Jim Jubak’s articles not only provide specific stock picks but also offer a good view on how to analyze stocks. Reading his columns is something I would recommend for anyone interested in investing in individual stocks (in addition to reading excellent books on investing). His latest column is 5 tech stocks full of promise
Then you’d probably spend some time looking at the price trends in the market. If you did, you’d notice that technology stocks were showing relative strength by hanging above their January highs (in contrast to sectors that are fighting to get back to January highs). You’d also see from your study of the charts that Cisco shares were near resistance levels set by their 200-day moving average and their April high of about $18.50.
…
None of that tells you whether the stock is reasonably priced. To figure that out, you might look at the average P/E ratio of the past five years. Because the average was 21.6, you could conclude that Cisco, at 14.1, was undervalued, since the price in the future will climb until Cisco trades again at something like 21.6 times earnings. Or you could conclude that the lower P/E ratio was a logical reaction by investors to the company’s falling earnings. Wall Street analysts now think Cisco’s earnings will fall 23.2% in fiscal 2009 and 6.3% in fiscal 2010.
Setting a target price isn’t a science. Where your target winds up is a result of the assumptions you make going in. I like to check the range of price targets for a stock and compare that with its current price. For Cisco, the range for a 12-month target price now seems to fall between $16 and $31 a share. At a recent $18.50 or so, Cisco has been trading above the most pessimistic target, but not by a great deal. Depending on your read for the market as a whole, that means Cisco is toward the cheap end of reasonable but not a compelling buy if you think, as I do, that this rally will yield to a correction in the next month or six weeks.
Related: 12 Stocks for 10 Years (March 2009 Update) – 10 Stocks for Income Investors – Dollar Cost Averaging – Does a Declining Stock Market Worry You?
One problem with investing in mutual funds is potential tax bills. If the fund has invested well and say bought Google at $150 and then Google was at $700 (a few years ago) there is the potential tax liability of the $550 gain per share. So if funds have been successful (which is one reason you may want to invest in them) they often have had a large potential tax liability.
With an open end mutual fund the price is calculated each day based on the net asset value, which is fair but really the true value if there is a large potential tax liability is less than if there was none. So in reality you had to believe the management would outperform enough to make up for the extra taxes that would be owed.
Well, the drastic stock market decline over the last few years has turned this upside down and many mutual funds actual have tax losses that they have realized (which can be used to offset future capital gains). Say the fund had realized capital losses of $30,000,000 last year. Then if they have capital gains of $20,000,000 next year they can use the losses from last year and will not report any taxable capital gains. And the next year the first $10,000,000 in capital gains would be not table either. Business Week, had an article on this recently – Big Losers Can Be Big Tax Shelters
…
Yet it is Miller’s newer charge, Legg Mason Opportunity, which holds stocks of all sizes and can take short positions, that will prove to be the real tax haven. Morningstar pegs its losses at 285% of its $1.2 billion in assets.
…
There are other funds with returns so ugly and losses so large that it may not matter what their trading style is for many years: Fidelity Select Electronics (FSELX), -539%; MFS Core Equity A, -369%; Janus Worldwide (JAWWX), -304%; Vanguard U.S. Growth (VWUSX), -227%.
How does a fund have over 100% tax losses? The way I can think of is if they have a great deal of redemptions. If the fund shrinks in size from a $3 billion fund to a $300 million fund they could have a 50% realized capital loss (down to $750 million) but then another $450 million in redemptions). Now the $300 million has a $750 million capital loss or 250%.
Related: Shorting Using Inverse Funds – Lazy Portfolio Results – Does a Declining Stock Market Worry You? – Asset Allocations Make A Big Difference
The recent performance of investments can be discouraging. However, the most damaging reaction to your financial future is to reduce your contributions to retirement savings. IRAs and 401(k)s are great ways to save for retirement. In fact the recent performance has convinced me to increase my contributions. This is for two reasons.
First, I had been somewhat optimistic in my guesses about investment returns. The current decline means that investments in the S&P 500 have returned about 0% over the last 10 years. That is a horrible performance and it will take many years to even bring that up to a bad performance. So if you reduce your long term investment performance expectations you need to add more while you are working (or reduce your retirement expectations – or work longer).
Second, I think now is a very good time (long term) to be investing. I think the declines in the markets (both the stock market and real estate market) now provide good investment opportunities. Of course I could be wrong but I am willing to make investments based on this believe. And I believe there are plenty of place real estate prices may still be too high, but I believe there are also good buys.
A third reason worth considering is the damage done to the economy over the last 10 years and the costs of dealing with that today. Those costs are going to have long term impacts. Likely the economy will be stressed paying for the over-indulgences of the past for quite a long time. That means the risks to those in that economy will increase. And therefore having larger reserves is a wise course of action to survive the rough times ahead. Those rough times include a substantial risk of inflation. Investing to protect against that risk is important.
I would recommend starting with at least a 200 basis point increase in retirement contributions. For example, if you were saving 10% for retirement, increase that to 12%. If you have not added to your IRA for 2008, do so now (you have until April 15th to do so). In fact, if you haven’t added to your IRA for 2009, do so now.
Related: How Much Will I Need to Save for Retirement? – Nearly half of all workers have less than $25,000 in retirement savings – Investing – What I am Doing Now
World-Beating China Rally Doomed by PetroChina’s Hong Kong Gap
…
Restrictions on foreign and local investment that prevent arbitrage with H shares helped make mainland equities more expensive.
It is pretty odd that there is such a large premium that local Chinese investors must pay to own stocks in the same companies available to foreign investors. There has been a discount on the Hong Kong shares (H-shares), of maybe 20-30%, for years. But it seems that either the H-shares are cheap or the Chinese shares are too expensive (or maybe a little of both). I am positive on the outlook for China both in the short and long term. Though investments there do have substantial risks (as they do anywhere). I would imagine this premium for Chinese (A-shares) should also largely disappear over the next decade as the market is allowed to become one (and at least allow arbitrage between to the two markets to reduce the premium).
Related: Capitalism in China – Easiest Countries for Doing Business 2008 – China and USA Exports and Imports Drop Sharply
I originally setup the 10 stocks for 10 years portfolio in April of 2005. The stock market has declined quite a bit since that time. Four of the 12 stocks currently have positive returns and 8 have losses (the market is down 8% annually). I still feel very happy with the makeup of this portfolio overall. The current stocks, in order of return:
| Stock | Current Return | % of sleep well portfolio now | % of the portfolio if I were buying today | |
|---|---|---|---|---|
| Amazon – AMZN | 91% | 10% | 8% | |
| Google – GOOG | 49% | 15% | 12% | |
| Templeton Dragon Fund – TDF | 40% | 10% | 10% | |
| PetroChina – PTR | 11% | 10% | 10% | |
| Cisco – CSCO | -17% | 6% | 8% | |
| Toyota – TM | -21% | 9% | 11% | |
| Templeton Emerging Market Fund – EMF | -25% | 4% | 5% | |
| Danaher – DHR | -28% | 6% | 9% | |
| Intel – INTC | -35% | 5% | 7% | |
| Tesco – TSCDY | -38% | 0% | 10% | |
| Pfizer – PFE | -45% | 6% | 6% | |
| Dell | -73% | 4% | 4% |
At this point I am most positive on Google, Toyota and Templeton Dragon Fund. I am still wary of Dell; it has fallen 73%. I have not sold any Dell, still the percentage of the actual portfolio invested in Dell has dropped to 4%, I have also reduced the amount I would invest now to 4% (and I am leaning to selling it). I am satisfied with Pfizer, at this price and yield. (and also like having some exposure to health care).
In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is -4.2% (the S&P 500 annualized return for the period is -8.3%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about -2.2%). The portfolio is beating the S&P 500 by 4.1% annually (which is actually quite good, though still that means just losing less than the S&P 500. Also it is a bit confused due to to Tesco not being included. View the current marketocracy Sleep Well portfolio page.
Related: 12 Stocks for 10 Years Update – June 2008 – 12 Stocks for 10 Years Update (Feb 2008) – posts on stocks – investing books
Read more
Warren Buffett is really someone worth listening to. This is a short talk he gave to MBA students and then he answers questions for over an hour. I think he is speaking at the University of Florida in 1998.
Here is a great quote to remember as you invest (from part 2): “To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish.” That goes for anyone I think. He was talking about the geniuses behind Long Term Capital Management (and the collapse about a decade ago – for those of you that think finance people risking serious harm to the economy for their personal gain is something new, it isn’t). You can read a good book about Long Term Capital Management’s fail: When Genius Failed.
Related: Warren Buffett’s Annual Report – Great Advice from Warren Buffett – Misuse of Statistics, Mania in Financial Markets – Investing Books
Read more
Dividends Falling Means S&P 500 Is Still Expensive
A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.
Just last November the S&P 500 dividend yield topped the bond yield for the first time since 1958. Yields often rise as stock prices fall on future prospects and companies announce dividend cuts after stocks have already fallen (due to the deteriorating conditions the company faces). So you always must be careful not to count dividends before they are paid. As an investor you need to look into the future and see how secure the dividends are likely to be.
Related: 10 Stocks for Income Investors – 10 Stocks for 10 Years – Curious Cat Investing Books
I do not like the actions of many in “private equity.” I am a big fan of capitalism. I also object to those that unjustly take from the other stakeholders involved in an enterprise. It is not the specific facts of this case, that I see as important, but the thinking behind these types of actions. Which specific actions are to blame for this bankruptcy is not my point. I detest that financial gimmicks by “private capital” that ruin companies.
Those gimmicks that leave stakeholders that built such companies in ruin should be criticized. It is a core principle that I share with Dr. Deming, Toyota… that companies exist not to be plundered by those in positions of power but to benefit all the stakeholders (employees, owners, customers, suppliers, communities…). I don’t believe you can practice real lean manufacturing and subscribe to this take out cash and leave a venerable company behind kind of thinking.
How Private Equity Strangled Mervyns
When those firms bought Mervyns from Target for $1.2 billion in 2004, they promised to revive the limping West Coast retailer. Then they stripped it of real estate assets, nearly doubled its rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves, according to the company. The moves left Mervyns so weak it couldn’t survive.
Mervyns’ collapse reveals dangerous flaws in the private equity playbook. It shows how investors with risky business plans, unrealistic financial assumptions, and competing agendas can deliver a death blow to companies that otherwise could have survived. And it offers a glimpse into the human suffering wrought by owners looking to turn a quick profit above all else.
Too much debt is not just a personal finance problem it is a problem for companies too. Continue reading on my original post on the Curious Cat Management Blog.
Related: Leverage, Complex Deals and Mania – Failed Executives Used Too Much Leverage – posts on debt
Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use "high yield" bank savings account now, FDIC insured - John]
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
- If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
I don’t actually agree with the contention in this post, but the post is worth reading. I will admit I am more certain of I like the prospect of investing in certain stocks (Google, Toyota, Danaher, Petro China, Templeton Dragon Fund, Amazon [I don't think Amazon looks as cheap as the others, so their is a bit more risk I think but I still like it]) for the next 5 years than I am in the overall market. But I am also happy to buy into the S&P 500 now in my 401(k).
Stocks Still Overpriced even after $6 Trillion in Market Cap gone from the Index
…
Even if we assumed a healthy economy, the price is no bargain. Throw in the fact that we are in recession and you can understand why the S & P 500 is still overvalued. We haven’t even come close to the historical P/E of 15.79 which includes good times as well.
Just to be clear current PE ratios have nothing to do with next year. It would be accurate to say someone making the argument that the S&P 500 is cheap now because of the current PE ratio, is leaving out an important factor which is what will earning be like next year. It does seem likely earnings will fall. But I also am not very concerned about earning next year, but rather earning over the long term. I see no reason to be fearful the long term earning potential of say Google is harmed today.
Related: S&P 500 Dividend Yield Tops Bond Yield for the First Time Since 1958 – 10 Stocks for 10 Years – Starting Retirement Account Allocations for Someone Under 40 – Books on Investing