The perfect situation for companies and their investors is the Goldilocks climate: not too hot and not too cold.
But whenever we get into a Goldilocks climate, it doesn't seem to last.
Most of the time, the economy is either heating up or cooling down, although the signals are so confusing that it's often hard to tell which way we're headed.
The government can't control a lot of things, especially the weather, but it has a big effect on the economic climate.
Of all the jobs the federal government does, from fighting wars to fighting poverty, it may be that its most important job is keeping the economy from getting too hot or too cold. It it weren't for the government, we might have had another Great Depression by now.
Wednesday 27 January 2010
The Economic Climate (8): Cold Climates and Recession
Reviewing the recessions in US since World War II to 1995: all last an average of 11 months, and cause an average of 1.62 million people to lose their jobs.
In a recession, business goes from bad to terrible.
Companies that sell soft drinks, hamburgers, medicines - things that people either cannot do without or can easily afford - can sail through a recession unscathed.
Companies that sell big-ticket items such as cars, refrigerators, and houses have serious problems in recessions. They can lose millions, or even billions, of dollars, and unless they have enough money in the bank to tide them over, they face the prospect of going bankrupt.
Many investors have learned to "recession-proof" their portfolios.
In a recession, business goes from bad to terrible.
Companies that sell soft drinks, hamburgers, medicines - things that people either cannot do without or can easily afford - can sail through a recession unscathed.
Companies that sell big-ticket items such as cars, refrigerators, and houses have serious problems in recessions. They can lose millions, or even billions, of dollars, and unless they have enough money in the bank to tide them over, they face the prospect of going bankrupt.
Many investors have learned to "recession-proof" their portfolios.
- They buy stocks only in McDonald's, Coca-Cola, or Johnson & Johnson, and other such "consumer growth" companies that tend to do well in cold climates.
- They ignore the likes of General Motors, Reynolds Metals, or U.S. Home Corp. These are examples of "cyclical" companies that suffer in cold climates.
- sell expensive products,
- make parts for expensive products, or
- produce the raw materials used in expensive products.
Tuesday 26 January 2010
The Economic Climate (7): The economy has gone from hot to cold in a matter of months.
A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.
Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models. The automakers are giving rebates, and car prices begin to fall a bit. Thousands of auto workers are laid off, and the unemployment lines get longer. People out of work can't afford to buy things, so they cut back on their spending.
Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV. This puts a damper on the motel business in Orlando. Instead of buying a new fall wardrobe, they make do with last year's wardrobe. This puts a damper on the clothes business. Stores are losing customers and the unsold merchandise is piling up on the shelves.
Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers. There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending. The economy has gone from hot to cold in a matter of months. In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.
Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models. The automakers are giving rebates, and car prices begin to fall a bit. Thousands of auto workers are laid off, and the unemployment lines get longer. People out of work can't afford to buy things, so they cut back on their spending.
Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV. This puts a damper on the motel business in Orlando. Instead of buying a new fall wardrobe, they make do with last year's wardrobe. This puts a damper on the clothes business. Stores are losing customers and the unsold merchandise is piling up on the shelves.
Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers. There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending. The economy has gone from hot to cold in a matter of months. In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.
The Economic Climate (6): Price of Money (Interest rate) rise in hot economy
With new stores being built and factories expanding all over the place, a lot of companies are borrowing money to pay for their construction projects. Meanwhile, a lot of consumers are borrowing money on their credit cards to pay for all the stuff they've been buying. The result is more demand for loans at the bank.
Seeing the crowds of people lining up for loans, banks and finance companies follow in the footsteps of the automakers and all the other businesses. They, too, raise their prices - by charging a higher rate of interest for their loans.
Soon, you've got the price of money rising in lockstep with prices in general - the only prices that go down are stock prices and bond prices.
A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.
Seeing the crowds of people lining up for loans, banks and finance companies follow in the footsteps of the automakers and all the other businesses. They, too, raise their prices - by charging a higher rate of interest for their loans.
Soon, you've got the price of money rising in lockstep with prices in general - the only prices that go down are stock prices and bond prices.
- Investors bail out of stocks because they worry that companies cannot grow their earnings fast enough to keep up with inflation.
- During the inflation of the late 1970s and early 1980s, stock and bond prices took a big fall.
A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.
The Economic Climate (5): Inflation in a hot economy
The main worry is that a hot economy and too much prosperity will lead to inflation - the technical term for prices going up.
One price hike leads to another, as businesses and workers take turns trying to match the latest increase.
- Demand for goods and services is high, which leads to a shortage of raw materials, and possibly a shortage of workers.
- Whenever there's a shortage of anything, the prices tend to go up.
- Car manufacturers are paying more for steel, aluminum, and so forth, so they raise the prices of cars.
- When employees begin to feel the pinch of higher prices, they demand higher wages.
One price hike leads to another, as businesses and workers take turns trying to match the latest increase.
- Companies are paying more for electricity, raw materials, and workers.
- Workers take home bigger paychecks but they lose the advantage because everything they buy is more expensive than it used to be.
- Landlords are raising rents to cover their increased costs.
The Economic Climate (4): The Hot Climate
The Hot Economic Climate
Business is booming, and people are crowding into stores, buying new cars, new couches, new VCRs, new everythings. Merchandise is flying off the shelves, stores hire more clerks to handle the rush, and factories are working overtime to make more products.
When the economy reaches the high-heat phase, factories are making so many products that merchandise is piling up at every level: in the stores, in the warehouses, and in the factories themselves. Store owners are keeping more goods on hand, so they won't be caught short.
Jobs are easy to find, for anybody who's halfway qualified, and the help-wanted ads in the newspapers go on for several pages. There's no better time for teenagers and recent college grads to enter the workforce than in the middle of a hot economy.
It sounds like the perfect situation:
The main worry is that a hot economy and too much properity will lead to inflation.
Business is booming, and people are crowding into stores, buying new cars, new couches, new VCRs, new everythings. Merchandise is flying off the shelves, stores hire more clerks to handle the rush, and factories are working overtime to make more products.
When the economy reaches the high-heat phase, factories are making so many products that merchandise is piling up at every level: in the stores, in the warehouses, and in the factories themselves. Store owners are keeping more goods on hand, so they won't be caught short.
Jobs are easy to find, for anybody who's halfway qualified, and the help-wanted ads in the newspapers go on for several pages. There's no better time for teenagers and recent college grads to enter the workforce than in the middle of a hot economy.
It sounds like the perfect situation:
- Businesses of all kinds are ringing up big profits;
- the unemployment lines are getting shorter; and
- people feel prosperous, confident, and secure in their jobs.
- That's why they're buying everything in sight.
The main worry is that a hot economy and too much properity will lead to inflation.
The Economic Climate (3): Hot, cold and warm or Goldilocks climate
In the economic climate, there are 3 basic conditions:
A hot climate makes investors nervous.
A cold climate depresses them.
What they're always hoping for is the warm climate, also known as the Goldilocks climate, when everything is just right.
But it is hard to maintain the Goldilocks climate. Most of the time, the economy is moving toward one extreme or another: from hot to cold and back again.
- hot,
- cold and
- warm.
A hot climate makes investors nervous.
A cold climate depresses them.
What they're always hoping for is the warm climate, also known as the Goldilocks climate, when everything is just right.
But it is hard to maintain the Goldilocks climate. Most of the time, the economy is moving toward one extreme or another: from hot to cold and back again.
The Economic Climate (2): Farmers and the Weather
At one time, when 80% of the population owned farms or worked on farms, the economic climate had everything to do with weather.
If a drought burned up the crops, or they drowned in the rain, farmers couldn't make money. And when the farmers had no money, the local general store wasn't doing any business, and neither were the suppliers to the general store. But when the weather was favourable, farms produced a record harvest that put cash in farmers' pockers. The farmers spent the money at the general store, which put cash in the store owner's pockets. The store owners would restock the shelves, which put cash in the suppliers' pockets. And so on.
No wonder the weather - and not the stock market - was the favourite topic at lunch counters and on street corners. Weather was so important to people's livelihood that a book of homespun predictions, The Farmer's Almanc, was a perennial bestseller. You don't see any weather books on the best-seller lists today. But books about Wall Street make those lists quite often.
Today, with less than 1% of the population involved in farming, the weather has lost much of its influence. In the business world, people pay less attention to the weather report and more attention to the reports on
In the economic climate, there are three basic conditions:
If a drought burned up the crops, or they drowned in the rain, farmers couldn't make money. And when the farmers had no money, the local general store wasn't doing any business, and neither were the suppliers to the general store. But when the weather was favourable, farms produced a record harvest that put cash in farmers' pockers. The farmers spent the money at the general store, which put cash in the store owner's pockets. The store owners would restock the shelves, which put cash in the suppliers' pockets. And so on.
No wonder the weather - and not the stock market - was the favourite topic at lunch counters and on street corners. Weather was so important to people's livelihood that a book of homespun predictions, The Farmer's Almanc, was a perennial bestseller. You don't see any weather books on the best-seller lists today. But books about Wall Street make those lists quite often.
Today, with less than 1% of the population involved in farming, the weather has lost much of its influence. In the business world, people pay less attention to the weather report and more attention to the reports on
- interest rates,
- consumer spending, and
- so forth, that come out of Washington and New York.
In the economic climate, there are three basic conditions:
- hot,
- cold, and
- warm.
The Economic Climate (1): Companies live in this economic climate
Companies live in a climate - the economic climate.
They depend on the outside world for survival, just as plants and humans do.
They depend on the outside world for survival, just as plants and humans do.
- They need a steady supply of capital, also known as the money supply.
- They need buyers for whatever it is they make, and
- Suppliers for whatever materials they make it from.
- They need a government that lets them do their job without taxing them to death or pestering them to death with regulations.
- they make money or
- lose money,
- thrive or
- wither away.
Maybank Research ups Hartalega’s earnings forecast
Maybank Research ups Hartalega’s earnings forecast
Written by Maybank Investment Research
Tuesday, 26 January 2010 10:00
KUALA LUMPUR: Maybank Investment Research has raised the earnings outlook for Hartalega by between 12% and 19% and lifted the target price to RM8.30.
It said on Tuesday, Jan 26 it expects 3QFY10 results are expected to again beat consensus forecasts. It has a Buy call on RM7.77.
“Strong earnings and margins should extend into FY11 before industry capacity catches up and restocking activities abate, potentially impacting ASP (average selling price) and margins in FY12.
“Nevertheless, we think that Hartalega, with its superior technical abilities, should be able to ride this out by raising operating efficiencies. Maintain Buy. Our new TP is DCF-derived,” it said.
Written by Maybank Investment Research
Tuesday, 26 January 2010 10:00
KUALA LUMPUR: Maybank Investment Research has raised the earnings outlook for Hartalega by between 12% and 19% and lifted the target price to RM8.30.
It said on Tuesday, Jan 26 it expects 3QFY10 results are expected to again beat consensus forecasts. It has a Buy call on RM7.77.
“Strong earnings and margins should extend into FY11 before industry capacity catches up and restocking activities abate, potentially impacting ASP (average selling price) and margins in FY12.
“Nevertheless, we think that Hartalega, with its superior technical abilities, should be able to ride this out by raising operating efficiencies. Maintain Buy. Our new TP is DCF-derived,” it said.
Buy and Hold vs. Market Timing
Buy and Hold = Select your stocks for your portfolio and hold.
Stock picking is easier than timing whole market.
Nobody can predict the future.
Even a broken clock is right twice a day.
What's luck got to do with it?
Is this person skillful or lucky?
For every action, there's an opposite reaction.
Buyers & Sellers, Bulls & Bears: that is what makes the markets.
The higher the risk, the higher the expected return.
http://video.yahoo.com/watch/3913819
Stock picking is easier than timing whole market.
Nobody can predict the future.
Even a broken clock is right twice a day.
What's luck got to do with it?
Is this person skillful or lucky?
For every action, there's an opposite reaction.
Buyers & Sellers, Bulls & Bears: that is what makes the markets.
The higher the risk, the higher the expected return.
http://video.yahoo.com/watch/3913819
Chat site for local or regional stocks
There are many blogs on local and regional investing.
Which is a good chat site(s) to visit for sharing on local or regional stocks? Any recommendations?
Which is a good chat site(s) to visit for sharing on local or regional stocks? Any recommendations?
Fitch upgrades Indonesia
Fitch upgrades Indonesia
Published: 2010/01/26
HONG KONG: Fitch Ratings upgraded Indonesia's sovereign rating yesterday to one notch below investment grade, giving a vote of confidence that is likely to spur further investments in Southeast Asia's biggest economy.
Indonesia's rating was raised to BB plus, with Fitch citing rising foreign exchange reserves, improving public finances and strong growth prospects as key factors behind the move. The outlook on the rating is stable.
The rupiah currency snapped back from early lows and spreads on Indonesian credit default swaps tightened after the upgrade of its long-term foreign and local currency ratings, and analysts said an investment grade rating was likely in the next few years.
"This (upgrade) reiterates what markets have been saying for a long time now, that Indonesia is a great credit story but it has some more work to do before getting that investment grade rating," said Kenneth Akintewe, a fund manager at Aberdeen Asset Management in Singapore who manages US$500 million (US$1 = RM 3.41) in assets.
Though foreign investors have been snapping up its bonds and stocks on its strong economic outlook as well as its high yield, analysts said high and volatile bouts of inflation and weak infrastructure meant its debt yields were close to those of Argentina - which has billions of US dollars in unsettled debt.
The stock market jumped over 80 per cent and bonds posted equity-like returns last year as investors have been attracted by the tantalising prospect that relatively stable politics and healthy economic growth could catapult the country to investment-grade status in a few years to stand alongside BRIC nations Brazil, Russia, India and China.
A US$2 billion Indonesian government bond sale earlier this month attracted US$4.5 billion in orders, bankers said.
Pimco, the world's biggest bond fund manager, recently said that it expects the economy to get an investment grade rating in the next three to five years.
The rupiah was the best performing Asian currency last year, gaining 17 per cent, and analysts are bullish about its prospects this year, too.
"I see capital gains for holding Indonesia's bonds with maturity above 10 years for long-term investors and the rupiah should also get a boost," Gunawan said.
Fitch now has the highest rating for Indonesia among the three major rating agencies, though it remains below its investment grade rating prior to the 1997 Asian financial crisis.
Standard & Poor's rates Indonesia's unsecured foreign currency debt at BB minus, while Moody's Investors Service has its sovereign foreign currency rating at Ba2, two notches below investment grade.
The upgrade means it is the highest ranking non-investment grade country in Asia ahead of the Philippines and Vietnam.
Fitch noted, however, that the country's relatively shallow capital markets remained vulnerable to risks surrounding a reversal of carry trades or sudden emerging-market risk aversion. It also said more reforms in its financial sector were needed.
"The concerns on the ground are the success of the reforms. To get investment grade, the reforms would have to play out," said Wellian Wiranto, Asian economist at HSBC in Singapore. - Reuters
Published: 2010/01/26
HONG KONG: Fitch Ratings upgraded Indonesia's sovereign rating yesterday to one notch below investment grade, giving a vote of confidence that is likely to spur further investments in Southeast Asia's biggest economy.
Indonesia's rating was raised to BB plus, with Fitch citing rising foreign exchange reserves, improving public finances and strong growth prospects as key factors behind the move. The outlook on the rating is stable.
The rupiah currency snapped back from early lows and spreads on Indonesian credit default swaps tightened after the upgrade of its long-term foreign and local currency ratings, and analysts said an investment grade rating was likely in the next few years.
"This (upgrade) reiterates what markets have been saying for a long time now, that Indonesia is a great credit story but it has some more work to do before getting that investment grade rating," said Kenneth Akintewe, a fund manager at Aberdeen Asset Management in Singapore who manages US$500 million (US$1 = RM 3.41) in assets.
Though foreign investors have been snapping up its bonds and stocks on its strong economic outlook as well as its high yield, analysts said high and volatile bouts of inflation and weak infrastructure meant its debt yields were close to those of Argentina - which has billions of US dollars in unsettled debt.
The stock market jumped over 80 per cent and bonds posted equity-like returns last year as investors have been attracted by the tantalising prospect that relatively stable politics and healthy economic growth could catapult the country to investment-grade status in a few years to stand alongside BRIC nations Brazil, Russia, India and China.
A US$2 billion Indonesian government bond sale earlier this month attracted US$4.5 billion in orders, bankers said.
Pimco, the world's biggest bond fund manager, recently said that it expects the economy to get an investment grade rating in the next three to five years.
The rupiah was the best performing Asian currency last year, gaining 17 per cent, and analysts are bullish about its prospects this year, too.
"I see capital gains for holding Indonesia's bonds with maturity above 10 years for long-term investors and the rupiah should also get a boost," Gunawan said.
Fitch now has the highest rating for Indonesia among the three major rating agencies, though it remains below its investment grade rating prior to the 1997 Asian financial crisis.
Standard & Poor's rates Indonesia's unsecured foreign currency debt at BB minus, while Moody's Investors Service has its sovereign foreign currency rating at Ba2, two notches below investment grade.
The upgrade means it is the highest ranking non-investment grade country in Asia ahead of the Philippines and Vietnam.
Fitch noted, however, that the country's relatively shallow capital markets remained vulnerable to risks surrounding a reversal of carry trades or sudden emerging-market risk aversion. It also said more reforms in its financial sector were needed.
"The concerns on the ground are the success of the reforms. To get investment grade, the reforms would have to play out," said Wellian Wiranto, Asian economist at HSBC in Singapore. - Reuters
Some Lowest P/E Stocks
LTKM 3.02
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
COASTAL 5.31
AJIYA 5.40
KLCC PROP 5.76
PANTECH 5.87
DXN 6.15
POH KONG 6.22
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
COASTAL 5.31
AJIYA 5.40
KLCC PROP 5.76
PANTECH 5.87
DXN 6.15
POH KONG 6.22
Hong Leong's offer undervalues EONCap: Chairman
Hong Leong's offer undervalues EONCap: Chairman
By Chong Pooi Koon
Published: 2010/01/26
EON Capital has sought clarification from Hong Leong 'on a range of details' in its buyout proposal, particularly on the valuation.
EON Capital Bhd (EONCap)(5266), which must decide on Hong Leong Bank Bhd's takeover offer by tomorrow, may try to remove the clause that restricts it from talking to other potential bidders while asking for a higher price.
EONCap, the smaller of the two banks, said it has yesterday sought clarification from Hong Leong "on a range of details" in its buyout proposal, particularly on the valuation.
"The board (of directors) is evaluating this approach, but on the face of it the offer price significantly undervalues EONCap," chairman Tan Sri Syed Anwar Jamalullail said in a statement yesterday.
Hong Leong, the sixth largest local bank, last Thursday said it will offer RM7.10 cash per share to take over EONCap. The offer priced EONCap at 1.4 times book value, which falls in the lower end of the past valuations range in local banking deals.
Still, many banking analysts feel that the price offered was fair given EONCap's weaker franchise, though others argued that scarcity premiums should be attached as there are not many local lenders left available for a takeover.
Hong Leong has also set strict conditions in its proposal, one of which requires EONCap to deal with it exclusively on the sale.
"In evaluating the Hong Leong Bank offer, we will consider all alternatives open to us in order to fulfil our responsibility to shareholders," Syed Anwar said yesterday.
Meanwhile, EON Banking Group chief executive officer Michael Lor was quoted by Bernama news agency as saying that EONCap's board was also looking into other offers as there were interested parties.
"If there are better opportunities, why not pursue all the alternatives?" he told reporters in Petaling Jaya yesterday. Lor, however, said that he did not know whether other banks had submitted their applications to Bank Negara Malaysia to participate in the negotiations.
EONCap said it had launched a three-year transformation programme in October 2007, which sharply improved the bank's performance despite difficult economic conditions in 2009.
"In the past year, we have seen our transformation programme succeeding. As Malaysia emerges from the economic downturn, EONCap is well positioned for future value creation," Syed Anwar said.
By Chong Pooi Koon
Published: 2010/01/26
EON Capital has sought clarification from Hong Leong 'on a range of details' in its buyout proposal, particularly on the valuation.
EON Capital Bhd (EONCap)(5266), which must decide on Hong Leong Bank Bhd's takeover offer by tomorrow, may try to remove the clause that restricts it from talking to other potential bidders while asking for a higher price.
EONCap, the smaller of the two banks, said it has yesterday sought clarification from Hong Leong "on a range of details" in its buyout proposal, particularly on the valuation.
"The board (of directors) is evaluating this approach, but on the face of it the offer price significantly undervalues EONCap," chairman Tan Sri Syed Anwar Jamalullail said in a statement yesterday.
Hong Leong, the sixth largest local bank, last Thursday said it will offer RM7.10 cash per share to take over EONCap. The offer priced EONCap at 1.4 times book value, which falls in the lower end of the past valuations range in local banking deals.
Still, many banking analysts feel that the price offered was fair given EONCap's weaker franchise, though others argued that scarcity premiums should be attached as there are not many local lenders left available for a takeover.
Hong Leong has also set strict conditions in its proposal, one of which requires EONCap to deal with it exclusively on the sale.
"In evaluating the Hong Leong Bank offer, we will consider all alternatives open to us in order to fulfil our responsibility to shareholders," Syed Anwar said yesterday.
Meanwhile, EON Banking Group chief executive officer Michael Lor was quoted by Bernama news agency as saying that EONCap's board was also looking into other offers as there were interested parties.
"If there are better opportunities, why not pursue all the alternatives?" he told reporters in Petaling Jaya yesterday. Lor, however, said that he did not know whether other banks had submitted their applications to Bank Negara Malaysia to participate in the negotiations.
EONCap said it had launched a three-year transformation programme in October 2007, which sharply improved the bank's performance despite difficult economic conditions in 2009.
"In the past year, we have seen our transformation programme succeeding. As Malaysia emerges from the economic downturn, EONCap is well positioned for future value creation," Syed Anwar said.
Public Bank lowered to 'sell' at Citi
Public Bank lowered to 'sell' at Citi
Published: 2010/01/26
Public Bank Bhd, Malaysia’s third biggest lender, was downgraded to “sell” from “hold” at Citigroup Inc. amid the bank’s lower dividend outlook.
Citigroup also cut Public Bank’s share price estimate to RM10.90 from RM11.67. -- Bloomberg
Published: 2010/01/26
Public Bank Bhd, Malaysia’s third biggest lender, was downgraded to “sell” from “hold” at Citigroup Inc. amid the bank’s lower dividend outlook.
Citigroup also cut Public Bank’s share price estimate to RM10.90 from RM11.67. -- Bloomberg
Hartalega gains as target price raised
Hartalega gains as target price raised
Published: 2010/01/26
Hartalega Holdings Bhd, a Malaysian rubber-glove maker, rose to a record after Maybank Investment Bank Bhd increased the share price forecast, saying fiscal third-quarter earnings due on January 28 will exceed consensus forecasts.
The stock gained 1.7 per cent to RM7.90 at 9:38 am local time, set for the highest level since it went public on April 17, 2008.
Maybank raised the target price for the stock to RM8.30 from RM6.50. -- Bloomberg
Published: 2010/01/26
Hartalega Holdings Bhd, a Malaysian rubber-glove maker, rose to a record after Maybank Investment Bank Bhd increased the share price forecast, saying fiscal third-quarter earnings due on January 28 will exceed consensus forecasts.
The stock gained 1.7 per cent to RM7.90 at 9:38 am local time, set for the highest level since it went public on April 17, 2008.
Maybank raised the target price for the stock to RM8.30 from RM6.50. -- Bloomberg
The Company When It's Young: Long on expectations and short on experience. Can grow very fast and High Risk.
The young company is full of energy, bright ideas, and hope for the future. It is long on expectations and short on experience.
It has the cash that was raised in the offering, so chances are it doesn't have to worry about paying its bills at this point. It expects to be earning a living before the original cash runs out, but there's no guarantee of that.
In its formative years, a company's survival is far from assured. A lot of bad things can happen.
In industries where the competition is fierce, companies knock each other off all the time. Electronics is a good example.
It is easy to see why 1/2 of all new businesses are dissolved within 5 years, and why the most bankruptcies happen in competitive industries.
Because of the variety of calamities that can befall a company in the high-risk juvenile phase of its life, the people who own the shares have to protect their investment by paying close attention to the company's progress.
When people go on vacation, they tend to take twice as many clothes as they're going to need, and half as much money. Young companies make the same mistake about money. They start out with too little.
Now for the good part:
It has the cash that was raised in the offering, so chances are it doesn't have to worry about paying its bills at this point. It expects to be earning a living before the original cash runs out, but there's no guarantee of that.
In its formative years, a company's survival is far from assured. A lot of bad things can happen.
- It may have a great idea for a product but spend all its money before the product is manufactured and shipped to the stores.
- Or maybe the great idea turns out not to have been so great after all.
- Or maybe the company gets sued by people who say they had the great idea first, and the company stole it. If the jury agrees with the plaintiffs, the company could be forced to pay millions of dollars it doesn't have.
- Or maybe the great idea becomes a great product that fails a government test and can't be sold in this country.
- Or maybe another company comes along with an even greater product that does the job better, or cheaper, or both.
In industries where the competition is fierce, companies knock each other off all the time. Electronics is a good example.
- Some genius in a lab in Singapore invents a better relay switch, and six months later it's on the market, leaving the other manufacturers with obsolete relay switches that nobody wants.
It is easy to see why 1/2 of all new businesses are dissolved within 5 years, and why the most bankruptcies happen in competitive industries.
Because of the variety of calamities that can befall a company in the high-risk juvenile phase of its life, the people who own the shares have to protect their investment by paying close attention to the company's progress.
- You can't afford to buy any stock and then go to sleep and forget about it, but young companies, especially, must be followed every step of the way.
- They are often in the precarious position where one false step can put them into bankruptcy and out of business.
- It's especially important to assess their financial strength - the biggest problem with young companies is that they run out of cash.
When people go on vacation, they tend to take twice as many clothes as they're going to need, and half as much money. Young companies make the same mistake about money. They start out with too little.
Now for the good part:
- Starting from scratch, a young company can grow very fast.
- It's small and its restless, and it has plenty of room to expand in all directions.
The Company in Middle Age (2): Midlife crisis of Apple
Whatever it's been doing doesn't seem to be working anymore. It abandons the old routines and thrashes around looking for a new identity. This sort of crisis happens all the time. It happened to Apple.
1980: In late 1980, just after Apple went public, it came out with a lemon: the Apple III. Production was halted while the problems were ironed out, but then it was too late. Consumers had lost faith in Apple III. They lost faith in the whole company.
There's nothing more important to a business than its reputation. A restaurant can be 100 years old and have a wall full of awards, but all it takes is one case of food poisoning or a new chef who botches the orders, and a century's worth of success goes out the window. So to recover from its Apple III fiasco, Apple had to act fast. Heads rolled in the front office, where several executives were demoted.
The company developed new software programs, opened offices in Europe, installed hard disks in some of its computers. On the plus side, Apple reached $1 billion in annual sales in 1982, but on the minus side, it was losing business to IBM, its chief rival. IBM was cutting into Apple's territory: personal computers.
Instead of concentrating on what it knew best, Apple tried to fight back by cutting in on IBM's territory: business computers. It created the Lisa, a snazzy machine that came with a new gadget: the mouse. But in spite of the muse, the Lisa didn't sell. Apple's earnings took a tumble, and so did the stock price - down 50% in a year.
Apple was less than 10 years old, but it was having a full-blown midlife crisis. Investors were dismayed, and the company's management were feeling the heat. Employees got the jitters and looked for other jobs. Mike Markkula, Apple's president, resigned. John Sculley, former president of Pepsi-Co, was brought in for the rescue attempt. Sculley was no computer experts, but he knew marketing. Marketing is what Apple needed.
Apple was split into 2 dividsions, Lisa and Macintosh. There was spirited rivalry between the two. The Macintosh had a mouse like the Lisa and was similar in other respects, but it cost much less and was easier to use. Soon, the company abandoned the Lisa and put all its resources into the Macintosh. It bought TV ads and made an incredible offer: Take one home and try it out for twenty-four hours, for free.
The orders poured in and Apple sold 75,000 Macintoshes in 3 months. The company was back on track with this great new product. There was still turmoil in the office, and Jobs had a falling out with Sculley.
This is another intersting aspect of corporate democracy: Once the shares are in public hands, the founder of the company doesn't necessarily get what he wants.
Sculley changed a few things around and solved a few more problems, and the Macintosh ended up doing what the Lisa was supposed to do: It caught on with the business crowd. New software made it eary to link one Macintosh to another in a network of computers. By 1988, more than a million Macintoshes had been sold.
A company's midlife crisis puts investors in a quantdary. If the stock has already dropped in price, investors have to decide whether
- to sell it and avoid even bigger losses or
- hold on to it and hoe that the company can launch a comeback.
The Company in Middle Age (1): Still growing but not as fast. Occasional Midlife crisis
Companies that manage to reach middle age are more stable than young companies.
In other words, they have setled into a comfortable routine. They're still growing, but not as fast as before. They have to struggle to stay in shape, just as the rest of us do when we reach middle age. If they allow themselves to relax too much, leaner and meaner competitors will come along to challenge the.
A company can have a midlife crisis, the same as a person. Whatever it's been doing doesn't seem to be working anymore. It abandons the old routines and thrashes around looking for a new identity. This sort of crisis happens all the time. It happened to Apple.
A company's midlife crisis puts investors in a quandary. If the stock has already dropped in price, investors have to decide whether
They have made a name for themselves and they've learned from their mistakes. They have a good business going, or they wouldn't have gotten this far. They've got a proven record of reliability. Chances are they've got money in the bank and they've developed a good relationship with the bankers, which comes in handy if they need to borrow more.
In other words, they have setled into a comfortable routine. They're still growing, but not as fast as before. They have to struggle to stay in shape, just as the rest of us do when we reach middle age. If they allow themselves to relax too much, leaner and meaner competitors will come along to challenge the.
A company can have a midlife crisis, the same as a person. Whatever it's been doing doesn't seem to be working anymore. It abandons the old routines and thrashes around looking for a new identity. This sort of crisis happens all the time. It happened to Apple.
A company's midlife crisis puts investors in a quandary. If the stock has already dropped in price, investors have to decide whether
- to sell it and avoid even bigger losses or
- hold on to it and hope that the company can launch a comeback.
Monday 25 January 2010
OSK Research maintains Buy on KPJ, target price RM2.95
OSK Research maintains Buy on KPJ, target price RM2.95
Written by OSK Investment Research
Friday, 22 January 2010 09:12
KUALA LUMPUR: OSK Investment Research is maintaining its forecast and BUY recommendation on KPJ Healthcare at an unchanged target price of RM2.95 based on 18.5 times price-to-earnings on FY10 EPS.
It said on Friday, Jan 22 that it likes KPJ’s business model as well as its promising growth potential in a defensive sector, on top of its on-going expansion.
"We would like to reiterate our view that KPJ is an excellent choice for portfolio balancing as well as long-term investment in view of its relatively recession-proof business and steady dividend payout," it said.
It added KPJ’s management had stated it sees the growth momentum in 2009 continuing into 2010, supported by a higher number of patients and higher utilization rate per patient.
"To expand its hospital network, KPJ has identified several potential candidates with focus on areas with untapped and growing demand for private healthcare such as Johor and East Malaysia," it said.
Written by OSK Investment Research
Friday, 22 January 2010 09:12
KUALA LUMPUR: OSK Investment Research is maintaining its forecast and BUY recommendation on KPJ Healthcare at an unchanged target price of RM2.95 based on 18.5 times price-to-earnings on FY10 EPS.
It said on Friday, Jan 22 that it likes KPJ’s business model as well as its promising growth potential in a defensive sector, on top of its on-going expansion.
"We would like to reiterate our view that KPJ is an excellent choice for portfolio balancing as well as long-term investment in view of its relatively recession-proof business and steady dividend payout," it said.
It added KPJ’s management had stated it sees the growth momentum in 2009 continuing into 2010, supported by a higher number of patients and higher utilization rate per patient.
"To expand its hospital network, KPJ has identified several potential candidates with focus on areas with untapped and growing demand for private healthcare such as Johor and East Malaysia," it said.
Rubberex 4Q net profit up 55% to RM5.61m
Rubberex 4Q net profit up 55% to RM5.61m
Written by Joseph Chin
Friday, 22 January 2010 16:03
KUALA LUMPUR: Rubberex Corp (M) Bhd posted net profit of RM5.61 million for the fourth quarter ended Dec 31, 2009, up 55.5% from the RM3.61 million a year ago due to sales contribution from its China subsidiaries and better profit margins and the company expects China to provide the bulk of the earnings this year.
It said on Friday, Jan 22 revenue rose 16.2% to RM91.72 million from RM78.9 million. Earnings per shares were 6.71 sen compared with 4.56 sen.
For the financial year ended Dec 31, 2009, net profit nearly doubled to RM16.56 million from RM8.63 million a year ago. Revenue was RM325.44 million compared with RM274.51 million.
"Such commendable achievement is mainly contributed by the strong demand of disposable gloves produced by its China operations. The board and management foresee that demand for disposable gloves will show further growth in 2010," it said.
Rubberex said additional production capacity has been installed in China which would increase the output by more than 25% to 5.6 billion pieces annually.
"Even though the industrial gloves segment of our Malaysian operation is showing improvement in orders intake amid encouraging signs of an economic recovery in the US, the management foresees that overall group's earnings growth for this year will continue to be derived mainly from its China operations.
"Barring any unforeseen circumstances, the group’s performance for financial year 2010 will be significantly better than the previous year," it said.
Written by Joseph Chin
Friday, 22 January 2010 16:03
KUALA LUMPUR: Rubberex Corp (M) Bhd posted net profit of RM5.61 million for the fourth quarter ended Dec 31, 2009, up 55.5% from the RM3.61 million a year ago due to sales contribution from its China subsidiaries and better profit margins and the company expects China to provide the bulk of the earnings this year.
It said on Friday, Jan 22 revenue rose 16.2% to RM91.72 million from RM78.9 million. Earnings per shares were 6.71 sen compared with 4.56 sen.
For the financial year ended Dec 31, 2009, net profit nearly doubled to RM16.56 million from RM8.63 million a year ago. Revenue was RM325.44 million compared with RM274.51 million.
"Such commendable achievement is mainly contributed by the strong demand of disposable gloves produced by its China operations. The board and management foresee that demand for disposable gloves will show further growth in 2010," it said.
Rubberex said additional production capacity has been installed in China which would increase the output by more than 25% to 5.6 billion pieces annually.
"Even though the industrial gloves segment of our Malaysian operation is showing improvement in orders intake amid encouraging signs of an economic recovery in the US, the management foresees that overall group's earnings growth for this year will continue to be derived mainly from its China operations.
"Barring any unforeseen circumstances, the group’s performance for financial year 2010 will be significantly better than the previous year," it said.
Pantech's 3Q net profit down 32% to RM11.7m
Pantech's 3Q net profit down 32% to RM11.7m
Tags: Pantech Group Holdings Bhd | third quarter
Written by The Edge Financial Daily
Monday, 25 January 2010 22:23
KUALA LUMPUR: Pipemaker PANTECH GROUP HOLDINGS BHD [] posted a 32% drop in net profit to RM11.7 million for its third quarter ended Nov 11, 2009 (3QFY10) from RM17.3 million a year earlier mainly due to lower sales volume from the trading division and lower output from manufacturing.
Revenue fell 30.6% to RM92.2 million from RM132.8 million, while basic earnings per share (EPS) dropped to 3.14 sen from 4.6 sen. It declared a special second interim single-tier dividend of 1.5 sen per share share versus eight sen per share a year earlier.
For the nine months to Nov 30, 2009, the group's net profit fell 21% to RM40.1 million from RM50.9 million a year earlier mainly due to lower contribution from the manufacturing division.
Revenue fell 9.8% to RM335.5 million from RM371.8 million. EPS fell to 10.71 sen from 13.57 sen while dividends declared rose to three sen from two sen in the same period in FY09.
On its prospects, Pantech said while there were signs of economic recovery, economic conditions continued to be challenging for the group.
“The board will continue its cautious approach undertaken to monitor, mitigate and respond to any negative economic headwinds through diligent administration of operational cost controls and cash flows.
“Barring any unforeseen circumstances, the board believes that the performance of the group for the current financial year will remain satisfactory while the long-term outlook of the oil and gas industry continues to be positive.”
Tags: Pantech Group Holdings Bhd | third quarter
Written by The Edge Financial Daily
Monday, 25 January 2010 22:23
KUALA LUMPUR: Pipemaker PANTECH GROUP HOLDINGS BHD [] posted a 32% drop in net profit to RM11.7 million for its third quarter ended Nov 11, 2009 (3QFY10) from RM17.3 million a year earlier mainly due to lower sales volume from the trading division and lower output from manufacturing.
Revenue fell 30.6% to RM92.2 million from RM132.8 million, while basic earnings per share (EPS) dropped to 3.14 sen from 4.6 sen. It declared a special second interim single-tier dividend of 1.5 sen per share share versus eight sen per share a year earlier.
For the nine months to Nov 30, 2009, the group's net profit fell 21% to RM40.1 million from RM50.9 million a year earlier mainly due to lower contribution from the manufacturing division.
Revenue fell 9.8% to RM335.5 million from RM371.8 million. EPS fell to 10.71 sen from 13.57 sen while dividends declared rose to three sen from two sen in the same period in FY09.
On its prospects, Pantech said while there were signs of economic recovery, economic conditions continued to be challenging for the group.
“The board will continue its cautious approach undertaken to monitor, mitigate and respond to any negative economic headwinds through diligent administration of operational cost controls and cash flows.
“Barring any unforeseen circumstances, the board believes that the performance of the group for the current financial year will remain satisfactory while the long-term outlook of the oil and gas industry continues to be positive.”
EON Cap reviewing HL Bank offer
EON Cap reviewing HL Bank offer
Written by Darlene Liew
Monday, 25 January 2010 12:18
KUALA LUMPUR: EON Bank chief executive officer Michael Lor says EON CAPITAL BHD [] board is still reviewing HONG LEONG BANK BHD []'s RM7.10 share offer.
He said on Monday, Jan 25 that the board should be making announcement in a few days to meet the deadline of seven days set by Hong Leong Bank earlier.
Hong Leong Bank had on Jan 21 announced it was offering RM7.10 per share to acquire EONCap, which owns EON Bank Bhd.
The offer, to be fully satisfied in cash, translates to 1.4 times book valued based on a shareholders’ fund of RM3.49 billion as at Sept 30, 2009.
http://www.theedgemalaysia.com/business-news/158277-flash-eon-cap-reviewing-other-offers.html
Written by Darlene Liew
Monday, 25 January 2010 12:18
KUALA LUMPUR: EON Bank chief executive officer Michael Lor says EON CAPITAL BHD [] board is still reviewing HONG LEONG BANK BHD []'s RM7.10 share offer.
He said on Monday, Jan 25 that the board should be making announcement in a few days to meet the deadline of seven days set by Hong Leong Bank earlier.
Hong Leong Bank had on Jan 21 announced it was offering RM7.10 per share to acquire EONCap, which owns EON Bank Bhd.
The offer, to be fully satisfied in cash, translates to 1.4 times book valued based on a shareholders’ fund of RM3.49 billion as at Sept 30, 2009.
http://www.theedgemalaysia.com/business-news/158277-flash-eon-cap-reviewing-other-offers.html
CIMB Research maintains Outperform on Public Bank (TP: RM14.20)
CIMB Research maintains Outperform on Public Bank
Written by CIMB Equities Research
Monday, 25 January 2010 09:48
KUALA LUMPUR: CIMB Equities Research is maintaining its outperform on Public Bank at RM11.98 and a target price of RM14.20, still pegged to a 10% premium over its DDM (dividend discount model) value.
CIMB Research said on Monday, Jan 25 the DDM parameters remain intact, including a cost of equity of 14.3% and dividend growth rates of 15.7% in the interim growth phase and 6% in the long-term growth phase.
"In the event of a rights issue, our target price would be reduced to RM13.30, which may lead to a review of our recommendation," it said.
The research house said Public Bank’s management confirmed that it does not have any immediate plans for a rights issue unless it has to meet a minimum equity capital ratio of 9-10%.
"We rate the chances of this worst-case scenario happening as low. Furthermore, we estimate that the EPS dilution of such a rights issue would only be about 5%-6%. As such, we retain our positive stance on the stock, which is underpinned by the favourable earnings outlook," it said.
CIMB Research said the stock remains an Outperform based on the potential re-rating catalysts of
http://www.theedgemalaysia.com/business-news/158255-cimb-research-maintains-outperform-on-public-bank.html
Written by CIMB Equities Research
Monday, 25 January 2010 09:48
- (1) stronger ROEs of 28-30% for FY10-12, as per the company’s target,
- (2) increased contributions from Greater China, and
- (3) new growth avenue in the bancassurance business.
The Company when It's Old (3): Why you might invest in these?
By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel?
There are several reasons you might do this.
Whether it's land, buildings, equipment, the stocks and bonds they keep in the bank, or the smaller companies they've acquired along the way, old companies have a substantial "break-up value." Shareholders act like the relatives of that aged rich aunt, waiting to find out who will get what.
There's always the chance an old company can turn itself around, as Xerox and American Express have been doing in the past couple of years.
On the other hand, when an old company falters or stumbles as badly as these companies did, it may take 20 or 30 years before it can get itself back on track. Patience is a virtue, but it's not well rewarded when you own stock in a company that's past its prime.
There are several reasons you might do this.
- First, big companies are less risky, in that they generally are in no danger of going out of business.
- Second, they are likely to pay dividend.
- Third, they have valuable assets that might be sold off at a profit.
Whether it's land, buildings, equipment, the stocks and bonds they keep in the bank, or the smaller companies they've acquired along the way, old companies have a substantial "break-up value." Shareholders act like the relatives of that aged rich aunt, waiting to find out who will get what.
There's always the chance an old company can turn itself around, as Xerox and American Express have been doing in the past couple of years.
On the other hand, when an old company falters or stumbles as badly as these companies did, it may take 20 or 30 years before it can get itself back on track. Patience is a virtue, but it's not well rewarded when you own stock in a company that's past its prime.
The Company when It's Old (2): Alcoa, GM & IBM
There's a lesson here that may save you some grief in the future. No matter how powerful it may be today, a company won't stay on top forever. Being called a "blue-chip" or a "world-class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name.
Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.
International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar. Johns-Manville, once number one in insulation and building supplies, topped out in 1971.
The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.
General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years. Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable. Sometime in the 1960s, its reflexes began to slow.
The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas. The attack was aimed directly at Detroit and GM was slow to react. A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.
It continued to make big cars when it could see that small foreign cars were selling like crazy. Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories. This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.
For three decades the largest industrial company in the US has not been largely profitable. Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you. People would sooner have believed that Elvis was lip-synching.
Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline. Since the early 1950s, IBM was a spectacular performer and a great stock to own. It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle. The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations. As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.
The stock was recommended by stockbrokers everywhere as the bluest of the blue chips. To mutual fund managers, IBM was a "must" investment. You had to be a maverick not to own IBM.
But the same thing happened to IBM that happened to GM. Investors were so impressed with its past performance that they did not notice what was going on in the present. People stopped buying the big mainframe computers that wer the core of IBM;s business. The mainframe market wasn't growing anymore. IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product. IBM's earnings sank, and as you probably can guess by now, so did the stock price.
By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel?
Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.
International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar. Johns-Manville, once number one in insulation and building supplies, topped out in 1971.
The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.
General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years. Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable. Sometime in the 1960s, its reflexes began to slow.
The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas. The attack was aimed directly at Detroit and GM was slow to react. A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.
It continued to make big cars when it could see that small foreign cars were selling like crazy. Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories. This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.
For three decades the largest industrial company in the US has not been largely profitable. Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you. People would sooner have believed that Elvis was lip-synching.
Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline. Since the early 1950s, IBM was a spectacular performer and a great stock to own. It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle. The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations. As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.
The stock was recommended by stockbrokers everywhere as the bluest of the blue chips. To mutual fund managers, IBM was a "must" investment. You had to be a maverick not to own IBM.
But the same thing happened to IBM that happened to GM. Investors were so impressed with its past performance that they did not notice what was going on in the present. People stopped buying the big mainframe computers that wer the core of IBM;s business. The mainframe market wasn't growing anymore. IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product. IBM's earnings sank, and as you probably can guess by now, so did the stock price.
By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel?
The Company when It's Old (1): Woolworth & US Steel
Companies that are 20, 30, 50 years old have put their best years behind them.
You can't blame them for getting tired. They'd done it all and seen it all, and there's hardly a place they can go that they haven't already been.
Take Woolworth. It's been around for more than 100 years - several generations of Americans grew up shopping at Woolworth's. At one point, there was a Woolworth's outlet in every city and town in America. That's when the company ran out of room to grow.
Recently, Woolworth has suffered a couple of unprofitable years. It can still make a profit, but it will never be the spectacular performer it was when it was younger. Old companies that were great earners in the past can't be expected to keep up the momentum. A few of them have - Wrigley's, Coca-Cola, Emerson Electric, and McDonald's come to mind. But these are exceptions.
US Steel, General Motors, and IBM are 3 prime examples of former champions whose most exciting days are behind them - although IBM and GM are having a rebound. US Steel was once an incredible hulk, the first billion-dollar company on earth. Railroads needed steel, cars needed steel, skyscrapers needed steel, and US Steel provided 60% of it. At the turn of this century, no company dominated its industry the way US Steel dominated steel, and no stock was as popular as US Steel stock. It was the most actively traded issue on Wall Street.
When a magazine wanted to illustrate America's power and glory, it ran a picture of a steel mill, with the fire in the furnaces and the liquid metal poureing like hot lava into the waiting molds. We are a nation of factories then, and a good deal of our wealth and power came from the mill towns of the East and the Midwest.
The steel business was a fantastic business to be in, and US Steel prospered through both world wars and six different presidents. The stock hit an all-time high of $108 7/8 in August 1950.
This was the beginning of the electronic age and the end of the industrial age and the glory of steel, and it would ahve been the perfect time for investors to sell their US Steel shares and buy shares in IBM. But you had to be very farsighted and unsentimental investor to realize this. After all, US Steel was classed as a blue chip, Wall Street's term of endearment for pretigious companies that are expected to excel forever. Hardly anyone would have predicted that in 1995, US Steel stock would be selling for less than it sold for in 1959.
To put this decline in perspective, the DJIA was bumping up against the 500 level in 1959, and it's gone up more than 4000 points since. So while stocks in the Dow have increased in value more than 8 times over, US Steel has gone downhill. Loyal shareholders have died and gone to heaven waiting for US Steel to reclaim its lost glory.
You can't blame them for getting tired. They'd done it all and seen it all, and there's hardly a place they can go that they haven't already been.
Take Woolworth. It's been around for more than 100 years - several generations of Americans grew up shopping at Woolworth's. At one point, there was a Woolworth's outlet in every city and town in America. That's when the company ran out of room to grow.
Recently, Woolworth has suffered a couple of unprofitable years. It can still make a profit, but it will never be the spectacular performer it was when it was younger. Old companies that were great earners in the past can't be expected to keep up the momentum. A few of them have - Wrigley's, Coca-Cola, Emerson Electric, and McDonald's come to mind. But these are exceptions.
US Steel, General Motors, and IBM are 3 prime examples of former champions whose most exciting days are behind them - although IBM and GM are having a rebound. US Steel was once an incredible hulk, the first billion-dollar company on earth. Railroads needed steel, cars needed steel, skyscrapers needed steel, and US Steel provided 60% of it. At the turn of this century, no company dominated its industry the way US Steel dominated steel, and no stock was as popular as US Steel stock. It was the most actively traded issue on Wall Street.
When a magazine wanted to illustrate America's power and glory, it ran a picture of a steel mill, with the fire in the furnaces and the liquid metal poureing like hot lava into the waiting molds. We are a nation of factories then, and a good deal of our wealth and power came from the mill towns of the East and the Midwest.
The steel business was a fantastic business to be in, and US Steel prospered through both world wars and six different presidents. The stock hit an all-time high of $108 7/8 in August 1950.
This was the beginning of the electronic age and the end of the industrial age and the glory of steel, and it would ahve been the perfect time for investors to sell their US Steel shares and buy shares in IBM. But you had to be very farsighted and unsentimental investor to realize this. After all, US Steel was classed as a blue chip, Wall Street's term of endearment for pretigious companies that are expected to excel forever. Hardly anyone would have predicted that in 1995, US Steel stock would be selling for less than it sold for in 1959.
To put this decline in perspective, the DJIA was bumping up against the 500 level in 1959, and it's gone up more than 4000 points since. So while stocks in the Dow have increased in value more than 8 times over, US Steel has gone downhill. Loyal shareholders have died and gone to heaven waiting for US Steel to reclaim its lost glory.
Extinct Companies: Some die young, some in middle age. Bankruptcies and Takeovers
Companies die every year.
Some die young. They try to go too far too fast on borrowed money they can't pay back, and they crash.
Some die in middle age because their products turn out to be defective, or too old-fashioned, and people stop buying. Maybe they're in:
Big companies can die right along with smaller and younger companies.
American Cotton, Laclede Gas, American Spirits, Baldwin Locomotive, Victor Talking Machine, and WRight Aeronautical were once big enough and important enough to be included in the Dow Jones Industrial Average, but they're gone now, and who remembers them? The same goes for Studebaker, Nash, and Hudson Motors, Remington Typewriter, and Central Leather.
Takeover
There's one way a company can cease to exist without actually dying. It can be swallowed up by some other company in a takeover.
Bankruptcy: Chapter 11 protection and Chapter 7
Chapter 11: And often, a company can avoid dying a quick death by seeking protection in a bankruptcy court. Bankruptcy court is the place where companies go when they can't pay their bills, and they need time to work things out. So they file for Chapter 11, a form of bankruptcy that allows them to stay in business and gradually pay off their debts. The court appoints a trustee to oversee this effort and make sure everyone involved is treated fairly.
Chapter 7: If it's a terminal case and the company has no hope of restoring itself to profitability, it may file for Chapter 7. That's when the doors are closed, the employees sent home, and the desks, lamps and word processors are carted off to be sold.
Often in these bankruptcies, the various groups that have a stake in the company (workers, vendors, suppliers, investors) fight each other over who gets what.
Companies are so important to the health and prosperity of the country that it is too bad there isn't a memorial someplace to the ones that have passed away. Or perhaps the state historic preservation deparments should put up plaques on the sites where these extinct companies once did business. There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism.
Some die young. They try to go too far too fast on borrowed money they can't pay back, and they crash.
Some die in middle age because their products turn out to be defective, or too old-fashioned, and people stop buying. Maybe they're in:
- the wrong business, or
- the right business at the wrong time, or
- worst of all, the wrong business at the wrong time.
Big companies can die right along with smaller and younger companies.
American Cotton, Laclede Gas, American Spirits, Baldwin Locomotive, Victor Talking Machine, and WRight Aeronautical were once big enough and important enough to be included in the Dow Jones Industrial Average, but they're gone now, and who remembers them? The same goes for Studebaker, Nash, and Hudson Motors, Remington Typewriter, and Central Leather.
Takeover
There's one way a company can cease to exist without actually dying. It can be swallowed up by some other company in a takeover.
Bankruptcy: Chapter 11 protection and Chapter 7
Chapter 11: And often, a company can avoid dying a quick death by seeking protection in a bankruptcy court. Bankruptcy court is the place where companies go when they can't pay their bills, and they need time to work things out. So they file for Chapter 11, a form of bankruptcy that allows them to stay in business and gradually pay off their debts. The court appoints a trustee to oversee this effort and make sure everyone involved is treated fairly.
Chapter 7: If it's a terminal case and the company has no hope of restoring itself to profitability, it may file for Chapter 7. That's when the doors are closed, the employees sent home, and the desks, lamps and word processors are carted off to be sold.
Often in these bankruptcies, the various groups that have a stake in the company (workers, vendors, suppliers, investors) fight each other over who gets what.
- These warring factions hire expensive lawyers to argue their cases.
- The lawyers are well-paid, but rarely do the creditors get back everything they're owed.
Companies are so important to the health and prosperity of the country that it is too bad there isn't a memorial someplace to the ones that have passed away. Or perhaps the state historic preservation deparments should put up plaques on the sites where these extinct companies once did business. There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism.
The Bulls and the Bears
In a normal day of trading, many stocks will go up in price, while otheres will go down.
But occasionally, there's a stampede when the prices of thousands of stocks are running in the same direction, like bulls at Pamplona. If the stampede is uphill, we call it a "bull market."
When the bulls are having their run, sometimes 9 out of 10 stocks are hitting new highs every week. People are rushing around buying as many shares as they can afford. They talk to their brokers more often than they talk to their best friends. Nobody wants to miss out on the good thing.
As long as the good thing lasts, millions of shareholders go to bed happy, and wake up happy. They sing in the shower, whistle while they work, help old ladies across the street, and count their blessings every night as they put themselves to sleep reviewing the gains in their portfolios.
But a bull market doesn't last forever. Sooner or later, the stampede will turn downhill. Stock prices will drop, with 9 out of 10 stocks hitting new lows every week. People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock sold today will fetch a better price than it would fetch tomorrow.
But occasionally, there's a stampede when the prices of thousands of stocks are running in the same direction, like bulls at Pamplona. If the stampede is uphill, we call it a "bull market."
When the bulls are having their run, sometimes 9 out of 10 stocks are hitting new highs every week. People are rushing around buying as many shares as they can afford. They talk to their brokers more often than they talk to their best friends. Nobody wants to miss out on the good thing.
As long as the good thing lasts, millions of shareholders go to bed happy, and wake up happy. They sing in the shower, whistle while they work, help old ladies across the street, and count their blessings every night as they put themselves to sleep reviewing the gains in their portfolios.
But a bull market doesn't last forever. Sooner or later, the stampede will turn downhill. Stock prices will drop, with 9 out of 10 stocks hitting new lows every week. People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock sold today will fetch a better price than it would fetch tomorrow.
Are you strategized to gain from a correction or a bear market?
Correction: When stock prices fall 10% from their most RECENT peak.
Bear market: When stock prices fall 25% or more from their most RECENT peak.
Statistics:
You can make a better case for calling a bear market a lemming market, in honour of the investors who sell their stocks because everybody else is selling.
Though financial losses are linked with the appearance of the bear market, there are also those who gained from the bear market. Are you strategized to gain from a correction or a bear market?
1929: Papa Bear market
1973-74: Momma Bear market, average stock was down 50%.
1982: Bear market
1987: Crash of 1987, Dow dropped over 1000 points in 4 months; 508 of those points in 1 day.
1990: Saddam Hussen bear market when investors worried about the Gulf War,
1997: Asian Financial Crisis Bear market
2001: Technology Bust Bear market
2008: Credit crunch Bear market
Bear market: When stock prices fall 25% or more from their most RECENT peak.
Statistics:
- There were 53 corrections during the last century.
- That is, 1 correction occurred every 2 years. (1:2)
- 1 in 3 corrections have turned into bear markets.(1:3)
- That is, 1 bear market appeared every 6 years.(1:6)
You can make a better case for calling a bear market a lemming market, in honour of the investors who sell their stocks because everybody else is selling.
Though financial losses are linked with the appearance of the bear market, there are also those who gained from the bear market. Are you strategized to gain from a correction or a bear market?
1929: Papa Bear market
1973-74: Momma Bear market, average stock was down 50%.
1982: Bear market
1987: Crash of 1987, Dow dropped over 1000 points in 4 months; 508 of those points in 1 day.
1990: Saddam Hussen bear market when investors worried about the Gulf War,
1997: Asian Financial Crisis Bear market
2001: Technology Bust Bear market
2008: Credit crunch Bear market
Anxious to buy and anxious to sell
A bull market doesn't last forever. Sooner or later, the stampede will turn downhill.
Are you one who is anxious to buy on the way up?
Are you one who is anxious to sell on the way down?
People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock today will fetch a better price than it would fetch tomorrow.
Are you one who is anxious to buy on the way up?
Are you one who is anxious to sell on the way down?
People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock today will fetch a better price than it would fetch tomorrow.
An EXTENDED bear market can test everybody's patience and unsettle the most experienced investors.
An extended bear market can test everybody's patience and unsettle the most experienced investors.
Small bears were easier to handle than the big (extended) bears of 1929 and 1973 - 74.
No matter how good you are at picking stocks, your stocks will go down, and just when you think the bottom has been reached, they will go down some more. If you own stock mutual funds, you won't do much better, because the mutual funds will go down as well. Their fate is tied to the fate of the stocks they own.
1929: People who bought stocks at the high point in 1929 (this was a small group, fortunately) had to wait 25 years to break even on the prices. Imagine your stocks being in the red for a quarter-century!
1973-74: From the high point in 1969 before the crash of 1973-74, it took 12 years to break even.
Perhaps we'll never see another bear market as severe as the one in 1929 - that one was prolonged by the Depression. But we cannot ignore the possibility of another bear of the 1973-74 variety, when stock prices are down long enough for a generation of children to get through elementary, junior high and high school.
Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms.
Small bears were easier to handle than the big (extended) bears of 1929 and 1973 - 74.
No matter how good you are at picking stocks, your stocks will go down, and just when you think the bottom has been reached, they will go down some more. If you own stock mutual funds, you won't do much better, because the mutual funds will go down as well. Their fate is tied to the fate of the stocks they own.
1929: People who bought stocks at the high point in 1929 (this was a small group, fortunately) had to wait 25 years to break even on the prices. Imagine your stocks being in the red for a quarter-century!
1973-74: From the high point in 1969 before the crash of 1973-74, it took 12 years to break even.
Perhaps we'll never see another bear market as severe as the one in 1929 - that one was prolonged by the Depression. But we cannot ignore the possibility of another bear of the 1973-74 variety, when stock prices are down long enough for a generation of children to get through elementary, junior high and high school.
Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms.
Predicting the market is difficult: Chorus of "experts" claiming to see bears that never show up.
It would be nice to be able to get a warning signal, so you could sell your stocks and your mutual funds just before a bear marekt and then scoop them up later on the cheap. The trouble is nobody has figured out a way to predict bear markets. The record on that is no better than the record on predicting recessions.
Once in a while, somebody calls a bear and becomes a celebrity overnight - a stock analyst named Elaine Garzarelli was celebrated for predicting the Crash fo 1987. (Roubini for the recent bear market of 2008). But you never hear of somebody prediting two bear markets in a row.
What you do hear is a chorus of "experts" claiming to see bears that never show up.
Since we are all accustomed to taking action to protect ourselves from snowstorms and hurricanes, it's natural that we would try to take action to protect ourselves from bear markets, even though this is one case in which being prepared like a Boy Scout does more harm than good. Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined.
http://myinvestingnotes.blogspot.com/2010/01/another-telling-statistics.html
Another telling statistics on Market Timing: Missing the chance to run with the bulls
Great Timing versus Lousy Timing
Once in a while, somebody calls a bear and becomes a celebrity overnight - a stock analyst named Elaine Garzarelli was celebrated for predicting the Crash fo 1987. (Roubini for the recent bear market of 2008). But you never hear of somebody prediting two bear markets in a row.
What you do hear is a chorus of "experts" claiming to see bears that never show up.
Since we are all accustomed to taking action to protect ourselves from snowstorms and hurricanes, it's natural that we would try to take action to protect ourselves from bear markets, even though this is one case in which being prepared like a Boy Scout does more harm than good. Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined.
http://myinvestingnotes.blogspot.com/2010/01/another-telling-statistics.html
Another telling statistics on Market Timing: Missing the chance to run with the bulls
Great Timing versus Lousy Timing
Investors can't avoid corrections and bear markets
Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms.
In 50 years of owning stocks, you can expect
You can expect 1 bear every 6 years, on average, that is, every 3 corrections turned into bear markets.
In 50 years of owning stocks, you can expect
- 25 corrections, of which
- 8 or 9 will turn into bears.
You can expect 1 bear every 6 years, on average, that is, every 3 corrections turned into bear markets.
Another telling statistics on Market Timing: Missing the chance to run with the bulls
Great Timing versus Lousy Timing
(Performance difference = 1.6% difference)
Investment returns from 1970 to 1995
Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%.
If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%.
So the difference between great timing and lousy timing is 1.6%.
Of course, you'd like to be lucky and make that extra 1.1%, but you'll do just fine with lousy timing, as long as you stay invested in stocks. Buy shaes in good companies and hold on to them through thick and thin.
There's an easy solution to the problem of bear markets. Set up a schedule of buying stocks or stock mutual funds so you're putting in a small amount of money every month, or four months, or six months. This will remove you from the drama of the bulls and bears.
Missing the chance to run with the bulls
One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming correction. It's also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks. In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.
A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps.
(Performance difference = 1.6% difference)
Investment returns from 1970 to 1995
Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%.
If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%.
So the difference between great timing and lousy timing is 1.6%.
Of course, you'd like to be lucky and make that extra 1.1%, but you'll do just fine with lousy timing, as long as you stay invested in stocks. Buy shaes in good companies and hold on to them through thick and thin.
There's an easy solution to the problem of bear markets. Set up a schedule of buying stocks or stock mutual funds so you're putting in a small amount of money every month, or four months, or six months. This will remove you from the drama of the bulls and bears.
Missing the chance to run with the bulls
One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming correction. It's also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks. In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.
A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps.
- If you kept all your money in stocks throughout these four decades, your annual return on investment was 11.5%.
- Yet if you were out of stocks for the fourty most profitable months during these fourty years, your return on investment dropped to 2.7%..
The real story is in the numbers - get the necessary training to read them
Four times a year, you'll get the report card that tells you
In the front, there's a personal message from the head of the company, recounting the year's events, but the real story is in the numbers.
Companies that intentionally mislead their shareholders (this rarely happens) face severe penalties, and the perpetrators can be fined or sent to jail. Even if it is unintentional (a more common occurrence), a company that misleads shareholders is punished in the stock market.
When a stock loses half its value overnight, that disturbs all the investors, including the corporate insiders, from the chief executive on down, who are likely to own large numbers of shares. That's why it is in their best interest to make sure the company sticks to the facts and doesn't exaggerate.
- how the company is doing,
- how its sales are going, and
- how much money it has made or lost in the lastest period.
In the front, there's a personal message from the head of the company, recounting the year's events, but the real story is in the numbers.
- These run for several pages, and unless you are trained to read them, they will surely strike you as both confusing and dull.
- You can get the necessary training from a good accounting course.
- Once you do, these dull numbers can become very exciting, indeed.
- What could be more exciting than learning to decipher a code that could make you a prosperous investor for life?
Companies that intentionally mislead their shareholders (this rarely happens) face severe penalties, and the perpetrators can be fined or sent to jail. Even if it is unintentional (a more common occurrence), a company that misleads shareholders is punished in the stock market.
- As soon as they realize it hasn't told them the whole truth, many big-time investors will sell their shares at once.
- This mass selling causes the stock price to drop.
- It's not unusual for share prices to fall by half (50%) in a single day after the news of the scandal gets out.
When a stock loses half its value overnight, that disturbs all the investors, including the corporate insiders, from the chief executive on down, who are likely to own large numbers of shares. That's why it is in their best interest to make sure the company sticks to the facts and doesn't exaggerate.
- They know the truth will come out sooner or doesn't exaggerate.
- They know the truth will come out sooner or later, because companies are watched by hundred, if not thousands of shareholders.
- A company can't brag about its record-breaking earnings if the earnings aren't there - too many investors are paying close attention.
The ultimate "NO" vote
Ultimately, the company exists for the shareholders. The directors are there to represent the shareholders' interests. These directors are not employees of the company. They make strategic decisions, and they keep tabs on what the managements are doing.
Any time you decide you don't like the management, its policies, or the direction the company is headed, you are always free to exercise the ultimate "no" vote and sell your shares.
Any time you decide you don't like the management, its policies, or the direction the company is headed, you are always free to exercise the ultimate "no" vote and sell your shares.
You have to Know the Story: Confusing the price with the story is the biggest mistake an investor can make.
If you're going to invest in a stock, you have to know the story. This is where investors get themselves in trouble. They buy a stock without knowing the story, and they track the stock price, because that's the only detail they understand. When the price goes up, they think the company is in great shape, but when the price stalls or goes down they get bored or they lose faith, so they sell their shares.
Confusing the price with the story is the biggest mistake an investor can make.
The story tells you what's happening inside the company to produce profits in the future - or losses, if it's a tale of woe.
But there are occasions when the picture is clear and the average investor is in a perfect position to see how exciting it is. These are the times when understanding a company can really pay off.
Confusing the price with the story is the biggest mistake an investor can make.
- It causes people to bail out of stocks during crashes and corrections, when the prices are at their lowest, which they think means that the companies they own must be in lousy shape.
- It causes them to miss the chance to buy more shares when the price is low, but the company is still in terrific shape.
The story tells you what's happening inside the company to produce profits in the future - or losses, if it's a tale of woe.
- It's not always easy to figure this out.
- Some stories are more complicated than others.
- Companies that have many different divisions are harder to follow than companies that make a single product.
- And even when the story is simple, it may not be conclusive.
But there are occasions when the picture is clear and the average investor is in a perfect position to see how exciting it is. These are the times when understanding a company can really pay off.
Sunday 24 January 2010
Stock Picking Strategies - Value Investor
Stock Picking Strategies | Value Investor
As long as the stock market exists, there must always be the bullish and the bearish trends in the market place. These are the two components that make up the stock market. What this implies is that for every single day that the stock market opens, there are people making money, and there are people who are equally loosing money at the same time depending on the direction of the market. As a discerning investor, you need to arm yourself with the strategies that are geared towards securing your investments and also ensuring that you profit from the market daily, regardless of the period on the floor, whether bull or bear. So in order to achieve this, your stock picking strategies and principles has an important role to play here.
The first principle a wise investor should adopt for success, is to go for value investing. This is one of the best known stock picking strategies.
How do you go about this? Simply look for the stocks that are selling at a bargain price, but have strong fundamentals, which include the company's earnings, dividends, cash flow, and book value. These are companies that are undervalued by the market, but are sure to soar immediately the market corrects itself, which is certain that it will do. It is important to note here that not all prices that are down that are cheap.
So a value investor will know how to do his due diligence before arriving at the conclusion that a particular stock is cheap or not. Price does not always determine whether a stock is cheap or not, the determinant factor is the fundamentals. E.g., if a company's share price suddenly drops from $20 to $5, it does not mean that the price is cheap at that $5, rather, a value investor will first of all find out why the price nose-dived.
These are the questions that a value investor must find answers to before investing his cash. The value investor knows that profits are made not just by trading of shares; rather, profits are made in stocks by investing in quality companies with strong fundamentals.
If you really want to make money in stocks, you have to sit down first, and ask yourself the type of investor you want to be. Ask yourself whether you are just trading in shares or whether you are investing for value. Don't follow the herd. Do your due diligence before investing. The internet has made things so easy today that you will get any information you need at your finger-tips. When you do this and remove greed, you will definitely make it big investing in stocks. Know when to exit and do so immediately, as waiting a minute or a day longer can wipe out a big fraction from your investment profits which are not a good idea at all.
by jsieiw
http://www.linkroll.com/Day-Trading-Finance--311038-Stock-Picking-Strategies-Value-Investor.html
As long as the stock market exists, there must always be the bullish and the bearish trends in the market place. These are the two components that make up the stock market. What this implies is that for every single day that the stock market opens, there are people making money, and there are people who are equally loosing money at the same time depending on the direction of the market. As a discerning investor, you need to arm yourself with the strategies that are geared towards securing your investments and also ensuring that you profit from the market daily, regardless of the period on the floor, whether bull or bear. So in order to achieve this, your stock picking strategies and principles has an important role to play here.
The first principle a wise investor should adopt for success, is to go for value investing. This is one of the best known stock picking strategies.
How do you go about this? Simply look for the stocks that are selling at a bargain price, but have strong fundamentals, which include the company's earnings, dividends, cash flow, and book value. These are companies that are undervalued by the market, but are sure to soar immediately the market corrects itself, which is certain that it will do. It is important to note here that not all prices that are down that are cheap.
So a value investor will know how to do his due diligence before arriving at the conclusion that a particular stock is cheap or not. Price does not always determine whether a stock is cheap or not, the determinant factor is the fundamentals. E.g., if a company's share price suddenly drops from $20 to $5, it does not mean that the price is cheap at that $5, rather, a value investor will first of all find out why the price nose-dived.
- Is it as a result of over-pricing which the market is now correcting?
- Or is it as a result of some fundamental problems?
- Or just because of profit taking and other market forces which does not affect the company's fundamentals?
These are the questions that a value investor must find answers to before investing his cash. The value investor knows that profits are made not just by trading of shares; rather, profits are made in stocks by investing in quality companies with strong fundamentals.
If you really want to make money in stocks, you have to sit down first, and ask yourself the type of investor you want to be. Ask yourself whether you are just trading in shares or whether you are investing for value. Don't follow the herd. Do your due diligence before investing. The internet has made things so easy today that you will get any information you need at your finger-tips. When you do this and remove greed, you will definitely make it big investing in stocks. Know when to exit and do so immediately, as waiting a minute or a day longer can wipe out a big fraction from your investment profits which are not a good idea at all.
by jsieiw
http://www.linkroll.com/Day-Trading-Finance--311038-Stock-Picking-Strategies-Value-Investor.html
Three Faces of Market Danger
Three Faces of Market Danger
By PAUL J. LIM
Published: January 23, 2010
AFTER one of the most volatile periods for stocks in decades, it’s only natural for investors to wonder how risky the markets will be in 2010.
Weekend Business: Paul Lim on stock market risks.Unfortunately, that is impossible to predict with any certainty. But investors can at least look for the types of risks the market seems most likely to face. Those perceived dangers have shifted in recent years. In 2008, for example, there was the all-too-real risk of losing big money in the global credit crisis. Last year, after the crisis seemed to subside, investors who stayed on the sidelines risked missing out on the market’s huge rebound.
Today, strategists say, investors face risks in three major categories:
EARNINGS RISK As the economy started to heal last year, investor expectations for corporate profits started to grow. That helped to drive up equity prices by 65 percent from March 9 to Dec. 31.
But after a rally of that magnitude, “people will start to get nervous about the ability of companies to actually meet those expectations,” said Ben Inker, director of asset allocation at GMO, an asset management firm in Boston. That is partly because corporate profit forecasts have grown so lofty.
Wall Street analysts estimate that earnings for companies in the Standard & Poor’s 500-stock index were up 193 percent in the fourth quarter of 2009, versus the period a year earlier, according to a survey by Thomson Financial. Moreover, they expect earnings for all of 2010 to be up more than 28 percent from 2009.
“While we are seeing profit improvement, we think the numbers that are getting baked in are excessive,” Mr. Inker said.
Michele Gambera, chief economist at Ibbotson Associates, an investment consulting firm in Chicago, points out that “it’s hard to have a stable improvement of corporate profits in an environment where companies are deleveraging.”
It’s also difficult to see profits soaring, he said, while the employment outlook is so weak. Not only does a struggling job market threaten consumer spending, it also exacerbates continuing problems in the financial system. “If people don’t have jobs, they cannot pay off their debts,” Mr. Gambera said.
VALUATION RISK When the market began to rally in March, stocks were roundly considered cheap. Back then, the price-to-earnings ratio for equities was a mere 13.3, based on 10-year averaged earnings, as calculated by Robert J. Shiller, the Yale economist.
But thanks to the recent surge in stock prices, the market P/E has jumped to a much frothier 20.8, versus the historical average of around 16.
“Current market valuations are high enough that they’re more or less suggesting everything is going to be fine this year,” said Robert D. Arnott, chairman of Research Affiliates, an investment management firm in Newport Beach, Calif. But if everything isn’t — if the economy hits a speed bump, for instance, or if corporate profits come in lower than expected — investors may start to question the prices they are paying for risky assets, he said.
This is why James W. Paulsen, who works in Minneapolis as chief investment strategist for Wells Capital Management, says that this year, unlike 2008 and 2009, “it will be important for people to go back to assessing valuations again.”
POLICY RISK Government economic policies are having a huge impact, but they can be tricky to predict. For instance, investors who were banking on imminent health care reform may need to rethink their strategy after the special Senate election last week in Massachusetts.
Health care is only one area that is up for grabs. This year, for example, the government and the Federal Reserve Board will face a big decision on whether to curtail the huge stimulus that has helped prop up the economy.
Mr. Arnott says he believes the Fed will be forced to raise short-term interest rates this year, possibly even before the recovery gains full traction.
The danger is that the markets may react badly to the end of the Fed’s unusually loose monetary policy.
“It’s not like the economy is out of the woods,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance, an asset manager in Boston. “The patient is still in the hospital.”
INVESTORS must also keep in mind that the tax cuts enacted under President George W. Bush — which lowered the maximum rate on long-term capital gains taxes to 15 percent from 20 percent and the top dividend tax rate to 15 percent from 39.6 percent — are due to expire at year-end.
While it is unclear whether the Obama administration will extend those cuts, or at least extend them for the middle class, the uncertainty is bound to raise concerns on Wall Street.
Because of the “potentially big risks that may come out of Washington,” Mr. Richardson said, “investors need to be more diversified than ever.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
http://www.nytimes.com/2010/01/24/business/24fund.html
By PAUL J. LIM
Published: January 23, 2010
AFTER one of the most volatile periods for stocks in decades, it’s only natural for investors to wonder how risky the markets will be in 2010.
Weekend Business: Paul Lim on stock market risks.Unfortunately, that is impossible to predict with any certainty. But investors can at least look for the types of risks the market seems most likely to face. Those perceived dangers have shifted in recent years. In 2008, for example, there was the all-too-real risk of losing big money in the global credit crisis. Last year, after the crisis seemed to subside, investors who stayed on the sidelines risked missing out on the market’s huge rebound.
Today, strategists say, investors face risks in three major categories:
EARNINGS RISK As the economy started to heal last year, investor expectations for corporate profits started to grow. That helped to drive up equity prices by 65 percent from March 9 to Dec. 31.
But after a rally of that magnitude, “people will start to get nervous about the ability of companies to actually meet those expectations,” said Ben Inker, director of asset allocation at GMO, an asset management firm in Boston. That is partly because corporate profit forecasts have grown so lofty.
Wall Street analysts estimate that earnings for companies in the Standard & Poor’s 500-stock index were up 193 percent in the fourth quarter of 2009, versus the period a year earlier, according to a survey by Thomson Financial. Moreover, they expect earnings for all of 2010 to be up more than 28 percent from 2009.
“While we are seeing profit improvement, we think the numbers that are getting baked in are excessive,” Mr. Inker said.
Michele Gambera, chief economist at Ibbotson Associates, an investment consulting firm in Chicago, points out that “it’s hard to have a stable improvement of corporate profits in an environment where companies are deleveraging.”
It’s also difficult to see profits soaring, he said, while the employment outlook is so weak. Not only does a struggling job market threaten consumer spending, it also exacerbates continuing problems in the financial system. “If people don’t have jobs, they cannot pay off their debts,” Mr. Gambera said.
VALUATION RISK When the market began to rally in March, stocks were roundly considered cheap. Back then, the price-to-earnings ratio for equities was a mere 13.3, based on 10-year averaged earnings, as calculated by Robert J. Shiller, the Yale economist.
But thanks to the recent surge in stock prices, the market P/E has jumped to a much frothier 20.8, versus the historical average of around 16.
“Current market valuations are high enough that they’re more or less suggesting everything is going to be fine this year,” said Robert D. Arnott, chairman of Research Affiliates, an investment management firm in Newport Beach, Calif. But if everything isn’t — if the economy hits a speed bump, for instance, or if corporate profits come in lower than expected — investors may start to question the prices they are paying for risky assets, he said.
This is why James W. Paulsen, who works in Minneapolis as chief investment strategist for Wells Capital Management, says that this year, unlike 2008 and 2009, “it will be important for people to go back to assessing valuations again.”
POLICY RISK Government economic policies are having a huge impact, but they can be tricky to predict. For instance, investors who were banking on imminent health care reform may need to rethink their strategy after the special Senate election last week in Massachusetts.
Health care is only one area that is up for grabs. This year, for example, the government and the Federal Reserve Board will face a big decision on whether to curtail the huge stimulus that has helped prop up the economy.
Mr. Arnott says he believes the Fed will be forced to raise short-term interest rates this year, possibly even before the recovery gains full traction.
The danger is that the markets may react badly to the end of the Fed’s unusually loose monetary policy.
“It’s not like the economy is out of the woods,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance, an asset manager in Boston. “The patient is still in the hospital.”
INVESTORS must also keep in mind that the tax cuts enacted under President George W. Bush — which lowered the maximum rate on long-term capital gains taxes to 15 percent from 20 percent and the top dividend tax rate to 15 percent from 39.6 percent — are due to expire at year-end.
While it is unclear whether the Obama administration will extend those cuts, or at least extend them for the middle class, the uncertainty is bound to raise concerns on Wall Street.
Because of the “potentially big risks that may come out of Washington,” Mr. Richardson said, “investors need to be more diversified than ever.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
http://www.nytimes.com/2010/01/24/business/24fund.html
Every person who owns shares in a company wants it to grow
Every person who owns shares in a company wants it to grow
When investors talk about "growth", they're not talking about size. They're talking about profitability, that is, earnings.
It means the profits are growing. The company will earn more money this year than last year, just as it earned more money last year than the year before that.
One way or the other, the name of the game is earnings. That's what the shareholders are looking for, and that's what makes the stocks go up.
People who buy shares are counting on the companies to increase their earnings, and they expect that a portion of these earnings will get back to them in the form of higher stock prices.
This simple point - that the price of s stock is directly related to a company's earning power - is often overlooked, even by sophisticated investors.
The earnings continue to rise, the stock price is destined to go up. Maybe it won't go up right away, but eventually it will rise.
And if the earnings go down, it's pretty safe bet the price of the stock will go down. Lower earnings make a company less valuable.
This is the starting point for the successful stockpicker. Find companies that can grow their earnings over many years to come.
It is not an accident that stocks in general rise in price on average of about 8% a year over the long term. That occurs because companies in general increase their earnings at 8% a year, on average, plus they pay 3% as a dividend.
Based on these assumptions, the odds are in your favour when you invest in a representative sample of companies. Some will do better than others, but in general, they'll increase earnings by 8% and pay you a dividend of 3%, and you'll arrive at your 11% annual gain.
Stock Price Watchers
The ticker-tape watchers begin to think stock prices have a life of their own.
"Expensive Shares"
By itself, the price of a stock doesn't tell you a thing about whether you're getting a good deal.
You'll hear people say: "I am avoiding IBM, because at $100 a share it's too expensive."
When investors talk about "growth", they're not talking about size. They're talking about profitability, that is, earnings.
It means the profits are growing. The company will earn more money this year than last year, just as it earned more money last year than the year before that.
- A company doubling its earnings in 12 months can cause a wild celebration on Wall Street, because it's very rare for a business to grow that fast.
- Big, established companies are happy to see their earnings increase by 10 to 15% a year, and
- younger, more energetic companies may be able to increase theirs by 25 to 30%.
One way or the other, the name of the game is earnings. That's what the shareholders are looking for, and that's what makes the stocks go up.
People who buy shares are counting on the companies to increase their earnings, and they expect that a portion of these earnings will get back to them in the form of higher stock prices.
This simple point - that the price of s stock is directly related to a company's earning power - is often overlooked, even by sophisticated investors.
The earnings continue to rise, the stock price is destined to go up. Maybe it won't go up right away, but eventually it will rise.
And if the earnings go down, it's pretty safe bet the price of the stock will go down. Lower earnings make a company less valuable.
This is the starting point for the successful stockpicker. Find companies that can grow their earnings over many years to come.
It is not an accident that stocks in general rise in price on average of about 8% a year over the long term. That occurs because companies in general increase their earnings at 8% a year, on average, plus they pay 3% as a dividend.
Based on these assumptions, the odds are in your favour when you invest in a representative sample of companies. Some will do better than others, but in general, they'll increase earnings by 8% and pay you a dividend of 3%, and you'll arrive at your 11% annual gain.
Stock Price Watchers
The ticker-tape watchers begin to think stock prices have a life of their own.
- They track the ups and downs, the way a bird watcher might track a fluttering duck.
- They study the trading patterns, making charts of every zig and zag.
- They try to fathom what the "market" is doing, when they ought to be following the earnings of the companies whose stocks they own.
"Expensive Shares"
By itself, the price of a stock doesn't tell you a thing about whether you're getting a good deal.
You'll hear people say: "I am avoiding IBM, because at $100 a share it's too expensive."
- It maybe that they don't have $100 to spend on a share of IBM, but the fact, that a share costs $100 has nothing to do with whether IBM is expensive.
- A $150,000 Lamborghini is out of most people's price range, but for a Lamborghini, it still might not be expensive.
- If IBM is earning $10 a share this year, then you're paying 10 times earnings when you buy a share for $100. That's a P/E ratio of 10, which in today's market is cheap.
- On the other hand, if IBM only earns $1 a share, then you're paying 100 times earnings when you buy that $100 share. That's a P/E ratio of 100, which is way too much to pay for IBM.
Capitalism is not a zero-sum game
Except for a few crooks, the rich do not get that way by making other people poor.
When the rich get richer, the poor get richer as well.
If it were really true that the rich get richer at the expense of the poor, then since the US is the richest country in the world, by now, they would have created the most desperate class of poor people on earth. Instead, they have done jsut the opposite.
There is substantial poverty in America, but it doesn't come close to matching the poverty seen in parts of India, Latin America, Afria, Asia, or Eastern Europe where capitalism is just beginning to take hold.
When companies succeed and become more profitable, it means more jobs and less poverty.
When the rich get richer, the poor get richer as well.
If it were really true that the rich get richer at the expense of the poor, then since the US is the richest country in the world, by now, they would have created the most desperate class of poor people on earth. Instead, they have done jsut the opposite.
There is substantial poverty in America, but it doesn't come close to matching the poverty seen in parts of India, Latin America, Afria, Asia, or Eastern Europe where capitalism is just beginning to take hold.
When companies succeed and become more profitable, it means more jobs and less poverty.
Companies are in business for one basic reason. They want to make a profit.
Profitable companies with good management are rewarded in the stock market, because when a company does well, the stock price goes up. This makes investors happy, including the managers and employees who own shares.
In a poorly managed company, the results are mediocre, and the stock price goes down, so bad management is punished. A decline in the stock price makes investors angry, and if they get angry enough, they can pressure the company to get rid of the bad managers and take other actions to restore the company's profitability.
A highly profitable company can attract more investment capital than a less profitable company. With the extra money it gets, the highly profitable company is nourished and made stronger, and it has the resources to expand and grow.
The less profitable company has trouble attracting capital, and it may wither and die for lack of financial nourishment.
The fittest survive and the weakest go out of business, so no more money is wasted on them. With the weakest out of the way, the money flows to those who can make better use of it.
All employees everywhere ought to be rooting for profit, because if the company they work for doesn't make one, they'll soon be out of a job. Profit is a sign of achievement. It means somebody has produced something of value that other people are willing to buy. The people who make the profit are motivated to repeat their success on a grander scale, which means more jobs and more profits for others.
In a poorly managed company, the results are mediocre, and the stock price goes down, so bad management is punished. A decline in the stock price makes investors angry, and if they get angry enough, they can pressure the company to get rid of the bad managers and take other actions to restore the company's profitability.
A highly profitable company can attract more investment capital than a less profitable company. With the extra money it gets, the highly profitable company is nourished and made stronger, and it has the resources to expand and grow.
The less profitable company has trouble attracting capital, and it may wither and die for lack of financial nourishment.
The fittest survive and the weakest go out of business, so no more money is wasted on them. With the weakest out of the way, the money flows to those who can make better use of it.
All employees everywhere ought to be rooting for profit, because if the company they work for doesn't make one, they'll soon be out of a job. Profit is a sign of achievement. It means somebody has produced something of value that other people are willing to buy. The people who make the profit are motivated to repeat their success on a grander scale, which means more jobs and more profits for others.
That a company earns a lot of money doesn't necessarily mean the stockholders will benefit.
That a company earns a lot of money doesn't necessarily mean the stockholders will benefit. The next big question is:
1. It can plow the money back into the business, in effect investing in itself.
2. Or it can waste the money.
3. Or a company can buy back its own shares and take them off the market.
4. Finally, the company can pay dividend.
A dividend is a company's way of paying you to own the stock. The money gets sent to you directly on a regular basis - it's the only one of the above 4 options in which the company's profits go directly into your pocket.
Dividend also have a psychological benefit.
Millions of investors buy dividend-paying stocks and nothing else.
- What does the company plan to do with this money?
1. It can plow the money back into the business, in effect investing in itself.
- It uses this money to open more stores or build new factories and grow its earnings even faster than before.
- In the long run, this is highly beneficial to the stockholders.
- A fast growing company can take every dollar and make a 20% return on it.
- That's far more than you and I could get by putting that dollar in the bank.
2. Or it can waste the money.
- It can waste on corporate jets, teak-paneled offices, marble in the executive bathrooms, executive salaries that are double the going rate, or buying other companies and paying too much for them.
- Such unnecessary purchases are bad for stockholders and can ruin what otherwise would be a very good investment.
3. Or a company can buy back its own shares and take them off the market.
- Why would any company want to do such a thing?
- Because with fewer shares on the market, the remaining shares become more valuable.
- Share buybacks can be very good for the stockholders, especially if the company is buying its own shares at a cheap price.
4. Finally, the company can pay dividend.
- A majority of companies do this.
- Dividends are not entirely a positive thing - a company that pays one is giving up the chance to invest that money in itself.
- Nevertheless, dividends are very beneficial to shareholders.
A dividend is a company's way of paying you to own the stock. The money gets sent to you directly on a regular basis - it's the only one of the above 4 options in which the company's profits go directly into your pocket.
- If you need income while you're holding on to the stock, the dividend does the trick.
- Or you can use the dividend to buy more shares.
Dividend also have a psychological benefit.
- In a bear market or a correction, no matter what happens to the price of the stock, you're still collecting the dividend.
- This gives you an extra reason not to sell in a panic.
Millions of investors buy dividend-paying stocks and nothing else.
- Compile a list of companies that have raised their dividends for many years in a row.
- In Wall Stree, one company has been doing it for 50 years, and more than 300 have been doing it for 10.
Market Multiple or "What the market is selling for".
The P/E ratio is a complicated subject that merits further study, if you are serious about picking your own stocks.
Here are some pointers about P/Es.
If you take a large group of companies, add their stock prices together, and divide by their earnings, you get an average P/E ratio.
On Wall Street, they do this with the Dow Jones Industrials, S&P 500 stocks and other such indexes. The result is known as the "market multiple" or "what the market is selling for."
In general, the faster a company can grow its earnings, the more investors will pay for those earnings.
Some companies steadily increase their earnigns - they are the growth companies.
Others are erratic earners, the rags-to-riches types. They are the cyclicals -
Here are some pointers about P/Es.
If you take a large group of companies, add their stock prices together, and divide by their earnings, you get an average P/E ratio.
On Wall Street, they do this with the Dow Jones Industrials, S&P 500 stocks and other such indexes. The result is known as the "market multiple" or "what the market is selling for."
- The market multiple is a useful thing to be aware of, because it tells you how much investors are willing to pay for earnings at any given time.
- The market multiple goes up and down, but it tends to stay within the boundaries of 10 and 20.
- The stock market in mid-1995 had an average P.E ratio of about 16, which meant that stocks in general weren't cheap, but they weren't outrageously expensive, either.
In general, the faster a company can grow its earnings, the more investors will pay for those earnings.
- That's why aggressive young companies have P/.E ratios of 20 or higher. People are expecting great things from these companies and are willing to pay a higher price to own the shares.
- Older, established companies have P/E ratios in the mid to low teens. Their stocks are cheaper relative to earnings, because established companies are expected to plod along and not do anything spectacular.
Some companies steadily increase their earnigns - they are the growth companies.
Others are erratic earners, the rags-to-riches types. They are the cyclicals -
- the autos, the steels, the heavy industries that do well only in certain economic climates.
- Their P/E ratios are lower than the P/.Es of steady growers, because their perfomance is erratic.
- What they will earn from one year to the next depends on the condition of the economy, which is a hard thing to predict.
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