Picking High-Growth Companies: How to Find the Next Apple
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 17, 2012: Issue #1711

Apple’s share price exceeded $500 this week, giving it the largest market cap of any U.S. company.

Apple (Nasdaq: AAPL) so successfully sells computers, phones and other electronic gadgets that recently announced fourth-quarter profits soared 118% on a 73% increase in revenue. This is unheard of for a $475-billion company.

To put this in perspective, earnings at the companies in the S&P 500 stock index are on track to post a 6.6% year-on-year rise for the fourth quarter. Yet once Apple’s earnings are factored out, the expected fourth-quarter gain shrivels to just 2.8%. This so skews results that many Wall Street analysts are now stripping Apple from the index before weighing valuations and making forecasts.

Of course, it’s just a matter of time before Apple’s torrid growth begins to wane. It’s not possible for $500-billion companies to keep growing at the rate of $5-billion companies… or even $50-billion companies.

So the key is to search for the next Apple. But how do you find it?

Fortunately, the factors that make a great-performing stock are well known and have been intensively studied by academics and researchers. We know the key characteristics that top-performing stocks generally possess before making their parabolic moves up.

Here are just a few:

1. Double-digit sales growth. You can only grow the bottom line for so long by cutting costs. Every business needs to have healthy top-line growth before it can generate robust and sustainable long-term earnings growth. Note that sales at Apple jumped 73% last quarter.
2. At least 25% quarterly earnings growth. In an economy as weak as this one, most companies can’t meet these first two hurdles. But, again, Apple is seeing earnings growth at more than four times this rate.
3. A return on equity of 17% or more. Return on equity – an excellent measure of management’s efficiency with capital – is calculated by dividing earnings per share by book value per share. (This is one of Warren Buffett’s key metrics, too.) Note that Apple’s return on equity is a whopping 46%.
4. New products and services. Apple is the king of innovation, regularly bringing out not just new versions of products but entirely new products: iPods, iTunes, iPhones and iPads.
5. High-quality management. Never forget that every company is essentially a team of people. And just as every great sports franchise needs a highly qualified coach, so does each company require a visionary leader. Apple’s co-founder and former CEO Steve Jobs was one of the greats. Now that he’s gone, it will be interesting to see how the new management performs.
6. Institutional support. The vast majority of shares traded on the major exchanges are mutual funds, hedge funds, pension plans and endowments. You want to own the same stocks the institutions are buying. And, indeed, institutions own more than 70% of Apple’s outstanding shares.

These are some of the key criteria that companies need to meet to generate superior long-term returns for shareholders.

We may not see another company in our lifetimes that transforms the business landscape the way Apple has. But there are plenty of great innovators out there, including Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG), Genentech, eBay (Nasdaq: EBAY), Costco (Nasdaq: COST) and Intuitive Surgical (Nasdaq: ISRG).

These companies – and others like them – are likely to be among the best-performing stocks in the years ahead.

Good Investing,

Alexander Green

Apple Inc., Business, Business/Finance, EBay, Economy of New York City, Economy of the United States, Finance, NASDAQ, Nasdaq 100, Stock, Technology/Internet, USD

Why You Should Do What Wal-Mart Just Did

by Alexander Green, Chief Investment Strategist
Monday, October 4, 2010: Issue #1358

last week, Wal-Mart (NYSE: WMT) made a $4.6 billion offer for Massmart Holdings, a major South African retailer with operations in 12 other African nations, too.

What’s the attraction?

Massmart operates low-cost, high-volume stores in general retailing, making it a good fit. The buyout will serve as an entry point to the entire continent.

Yet there are risks aplenty. South Africa is only beginning to emerge from recession. It’s plagued by high crime and unemployment and has a heavily unionized work force known for long, sometimes violent, strikes.

So why is Wal-Mart doing this? Because it can’t afford not to…

Why Wal-Mart is Heading to South Africa

Over the past decade, Wal-Mart shares have flatlined, just like the broad market. Yet shares of its major rival, Target (NYSE: TGT) have more than doubled.

Wal-Mart has also lost ground to its global archrival Carrefour. The French-based chain got to South America and Asia ahead of Wal-Mart. Carrefour is even the largest international retailer in China, the most coveted retail market in the world.

Wal-Mart must move aggressively to maintain growth in a difficult global marketplace. And so must investors who want to achieve financial independence in the years ahead.

Five Reasons Why You Need to Invest in Emerging Markets

Why should you diversify into emerging markets? The reasons are five-fold…

1. Demographics: Emerging markets contain three-quarters of the world’s land mass and roughly the same percentage of its people. China and India alone make up nearly a third of the world’s population.
2. Stronger Growth Rates: If you were a businessman, where would you rather operate – in an economy growing at 2% a year or in one growing four times that fast? It’s not a difficult question to answer.
3. Better Valuations: In the United States, you might pay 30 times earnings for a company growing at a 20% annual rate. In Brazil or Indonesia, you’re more likely to pay about 15 times earnings. If you believe in buying growth at a reasonable price, you need to own companies in developing markets.
4. Currency Diversification: The old greenback isn’t what it used to be. And there’s a risk that it may get weaker in the years ahead. Some emerging markets, on the other hand, hold their currencies artificially low to promote exports. That means investors are likely to see currency appreciation as well as capital appreciation.
5. Safety: This is a shocker to many investors: Investing in inherently riskier emerging markets makes your portfolio less volatile. Why? Because emerging markets aren’t perfectly correlated with developed markets. When our markets zig, theirs often zag. The final effect is that your portfolio shows higher returns with less overall risk, the whole point of diversification.

Why U.S. Growth Will Come From Abroad… And Where You Need to Be

A few days ago, a friend with a local business told me he can’t imagine where – with the domestic economy in a funk and the home refinancing game over – future U.S. economic growth is going to come from.

It will come from companies who are moving aggressively overseas – like Wal-Mart, which has boosted its international sales to nearly one-quarter of the company’s total, compared with just 4% in 1995. It will also come from American companies that are able to service these firms.

Consumers in emerging markets need everything we take for granted in the West: better quality food, clothing, shelter, health care, credit cards, computers, cell phones, insurance and so on.

But make no mistake: Countries like Brazil and India and China are not going to let Western firms come in and just pick all the low-hanging fruit. If you want to reap the maximum benefit from the world’s biggest economic development story, you need to move a percentage of your portfolio into these markets themselves.

That’s the real lesson behind the Bentonville Behemoth’s aggressive South African new acquisition.

Good investing,

Alexander Green

Business, Business/Finance, Carrefour, Commerce, Dow Jones Industrial Average, Economy of the United States, Target Corporation, Wal-Mart, Wal-Mart Stores Inc., WMT

The End-of-the-World Portfolio… Is it Too Early to Have One?

by Alexander Green, Chief Investment Strategist

Wednesday, June 9, 2010: Issue #1277

First one friend called. Then another. And then yet another.

Now their friends are calling me, too, asking about my “End-of-the-World Portfolio.”

So I’ve decided to just go ahead and tell everyone about it.

All the friends who called – and their friends, too – are well-educated businessmen. They’re convinced that not only the United States government, but also the governments of Europe, Britain and Japan have simply lost their tether.

We’ve all seen deficit spending before. It’s been a problem for decades. But nothing like this…

Putting the Eye-Popping Numbers into Perspective

The unfunded liabilities for Social Security, Medicare and Medicaid alone now top $108 trillion.

Of course, that number is too large to mean anything to most of us. It’s only when you bring it into context that it becomes alarming.

The $108 trillion is approximately $815,000 per U.S. taxpayer. (And this is just the projected shortfall in Social Security, Medicare and Medicaid. It has nothing to do with the rest of the federal debt, which tops $13 trillion.)

Entitlement spending in other parts of the world is an even bigger problem. And the federal deficits are even more gargantuan. In Japan, for example, debt as a percentage of GDP will hit 200% this year.

Many of my friends look at the fiscal problems in Greece – that necessitated a $1 trillion bailout from the European Union – as just a warning shot across the bow. They’re concerned that things are only just beginning to unravel and will get considerably worse.

Are they right? Only time will tell. But here’s what they keep telling me…

Are You At the Mercy of Wasteful Governments?

“Alex, I busted my hump to earn this money. I’ve paid taxes on it. I’ve saved it instead of spending it. I’m not going down with the ship if those boneheads in Washington spend us into oblivion. How do I protect myself?”

Let me begin by saying that I’ve listened to apocalyptic economic forecasts for decades now. Putting all your money in gold bullion, freeze-dried food and shotgun shells hasn’t been a particularly auspicious strategy.

The difference here is that these folks aren’t gloom-and-doomers who have droned the same message for over 30 years. They are ordinarily optimistic folks who think Western governments are driving the world economy down the road to ruin.

The knock against democracy in Greece and Rome a few thousand years ago was that once the electorate realized they could use their representatives to loot the Treasury, all would be lost. Lately, that remark is looking prescient.

As one friend summed it up: “Look, Alex, I don’t care if I’m wrong about Armageddon and my returns turn out to be lower than what they might have been. Just tell me what to do so I can hang on to what I’ve got and maybe match or beat inflation by a little bit.”

How to Allocate Your Assets in the “End-of-the-World Portfolio”

With that modest goal in mind, here is my suggestion if you want to hunker down for the end of the world – a posture that admittedly may be premature.

• Put 40% of your liquid portfolio in a laddered portfolio of AAA-insured, tax-free bonds. (Be sure to buy state-specific bonds if you’re in a high-tax state.)
• Put 40% in a laddered portfolio of inflation-adjusted Treasuries, also AAA-rated. (For tax reasons, these are best owned in your retirement account.) This is your protection against inflation, as Uncle Sam might opt to spend us out of a tight spot with interest rates already near zero.
• Put the remaining 20% in defensive, blue-chip, dividend-paying stocks. I’m referring to food companies, healthcare companies, utilities, defense contractors, gold mining companies and the like. This should provide some growth and income.

Why include stocks at all? Because 200 years of history shows that an 80/20 split between stocks and bonds is actually less risky than a 100% bond portfolio.

On a personal note, I would not invest my own money this way. (At least not yet.) I’m not calling for the end of the world.

But my friends seem grateful just to have a clear-cut plan. One of them even concedes that it’s not his “End-of-the-World Portfolio”: “I tell people it’s my “Cup-Your-Groin Portfolio.”

I suppose it is. I only hope our elected misrepresentatives get the message before we all need one.

Good investing,

Alexander Green

Laddering means varying your portfolio between short-, medium- and long-term bonds. This is your protection against deflation and the virtual certainty of higher taxes.

Business/Finance, Doomer, Economy of the United States, Government, Government debt, Medicare, Political economy, United States, United States public debt