Cold Weather, Hot Stock

In This Issue: Cold Weather, Hot Stock The Upcoming Utility Shakeout All That Glitters Is Definitely Not Gold Buffett Didn't Start Out Rich But he did begin investing with a powerful strategy that kick-starts wealth like none other. Funny thing is, Buffett can't use the strategy anymore – he's too darn rich. Luckily (unless you're a billionaire already), it's open to you. And it still works like magic. In fact, there's no swifter, surer way to becoming a millionaire in all of investing. Want to learn how? The full story. Cold Weather, Hot Stock 11/21/2014 By Benjamin Shepherd Winter has come early in many parts of the United States, and it looks like it will be a bad one. Even though winter doesn't officially begin until December 21, Buffalo, NY, is already buried under 5.5 feet of snow, possibly making it the snowiest 24 hours in US history. All fifty US states have also already reported freezing temperatures -- yes, that includes the Deep South and Hawaii -- marking the coldest November since 1976. That's great news for Polaris Industries (NYSE: PII) which, in addition to designing and building off-road and all-terrain vehicles and motorcycles, has been a major manufacturer of snowmobiles for more than six decades now. It is also a major supplier of light troop vehicles to the defense establishment. Full-year 2013 sales grew by 18% last year to $3.8 billion, largely thanks to its massive sales network of more than 1,750 dealers here in North America and more than 1,400 in more than 100 foreign countries. Here in the US, one-in-three power-sport vehicle sales in a Polaris. One of the reason Polaris's products are so popular is the company's devotion to research and development (R&D). With five R&D centers, the company typically spends about 4% of its revenue on innovating new products and features. Those efforts are key because, while I have no sexist intentions here, when men buy high-end toys, they tend to want the best available. And the company's own market research shows that about 90% of its buyers are men with incomes of about $100,000, so they can usually afford the best. That spending is a major reason why Polaris is able to offer 18 new off-road vehicle models, five new motorcycle models and more than 300 new accessories for the 2015 model year alone. Aside from that, the company has also done an amazing job of managing its balance sheet. The company currently has a debt-to-equity ratio of just 0.3 as compared to an industry average of 1.0, having paid off more than $120 million in debt so far this year. It also has about $169 million of cash on hand, though that number can fluctuate depending on its acquisition, capital investment and R&D plans. For instance, the company spent a sizable chunk of cash building a new off-road vehicle manufacturing plant in Opole, Poland, which opened in September. Its first such facility outside of North America, the plant covers 345,000 square feet and is expected to being shipping out new vehicles in the first quarter. With manufacturing now able to be completed closer to the company's European customer base, the plant is actually expected save company about $20 million annually in reduced labor and shipping costs. A second plant is also planned for India. Polaris has also shown a strong dedication to creating shareholder value, recently bumping its share repurchase program up from $100 million to $200 million. It also pays a small but consistently growing dividend, averaging about 18% growth over the past five years. The company is on track to payout a total of $1.92 for 2014, resulting in a yield of about 1.2%. Polaris also has a strong commitment to lean manufacturing principles, so while its revenue has grown an average of 8.9% yearly over the past decade, earnings per share (EPS) have shot up by 15.8%. Operating expenses are expected to fall by about 0.7% this year alone. The company expects full-year 2014 revenue to grow by about 18% to between $4.425 billion and $4.475 billion, with EPS up by as much as 23% to $6.65. Wall Street expects earnings to come in slightly lower than that, falling closer to the midpoint of management's guidance at $6.62, but Polaris has a strong history of surprising to the upside. Analysts forecast another strong year in 2015, with a mean estimate of 20.1% EPS growth to $7.95 with average growth of 16.2% over the next five years. While there is some risk to owning Polaris, such as a tightening of consumer credit availability, it has historically weathered downturns fairly well. It has also been consistently expanding its geographic footprint, either by pushing into new markets itself or by acquiring companies which are already operating in new territories. Throw in the fact that management has kept costs down and maintained a solid balance sheet, nothing short of another major recession should have a huge impact. And if the winters in the Northern Hemisphere continue worsening, it might find whole new markets opening up to it. With a solid balance sheet and steadily growing sales, Polaris Industries is a good buy up to $167. Add Your Name to the Midterm Election Winners The GOP won big in the 2014 midterm election – and so can you. The stunning outcome just about ensures the Keystone XL Pipeline will be approved. One particular group of stocks is set to soar when President Obama finally approves – with House and Senate pressure – the pipeline go-ahead. Share prices will jump. But there's only a brief window of opportunity to act. Full details. The Upcoming Utility Shakeout 11/20/2014 By Richard Stavros With more and more utilities trading at premium valuations, now is the time for investors to diversify their portfolios into the sector's higher-quality names. That's my conclusion after attending the Edison Electric Institute Financial Conference last week, an annual event hosted by the association of investor-owned power companies that gives utility CEOs and their investor-relations teams an opportunity to pitch their stocks directly to the investment community. At the conference, I was struck by the strange indifference among big investors to the risks within the sector. This complacent attitude is further evidenced by the fact that many utilities' valuation multiples are converging (See "The Great Convergence in Utility Valuations"), indicating that large fund managers really do not understand the risks in the segment, or have overlooked these risks in a flight to safety. Indeed, a trader for a multi-billion-dollar fund manager I met with at the conference essentially confirmed this theory, when he observed that large fund managers are blindly buying utility stock indices, with little focus on individual names. When these funds eventually rebalance their portfolios away from utilities, this will inevitably lead to a shakeout as investors become more selective. The Great Convergence in Utility Valuations Source: YCharts This convergence in valuations has happened before. In the late 1990s, for instance, a common complaint by utility CEOs was that valuations didn't take into account whether a company was fully regulated, diversified, or a pure-play merchant operator. It wasn't until the Enron debacle, the California Crisis and the merchant overbuild that investors began to fully understand the sector's risks. This convergence occurred again in 2006. Unfortunately, it was soon followed by the broad market selloff that helped precipitate the Global Financial Crisis. Thereafter, chastened investors cast a more skeptical eye at these companies and discovered that many utilities had overbuilt during the bubble, and now struggled with tepid power demand in the wake of the downturn, a situation that still persists for many in the industry. Today, utilities are making big plays into the shale space, as well as into renewables and wires, while others have retail, wholesale or international initiatives. Still others are making new decisions about how much of their business will be regulated. Each of these plays has varying degrees of risk and reward, and investors must attempt to gauge whether the risk entailed by a particular utility's strategy fits with their own investment goals. These strategies are at least partly the result of the industry's changing business model. And the trends driving this change, such as cheap natural gas, technological disruption, and tighter emissions standards, will continue to evolve. At the conference, I got the industry's take on various trends and developments, including impending Republican control of both chambers of Congress. As I observed shortly after the midterm election, a Republican Congress could change the value proposition of certain utilities. For instance, if Republicans were to successfully push back on anticipated Environmental Protection Agency (EPA) regulations on carbon emissions, coal-heavy utilities could see a rise in valuations since a lower cost of compliance offers investors greater earnings visibility. Meanwhile, utilities that have been pursuing a clean-technology strategy could see a decline in their valuations if these investments prove costlier in the absence of EPA regulations. The More Things Change When I asked Gerard Anderson, CEO of DTE Energy Holding Co (NYSE: DTE), about what the GOP's control of Congress might mean for utilities, he said that when President Bush took office in 2001, similar assumptions about regulatory rollback pervaded the industry. A story published then in The New York Times even suggested that a meeting between the EPA and a utility group had ended with the EPA administrator wrapped around the industry's little finger. However, Anderson was at that meeting, and he said the reporter's take on the story couldn't have been further from the truth. In fact, the reality was quite the opposite: The EPA administrator was laying down the law and telling the utilities he expected compliance with the rules of the day. Instead, Anderson said that what typically happens is environmental laws are vetted and challenged ad infinitum, but there's little that any party can do to change them. The manager of investor relations for Southern Company (NYSE: SO), Jimmy Stewart, basically agreed with him. Stewart said it still might be possible to influence some aspects of the proposed law that would limit emissions, but mainly by changing the details, such as adjusting compliance dates. One of the best points regarding the EPA's proposed rules came from Thomas Hamlin, vice president of financial planning and investor relations at Dominion Resources Inc (NYSE: D). He said the new rules are coming so quickly that utilities don't have the luxury of waiting to see which way the political winds blow. Over the past few years, many utilities have had to develop multi-year plans to shut down coal plants and build replacements that would meet the EPA's timeline. And at this point, those plans will have to move forward. And even companies that have developed renewables or are in the renewables industry do not fear the GOP changeover, despite the fact that Republicans have threatened to roll back renewables subsidies. James Hughes, CEO of First Solar Inc (NSDQ: FSLR), told me that cutting back subsidies would have less effect on the industry than when it was in its infancy, because the cost of solar has come down so dramatically. Many analysts say that even without EPA rules the industry will continue its shift toward cleaner natural gas-powered plants given how cheap natural gas has become. Also, building a new coal plant is nearly impossible now as politicians and regulators routinely yield to NIMBY (not in my backyard) sentiment. In future issues of Utility & Income, we'll drill down into some of the other topics covered at the conference, including distributed generation, cyber-security, renewables, YieldCos and more, and we'll analyze how these trends will impact the industry. Subscribers to Utility Forecaster receive the full update, which lists those utilities best positioned to weather a potential industry shakeout. This article originally appeared in the Utility & Income column. Never miss an issue. Sign up to receive Utility & Income by email. 10% Yields and Almost No Taxes Imagine being able to pocket $10,000 per year for every $10,000 you invest and have it be 95% tax-free. It's all possible, with one overlooked investment that not one in 100 investors has put a penny into. That's their loss. Find out how to make it your gain. Go here now. All That Glitters Is Definitely Not Gold 11/21/2014 By Jim Pearce There's been a lot of talk about gold lately, most of it speculation over the near term direction of its price now that the Fed's aggressive program of Quantitative Easing is nearing its end. Quite frankly, I continue to be surprised by the degree of concern over something that, in the overall scheme of things, shouldn't be nearly as important as it is. Yet the price of gold continues to capture headlines and dominate financial media discourse, even though its long-term behavior bears little correlation to other financial assets, and quite frankly has performed very poorly as an investment over the long haul. When I started out as a stockbroker in September of 1983 gold was worth around $400 an ounce, about one third of its current value. Don't get me wrong, tripling your money over 30 years isn't bad. But it pales in comparison to the S&P 500 index, which has increased in value more than 10 times over the same span after adjusting for dividends and stock splits. And that's another problem with gold; not only does it not pay any dividend income while you own it, but it can actually cost you money to store it. So what else is wrong with gold? First of all, there isn't nearly as much gold in existence as you may think. All of the gold ever mined -- approximately 170,000 metric tons or so -- could fit inside the gym of your local high school. That's a lot when it's all in one place, but not so much when it's spread all over the world. Although a finite supply of something is usually beneficial to its price, too little of something makes it impossible to integrate into a meaningful sector of the economy. One reason why gold is used so much for jewelry is that it is so pretty, but another reason is that you don't need very much of it for that purpose. But if gold was necessary to fuel an automobile or build a skyscraper, then we'd be living in a very different world then the one we do now thanks to much larger supplies of oil and steel. And even though oil and steel are lousy investments in and of themselves, vast fortunes have been made by the people and companies who have used them to energize our planet and house its inhabitants. In other words, you can build large industries around more plentiful resources like oil and steel, but you can't build much industry around something as scarce as gold. Nevertheless, primarily for cultural reasons, it is still viewed as a "must-have" asset during times of rising inflation. Prior to 1971 when our currency was directly linked to gold that made a lot of sense, but now that the U.S. and all other major nations use a fiat currency it is difficult to justify linking gold so tightly with money. In theory, at least, the price of gold is no more tied to the value of the dollar than is the price of oil or steel. However, currently there is so much money tied up in financial instruments that use gold and the dollar as their subjects that a de facto relationship does exist. Along with U.S. Treasury notes, the relative value of the three instruments have become intertwined in a byzantine labyrinth of options, futures, and various forms of "synthetic" securities that in the near term it would be impossible to decouple one from the others without causing enormous ripples throughout the global financial system. All that said, we include a gold ETF in the 'Inflation Hedges' sleeve of the Personal Finance Fund portfolio for the simple reason that its price behavior during times of rampant inflation is entirely predictable: it goes up in value. Sometimes it goes up a lot, such as three years ago when it topped out above $1,800. And so long as enough people believe that it should do that, then it will continue to do so. Eventually the price of gold will decouple altogether from the value of money, but that probably won't happen unless we get to the point where there is a true global economy operating on a single form of fiat currency. Until then, you can reliably count on gold as one of the few true inflation hedges available in the market. This article originally appeared in the Mind Over Markets column. Never miss an issue. Sign up to receive Mind Over Markets by email. You'll Never Hear It Coming There are hundreds of economic indicators out there that analysts use to predict a market crash. Some are better than others. The truth is, no matter which indicator you may be watching or which analyst you may follow…you'll never hear the crash coming. They happen almost overnight, and by the time they hit it's, too late to react. That's why you always need to be prepared. I have five bulletproof stocks that will make you money through ANY market. You can get their lucrative details here. You are receiving this email at benjamart.ss.stock@blogger.com as part of your subscription to Investing Daily's Stocks To Watch, published by Investing Daily. To ensure delivery directly to your inbox, please add postoffice@investingdaily.com to your address book today. Email Preferences | About Us | Premium Services | Contact Us | Privacy Policy Copyright 2014 Investing Daily. All rights reserved. Investing Daily, a division of Capitol Information Group, Inc. 7600A Leesburg Pike West Building, Suite 300 Falls Church, VA 22043-2004 U.S.A.