TAG | financial ratios
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677
Investors are scared right now and it’s not hard to see why.
Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.
We have all heard these negatives repeated daily and cycled endlessly in the national media.
However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)
Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.
This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.
If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…
Contrarian Investing Works
It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.
A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.
In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)
Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.
I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”
I’m trying to contain my glee. Who says no one rings a bell in the stock market?
The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:
1. Is logic or emotion governing my decision making about my portfolio?
2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?
We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.
Good Investing,
Alexander Green
15
The One Place to Invest for Growth, Income… and Safety
0 Comments | Posted by Alexander Green in Alexander Green
The One Place to Invest for Growth, Income… and Safety
by Alexander Green, Investment U Chief Investment Strategist
Monday, November 14, 2011: Issue #1642
Eight weeks ago, I wrote an Investment U column pounding the table for dividend stocks. Since then, they’ve ratcheted higher, but I still see plenty of upside ahead.
Someone who shares my enthusiasm for high-yield stocks right now is my friend and former colleague Rick Pfeifer, Senior Portfolio Manager at Fund Advisors of America, a Florida-based money management firm.
On a recent trip to the sunshine state, I stopped into his office to hear why he, too, feels this is one of the best places to put your money to work today.
Q: Rick, there’s an awful lot of fear and anxiety about the economy and the stock market right now. Investors are confused and uncertain about what to do with their money. What is your take on things?
A: In a market as volatile as this, you have to spread your bets. But my take is this: If you’re looking for growth, buy dividend-paying stocks.
If you’re looking for income, buy dividend-paying stocks. If you’re looking for safety, buy dividend-paying stocks.
Q: Why?
A: The first question every investor has to ask himself is, “How should I divide my money among stocks, bonds and cash?”
The average money market fund currently pays two one-hundredths of one percent. At that rate, you will double your money in just 3,600 years.
Q: Not terribly attractive.
A: Definitely not.
And Treasury yields won’t make you jump up and click your heels, either. The 10-year guy is yielding two percent, which translates – at best – to a zero-percent yield after inflation.
Q: Tough to meet your investment goals that way.
A: Right.
In my view, dividend stocks are a good place to be right now for several reasons. Let’s talk about safety first. When the Dow traded at these levels 11 ½ years ago, it sold for 47 times earnings. Today it trades at less than 14 times earnings. Stocks are cheap right now on the basis of sales and earnings.
But even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and sometimes fight the broad trend and rise in value. The reason is obvious. These tend to be mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.
Q: U.S. companies are sitting on a record amount of cash now, too, right?
A: Correct.
U.S. companies currently hold more than $2 trillion in cash, a record. Thanks to this economy and the current Administration (don’t get me started), companies aren’t hiring and they’re not boosting spending. So a lot of this cash is rightfully going back to shareholders.
The Dow currently yields more than bonds. And dividend growth among U.S. companies has averaged 10 percent per year over the last two years, more than double the long-term dividend growth rate.
Q: Okay. Dividend stocks are less risky than non-dividend payers and currently pay more than cash or bonds. But how do you think this group will perform in the years ahead?
A: We can only use long-term historical performance as a guide, but the numbers are pretty darn encouraging. Over the last 50 years, for instance, the highest 20 percent yielding stocks in the S&P 500 returned 14.2 percent annually.
That’s good enough to double your money every five years – or quadruple it in 10. And if you were even more selective, say investing only in the 10 highest yielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7 percent.
Q: We should add the standard caveat here about past performance and point out that there are risks with dividend stocks, too, right?
A: Indeed. You have to be selective. An investor would be foolish to plunk for a stock just because the dividend is large. The market is full of “dividend traps,” troubled companies that pay hefty dividends to keep investors from bailing out.
Q: How does an investor avoid those?
A: Mainly, by doing his or her homework. You need to look at prospective sales and earnings growth. You have to examine the balance sheet and make sure that the company isn’t too highly leveraged.
You have to note cash balances. And, perhaps most importantly, you need to analyze whether the payout ratio is sustainable.
Q: So can you give us a few examples of high-yielders that have you been buying in your managed accounts lately?
A: I’ve been nibbling at Windstream Corp. (Nasdaq: WIN), a well-run communications and networking company with an 8.3-percent current yield. I like oil and gas producer Enerplus (NYSE: ERF), with its high operating margins and 7.7-percent dividend.
And – this one is a bit different – I’ve been picking up a 10.3-percent yield with the Gabelli Global Gold Trust (AMEX: GGN). There are plenty of other attractive high-yield situations out there, too. They should be owned, of course, as part of a more broadly diversified portfolio.
Q: I agree, Rick. Thanks for your time. Let’s chat about this sector again in a few weeks.
Good investing,
Alexander Green
[Editor's Note: Fund Advisors offers Investment U subscribers a complimentary portfolio review. For more information, feel free to call Rick - or his partner Greg Galloway - at 800.438.3040 or 407.667.4729.]
2
Why Ignorance Is Bliss In the Stock Market
0 Comments | Posted by Alexander Green in Alexander Green
Why Ignorance Is Bliss In the Stock Market
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, May 2, 2011: Issue #1503
The other day I was speaking with a friend who’s too nervous to invest in the market.
“I just can’t pull the trigger,” he said. “How can you buy stocks when the Fed is priming the pump, real estate is in a tailspin, the dollar is in the tank, the Euro zone is teetering, the Middle East is a powder keg and Congress – as always – is spending money the way my wife does in Vegas?”
I know just how he feels. After all, like most investment analysts I spend my days marinating in the news cycle. I see all these terrible headlines, often several times a day. It’s hard to turn a blind eye.
But if you want to be a successful investor, you may need to do just that. Let me explain …
The national news backdrop is always unsettling. Americans experienced plenty of good times over the last 80 years, but they were punctuated by recession, depression, inflation, war (including two big ones) and almost limitless scary scenarios.
But, through it all, there’s always been plenty of money made owning the fastest-growing, most-profitable companies in the nation. Everyone knows that the best way to get rich is to own a business making money hand over fist.
Yet if you strike out on your own, you’ll find there are more than a few hurdles. For starters, you need a significant amount of capital to start a business. You have to have a lot of entrepreneurial skill, a talent for dealing with customers, employees, suppliers and regulators. And if you meet these first two requirements, strap yourself in. Because it’s a well-known fact that 85 percent of new businesses fail in the first five years.
Fortunately, you don’t have to have this kind of money or take these kinds of risks to get rich in business. You only need to own shares of companies that are – in the words of my 25-year-old nephew – “killing it.”
I’m talking about companies experiencing double-digit sales growth, sharply higher earnings and fat returns on equity. These companies tend to be innovators, continually launching hot new products and services. (Apple is a prime example.) You’ll find that institutions are taking big positions in these stocks. The companies themselves are often buying back their own shares. And the chart – which shows technical factors like price and volume – generally gets an A+.
It’s called momentum investing. And it works. Just a few weeks ago, for instance, we bought shares of internet security company Fortinet (Nasdaq: FTNT). Last week the company reported a blockbuster quarter. Sales jumped 34 percent. Operating income more than doubled. And the CEO Ken Xie pointed out that the pipeline is full and the company is achieving “significant momentum.”
Our shares jumped over 14 percent in one day. And I see plenty more upside ahead.
Of course, we never would have bought this stock if – instead of looking at the fundamentals of the business – we spent our days worrying about the state of the world.
I’ll let you in on a little secret. As an investor, it’s not your job to envision solutions for the political arena, the world economy, or the financial markets. And that’s a good thing. Because the world is way too big and complicated to figure out anyway.
And it’s not necessary. If you want to make money in the market, forget about the “macro” picture. And focus instead on identifying businesses that are likely to post huge earnings surprises in the weeks and months ahead.
That’s how all the great investors – from Buffett to Templeton to Lynch – did it. And that’s how you can do it, too.
Good investing,
Alexander Green
14
If You Knew What Warren Buffett Knows…
0 Comments | Posted by Alexander Green in Alexander Green
If You Knew What Warren Buffett Knows…
by Alexander Green, Chief Investment Strategist
Monday, March 14, 2011: Issue #1468
My publisher recently forwarded me a note from an Investment U reader…
“You guys are recommending a 5% gold allocation in your model portfolio. That’s not nearly enough. I currently have an 80% gold allocation. Given the sorry state of the world, I’ll bet I’m going to make a lot more money than you will in stocks.”
I’m tempted to take that bet.
Sure, gold is up five-fold over the last decade and three-fold over the last five years. But that tells you nothing about where gold will be a year from now, or a month from now.
True, gold may go higher. Perhaps a lot higher. But would I bet 80% of my portfolio on it?
Not a chance. This investor – who clearly lacks experience more than confidence – may be right about the near-term direction of gold. But he’s taking a boatload of risk.
More importantly, he’s making a fundamental investing mistake…
Successful Investing Comes Down to Two Choices
When it comes to the financial markets, no one knows for certain what the future holds. That means every investor faces a stark choice.
- Either: Run your portfolio by making a series of guesses about what lies ahead for the economy and the stock market, jumping in and out of stocks, or bonds, or gold, or sector funds.
- Or: Invest according to proven, time-tested principles.
It amazes me just how many investors opt for the former, following some dubious analysis or making outlandish guesses. It’s even more surprising when you consider the stakes.
Protect and enhance your investment capital over time and you can live a life with all kinds of choices, plenty of financial security and the peace of mind that goes with it.
On the other hand, if you gamble with your savings, you might find that not only have your savings vanished but, more importantly, you no longer have enough time to make up for your mistakes.
People who grossly mismanage their portfolios almost always make the same mistake. They forget to ask that one basic question: What if I’m wrong?
A Powerful Statement From the World’s Greatest Investor
Given recent events, I understand why there’s a lot of skepticism about the outlook for stocks. The media harps on unrest in the Middle East, the spike in oil prices, the real estate slump, high unemployment and unwieldy federal deficits.
But they spend much less time on rock-bottom interest rates, low inflation, an improving economy and record corporate profits.
Listen to different sources and you can come up with completely different conclusions about the future. But here’s someone worth hearing:
Warren Buffett – the world’s greatest investor – recently told CNBC: “I’m 100% enormously optimistic about the future for this country. There’s no way you can bet against America and win… We’ve unleashed human potential and will continue to do so. Twenty years from now, your kids and grandchildren will live far better than you live.”
Most Americans don’t agree with this. Some find it completely unbelievable. That’s why The Oxford Club has put together a special report explaining why America’s best days are still ahead – and inviting you to take full advantage of a more optimistic investment outlook.
Good investing,
Alexander Green
Publisher’s Note: There was a problem with the data featured in Friday’s Investment U article, “Electric Vehicles: Green Power or Just Adding to the Pollution Problem.”
The data came from the North American Electric Reliability Corporation and indicated where power for electric vehicles would likely come from in the future, once the electric vehicle fleet has matured. We wrongly implied that the data referred to the current power grids of various U.S. regions. We regret the error and thank our readers for helping to point it out. We have corrected the article.
~ Jay Livingston, Publisher, Investment U
19
Is Apple the Perfect Growth Stock?
0 Comments | Posted by Alexander Green in Alexander Green
Is Apple the Perfect Growth Stock?
by Alexander Green, Chief Investment Strategist
Monday, July 19, 2010: Issue #1304
I’ve often said that my stock-picking approach can be boiled down to this mantra:
Share prices follow earnings.
I challenge you to look back through history and find even a single company that increased its earnings quarter after quarter, year after year, and the stock didn’t tag along.
By the same token, try to find a company whose earnings were flat or declining year after year and the shares kept rising. It doesn’t happen, even in a roaring bull market.
But is growth in earnings per share all you really need? Could it be that simple?
Of course not.
Any company can increase its earnings for a while merely by cutting expenses. But eventually, a firm reaches a point where it can’t cut costs further without damaging the underlying business. (Obviously, if you reach the point where you’re selling off key infrastructure or laying off top people to boost short-term profits, you’re hurting the company’s long-term prospects.)
There are other important factors as well and I can illustrate a few of them by pointing to a near-perfect growth stock…
Want to See If a Company is Growing? Look to These Three Crucial Factors
In order to see robust bottom-line growth, you need to see substantial top-line growth. In other words, sales have to rise, too.
And Apple, Inc. (Nasdaq: AAPL) is doing just that.
- Sales & Earnings: The company is selling boatloads of iPods, iMacs, iPhones and iPads. In many instances, it’s been unable to keep up with demand. In the most recent quarter, sales jumped 49%. That enabled earnings to soar 90%.
- Profit Margins: This is another important factor. If competitors can come in and easily underprice you, your business is vulnerable.
But Apple is well-protected with its iron-clad patents on the Mac operating system and many of the key features of its bestselling products. So it’s no surprise that operating margins top 29%. Or that Apple is up 63% over the last 52 weeks, even after the recent market dip.
Over time, Apple has brought down the price of most of its products, but not because competitors were forcing them down. Management did it because they wanted to broaden the potential market for Apple’s products. That’s key.
- Return on Equity: This key metric is calculated by dividing earnings per share by book value (or net assets) per share.
Why is this important? Because it tells you how efficiently management is deploying the firm’s capital. Warren Buffett – who puts a great deal of emphasis on ROE – says anything above 17% is good. Apple’s return on equity is twice that.
Happy Customers… Happy Shareholders
Apple has done plenty of other things right, too. It’s a consistent innovator and is a world-class marketer. (Its products are so cool, customers find themselves lusting over things they don’t even need.) And it’s done a good job of keeping a lid on costs.
The end result? Earnings per share have boomed over the last decade. And while the broad market has gone nowhere, shares of Apple are up several-fold.
It’s a classic story of a company that keeps its customers coming back because it makes them happy. And the resulting increase in earnings keeps shareholders delighted, too.
Good investing,
Alexander Green
