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| | | 10/09/2014 By Thomas Scarlett 
As I write, the stock market has been plunging for several hours. October is often a rough month for equity investing, and stocks have been rising for quite some time without a significant correction, so keep your seat belts fastened for the next few weeks. The stock market, of course, is a leading indicator, so it has already processed the positive information that is just now making itself felt in the broader economy. It is often the case that by the time the economy itself is clearly in recovery, stocks have already hit their highs and are preparing for a comedown. But there are always some stocks worth buying, and in a turbulent market it's best to go for well-known brand names with reliable earnings histories. Starbucks (NASDAQ: SBUX), the world's best known purveyor of the world's most widely consumed beverage, is one such company.
According to a Reuters/University of Michigan survey, consumer confidence has rebounded to near its highest level since 2007 -- right before the economic tsunami washed away trillions of dollars from the U.S. economy.
"The most important issue is whether consumers will show greater resistance to the backslides that have repeatedly occurred in the past few years," says Reuters/Univ. of Michigan Surveys of Consumers chief economist Richard Curtin.
"Resilience among consumers is dependent on positive long term economic expectations," he adds. "While near term expectations have improved substantially, longer-term expectations for personal finances as well as the overall economy have remained unchanged from a year ago. Hopefully, as the pace of economic growth springs ahead in the coming months, the main beneficiary will be an improvement in long term economic expectations for personal finances as well as the overall economy." Starbucks stock is trading at around $75 per share. But it has been on a slow, but steady, downward slide since July 2013, when it was trading above $80 per share. There's no fundamental reason for the downslide, however. So this is a good opportunity to pick up a solid growth stock when it's not trading at or near its 52-week high.
Starbucks has reported financial results for its 13-week fiscal third quarter and 39-week fiscal year to date ended June29, 2014. Consolidated net revenue growth accelerated to 11%; net revenues totaled $4.2 billion -- a record for the company's third quarter. Global comparable store sales increased 6%, marking the 18th consecutive quarter of global comp growth of 5% or greater. Consolidated operating income increased 25%, to a Q3 record$769 million. Most importantly, earnings per share increased 22% to a Q3 record$0.67per share. The company opened 344 net new stores globally, ending the quarter with 20,863 stores across 64 countries. Global comparable store sales increased 6 percent, while Americas and U.S. comp growth of 6 percent- that's ahead of estimates pegging same store sales growing 5.4 percent. Growth was particularly along the Pacific Rim, where "strong traffic" drove growth rates up to 7 percent for the quarter. Consolidated operating income increased 18 percent, or $100 million, to a Q2 record $644 million.
What's really intriguing about Starbucks quarterly numbers is the robust enthusiasm showed by company founder Howard Schultz. Sure, CEOs tend to pound the drums on quarterly conference calls with analysts. It's part of their jobs. Nobody likes a Debbie Downer in the corner office, and most chief executives know how to make lemonade out of lemons, and sell those lemons to Wall Street, and to Main Street.
"Starbucks Q3 represents another quarter of outstanding operating performance in which each of our segments contributed to record results," said Schultz. "The increasing power of the Starbucks brand, the success of our best-in-class mobile, social and digital technologies and our greatest asset - over 300,000 partners who deliver the Starbucks Experience to over 70 million customers around the world each week - position us to continue growing our business around the world and into the future."
Considering that consumers are rallying around the flag, economically, Starbucks seems like the perfect retail branding play for growth-minded investors. Get in at $75 now, and watch it roll toward $90 within six months. Tom Scarlett is an investment analyst at Personal Finance. | | |
America's energy boom is in full swing. We're pumping more oil and natural gas from the ground than ever thought possible. But there's a problem with the massive supplies. They're putting a strain on the companies that move around and store all this fuel. That's bad news if you're a driller and you have to throttle your output because you have no place to put it. But it's exceptionally good news if you own the six stocks I've pinpointed. They're all running at full capacity and making a mint. And thanks to the way they're structured, they have to pay a majority of what they make out to shareholders. Follow this link for their profitable details.
| | | 10/07/2014 By Robert Rapier 
The way humans use tools distinguishes us from every other species. We use them in all facets of life, and when we use the right tool for the job we can greatly leverage our natural abilities. But all tools have limitations, and they can even be dangerous when used improperly.
For investors, improper use of tools can be costly. One tool that many investors rely on is the stock screener, which is a useful tool for ranking stocks according to factors such as profit margins, gross profit, market capitalization, and earnings growth. There are stock screeners designed to find growth stocks, value stocks, stocks that are candidates to short -- in fact because of the many variables involved, a stock screener can be tuned to practically infinite gradations.
However, one must be exceedingly careful in relying too heavily on a stock screener. Sometimes there are extraordinary circumstances that can distort a company's metrics, driving a particular company to the top or bottom of a particular stock screen. For example, if you were to screen stocks looking for companies with the lowest price/earnings (PE) ratio based on last year's earnings, you could easily run across a company that has recently fallen on hard times, so is cheap for good reason.
Last week I ran a popular stock screener designed to identify attractively-priced companies based on five different variables: net profit margin, compound annual growth rate (CAGR) of revenue, the return on equity (ROE), the equity ratio (the percentage of assets financed by equity), and the coverage ratio (a measure of the amount of leverage). The following table shows the top five stocks based on those metrics: 
The highest ranking stock according to this screen was that of a Canadian company called Cipher Pharmaceuticals (TSE: DND). The second highest ranking company per this stock screen was Whiting USA Trust (NYSE: WHX). Whiting's entry on this list is interesting for a couple of reasons. First, it is a royalty trust, which has some similarities to a master limited partnership (MLP). Investors in trusts and MLPs enjoy tax deferrals on the income they receive, and the financial metrics of these investment vehicles are often not easily comparable to those of corporations. When doing stock screens, this must be understood. The same holds true when comparing companies across different industries. But the main reason it was interesting to see Whiting on the list is that back in August, a compelling case was made that Whiting was significantly overvalued. The reason is that Whiting is a terminating royalty trust that is scheduled to terminate in March 2015. In August, WHX was trading at $2.29, yet the sum of the projected distributions between August and the termination date amounted to less than $1.40 based on Whiting's own projections. In fact, Whiting acknowledged as much in its August distribution announcement: "To the extent that the Trust units are trading at a price substantially in excess of the aggregate distributions that may be reasonably expected to be made prior to the termination of the Trust, the market price decline in Trust units is likely to include one or more abrupt substantial decreases." Thus, based on the projected remaining distributions, Whiting was overvalued at that time by at least 64%, and therefore an obvious candidate to sell short. In August, several articles were written that highlighted the unusual situation, and short interest shot up by 65%. But oddly enough, the unit price began to rise and before the end of September the price reached $2.68 -- 17% higher than the value on Aug. 19, when three separate articles were published calling attention to Whiting's situation. What caused Whiting's price to rise? Did management revise projected distributions upward? No. Apparently what drove up the unit price was that Whiting started to show up on various stock screens (as shown in the table earlier), and investors bought into what appears to be -- according to a number of metrics -- a seriously undervalued company. In reality the underlying value of Whiting should reflect its remaining distributions, but this isn't something that would show up on a stock screen. A second level of due diligence would have uncovered this, and investors who were interested in the trust would have recognized the downside risk. nstead, not only has the careless use of stock screeners exposed investors to downside risks they may not appreciate, it drove up the unit price into even more unsupportable territory -- generating losses for those who shorted this "no-brainer" opportunity. Conclusions Today Whiting is valued at 78% above its remaining projected distribution. Buying Whiting is like spending $45 on a $25 gift card. Eventually Whiting's price will start to reflect its intrinsic value, and there will be "one or more abrupt substantial decreases" in the unit price as management has predicted. There are several lessons here. One is that things can go wrong even with the most ironclad no-brainer investment ideas. Second, it confirms that markets can certainly behave irrationally. Finally, it shows what can happen when too much emphasis is placed on a tool as blunt as a stock screener. Those are useful for identifying investment candidates, but investors should always apply additional due diligence in order to protect themselves from risks that the screener can't identify. This article originally appeared in the The Energy Letter column. Never miss an issue. Sign up to receive The Energy Letter by email. | | |
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| | | 10/08/2014 By Jim Fink 
When you're investing in small cap stocks, "seasonality" is a key word. Historically, small-caps have underperformed large caps in the July to November time-frames of all calendar years, only to sprint ahead and outperform large caps after the elections and into the new year. For whatever reason, small caps have tended to underperform in midterm election years as well -- such as 2014. But they tend to come roaring back the following year. There are a lot of fears right now that a higher U.S. dollar will hurt corporate earnings through a"triple whammy" effect of: (1) driving up the costs of doing business overseas, (2) suppressing the value of non-U.S. sales, and (3) signaling weak international demand. However, the dollar may be overbought in the short-term, having risen for 12 consecutive weeks prior to this week. The dollar suffered its largest one-day drop in more than a year on Monday, Oct. 6th. Bearish seasonality may also have played a role. There typically is some autumn stock-market weakness in mid-term election years and historically the worst-performing month of the year is September, so now was a predictable time for a temporary interruption in the current bull-market rally to occur. The stock market has not suffered a 10% correction in more than two years (more than 575 trading days), which is longer than double the average length between corrections, but not unprecedented (eight periods have been even longer). The S&P 500 fell 1.6% in September, so the month held true to historical bearishness. The small-cap Russell 2000 index performed much worse in September, down 6.2%,but should be bottoming. Over the past three years, every few months the stock market experiences a dip of a few percentage points, only to climb to new highs afterwards. The bottom-line is this: if the pattern of the past two years is still driving the market's playbook, then a re-test of recent highs is on the way. Enough extremes in shorter term measures of market stress have been reached in the past two weeks to mark a washout. But price declines may continue for another one to two weeks before reversing. The key missing element is time. The down cycles have become increasingly short. This one was less than 2 weeks. One reason to expect a larger sell off is that that has been a pattern during mid term election years. As an example, in the past four mid-term years, SPX has sold off by 8%, 16%, 20% and 34%; from its high to its eventual low has taken 2-6 months.
In the past six months, the largest correction was 4.6% and took just 10 days.Another reason is that SPX will have traded above its lower Bollinger band for 22 months by the middle of this coming week. That is four months longer than even the powerful 1995-96 period. The S&P 500 Volatility Index (VIX) is also flashing a bearish signal. As one market strategist noted: Right now the VIX high for the year was in February: 21.44 on February 3. If you go back 25 years to the beginning of the VIX, it's never topped out in February. October is typically a very high volatility month. I do expect that we get a pullback that rolls through the first half of October. It's seasonally right. We've had a lot of complacency. If there is market weakness over the next month or so, the odds of a market rally into year-end are very good because U.S. economic news is positive with no recession in sight. Positive economic news in the U.S. includes: Three Federal Reserve bank presidents have warned against raising rates too quickly, stating that the strength in the U.S. dollar would lower inflationary pressures through lower import prices.Economic weakness in China, Japan, and the Eurozone will all continue to prop up the U.S. dollar and limit U.S. economic growth, with Chinese weakness the biggest negative influence. The fourth quarter of midterm election years is historically very strong. Even better, when the historically- weak May through October period acts against its nature and is a bullish period, the odds of this bullishness continuing in the following three months of November through January is over 90% and with an average positive return of more than 5%. Furthermore, a Dow Theory buy signal was triggered in late-September that suggests stock prices will rise further, perhaps by 20%. Value investors should also take heart in knowing that the greatest value investor of them all, Warren Buffett, took advantage of the recent market downdraft to buy stocks, telling CNBC: "The more the market goes down, the more I like to buy." Bottom line: For now, I would stay invested because the Ivy Portfolio market-timing system based on the 10-month moving average remains on a "buy" signal for U.S. stocks, bonds, and real estate (sells are foreign stocks and commodities). Yes, U.S. small-caps have underperformed in 2014, but history and financial theory argue that buying more small caps when they're down should really pay off soon. This article originally appeared in the Small Cap All-Stars column. Never miss an issue. Sign up to receive Small Cap All-Stars by email. | | |
Yes, the stock market is having a banner year. But the simple truth is: It's overheated – especially dividend stocks. The first half of 2014 saw almost $30 billion in dividend increases alone. As a result, eager investors have plowed into these U.S. stocks and prices have skyrocketed. That's a problem. You could be overpaying by 60% on your next stock purchase.
But…amazing, cheap income opportunities still abound if you're willing to think globally. I have 5 income opportunities that are still available at bargain prices with big dividends…such as 10.05%, 10.10%, 10.32% and more. They're worth a look. Details here.
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