Cash Flow Is Key… When it comes to evaluating the safety of a dividend, the first thing we need to verify – given the current economic slowdown – is demand for a company’s products. After all, a company needs to generate a steady stream of cash in order to keep paying its shareholders.

But this dividend stock is ideally suited to weather the economic mess and is well capable of bolstering your income.

Look no further than Philip Morris International, Inc. (NYSE: PM).

Repeat Business… No Matter What The Economy Is Doing

I’m going to give you 10 reasons why Philip Morris’s dividend-paying capability is so solid.

And given that consistent business is so crucial to a company’s cash flow generation, it’s no surprise to see that the first three reasons all focus on the firm’s rock-solid demand…

1. Recessions Don’t Matter: As you might suspect, addictive products tend to enjoy the steadiest demand. In fact, based on empirical evidence from Citi Investment Research, the last two recessions “had no material effect on [cigarette] demand.” This recession should be no different.

2. Population Growth Offsets Higher Taxes: Obviously, demand is not inelastic. Consumers are sensitive to price changes. And as the world’s governments contend with sagging economies, they continue to hike cigarette taxes in order to meet budget obligations.

The World Health Organization estimates for every 10% increase in price, demand slips by 4% in mature markets and by 8% in developing markets. However, when you factor in population growth, the impact is almost cut in half. More importantly, Philip Morris’ highest margin markets (accounting for 60% of revenues) come from the less impacted mature markets. In other words, the company’s profits are extremely durable.

3. Emerging Markets: The WHO estimates that 80% of the world’s 1.3 billion smokers live in developing countries. And sales in emerging markets are increasing modestly, compared to declining volumes in developed markets.

Philip Morris is uniquely positioned to capture the lion’s share of this growth. It operates in 160 countries and derives over 60% of its sales from emerging markets. It also owns seven of the leading 15 international brands, including the hands-down leader, Marlboro.

So it’s no surprise that total volumes increased a steady 2.5% in 2008. And total sales, net of excise taxes, increased by 12.7% to $25.7 billion. As management acknowledges, there’s no mistaking that, “This strong performance was driven by emerging markets.”

Now how about that cash?

If Cash Is King, Philip Morris Rules

Beyond steady demand, we also need to verify that cash isn’t being misspent and thus jeopardizing the dividend payment. The next three reasons pertain to Philip Morris’ ability to pay its dividend indefinitely…

4. Ample Free Cash Flow: In 2008, Philip Morris generated $6.8 billion in free cash flow, thanks to solid sales growth, supply-chain optimization and other cost-cutting initiatives. That was a year-over-year increase of 52.7%. Best of all, this figure should keep climbing, as the company is only about halfway through its three-year, $1.5 billion cost-reduction program.

5. A Solid Cash Buffer: With $2.4 billion in the bank, Philip Morris is sitting on enough cash to cover two quarters worth of dividends.

6. Minimal Litigation And Regulation Risk: The 2008 spin-off from Altria eliminated the legal and regulatory risks facing domestic operations. In other words, we don’t have to worry about the possibility of any adverse judgments that would require Philip Morris to pay enormous settlements and hinder its ability to pay short and intermediate-term dividends. Same goes for newly passed legislation, which grants the FDA regulatory control over the industry.

7. Credit Is No Concern: The bulk of the company’s debt was issued before the credit markets soured. And because it’s well laddered at “attractive interest rates,” there’s no concern about interest costs skyrocketing and cutting into dividend payments, due to untimely refinancing. Should any emergencies arise, the company can tap into its $6 billion in unused bank credit lines.

8. The Payout Ratio Is Conservative: Even after increasing the dividend by 17.4% in August (to $0.54 per quarter), Philip Morris still only paying out 61% of profits. So profits would need to drop dramatically in order to pose an immediate threat to the current payout. The low ratio also leaves plenty of room to increase the dividend.

Now for the final two reasons why Philip Morris’ dividend is solid…

Management Strength And A Currency Boost

The final two reasons the company’s dividend is safe pertain to management and market predictions. Because they’re subjective, they’re not significant on a stand-alone basis. But they do contribute positively to the overall outlook for the stock…

9. Management Pedigree And Commitment: Remember, Philip Morris spun off from Altria, which had increased its dividend in 39 out of the last 41 years. That history and “commitment to reward our shareholders generously” is ingrained in Philip Morris’ management. And as the CFO reveals, if maintaining that commitment “means that the payout ratio overshoots 65% [occasionally], so be it.”

10. Currency Tailwinds: A strong dollar hurts results because Philip Morris is based in the United States, yet records almost all of its sales in foreign markets. However, many experts (including yours truly) believe the dollar is doomed, which will only magnify the company’s profitability.

A Solid Dividend… And 14% Earnings Growth To Boot

In the end, the fundamentals above prove the most important thing to income-seeking investors: The dividend is safe.

They also point to the prospects for steady share appreciation. After all, the stock is trading cheaply at just 12 times earnings. Management also expects to increase earnings by 14% next year.

As CFO Hermann Waldemer explains, “We have excellent momentum going into 2009. Our market shares are growing overall… And our share growth is accelerating [too].”

And this is the reason to buy before the company reports its quarterly earnings on July 23: Because we’ll get proof. If we wait for the results, I’m afraid the shares will get away from us and diminish the yield.

At current prices, Philip Morris pays a reliable 5% with strong prospects for stock appreciation, too. So don’t miss out.
Good investing,
Louis Basenese

Source :  Philip Morris: 10 Reasons To Buy This Dividend Stock Before Next Thursday

Editors Note: This article appears as a guest editorial by Louis Basenese, Advisory Panelist, Investment U.

So, I’ll take Bill Gross’ recommendation one step further. Forget now. Dividend-paying stocks ALWAYS deserve a place in your portfolio.

Yet, in this market, it’s increasingly difficult to find reliable dividend stocks.

“This is going to be the worst [dividend-cutting year] in 50 years,” Howard Silverblatt, Senior Index Analyst at Standard & Poor’s, predicted in January. So far he’s right with industry titans like General Electric and Dow Chemical announcing cuts.

Keep in mind, Dow Chemical maintained or increased its dividend every year since 1912. That means conditions this year are worse for the company – at least on a cash flow basis – than during the Great Depression.

Against this backdrop, it’s understandable why many investors consider no dividend safe. But that’s a mistake. Fact is, countless companies will weather this storm with their dividend intact.

To find such companies I focus on the following six criteria and I recommend you do the same:

1. Simple business. The fewer the moving parts the fewer things that can go wrong and sap cash intended for dividend payments. Focus on companies doing one or two things that you can understand, as opposed to massive corporations with dozens of operating segments.
2. Steady demand. Given the Great Recession, the first thing we need to verify is demand for a company’s products. After all, a company needs a steady stream of cash coming in to afford to pay it out to shareholders. Stick to industries or sectors with recession-proof or recession-resistant demand (food, alcohol, tobacco, health care, etc.).
3. High cash balance. Cash IS king, especially when it comes to maintaining a dividend. Consider it insurance against any unexpected slowdowns. At a minimum, insist on enough cash to cover one quarter’s worth of dividends.
4. Minimal need for credit. Securing credit in this market is extremely difficult. Accordingly, I focus on companies that do not need to raise significant amounts of capital. Remember, too, when interest rates rise, so do interest payments for companies that rely on a significant amount of debt. So it’s also important to focus on companies with reasonable or low debt balances. This insures interest payments won’t sap money intended for us.
5. Cash flow positive. If a company’s not generating cash each quarter, the only way to pay a dividend is by borrowing or tapping into cash reserves. Such practices are not sustainable over the long term. Eventually, the dividend will be cut.
6. Earnings buffer. Insist on a dividend payout ratio (annual dividends/annual net income) of 80% or less. A company paying out 100% of earnings has no wiggle room in the event of a slowdown. If business suffers, so will the dividend.

Obviously not every stable dividend-paying stock will meet all these criteria. But the more criteria a stock fits, the more stable you can consider its dividend.

I followed these six criteria to unearth all the dividend stocks I’ve previously mentioned here -TEPPCO Partners (NYSE: TPP), Lorillard (NYSE: LO) and Windstream Corp. (NYSE:WIN).

Lorillard and Windstream remain attractive at current prices.

Next week, I’ll reveal another dividend-paying stock worth your consideration. But please note, in the days ahead my dividend-sleuthing prowess will change venues.

You see, because these columns are garnering so much interest, we’ve just decided to revamp the entire mid-month issue of The Oxford Club Communiqué. Going forward, each mid-month issue will be exclusively dedicated to dividend-paying stocks and other safe ways to generate an income.

So if you want a steady stream of stable dividend-paying stocks, you’ll have to join us. Go here to sign up today.

Source: 6 Steps for High-Yield Dividends

Identifying The Market’s Next Takeover Targets

The task of identifying the market’s next takeover targets can be daunting. Literally thousands of potential targets exist, which is probably why most investors liken it to a crapshoot and in turn, shun such a strategy altogether.

But that’s a monumental mistake!

They’re passing up easy double-digit profits. Historical takeover premiums (the amount paid over the current share price for a target company) average 22%, according to a study in The Journal of Finance.

And that’s just the averages.

It’s common for many deal premiums to reach into the high double digits and even triple digits.

Investing in Takeover Targets – 3 Steps to Improving Your Odds

By following three simple steps when investing in takeover targets, we can dramatically improve our odds of success…

• Go where there is consolidation. Consolidation trends are a powerful predictive tool because they tend to persist. Think about it. When your biggest competitor goes out and doubles in size overnight, there’s only one way to respond – find a suitable acquisition of your own to remain competitive. Thus, by focusing on those industries and sectors undergoing the most rapid consolidation, we can isolate high probability targets.
• Focus on companies with valuable (and undervalued) assets. Whether it’s a new drug, a mammoth oil discovery, key market share, distribution channels, or a few promising patents, the real reason a company is acquired is because it owns a particular asset of value to the acquirer. Only invest in companies with such “must have” assets. And to reduce risk even further, I suggest buying clearly undervalued companies – ones trading at or near cash levels on the balance sheet. (Yes, they do exist.)
• Insist on improving fundamentals. Understand that takeovers take time. In fact, acquiring companies might spend as much as nine months conducting due diligence. Yet, even then, there’s nothing stopping them from walking away from a deal (Microsoft -NASDAQ:MSFT- and Yahoo! -NASDAQ:YHOO- ring a bell?). I recommend buying an “insurance policy” to protect against such unprofitable break-ups. By that I mean, only buy companies with improving fundamentals – whether it’s strong earnings growth, new product launches, increasing market share, etc. That way, you stand to profit even if a takeover never materializes.

You’ll recall in my previous article about the imminent takeover boom, I singled out three sectors that fit the first criteria above – health care (specifically drug makers), energy and technology.

3 Takeover Targets to Add to Your Portfolio Today

For those unwilling to expend the effort to carry out the next two steps… or just eager to get going immediately, here are three takeover targets to consider adding to your portfolio today:

• Crucell NV (Nasdaq: CRXL): Merck (NYSE:MRK) and Schering Plough (NYSE:SGP). Pfizer (NYSE:PFE) and Wyeth( NYSE:WYE). Roche and Genentech (NYSE:DNA). Now Gilead Sciences (NASDAQ:GILD) and CV Therapeutics. Crucell is likely next. It’s the largest independent vaccine maker, with products for treating influenza, childhood diseases and hepatitis B. Crucell’s PER.C6 cell line is its most valuable asset. The company already licenses out the technology to over 60 companies. And there’s no doubt management is accepting offers. In January, it was in friendly talks with Wyeth, before Pfizer swooped in and bought Wyeth and ended the discussions. Best of all, multiple suitors exist (Novartis -NYSE:NVS-, Sanofi-Aventis (NYSE:SNY), Merck and eventually Pfizer) so a bidding war could unfold, which translates into greater profit potential for us.

• Anadarko Petroleum, Corp. (NYSE: APC): As oil tycoon T. Boone Pickens famously observed, it’s often cheaper to drill for oil on the floor of the New York Stock Exchange than in the ground. Andarko proves it, as its reserves currently trade for less than $10 per barrel. Throw in a recent deep-sea discovery off Brazil, minimal political risk (80% of assets are located in North America) and high-quality, relatively untapped and undervalued natural gas assets and the takeover case here is an cinch. A multi-billion dollar stock repurchase program provides downside protection, too.

• Lawson Software (Nasdaq: LWSN): The company is a quickly growing niche vendor of enterprise resource planning (ERP) software for medium-sized businesses. Tech heavyweights like Oracle (NASDAQ:ORCL), Cisco (NASDAQ:CSCO)and Microsoft are in desperate need of new growth initiatives. They have little exposure to the middle-market. And they have the cash to afford to buy it. The $308 million in cash sitting on Lawson’s balance sheet reduces our risk and also represents a 32% instant rebate to any potential suitors.

Full disclosure: I have recommended all three of these companies to subscribers in recent months. And we’re sitting on gains of 8%, 25% and 59%, respectively, proving it pays to follow step 3 above.

So to echo Alex’s sentiments from Monday, if you haven’t added a handful of potential corporate takeover targets to your portfolio, what are you waiting for? The opportunities and potential profits will be historic.

Good investing,

Lou Basenese

Source:  Takeover Targets: 3 Steps to Finding Them & 3 Stocks for Any Portfolio

This from Lou:

Billionaire investor George Soros and I don’t normally see eye to eye. He supports drug decriminalization, assisted suicide, America bashing… and a host of other off-the-reserve liberal causes.

I don’t. I’m an old-school Reagan conservative. (Full disclosure – I’m so old school, I named my first born after the late President.)

But here’s the thing. When it comes to investing, great political divides matter little. Because it’s not about getting our guy elected or unashamedly pushing a partisan agenda.

Instead, business – and by extension, investing in businesses – is only about increasing profits, as Milton Friedman put it. And based on the latest SEC filing for Soros’ hedge fund, we both agree on the best way for investing in crude oil’s imminent rebound…

Interested in Making Money In Stocks? Bookmark This Website…

If you’re interested in making money in stocks, regardless of your political leanings, you should bookmark the following website – and visit it daily. It’s a link to the most recent SEC filings.

• The first thing you should scan for are Form 4 filings. For a refresher on why, consult my friend Alex Green’s recent column on tracking insider trading.
• The next best thing to insiders backing up the truck is institutions doing so. And that’s because numerous studies confirm heavy institutional buying almost always leads to excess returns in future months.
• In other words, follow the “smart money” and you’ll often profit, too. And thankfully, we can easily monitor institutional purchases (and sales) via Form 13-F filings.

You see, the SEC requires all money managers with over $100 million in assets to disclose their U.S.-traded stocks, options and convertible bonds each quarter. And yesterday, Soros’ hedge fund firm, Soros Fund Management LLC, made its holdings public.

Turns out he increased his stake in one company by roughly 16 million shares, or 74%. And since April, he’s more than tripled his stake in this company to 36.8 million shares, up from 11.4 million.

Petrobras – The Best Play for Investing in Crude Oil

The object of Soros buying is none other than Brazil’s state-controlled oil company, Petrobras (NYSE: PBR). It’s a wise investment in my opinion. In fact, I recommended it to Oxford Club members last month at our Chapter Meeting in Managua, Nicaragua.

Here are five reasons why -

1. New discoveries. Worldwide oil demand might be off. But it’s temporary. And even if demand miraculously plateaus (don’t count on it with gas below $2 per gallon), the world would still “need to replace one Saudi Arabia per three years,” according to Petrobras’ CEO. No other company is making bigger discoveries than Petrobras. In fact, the company’s recent finds could triple its reserves. And as we all know, the country with the oil is always in control.
2. Long-term focus. With crude below $40 per barrel, most oil companies are cutting back on exploration and development. Not Petrobras. They plan to spend $174 billion by 2013, which ensures they’ll have plenty of products to sell when oil prices climb higher.
3. Low cost. Management estimates it can be profitable on new projects, even if crude oil stays around $45 per barrel. Few – if any – other major oil producers can claim such a low hurdle rate. Basic economic principles govern here – the low cost provider of a commodity enjoys the most profits when prices rise. And share prices often go along for the ride, too.
4. Deep-water expertise. All the easy-to-find crude oil is gone. But Petrobras is an expert in deep-water exploration. That’s a competitive advantage no other oil company can touch. And it should continue to help Petrobras add reserves at much lower costs than its peers.
5. Valuation. Emerging markets took it on the chin – twice as hard as the United States – despite stronger underlying fundamentals. It’s pointless to argue whether or not it was deserved. What matters is many high-quality stocks got caught up in the downdraft and now trade at mouthwatering levels. Petrobras is no exception, trading for less than 10 times earnings.

Add it all up, and this is one time I’m willing to admit I actually agree with George Soros. But forget about me. His sizeable investment and track record – last year his Quantum Endowment Fund returned 8%, compared to an 18% loss for the average hedge fund – are reasons enough to consider adding Petrobras to your portfolio.

Source: Investing in Crude Oil: The Best Way to Play Oil’s Imminent Rebound

This from Investment U:

I’ll be the first to confess, I flubbed the extent of the downturn in the financial space. Last April, I recommended “backing up the truck” and playing the rebound via the Financial Select Sector SPDR ETF (AMEX: XLF). Instead of a short-term opportunity, it’s turned into a really long-term rebound play.

But as I told members at our Central American meeting in Nicaragua last week, I’m human. I make mistakes. Both in life and investing. Thankfully, I’m not as bad as Wall Street analysts…

Forget Your Broker, Wall Street Analysts are a Bigger Threat

Most people will tell you a bad broker, motivated to increase his net worth by leeching fees off your net worth, is your biggest enemy. Not so. A blind faith in Wall Street analysts poses a bigger threat.

Forget being wrong some of the time. They’re wrong most of the time. Or as a recent MarketWatch article tells it, “If there’s one group of Wall Street denizens that have performed as poorly as bankers in the credit crisis, it’s the equity analysts who cover Corporate America.”

For instance, well into the credit crunch, they predicted earnings growth of 11.5% for the fourth quarter of 2007. Low and behold, earnings actually plunged 25%, based on Thomson Reuters data. They were off a whopping 36.5%! No rational explanation could explain, let alone justify, such a big miss.

Here’s the most compelling observation, though. According to Ashwani Kaul, the numbers cruncher at Thomson Reuters, the “figures show that analysts tend[ed] to err on the side of the positive when predicting earnings growth.”

But that was then. After being so wrong, for so long, I’m convinced most analysts fear for their jobs… and the pendulum’s swung back the other way. They’re being way too pessimistic now.

Case in point. Analysts’ estimates for the S&P 500 companies rest at their lowest levels for the last four years. In the last month alone, they’ve piled drive expectations into the ground, lowering EPS forecasts for 982 companies.

Companies themselves have even jumped on the pessimism bandwagon. In the third quarter, only 3% raised guidance. While the majority – you guessed it – lowered expectations.

Bottom line, the negative side of the market is getting overcrowded. And for once, I think analysts actually got ahead of the downward spiral.

That’s not so say we won’t have any more repeat performances. But we will certainly get pockets of outperformance. Companies beating expectations, with share prices eventually rebounding to reflect the good news.

Here’s how to play it…

Stock Profits From the Point of Maximum Pessimism

The late Sir John Templeton believed, “The time of maximum pessimism is the best time to buy.” (I agree.) And he did just that.

But he didn’t load up on the market indiscriminately. Instead, he cherry-picked companies trading at cheap valuations, with solid businesses and above average growth prospects.

He was talking about companies like Minnesota-based Fastenal (Nasdaq:FAST). It’s a supplier of nuts, bolts, parts and tools to manufacturers and commercial contractors.

I’ll concede that such a business is unglamorous and mind-numbingly boring. But the fact is, the company’s nearly 700,000 products are vital. They are used to operate and keep up large buildings, campuses and industrial plants, as well as bolt together furniture, appliances and trucks.

Recession or not, demand remains stable for Fastenal’s products. Otherwise, simply put, stuff stops working.

I originally alerted Oxford Club members to this stock in November. It reported earnings yesterday. And guess what? It beat expectations. The company posted a 10% increase in profits and enviable same-store sales growth of 8%.

Moving forward it will continue to grow thanks to four key competitive advantages – unparalleled convenience, market penetration, cost leadership and customization.

Strong insider ownership, double-digit growth opportunities and the most attractive valuation in over a decade (approximately 40% below its historic price-to-earnings ratio) only make the stock more compelling. I still rate it a “Buy.”

Whether you trust my analysis on Fastenal or not, just remember this: Analysts’ earnings estimates resemble a waterfall, cascading lower and lower with each passing week. They’re bound to overshoot the mark.

In many cases, like Fastenal’s, they already did. And that means plenty of bargain stocks exist to profit from the imminent pivot from pessimism to optimism.

Source: Stock Profits from Today’s “Maximum Pessimism”

It’s time to make a big bet and begin investing in China.

I know. It’s not exactly a popular stance. And the smart money is doing exactly the opposite. Or so it appears…

Yesterday, the Royal Bank of Scotland hit up the China ATM for a $2.37 billion withdrawal. It sold its entire 4.3% stake in Bank of China. And a week ago, Bank of America cashed out part of its stake in China Construction Bank Corp. for an estimated $2.83 billion.

Making matters worse, the MSCI China Index lost a record 53% last year. It’s counter-intuitive and near impossible to rationalize adding money to a losing investment…

Investing In China – 11 Reasons Why It’s Time

Here are 11 reasons why investing in China is exactly what we should do:

1. The truly “smart money” is buying, not selling. To be fair, the reason Bank of America “took a little money off the table,” according to spokesman Bob Stickler, is because of its own financial condition and need to raise cash. Same goes for the Royal Bank of Scotland. Yet, looking past these institutions, the truly smart money is loading up on China. Mark Mobius, the king of emerging markets, sums it up best, “We’re having a wonderful time buying tremendous bargains.” Stats from research firm EPFR indicate the rest of the smart money is following suit. Funds investing in emerging-market stocks raised their Chinese holdings to the highest level since 1995. We should, too.
2. Chinese stocks are cheap. Ridiculously so. If legendary investors like Warren Buffett salivated over U.S. stocks trading at 12 times earnings, they should be rabid over Chinese stocks. Based on the MSCI China Index, the average Chinese stock trades for less than eight times earnings.
3. Share prices are contracting, but earnings keep growing. Based on the severity of the sell off, you’d think every Chinese company was unprofitable and headed for bankruptcy. Yet the fundamentals remain rock solid. The average Chinese company is still growing earnings by 30%, according to a recent report in China Securities Journal. Compare that to the estimated 12% earnings decline in the fourth quarter for the companies in the S&P 500, and the bargain valuations make even less sense.
4. Chinese investors learned a tough, but necessary, lesson. During the height of China’s economic boom, retail investors viewed the stock market as an ATM. They lined up by the millions to open brokerage accounts. But much like our infamous dot-com bubble, Chinese day traders and novice investors got a very painful reminder of what happens when the “Greater Fool Theory” reaches the last idiot. The important thing, however, is that the correction served a higher purpose. It began the process of flushing the extreme irrationality from the market. So we can be certain the next leg up will be governed by fundamentals, not hype.
5. Oil is much cheaper. One of China’s biggest challenges was to keep a lid on inflation, while still maintaining its breakneck pace of economic growth. That was no easy task with oil at $150 as the cost of shipping, food and fuel were increasing rapidly. Keep in mind, China imports a net 3.3 million barrels of oil a day. Now that oil prices are down considerably, we can cross one big inflation risk off the list.
6. The economy is NOT in a recession. Sure, it’s slowing down, but China is still on track for a solid 6% expansion based on analysts’ estimates. And 8% if you believe the government statistics. Regardless of who ends up being right, compared to the contraction in the United States, such a rate is downright explosive.
7. Massive foreign reserves. The last time Chinese stocks were this cheap was during the Asian financial crisis. Back then, most Asian countries were running huge deficits. But this time the roles are reversed. As of December, China boasts $1.95 trillion in foreign reserves. And counting. If necessary, the government can deploy these surpluses to keep economic growth humming along.
8. Personal savings. Unlike Americans that spend more than they earn, the Chinese save an amazing 35 cents on every dollar. This provides yet another cushion against any slowdowns. But also an enormous opportunity for future growth. As China’s economy develops, and affordable insurance and health care become ubiquitous, expect the Chinese to get comfortable spending more of their hard earned cash.
9. The consumer is just getting started. The country’s burgeoning middle class, now the size of the entire United States, is just getting started. The McKinsey Quarterly estimates that it will take two decades before these nouveau riche reach their full spending potential. As we know from our own experience and prosperity – 70% of GDP in the United States is attributed to consumer spending – the consumer is an engine of economic growth. In other words, the global recessionary headwinds are no match for the Chinese consumer.
10. Forget what Westerners think, locals are optimistic. We know consumer confidence plays a big role in the success of our own economy. It flat out stinks right now in the United States, And the economic conditions reflect it. But in China, it’s an entirely different situation. A recent survey from the Pew Research Center shows that most Chinese (86%) feel positive about where their country is headed. And that’s up from 25% just six years ago. If they overwhelmingly see good things on the horizon, we should believe them.
11. The “mother of all stimulus plans.” While the massive government stimulus package has yet to take hold in the United States, rest assured it will. Same goes for the $584 billion the Chinese government is pumping into its economy. As a fund manager for BlackRock notes, China’s “got the mother of all stimulus plans” when you factor in the government spending, savings rates and the rapid decline in commodities prices.

Investing in China: 6 Ways to Play It

Make no mistake. The shooting fish in the barrel stage of investing in China is long over. Simply buying the iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) won’t cut it anymore. It’s too obvious.

So how do we play the next bull charge in China?

Well, last week, I offered up one compelling small-cap Chinese play, E-House Holdings (NYSE:EJ). I’d stick to that theme – small caps, with the strongest growth profiles. And that puts China Security & Surveillance (NYSE:CSR), a leading provider of digital surveillance technology, and A-Power Energy Generation Systems (Nasdaq:APWR), a power equipment company, at the top of my list.

For those with a more conservative bent, I’d stick to large-cap, blue chip, best-of-breed China stocks. Ones like China Mobile Ltd. (NYSE:CML), the world’s largest phone company. It sports a sold balance sheet, increasing profitability and a temporarily cheap valuation.

Whatever you do, don’t wait too long. The Chinese New Year holiday gets underway January 25. When it’s over, don’t be surprised if the Chinese markets start fresh and get back to their winning ways.

And I say that because the strong economic underpinnings, which lined investors’ pockets with gold from 2004 to 2007, remain well intact. Whether the next leg up will produce the same 450%-plus returns remains to be seen. But rest assured, the catalysts are in place to make it possible.

Source: Investing in China: 11 Reasons Why & 6 Ways to Buy

This from Investment U:

Forget the grim news that Alcoa (NYSE:AA) is slashing costs and cutting 13% of its workforce. We all know times are tough. But the market’s a forward-looking beast. And right now, it’s doing exactly what I predicted on November 19. It’s favoring small caps over large caps.

In December the little guys put up big numbers – a 5.8% gain versus a mere 1.1% uptick for the large guys, based on the Russell 2000 and S&P 500 indexes.

Before I get to my favorite ways to screen and play this emerging small-cap rally, let me first address my critics.

My last column failed to convince some of you. Others thought I simply skimped on the proof. Or more specifically, that I failed to tell you why NOW is the right time to buy small caps.

As they put it, “We all know small caps lead the markets out of a recession. But what makes you so convinced we’re on the way out?”

As my college physics professor liked to say before each lecture, “Prepare to be enlightened.”

Why It’s Prime for Small-Cap Investing

Let me first disclose, I’m not a market timer. I don’t look for single infallible data points to signal my buys or sells. Instead I track trends (both long and short term). And there’s no denying the trend at the National Bureau of Economic Research – the committee responsible for officially uttering the economic curse word, recession.

You see, these guys – albeit a collection of the most educated and intelligent economists – have a knack for being late. By the time they make the call, the recession is usually close to over. Or in the case of the last two recessions (1990 and 2001), over completely.

This time will be no exception. The government’s about to dope up the economy on stimulus packages. In other words, plenty of economic growth is in the works. If you’re skeptical spending massive amounts of money we don’t have will do the trick, I understand. But just realize, something will prove to be the catalyst for a turnaround. And the numbers belie that something will materialize very soon:

• Since 1900, the average recession lasted 14.4 months.
• And since World War II, only two recessions (1973 and 1981) lasted longer than 15 months.
• So strictly by the numbers – based on a start date of December 2007 for the current recession – odds are this recession will be history by early spring.

You could argue, if you dare utter the words that “this time will be different,” that we’ve never experienced such a financial collapse. And the averages could be meaningless.

Fair enough. But again, I challenge you to recall any other period when so much stimulus (in the form of obscenely low interest rates, tax breaks and massive government spending) poured into the markets with no impact.

It doesn’t exist.

Ultimately, we’re at the tail end of this recession. And we know that means a small-cap rally is next. If you really want to press your luck, you could wait to until the end of the first quarter to consider small caps stocks. But I wouldn’t.

Being late could mean missing out on serious profits. Whenever you decide to jump in, here’s how I would go about finding the best opportunities…

Small-Cap Investing: The Big 3 Screening Criteria

In this market, our primary concern needs to be credit. Companies need it to operate and grow. Small caps are no exception.

That’s why the first thing I screen for is small companies with no or little debt (debt-to-equity ratios below 0.3). This alone will narrow down your choices significantly. But it will also reduce your risk.

Next, screen for companies with a sustainable competitive advantage. It could be revolutionary products, an insurmountable first-mover advantage, or extremely high barriers to entry. Anything that protects the underlying business from competition and enables the company to do the most important thing of all – increase earnings by at least 30%.

Yes, such companies do exist. And a market panic can only hold them back so long. Eventually, share prices will follow earnings. If you stick to the fastest-growing companies, I guarantee you’ll be holding onto the fastest-growing stocks, too.

Beyond these criteria, look for companies within three years of an initial public offering. Wall Street tends to overlook many of these firms. Plus, smaller and/or newer companies have more room to grow.

2 Small Caps Stock Investments to Bank On

In November, I singled out Genoptix, Inc. (Nasdaq:GXDX) and American Pubic Education, Inc. (Nasdaq:APEI). I still consider both strong buys. I’d also add these two small caps to the list:

E-House Holdings (NYSE:EJ).

Debt-to-equity checks in at 0.07. It could easily be zero as the company has enough cash to pay off debt almost six times over. E-House possesses an insurmountable first-mover advantage in the real estate agency services industry, with 1,800 professionals in offices in more than 20 cities. And its earnings have increased 62%.

I know. It’s a real-estate stock. And a Chinese stock, to boot. But that doesn’t matter. Nothing’s going to put a stop to the Chinese wealth creation machine. And the next big ticket item (after a television, refrigerator, air conditioning and a car) for the Chinese middle class is a home. If you have any doubt, consider E-House increased sales 63% in the first nine months of 2008. Despite such impressive fundamentals, shares trade for just 15 times forward earnings. But they’re on the move, up 51% since December 1, 2008.

American CareSource Holdings, Inc. (Nasdaq:ANCI)

Debt-to-equity checks in at zero. ANCI has just $16,000 in outstanding debt and over $8 million in cash. The company’s competitive advantage comes from its size and position as the first ancillary benefits management company. ANCI helps companies control health care costs by offering cost effective alternatives to physician and hospital-based services through its network of 2,400 providers. It also uses a proprietary software platform to help clients identify additional areas for cost improvement. Growth is off the charts with revenues up 127% and earnings quadrupling in the most recent quarter.

It goes without saying that controlling health care costs is a big concern. For the government and individual business owners alike. As a result, demand for ANCI’s services will only increase. And just because you probably never heard of the ancillary health care market, don’t think it’s small. At $574 billion it accounts for 30% of total national health expenditures. Given the current fascination with cutting costs, that percentage will only increase, leaving endless opportunities to grow for ANCI.

Source: Small-Cap Investing: How to Play The Emerging Small-Cap Rally

This from Investment U:

Investing requires tough decisions. What to buy? When to buy? How much?

But none more difficult than this: Admitting the fundamentals no longer support an investment you own. Or, as the French philosopher Geoffrey F. Abert summed it up over 900 years ago, “It often takes more courage to change one’s opinion than to stick to it.”

And today I’m living proof.

Just three weeks ago, to the day, I declared, “The dollar’s not done.” I laid out my case about Jim Roger’s being wrong.

But I’m officially changing my stance on the falling U.S. dollar.

To be clear, it’s not because I finally saw the light, recognized the error of my ways, or heeded the “sage” advice of so many of you that wrote in to chastise my “foolishness” or “ignorance.” And I didn’t get a personal phone call from Jim Rogers, either.

I don’t cave to bullying or criticism. Just fundamentals. And the bottom line is this – for most of the year, the fundamentals supported a stronger dollar. Enough so to allow my subscribers to lock in gains shorting the euro versus the dollar of 12%, 58%, 60%, even 267%.

But those fundamentals changed. Big time. So here’s what you need to know, and how this fundamental change could be as profitable as the last one.

U.S. Dollar Doubts Surface As Investors Give Up On Yield & Value

My first doubts about the U.S. dollar surfaced when investors gave up on yield and value. In return for, well, no return. Remember, last week I reported demand for four-week Treasury bills – offering ZERO percent interest – outstripped supply four times over.

If that wasn’t bad enough, I noticed investors on the long-end of the bond market weren’t investing any smarter. All they want is “safety-only,” too. Case in point – the yield on 10-year and 30-year Treasuries fell below 3%.

Forget below average. Such paltry yields represent the lowest levels in the last 50 years.

So what’s the big deal? Well, it’s the equivalent of Bank of America putting out a curbside sign during the real estate run-up advertising “no-documentation1% mortgages.” People can’t resist cheap money. And we shouldn’t expect our elected representatives to show any better restraint. They will borrow cheaply and spend freely, while they can.

And it’s the extent of this spending that troubles me, and threatens the dollar the most.

The Flood is Coming and There’s No Ark to Save The Dollar

Forget the $530 billion of government debt that flooded the market last quarter. Or the $550 billion estimated for this quarter. President-elect Obama is planning a tsunami.

If you have any doubt, just consider the trend in estimates for his soon to be released economic stimulus package.

• A few weeks ago, $500 billion was the consensus number.
• Then it crept up to $700 billion.
• Now, Republicans and Democrats alike believe the final plan will top $1 trillion.
• And that’s on top of the $4 trillion price tag for his proposed middle-class tax cut and universal health care.

The only way to absorb the impending and massive Treasury issuances will be for the Fed to flood the market with dollars. Or put more plainly, to run the printing presses 24/7 – which many of you already suspect they’re doing.

Arguably, these factors alone should be enough. But I’m stubborn. I wanted one more thing before I let go of my dollar bullishness. And yesterday I got it.

The U.S. Dollar Index Breaks An Uptrend

Recall, in July the U.S. dollar index bottomed out and entered a confirmed uptrend. But after rattling off about a 20% gain, everything just came unglued. And yesterday, the U.S. dollar index officially broke through the uptrend line. So look out below. Because there’s no telling where the next support level rests.

That being said, I don’t think it’s time to do the opposite of my previous recommendation, and get long the euro. Not hardly. The recent hawkish comments out of the European Central Bank scare me. They won’t be able to escape this financial crisis either, no matter how defiant the rhetoric. Plus, euro-zone banks still need to unwind as much as $800 billion of dollar-denominated leverage.

In short, the upside in the euro versus the dollar will be subdued. Not to mention, a far better opportunity exists shorting long-dated Treasuries.

As The Bond Market See-Saws…

The bond market is remarkably simple – it’s a seesaw, with interest rates on one end & bond prices on the other. When one goes up, the other goes down.

If you have any doubt, consider recent history. As the Fed aggressively cut interest rates, bond prices went vertical. Up 20% in some cases. That’s unheard of for bonds. And it represents our newest bubble (first real estate, then oil, now treasuries).

Make no mistake, this bubble will end just the same.

• First, because the government can’t get away with near zero yields forever. Investors will eventually demand a respectable return on their money. Especially foreign governments. In the last quarter alone they increased their U.S. debt holdings by 12%, according to Bloomberg. To load up even more will require additional compensation.
• Second, because inflation is around the corner. Never has a world government spent (or planned to spend) so much and avoided it. The only way to curb the resulting inflation will be for the Fed to abruptly reverse course, and begin raising rates at the first signs of an economic recovery.
• Bottom line, the only way for rates to go from here is up, which means bond prices will head the opposite direction.

Again, I aim to be transparent in my analysis. Always. And that includes defying Lillian Hellman’s observation that “people change and forget to tell each other.”

Consider this your notice. My outlook for the falling U.S. dollar has changed, albeit quickly.

This isn’t an apology. It’s simply a head’s up that more compelling opportunities exist. One a fellow colleague summed up perfectly, “If you don’t short Treasuries right now, you’re dumber than investors buying them for a zero percent return.”

A bit harsh. But hard to refute.

Source: The Falling U.S. Dollar: Taking An About-Face

This

I’ll be the first to concede the going’s tough. That almost every “time-tested” strategy that worked well in bull markets is sputtering and collapsing.

But is it so bad we’ve given up on turning a profit? And just resigned ourselves to preserving our principal, right?

WRONG.

This week the Treasury sold $32 billion in 4-week bills at a yield of ZERO percent.

That’s not a typo. Investors actually clamored for the opportunity to lend the government their money in return for absolutely no return. In fact, investors bid $126 billion at the auction, more than four times the amount available.

As Michael Franzese, the head of government bond trading at Standard Chartered explains, “I have never seen this before… It’s all about capital preservation for the turn of the year, not capital appreciation.”

Forget unbelievable. It’s idiotic. What investors are essentially saying is that absolutely no better opportunity exists in the market right now – that survival is their paramount goal of investing, not profiting. But ignore what the lemmings are doing. Their folly is creating endless (and historic) opportunities for us to increase our wealth. Of course, simply telling you that will not suffice…

6 Market Investment Opportunities Right Now

Let me share with you a short-list of market investment opportunities I’m researching and taking advantage of on a daily basis. If nothing else, it should make you think twice before you follow the $32 billion worth of stupid money…

• International Stocks: Forget decoupling. It was a farce. The United States caught a cold… and international markets caught pneumonia. The offshoot? International markets are the cheapest on the planet – despite much stronger growth prospects than in the United States. For instance, the average Russian stock trades for just three times earnings! South Africa and Brazil are the next cheapest at six and seven times, respectively. An easy way to capture upside here is to rebalance your portfolio by adding money to your diversified international funds or investments. One of my favorite options here is the Templeton Emerging Markets Fund (NYSE:EMF), run by the best international manager around, Mark Mobius.
• “Free” Stocks: Hundreds of stocks trade below their cash balances, making them essentially free. Some will of course, burn through that cash faster than my wife on a shopping spree. So we can’t buy blindly. But that’s not the case for all of these stocks. One compelling opportunity I recently presented to my subscribers is Immersion Corp. (Nasdaq:IMMR) – a leader in haptic technology. Forget cash on hand, its patent portfolio is worth more than the current stock price.
• Income: Dividend yields rest at 15-year highs. Of course, not all dividend-paying stocks are created equal. Many will slash or suspend payments just to survive the downturn. But others won’t. The master limited partnership (MLP) space is rife with opportunity. Investors seem to forget these companies aren’t impacted by the price of oil and gas. They just get paid to transport it. The price of oil might be off 70%, but demand is not. My favorite play here is Kinder Morgan Energy (NYSE:KMP). It just increased its dividend and currently offers investors an attractive 8.7% yield.
• Munis: We all know there are NO guarantees in investing. But I can guarantee taxes are going up. How else will the government fund the billions upon billions in new spending? Especially, at a time when tax receipts will plummet. Thanks to a drop in corporate profits and the loss of 1.2 million taxpayers to unemployment. No surprise, the herd is piling out of munis ($7.4 billion so far this quarter) at exactly the wrong time. Their folly is creating attractive tax-free income yields and upside for us. For instance, the Vanguard Intermediate Tax Exempt Fund (VWITX) currently sports a 4.25% yield. That’s tax free and equivalent to earning 6.5% (based on a 35% tax bracket).
• Real Estate: Pricing remains completely irrational for real estate investment trusts (REITs). Some closed-end funds are off as much as 90%. Dirt is cheap – but it isn’t that cheap. This is a once-in-a-lifetime rebound opportunity. If nothing else, capitalize on the unstoppable trend of homeowners converting into renters by considering an apartment like Equity Residential Properties (NYSE:EQR).
• Short selling: An economic recovery won’t save every company. Plenty will remain in the tank, or worse, end up on the courthouse steps. Yet, most investors overlook the simple strategy to profit from these collapses – selling short. But they shouldn’t. In these markets it’s one of the few strategies consistently booking winners. That’s why I’ve been using it for my subscribers. Just last week, we booked a 50% winner in The New York Times Company (NYSE:NYT), for example.

Remember this is just my short-list. The key takeaway is simple – investment opportunities abound.

Granted, we might have to work harder than normal to unearth them. But we certainly don’t have to resign ourselves to handing over our hard earned capital to the government for nothing in return. After all, that privilege is reserved for our tax dollars.

Source: 32 Billion Reasons The Average Investor Will Fail

This from Investment U:

Value investors, consider this your warning… With thousands of stocks down 50% (or more), investors are salivating over the bargains. But for every true deal, there are at least three “value traps” – stocks destined to languish at depressed levels indefinitely. Or worse, get cheaper still.

Think Kmart here. In late 2001, it became the poster child for value investors. They argued it was dirt cheap based on countless metrics like book value and sales. And it was destined for a historic turnaround.

Sure enough, the stock went from the bargain bin to the trash heap, as the company filed bankruptcy in early 2002.

So before you go bargain hunting in this market, arm yourself with this list. It could be your only chance to avoid getting snared by the countless “Kmarts” begging for your investment…

Value Stocks & Value Traps

In theory, a value stock is a beaten-down company that’s:

• 1. Cheap compared to its earnings, its competitors and/or some other relevant benchmark
• 2. Poised for a turnaround.

In contrast, a value-trap is simply:

• A beaten-down company that’s cheap compared to its earnings, its competitors and/or some other relevant benchmark
• That never quite turns around.

Unfortunately, no formula exists to calculate when, or if, a turnaround will ever occur.

10 Questions To Help Value Investors

These 10 questions should help any value investor. And ultimately, keep you out of most value traps…

1. Is there a near-term catalyst? First things first, if there’s nothing on the horizon – like a new product launch, key marketing arrangement, a shake-up of the executives, the conversion of a massive order backlog, etc. – we shouldn’t bother. Companies and stocks need catalysts in order to advance. If none exist in the next 12 to 18 months, chances are the stock will be stuck in neutral, or worse, reverse.
2. What are insiders doing? Nobody knows the company – and its future prospects – better than the insiders. If they’re not salivating over the “cheap” prices and backing up the truck, we shouldn’t either.
3. Is the company addicted to debt? Too much debt magnifies the impact of tough times. As sales decrease, interest payments take up more and more of the company’s earnings. Not to mention, unwinding leverage is a time-consuming process. So even if the company boasts new, fiscally responsible management, beware. Or as Warren Buffett observes, “When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”
4. Does the dividend yield seem too good to be true? Value investors love to tout they “get paid to wait” for a turnaround. Granted, many stocks do maintain their dividends through a downturn. But countless others don’t. They slash or cancel them altogether, just to stay in business. No matter how tempting, tread carefully when the dividend yield hits double-digit levels.
5. Is the company just as “cheap” based on the future? At first glance Eastman Kodak (NYSE: EK) appears dirt cheap, trading at a price-to-earnings (PE) ratio of 2.96. But don’t be fooled. Or get too easily excited. Remember, the PE ratios cited on most financial websites are historical. And as investors, we don’t care what a company was worth… we care about what it will be worth. So before you buy, make sure the stocks forward PE ratio is similarly attractive. (FYI – Eastman’s is not. It trades at 27 times forward earnings. Hardly cheap.)
6. Which direction is the company’s market share headed? A general economic slowdown is one thing. But when a company’s losing market share, too, that’s an indication that a competitor has a better mousetrap. And while economic growth is cyclical, market share is not. Even if the economy or industry turns around, chances are the company’s market share won’t.
7. Does the company operate in a highly cyclical or moribund industry? If you go hunting in a highly cyclical industry (like semiconductors) you’re asking for trouble. Same goes for industries destined for obsolescence (like print media). To win with these stocks, you need both the company’s misfortunes and the industry’s to reverse course.
8. How’s the free cash flow? Earnings can be massaged, manipulated or completely fabricated. But cash cannot. So make sure free cash flow is stable, or growing. If nothing less, it provides management with a little wiggle room, or margin of error when considering ways to speed up a turnaround.
9. Is the stock liquid enough? Just like insiders provide support to share prices, so do institutions (mutual funds, pension plans, hedge funds, etc). Both groups can move stocks prices quickly and significantly. However, many institutions can’t or won’t buy stocks trading for less than $10, with a market cap below $1 billion and/or that don’t trade several million dollars worth of shares each day. Without the potential for institutional ownership, a quick rebound in prices becomes less likely.
10. Does the company have a sustainable competitive advantage? For a stock to turnaround we need the company to thrive, not survive. That’s not possible without a sustainable competitive advantage. So stick to companies like Apple (Nasdaq: AAPL) that are light-years ahead of the competition in terms of design, market share, new product offerings and/or technology.

In the end, don’t kid yourself. Detecting a value trap is no easy task. Even the best investors occasionally get snared. Think Bill Miller (with Countrywide and Freddie Mac (NYSE: FRE)) and Carl Icahn (with Yahoo! (Nasdaq: YHOO) and Advanced Micro Devices (NYSE: AMD)).

But at the very least, these 10 questions will ensure you never buy blindly, or on price alone.

Source: Value Investors – Beware The Value Traps