The Stock Market's Resiliency

The housing/banking crisis of late 2007 to early 2009 was a devastating blow to the US economy. On October 1 of 2007 the Dow Jones Industrial Average ($INDU) was at 13,930. Then the free fall began, and by March 9, 2009, the Dow had plunged to 6,547, losing more than half of its value. But, little by little, the market recovered, taking us to today, where the Dow is 12,653, making back almost all of the ground it lost during the banking crisis. That is why experts put their faith in the power of stocks as investments. It takes time, but the market is resilient, and it does come back eventually. Many people saw their portfolios cut in half from 2007 to 2009. Those who are retired or close to retirement hopefully had a large percentage of their investments in something safer than stocks, like bonds. At the depths of the crisis of 2009, some probably got discouraged with the Dow and withdrew their investments. This is the worst thing that a person could have done. Just think about how many blue chip stocks were at bargain prices at that time. That would have been the time to buy like never before.

Since 1980, the growth of the Dow has been nothing short of amazing, when compared to the sluggish overall rise that happened during previous decades. From 1980 to today, the Dow has multiplied over 14 times! Consider these figures, showing the value of the Dow:

1-1-1930..... 267
2-1-1940..... 146
1-1-1950..... 201
1-1-1960..... 622
1-1-1970..... 744
1-1-1980..... 875
12-1-1989..... 2,753
11-1-1999..... 10,877
10-1-2007..... 13,930


How long before it hits 15,000? Stay tuned.

*Some information from money.msn.com.

Crisis for Carnival Corporation (CCL)

A couple weeks ago, on January 13, a ship wreck happened off the coast of Italy involving the Costa Concordia, a ship owned by Carnival Cruise Lines Corporation. Carnival is a large conglomerate that owns ships that sail under the brands of Carnival, Princess, Holland America Line, Cunard, and various European, Australian and Asian cruise lines. The company operates 98 ships and also owns many hotels, motorcoaches and domed rail cars. The next trading day after the accident was January 17. The volume for Carnival (CCL) is normally about 4 million shares. On January 17, it was almost ten times that amount. The stock lost about $5 per share, going from about $34 to $29. Lots of people sold CCL that day, no doubt with many people selling short, betting it would go down in the wake of the accident. On December 23rd of last year, one of the company's officers sold 124,000 shares, yielding $4.1 million. The 52 week range for this stock has been from $28 to $47. This is a public relations crisis for Carnival, and no doubt, many will be monitoring the situation to see what happens. It pays to follow the stories in the news. Smart investors not only pay attention to the news regarding stocks in their portfolio, but the news regarding various companies and the overall macroeconomic health of the world, as those factors can have an effect on investments. CCL is a cyclical stock. Taking a cruise is a luxury, not a necessity, so I'd expect this investment to do better as the world economy improves, and people have more disposable income. During 2009, at the height of the economic slow down, the stock was as low as $17 per share, so it has rebounded quite a bit since then. Carnival's key competitor is RCL, Royal Caribbean Cruise Line. Investors are paying 12.6 times earnings for CCL and 9.6 times earnings for RCL. Currently, RCL is $28 per share. Comparing the percentage of total assets to total liabilities, RCL has more debt than CCL. A better dividend yield can be had with Carnival (1.40% vs. 3.30%), but we still need to see how the recent accident will affect Carnival financially. The loss of one of their ships plus the negative press and pending lawsuits could be quite a blow.

*Some information from finance.yahoo.com

The Future of Best Buy

I recently took an international business class. We had to choose one company and one country, and determine if that company should expand into the country we chose. I chose Best Buy (BBY) and the country of Norway. I determined that Best Buy not only should avoid expansion into Norway, but they should cut costs in America, and maybe close down certain locations here. Best Buy faces fierce competition especially from amazon.com. Also retailers like Wal Mart and Target sell much of the same merchandise that Best Buy sells. I predict that eventually Best Buy will go the way of Circuit City, and cease to exist. In September of last year, one of the company's officers sold almost 11,000 shares. In April of last year, another officer sold 43,000 shares. Insider transactions can be accessed easily through finance.yahoo.com. Last year, Best Buy's share price fell by 27 percent. Their sales of televisions and computers has declined. Best Buy used to depend on sales of DVDs and CDs but many people do not buy these anymore, instead they buy mp3s and watch movies on demand or stream via Netflix. The percentage of physical media allocated to each store has been shrinking. The transition from physical media to digital media has hurt many brick and mortar book stores and CD stores. Amazon.com has an advantage since they have no physical retail outlets. Best Buy's total assets versus total liabilities as of February 26, 2011 is almost $18 billion in assets versus about $11 billion in liabilities. Retained earnings are over $6 billion. So, the company has breathing room financially, but still I wonder about the long term health of this company, and its cash flow.

* Some information from finance.yahoo.com and The Wall Street Journal

Sector Rotation Utilizing Cyclical and Secular Investments

Jim Cramer's book "Real Money" discusses rotating one's portfolio through different investments based on multiple (price to earnings ratio) contraction and expansion. He also talks about secular stocks versus cyclical stocks. I would recommend that everyone reads the book for some great tips. He even includes a chart to show when to get in and out of certain investments to maximize the growth of your portfolio. He says that the economy follows specific patterns that can be tracked. Cyclical stocks go along with the economy. When the economy is good, people will buy discretionary items or luxuries. Cadillac will probably sell more cars when the economy is strong and people have money. Secular stocks on the other hand, do well no matter what the economy is doing. People will buy soap and detergent even if the economy is poor. You can rotate investments between cyclical and secular booms. We will pay a higher multiple to earnings for the growth of a secular company than for the growth of a cyclical company. One can’t be deferred, one can. Many people like to invest in secular stocks such as Procter and Gamble (PG), Johnson and Johnson (JNJ) and Kimberly Clark (KMB) since they pay a good dividend and they are companies that sell products that are widely used by the average consumer. Sector rotations: Depending on the state of the economy, you should buy or sell certain stocks at certain times. These will be either cyclical or secular investments. You want to buy based on multiple expansion and sell based on multiple contraction. This is tied into E x M = P. Earnings x multiple (P/E ratio) = price per share

In a recession the stocks with the biggest multiple expansions are the secular investments, such as P&G. When P&G peaks, get into a cyclical stock. When the fed cuts interest rates, get into something discretionary. Purchase cyclicals when the M is highest. Sell non-cyclicals when the M is highest.

PG was $44 when market bottomed out in March 2009. 9 months later it was $62. Low price times higher multiple will equal same earnings.

When times are bad, buy something like PG which is non-cyclical. The earnings will be good even in bad times. The E will be good and the M will contract. As things turn around, the M will expand, making it more expensive. A higher multiple will be paid for secular or non-cyclical stocks.

Before times get good, get into something cyclical like MYG (Maytag) or Dow (DOW) (smokestack stocks), since lowering interest rates will raise their earnings and the multiple will expand since people will pay more for it. On the low end of the cycle, the cyclicals will be cheaper since the earnings will be smaller.

The above information is a summary of principles from Jim Cramer's "Real Money". Investing can be risky, so do your homework or hire a professional before trading securities.

A "Golden" Opportunity?

Lately we have been hearing a lot about investing in gold. It is ironic that when gold is at an all time high, people recommend investing. It seems like when it is low, that is the time to invest. Most experts recommend having just a small percentage of the portfolio in gold. Those who do not want to invest in physical gold can buy stock in gold mining companies. The price of gold is currently $1656 per ounce. Over the past 30 days the gold price has risen 2.28%. Over the past year the rise has been 20.75%. But, the serious gain would have come from investing 5 years ago. The gain from 2007 to 2012 has been an amazing 162.25%! The price of gold often goes the inverse direction of the Dow Jones Industrial Average since when the Dow is down, people are searching for an alternative investment. I found an exchange traded fund (ETF) that invests in the inverse of gold. When gold goes down, this investment will go up. It is symbol DZZ, Deutsche Bank AG DB Gold Double. It is currently at $4.78, with a 52 week range between $3.83 and $9.26. This fund has net assets of $107 million. It was founded in February of 2008. It's 3 year total return has been -39.73%, but when gold drops (and it will eventually), it will have a better performance. I looked at the performance of other ETFs, not necessarily those tied in to the price of gold. ETF symbol LBND has been a top performer, earning 117% over the last year. That ETF trades leveraged debt. The investment seeks to replicate, net of expenses, three times (300%) the performance of the DB Long U.S. Treasury Bond Futures index. The index measures the performance of a long investment in the CBOT Ultra T-Bond futures.

*Some information from finance.yahoo.com and http://www.goldprice.org/spot-gold.html

"Cheap" Stocks Versus "Expensive" Stocks

When I first started learning about stocks, I thought that a stock that sells for $50 per share was too expensive and I wanted to find a stock that sells for $25 per share. I learned that this view of stocks is overly simplistic and just plain wrong. Google (GOOG) is $623 per share. Jim Cramer has talked about how the movement of stock prices is tied generally to the basic economic theory of supply and demand. $623 is a lot of money for one share, but with a price to earnings ratio, or multiple, of 21, some would see it as a bargain. For comparison sake, Amazon (AMZN)sells for $179 per share, with a P/E ratio of 94. Google is in high demand since it is a company that has proven to be innovative and well managed. Apple is in the same category. In 2008, Google dropped as low as $260 dollars per share. Now it is over twice that amount. Smart investors would have bought Google in 2008 and sold it recently, turning a handsome profit. People will pay a premium for Google since the balance sheet shows that its total assets have almost doubled from the end of 2008 to the end of 2010, going from $31 billion to $57 billion. Total liabilities have gone from $3 billion to $11 billion over the same period. So, at the end of 2010, the total liabilities were only about 20% of the total assets, which is impressive in this day and age where many companies (and individuals) are carrying so much debt. The ratio of assets to liabilities for Amazon is over 50%. There are other valuation criteria for evaluating stocks other than P/E and the balance sheet analysis, but these are a couple of things to consider when picking investments. It makes sense to compare stocks in the same sector. So, if you want to buy a tech stock, you can compare Google to Apple, Microsoft, Amazon, E-Bay and others. Do your homework such as listening to conference calls, examining the balance sheet, following news about the company, analyzing the annual report, and other tasks. You can monitor trading of insiders who own large quantities of the stock, and look up historical prices/dividend yields by using sites like Yahoo Finance or MSN Money. Look at the 52 week high and 52 week low. Search for bargains, just like when you buy anything else. Buy low, sell high is the cardinal rule of investing. Past performance gives you an idea of the stock's track record and volatility, but future performance is more important. Look at the figures for revenue, earnings per share and growth rate. Google went public on August 19, 2004, selling for $100 per share. How many of us would like to take a time machine back to that day and load up on shares of Google? Ten shares bought for $1000 back then would be worth $6230 now.

Stock Selection Factors

So, you want to start buying stocks. What criteria should you follow to decide which investments are right for you? According to Kiplinger's magazine, here's what to consider.

1. Price versus earnings--- Look at the price to earnings ratio to decide.
2. Growth of the company--- Future growth is essential more than past growth.
3. Dividends--- Does it pay a dividend and has it been going up or down? Some of the highest dividend yields right now are paid out by Merck (MRK) at 4.4%, AT&T (T) at 5.9% and Verizon (VZ) at 5.2%.
4. Cash flow--- Does it have enough money coming in to pay dividends and debts?
5. Industry trends--- What does that industry or sector look like overall? Is it thriving or struggling?
6. Governance--- Is there a board governing what happens at the company?

Here's a link to the article:

http://kiplinger.com/columns/picks/archive/how-an-individual-investor-picks-stocks.html