Brian Nichols's Blog
April 22, 2013
Five Stocks to Gain this Week! 4/22/2013
Earnings season has officially begun, and it is the perfect time to buy, both after a company underperforms despite strong earnings and also after a stock's trend is changed following a strong reaction to earnings. But also, there are underperforming stocks that could trade higher next week following earnings, or stocks in biotechnology that will rally following data. Basically, there is an array of stocks that could move for a multitude of reasons, and in this piece, I am looking at five such stocks.
Strong Earnings Look to Reverse Trend
After reaching new highs at $844.00, shares of Google (GOOG) had fallen back to the $760.00 range prior to earnings. Some had even considered that Google could become the next Apple, but after earnings, the stock is trading higher by 4.30% and I believe its strong quarter will reverse the trend.
Currently, there is a lot of speculation surrounding Google, whether it be Android, Glass, or self-driving cars, it is a company with a great grasp on technology and is at the cutting edge of innovation. During its most recent quarter, the company saw year-over-year (YOY) revenue growth of 31% (22% excluding Motorola). The company's CEO, Larry Page, confirmed Google's "big bet" mentality and the company's "AdWords" revamp is seeing a great deal of support. Most importantly, the company looks to be finding solid ground with advertising and the shift to mobile, as paid clicks rose 20% YOY.
When you compare Google to the other technology leader, Apple, you realize that Google is a much more expensive stock. However, the company also has a clear vision and fewer questions surrounding its future. In addition, the stock has "flipped the trend" and has now reversed back towards $800.00. Therefore, with this change in sentiment, caused by fundamental catalysts, I'd watch Google closely next week for continued gains and a trend above $800.00.
Despite Gains, This Stock is Still Nowhere Near Fair Value
At this point, I am calling for gains in Rite Aid (RAD) until the stock gets closer to $3.00. It is now trading at multi-year highs with no resistance in sight, although I assume there will be some psychological resistance near $3.00. Currently, the stock is presenting, what I believe, the clearest value in the market, now profitable after years of inefficiency.
In 2013 alone, Rite Aid has rallied 72%, including 30% since April 10. The reasons for these gains are fundamental improvements, not technicals or speculation. Back in Q3 the company posted its first profit in more than four years, and then after its Q4 earnings, the company had achieved full-year profitability for the first time in six years. The company is now crushing all of its own expectations with bottom line guidance. Yet because the company is so large, its operating margins are still just 2.83%, far below its larger competitors.
The reason for Rite Aid's sudden boost in fundamental performance is both changes made by management to restructure the business, but also a shift to generics in the space, which also carry higher margins. My belief that the stock will continue to rally is based on the fact that despite large gains it is still trading with a price/sales ratio of just 0.08. This is due to many years of underperformance. Meanwhile, Walgreen and CVS trade at valuations that are more than seven times more expensive, yet all three companies are now profitable. As a result, I expect Rite Aid to trade higher regardless of the market. I think it will now correct after years of underperformance to account for the fact that the company is profitable; and might I add, there is speculation of a takeover. Of course, there will be pullbacks along the way, but with such an incredible quarter, watch for gains over the next three months as more and more investors catch wind of this great comeback story.
Expecting an End to This Pullback
If you like comeback stories, then you'll love what Best Buy (BBY) has to say. The company has seen its valuation increase almost 100% in 2013 alone, and much like Rite Aid, this was due to years of underperformance, the stock being oversold, and presenting clear value to its peers.
Back on April 3, the company created buzz when it announced a plan with Samsung to create mini-stores inside its "big stores" for Samsung products. This includes 1,400 mini-stores and is the start of a new-look Best Buy. Personally, I love the story, and the 14% gains that the news created. I also like that sales have been consistent and that a new sales tax for online retailers could bode well for Best Buy. However, I also said on many occasions (on Twitter), that because of its large gains investors should expect a pullback. Since April 9, that pullback has occurred, and I believe that after last week's stabilization, gains will now continue.
I am not a technical investor in the least bit, I am a fundamental investor, but Best Buy is a stock trading at just 0.16 times sales with a forward dividend yield of 3.00%! The company continues to see its float decline in a number of shorts. Its value, specifically price/sales ratio, is far cheaper than the competition and because of recent gains, its slight pullback, and now stability in shares, I'd watch for a continued rally, as I believe fundamental investors are simply waiting for good times to jump in on this stock.
An Under-the-Radar Biotech Stock to Watch
Now that we've looked at three big name companies, let's go a little under-the-radar, with a healthcare company called Theravance (THRX). If you haven't heard of this company, then take notice and be prepared for large gains.
The $3.2 billion company is a clinical-stage biotech that saw gains of 16% on Thursday of last week. The company's valuation rose after an FDA panel recommended the approval of its once-daily COPD inhaler "Breo Ellipta", also called "Relvar" in the U.S. The reason this is significant is because the COPD market is massive, estimated at $11 billion last year. After its approval, Theravance's drug, Relvar, will compete directly with AstraZeneca's drug, Symbicort, which returned $3.19 billion last year. Theravance is actually partnering with GlaxoSmithKline, but receives the majority of the revenues earned on product sales. As a result, this is a $3.2 billion company, with a multi-billion dollar product on its hand, and an impending launch.
Due to the factors that I just laid out, I consider Theravance a "can't miss stock." Not only does it have a potential blockbuster and close ties to big pharma, but also a very strong pipeline including a Phase 2b product for gastrointestinal pain associated with opioid therapy, and an antibiotic medication for bacterial infections. Over the last year, we have seen a number of big jumps in biotechnology, including Sarepta Therapeutics, Celldex Therapeutics, ACADIA Pharmaceuticals, and Repros Therapeutics. Almost all saw large gains followed by a period of consolidation just prior to continued gains. I expect Theravance to continue the same trend, as it pulled back on Friday. So look for continued gains next week as the market reconsiders the upside that is present.
A Small Cap High-Flying Idea
Theravance was an under-the-radar company, but not near to the same extent as Consumer Portfolio Services (CPSS), which is a $185 million financial company in the automotive space. In one-year alone, this stock has rallied 480%; yet during the month of April, has pulled back to post losses of 25%. Yet with the company reporting very strong earnings on Wednesday, I'd watch for this trend to reverse rather quickly.
Consumer Portfolio Services is the perfect example of two important points for retail investors: First, don't let performance dictate your assessment of upside and second, don't let post-earnings reactions dictate your opinions of a quarter. CPSS actually traded lower after earnings on Wednesday and Thursday (by double digits), yet this was following a very strong quarter.
For the quarter, Consumer Portfolio Services exceeded bottom line expectations by a small margin, yet with revenue of $54.6 million (growth of more than 20%), it exceeded the consensus by a mindboggling $22.5 million! In addition, this is a company with upside tied to its managed portfolio and contracts purchased. For the quarter, CPSS grew its managed portfolio by more than $70 million and purchased $180 million in new contracts.
Aside from a strong quarter, and large one-year gains, the stock is still cheap. Currently, the stock trades at just one times sales and just 7.00 times next year's earnings. Therefore, with all things considered, I can't find a reason that the stock traded lower, other than it being an incorrect trend. On Friday the stock rallied more than 6%, and after a month full of losses, I would watch this stock closely and expect a massive run higher next week as investors start to take notice.
Conclusion
In this week's "Five Stocks to Watch", I gave you a little bit of everything. However, as a fundamental investor, the suggested upside for these stocks is based on long-term trends and my belief that each stock is attractive over a period of time. I urge you to explore your portfolio and also to assess stocks following earnings or other catalysts. I think you'll be surprised to find the level of value that is scattered throughout the market. Then, simply react, invest in value, and return gains regardless of market conditions.
Check out my critically acclaimed book "Taking Charge With Value Investing (McGraw-Hill, 2013)"
http://www.amazon.com/Taking-Charge-V...
Strong Earnings Look to Reverse Trend
After reaching new highs at $844.00, shares of Google (GOOG) had fallen back to the $760.00 range prior to earnings. Some had even considered that Google could become the next Apple, but after earnings, the stock is trading higher by 4.30% and I believe its strong quarter will reverse the trend.
Currently, there is a lot of speculation surrounding Google, whether it be Android, Glass, or self-driving cars, it is a company with a great grasp on technology and is at the cutting edge of innovation. During its most recent quarter, the company saw year-over-year (YOY) revenue growth of 31% (22% excluding Motorola). The company's CEO, Larry Page, confirmed Google's "big bet" mentality and the company's "AdWords" revamp is seeing a great deal of support. Most importantly, the company looks to be finding solid ground with advertising and the shift to mobile, as paid clicks rose 20% YOY.
When you compare Google to the other technology leader, Apple, you realize that Google is a much more expensive stock. However, the company also has a clear vision and fewer questions surrounding its future. In addition, the stock has "flipped the trend" and has now reversed back towards $800.00. Therefore, with this change in sentiment, caused by fundamental catalysts, I'd watch Google closely next week for continued gains and a trend above $800.00.
Despite Gains, This Stock is Still Nowhere Near Fair Value
At this point, I am calling for gains in Rite Aid (RAD) until the stock gets closer to $3.00. It is now trading at multi-year highs with no resistance in sight, although I assume there will be some psychological resistance near $3.00. Currently, the stock is presenting, what I believe, the clearest value in the market, now profitable after years of inefficiency.
In 2013 alone, Rite Aid has rallied 72%, including 30% since April 10. The reasons for these gains are fundamental improvements, not technicals or speculation. Back in Q3 the company posted its first profit in more than four years, and then after its Q4 earnings, the company had achieved full-year profitability for the first time in six years. The company is now crushing all of its own expectations with bottom line guidance. Yet because the company is so large, its operating margins are still just 2.83%, far below its larger competitors.
The reason for Rite Aid's sudden boost in fundamental performance is both changes made by management to restructure the business, but also a shift to generics in the space, which also carry higher margins. My belief that the stock will continue to rally is based on the fact that despite large gains it is still trading with a price/sales ratio of just 0.08. This is due to many years of underperformance. Meanwhile, Walgreen and CVS trade at valuations that are more than seven times more expensive, yet all three companies are now profitable. As a result, I expect Rite Aid to trade higher regardless of the market. I think it will now correct after years of underperformance to account for the fact that the company is profitable; and might I add, there is speculation of a takeover. Of course, there will be pullbacks along the way, but with such an incredible quarter, watch for gains over the next three months as more and more investors catch wind of this great comeback story.
Expecting an End to This Pullback
If you like comeback stories, then you'll love what Best Buy (BBY) has to say. The company has seen its valuation increase almost 100% in 2013 alone, and much like Rite Aid, this was due to years of underperformance, the stock being oversold, and presenting clear value to its peers.
Back on April 3, the company created buzz when it announced a plan with Samsung to create mini-stores inside its "big stores" for Samsung products. This includes 1,400 mini-stores and is the start of a new-look Best Buy. Personally, I love the story, and the 14% gains that the news created. I also like that sales have been consistent and that a new sales tax for online retailers could bode well for Best Buy. However, I also said on many occasions (on Twitter), that because of its large gains investors should expect a pullback. Since April 9, that pullback has occurred, and I believe that after last week's stabilization, gains will now continue.
I am not a technical investor in the least bit, I am a fundamental investor, but Best Buy is a stock trading at just 0.16 times sales with a forward dividend yield of 3.00%! The company continues to see its float decline in a number of shorts. Its value, specifically price/sales ratio, is far cheaper than the competition and because of recent gains, its slight pullback, and now stability in shares, I'd watch for a continued rally, as I believe fundamental investors are simply waiting for good times to jump in on this stock.
An Under-the-Radar Biotech Stock to Watch
Now that we've looked at three big name companies, let's go a little under-the-radar, with a healthcare company called Theravance (THRX). If you haven't heard of this company, then take notice and be prepared for large gains.
The $3.2 billion company is a clinical-stage biotech that saw gains of 16% on Thursday of last week. The company's valuation rose after an FDA panel recommended the approval of its once-daily COPD inhaler "Breo Ellipta", also called "Relvar" in the U.S. The reason this is significant is because the COPD market is massive, estimated at $11 billion last year. After its approval, Theravance's drug, Relvar, will compete directly with AstraZeneca's drug, Symbicort, which returned $3.19 billion last year. Theravance is actually partnering with GlaxoSmithKline, but receives the majority of the revenues earned on product sales. As a result, this is a $3.2 billion company, with a multi-billion dollar product on its hand, and an impending launch.
Due to the factors that I just laid out, I consider Theravance a "can't miss stock." Not only does it have a potential blockbuster and close ties to big pharma, but also a very strong pipeline including a Phase 2b product for gastrointestinal pain associated with opioid therapy, and an antibiotic medication for bacterial infections. Over the last year, we have seen a number of big jumps in biotechnology, including Sarepta Therapeutics, Celldex Therapeutics, ACADIA Pharmaceuticals, and Repros Therapeutics. Almost all saw large gains followed by a period of consolidation just prior to continued gains. I expect Theravance to continue the same trend, as it pulled back on Friday. So look for continued gains next week as the market reconsiders the upside that is present.
A Small Cap High-Flying Idea
Theravance was an under-the-radar company, but not near to the same extent as Consumer Portfolio Services (CPSS), which is a $185 million financial company in the automotive space. In one-year alone, this stock has rallied 480%; yet during the month of April, has pulled back to post losses of 25%. Yet with the company reporting very strong earnings on Wednesday, I'd watch for this trend to reverse rather quickly.
Consumer Portfolio Services is the perfect example of two important points for retail investors: First, don't let performance dictate your assessment of upside and second, don't let post-earnings reactions dictate your opinions of a quarter. CPSS actually traded lower after earnings on Wednesday and Thursday (by double digits), yet this was following a very strong quarter.
For the quarter, Consumer Portfolio Services exceeded bottom line expectations by a small margin, yet with revenue of $54.6 million (growth of more than 20%), it exceeded the consensus by a mindboggling $22.5 million! In addition, this is a company with upside tied to its managed portfolio and contracts purchased. For the quarter, CPSS grew its managed portfolio by more than $70 million and purchased $180 million in new contracts.
Aside from a strong quarter, and large one-year gains, the stock is still cheap. Currently, the stock trades at just one times sales and just 7.00 times next year's earnings. Therefore, with all things considered, I can't find a reason that the stock traded lower, other than it being an incorrect trend. On Friday the stock rallied more than 6%, and after a month full of losses, I would watch this stock closely and expect a massive run higher next week as investors start to take notice.
Conclusion
In this week's "Five Stocks to Watch", I gave you a little bit of everything. However, as a fundamental investor, the suggested upside for these stocks is based on long-term trends and my belief that each stock is attractive over a period of time. I urge you to explore your portfolio and also to assess stocks following earnings or other catalysts. I think you'll be surprised to find the level of value that is scattered throughout the market. Then, simply react, invest in value, and return gains regardless of market conditions.
Check out my critically acclaimed book "Taking Charge With Value Investing (McGraw-Hill, 2013)"
http://www.amazon.com/Taking-Charge-V...
February 22, 2013
What is the Best Way to Invest in Apple?
How Should You Invest in Apple?
The million dollar question is, “How Do I Invest in Apple?” If you know the answer, then you can make a lot of money in this unprecedentedly undervalued company. But unfortunately, no one truly knows the answer to this question. This is a stock that is trading without any reason or logic. It’s a fast-growing large cap stock that any true value investor would tell you is a great buy. Therefore, I don’t think there is a question as to whether or not it’s a good buy, but rather how to maximize profits, and relieve your nerves when investing in Apple, is a different story.
Spread the Investment for Peace of Mind
If you’re like 95% of the large investment firms in the country, then you have lost significant money in Apple over the last four months; due to it being a large position in your portfolio. And let’s face it, you probably can’t take another large loss. Therefore, why not spread your investment? Seriously, is there a reason that you have to be either “all-in” or “all-out” Apple? The biggest problem that investors are making is trying to regain their losses; as we naturally revert to desperate emotional based decisions to regain our investment losses.
My suggestion is to buy the stock over a period of time rather than all-at-once. My Apple buyback strategy is to invest 80 shares total in Apple over a course of eight weeks. I have already purchased 20 shares, 10 shares at $500 and another 10 shares at $448; therefore I am still trading with a loss. But, over the course of six weeks I will continue to acquire 10 shares per week which should allow for a stock that is fundamentally cheap to find a balanced trading ground. Then, I feel more confident in my position, but if I would have bought “all-in” at $500 then I might have sold or panicked when it fell after earnings. But instead, I feel no sense of urgency and have confidence in my position due to still being able to acquire shares in the future at a cheaper price.
Why Split Up the Purchase?
When the stock market is rising, or when we are making money, the same neurochemicals that are released in the brain of a drug addict are released in that of an investor (2011 Journal of Financial and Quantitative Analysis). Therefore, we repeat the behavior over-and-over because of previous encounters of success (not realizing just as many failures); so when we see Apple rising by 2% we try to jump in and capitalize on the trend. But when it starts to fall by 2%, the feeling of loss, that we have already experienced, starts to kick in, leading to desperate actions.
The decision to split up your investment works in several ways: A) it limits the size of your risk, B) it allows you to buy at the best price, and C) it allows you to stomach the losses if they do occur. If I was to buy 80 shares of Apple right now and it fell to $375, I would be tempted to sell even though I still believe that the stock is fundamentally undervalued at $460. Yet those previous periods of loss combined with the large position, and the fact that the market is trading higher, makes it almost impossible to hold throughout the volatility. However, when you purchase in small amounts it doesn’t matter what happens short term because you’re not fully invested. As a result, you begin to look at the investment in a different way: If it trades lower you know that you’ve lost some but that you have more shares to buy at a cheaper price, and if it rises then you know that some gains are already locked it and that you didn’t “miss out”.
When dealing with stocks that have lost great value in a short period of time, a buying strategy such as this is necessary to avoid mental pitfalls and emotional decisions that end up costing you even more money.
http://www.mhprofessional.com/busines...
Taking Charge with Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio
Brian Nichols
The million dollar question is, “How Do I Invest in Apple?” If you know the answer, then you can make a lot of money in this unprecedentedly undervalued company. But unfortunately, no one truly knows the answer to this question. This is a stock that is trading without any reason or logic. It’s a fast-growing large cap stock that any true value investor would tell you is a great buy. Therefore, I don’t think there is a question as to whether or not it’s a good buy, but rather how to maximize profits, and relieve your nerves when investing in Apple, is a different story.
Spread the Investment for Peace of Mind
If you’re like 95% of the large investment firms in the country, then you have lost significant money in Apple over the last four months; due to it being a large position in your portfolio. And let’s face it, you probably can’t take another large loss. Therefore, why not spread your investment? Seriously, is there a reason that you have to be either “all-in” or “all-out” Apple? The biggest problem that investors are making is trying to regain their losses; as we naturally revert to desperate emotional based decisions to regain our investment losses.
My suggestion is to buy the stock over a period of time rather than all-at-once. My Apple buyback strategy is to invest 80 shares total in Apple over a course of eight weeks. I have already purchased 20 shares, 10 shares at $500 and another 10 shares at $448; therefore I am still trading with a loss. But, over the course of six weeks I will continue to acquire 10 shares per week which should allow for a stock that is fundamentally cheap to find a balanced trading ground. Then, I feel more confident in my position, but if I would have bought “all-in” at $500 then I might have sold or panicked when it fell after earnings. But instead, I feel no sense of urgency and have confidence in my position due to still being able to acquire shares in the future at a cheaper price.
Why Split Up the Purchase?
When the stock market is rising, or when we are making money, the same neurochemicals that are released in the brain of a drug addict are released in that of an investor (2011 Journal of Financial and Quantitative Analysis). Therefore, we repeat the behavior over-and-over because of previous encounters of success (not realizing just as many failures); so when we see Apple rising by 2% we try to jump in and capitalize on the trend. But when it starts to fall by 2%, the feeling of loss, that we have already experienced, starts to kick in, leading to desperate actions.
The decision to split up your investment works in several ways: A) it limits the size of your risk, B) it allows you to buy at the best price, and C) it allows you to stomach the losses if they do occur. If I was to buy 80 shares of Apple right now and it fell to $375, I would be tempted to sell even though I still believe that the stock is fundamentally undervalued at $460. Yet those previous periods of loss combined with the large position, and the fact that the market is trading higher, makes it almost impossible to hold throughout the volatility. However, when you purchase in small amounts it doesn’t matter what happens short term because you’re not fully invested. As a result, you begin to look at the investment in a different way: If it trades lower you know that you’ve lost some but that you have more shares to buy at a cheaper price, and if it rises then you know that some gains are already locked it and that you didn’t “miss out”.
When dealing with stocks that have lost great value in a short period of time, a buying strategy such as this is necessary to avoid mental pitfalls and emotional decisions that end up costing you even more money.
http://www.mhprofessional.com/busines...
Taking Charge with Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio
Brian Nichols
New Age Investing with a $50,000 Portfolio
The concept of diversification has always been quite clear: The goal is to invest in a number of sectors, markets, and types of investments to be better protected from volatility and to perform better over the course of many years. Most people believe that you need a balanced presence of REITs, bonds, ETFs, etc. in order to be diversified. While these investments work for many, and have paid dividends, it's not my preference and I believe better returns can be achieved with equity investments in the stock market with a number of new age strategies.
There's a reason that I don't like the idea of a balanced portfolio with the use of bonds: I consider it a mindless investment strategy that has become more of a rule on Wall Street versus a sensible approach to investing. Personally, I want to invest in something that makes money, that reports earnings, and that produces a product or offers a service that I can see, touch, and utilize. Therefore, I don't like investments in commodities, as I don't like any investment that is only controlled by fear and greed (i.e. gold). My investment goal is to buy low and sell high, as is everyone else's goal. But if interest rates are at zero, then there is nowhere to go but up over a period of time for bonds. Hence, bonds have reached a peak, and when interest rates begin to rise, bonds will fall, meaning it's no longer a "buy low sell high" investment.
Now there is no denying that investments such as bonds have been good for many years. But after more than a decade of flat trading, it now looks as though equity markets are preparing for a breakout higher, or to at least find some stable ground. Either way, regardless of market direction, there are numerous companies that pay high dividends that can return nice gains for an investor in any stage of their life. In this article I am looking at one specific group of investors, those with a med-high risk tolerance, who wish to earn higher returns with slightly more risk while still be protected for the long-term. The good thing about a high-yield dividend investment strategy is that risk is naturally lower as investors and institutions hold the investments longer. Therefore, I am going to show you how to diversify a $50,000 portfolio in equities alone with a med-high risk approach.
$50,000 Portfolio
Secular Investments $15,000
Cyclical Investments $25,000
Speculative/Growth Investments $10,000
Secular Investments
It's important to include secular investments in any portfolio because these are the companies with growth and performance that remains consistent regardless of the economy. These are often called "recession proof" investments. In this particular portfolio, $15,000 is set aside for this portion of your portfolio. The good thing about these investments is that a secular company's success is often tied to population, because it provides products or services that we can not live without. Therefore, over time, these stocks should also trade higher while also paying good dividends.
I've never been a big fan of the "one-size fits all" investment approach. The reason I am using a $50,000 portfolio is because a person with this portfolio will invest differently than a person with a $50,000,000 portfolio. When you have $50,000,000 you are trying to protect first then grow second, but with $50,000 you want to make money and reach a point where you can retire comfortably. Therefore, despite this being a safety portion of your portfolio, you want to ensure that certain measures are taken to get the most from the investment, purchasing three good stocks that could outperform the market. As a result, you want growth potential, high institutional ownership as a security blanket, large dividend yield, and a history of increasing the dividend. Here are three secular investments that would fit nicely into this portfolio.
(use this model for the stocks below)
Company
Ticker
5-Year Performance
Institutional Ownership
Current Yield
5 Yr. Dividend Growth
The Southern Company
(SO)
22.6%
45%
4.47%
25%
McDonald's Corporation
(MCD)
75.4%
65%
3.24%
100%
Philip Morris
(PM)
78.4%
70%
3.88%
85%
The three stocks above show how I would diversify a $50,000 portfolio with companies that will perform regardless of the economy. Some might think that companies such as Exxon Mobil (XOM) or Procter & Gamble (PG) fit better as secular investments; however these three pay better dividends, have performed better, and have just as stable of businesses. The Southern Company as a utility company is self-explanatory, but with McDonald's we have seen that as economic problems exist that consumers flock to the restaurant because it's cheap food. There is probably no company in the world that has endured more regulation, criticism, and hate than Phillip Morris yet it continues to trade higher and improve fundamentally. Therefore, my $15,000 gets split into these three investments.
Cyclical Investments
The same rules apply for a cyclical stock, which is a company that grows with a strong economy, which we use for secular investments. It needs to pay a good yield, have strong ownership, and performance. Furthermore, we are investing in these companies as value investments, those that are cheap compared to growth and outlook. Once again, three investments split into the balance allowed, which is $25,000. The reason that this would be the largest category is because it presents the greatest likelihood for strong performance while also paying a dividend, as cyclical stocks tend to trade with greater beta.
If the idea is to buy low and sell high then a bank is the perfect cyclical investment. Personally, I prefer regional banks that will grow with strong regional performance, yet larger banks work just as well. The reason that banks might be a good investment choice is due to recent improvements in housing and because compared to book value the space is among the cheapest in the market. My favorite is JPMorgan Chase (JPM). While other banking stocks have lost significant value over the last five years it has traded evenly and has a dividend yield of 2.47%. The company has a massive presence and institutional ownership of 73% and is currently trading at new 52-week highs. If you believe that housing will recover at some point then you might want to look at a company such as JPMorgan, a stock with limited downside but great global upside.
Ford Motor Co. (F) might be the perfect value stock. The auto industry has been the strength of the economy for the last two years with sales at multi-year highs. The stock is trading at about 0.40 times sales with a forward P/E ratio of 7.86. In addition, the ultimate sign of value might be the fact that sales in the U.S. are expected to rise and the crippling region of Europe has found a bottom according to the auto giant's recent earnings. Yet if you need more signs of confidence from Ford, the company recently increased its dividend by 100%, and now pays a yield of 3.10%. Therefore, I say this is a great undervalued investment in a growing company that is returning larger amounts of capital to its shareholders.
My final investment is Seagate Technologies (STX), a stock that has been priced for a worst case scenario for the last six months. The company is one of the most shareholder friendly companies in the entire market; a company that returned 95% of its operating cash flow in the form of redemptions and dividends in the last quarter alone. The company increased its dividend by 19% and is now paying a dividend of 4.50% in 2013. Yet despite these facts, the stock remains cheap with a P/E ratio of 4.50 and a price/sales of 0.75. The reason is because of the shift to tablets and smartphones by consumers, and Seagate is a company that makes hard disk drives that are widely used in computers and laptops. However, people forget that hard disk drives are used in various devices and equipment such as DVRs, gaming consoles, supercomputers, and are even used to store information through the cloud. Therefore, this is a company that I'd definitely want to own in my portfolio.
Speculative Growth
While investors who prefer long-term performance must have a balanced dividend approach it's still always good to have a little speculation in your portfolio. These are stocks that don't return yield but are undervalued with good growth prospects. In a $50,000 portfolio this particular segment would account for anywhere between $10,000 and $15,000. In this particular chart it accounts for $10,000, and should be split into two or three different investments. Despite the fact that you are taking on a med-high risk, you never want to place too many eggs in one basket when dealing with a speculative investment.
So in this category we look for three things: 1) Unrealized value in the market, 2) solid growth potential, and 3) an unmeasured fundamental of some sorts that could become a high return catalyst. My top three in this category are as followed: XPO Logistics (XPO), Spectrum Pharmaceuticals (SPPI), and Alcatel-Lucent (ALU). XPO Logistics is a company trading at about 0.50 times this year's sales yet is set to grow by more than 150% year-over-year due to acquisitions; Alcatel-Lucent trades at just 0.21 times sales despite competitors in the market trading at 1.0-2.0 time's sales; and Spectrum trades at less than three times sales in a biotechnology space that warrants high valuations compared to sales.
When deciding on a long-term investment I have always preferred sales over income because a company can always cut costs to improve its bottom line, but creating revenue is a different story. A company with higher revenue can make more significant cuts to earn larger bottom line growth, while a company such as The Home Depot (HD) can only cut its costs so much before margins peak and sales have to grow. Furthermore, larger revenue usually means more assets or that the company could be broken down and sold for more than its valuation. Such is the case for Alcatel-Lucent, which is its unmeasured fundamental that could push the stock higher over a course of several years.
XPO Logistics CEO Bradley Jacobs is attempting to build his fifth billion dollar company, all of which were started from scratch, therefore history tells us not to bet against this guy. And Spectrum has operated to perfection over the last five years, has three approved drugs, and 10 in its pipeline. Therefore, with these three companies we have unmeasured fundamental/catalyst, value, and different growth drivers for each: XPO growing through acquisitions and cold starts; Alcatel restructuring and focusing on its profitable and growing businesses; and Spectrum with its pipeline and history of clinical perfection.
Conclusion
The first thing that diversification purists are going to say to me is that you can't have a diversified long-term portfolio without diversification into all sectors/industries. Actually, this stance might be the second argument behind those screaming about owning bonds and fixed income investments. However, this is one of countless strategies/theories that I have discussed in my new book on many different levels, both fundamental and psychological, that I call an unconventional new age method of diversification. Because although I am not equally diversifying my portfolio with every industry with the exact same percentage to be "fully protected", I have indirectly built a very diversified portfolio based on investing in companies that serve a purpose in my portfolio.
I have cyclical stocks that will grow in a booming economy, then I am hedging that position with secular stocks that should perform well regardless of the market, and finally I have a speculative undervalued portion that will hopefully appreciate over time. All the while, five of the companies in my portfolio have a global presence which gives me more than 50% of my portfolio exposed to global growth. Yet despite this fact, there will still be some who will say that this portfolio is not diversified, but the truth is that it's greatly diversified. I simply invested in companies to serve an actual purpose in my portfolio rather than buying an index fund, a bond, or a mutual fund just to ensure that I held many holdings. This portfolio has biotechnology, transportation, communications, tobacco, restaurant, utilities, auto, bank, and a technology holding. Therefore, I am greatly diversified and am well-positioned with undervalued companies that have growth and have allocated capital based on my risk assessment. Finally, I'd like to remind you that this is a very simple entry level strategy. My book takes this many steps further with countless strategies for diversification and knowing when to buy at the right time for maximum gains.
http://seekingalpha.com/article/11701...
Taking Charge with Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio
Brian Nichols
There's a reason that I don't like the idea of a balanced portfolio with the use of bonds: I consider it a mindless investment strategy that has become more of a rule on Wall Street versus a sensible approach to investing. Personally, I want to invest in something that makes money, that reports earnings, and that produces a product or offers a service that I can see, touch, and utilize. Therefore, I don't like investments in commodities, as I don't like any investment that is only controlled by fear and greed (i.e. gold). My investment goal is to buy low and sell high, as is everyone else's goal. But if interest rates are at zero, then there is nowhere to go but up over a period of time for bonds. Hence, bonds have reached a peak, and when interest rates begin to rise, bonds will fall, meaning it's no longer a "buy low sell high" investment.
Now there is no denying that investments such as bonds have been good for many years. But after more than a decade of flat trading, it now looks as though equity markets are preparing for a breakout higher, or to at least find some stable ground. Either way, regardless of market direction, there are numerous companies that pay high dividends that can return nice gains for an investor in any stage of their life. In this article I am looking at one specific group of investors, those with a med-high risk tolerance, who wish to earn higher returns with slightly more risk while still be protected for the long-term. The good thing about a high-yield dividend investment strategy is that risk is naturally lower as investors and institutions hold the investments longer. Therefore, I am going to show you how to diversify a $50,000 portfolio in equities alone with a med-high risk approach.
$50,000 Portfolio
Secular Investments $15,000
Cyclical Investments $25,000
Speculative/Growth Investments $10,000
Secular Investments
It's important to include secular investments in any portfolio because these are the companies with growth and performance that remains consistent regardless of the economy. These are often called "recession proof" investments. In this particular portfolio, $15,000 is set aside for this portion of your portfolio. The good thing about these investments is that a secular company's success is often tied to population, because it provides products or services that we can not live without. Therefore, over time, these stocks should also trade higher while also paying good dividends.
I've never been a big fan of the "one-size fits all" investment approach. The reason I am using a $50,000 portfolio is because a person with this portfolio will invest differently than a person with a $50,000,000 portfolio. When you have $50,000,000 you are trying to protect first then grow second, but with $50,000 you want to make money and reach a point where you can retire comfortably. Therefore, despite this being a safety portion of your portfolio, you want to ensure that certain measures are taken to get the most from the investment, purchasing three good stocks that could outperform the market. As a result, you want growth potential, high institutional ownership as a security blanket, large dividend yield, and a history of increasing the dividend. Here are three secular investments that would fit nicely into this portfolio.
(use this model for the stocks below)
Company
Ticker
5-Year Performance
Institutional Ownership
Current Yield
5 Yr. Dividend Growth
The Southern Company
(SO)
22.6%
45%
4.47%
25%
McDonald's Corporation
(MCD)
75.4%
65%
3.24%
100%
Philip Morris
(PM)
78.4%
70%
3.88%
85%
The three stocks above show how I would diversify a $50,000 portfolio with companies that will perform regardless of the economy. Some might think that companies such as Exxon Mobil (XOM) or Procter & Gamble (PG) fit better as secular investments; however these three pay better dividends, have performed better, and have just as stable of businesses. The Southern Company as a utility company is self-explanatory, but with McDonald's we have seen that as economic problems exist that consumers flock to the restaurant because it's cheap food. There is probably no company in the world that has endured more regulation, criticism, and hate than Phillip Morris yet it continues to trade higher and improve fundamentally. Therefore, my $15,000 gets split into these three investments.
Cyclical Investments
The same rules apply for a cyclical stock, which is a company that grows with a strong economy, which we use for secular investments. It needs to pay a good yield, have strong ownership, and performance. Furthermore, we are investing in these companies as value investments, those that are cheap compared to growth and outlook. Once again, three investments split into the balance allowed, which is $25,000. The reason that this would be the largest category is because it presents the greatest likelihood for strong performance while also paying a dividend, as cyclical stocks tend to trade with greater beta.
If the idea is to buy low and sell high then a bank is the perfect cyclical investment. Personally, I prefer regional banks that will grow with strong regional performance, yet larger banks work just as well. The reason that banks might be a good investment choice is due to recent improvements in housing and because compared to book value the space is among the cheapest in the market. My favorite is JPMorgan Chase (JPM). While other banking stocks have lost significant value over the last five years it has traded evenly and has a dividend yield of 2.47%. The company has a massive presence and institutional ownership of 73% and is currently trading at new 52-week highs. If you believe that housing will recover at some point then you might want to look at a company such as JPMorgan, a stock with limited downside but great global upside.
Ford Motor Co. (F) might be the perfect value stock. The auto industry has been the strength of the economy for the last two years with sales at multi-year highs. The stock is trading at about 0.40 times sales with a forward P/E ratio of 7.86. In addition, the ultimate sign of value might be the fact that sales in the U.S. are expected to rise and the crippling region of Europe has found a bottom according to the auto giant's recent earnings. Yet if you need more signs of confidence from Ford, the company recently increased its dividend by 100%, and now pays a yield of 3.10%. Therefore, I say this is a great undervalued investment in a growing company that is returning larger amounts of capital to its shareholders.
My final investment is Seagate Technologies (STX), a stock that has been priced for a worst case scenario for the last six months. The company is one of the most shareholder friendly companies in the entire market; a company that returned 95% of its operating cash flow in the form of redemptions and dividends in the last quarter alone. The company increased its dividend by 19% and is now paying a dividend of 4.50% in 2013. Yet despite these facts, the stock remains cheap with a P/E ratio of 4.50 and a price/sales of 0.75. The reason is because of the shift to tablets and smartphones by consumers, and Seagate is a company that makes hard disk drives that are widely used in computers and laptops. However, people forget that hard disk drives are used in various devices and equipment such as DVRs, gaming consoles, supercomputers, and are even used to store information through the cloud. Therefore, this is a company that I'd definitely want to own in my portfolio.
Speculative Growth
While investors who prefer long-term performance must have a balanced dividend approach it's still always good to have a little speculation in your portfolio. These are stocks that don't return yield but are undervalued with good growth prospects. In a $50,000 portfolio this particular segment would account for anywhere between $10,000 and $15,000. In this particular chart it accounts for $10,000, and should be split into two or three different investments. Despite the fact that you are taking on a med-high risk, you never want to place too many eggs in one basket when dealing with a speculative investment.
So in this category we look for three things: 1) Unrealized value in the market, 2) solid growth potential, and 3) an unmeasured fundamental of some sorts that could become a high return catalyst. My top three in this category are as followed: XPO Logistics (XPO), Spectrum Pharmaceuticals (SPPI), and Alcatel-Lucent (ALU). XPO Logistics is a company trading at about 0.50 times this year's sales yet is set to grow by more than 150% year-over-year due to acquisitions; Alcatel-Lucent trades at just 0.21 times sales despite competitors in the market trading at 1.0-2.0 time's sales; and Spectrum trades at less than three times sales in a biotechnology space that warrants high valuations compared to sales.
When deciding on a long-term investment I have always preferred sales over income because a company can always cut costs to improve its bottom line, but creating revenue is a different story. A company with higher revenue can make more significant cuts to earn larger bottom line growth, while a company such as The Home Depot (HD) can only cut its costs so much before margins peak and sales have to grow. Furthermore, larger revenue usually means more assets or that the company could be broken down and sold for more than its valuation. Such is the case for Alcatel-Lucent, which is its unmeasured fundamental that could push the stock higher over a course of several years.
XPO Logistics CEO Bradley Jacobs is attempting to build his fifth billion dollar company, all of which were started from scratch, therefore history tells us not to bet against this guy. And Spectrum has operated to perfection over the last five years, has three approved drugs, and 10 in its pipeline. Therefore, with these three companies we have unmeasured fundamental/catalyst, value, and different growth drivers for each: XPO growing through acquisitions and cold starts; Alcatel restructuring and focusing on its profitable and growing businesses; and Spectrum with its pipeline and history of clinical perfection.
Conclusion
The first thing that diversification purists are going to say to me is that you can't have a diversified long-term portfolio without diversification into all sectors/industries. Actually, this stance might be the second argument behind those screaming about owning bonds and fixed income investments. However, this is one of countless strategies/theories that I have discussed in my new book on many different levels, both fundamental and psychological, that I call an unconventional new age method of diversification. Because although I am not equally diversifying my portfolio with every industry with the exact same percentage to be "fully protected", I have indirectly built a very diversified portfolio based on investing in companies that serve a purpose in my portfolio.
I have cyclical stocks that will grow in a booming economy, then I am hedging that position with secular stocks that should perform well regardless of the market, and finally I have a speculative undervalued portion that will hopefully appreciate over time. All the while, five of the companies in my portfolio have a global presence which gives me more than 50% of my portfolio exposed to global growth. Yet despite this fact, there will still be some who will say that this portfolio is not diversified, but the truth is that it's greatly diversified. I simply invested in companies to serve an actual purpose in my portfolio rather than buying an index fund, a bond, or a mutual fund just to ensure that I held many holdings. This portfolio has biotechnology, transportation, communications, tobacco, restaurant, utilities, auto, bank, and a technology holding. Therefore, I am greatly diversified and am well-positioned with undervalued companies that have growth and have allocated capital based on my risk assessment. Finally, I'd like to remind you that this is a very simple entry level strategy. My book takes this many steps further with countless strategies for diversification and knowing when to buy at the right time for maximum gains.
http://seekingalpha.com/article/11701...
Taking Charge with Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio
Brian Nichols
