Last year has been brutal for dividend-focused investors. Companies that not long ago were considered bastions of dividend fortitude -- Morgan Stanley (NYSE: MS), SunTrust Banks (NYSE: STI), New York Times (NYSE: NYT), for example -- are slashing payouts left and right. Far more companies cut their dividends in April alone than in all of 2007 (76-44, for the curious).
There's plenty of reason to be sore about those dividend cuts: Mind-blowingly thorough research from Wharton professor Jeremy Siegel shows that dividends are a crucial driver of long-term market outperformance.
But rather than spend the rest of this recession hiding under a rock, we dividend-loving investors can profit. Yes, many companies are cutting their dividends, but there are plenty of stocks not only maintaining their dividends, but growing them -- 59 in April alone!
Spotting the long-haul winners
As we've seen, cuts happen. But fortunately, identifying dividend payers with sustainable, growing payouts isn't exactly rocket science -- you just need to know what you're looking for.
Companies with long, uninterrupted histories of dishing out dividends typically share these three traits.
1. They rake in cash.
Healthy dividends are funded with free cash flow, which means that prodigious cash generation and dividend safety go hand in hand. Dividend-dealing PepsiCo, for example, converts a sticky 9% of its revenue into free cash.
2. They aren't cyclical.
During boom times, profits in a cyclical industry flow like a Saudi oil well, often leading management teams to overcommit to high dividends and significant expansion. When a cyclical industry tightens up (and such industries always do), cash profits follow suit, and once-high dividend payouts quickly find themselves on the chopping block. U.S. Steel (NYSE: X), anyone?
3. They are conservatively capitalized.
Even well-run companies that aren't in cyclical industries can occasionally find themselves on the outs. Look for companies that consistently produce operating profits well in excess of their debt obligations.
By looking out for companies that demonstrate these qualities, you're setting yourself up to find the next great dividend winner.
A company that recently caught my eye -- and that demonstrates these three qualities -- is Income Investor Buy First recommendation Waste Management, the largest player in the trash game.
Trash and cash
Waste Management operates in a pretty mundane industry. But your trash is Waste Management's cash. The company turns a solid 9% of its revenue into free cash flow and pulls in operating profits nearly five times that of its interest expense.
And while declines in industrial trash collection have slowed growth, as those of us who routinely lug our trash to the curb can attest, demand for residential trash collection is extremely consistent.
Owning shares of Waste Management is a bit like having a stake in a collection of small near-monopolies. Building a landfill requires a lot of cash, involves miles of red tape, and faces intense blowback from the locals. These challenges keep competition at bay and have helped lead to consolidation and better pricing in the industry.
It gets better
For starters, there's no real chance that technological obsolescence will undercut Waste Management's service offering. In other words, Waste Management won't play the Yahoo! (Nasdaq: YHOO) to anyone's Google (Nasdaq: GOOG). Another plus: Waste Management doesn't have to spend gobs of cash on research and development every year simply to maintain its competitive position. Waste hauling is as static a business as it is boring -- and that's a good thing.
And unlike with oil, gasoline, and other high value-to-weight commodities, it doesn't make economic sense to haul trash over long distances. That means you don't have to worry about distant competition threatening your localized pricing, as it often does in other industries -- picture local newspapers' classified rates before and after eBay (Nasdaq: EBAY).
Now, take the ability to set local prices with minimal competition, combine it with the rational pricing of this consolidating industry, and it's little wonder that Waste Management and the other major waste haulers are able to push around their customers, consistently raising prices on their largely captive customer base.
Dumping it all together
There's a lot to love about such sturdy, growing dividend payers -- just ask one of the company's largest investors, Bill Gates. Waste Management is typical of most Income Investor recommendations: strong, well-managed, and boasting healthy cash flows and a sustainable dividend.
On the surface, there isn't much pizzazz to dividend-focused investing, but as Jeremy Siegel's research and Income Investor's results have shown, the strategy is a proven winner.
2009-05-12
Be Careful About The Index Hugger
Don't be fooled by the warm and fuzzy name - index huggers are arguably the most vile, misleading vehicles in the investment market. These funds, sometimes called "closet trackers" or "pseudo trackers", are mutual funds or portfolios of equities that are marketed as actively managed, but in fact keep so close to the relevant index, that one might as well have purchased a real tracker.
Let's look at a little analogy:
Imagine that you are sick - dying. You go to the hospital because the hospital promises to care for its patients, to give specialized treatment. You check in and pay the hefty fees, but instead of the personalized care you expect, the staff simply leave you in bed, letting nature run its course - for better or worse. This is the kind of care you get when you accidentally buy into a closet tracker. You'd have been better off taking your chances at home. You'd save money and wouldn't have any false assumptions.
These funds exploit investor ignorance, tricking people into paying for a service and a market-beating return that they won't receive. This article will explore the closet tracking phenomenon and show how you can avoid being the latest unsuspecting victim.
Closet Trackers Abound
Research conducted in the Edinburgh, Scotland, by market research firm The WM Company found that almost 75% of "active funds" deviate only marginally from their benchmark index.
The study covered data from 1980 to 2000, and found that 40% of supposedly active funds deviate by between 0-3%, and a further 34% by 3-6% per cent. The study also found that roughly three-quarters (127 out of 168) of funds simply do not beat the index.
Many Buy Into These Misleading Funds
The above statistics have alarming consequences, particularly for inexperienced investors who do not know how the investment industry works. These investors expect something very different from what they often receive.
Anyone who is aware of business cycles and market crashes would logically expect fund managers to ensure that their portfolios perform reasonably well in all market situations. They would expect each stock purchase to be carefully considered, any changes in the market or with respect to the individual companies to be reflected in immediate sales and purchases and so on. For such individuals, the realization that their money is in a closet tracker can be a rude awakening.
This is surely the real danger of closet trackers. People believe their investments are being managed in such a way as to minimize potential losses. They feel safe leaving their money in the stock market, secure in the knowledge that their money is being looked after. Yet, a closet tracker will go up and down with the market, fully exposed to stock market cycles.
If the S&P index goes up (or down) by 5%, most American funds will go up (or down) by about the same amount. This is a fundamental reality of the investment industry, but the buyers of closet trackers are usually unaware of this reality - until the market takes a dive.
Why They Exist
These funds have little, if anything, to offer investors; however, for the fund company, closet trackers are great. They are cheap, easy to run and fees are paid for a non-existent service. Accordingly, closet trackers enable large brokerage houses to run - not manage - hundreds or even thousands of portfolios with a passive one-size-fits-all approach. It suits them just as much as it does not suit the investor.
Unfortunately, regulatory measures have not caught up with investor distress so far. If somewhere in the prospectus the fund mentions that it will attempt to mirror or track an index, then unfortunately it is a case of "buyer beware". The investor might think he or she is getting something tailor-made but the fine print says it's strictly off the rack
Spotting a Closet Tracker
If you want a tracker, you're much better off buying a real one - you will pay much less in fees and will know what you are getting. However, if you want active management, you'll need to find a fund or broker that can outperform consistently in different market situations or one who does not even attempt to beat a benchmark. You may, for instance, prefer a small portfolio of 5-15 stocks, each genuinely actively managed with its own stop (buying or selling limits), ongoing monitoring and control and so on.
Index huggers are simply not "managed" in the true sense of the word. Unless a fund manager can, in some way, do better than the market itself in terms of returns, you do not need him or her. For a broker or fund manager, being a nice guy is not enough. No matter how charming the fund company of a closet tracker is, and irrespective of how glossy and impressive the brochures or internet sites are, these are bad investments in financial terms.
You can spot these funds by asking the right questions. These include:
What features do you offer that I can't get from a tracker (personalized information, communication, tailor-made portfolio)?
How exactly does your active management operate, and how does it help?
Do you benchmark with an index and if so, which one?
Do you beat it consistently and if so, by how much?
Understand the Pitfalls of Both Styles Before You Buy
Active management - It is not easy to find a consistently outperforming fund or broker. Getting reliable information on performance is time consuming, can be complex, and may not always be possible. Past performance simply cannot be extrapolated into the future. In short, you may prefer not to bother with the hassle of active management.
Index Trackers - There are different indexes and differently composed trackers. So, some homework or reliance on the seller is still needed. Either way, it is not all safe sailing. However, the fact remains that trackers are cheaper and, at least on a relative scale, you do really know what you are getting. There is no doubt that the tracker route is more transparent and straightforward.
Conclusion
Unfortunately, closet trackers will probably always exist. Closet trackers are just too cheap, easy to run and profitable, and there are just too many naive investors out there, for such funds to disappear. But, informed investors can identify and avoid them.
For the market as a whole, regulation and investor education are the solutions. Regulators need to ensure that firms and individuals are not allowed to sell funds that promise something they don't deliver - otherwise, the old "buyer beware" principle prevails, and many buyers are not and will never be aware of this problem.
Let's look at a little analogy:
Imagine that you are sick - dying. You go to the hospital because the hospital promises to care for its patients, to give specialized treatment. You check in and pay the hefty fees, but instead of the personalized care you expect, the staff simply leave you in bed, letting nature run its course - for better or worse. This is the kind of care you get when you accidentally buy into a closet tracker. You'd have been better off taking your chances at home. You'd save money and wouldn't have any false assumptions.
These funds exploit investor ignorance, tricking people into paying for a service and a market-beating return that they won't receive. This article will explore the closet tracking phenomenon and show how you can avoid being the latest unsuspecting victim.
Closet Trackers Abound
Research conducted in the Edinburgh, Scotland, by market research firm The WM Company found that almost 75% of "active funds" deviate only marginally from their benchmark index.
The study covered data from 1980 to 2000, and found that 40% of supposedly active funds deviate by between 0-3%, and a further 34% by 3-6% per cent. The study also found that roughly three-quarters (127 out of 168) of funds simply do not beat the index.
Many Buy Into These Misleading Funds
The above statistics have alarming consequences, particularly for inexperienced investors who do not know how the investment industry works. These investors expect something very different from what they often receive.
Anyone who is aware of business cycles and market crashes would logically expect fund managers to ensure that their portfolios perform reasonably well in all market situations. They would expect each stock purchase to be carefully considered, any changes in the market or with respect to the individual companies to be reflected in immediate sales and purchases and so on. For such individuals, the realization that their money is in a closet tracker can be a rude awakening.
This is surely the real danger of closet trackers. People believe their investments are being managed in such a way as to minimize potential losses. They feel safe leaving their money in the stock market, secure in the knowledge that their money is being looked after. Yet, a closet tracker will go up and down with the market, fully exposed to stock market cycles.
If the S&P index goes up (or down) by 5%, most American funds will go up (or down) by about the same amount. This is a fundamental reality of the investment industry, but the buyers of closet trackers are usually unaware of this reality - until the market takes a dive.
Why They Exist
These funds have little, if anything, to offer investors; however, for the fund company, closet trackers are great. They are cheap, easy to run and fees are paid for a non-existent service. Accordingly, closet trackers enable large brokerage houses to run - not manage - hundreds or even thousands of portfolios with a passive one-size-fits-all approach. It suits them just as much as it does not suit the investor.
Unfortunately, regulatory measures have not caught up with investor distress so far. If somewhere in the prospectus the fund mentions that it will attempt to mirror or track an index, then unfortunately it is a case of "buyer beware". The investor might think he or she is getting something tailor-made but the fine print says it's strictly off the rack
Spotting a Closet Tracker
If you want a tracker, you're much better off buying a real one - you will pay much less in fees and will know what you are getting. However, if you want active management, you'll need to find a fund or broker that can outperform consistently in different market situations or one who does not even attempt to beat a benchmark. You may, for instance, prefer a small portfolio of 5-15 stocks, each genuinely actively managed with its own stop (buying or selling limits), ongoing monitoring and control and so on.
Index huggers are simply not "managed" in the true sense of the word. Unless a fund manager can, in some way, do better than the market itself in terms of returns, you do not need him or her. For a broker or fund manager, being a nice guy is not enough. No matter how charming the fund company of a closet tracker is, and irrespective of how glossy and impressive the brochures or internet sites are, these are bad investments in financial terms.
You can spot these funds by asking the right questions. These include:
What features do you offer that I can't get from a tracker (personalized information, communication, tailor-made portfolio)?
How exactly does your active management operate, and how does it help?
Do you benchmark with an index and if so, which one?
Do you beat it consistently and if so, by how much?
Understand the Pitfalls of Both Styles Before You Buy
Active management - It is not easy to find a consistently outperforming fund or broker. Getting reliable information on performance is time consuming, can be complex, and may not always be possible. Past performance simply cannot be extrapolated into the future. In short, you may prefer not to bother with the hassle of active management.
Index Trackers - There are different indexes and differently composed trackers. So, some homework or reliance on the seller is still needed. Either way, it is not all safe sailing. However, the fact remains that trackers are cheaper and, at least on a relative scale, you do really know what you are getting. There is no doubt that the tracker route is more transparent and straightforward.
Conclusion
Unfortunately, closet trackers will probably always exist. Closet trackers are just too cheap, easy to run and profitable, and there are just too many naive investors out there, for such funds to disappear. But, informed investors can identify and avoid them.
For the market as a whole, regulation and investor education are the solutions. Regulators need to ensure that firms and individuals are not allowed to sell funds that promise something they don't deliver - otherwise, the old "buyer beware" principle prevails, and many buyers are not and will never be aware of this problem.
2009-05-11
Knowing Five Things About Asset Allocation
With literally thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with stock picking might be the wrong approach. Instead, you should start by deciding what mix of stocks, bonds and mutual funds you want to hold - this is referred to as your asset allocation.
What is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors it's the best protection against major loss should things ever go amiss in one investment class or sub-class.
The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.
We must emphasize that there is no simple formula that can find the right asset allocation for every individual - if there were, we certainly wouldn't be able to explain it in one article. We can, however, outline five points that we feel are important when thinking about asset allocation:
Risk vs. Return
The risk-return tradeoff is at the core of what asset allocation is all about. It's easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest "potential" (stocks and derivatives) isn't the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2000-2002 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. It's time to face the truth: every year your returns are going to be beaten by another investor, mutual fund, pension plan, etc. What separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return. Yes, investors with a higher risk tolerance should allocate more money into stocks. But if you can't keep invested through the short-term fluctuations of a bear market, you should cut your exposure to equities.
Don't Rely Solely on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but never rely solely on software or some pre-determined plan. For example, one rule of thumb that many advisors use to determine the proportion a person should allocate to stocks is to subtract the person's age from 100. In other words, if you're 35, you should put 65% of your money into stock and the remaining 35% into bonds, real estate and cash.
But standard worksheets sometimes don't take into account other important information such as whether or not you are a parent, retiree or spouse. Other times, these worksheets are based on a set of simple questions that don't capture your financial goals. Remember, financial institutions love to peg you into a standard plan not because it's best for you, but because it's easy for them. Rules of thumb and planner sheets can give people a rough guideline, but don't get boxed into what they tell you.
Determine your Long and Short-Term Goals
We all have our goals. Whether you aspire to own a yacht or vacation home, to pay for your child's education, or simply to save up for a new car, you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.
For example, if you're planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.
Time is your Best Friend The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A bad couple of years in the stock market will likely show up as nothing more than an insignificant blip 30 years from now.
Just Do It!
Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks vs. bonds, but don't forget to categorize what type of stocks you own (small, mid, or large cap). You should also categorize your bonds according to their maturity (short, mid, long-term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.
There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift: asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.
What is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors it's the best protection against major loss should things ever go amiss in one investment class or sub-class.
The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.
We must emphasize that there is no simple formula that can find the right asset allocation for every individual - if there were, we certainly wouldn't be able to explain it in one article. We can, however, outline five points that we feel are important when thinking about asset allocation:
Risk vs. Return
The risk-return tradeoff is at the core of what asset allocation is all about. It's easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest "potential" (stocks and derivatives) isn't the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2000-2002 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. It's time to face the truth: every year your returns are going to be beaten by another investor, mutual fund, pension plan, etc. What separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return. Yes, investors with a higher risk tolerance should allocate more money into stocks. But if you can't keep invested through the short-term fluctuations of a bear market, you should cut your exposure to equities.
Don't Rely Solely on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but never rely solely on software or some pre-determined plan. For example, one rule of thumb that many advisors use to determine the proportion a person should allocate to stocks is to subtract the person's age from 100. In other words, if you're 35, you should put 65% of your money into stock and the remaining 35% into bonds, real estate and cash.
But standard worksheets sometimes don't take into account other important information such as whether or not you are a parent, retiree or spouse. Other times, these worksheets are based on a set of simple questions that don't capture your financial goals. Remember, financial institutions love to peg you into a standard plan not because it's best for you, but because it's easy for them. Rules of thumb and planner sheets can give people a rough guideline, but don't get boxed into what they tell you.
Determine your Long and Short-Term Goals
We all have our goals. Whether you aspire to own a yacht or vacation home, to pay for your child's education, or simply to save up for a new car, you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.
For example, if you're planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.
Time is your Best Friend The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A bad couple of years in the stock market will likely show up as nothing more than an insignificant blip 30 years from now.
Just Do It!
Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks vs. bonds, but don't forget to categorize what type of stocks you own (small, mid, or large cap). You should also categorize your bonds according to their maturity (short, mid, long-term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.
There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift: asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.
Don't Trust the Rally in Financials
It's been a very interesting start to 2009. Four months into the year, we've seen a tale of two halves: The worst performers from the first two months of the year performed best in March and April.
The worst performers? Financials -- the stocks making the news -- continued their upward streak in April, appreciating 22.2%, but they remain down for the year. Financials and utilities remain the only double-digit decliners so far in 2009, which is not all that bad given the remarkable thud with which we started the year.
It is curious to note that things in April developed very similarly to the way they did in March:
Source: Standard & Poor's.
Provided that the S&P 500 had fallen more than 20% for the year in early March, finishing April down only 3.4% for the year is a heroic achievement. One big concern, though, is that this rally is led by the worst stocks -- a characteristic of bear market rallies, as I noted in March's performance wrap-up.
Still, even if this is a bear market rally, that does not mean you should necessarily fight it. As legendary trader Jesse Livermore said long ago, "There is only one side of the market, and it is not the bull side or the bear side, but the right side." With that in mind, let's try to make sense of the numbers.
False dawn for the banks?
While it appears that there's been a short squeeze in the financial sector, fundamentals drive the share price performance in the long term. Large short positions act like lighter fluid poured on wet wood. Yes, the fire burns spectacularly for a short while, but in the end, all you get is smoke.
Mike Mayo, the star banking analyst at Calyon Securities, believes that bank losses will be much larger than those during the Great Depression, leveling off between 3.5% and 5.5% of total loans made.
During the Depression, the loan loss high-water mark hit 3.4%. We haven't reached that point yet, but as I recently read in a Goldman Sachs (NYSE: GS) research report, there's at least another year of climbing bank losses, given our current point in the recession, and the three-year cycles such situations typically follow.
In that light, it is easy to see the recent sharp rise in bank stocks as a massive short squeeze. So to those chasing Citigroup (NYSE: C) and the like because they are "cheap," I say think twice, and instead study company fundamentals. You're better off sticking with well-run banks like JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC).
Three out of 10
Three out of 10 sectors in the S&P 500 are up for the year: technology (16.5%), materials (11.9%), and consumer discretionary (8.3%). I've written before about the merits of tech stocks -- with their low debt burdens and strong cash positions -- so this is no surprise to me. I'm more intrigued about the action in the other two economic sectors.
Materials seem to be rallying on the hope that "less bad" economic numbers mean the worst is over for the U.S. economy. Then there's the Chinese stimulus package, which could mean increased commodity demand. I'm a believer in commodities, but investors shouldn't expect a return to the feverish world economic growth rate we saw in 2003-2007. (At least, not soon.)
The consumer discretionary sector -- a classic sector that leads the market at the end of a recession -- is now in the black for the year. While it seems unlikely that consumers will spend vigorously in times of rising unemployment, stocks usually bottom before the fundamental picture turns, so this is undoubtedly a positive sign.
Target (NYSE: TGT) is one consumer discretionary stock I like -- in fact, back in March, I wrote about how I liked Target better than Wal-Mart (NYSE: WMT).
The key to Target's performance is the recovery of the U.S. consumer. While consumer spending may be less than what it's been in recent years, when the economic shock of late 2008 wears out, Target is well-positioned. Given the strong advance in Target's share price in recent weeks, investors would do well to practice patience and look for pullbacks.
After a monstrous seven-week run, I am starting to wonder if one should not look for a pullback in the broad market, too. This year "sell in May and go away" isn't sounding so bad.
The worst performers? Financials -- the stocks making the news -- continued their upward streak in April, appreciating 22.2%, but they remain down for the year. Financials and utilities remain the only double-digit decliners so far in 2009, which is not all that bad given the remarkable thud with which we started the year.
It is curious to note that things in April developed very similarly to the way they did in March:
Source: Standard & Poor's.Provided that the S&P 500 had fallen more than 20% for the year in early March, finishing April down only 3.4% for the year is a heroic achievement. One big concern, though, is that this rally is led by the worst stocks -- a characteristic of bear market rallies, as I noted in March's performance wrap-up.
Still, even if this is a bear market rally, that does not mean you should necessarily fight it. As legendary trader Jesse Livermore said long ago, "There is only one side of the market, and it is not the bull side or the bear side, but the right side." With that in mind, let's try to make sense of the numbers.
False dawn for the banks?
While it appears that there's been a short squeeze in the financial sector, fundamentals drive the share price performance in the long term. Large short positions act like lighter fluid poured on wet wood. Yes, the fire burns spectacularly for a short while, but in the end, all you get is smoke.
Mike Mayo, the star banking analyst at Calyon Securities, believes that bank losses will be much larger than those during the Great Depression, leveling off between 3.5% and 5.5% of total loans made.
During the Depression, the loan loss high-water mark hit 3.4%. We haven't reached that point yet, but as I recently read in a Goldman Sachs (NYSE: GS) research report, there's at least another year of climbing bank losses, given our current point in the recession, and the three-year cycles such situations typically follow.
In that light, it is easy to see the recent sharp rise in bank stocks as a massive short squeeze. So to those chasing Citigroup (NYSE: C) and the like because they are "cheap," I say think twice, and instead study company fundamentals. You're better off sticking with well-run banks like JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC).
Three out of 10
Three out of 10 sectors in the S&P 500 are up for the year: technology (16.5%), materials (11.9%), and consumer discretionary (8.3%). I've written before about the merits of tech stocks -- with their low debt burdens and strong cash positions -- so this is no surprise to me. I'm more intrigued about the action in the other two economic sectors.
Materials seem to be rallying on the hope that "less bad" economic numbers mean the worst is over for the U.S. economy. Then there's the Chinese stimulus package, which could mean increased commodity demand. I'm a believer in commodities, but investors shouldn't expect a return to the feverish world economic growth rate we saw in 2003-2007. (At least, not soon.)
The consumer discretionary sector -- a classic sector that leads the market at the end of a recession -- is now in the black for the year. While it seems unlikely that consumers will spend vigorously in times of rising unemployment, stocks usually bottom before the fundamental picture turns, so this is undoubtedly a positive sign.
Target (NYSE: TGT) is one consumer discretionary stock I like -- in fact, back in March, I wrote about how I liked Target better than Wal-Mart (NYSE: WMT).
The key to Target's performance is the recovery of the U.S. consumer. While consumer spending may be less than what it's been in recent years, when the economic shock of late 2008 wears out, Target is well-positioned. Given the strong advance in Target's share price in recent weeks, investors would do well to practice patience and look for pullbacks.
After a monstrous seven-week run, I am starting to wonder if one should not look for a pullback in the broad market, too. This year "sell in May and go away" isn't sounding so bad.
2009-05-10
There Is A Cheaper Way to Lock In Profits
The rally in stocks since March has brought some much-needed relief to shellshocked investors who saw so much of their net worth go up in smoke during 2008. And if you're looking to take advantage of a strategy that could help you preserve most of the money you've recovered in the past two months, there's more good news: It's a lot less expensive to protect yourself than it was earlier this year.
One simple way you can guard against your stocks falling sharply in value is by buying put options. These options essentially guarantee that no matter how much your shares drop, you have the right to sell them at a price you determine within a certain period of time.
As you might expect, put options got expensive during both the November panic and the ensuing plunge in March. But now that a measure of calm has descended upon the market, you can buy puts much more reasonably.
The VIX and you
The volatility index, or VIX, is one measure that follows the relative cost of options. Because options pricing depends on volatility -- the more volatile a stock is, the more expensive the associated options will be -- looking at the VIX will give you a sense of how much you'll pay to protect yourself against market fluctuations.
After hitting historic highs last October and November, the VIX has turned downward. Many pointed to those lower levels as evidence that the March decline wasn't the true low for the bear market. Whatever the reason, current volatility levels haven't been this low since shortly before Lehman's bankruptcy in mid-September.
Grabbing your gains
If you want to hedge against giving up some of the gains you've seen in your portfolio over the last two months, you can probably now do so without spending quite as much. The VIX tracks options on the broad S&P 500 index, so some individual stocks may not have seen their volatility levels fall -- but it's likely that many have.
Puts on many stocks offer reasonable prices right now. Here's a sample of current put costs on some commonly traded stocks and ETFs.
Which option you should buy depends on how much protection you want. The May options listed for Microsoft and Wynn will only protect you for the next week and a half, but you can spend more to get an option that will last longer, if that's more in line with your investing strategy.
Speculating on security
Like most options strategies, buying puts involves substantial risk. If shares rise or even stay flat, you would lose your entire investment on most of the options listed above. In fact, if your option's strike price is below the stock's current value, you could actually see your shares drop and still suffer a complete loss on your put option.
You can look at put options the same way you do an insurance policy, though. If your stocks drop in the near future, paying around 3% or so of the current share price to limit your losses may well be worth the cost.
Still, the cost of long-term puts makes it expensive to get extended protection. As you can see from the SPDR put listed above, you'd pay almost 13% of the current stock price to limit your losses to $1.56 per share -- and even that option only lasts for seven months.
So don't expect to cover your downside forever using put options. But if temporary protection makes you more confident about taking advantage of still-attractive valuations on stocks, your future gains could easily dwarf what you spend on puts.
One simple way you can guard against your stocks falling sharply in value is by buying put options. These options essentially guarantee that no matter how much your shares drop, you have the right to sell them at a price you determine within a certain period of time.
As you might expect, put options got expensive during both the November panic and the ensuing plunge in March. But now that a measure of calm has descended upon the market, you can buy puts much more reasonably.
The VIX and you
The volatility index, or VIX, is one measure that follows the relative cost of options. Because options pricing depends on volatility -- the more volatile a stock is, the more expensive the associated options will be -- looking at the VIX will give you a sense of how much you'll pay to protect yourself against market fluctuations.
After hitting historic highs last October and November, the VIX has turned downward. Many pointed to those lower levels as evidence that the March decline wasn't the true low for the bear market. Whatever the reason, current volatility levels haven't been this low since shortly before Lehman's bankruptcy in mid-September.
Grabbing your gains
If you want to hedge against giving up some of the gains you've seen in your portfolio over the last two months, you can probably now do so without spending quite as much. The VIX tracks options on the broad S&P 500 index, so some individual stocks may not have seen their volatility levels fall -- but it's likely that many have.
Puts on many stocks offer reasonable prices right now. Here's a sample of current put costs on some commonly traded stocks and ETFs.
Which option you should buy depends on how much protection you want. The May options listed for Microsoft and Wynn will only protect you for the next week and a half, but you can spend more to get an option that will last longer, if that's more in line with your investing strategy.
Speculating on security
Like most options strategies, buying puts involves substantial risk. If shares rise or even stay flat, you would lose your entire investment on most of the options listed above. In fact, if your option's strike price is below the stock's current value, you could actually see your shares drop and still suffer a complete loss on your put option.
You can look at put options the same way you do an insurance policy, though. If your stocks drop in the near future, paying around 3% or so of the current share price to limit your losses may well be worth the cost.
Still, the cost of long-term puts makes it expensive to get extended protection. As you can see from the SPDR put listed above, you'd pay almost 13% of the current stock price to limit your losses to $1.56 per share -- and even that option only lasts for seven months.
So don't expect to cover your downside forever using put options. But if temporary protection makes you more confident about taking advantage of still-attractive valuations on stocks, your future gains could easily dwarf what you spend on puts.
2009-05-09
Companies We Should Buy Now
The stock market is realy different from what it was a decade ago. The Internet, frankly, changed everything.
We take it for granted now, but the Web democratized the buying and selling of stocks in an unprecedented way.
Party at the moon towerEquities, for one, have become more accessible in two ways:
1.Internet-based discount brokerages provide a dirt cheap alternative to buying stocks through very costly full-service brokerages. Not only are investors saving money on commissions in general, but we're also able to buy shares in small lots and still keep commissions to less than 2% of our investment.
2.The volume of information on stocks and funds is arresting. Anyone with a computer can now access the same information and tools as professional investors.
That's not just theoretical, either. According to a study by the Investment Company Institute, of the millions of households that own shares in mutual funds, "the Internet has become central to many shareholders' management of their finances. About eight in 10 shareholders with Internet access go online for financial purposes, such as to check their bank or investment accounts, obtain investment information, or buy or sell investments."
Shameless Spider-Man reference aheadWith great power, though, comes great responsibility. And data shows that such empowerment sometimes backfires.
As Fool co-founder David Gardner has said time and again, "The market is so short-term." The real-time streaming quotes, daily news stories, frequent analyst upgrades and downgrades, and quarterly earnings reports program investors into a certain mind-set, where minute-to-minute information becomes more significant than it needs to be. Investors, in short, outsmart themselves.
That's a conclusion from the work of professors Brad Barber and Terrance Odean, who studied the investing habits of 60,000-plus individual investors in the 1990s. They found that investors moved in and out of stocks far too frequently, thereby suffocating returns and generating excess tax and trading costs to boot. Put more simply, they concluded that "trading is hazardous to your wealth."
Why, then, do investors trade so frequently? In the words of Barber and Odean, "We believe that these high levels of trading can be at least partly explained by a simple behavioral bias: People are overconfident, and overconfidence leads to too much trading."
See, information breeds confidence. Many investors today -- pros and amateurs alike -- believe that they can know more than their fellow investors. But here's something we pretty much take as gospel these days: If you discovered a "trading signal" on the Internet, hundreds of thousands of other people did, too.
Get out of that mind-setThe recent market nosedive, and the subsequent doom-and-gloom news headlines, have been stressful. We've received a ton of email from folks wondering the same thing: What should our next move be? As we see it, the rules of the game haven't changed -- if you're seeking long-term wealth from the market, live by three rules:
1.Buy great companies ...
2.at good prices ...
3.and be patient.
The first point is paramount. "Buying companies" is much, much different from "trading stocks." It's also a lot easier and a lot more reliable. So if you want to make serious money in stocks, start with great companies.
Easier said than done
What makes a great company? That's the rub. There are many ways to measure greatness. Costco (Nasdaq: COST), for example, has a high net promoter score. American Express (NYSE: AXP) and Tiffany (NYSE: TIF) have nearly unmatched brand and marketing savvy. Kimberly-Clark (NYSE: KMB) and 3M (NYSE: MMM) have long histories of innovation and devote significant resources to R&D. Google (Nasdaq: GOOG) and salesforce.com (NYSE: CRM) have unique corporate cultures and are among Fortune's "100 Best Companies to Work For."
We're not advocating that you go out and buy those specific companies, but they are the kinds of companies you should be buying (not trading!) right now -- and holding for the long term.
We take it for granted now, but the Web democratized the buying and selling of stocks in an unprecedented way.
Party at the moon towerEquities, for one, have become more accessible in two ways:
1.Internet-based discount brokerages provide a dirt cheap alternative to buying stocks through very costly full-service brokerages. Not only are investors saving money on commissions in general, but we're also able to buy shares in small lots and still keep commissions to less than 2% of our investment.
2.The volume of information on stocks and funds is arresting. Anyone with a computer can now access the same information and tools as professional investors.
That's not just theoretical, either. According to a study by the Investment Company Institute, of the millions of households that own shares in mutual funds, "the Internet has become central to many shareholders' management of their finances. About eight in 10 shareholders with Internet access go online for financial purposes, such as to check their bank or investment accounts, obtain investment information, or buy or sell investments."
Shameless Spider-Man reference aheadWith great power, though, comes great responsibility. And data shows that such empowerment sometimes backfires.
As Fool co-founder David Gardner has said time and again, "The market is so short-term." The real-time streaming quotes, daily news stories, frequent analyst upgrades and downgrades, and quarterly earnings reports program investors into a certain mind-set, where minute-to-minute information becomes more significant than it needs to be. Investors, in short, outsmart themselves.
That's a conclusion from the work of professors Brad Barber and Terrance Odean, who studied the investing habits of 60,000-plus individual investors in the 1990s. They found that investors moved in and out of stocks far too frequently, thereby suffocating returns and generating excess tax and trading costs to boot. Put more simply, they concluded that "trading is hazardous to your wealth."
Why, then, do investors trade so frequently? In the words of Barber and Odean, "We believe that these high levels of trading can be at least partly explained by a simple behavioral bias: People are overconfident, and overconfidence leads to too much trading."
See, information breeds confidence. Many investors today -- pros and amateurs alike -- believe that they can know more than their fellow investors. But here's something we pretty much take as gospel these days: If you discovered a "trading signal" on the Internet, hundreds of thousands of other people did, too.
Get out of that mind-setThe recent market nosedive, and the subsequent doom-and-gloom news headlines, have been stressful. We've received a ton of email from folks wondering the same thing: What should our next move be? As we see it, the rules of the game haven't changed -- if you're seeking long-term wealth from the market, live by three rules:
1.Buy great companies ...
2.at good prices ...
3.and be patient.
The first point is paramount. "Buying companies" is much, much different from "trading stocks." It's also a lot easier and a lot more reliable. So if you want to make serious money in stocks, start with great companies.
Easier said than done
What makes a great company? That's the rub. There are many ways to measure greatness. Costco (Nasdaq: COST), for example, has a high net promoter score. American Express (NYSE: AXP) and Tiffany (NYSE: TIF) have nearly unmatched brand and marketing savvy. Kimberly-Clark (NYSE: KMB) and 3M (NYSE: MMM) have long histories of innovation and devote significant resources to R&D. Google (Nasdaq: GOOG) and salesforce.com (NYSE: CRM) have unique corporate cultures and are among Fortune's "100 Best Companies to Work For."
We're not advocating that you go out and buy those specific companies, but they are the kinds of companies you should be buying (not trading!) right now -- and holding for the long term.
How to Do When the Dow Hits 7,500
Talk about ironic ... I originally submitted this article to my editor on Aug. 29, after the Dow had fallen "all the way" to 11,500 -- but it never got published.
The plan was to take you back to 1996 -- when the Dow crossed the 6,000 mark for the first time ever -- to a Charlie Rose roundtable that included Jim Cramer and Motley Fool co-founders David and Tom Gardner.
Another crazy call by Cramer Back then, Cramer argued that the Dow would soar all the way to 7,500 -- despite the fact that it had already more than doubled in just over five years, and that even shares of behemoths like Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO) had risen more than 100% from their 1991 lows.
Meanwhile, David and Tom took a much different approach, telling viewers, "We don't care where the market is headed." They explained that they were focused on finding the best eight or nine stocks to grow your wealth over the long haul. Basically, they searched for stocks that:
Were underfollowed on Wall Street.
Had a net profit margin of at least 10%.
Had earnings and sales growth greater than 25%.
Had insider holdings of 15% or more.
I went on to show how, early on, this approach led them to America Online and Amazon.com (Nasdaq: AMZN), among others -- not to mention that it landed them on the covers of magazines from Fortune to Newsweek. But I also thought it fair to point out that it was hard not to get rich in that market.
After all, Cramer had been right on the money. The Dow soared to well over 9,000 in 1998 and reached a whopping 11,500 less than two years after that -- which is exactly where it stood on Aug. 29, 2008, when I submitted my article.
Could my timing be any worse? Sure, we were in the middle of a fierce bear market -- but I pointed out that of the 24 stocks that David and Tom recommended to their Stock Advisor subscribers during the last bear market ...
Twenty-three were (or had been sold) in positive territory.
Eleven had more than doubled.
Five were up more than 400%.
I even added, "I bring this up merely to illustrate that despite what all the talking heads on TV are telling you, you absolutely should be buying great companies right now -- while they are still selling at massive discounts."
I'd almost jokingly insinuated that the Dow could drop to 7,500 ... and then, within six weeks, we were a mere 200 points from seeing it do just that.
And here we are now -- thrilled to finally be above 8,000 again! But even after the recent rally, I’m still sitting on sizable losses in Apple (Nasdaq: AAPL) and AT&T (NYSE: T). And I'm left with the same questions that you probably have, like "have we finally seen the market bottom?" and "should I just sell everything and move on?"
After having been so thoroughly humbled by this market, I won't go so far as to suggest that you follow Buffett's lead to be greedy when others are fearful. And I won't even preach what my fellow Fools and I are practicing.
Instead, I'll simply share the advice that Tom Gardner recently gave us at our company-wide "huddle" ...
How you can turn losses into a huge win Tom pointed out that when things are going well, most of us spend all of our time high-fiving and celebrating, whereas when things go sour, we turn to sulking, worrying, and even panicking.
Meanwhile, when the going gets tough for the toughest, smartest, and most successful people out there, they do something drastically different ... they learn from it. And that's what sets them apart.
Take Benjamin Graham, for example ... He went bankrupt three separate times as an investor. But each time, he documented and studied his failures, and he was eventually able to impart this investment wisdom to countless others -- including Warren Buffett, who in turn learned from his own mistakes and failures.
Early in Buffett's career, he mistakenly believed he could save a failing textile mill. After being forced to liquidate its textile operations, Buffett learned to pay up for quality and turned that company into a $140 billion legend.
Another great example is Pixar's John Lasseter. After he graduated from college, Disney (NYSE: DIS) hired him to captain its Jungle Cruise ride at Disneyland. Later, the company gave him a shot at being an animator, and he quickly recognized the ability of new computer technologies to revolutionize animation.
But Disney was so unimpressed with his first feature that they fired him on the spot. So Lasseter literally went back to the drawing board. After fine-tuning his process, he moved on to the company that would become Pixar, where he's won two Academy Awards and churned out a string of blockbuster hits that included Toy Story, A Bug's Life, and Cars.
Oh, and let's not forget -- he and Steve Jobs later sold Pixar to Disney for a cool $7.4 billion.
Now it's your turn At the end of August, I never would have imagined that we would see the Dow hit 7,500 -- much less almost hit 6,500. But now I know that anything is possible. And I think that rather than celebrating the market’s recent run-up, the best thing we can do is focus on learning from our past mistakes so we can make better investments going forward.
I've already learned that companies like Clearwire -- which bleed cash quarter after quarter and are years away from profitability -- may not be the best places for my money, no matter how intriguing their stories are.
I've also learned that I should avoid investing in companies with business models that are a bit too complex for me to fully understand. That's why I recently sold my shares of NYSE Euronext and Goldman Sachs, and why I probably won't be buying shares of JPMorgan (NYSE: JPM), HSBC, or Fannie Mae anytime soon -- no matter how cheap they get.
The plan was to take you back to 1996 -- when the Dow crossed the 6,000 mark for the first time ever -- to a Charlie Rose roundtable that included Jim Cramer and Motley Fool co-founders David and Tom Gardner.
Another crazy call by Cramer Back then, Cramer argued that the Dow would soar all the way to 7,500 -- despite the fact that it had already more than doubled in just over five years, and that even shares of behemoths like Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO) had risen more than 100% from their 1991 lows.
Meanwhile, David and Tom took a much different approach, telling viewers, "We don't care where the market is headed." They explained that they were focused on finding the best eight or nine stocks to grow your wealth over the long haul. Basically, they searched for stocks that:
Were underfollowed on Wall Street.
Had a net profit margin of at least 10%.
Had earnings and sales growth greater than 25%.
Had insider holdings of 15% or more.
I went on to show how, early on, this approach led them to America Online and Amazon.com (Nasdaq: AMZN), among others -- not to mention that it landed them on the covers of magazines from Fortune to Newsweek. But I also thought it fair to point out that it was hard not to get rich in that market.
After all, Cramer had been right on the money. The Dow soared to well over 9,000 in 1998 and reached a whopping 11,500 less than two years after that -- which is exactly where it stood on Aug. 29, 2008, when I submitted my article.
Could my timing be any worse? Sure, we were in the middle of a fierce bear market -- but I pointed out that of the 24 stocks that David and Tom recommended to their Stock Advisor subscribers during the last bear market ...
Twenty-three were (or had been sold) in positive territory.
Eleven had more than doubled.
Five were up more than 400%.
I even added, "I bring this up merely to illustrate that despite what all the talking heads on TV are telling you, you absolutely should be buying great companies right now -- while they are still selling at massive discounts."
I'd almost jokingly insinuated that the Dow could drop to 7,500 ... and then, within six weeks, we were a mere 200 points from seeing it do just that.
And here we are now -- thrilled to finally be above 8,000 again! But even after the recent rally, I’m still sitting on sizable losses in Apple (Nasdaq: AAPL) and AT&T (NYSE: T). And I'm left with the same questions that you probably have, like "have we finally seen the market bottom?" and "should I just sell everything and move on?"
After having been so thoroughly humbled by this market, I won't go so far as to suggest that you follow Buffett's lead to be greedy when others are fearful. And I won't even preach what my fellow Fools and I are practicing.
Instead, I'll simply share the advice that Tom Gardner recently gave us at our company-wide "huddle" ...
How you can turn losses into a huge win Tom pointed out that when things are going well, most of us spend all of our time high-fiving and celebrating, whereas when things go sour, we turn to sulking, worrying, and even panicking.
Meanwhile, when the going gets tough for the toughest, smartest, and most successful people out there, they do something drastically different ... they learn from it. And that's what sets them apart.
Take Benjamin Graham, for example ... He went bankrupt three separate times as an investor. But each time, he documented and studied his failures, and he was eventually able to impart this investment wisdom to countless others -- including Warren Buffett, who in turn learned from his own mistakes and failures.
Early in Buffett's career, he mistakenly believed he could save a failing textile mill. After being forced to liquidate its textile operations, Buffett learned to pay up for quality and turned that company into a $140 billion legend.
Another great example is Pixar's John Lasseter. After he graduated from college, Disney (NYSE: DIS) hired him to captain its Jungle Cruise ride at Disneyland. Later, the company gave him a shot at being an animator, and he quickly recognized the ability of new computer technologies to revolutionize animation.
But Disney was so unimpressed with his first feature that they fired him on the spot. So Lasseter literally went back to the drawing board. After fine-tuning his process, he moved on to the company that would become Pixar, where he's won two Academy Awards and churned out a string of blockbuster hits that included Toy Story, A Bug's Life, and Cars.
Oh, and let's not forget -- he and Steve Jobs later sold Pixar to Disney for a cool $7.4 billion.
Now it's your turn At the end of August, I never would have imagined that we would see the Dow hit 7,500 -- much less almost hit 6,500. But now I know that anything is possible. And I think that rather than celebrating the market’s recent run-up, the best thing we can do is focus on learning from our past mistakes so we can make better investments going forward.
I've already learned that companies like Clearwire -- which bleed cash quarter after quarter and are years away from profitability -- may not be the best places for my money, no matter how intriguing their stories are.
I've also learned that I should avoid investing in companies with business models that are a bit too complex for me to fully understand. That's why I recently sold my shares of NYSE Euronext and Goldman Sachs, and why I probably won't be buying shares of JPMorgan (NYSE: JPM), HSBC, or Fannie Mae anytime soon -- no matter how cheap they get.
Profiting From a Bankrupt GM
Chrysler's taken the plunge. General Motors (NYSE: GM) has mounted the diving board. And the question now is, who's best placed to profit from a GM bankruptcy -- or more generally, the seismic changes taking place in the auto market?
The usual suspects
Some would suggest it's the Big Three Japanese automakers who will thrive from Detroit's demise. Toyota (NYSE: TM) has already won the title of "world's biggest automaker." Meanwhile, Nissan (Nasdaq: NSANY) and Honda (NYSE: HMC) should both benefit from weaker U.S. competition.
From my point of view, though, "none of the above" is the biggest potential profiteer from Detroit's implosion. To find the real winner, you need to train your binoculars not east, but north. To Canada. To Magna International (NYSE: MGA).
And now, for something completely different
Nearly four years ago, I laid out a roadmap for how North America's car industry might rise from the ashes of Detroit. Key to the plan was the arising of a "new" automaker -- one unburdened by the exorbitant legacy costs of the old Big Three automakers, having vast experience in the auto industry, capable of building its own cars, and most important of all, possessing that rarest of auto industry skills: Earning a profit.
GM? No, MM. Magna Motors
All of which fits Magna International to a "T." Over more than a century in business, Magna has proven itself arguably the best auto parts company on the planet. It sells parts to all of the automakers named above, and a few dozen more that aren't. And when I say "auto parts," I'm not even doing Magna justice. This company goes beyond churning out brake pads and steering wheels, folks. It builds whole cars.
In March, we learned that Ford (NYSE: F) has hired Magna to build the guts for its first-ever electric car -- a Focus spinoff that will travel 100 miles without drinking a drop of petrol, expected to hit dealer lots in 2011. Nor is Ford the only "carmaker" outsourcing its primary function to Magna.
Magna's Chief Technical Officer for the Americas, Ted Robertson, says the Focus's guts are: "a generic system we were designing so it could be put into anybody's vehicle." (Much like how Microsoft (Nasdaq: MSFT) puts its Sync system in Fords today, but has the right to sell it also to other companies any time they're ready.) Thus, Magna threatens to turn the rest of the industry into essentially a big marketing and distribution shop, while Magna makes the actual cars -- and much of the profits.
And that's just the start
Two years ago, Magna tried to become a "carmaker" in its own right, when it "lost" the bidding war for Chrysler (is there such a thing as a Pyrrhic loss?) Last month, we learned that Magna hasn't given up the dream, either. It's trying again, this time bidding -- whether with or against Fiat is still in question -- to take a stake in GM's European Opel division.
So to sum up, the global auto industry has been turned on its head, with Chrysler bankrupt and soon to be owned by its own union, GM en route to becoming "Government Motors," and now even the Japanese automakers are posting losses. With everyone else now in full-scale rout, here comes Magna International, hitting the accelerator and driving to disrupt the industry even further.
But is the price right?
The opportunity for Magna to thrive is clearly present. But... what about the price tag? I mean, the stock sells for almost a 60 P/E. Is this really something you can afford to invest in?
While that P/E may be off-putting at first, other measures of valuation suggest the stock could indeed present a compelling bargain. The value of its assets, for example. Magna's tangible book value amounts to $54.61 per share. That makes the $37 per share price look like pretty quite a sweet discount from sticker price.
Or the scale of its profits. In one of the worst markets for selling cars -- and car parts -- imaginable, Magna generated $315 million in free cash flow last year. Over the five years before that, the company generated more than $3.34 billion -- an average of $668 million per year.
Clearly, this is one car company that knows how to make a buck. And speaking of bucks, Magna's balance sheet shows nearly $2.8 billion in cash, and almost $200 million more in long-term investments. Long term debt amounts to a piddling $143 million, while pension obligations -- that hobgoblin of carmakers south of the (U.S.-Canada) border -- come to just under a modest $300 million.
At today's price, Magna's stock alone sells for just under 13 times trailing free cash flows. For a company that most analysts think will grow at 11.65% annually over the next five years, that seems reasonable. For a company as cash-heavy as Magna is, it's downright cheap.
While Detroit flounders, and even Tokyo shows itself capable of losing money, Canadian Magna continues to motor on.So it looks like Magna shareholders could be in for one very profitable ride.
The usual suspects
Some would suggest it's the Big Three Japanese automakers who will thrive from Detroit's demise. Toyota (NYSE: TM) has already won the title of "world's biggest automaker." Meanwhile, Nissan (Nasdaq: NSANY) and Honda (NYSE: HMC) should both benefit from weaker U.S. competition.
From my point of view, though, "none of the above" is the biggest potential profiteer from Detroit's implosion. To find the real winner, you need to train your binoculars not east, but north. To Canada. To Magna International (NYSE: MGA).
And now, for something completely different
Nearly four years ago, I laid out a roadmap for how North America's car industry might rise from the ashes of Detroit. Key to the plan was the arising of a "new" automaker -- one unburdened by the exorbitant legacy costs of the old Big Three automakers, having vast experience in the auto industry, capable of building its own cars, and most important of all, possessing that rarest of auto industry skills: Earning a profit.
GM? No, MM. Magna Motors
All of which fits Magna International to a "T." Over more than a century in business, Magna has proven itself arguably the best auto parts company on the planet. It sells parts to all of the automakers named above, and a few dozen more that aren't. And when I say "auto parts," I'm not even doing Magna justice. This company goes beyond churning out brake pads and steering wheels, folks. It builds whole cars.
In March, we learned that Ford (NYSE: F) has hired Magna to build the guts for its first-ever electric car -- a Focus spinoff that will travel 100 miles without drinking a drop of petrol, expected to hit dealer lots in 2011. Nor is Ford the only "carmaker" outsourcing its primary function to Magna.
Magna's Chief Technical Officer for the Americas, Ted Robertson, says the Focus's guts are: "a generic system we were designing so it could be put into anybody's vehicle." (Much like how Microsoft (Nasdaq: MSFT) puts its Sync system in Fords today, but has the right to sell it also to other companies any time they're ready.) Thus, Magna threatens to turn the rest of the industry into essentially a big marketing and distribution shop, while Magna makes the actual cars -- and much of the profits.
And that's just the start
Two years ago, Magna tried to become a "carmaker" in its own right, when it "lost" the bidding war for Chrysler (is there such a thing as a Pyrrhic loss?) Last month, we learned that Magna hasn't given up the dream, either. It's trying again, this time bidding -- whether with or against Fiat is still in question -- to take a stake in GM's European Opel division.
So to sum up, the global auto industry has been turned on its head, with Chrysler bankrupt and soon to be owned by its own union, GM en route to becoming "Government Motors," and now even the Japanese automakers are posting losses. With everyone else now in full-scale rout, here comes Magna International, hitting the accelerator and driving to disrupt the industry even further.
But is the price right?
The opportunity for Magna to thrive is clearly present. But... what about the price tag? I mean, the stock sells for almost a 60 P/E. Is this really something you can afford to invest in?
While that P/E may be off-putting at first, other measures of valuation suggest the stock could indeed present a compelling bargain. The value of its assets, for example. Magna's tangible book value amounts to $54.61 per share. That makes the $37 per share price look like pretty quite a sweet discount from sticker price.
Or the scale of its profits. In one of the worst markets for selling cars -- and car parts -- imaginable, Magna generated $315 million in free cash flow last year. Over the five years before that, the company generated more than $3.34 billion -- an average of $668 million per year.
Clearly, this is one car company that knows how to make a buck. And speaking of bucks, Magna's balance sheet shows nearly $2.8 billion in cash, and almost $200 million more in long-term investments. Long term debt amounts to a piddling $143 million, while pension obligations -- that hobgoblin of carmakers south of the (U.S.-Canada) border -- come to just under a modest $300 million.
At today's price, Magna's stock alone sells for just under 13 times trailing free cash flows. For a company that most analysts think will grow at 11.65% annually over the next five years, that seems reasonable. For a company as cash-heavy as Magna is, it's downright cheap.
While Detroit flounders, and even Tokyo shows itself capable of losing money, Canadian Magna continues to motor on.So it looks like Magna shareholders could be in for one very profitable ride.
2009-05-07
It Will Make You a Dumber Investor
It' may be a Minnesota, Lake Wobegon-wanna-be humility thing, but I'm no fan of Twitter, the social networking microblog that lets users send each other 140-character messages on the fly. In an age of epic narcissism, where people already measure their worth by collecting Facebook "friends" and LinkedIn contacts like so many Alf pogs or Beanie Babies, I don't think we really need another avenue for mass navel-gazing. In fact, I think this trend could be harmful to your nest egg.
Here's my major malfunction Over the past few weeks, as Twitter has become for many a must-have doo-dad, I'm detecting some disturbing trends in Twit finance that I think will lead you to make bad investing decisions. It came to a head for me this week when I noticed a SmartMoney article based on the premise that following its favorite dozen economic/market bloggers can help make you "make smarter money moves."
That's an unproven assertion, to put it kindly.
To put it more truthfully, it's absolute garbage.
When more and more quickly isn't better Following Wall Street traders, stock pickers, and up-to-the-second news feeds is already a full-time job for some. Think you can analyze data faster than the trading desks at Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), or hundreds of hedge funds, who have massive computer systems and special data pipes so they can stay ahead of the competition on the latest micro-movements in the market? No way.
Nor would following SmartMoney's advice to keep tabs on smart macro prognosticators like Roubini and Krugman have helped. Had you paid much attention to recent, rank economic news, you might have missed out on a big market rally that sent consumer-facing stocks like Home Depot (NYSE: HD) and Chipotle (NYSE: CMG) up 30% or more.
The fact is, Twitter can't make you nimbler than anyone else. And even if it could, it would be no guaranteed money maker. Remember, even if you knew everything first, you still wouldn't know which way the markets (or individual stocks) might move after that information. A single example: Logitech (Nasdaq: LOGI) recently reported a horrendous Q4, far worse than analysts guessed, yet the stock is up more than 15% since then. Had you known before the release what those numbers were, I'm sure you would have guessed (as I did) that the stock would have dropped like a rock. And despite having better than up-to-the-minute information, you would have been wrong. Had you loaded up on bearish options, you could be nicely toasted by now.
When more and more quickly is worse More information, more quickly, is clearly not better, but it can't hurt, right?
Unfortunately, it can -- big time.
The problem centers on the way your brain relegates decision making to two separate systems (a scenario described in recent books such as Nassim Nicholas Taleb's Black Swan, Jonah Lehrer's How We Decide, and Jason Zweig's Your Money and Your Brain.) Briefly put, one part of your brain uses shortcuts, based on emotions and other fleeting stimuli, to come to conclusions quickly, often before you're even aware a decision has been made. The other decision-maker, which operates in a different part of the brain, is slower, more reasoned, and more balanced. Making things worse, decisions involving money (especially random ones, the kind generated by the stock market) are already shown to engage the emotional part of the brain, eliciting responses and behavior similar to addicts looking for a fix.
Alas, just when it matters most, you're most likely to route an important decision to the most fast-acting but ill-informed, brevity-worshipping part of your brain. I think I'll call it your Inner Twit.
And if you think you're too smart or self-aware to fall victim to your Inner Twit, think again. You don't get much of a choice about where to send these decisions.
There is hope The surest way to avoid being tripped up by your Inner Twit is to make no snap investing decisions at all. Sleep on it. Put it on your to-do list for next week. And if you aren't going to act on the worthless, up-to-the-second noise craved by your Inner Twit, it's a safe bet that you can ignore it altogether. That's why I've been advising investors for years to ignore the ridiculous, rotating headlines on Yahoo! Finance, the seizure-inducing ticker-crawls on CNBC, and the frenzied hand-waving on stock message boards.
Twitter is only the latest, and most banal, extension of a culture that has a hard time recognizing the difference between information and knowledge, between timely and useful, between price and value. And make no mistake, your time is valuable. Any time you waste on Twits is time you could be spending on more important things: Read that latest proxy statement, call your spouse and say "hi," or throw a tennis ball for your dog.
One example As co-advisor at Motley Fool Hidden Gems, information overload and a false sense of urgency are two of the biggest challenges I face. Sure, I like to stay up-to-date on what's happening to our holdings, yet I need to remain aware of how my Inner Twit twists the information I receive, and step back and breathe before making decisions. For instance, shortly after I recommended Autoliv (NYSE: ALV) to members, the company announced an equity and debt offering that sent shares plunging. Couple that with a constant stream of news about bankruptcies at big customers like Ford (NYSE: F) and General Motors (NYSE: GM), and it had many people screaming for us to dump it. My Inner Twit was shouting the same thing. The last thing I needed was a greater supply of 140-word snippets about the state of the auto industry. So, I stepped back to think.
A more sober analysis convinced me that this was not a catastrophe. Only a few weeks later, this recommendation is now up 66% for us, nearly 50 percentage points better than the wider market. (Full disclosure: We've got our share of laggards, too.)
Foolish final thought Most often, in investing, the last thing we need is more information. We have a hard enough time handling the flood we've already got. Step away from the Twitter and concentrate on what matters: the price you're paying for a stock, the business fundamentals, stewardship of capital, returns on investment.
Here's my major malfunction Over the past few weeks, as Twitter has become for many a must-have doo-dad, I'm detecting some disturbing trends in Twit finance that I think will lead you to make bad investing decisions. It came to a head for me this week when I noticed a SmartMoney article based on the premise that following its favorite dozen economic/market bloggers can help make you "make smarter money moves."
That's an unproven assertion, to put it kindly.
To put it more truthfully, it's absolute garbage.
When more and more quickly isn't better Following Wall Street traders, stock pickers, and up-to-the-second news feeds is already a full-time job for some. Think you can analyze data faster than the trading desks at Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), or hundreds of hedge funds, who have massive computer systems and special data pipes so they can stay ahead of the competition on the latest micro-movements in the market? No way.
Nor would following SmartMoney's advice to keep tabs on smart macro prognosticators like Roubini and Krugman have helped. Had you paid much attention to recent, rank economic news, you might have missed out on a big market rally that sent consumer-facing stocks like Home Depot (NYSE: HD) and Chipotle (NYSE: CMG) up 30% or more.
The fact is, Twitter can't make you nimbler than anyone else. And even if it could, it would be no guaranteed money maker. Remember, even if you knew everything first, you still wouldn't know which way the markets (or individual stocks) might move after that information. A single example: Logitech (Nasdaq: LOGI) recently reported a horrendous Q4, far worse than analysts guessed, yet the stock is up more than 15% since then. Had you known before the release what those numbers were, I'm sure you would have guessed (as I did) that the stock would have dropped like a rock. And despite having better than up-to-the-minute information, you would have been wrong. Had you loaded up on bearish options, you could be nicely toasted by now.
When more and more quickly is worse More information, more quickly, is clearly not better, but it can't hurt, right?
Unfortunately, it can -- big time.
The problem centers on the way your brain relegates decision making to two separate systems (a scenario described in recent books such as Nassim Nicholas Taleb's Black Swan, Jonah Lehrer's How We Decide, and Jason Zweig's Your Money and Your Brain.) Briefly put, one part of your brain uses shortcuts, based on emotions and other fleeting stimuli, to come to conclusions quickly, often before you're even aware a decision has been made. The other decision-maker, which operates in a different part of the brain, is slower, more reasoned, and more balanced. Making things worse, decisions involving money (especially random ones, the kind generated by the stock market) are already shown to engage the emotional part of the brain, eliciting responses and behavior similar to addicts looking for a fix.
Alas, just when it matters most, you're most likely to route an important decision to the most fast-acting but ill-informed, brevity-worshipping part of your brain. I think I'll call it your Inner Twit.
And if you think you're too smart or self-aware to fall victim to your Inner Twit, think again. You don't get much of a choice about where to send these decisions.
There is hope The surest way to avoid being tripped up by your Inner Twit is to make no snap investing decisions at all. Sleep on it. Put it on your to-do list for next week. And if you aren't going to act on the worthless, up-to-the-second noise craved by your Inner Twit, it's a safe bet that you can ignore it altogether. That's why I've been advising investors for years to ignore the ridiculous, rotating headlines on Yahoo! Finance, the seizure-inducing ticker-crawls on CNBC, and the frenzied hand-waving on stock message boards.
Twitter is only the latest, and most banal, extension of a culture that has a hard time recognizing the difference between information and knowledge, between timely and useful, between price and value. And make no mistake, your time is valuable. Any time you waste on Twits is time you could be spending on more important things: Read that latest proxy statement, call your spouse and say "hi," or throw a tennis ball for your dog.
One example As co-advisor at Motley Fool Hidden Gems, information overload and a false sense of urgency are two of the biggest challenges I face. Sure, I like to stay up-to-date on what's happening to our holdings, yet I need to remain aware of how my Inner Twit twists the information I receive, and step back and breathe before making decisions. For instance, shortly after I recommended Autoliv (NYSE: ALV) to members, the company announced an equity and debt offering that sent shares plunging. Couple that with a constant stream of news about bankruptcies at big customers like Ford (NYSE: F) and General Motors (NYSE: GM), and it had many people screaming for us to dump it. My Inner Twit was shouting the same thing. The last thing I needed was a greater supply of 140-word snippets about the state of the auto industry. So, I stepped back to think.
A more sober analysis convinced me that this was not a catastrophe. Only a few weeks later, this recommendation is now up 66% for us, nearly 50 percentage points better than the wider market. (Full disclosure: We've got our share of laggards, too.)
Foolish final thought Most often, in investing, the last thing we need is more information. We have a hard enough time handling the flood we've already got. Step away from the Twitter and concentrate on what matters: the price you're paying for a stock, the business fundamentals, stewardship of capital, returns on investment.
2009-05-05
Not Listening to Buffett Cost Me Thousands
Forbes recently ranked Berkshire Hathaway Chairman Warren Buffett as the second-richest man in the world, with an estimated net worth of $37 billion. Although his net worth has dropped by a cool $25 billion over the past 12 months, it's still an impressive haul.
Although some people have recently questioned his judgment, Buffett is still almost universally accepted as one of the world's greatest stock market investors. When he talks, it pays to listen.
The Oracle is commonly considered a value investor, but he seems just as focused on growth. Either way, he has proved that he's an intelligent investor. As Buffett's sidekick Charlie Munger once said, "All intelligent investing is value investing."
Google as a value stock
Buffett focuses on companies with favorable long-term economics and strong competitive advantages -- companies such as Coca-Cola, Wells Fargo (NYSE: WFC), and American Express (NYSE: AXP), all of which are current Berkshire investments, either through common stock holdings or fixed-income securities.
One Wall Street analyst called Coca-Cola "very expensive" around the time Buffett started buying it. It wasn't a typical value stock. But as Buffett once said: "If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."
Now that's a competitive advantage.
See, value investing is not all about buying stocks with low price-to-earnings, price-to-book, or price-to-sales ratios. Far from it.
For example, Google would have been a great value stock at its IPO in August 2004, despite selling, at the time, for more than 100 times earnings.
A value stock trading for more than 100 times earnings? Yep. Google was growing rapidly, continuing to take market share, and building sustainable competitive advantages in its enterprising culture, superior advertising platform, and brand loyalty. Given its growth rate ever since, and its powerful business model, it was underpriced back then.
Investing shock: Buffett was wrong
Buffett didn't buy Google. Sadly, neither did I -- a decision that has cost me thousands.
I held off on buying Google shares because they seemed expensive. I knew it owned the vast majority of the search-market share and had both a great corporate culture and innovative leaders. But I couldn't get past that lofty P/E ratio.
Instead, I was concentrating on buying poor companies on the cheap. These "trash stocks," as I call them, have a nasty habit of getting even cheaper -- and sometimes even going bust.
At least I'm not alone in buying trash stocks. In his 1989 letter to Berkshire Hathaway shareholders, Buffett himself admitted to similar crimes. In a section of the letter called "Mistakes of the First Twenty-Five Years (A Condensed Version)," Buffett says he never should have bought control of the textile company Berkshire Hathaway.
Why? Even though he knew that the textile-manufacturing business Berkshire operated was in a declining industry, he was enticed to buy because the price looked cheap. The Berkshire of today wouldn't exist without that original purchase, but Buffett reluctantly closed the textile business in 1985.
And that brings to mind a timeless Buffett-ism: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Value investing for suckers
I'm a great fan of Warren Buffett and like to think of myself as a value investor. But too often I've been guilty of buying those "trash stocks" -- cheap stocks with mediocre (or worse) businesses.
Although I've never owned them, over the years, I've come close to buying shares in Palm (Nasdaq: PALM), Ford (NYSE: F), Abercrombie & Fitch (NYSE: ANF), Motorola (NYSE: MOT), and even Las Vegas Sands (NYSE: LVS) -- all of which appear relatively cheap but operate in intensely competitive industries and/or carry plenty of debt.
Twenty years have passed since that famous 1989 letter to Berkshire Hathaway investors. As I review my portfolio today, I see fewer and fewer "trash stocks."
Through a combination of expensive errors, experience, and a commitment to continued investing education, I've slowly come to realize that the best long-term investments are in companies in growing industries that possess long-term, sustainable competitive advantages.
Although some people have recently questioned his judgment, Buffett is still almost universally accepted as one of the world's greatest stock market investors. When he talks, it pays to listen.
The Oracle is commonly considered a value investor, but he seems just as focused on growth. Either way, he has proved that he's an intelligent investor. As Buffett's sidekick Charlie Munger once said, "All intelligent investing is value investing."
Google as a value stock
Buffett focuses on companies with favorable long-term economics and strong competitive advantages -- companies such as Coca-Cola, Wells Fargo (NYSE: WFC), and American Express (NYSE: AXP), all of which are current Berkshire investments, either through common stock holdings or fixed-income securities.
One Wall Street analyst called Coca-Cola "very expensive" around the time Buffett started buying it. It wasn't a typical value stock. But as Buffett once said: "If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."
Now that's a competitive advantage.
See, value investing is not all about buying stocks with low price-to-earnings, price-to-book, or price-to-sales ratios. Far from it.
For example, Google would have been a great value stock at its IPO in August 2004, despite selling, at the time, for more than 100 times earnings.
A value stock trading for more than 100 times earnings? Yep. Google was growing rapidly, continuing to take market share, and building sustainable competitive advantages in its enterprising culture, superior advertising platform, and brand loyalty. Given its growth rate ever since, and its powerful business model, it was underpriced back then.
Investing shock: Buffett was wrong
Buffett didn't buy Google. Sadly, neither did I -- a decision that has cost me thousands.
I held off on buying Google shares because they seemed expensive. I knew it owned the vast majority of the search-market share and had both a great corporate culture and innovative leaders. But I couldn't get past that lofty P/E ratio.
Instead, I was concentrating on buying poor companies on the cheap. These "trash stocks," as I call them, have a nasty habit of getting even cheaper -- and sometimes even going bust.
At least I'm not alone in buying trash stocks. In his 1989 letter to Berkshire Hathaway shareholders, Buffett himself admitted to similar crimes. In a section of the letter called "Mistakes of the First Twenty-Five Years (A Condensed Version)," Buffett says he never should have bought control of the textile company Berkshire Hathaway.
Why? Even though he knew that the textile-manufacturing business Berkshire operated was in a declining industry, he was enticed to buy because the price looked cheap. The Berkshire of today wouldn't exist without that original purchase, but Buffett reluctantly closed the textile business in 1985.
And that brings to mind a timeless Buffett-ism: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Value investing for suckers
I'm a great fan of Warren Buffett and like to think of myself as a value investor. But too often I've been guilty of buying those "trash stocks" -- cheap stocks with mediocre (or worse) businesses.
Although I've never owned them, over the years, I've come close to buying shares in Palm (Nasdaq: PALM), Ford (NYSE: F), Abercrombie & Fitch (NYSE: ANF), Motorola (NYSE: MOT), and even Las Vegas Sands (NYSE: LVS) -- all of which appear relatively cheap but operate in intensely competitive industries and/or carry plenty of debt.
Twenty years have passed since that famous 1989 letter to Berkshire Hathaway investors. As I review my portfolio today, I see fewer and fewer "trash stocks."
Through a combination of expensive errors, experience, and a commitment to continued investing education, I've slowly come to realize that the best long-term investments are in companies in growing industries that possess long-term, sustainable competitive advantages.
2009-05-03
Do you have a very best stock to Own？
That is to say. A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years, with dividend reinvestment?
You might have guessed General Electric or maybe Exxon-Mobil (NYSE: XOM) with their respective traditions of long-term success, but in terms of returns, Kraft has been among the very best stocks of the past half-century.
I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.
A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.
Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!
The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?
A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads.
And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Cisco (Nasdaq: CSCO) -- which has $30 billion in cash -- are under-serving their owners. It's time to share the wealth, guys.
In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.
Like Kraft, Walt Disney (Nasdaq: DIS) has an enormous portfolio of highly recognizable brands. In addition to the obvious Mickey Mouse names, Disney also owns high value properties like ABC/ESPN, Touchstone Pictures, and Internet properties like movies.com, in addition to many more. While the media/entertainment industry is rife with competition from the likes of CBS (NYSE: CBS) and Time Warner (NYSE: TWX) and others, Disney's strong array of premium products allows it to thrive throughout the years. The company has a solid 1.7% yield in addition to decent long-term growth opportunities.
But you needn't limit yourself to the world of the well known if you're thirsty for some action. Examine Cellcom Israel, a big name in the Israeli cellular market. Sporting a $2.2 billion market cap, the company certainly does not operate on the same scale as a Verizon (NYSE: VZ). But with a 12.1% annual dividend yield, you can really afford to wait while this company continues to grow.
Finally, check out the world's steel businesses as a place for solid dividend income. The steel industry is a mature cash-rich business that should see some decent growth in the future, despite short-term headwinds. Examine names like Arcelor Mittal with a 2.8% yield and South Korean firm POSCO, a stock that yields 2% in addition to tremendous potential for capital appreciation. You can also examine the more stodgy American firm Nucor (NYSE: NUE) which yields a solid 3.6%.
Conclution
These companies aren't perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.
You might have guessed General Electric or maybe Exxon-Mobil (NYSE: XOM) with their respective traditions of long-term success, but in terms of returns, Kraft has been among the very best stocks of the past half-century.
I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.
A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.
Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!
The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?
A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads.
And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Cisco (Nasdaq: CSCO) -- which has $30 billion in cash -- are under-serving their owners. It's time to share the wealth, guys.
In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.
Like Kraft, Walt Disney (Nasdaq: DIS) has an enormous portfolio of highly recognizable brands. In addition to the obvious Mickey Mouse names, Disney also owns high value properties like ABC/ESPN, Touchstone Pictures, and Internet properties like movies.com, in addition to many more. While the media/entertainment industry is rife with competition from the likes of CBS (NYSE: CBS) and Time Warner (NYSE: TWX) and others, Disney's strong array of premium products allows it to thrive throughout the years. The company has a solid 1.7% yield in addition to decent long-term growth opportunities.
But you needn't limit yourself to the world of the well known if you're thirsty for some action. Examine Cellcom Israel, a big name in the Israeli cellular market. Sporting a $2.2 billion market cap, the company certainly does not operate on the same scale as a Verizon (NYSE: VZ). But with a 12.1% annual dividend yield, you can really afford to wait while this company continues to grow.
Finally, check out the world's steel businesses as a place for solid dividend income. The steel industry is a mature cash-rich business that should see some decent growth in the future, despite short-term headwinds. Examine names like Arcelor Mittal with a 2.8% yield and South Korean firm POSCO, a stock that yields 2% in addition to tremendous potential for capital appreciation. You can also examine the more stodgy American firm Nucor (NYSE: NUE) which yields a solid 3.6%.
Conclution
These companies aren't perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.
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