Investment Books Reviews

Stocks: The Double-Your-Money Club

2008-05-14T17:26:00.000-07:00

How do you spot companies that could potentially rise 100% in price? BusinessWeek asked experts for some advice and their favorite stock picks

It's an investor's dream: A stock with the potential to double in price.

Finding these stock market gems before they double is difficult but not impossible. According to data provider Capital IQ, there are almost 6,700 stocks that trade on major U.S. exchanges, and less than 100, or 1.4%, have doubled in the past year.

Still, this rare species is worth hunting. BusinessWeek asked fund managers and other market experts to pick stocks that could provide 100% returns in the next couple years

It's possible none of the companies will meet their recommenders' highest hopes. Not only are there long odds against any one stock doubling but the market faces rocky conditions amid a tough economy and a persistent financial crisis. Also, the 16 stocks named by our experts include some unproven, volatile names, reflecting the fact that investors hoping for big returns also must take major risks.

Taking those caveats into account, how do our experts recommend you find stocks that could double? Everyone has a different strategy, but all look for ways to outsmart an efficient market.

Small-Cap Opportunities

Mary Lisanti, portfolio manager of the Adams Harkness Small Cap Growth Fund (ASCGX), says young companies in the small-cap segment offer the most opportunity.

For one thing, "nobody knows much about them," she says, giving investors a chance to spot great prospects before the rest of the market sees them. Also, many small companies are growing by exploiting a particular niche. "The good ones have figured out strategies that get them to grow no matter what happens to the economy," says Lisanti, who recommends semiconductor firm Rubicon Technology (RBCN) and Titan Machinery (TITN), a chain of stores selling agricultural and construction equipment.

(All our sources or their funds own the stocks they recommend.)

Bargain Hunting

Many investors crunch the numbers, looking for promising companies trading at discount prices. Robert Auer, who runs the Auer Growth Fund (AUERX), looks for strong revenue and earnings growth paired with a low price-earnings (or p-e) ratio.

He says one of his picks, specialty chemical firm OM Group (OMG), is growing more quickly than Apple (AAPL) but trades at just a fraction of Apple's high p-e.

Consider Stock Movement

But William Van Keulen, of Colorado Springs (Co.) financial adviser Carnick & Co., avoids a strategy focused exclusively on value. "We don't like bottom fishing," he says. Investing in cheap stocks can be "a little bit like catching a falling knife many times, depending on where the economy is going."

Van Keulen also uses technical analysis—the study of a stock's movement in the market—to find his favorite picks, which included software companies Ansys (ANSS) and IHS (IHS).

Pessimistic Picks

Richard Sparks of Schaeffer's Investment Research, an expert on technicals, says it's a good sign if market data indicate a lot of skepticism toward a stock. For example, a lot of short interest in a stock—i.e., investors betting the price will fall—can actually help a stock rally quickly if a rising share price forces short sellers to buy back shares.

Sparks' picks, glassmaker Apogee Enterprises (APOG) and Volterra Semiconductor (VLTR), both face a lot of market pessimism, he says.

Short-Term Choices

Of course, when stocks fall out of favor with the market, it's often for good reasons. Thyra Zerhusen, manager of the Aston/Optimum Mid Cap Fund (CHTTX), looks for stocks selling at a discount for bad reasons.

"We look for short-term trouble," Zerhusen says. Her top picks may have "stumbled short term, but it can be corrected." She thinks Chicago Bridge & Iron (CBI) and Jabil Circuit (JBL) could double, proving their doubters wrong.

Despite the risky environment, some believe this is the perfect time to be hunting for stocks with large upside potential. Carnick & Co.'s Van Keulen says he and his colleagues "salivate" over stocks at a time like this. With the broad Standard & Poor's 500-stock index down 10.6% in the past seven months, he sees many stocks trading at reasonable prices.

Link to the article: http://finance.yahoo.com/retirement/article/105064/Stocks-The-Double-Your-Money-Club

Recessions Are in the Eye of the Beholder

2008-05-12T05:30:00.001-07:00

How many times have you been witness to an event and then read about it in the newspaper later? How many times would you say the newspaper reported the event as you witnessed it?

If you're like me, truthful, accurate reportage is a rarity in your experience when compared with, well, with your experience.

Reports of Recession Greatly Exaggerated

This is as true of giant national events as it is of neighborhood ones. I've been involved in many of these big events, from Watergate to the Drexel/Michael Milken junk bond scandal. The media simply never gets it right. They give an impression, highly colored by the inexperience, bias, and laziness of the reporter. Most of all, in national events, the reporting is based upon the reporter's urgent need to magnify his or her own importance. This is only human, but it's good to recognize it.

I've been thinking about this a lot because in the last few weeks, we've seen a barrage of data buried in the back pages of major newspapers telling us that the "recession" everyone said was a certainty, the "recession" that the reporters assured us would be about as bad as the Great Depression, is simply not happening.

The bond markets have rallied staggeringly. The stock markets had one of their best months ever in April. The rate of defaults on corporate bonds remains extremely low. And index securities that track mortgage defaults are saying that the fear of a colossal national mortgage default epidemic was ill-founded.

Ignoring the Data

Just as I am writing this, new employment data has come out showing only very small job losses in April -- 20,000 jobs out of a labor force of very roughly 160 million, meaning that 1 in 8,000 jobs has been lost. The actual rate of unemployment is falling to a very modest level -- 5 percent.

Yet the national media is still selling us fear of a recession. One of the major national newspapers has a reporter who's desperately trying to peddle a story of national economic collapse even as the economy stays afloat.

And the beautiful part is that it's now crystal clear that we're not in a recession (we could be later -- anything can happen). There was just a report that showed first-quarter 2008 GDP growth was positive, meaning that as a matter of arithmetic we can't be in a recession, any more than a man who's gained weight can also be losing weight.

The Economy's Still Afloat

No, that's not the beautiful part: The beautiful part is that because we're not meeting the definition of a recession -- two consecutive quarters of negative economic growth -- the pundits are trying to rewrite the definition, to make it just about anything they feel like making it. (Or, as I like to say, the new rules allow liberals to call a conservative administration's tenure a recession any time they have the urge.)

Ladies and gentlemen, the dogs may bark but the caravan moves on. Adroit moves by the Federal Reserve have saved the economy from a bad recession. The housing crisis was never anywhere near as bad as the media naysayers were trying to claim. The mortgage foreclosure problem was never the disaster hedge fund traders and their allies in the media were trying to say.

This big old leaky barge of an economy is still floating lazily down the river. It's not as strong as it was two years ago, but it's still above the water line. The big problem for most employers now (as they tell me) is getting decent labor. Any halfway skilled, halfway decent college grad can have her choice of jobs. Anyone with a real work ethic and an education can make a fine living.

Get Real Now

I've come to feel that you, my readers, are my family. So I hope you haven't been terrified by the media and didn't sell your stocks. I hope you've been buying while the market was down. It may have some further air pockets, but the direction sure looks like it'll be up for a while now. P/E's aren't at all high, and foreign stocks are amazingly cheap.

And I'll add another suggestion. My evidence is anecdotal at this point, but I'm hearing of an uptick in home sales in my beloved Southern California and my native Washington, D.C. I think the tide is hitting full ebb, and while it may ebb for a while, it'll turn before long.

The nation is still rich. Mortgage rates are low. Employment is high. Contrary to media reports, loans are easily available to qualified buyers. Houses are still tax-subsidized. Young families need homes. We old people need retirement homes. People are moving for many reasons, and they need homes, too. Clearly it's a good time to dip your toe in and see how you like the residential real estate water.

Bunk, More or Less

As for the financial journalists, take a cue from Henry Ford, who famously said, "History is more or less bunk."

I wouldn't say business journalism is all bunk. But I would say it's about glorifying the reporters and selling newspapers. And while fear sells papers, it doesn't make for good investors.

Link to the article: http://finance.yahoo.com/expert/article/yourlife/81478;_ylt=AqWpvout3ujLdorjFvjSFvC7YWsA

Top tips: Reasons for optimism

2008-03-29T10:36:00.000-07:00

Consumer confidence plunged to a five-year low Tuesday as tight credit markets, rising prices and worsening job prospects weigh on American consumers. But Gerri Willis is here to give us reasons for optimism.

Low mortgage rates

This is good news for homeowners who want to refinance into a fixed rate loan.

Today, the traditional 30-year mortgage rate is less than 6%, according to the Mortgage Bankers Association. And if you have an adjustable-rate mortgage, Fed rate cuts will make your adjustment less painful.

If you have a home equity line of credit, you will also see your interest rate decline. A majority of HELOCs are tied to the prime rate. And those rates have fallen as the fed cuts rates.

And there's also good news out there if you are in the market for a jumbo loan. Traditionally, rates on jumbo loans - mortgages up to $417,000 - were high because Fannie Mae and Freddie Mac couldn't purchase loans over that amount.

But thanks to the economic stimulus package that passed in congress, that limit is raised to $729,000. That means you'll likely pay a lower rate.

But you have to act quickly. You'll have to lock in those lower jumbo rates because the higher limits only last until Dec. 31.

2. Consumer incentives

If you're in the market for a car, the time to buy is now until the end of the summer. That's when incentives will reach record numbers, says Jesse Toprak with Edmunds.com.

That's because this year could be the worst year in a decade for car sales, according to Toprak. These incentives will include cash rebates, low APR programs, lower interest rates on leases and dealer cash incentives. The vehicles with the most incentive programs: SUVs and large trucks.

Compact cars tend to have the least incentives. "In times of economic uncertainty, people make safer choices. Manufacturers don't need as much incentive to sell them," says Toprak.

To see a list of what incentives are available for an individual car, check out Edmunds.com.

Another good place for bargains: Furniture. Sales volume is low, so furniture retailers are rolling out the deals.

And if you want to get a good deal on a flat panel LCD or plasma TVs, those prices are going down too. In fact, according to Consumer Reports, you should find a good selection of these TVs for less than $1000.

3. Buy the recession

When the market plunges, it's tempting to cut your losses and pull your money out of the market. But market declines can provide opportunities for investors looking for investments at bargain prices.

Consider this, if you missed 30 of the best days in the market you would have wound up losing almost half of your portfolio's value, according to a research note by Edward Jones.

Keep in mind that the stock market falls in anticipation of a recession and recovers before it ends. Your best bet is to keep your portfolio diversified, prepare for some short-term setbacks but keep your eyes on the long-term horizon.

Link to the article: http://biz.yahoo.com/cnnm/080327/032608_toptips.html?.v=1&.pf=banking-budgeting

Ten ways to crash-proof your investments

2008-03-18T17:11:00.000-07:00

Here are 10 ways to avoid permanent losses and crash-proof your portfolio:

1. Diversify among many stocks

2. Diversify across many sectors

3. Spread your portfolio among different asset classes

4. Spread your investments geographically

5. Don't forget fixed income

6. Consider a mechanical defensive strategy to limit losses

7. Avoid paying unnecessary expenses

8. Avoid paying unnecessary taxes

9. Don't panic

10. You can't outwit the bear by avoiding all risk

Link to the article: http://finance.yahoo.com/focus-retirement/article/104648/Outwitting-the-Bear?mod=retirement-preparation

What an Ice Cream Factory Can Teach You About Stocks

2008-03-18T16:59:00.001-07:00

Lessons from Main Street for Wall Street

The market has been a source of great uncertainty for many Americans over the past few months. With equity prices falling and the credit markets freezing, rapid interest rate drops and liquidity infusions by the Federal Reserve have helped but not completely halted the tide. It was during these times that Ben Graham used to tell his students that one could think of himself (or herself) as a partial owner in a business and be content with collecting the cash dividends that came in the mail in the meantime.

There is great comfort in this psychological disposition. Today, for instance, I happened to be in Houston, Texas and visited a nearby community to see the factory tour of the Blue Bell Creamery, a large regional ice cream brand that is a favorite at the White House.

As we were watching the machines filling the cartons with various flavors, it was obvious to me that a private business owner wouldn’t think of his “stock” going down when Wall Street ran into trouble; instead, he would focus entirely on his own bottom-line profits. Thousands of miles away from the brokers, analysts, and hedge funds that call Manhattan home, the yardstick of success would be measured in terms of the net income generated for the owners over the long-run, not the day-to-day fluctuations in daily shipments.

As a business owner, this is the same approach I take when valuing stocks. Declines, even substantial ones, don’t bother me in the least provided the underlying premise for my investment still remains intact. Success is measured by what Warren Buffett called “owner earnings”, especially as measured against the total capital invested. That is the estimated cash profits generated by a business after paying for capital expenditures if unit volume were to remain the same. In other words, if you wanted to take all of the net income in cash dividends each year to spend at Saks Fifth Avenue or to give to charity, how much could you take out without hurting the competition position of the company? How many people do you know actually think about this when they purchase shares of stock in their brokerage or retirement accounts?

This is one of the reasons that cash dividends have remained such an important source of total return for shareholders over the long run. Unethical, or just plain inept, management can often overstate profits through countless means, including adjusting depreciation schedules, pension assumptions, and health care costs. You can’t fake a cash dividend. When shareholders receive money in the mail or have it directly deposited into their bank or brokerage account, it’s a sign that the quality of earnings for a business might possibly be better than comparable firms because there was actual cash sitting in the company’s coffers.

Link to the article: http://beginnersinvest.about.com/od/dividendsdrips1/a/ice_cream_stock.htm

Article - Make Your Money Work for You - Yahoo Finance

2008-02-27T06:35:00.000-08:00

How much do you really know about what to do with your money?
Recently, a reader named Dave left this comment on my blog:
"I have tried asking for advice through other sites like Forbes and Vanguard, but it is all so confusing to me. I have money to invest; I just don't know how to invest it. With all of the fees and gimmicks, it is very frustrating. I know I need to get into stocks to get the max return, but I just can't make the distinction between mutual funds and that sort of thing. Any advice would be great."
I decided to write this column on my own approach to investing as a primer for readers like Dave, and a refresher course for those who may have gotten started with their investment planning already.Saving, Retirement Planning, and Speculation
Saving, retirement planning, and speculation are three very distinct categories that are often lumped together under the heading "investments," which can be extremely confusing.
First, it's important to understand that you can't bury your money under your mattress; if you do this, inflation will destroy its value over time.
That leaves paying down debt; spending on necessary or elective depreciating assets such as food, clothing, and entertainment; and the three options above: saving, retirement planning, and speculation.
For the sake of this column, let's say that you've managed to pay down your high-interest debt -- such as credit cards -- and you manage your expenses well enough to reserve 10 percent or 15 percent of your income each month. Now we can cover what you are going to do with that reserved money in order to live with financial security both now and in the future.
First, there's saving. Saving means putting your money in a very safe vehicle such as a savings account, a money-market account, or a CD (certificate of deposit). With the majority of these ultra-safe vehicles, the rate of return is barely above inflation -- currently an average of 3.08 percent for a six-month CD on Bankrate.com.
Everyone must save. If you're just starting to put away money, you should aim to build up an emergency fund totaling three to six months' expenses. On top of that, you should have a dream fund for planned expenses such as a house, car, vacation, wedding, or baby -- whatever is in your one-year and five-year plans.
Next, there's retirement planning. This is the investment activity I'm going to spend the most time on because it's what people tend to need the most help with.Everyone needs to plan for his or her own retirement, and most people don't start soon enough or save enough. Here's where members of Generation Debt can be savvy. If you start in your 20s, you can get away with saving just 5 percent of your income and be fairly well set when it's time to retire. If you're starting in your 40s, you'll be shoveling in 30 to 40 percent of your income just to make it to the finish line in decent shape.
Retirement planning should start with the money set aside from your salary in a tax-deferred retirement account: a 401(k) or 403(b) if your employer provides them, or an IRA if they don't. With those contributions, you will mostly want to buy a balanced portfolio of stocks. A good retirement plan is defined by reasonable, targeted long-term returns in the 7 percent range, similar to the rate of growth of the stock market as a whole.
You should try to diversify the funds in that account as much as possible while keeping your costs as low as you can (partly by keeping transactions to a minimum). And you need to take a long-term view.
To keep down your expenses, look for no-load, low-cost mutual funds. When you look up a fund, a number called the "expense ratio" tells you how expensive it is in terms of fees and commissions compared to other funds. The average expense ratio is over 1 percent, while an index fund can be as low as 0.02 percent. This article tells you more about fund expenses.
Speculating is the riskiest type of investment, and it has no place in retirement planning. You are speculating, not planning for retirement, if you're taking advice from Jim Cramer's "Mad Money", trying to maximize your returns into the double digits by choosing particular stocks, and timing the market so that you can buy low and sell high. Another activity that falls under the category of speculation is buying a house in order to "flip" it.
Most individuals find it very difficult to beat the market by speculating. If you want to try it for fun, after you've maxed out your retirement contributions, that's fine. But if you are really that good at doing research on individual companies or predicting what the economy is going to do, do what Cramer did: Go into finance for a living.
Get Good Sources of Information
Two-thirds to three-fourths of the information you will find on Yahoo! Finance, on CNBC, and similar resources about "investing" is really about speculating. That's because it's exciting for financial journalists to cover "stocks everyone is talking about" or the daily ups and downs of the market. But this won't help your long-term retirement-planning strategy.
The big brokerage firms like Fidelity and Vanguard offer some great information on retirement planning, but remember that their income depends on fees and commissions, so you have to be vigilant in seeking out the lowest-cost investment options on their sites.
That leaves folks who specialize in personal finance, which is distinct from investing. We all have our own personal philosophies and agendas, so it's good to read as widely as possible and compare to find an approach that sounds good. As a rule of thumb, don't pay attention to anyone who promises to make you rich.
I like Henry Blodget's "Wall Street Self Defense Manual" (you can read about his approach here in Slate). He was once on the dark side, disgraced and banned from the securities biz for playing a part in pumping the biggest stock bubble in history, but in his new, reformed life, Blodget gives solid advice.
This recent "New York Times" article about top Yale investor David Swensen's book, "Unconventional Success: A Fundamental Approach to Personal Investment", contains some good information as well.Diversify
So, you have maxed out your contributions to a 401(k). Now what?
Buying and holding a low-cost index stock fund such as Fidelity's Spartan 500 is the easiest way to capture returns close to the overall market return of 7 percent to 10 percent. The 500 refers to the 500-stock average; owning this fund is like owning the whole stock market.
If you want to diversify beyond owning a U.S. stock index, two good places to look are foreign stock markets and real estate. Most of the value of the world's markets is outside the U.S., but most American investors keep the majority of their money inside the country. Right now I have about a third of my retirement money in foreign stock indexes.
You can also invest in real estate. Such investing could mean buying a home or other property, especially if you plan to live in it as well. But you can also invest in a REIT, or Real Estate Investment Trust. With a REIT, you are owning a piece of a bunch of properties, similar to a mutual fund of stocks. That way, you're not gambling on the rise or fall of one particular real estate market. Check out the Vanguard REIT Index Fund. Set It and Forget It
Every time you make a trade, you pay commissions and fees, and when you sell an investment, you pay capital gains taxes on any income from that sale. Over the long run, these costs can eat heavily into your returns. So save more money and add to your investment mix over time, but don't make rash decisions based on short-term changes in the market. Remember -- if you're a young investor, time is on your side.

Link to the article: http://finance.yahoo.com/expert/article/generationdebt/68698;_ylt=ArUrPXQp3wQtQ79eN1G0FdS7YWsA

Article - Four Ways to Hedge Against Falling Home Prices - Yahoo Finance

2008-02-27T06:30:00.000-08:00

Here are four ways to hedge against falling home prices:
1. Wait It Out as a Renter
Forget the American Dream. Buying a home in a tanking real estate market isn't going to turn you into Andrew Carnegie any faster. Your best investment may be a rental.
If you already own a home and you intend to stay in it for years to come, of course, selling now probably doesn't make much sense: the commissions and fees of a sale can easily wipe out the gain. But if you don't own a home -- or if you're moving for other reasons -- these fees will be extra savings.
The long and short of it: rent paid may be money in the bank.

2. Play the Futures Market
The obvious hedge against falling home prices is to bet against the residential real estate market in your area.
In 10 major markets, the Chicago Mercantile Exchange offers housing futures and options that are tied to the S&P/Case-Shiller Home Price indices. Bearish investors can go short on securities and invest in the right or obligation to sell borrowed securities up to a later, specified date. If the security loses value, the investor gains money.
Theoretically, if you own a home and go short on the index, should the real estate market in your area plunge, your house will lose value, but the loss will be offset by a gain in the futures market. Conversely, if the market does well, your home will increase in value, and you'd lose on the futures investment.

3. Take Out Home-Equity Assurance
A select few of those looking for more direct protection have another option: a handful of cities -- including Syracuse, N.Y., Florissant and Ferguson, Mo., and parts of Chicago -- offer home-equity assurance programs.
Though home-equity assurance programs work differently, they typically appraise a house when a homeowner registers for the program, and then pay the homeowner the difference if the house sells for less than the appraised value or if neighborhood property values fall.

4. Engage in Short-Selling
For those who don't live in cities with protection plans -- or who simply didn't enroll in them -- and who find their home loans worth more than their home, there may be another option: the short sale.
Short-selling houses has one major advantage to short selling stocks: there's no downside risk. Arranged properly, the lender, not the borrower, takes the loss.
In a housing short sale, the borrower sells his house for less than the amount of the mortgage, takes a hit on his credit report, and moves free and clear of any housing debt.
If it sounds like there must be a doozie of a catch, there is.
Lenders must agree to the short sale. And typically they'll only do that if the house is at risk of foreclosure, and they believe a short sale will be more cost effective.

But though some homeowners may be able to mitigate their losses, others can do nothing but wish they had bought into the market at a better time.
"If you buy an asset and the value declines you've taken a loss," says Miller of Sensible Financial. "There's no undo button."

Link to the article: http://finance.yahoo.com/real-estate/article/104493/Four-Ways-to-Hedge-Against-Falling-Home-Prices;_ylt=AvYxL9_zoLRF17BmAIhGwaK7YWsA