Wednesday, July 30, 2008

Phillip Fisher's 15 Points to Look For in a Common Stock

If you haven't read Phillip Fisher's Common Stocks and Uncommon Profits, I'd recommed picking it up. He's a legendary investor who brought clarity and a new way of thinking to investing. Also, his son is Ken Fisher, one of the investments voices I pay most attention to today. Here are his 15 points to look for in a common stock, and 5 don'ts for investors. Keep these in mind as you look for stocks in this market.

15 Points to Look for in a Common Stock

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

3. How effective are the company's research and development efforts in relation to its size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company's cost analysis and accounting controls?

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?

12. Does the company have a short-range or long-range outlook in regard to profits?

13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles or disappointments occur?

15. Does the company have a management of unquestionable integrity?

Five Don'ts for Investors

1. Don't buy into promotional companies.

2. Don't ignore a good stock just because it is traded "over-the-counter."

3. Don't buy a stock just because you like the "tone" of its annual report.

4. Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.

5. Don't quibble over eighths and quarters.

Perception is NOT Reality

The market is trading in a difficult pattern right now. We're getting whipsawed each day as the hedge funds buy and sell financial stocks. That is the only thing moving the market right now. You have a major dislocation in prices vs. value right now, but that doesn't mean it will get sorted out quickly. Many oil stocks are trading at levels of when oil was $70 barrel (its currently $121), and you have financial stocks trading at levels when they still made money (and paid dividends). This dislocation is being caused by funds cycling in and out of these sectors. They carry so much weight that they can cause these imbalances. Part of me wants to buy like crazy, but I remember the quote from economist John Maynard Keynes, which said "The market can stay irrational longer than you can stay solvent."

My advice is stick to your convictions. If you have a well designed portfolio, and you've done research on your stocks, you'll be fine. Don't buy into the hype.

Tuesday, July 29, 2008

Strong Earnings From US Steel Should Help Global Economy Story

The so called "global economy" stocks have sold off with the rest of everything else, as worries of US weakness have spread elsewhere. The earnings are saying otherwise. A few examples:

-US Steel(X)- Second-quarter net income rose to $668 million, or $5.65 per share, from $302 million, or $2.54 per share, in the year-ago quarter.

Excluding a charge related to inventories, the company posted a profit of $5.68 per share, easily beating analysts' consensus forecast of $3.84 per share, according to Reuters Estimates.

"We expect another excellent quarter with continued earnings improvement as price increases implemented during the second quarter and early in the third quarter are expected to improve average realized prices for each of our reportable segments," Chairman and Chief Executive John Surma said in a statement

-Manitowoc (MTW)- Manufacturer Manitowoc Company Inc. said Monday that second quarter earnings rose 37 percent on stronger overseas demand for its construction equipment unit and strength in its marine division.

-Mosaic (MOS)- Fertilizer chemicals company Mosaic Co. on Monday said its fiscal fourth-quarter earnings quadrupled from a year ago as sales doubled on continued strong demand for its agricultural products.

"The fundamental driver of our business -- the need for more food -- continues unabated," Jim Prokopanko, Mosaic's president and chief executive said in a statement.

-And don't forget oil stocks. National Oilwell Varco (NOV)- Oilfield service provider National Oilwell Varco Inc. on Tuesday reported its second-quarter profit grew 32 percent on strong demand for its equipment.

The company reported income of $421.7 million, or $1.04 per share, compared with $318.5 million, or 89 cents per share, during the second quarter of 2007.

Pete Miller, National Oilwell's chairman, president and chief executive, said in a statement that demand for capital equipment products remained strong, which was reflected in the company's record $10.8 billion backlog.

But apparently its time to buy financial stocks who's outlook is in the tank. Hmmm.

Monday, July 28, 2008

Is Apple a Good Investment?

I've owned Apple (AAPL) stock off and on over the past couple of years. It was one of my biggest gains ever a couple of years ago, as I rode the stock from about 60 to 100. The dynamics of the company have changed since then. The main focus is the iphone. Although I haven't used one, I've studied its unique features and what it means for the market. Many have said that P/E analysis of Apple's stock is useless (hold on before you think of America Online in the late 90's). It is not due to its future earnings, but in the way that they credit earnings for the iphone. They defer a significant portion of the revenue on each iphone sale, instead crediting themselves on the subscription basis rather than the entire unit price. At least this is how I understand it.

The 3G market is the future, and with higher internet speeds, there should now be nothing holding back the iphone, because it has many more features and is easier to use than its competitors.

You also have to like their dominance in other markets, such as mp3 players (ipods), and music sales (itunes). Also, their is a pretty steady shift in popularity to mac computers as well.

As for the stock, it has become fairly predictable. Apple has a history of giving very conservative earnings, and then beating them substantially. This years correction to 120 was obviously a buying opportunity, and if we continue to see mid-quarter weakness, I'd look at picking up some shares.

I like Apple, just like Google, because they are the true innovators in our economy and society. People continue to buy and use their products, and I don't see this slowing any time soon.

Friday, July 25, 2008

Media Donations Favor Democrats 100 to 1

I don't post about politics much on the blog, but I'm posting this article because I wanted to point out that the media is indeed biased. Not entirely, but in some cases. The same goes for the financial media, and its important to not let our investment decisions get swayed too far by opinion articles. Most financial media types always are bears or bulls; very few are flexible. Sane investing is hard enough as it is in today's environment, and we don't need so-called experts telling us what to do.

Here's the story.

Have a great weekend!

Is it Safe to Buy...Anything?

Yesterday's sell off gave us a little bit of a reality check, which in my mind, was deserved. The financial stocks traded way too high for the amount of news that spurred the rally. Now the question is, is there something worth buying? The answer is, there isn't much that seems like a value now. Energy stocks seem like a relative value, only if you believe that oil prices won't drop further from here. I lean more to that camp that the buy financial stocks camp, which has been no secret for anyone reading this blog.

If earnings were our positive catalyst, then economic data will be our negative catalyst. If you balance the two, I can't say I see a strong move up or down from here. The strength in financial stocks is now priced into the market, as well as the economic weakness.

Thursday, July 24, 2008

When the Funds Decide to Exit the "Financial Trade", Look Out Below

I've said this before, and I believe it now: This rally in financial stocks is a trade. It is rotation of mutual fund and hedge fund money out of weak dollar stocks into financial stocks. How long will it last is the question? These funds can't actually be building huge positions in companies that were on the verge of collapse a week or two ago, can they? Its purely a trade in my opinion. The unwinding of this trade would put us in a true bear market situation, where there are no safe havens. Up until this point, you could park money in commodity based stocks. But with oil selling off, and demand destruction well under way, investors are getting spooked out of these stocks as well. Its times like these that are truly frustrating for investors...

Wednesday, July 23, 2008

Atlas Shrugged - Applies Now More than Ever

I'm in the middle of reading this incredible novel which provides some interesting themes to capitalists. Author Ayn Rand ultimately developed her philosophy of objectivism through this novel. In today's environment, with governments seemingly increasing their powers to control markets, this book has some interesting points.

I'll add some more commentary once I'm finished with the book, but just wanted to see if anyone who's read it has some comments.

The book seems to be regaining a lot of momentum, and it looks like a movie is in the works for 2009.

Here's the synopsis from Wikipedia.

And a link to the Ayn Rand Institute.

If you want to pick up a copy, I've added it in my recommended reading list on the right hand margin, and you can get it from

Another Classic Turnaround by Cramer

Just a quick note to Jim Cramer's army:

Here's a quote from a couple of weeks ago:

"Sell everything. Nothing's working. Revisit when the prices are adjusted for a big recession, soaring inflation and a crushed consumer. Sell at 12,000 and come back at 10,000. Even better: short it." -Jim Cramer. June 27.

Now, here's his quote from last night:

"I need you to stop reacting to only the earnings and look at the bigger picture: the prices of oil and gas and the newfound health of banks," he said. "This market's a buy." -Jim Cramer, July 22.

Now I think he does a great service by getting people interested in investing. But if you think you can make money from following his daily recommendations, you're going to figure out that lesson the hard way. Here's my post from a couple of weeks ago.

This is Incredible

The amount of money pouring into financial stocks is baffling. Its important to understand that most funds have these stocks as their largest holdings, as do the major indexes. But as recent as a week ago, the big boys were dumping these stocks so fast it would make your head spin. The money is rotating out of energy stocks and back into financial stocks. It is so hard to trade with this mentality ruling Wall Street. These trends are literally changing by the day. The long term investor is getting whipped. Right now the best thing to do is build your portfolio with solid stocks, and keep away from it as much as you can. These sharp sell-offs and snap-back rallies are awfully tough to take.

Fundamentals have nothing to do with this. It is large funds riding financial stocks for a trade. And what's truly sad is that the government is bailing out these banks, and seeing the stocks climb, thinking their policies are helping. The funds are just using them for a trade. Pure and simple. Don't buy into the hype. That's all I can say.

Tuesday, July 22, 2008

Leadership Needs to Come From Industrials

When you look at the current state of the market, its kind of been in disarray. Oil stocks are getting beaten down (although I'd be a buyer of select names), and the rally in financials has no substance to it. When you look at earnings, the large cap, industrial type names are the ones performing. I'm speaking pretty loosely when I say industrials. I mean mostly multinationals. United Technologies, Dupont, Johnson and Johnson, Intel, Nokia. They've all reported pretty good earnings, amongst a pretty difficult environment. The key for them has been less reliance on the US consumer, and less exposure to fuel prices.

The market has to let these companies provide our leadership now. If its bank stocks, no rally can be sustained, because they are too volatile. Energy stocks helped the market over the past year, but are subject to cyclical swings based on oil supplies.

It was impressive that the market rallied back from this morning's lows. The headlines were predicting some major losses today, and we were back up to level within a half hour. Thats positive. But can it hold?

Saturday, July 19, 2008

The Case for Buying (or Selling) Financial Stocks

Thanks to this week's rally in financial shares, we're getting a barrage of media telling us to buy these oversold names. I'll take a look at both sides of the trade here.

First, on the buy side, they are simply extremely oversold. These stocks have declined steadily since basically last August, with no prolonged support or bottom.

Second, most are sporting a pretty strong dividend yield (if they haven't yet cut it). Wachovia 11.2%, Bank of America 9.7%, and Citigroup 7.1%. Wells Fargo shocked the market by raising their dividend this week. This was a move that was probably planned to help shore up confidence, because I'm sure they needed that money somewhere.

Third, most of these companies have great brand names with an amazing global reach. Especially some of the investment banks like Goldman, Morgan Stanley, etc.

Fourth, many of these companies have the most talented management in the world. Wells Fargo, American Express, Goldman Sachs, Merrill Lynch. Brand name and strong management are some of Warren Buffetts strongest criteria for picking a stock.

Now, lets look at the reasons not to buy these stocks.

First, their businesses are in disarray. The nationwide housing trouble, mixed with credit problems, have nailed these companies, many to the point of collapse.

Second, there has been no evidence that housing has bottomed. The consumer is still being pinched from all angles with energy and food inflation, while their biggest asset (their house) has lost value.

Third, and this is the biggest reason for me, is these banks are giving up their competitive advantage. They are selling stakes to overseas sovereign wealth funds. They are selling off their best assets (Merrill just sold their Bloomberg stake, and is talking about selling their Blackrock stake). Although this allows the company to stay afloat, what happens once the turmoil is over? They've lost much of what has made them great. That can make a case for never investing long term in many of these companies.

Fourth, there is no reason to believe that this weeks rally was nothing more than funds manipulating prices, or sentiment. They have a lot of money tied up in these companies, and maybe are looking for a chance to exit them, or make a short term trade.

In conclusion, I'd say you could buy financial stocks for a short term trade, if that's your style. But long term, I only like a few of these names. And that's those with strong management, who haven't leveraged their future to stay afloat now. Even once we return to normal times for these stocks, their earnings will be eroded for a long, long time.

Disclosure: None. Image borrowed from Barrons.

Friday, July 18, 2008

What Happens When Financials are Done Reporting Earnings?

The driver for the market has been earnings. Its been mostly financial earnings that the market is responding to. The companies that are performing well aren't getting much attention. So, once the under performing banks are done reporting their better than expected earnings, will the market hold up on fundamentals? Not on the fundamentals of the bank stocks. Thats why I like to focus on solid companies that are performing well.

The problem with this market is the constant rotation in and out of sectors. I can attribute it largely to hedge funds and computer based quantitative trading models. These aren't people on the other side of these trades, but computers which kick in and by or sell at given times or is certain situations arise. Thats why its so hard to hold any trend right now. Mark from "fund my mutual fund" has talked about this quite a bit. Here's a good post from his blog on this subject.

A couple stocks I'm looking at due to sector weakness:

Brazilian miner Vale (RIO). They recently made a stock placement at around $29 and the stock has traded down. They are rumored to be getting ready for a larger purchase.

XTO energy.(XTO). A great natural gas play. They've sold off with oil and nat. gas prices dropping.

I think the momentum from financials will hold up for a little while, but while wear off. Then we'll be back to oil and weak dollar plays.

Thursday, July 17, 2008

Solid Earnings are the Catalyst

As I said a few days ago, the best shot for upward momentum (heck the only shot) is solid earnings. Well, thats what we're getting. Wells Fargo(WFC), United Technologies(UTX), JP Morgan(JPM), Nokia (NOK). Add that to severe pessimism and oversold conditions, and we were due for a bounce. The question is can we hold this momentum and carry it for awhile? If earnings continue to surprise, I think that answer is yes.

The solid results from Nokia are encouraging. Their valuation has gotten so cheap because of fears of the iphone hurting their sales, among other things. Here are a few quotes from the announcement:

"Looking at the rest of the year, we are optimistic and have had good feedback about the broad range of new products we expect to sell in our device business," Nokia Chief Executive Olli-Pekka Kallasvuo said in a statement."

In terms of volume, company had its biggest sales growth in Asia, Latin America, the Middle East and Africa. Sales of Nokia phones were up 10 percent in North America and flat in Europe.

However, the closely watched average selling price of Nokia phones continued to fall because of higher volumes of cheaper phones sold in emerging markets and a negative impact of the weak dollar, Nokia said.

The average price for a Nokia handset was $117, down from $125 in the first quarter of the year and $143 in the second quarter of 2007.

I think there are more gains to be had here. Its a solid stock at a good valuation. They have a strong global brand, which continues to strengthen.

As for the rest of the market, we'll see what earnings brings us.

Disclosure: Long NOK.

Wednesday, July 16, 2008

Why Crude Oil is Dropping

Interesting day in the market. Wells Fargo surprised with a decent quarter (relatively speaking, of course). Oil prices continue to slide. Its because of a few basic factors here:

1) The dollar is strengthening (very slightly), and crude oil is priced in dollars.
2) President Bush lifted the ban on offshore drilling (potentially raising future supply, even though it will probably get blocked in congress).
3) Further weakening in the economy and with consumers point toward demand destruction.

Are any of these factors sustainable? The best answer I have is probably not.

1) We've done nothing but institute policies which will further weaken our currency. Continued bailouts are weakening our country's balance sheet and will make us print more money. (And now the Fed wants more power?!?)
2) Bush continues to make these symbolic gestures now that he doesn't have to pander to voters. First it was vetoing the farm bill, now its lifting the drilling ban. He knows neither would probably happen, but this way he can say "Don't blame me! Its congresses fault!"
3) Demand destruction is happening, but it is being picked up by the Chinese. Their economy is still growing rapidly, and their government subsidizes gas for its people, giving them no real incentive to conserve aside from environmental concerns. And lets face it, China isn't exactly the leaders of the green movement.

The strong dollar rallies never seem to stick. Bank stocks reverse, home builders, REITS, and retailers all advance, but nothing seems to last. Can we believe this time is any different?

Monday, July 14, 2008

Another Bailout

Another week, another bailout by the government/federal reserve. Our policy of subsidizing lending institutions isn't very popular, nor should it be. At this point, what are they protecting? Substantial declines in the stock market based on fear? Ah, we've already had quite a bit of that. This policy is killing our currency, not to mention it is sending the wrong message. There are more banks in trouble, and we can't afford to bail them all out. The taxpayers are covering this bill.

At the same time we are exporting $700 billion per year for foreign oil, and the charge against this is being led by an oil man? (Its a good plan by the way, please sign up for it here.)

How can anyone be pleased with our politicians right now?

Saturday, July 12, 2008

Don't Let the Bears Get to You (Or the Bulls)

Its a tough time to be an investor. In true bear markets, nothing works. We're entering that phase right now. Energy worked for the first part of the year, but now oil stocks are dropping even though oil prices are elevated. Any rally we see cannot be trusted right now because its based on short covering and bottom fishing in financial stocks.

Barron's led with a Bullish cover on real estate of all things. They say there are signs the market is improving (although just bearly). Here's an interesting quote from the article:

"Other than Larry Kudlow of CNBC, none of the journalists who interviewed me after the latest release seemed at all interested in any of the positive developments," says David Blitzer, chairman of the S&P Index Committee. "They seemed focused on the bad year-over-year number."

This is the biggest reason to be bullish right now. EVERYONE IS BEARISH. Barry Ritholtz writes a great blog, be he's become so bearish that its hard to read his posts anymore. That's the case with almost everyone. They get so far down a path that they don't even consider any other outcomes. And the bears could be right; there could be a lot more to go. But I'd rather be flexible and buy some stocks as they become more attractive, while not falling into the trap of buying speculative names (poor performing financials).

The week ahead brings some promise. Earnings are the best chance for a positive catalyst for this market.

Thursday, July 10, 2008

Ready to Throw in the Towel?

Most investors, if they haven't already, are ready to throw in the towel here. No rally holds up longer than 24 hours, and the news seems to be weakening. Unfortunately, most people have it backwards. Our brains are trained to avoid short term pain, even if it means throwing away long term gain. This is why its so hard to be a successful investor. You need to basically take whatever emotion comes naturally, and do the opposite.

GE is reporting tomorrow. We all remember their Q1 results, which shocked the market. They seem pretty active in restructuring a bit, with news out this morning of potential consumer and industrial division spin offs. Any company that big is going to have too much trouble being nimble in a changing market.

Hang in there. Avoid the risk to bottom fish on troubled financial companies. Stick with strong brands, companies with growing earnings, and beneficiaries of global secular growth.

Tuesday, July 8, 2008

Boone Pickens Back Again

I've talked about Boone Pickens quite a bit here on the blog, and if you are familiar with him, prepare to be. He's going to be hitting the airwaves with his energy campaign, and I love it. Since our politicians aren't going to do anything about our energy problem, he's taking it directly to the people. The idea of his thesis is to take the large percentage of natural gas we use to generate electricity, and get that from wind and solar. Then we can use the natural gas, which is cleaner than gasoline and found in the US, to power our vehicles. His company, Clean Energy Fuels Corp. (CLNE) is providing the infrastructure. Although the stock is pretty speculative to this point, this campaign could get the next president on board with incentives, and that could make his stock explode.

Here's the full story on his campaign from USA Today.

Here's the website for Pickens' new campaign.

And, here's a good video of him explaining the energy situation.

Can Earnings Jump Start This Market?

Earnings season kicks off today. As usual, Alcoa (AA) leads off. I'll talk about them in a minute. But first, lets look at the previous earnings cycle. We were coming off a major market drop (the march Bear Stearns low), so sentiment was poor. Estimates were dropping as analysts expected companies to announce massive layoffs following the December jobs report. But a lot of earnings surprised to the upside.

A couple of things are virtual certainties this earnings season. First, companies that rely largely on transportation are going to be weak. UPS and FEDEX. We know the story here, as they've been issuing multiple profit warnings. Second, expectations will be low. Does anyone remember Google last quarter? The analysts and pundits were enjoying ripping on the "untouchable Google" coming into earnings, saying things like "growth is slowing", "paid clicks will be way down", and "time for Google to come back to earth." Well, Google blew the doors off. Stock rallied fiercely. My point is that be careful about getting to dour with sentiment. The media can lead us into this false sense of how terrible or great EVERYTHING is. One of my favorite quotes is "Its never as good as they say it is and its never as bad as they say it is either." Keep this in mind.

So take a look at today's lead-off batter (sorry I've been watching too much baseball) Alcoa (AA). You've got a company in the midst of potentially being bought out by Brazilian super-miner Vale (RIO). Their earnings estimates have been cut pretty consistently over the past few weeks. So has the stock price. A lot of downside has been priced into the stock, but there are some reasons to own it, and the potential buyout is one. Another is the fact that the market for metals is still pretty strong right now. I don't like to "game" earnings, as its too unpredictable, but Alcoa is fairly attractive right now.

Stocks are oversold. Although I'm still holding some short positions, I'm considering cutting them.

Monday, July 7, 2008

Ken Heebner Still Bullish

Superstar fund manager Ken Heebner remains bullish on the economy and stocks. He makes some good points, and I found one particularly interesting about housing:

"I understand how serious the housing problem is. But it's not as broad a problem as widely perceived. It's reduced everyone's sense of financial well-being, but a third of homeowners don't have a mortgage, and the vast majority of people made down payments and have fixed-rate mortgages, so there's no financial strain. For them, the only impact is the psychological impact of declining housing prices. So therefore I don't think this is as big a deal as everyone else does. We've passed the point of maximum distress."

So to some extent housing, as well as the stock market, has become a crisis of confidence. The average guy who has made some decent financial decisions, and lives within his means, doesn't need to be panicking right now.

As an aside, most fund managers have to stay somewhat bullish no matter what. They make their living based on how much money they are managing, and try to be more a calming influence than an inciter of panic.

Here's the full interview. Via Boston Globe.

Thursday, July 3, 2008

This is Where Momentum Players Get Burned

This is the type of market where the momentum guys are getting crushed. Fears of lower demand for steel after GM's troubles have shaken steel stocks. Many have dropped 10-15% in the past few days. It's an overreaction, but who likes to hold through those types of drops. Same goes for speculative solar stocks, and agriculture stocks. When the fear is that the trend is over, the hedge funds holding these stocks get out, and quick.

The market is trading like a full on bear market now that we've reached the 20% drop. This is where investors start to throw in the towel, and sentiment drops even further. Subsequently, these are the best times to buy stocks. I can guarantee you that Warren Buffett is buying here.

A short trading day, and a short week. Enjoy the long weekend, and maybe do some homework, because there are some deals out there!

Wednesday, July 2, 2008

Rally in Financials Not Helping

Every time we get these quick spurt rallies in financial stocks, it doesn't help things. At least not with my strategy (which is short indexes, long non-financial, weak dollar plays). Right now all the action controlling the market is with bank stocks. They rally hard, then fizzle. Because they make us such as large part of the major stock indexes, they are controlling how the numbers look. Everything else is just sort of doing its thing. I can't endorse buying oil stocks here, nor would I sell them.

The question now seems to be will the commodity plays fizzle out? Steel, gold and/or miners, oil stocks, agriculture stocks. That and short covering in financial stocks is what people are watching.

Most economic data is fairly week, but some is holding up. But this is what's ahead for us now. Lots of back and forth. Lots of uncertainty. Most investors won't like it, and many will bail for now. But its a good time to be picking away at stocks that are getting beaten up because of overall uncertainty.