markets will start to decide which direction they are headed for the next couple of months. Looking back at last year, this time was fairly positive, and oil prices headed higher. But all of that set up to a decline in early to mid summer. I do think that oil prices are going to continue higher. I've been positive on refiners mostly rather than oil services. If you're going to look at a driller, concentrate on offshore rather than land drillers.

Here is a nice article about Warren Buffett and his current views on the market.