Today I found an article about a unsuccessful investment story, which may give us some tips. The following:
At the time, I thought I had overpaid ... but "the time" was 2001 -- much nearer the start of the housing boom (that's recently turned bust) than its end. Fast forward a few years, and I sat down to my trusty computer, pulled up Zillow.com for a "Zestimate," and was informed that my little brick box was worth more than $500,000. Amazing news? Sure. Gratifying? You bet. Zillow was telling me that my house had more than doubled in value in just five short years.
Sadly, Zillow was on crack.
Welcome to the other side of the looking glass
About a year after receiving the good news from Zillow, I sold the house for far less than the site had told me it was worth. A 25% drop -- $100,000 -- from the top, in fact. Or, if you're a glass-half-full kind of a Fool, a 60% profit beyond what I paid for it.
The real truth, though, is that the house was worth neither what I paid for it, nor what I could have sold it for in 2006 -- nor even what I ultimately pocketed from the whole transaction. The real worth of the house was something unknowable, something that could only be guessed at: its intrinsic value.
"Price is what you pay. Value is what you get."
Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it. Far be it from me to criticize the Oracle's wisdom, but Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?
Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."
A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.
Hunting stocks with an axe
Yet in real life, we don't allow the lack of an exact answer to stop us from buying. Humans need shelter, so we buy a house when the price seems fair. We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.
The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." We make our best guess at a fair price. We try to buy for significantly less than our estimation. If we guess right more often than wrong, we make money. But where do we start?
Start with common sense
Look in places where you're more likely than not to find bargains:
Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. Last month, I noted five stocks that had fallen to their 52-week lows. While the S&P trades 12% higher today, all five of those stocks have risen anywhere from 22% (Marvel Entertainment (NYSE: MVL)) to 184% (Republic Airways).
Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.
Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. In recent weeks, this method has yielded me such unexpected bargains as NetEase.com (Nasdaq: NTES), priceline.com (Nasdaq: PCLN), and eBay (Nasdaq: EBAY).
Conclution
The key point I want you to take away from all this is simple: Trust your instincts.
When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.
Source from: fool.com
Showing posts with label financial crisis. Show all posts
Showing posts with label financial crisis. Show all posts
2009-03-24
Pick the Defense Stocks into Your Portfolio
Has anyone else noticed that defense stocks are at multi-year lows, and that they're trading for ridiculous price-to-earnings ratios of around 8? Such as Boeing, (BA), Northrup Grumond, (NOC). Haliburton which is kind of a defense stock mostly sub contracting though was up over a buck (HAL). Northrup and Boeing are both decent dividend producing stocks too. Both were at new lows or near new lows but did a nice rebound recently. It’s wise to found some high-performing defense companies whose shares have been beaten down well below their true value.
You must be kidding
I’ll bet many people equate investing in a defense stock with arranging potpourri -- a mundane activity. The perception is that despite their cool products, defense firms are slow-growing and somewhat boring businesses. Indeed, defense companies are considered superstars if they can generate 10% annual revenue growth.
What’s worse (the bear argument goes) is that growth will be much harder to come by in the next decade than the last. The past 10 years were phenomenal for contractors, as the defense budget more than doubled from $292 billion in 1999 to an expected $611 billion next year. But there are now major pressures on spending, including possible withdrawal from Iraq and a financial crisis that requires large sums of government money.
Didn't you say you liked defense stocks?
As a member of the Motley Fool Inside Value team who has spent five years analyzing the defense and aerospace industries on Wall Street, I believe now is the time to get excited about defense stocks. You see, investors are so scared they have forgotten why defense is an excellent area to invest. Here are some reasons:
There are huge barriers to entry.
Long product lifecycles mean high visibility of earnings and cash flow.
Defense programs are hard to cut.
Defense is counter-cyclical to the economy.
Unfortunately, the world is not a safe place.
Entry denied
The defense industry has tremendous barriers to entry. It's a bit like the Augusta National Golf Club, which limits the number of members to about 300. It is almost unprecedented to start a new defense company from scratch. You can build a defense company up through acquisitions, like L-3 Communications (NYSE: LLL) did, but unlike Silicon Valley, for example, you won’t see random start-ups like Microsoft (Nasdaq: MSFT) or VMware (NYSE: VMW) taking the industry by storm.
Of course, there is competition amongst defense contractors, but it's usually limited within each market. There are only two makers of submarines, two main ship makers, three aircraft makers, and only one builder of aircraft carriers. Less competition is good for the existing players.
Boring is the new brilliant
Defense products have long lives, and this leads to high visibility of earnings and cash flow. Did you know that not only are Boeing’s (NYSE: BA) B-52 bombers still flying, but they are also projected to last until 2040, for a total of 80 years? Contrast this with salesforce.com (NYSE: CRM), which may be a great company, but is constantly forced to innovate just to maintain market share. Change destroys businesses, and thankfully, the rate of change in defense is relatively slow, often measured in decades, not years.
Defense programs are difficult to cut
Right now, valuations assume deep cuts to the defense budget. While the budget will face pressure, I don't believe it will fall as much as expected. First, defense programs are notoriously hard to cut because Congress must sign off, and contractors account for significant employment in many states. With the economy reeling, it is important to keep jobs in place. Also, even if programs are cancelled, contractors are entitled to termination fees.
No bailouts needed for these counter-cyclicals
Despite the recent market surge, the economy is expected to remain weak for some time, and defense companies tend to be counter-cyclical to the overall economy, which helps to insulate them from recessions. Even some of our strongest consumer brands like PepsiCo (NYSE: PEP) and Church & Dwight (NYSE: CHD) are not nearly as immune to the current economic environment.
Defense companies have risks such as underfunded pension plans, but on the whole, business results should be steady over the next few years. Indeed, one Wall Street analyst forecasts all of the "big five" defense contractors will increase their earnings in 2010 compared to 2009. I'll take that in this environment.
Are we safe?
Even though valuations have declined enormously, it's hard to argue the world is suddenly a much safer place that it was last year. Many significant threats to our security exist, and just one incident could increase the public's willingness to fund defense programs. Defense spending as a percentage of GDP is historically low at only 4.5%, compared to peaks of 6.2% in 1986 and 10% or so in the 1960s. And while it won't set any speed records, growth has been surprisingly strong -- defense spending has grown at a 5.4% annual clip over the past 50 years.
Excited yet?
It’s time to get excited about defense. Investors appear to be overlooking the many positives of this important industry and have pushed down the sector's valuation, making this a good time to get into an industry with a stable long-term outlook. Paying only 8 times forward earnings for that privilege appears very tempting.
You must be kidding
I’ll bet many people equate investing in a defense stock with arranging potpourri -- a mundane activity. The perception is that despite their cool products, defense firms are slow-growing and somewhat boring businesses. Indeed, defense companies are considered superstars if they can generate 10% annual revenue growth.
What’s worse (the bear argument goes) is that growth will be much harder to come by in the next decade than the last. The past 10 years were phenomenal for contractors, as the defense budget more than doubled from $292 billion in 1999 to an expected $611 billion next year. But there are now major pressures on spending, including possible withdrawal from Iraq and a financial crisis that requires large sums of government money.
Didn't you say you liked defense stocks?
As a member of the Motley Fool Inside Value team who has spent five years analyzing the defense and aerospace industries on Wall Street, I believe now is the time to get excited about defense stocks. You see, investors are so scared they have forgotten why defense is an excellent area to invest. Here are some reasons:
There are huge barriers to entry.
Long product lifecycles mean high visibility of earnings and cash flow.
Defense programs are hard to cut.
Defense is counter-cyclical to the economy.
Unfortunately, the world is not a safe place.
Entry denied
The defense industry has tremendous barriers to entry. It's a bit like the Augusta National Golf Club, which limits the number of members to about 300. It is almost unprecedented to start a new defense company from scratch. You can build a defense company up through acquisitions, like L-3 Communications (NYSE: LLL) did, but unlike Silicon Valley, for example, you won’t see random start-ups like Microsoft (Nasdaq: MSFT) or VMware (NYSE: VMW) taking the industry by storm.
Of course, there is competition amongst defense contractors, but it's usually limited within each market. There are only two makers of submarines, two main ship makers, three aircraft makers, and only one builder of aircraft carriers. Less competition is good for the existing players.
Boring is the new brilliant
Defense products have long lives, and this leads to high visibility of earnings and cash flow. Did you know that not only are Boeing’s (NYSE: BA) B-52 bombers still flying, but they are also projected to last until 2040, for a total of 80 years? Contrast this with salesforce.com (NYSE: CRM), which may be a great company, but is constantly forced to innovate just to maintain market share. Change destroys businesses, and thankfully, the rate of change in defense is relatively slow, often measured in decades, not years.
Defense programs are difficult to cut
Right now, valuations assume deep cuts to the defense budget. While the budget will face pressure, I don't believe it will fall as much as expected. First, defense programs are notoriously hard to cut because Congress must sign off, and contractors account for significant employment in many states. With the economy reeling, it is important to keep jobs in place. Also, even if programs are cancelled, contractors are entitled to termination fees.
No bailouts needed for these counter-cyclicals
Despite the recent market surge, the economy is expected to remain weak for some time, and defense companies tend to be counter-cyclical to the overall economy, which helps to insulate them from recessions. Even some of our strongest consumer brands like PepsiCo (NYSE: PEP) and Church & Dwight (NYSE: CHD) are not nearly as immune to the current economic environment.
Defense companies have risks such as underfunded pension plans, but on the whole, business results should be steady over the next few years. Indeed, one Wall Street analyst forecasts all of the "big five" defense contractors will increase their earnings in 2010 compared to 2009. I'll take that in this environment.
Are we safe?
Even though valuations have declined enormously, it's hard to argue the world is suddenly a much safer place that it was last year. Many significant threats to our security exist, and just one incident could increase the public's willingness to fund defense programs. Defense spending as a percentage of GDP is historically low at only 4.5%, compared to peaks of 6.2% in 1986 and 10% or so in the 1960s. And while it won't set any speed records, growth has been surprisingly strong -- defense spending has grown at a 5.4% annual clip over the past 50 years.
Excited yet?
It’s time to get excited about defense. Investors appear to be overlooking the many positives of this important industry and have pushed down the sector's valuation, making this a good time to get into an industry with a stable long-term outlook. Paying only 8 times forward earnings for that privilege appears very tempting.
2009-03-15
Small Stocks --- The Best Stocks to Buy in This Cold Market
You're probably getting all sorts of conflicting messages these days.
On the one hand, you have gloom-and-doom predictions from luminary economists like Nouriel "Dr. Doom" Roubini, calling an S&P 500 bottom possibly as low as 600 -- more than 20% below yesterday's close.
On the other hand, you have the world's most respected investor, Warren Buffett, saying that now is a good time to buy. Buffett is also putting new money to work, buying shares of Burlington Northern (NYSE: BNI) and Ingersoll-Rand.
Here, with so much debate over what has been roundly dubbed "the worst financial crisis since the Great Depression," we looked back at how various strategies fared during each of the other financial crises since the Great Depression, and try to get some useful guide to go through this economy depression.
To get started, I turned to trusty data from Ibbotson Associates, a leading authority on investment research. I calculated the historical returns for cash, bonds, and stocks for those who invested the year following the start of each recession -- exactly the point at which we find ourselves today -- and measured the five-year annualized return for each period.
Here are the results:
*Data from Ibbotson Associates, Salomon Brothers Long-Term High-Grade Index, National Bureau of Economic Research, Consumer Price Index, author's calculations.
**Returns calculated from 1971-1975.
Rule your recession
Three lessons stand out from this data:
Stocks outperform bonds and T-Bills most of the time, and by large amounts. And remember, these are just averages -- stronger index components like PepsiCo (NYSE: PEP) and Procter & Gamble (NYSE: PG) did even better than the S&P 500 average the last time around.
Unless you need money or plan on investing it, don't park your capital in cash or Treasury bills. If you're bearish enough on stocks to avoid the stock market, history shows that it's much better to be in a diversified batch of long-term, high-grade corporate bonds.
The only period the S&P 500 lost money was the 1930-1934 deflationary death spiral, when deflation ran a chilling 5% annually. Inflation currently sits around 0.4% annually, but so long as it doesn't plunge well below zero and remain there -- something even Roubini, the most prominent stag-deflation advocate, doubts will happen -- investors who are looking to buy a diversified basket of stocks today are well-positioned.
But that's not the whole story
Various studies -- including one of my own -- show that small caps tend to outperform their larger counterparts by a significant margin, particularly in recessions. To confirm this, I ran the numbers once more to include the smallest quintile of stocks:
*Data from Ibbotson Associates, Salomon Brothers Long-Term High-Grade Index, National Bureau of Economic Research, author's calculations.
On the one hand, you have gloom-and-doom predictions from luminary economists like Nouriel "Dr. Doom" Roubini, calling an S&P 500 bottom possibly as low as 600 -- more than 20% below yesterday's close.
On the other hand, you have the world's most respected investor, Warren Buffett, saying that now is a good time to buy. Buffett is also putting new money to work, buying shares of Burlington Northern (NYSE: BNI) and Ingersoll-Rand.
Here, with so much debate over what has been roundly dubbed "the worst financial crisis since the Great Depression," we looked back at how various strategies fared during each of the other financial crises since the Great Depression, and try to get some useful guide to go through this economy depression.
To get started, I turned to trusty data from Ibbotson Associates, a leading authority on investment research. I calculated the historical returns for cash, bonds, and stocks for those who invested the year following the start of each recession -- exactly the point at which we find ourselves today -- and measured the five-year annualized return for each period.
Here are the results:
*Data from Ibbotson Associates, Salomon Brothers Long-Term High-Grade Index, National Bureau of Economic Research, Consumer Price Index, author's calculations.
**Returns calculated from 1971-1975.
Rule your recession
Three lessons stand out from this data:
Stocks outperform bonds and T-Bills most of the time, and by large amounts. And remember, these are just averages -- stronger index components like PepsiCo (NYSE: PEP) and Procter & Gamble (NYSE: PG) did even better than the S&P 500 average the last time around.
Unless you need money or plan on investing it, don't park your capital in cash or Treasury bills. If you're bearish enough on stocks to avoid the stock market, history shows that it's much better to be in a diversified batch of long-term, high-grade corporate bonds.
The only period the S&P 500 lost money was the 1930-1934 deflationary death spiral, when deflation ran a chilling 5% annually. Inflation currently sits around 0.4% annually, but so long as it doesn't plunge well below zero and remain there -- something even Roubini, the most prominent stag-deflation advocate, doubts will happen -- investors who are looking to buy a diversified basket of stocks today are well-positioned.
But that's not the whole story
Various studies -- including one of my own -- show that small caps tend to outperform their larger counterparts by a significant margin, particularly in recessions. To confirm this, I ran the numbers once more to include the smallest quintile of stocks:
*Data from Ibbotson Associates, Salomon Brothers Long-Term High-Grade Index, National Bureau of Economic Research, author's calculations.**Returns calculated from 1971-1975.
Small stocks outperformed T-Bills, bonds, and the S&P about two-thirds of the time -- and they did so by a ridiculous margin.
But how much dough are we talking about?
A few percentage points might not seem like much, but remember, these are annualized figures. Here's how much money $1,000 invested and held for each five-year period would be worth today, adjusted for inflation:
The data over 13 recessionary periods and various academic studies reveals a powerful lesson: Small stocks really are the best stocks to consider buying in this market.
Why are small stocks so great?
There are many reasons for why all of the market's best stocks have been small caps. Among the three most prominent are:
Small caps attract less coverage from major brokerage houses and consequently are more likely to be mispriced.
Smaller stocks have more opportunities for growth.
Smaller companies have the ability to be nimbler in tricky situations. Starbucks (Nasdaq: SBUX) has been handling the complex logistics of closing 8% of its more than 7,000 U.S. stores. On the other hand, if tiny Buffalo Wild Wings had to close 8% of its 575 stores and reallocate resources, it could do so relatively easily.
These may also explain why all of the top 30 performers that emerged from the 2001 recession were small or mid caps, including USG, (NYSE: USG), Coach (NYSE: COH), and Research In Motion (Nasdaq: RIMM), which each rose more than 700%.
Source from: fool.com
Small stocks outperformed T-Bills, bonds, and the S&P about two-thirds of the time -- and they did so by a ridiculous margin.
But how much dough are we talking about?
A few percentage points might not seem like much, but remember, these are annualized figures. Here's how much money $1,000 invested and held for each five-year period would be worth today, adjusted for inflation:
The data over 13 recessionary periods and various academic studies reveals a powerful lesson: Small stocks really are the best stocks to consider buying in this market.
Why are small stocks so great?
There are many reasons for why all of the market's best stocks have been small caps. Among the three most prominent are:
Small caps attract less coverage from major brokerage houses and consequently are more likely to be mispriced.
Smaller stocks have more opportunities for growth.
Smaller companies have the ability to be nimbler in tricky situations. Starbucks (Nasdaq: SBUX) has been handling the complex logistics of closing 8% of its more than 7,000 U.S. stores. On the other hand, if tiny Buffalo Wild Wings had to close 8% of its 575 stores and reallocate resources, it could do so relatively easily.
These may also explain why all of the top 30 performers that emerged from the 2001 recession were small or mid caps, including USG, (NYSE: USG), Coach (NYSE: COH), and Research In Motion (Nasdaq: RIMM), which each rose more than 700%.
Source from: fool.com
2009-02-26
China held the largest U.S. government bonds in the world as forex investment
Purchasing U.S. government bonds was one of the choices for China's huge foreign exchange reserves, which stood at nearly 2 trillion U.S. dollars, said Liu Mingkang, Chairman of China Banking Regulatory Commission Thursday.
China manages its foreign exchange reserves under the principle of maintaining safety, liquidity and profitability, Liu told a press conference on measures of banking system against financial crisis.
Premier Wen Jiabao said in an interview with the Financial Times during the Davos forum that the country was exploring more efficient ways to use its reserves to boost domestic development.
China's reserves hit a record 1.95 trillion U.S. dollars at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with 1.03 trillion U.S. dollars.
According to the U.S. Treasury, China held 681.9 billion U.S. dollars worth of U.S. government bonds as of November, and it bought another 14.3 billion U.S. dollars worth in December.
Source from: http://news.xinhuanet.com/english
China manages its foreign exchange reserves under the principle of maintaining safety, liquidity and profitability, Liu told a press conference on measures of banking system against financial crisis.
Premier Wen Jiabao said in an interview with the Financial Times during the Davos forum that the country was exploring more efficient ways to use its reserves to boost domestic development.
China's reserves hit a record 1.95 trillion U.S. dollars at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with 1.03 trillion U.S. dollars.
According to the U.S. Treasury, China held 681.9 billion U.S. dollars worth of U.S. government bonds as of November, and it bought another 14.3 billion U.S. dollars worth in December.
Source from: http://news.xinhuanet.com/english
2009-02-13
three reasons why China will be the first to recover from the financial crisis
Which country will be the first to recover from the financial crisis? This clearly is a question that has greatly attracted the world’s attention. Zuo Xiaolei, chief economist at Galaxy Securities, recently wrote an article for People’s Daily explaining three reasons why she chose China.
Zuo said that three aspects support the fact that China will take the lead in achieving economic recovery in front of the developed countries of Europe and the Americas.
The first reason lies in China having the foundation of a strong real economy. Restoration of the economy lies in the recovery of the "real economy" rather than in the development of a "virtual economy." Over the past years, China has been committed to the development of the most traditional real economy, and has already become the "manufacturing center" of the world as well as the "world’s workshop.” Moreover, China's manufacturing sector possesses the most fundamental portion of the international division of labor, producing medium and low-end products.
More importantly, after undergoing this round of economic “mutation,” China now has a deeper understanding of the vulnerability of its development model, which is excessively dependent on external demand. It is now agreed that boosting overall domestic demand, preventing drastic economic downturn and promoting economic recovery and growth are essential measures to be followed.
The second reason is China’s comparatively solid financial strength in terms of its economic aggregate. The rapid growth of the Chinese economy in recent years has led to a steady growth in its fiscal revenue, resulting in the continuous strengthening of China’s economic power. It has provided guaranteed economic strength for the government’s efforts to increase investments to solve problems concerning people’s livelihoods, stimulate consumption and boost economic growth.
In addition, China has abundant private resources due to the high savings rate of its people. China's savings rate has always maintained a high level at over 40 percent. Huge savings make it possible for China to mobilize sufficient private investment funding. The huge amounts of private savings may become the largest strength and support for promoting economic recovery.
The third reason lies in China’s stable financial system. A few years ago, China carried out a round of large-scale rectifications and restructurings in its financial system. While providing stable financial services, the country's stable financial environment has also provided favorable and immense space for implementing monetary policies to support economic recovery during crisis, and has created room for great flexibility in macroeconomic control policies.
Zuo said that three aspects support the fact that China will take the lead in achieving economic recovery in front of the developed countries of Europe and the Americas.
The first reason lies in China having the foundation of a strong real economy. Restoration of the economy lies in the recovery of the "real economy" rather than in the development of a "virtual economy." Over the past years, China has been committed to the development of the most traditional real economy, and has already become the "manufacturing center" of the world as well as the "world’s workshop.” Moreover, China's manufacturing sector possesses the most fundamental portion of the international division of labor, producing medium and low-end products.
More importantly, after undergoing this round of economic “mutation,” China now has a deeper understanding of the vulnerability of its development model, which is excessively dependent on external demand. It is now agreed that boosting overall domestic demand, preventing drastic economic downturn and promoting economic recovery and growth are essential measures to be followed.
The second reason is China’s comparatively solid financial strength in terms of its economic aggregate. The rapid growth of the Chinese economy in recent years has led to a steady growth in its fiscal revenue, resulting in the continuous strengthening of China’s economic power. It has provided guaranteed economic strength for the government’s efforts to increase investments to solve problems concerning people’s livelihoods, stimulate consumption and boost economic growth.
In addition, China has abundant private resources due to the high savings rate of its people. China's savings rate has always maintained a high level at over 40 percent. Huge savings make it possible for China to mobilize sufficient private investment funding. The huge amounts of private savings may become the largest strength and support for promoting economic recovery.
The third reason lies in China’s stable financial system. A few years ago, China carried out a round of large-scale rectifications and restructurings in its financial system. While providing stable financial services, the country's stable financial environment has also provided favorable and immense space for implementing monetary policies to support economic recovery during crisis, and has created room for great flexibility in macroeconomic control policies.
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