:: creative : investor : 101 ::

Two Types of Stocks for the Current Economic Environment

2009-08-06T12:51:00.005-04:00

So, according to the Bill Gross' commentary in his August Investment Outlook, due to the expected reduced economy growth, and therefore reduced overall earnings growth, over the next few years, the best investments would be aggressive growth companies that are currently undervalued and large companies that can continue to raise dividends. Or at least that's the way I interpreted his commentary. Operating within the Mr. Gross' framework, I would argue that those are the two types of companies that investors would flock to because

When overall earnings growth is depressed, you'll demand higher dividend payments. Therefore, you'll want to invest into companies whose current dividend payout ratio is relatively low, which will allow them to significantly increase the dividend payout if needed. You also want companies that have a history of dividend increases and who will therefore be willing to continue increasing the divident payout. Furthermore, since more investors will have increased demand for and appreciation for such companies, their stock will go up as well due to the increased demand for their dividend payments. So, it's a two-prong profit generating strategy from such stocks, as long as you pick the right ones, of course!
You will also want to pay attention to the companies that can grow aggressively despite the overall economic slowdown. Such companies always exist, even in the worst of depressions. These companies would be at the lower spectrum of the market cap universe; they are highly innovative and dismissive of conventional wisdom; they're likely to be the frontrunners of their respective industries, but you also need to be careful with the industry and sector selections. For example, even though it's possible to have a high-flying retail operation (maybe Gamestop?) that will defy all logic and economic sense (is there such a thing? or should I have said "nonsense"?), you will probably have a higher chance of success in the biotech or data storage areas (if VMware was introduced to the market right now, it would still take off like crazy despite the gloomy market conditions and even though it wouldn't rise quite as much as it did, it would still be a great investment right now).

I think that Mr. Gross makes a good case for depressed earnings over the next few years, but it's important to keep in mind that market doesn't always react quite as you'd logically reason it would (I like to believe that my points above have some logic to them...).

Is Market's Summer Run-up Over?

2009-08-02T15:16:00.003-04:00

All media outlets seem to have an opinion on whether the summer bull run is over or will keep the momentum going. Majority seems to be under the opinion that this sharp run-up must result in a sharp pullback. I find this to be a pretty useful piece of information simply because conventional thinking and magazine covers generally tend to be wrong, at least as far as the timing goes. I agree that a pullback is all but inevitable, but I'm not convinced that it will happen as soon as a lot of the pundits and apparently many of the retail investors (more on this in a moment) expect it to occur. For one, earnings season is not over, and there are likely to be more good earning news coming out in the next few weeks than bad news. Most of the earning improvements though are a result of either government stimulus favorably affecting particular industries or analysts' "consensus" earnings estimates being affected by the "bear" bias. Analysts tend to have overly bullish expectations in the bull markets and likewise overly bearish expectations in the bear markets. Therefore it's easier to beat the estimates they made after several horrible quarters. I would expect a whole lot more earnings misses in the third and fourth quarters due to the undue optimism that seems to be clouding the market nowadays.

So, confirming my sense of public wrongness about the market, Schaeffer's Investment Research pointed out a similar sentiment in the "Monday Morning Outlook" commentary:

"Moreover, retail investors are getting more comfortable with the market's outlook, and they have tended to be very reactive and wrong at key points throughout 2009. For example, according to the latest American Association of Individual Investors weekly survey, nearly 48% of investors are bullish. This is the highest percentage of bulls since June 4, which preceded a mild pullback in the SPX during the course of the following month. For what it is worth, only 28% of those surveyed were bullish ahead of the SPX's breakout two weeks ago."

Additionally, professional investors seem to be off the mark as well:

"...a recent survey of 127 institutional investors by TheMarkets.com revealed, "Surveyed investors expect that key sectors of focus over the next 12 months will be energy, financials, healthcare and basic materials." We find it extremely odd that technology was not listed among those key sectors, especially given QQQQ's strong technical performance in 2009."

Once again, I agree with the Schaeffer's analysts, since technology has already shown resilience and it's one of the most concentrated sectors innovation-wise and I think previous recessions have shown that the most innovative companies rebound the strongest as the economy picks up. This is not to say that the aforementioned sectors (energy, financials, etc.) will necessarily lag technology, but at the very least technology sector should be right there with them.

Minimum Payment - Time to Abolish This Great Idea?

2008-12-24T01:55:00.000-05:00

An interesting study done in Warwick University reveals that minimum payment requirements presented to customers by the credit card companies (as dictated by law) in an effort to increase payment amounts and decrease consumer debt levels, may actually be doing the opposite. According to the study, people who would have otherwise paid a higher amount on their credit card bill, faced with the minimum payment amount, which is usually a very low amount, pay significantly less towards their balance therefore increasing their indebtedness.

Talk about unintended consequences. They should really conduct some economic focus groups and do rigorous simulations before they pass any law intended "to provide incentives for an improved behavior." Of course, a good chunk of all legislations would fall under that category.

Additional Resources:

A nudge in the wrong direction