Contrarian Stock Market Investing News - Featuring Bargain Stocks » Stock Valuations

Why Obama’s “Phony Money” Won’t Fix Economy

Contrarian Profits — Tue, 19 May 2009 14:17:57 +0000

There’s a lot of anger towards President Obama. Most of it is misplaced. Obama is a slick young politician with high approval ratings. He replaced a president who had 90% approval ratings at one point – the highest of any president in history. Both have sacrificed the free-market principles America was founded on. Partisan politics mean nothing when both parties insist on spending the country into oblivion.

We challenge you to find the “green shoots” in this picture. It shows the severity of the financial crisis in terms of corporate profits.

As we’ve said before, you may be able to have a jobless recovery, but we seriously doubt you can have a profitless one. Unless the negative trend line of this chart changes direction, you can forget about a sustainable rebound in stocks.

What you’re looking at is by far the biggest decline in earnings on record (the data goes back to 1936). It shows that 12-month as-reported S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009). (Hat tip to The Big Picture.)

This decline will not be fixed by Team Obama “phony money” solution. At best, the complete abandonment of sound fiscal principles will put off the great credit unwinding. And there is evidence in current stock valuations that it is having an effect on investor sentiment. But as recent experience has taught us, credit expansion cannot go on forever. And a bubble in treasuries is no exception.

Here’s what RBS chief credit strategist Bob Janjuah has to say about phony money. (Apologies to the grammar police: Janjuah isn’t one for the finer points of syntax and spelling.)

As absurd as the shrill chorus that is busy spinning that fact that coz central banks are going print-tastic, this means stocks are going higher and higher. Have folks learnt NOTHING!! The events of the last few yrs highlight the difference between ILLUSORY wealth/growth and REAL wealth/growth. The illusion can win out for a while, but ultimately REALITY WILL BITE HARDER the longer the illusion persists. But somehow this shrill chorus is given air-time and column inches – I am stunned by this. Be Warned – reckless central bank printing has NEVER succeeded over any meaningful investment horizon as a means of delivering real grwth and real wealth gains, and it is NOT going to wrk now. In fact, if the REFLATION/NOMINAL GRWTH policy trick does get legs, it will be simply setting up the next even more nasty balance sheet recession, from which the road back to normality will be horrible and much worse than what we have now.

Popular Stock Indicator Tells Investors to Hit the BRICs

Jennifer Yousfi — Mon, 02 Jun 2008 15:06:49 +0000

Global investors seeking undervalued markets might want to look at Russia, China, India, Malaysia, South Korea or Brazil. And if they want to avoid overvalued markets, they’d be best to eschew Italy, the United States, Japan, Canada, Switzerland, or Germany.

What’s tipping us off? The so-called Price/Earnings-to- Growth ratio, better known to investors as the “PEG” ratio.

Let me explain …

One of the most popular stock valuations is the Price/Earnings (P/E) ratio. If you take that calculation one step further and include a stock’s expected growth rate you hit on the P/E-to-growth ratio, or PEG ratio.

Analysts have been using PEG ratios for years, now, to pick undervalued stocks, but now you also can use that same ratio to determine which countries are trading at good value.

A recent Bespoke Investment Group report used the popular PEG ratio to identify which country’s stocks are currently undervalued.

“Late last year, we began performing this analysis on countries to get a better comparison of the valuations of both developed and emerging markets,” the B.I.G. Tips report read. “To do this, we divide the country’s [gross domestic product] growth estimate into the estimated P/E ratio of its major stock market index.”

Like an individual security’s PEG ratio, the lower the ratio, the more undervalued the stock.

The top-three spots on that list go to Russia (1.37), China (1.91) and India (2.06). Brazil clocks in at sixth with 2.80. Money Morning readers may recognize them as member of the “BRIC” nations – a term coined by Goldman Sachs Group Inc. (GS) in 2003 identifying rapidly growing emerging economies (Brazil, Russia, India, China). [For a complete listing of the PEG ratios of the respective countries, please see the chart below.]

Rounding out the top six are Malaysia (2.37) and South Korea (2.66), the latter of which is another investing favorite of both Money Morning and Warren Buffett, chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B).

The United States, on the other hand, comes in near the bottom with an estimated PEG ratio for 2008 of 11.39.

When using the calculations to make investment picks, it’s important to remember that both the P/E ratio and the 2008 GDP growth are only estimates. Still, it’s easy to see how fast-growing economies have the leg up on more mature markets such as Japan and the United States.

How to Play the PEG for Profits

One of the easiest ways for U.S. investors to cash in on a foreign country’s expected stock market growth is with an American-listed exchange-traded fund (ETF) or exchange-traded note (ETN) that mirrors a foreign stock market index.

For the BRICs, you could try the iShares MSCI Brazil Index (EWZ), the Market Vector Russia ETF Trust (RSX), the Barclays IPath India Index ETN (INP), or the iShares FTSE/Xinhua China 25 Index (FXI).

If you prefer to stick to individual securities:

Russia: OAO Gazprom (OTC: OGZPY), the state-owned natural gas monopoly with ambitions to control Western Europe’s gas supplies.

Lukoil (OTC: LUKOY), the other obvious Russian heavyweight, is the largest state-controlled oil company.

China: A terrific way to play China is with the Region Opportunity Fund (USCOX), a mutual fund run by San Antonio-based U.S. Global Investors Inc. (GROW). Indeed, U.S. Global, itself, is a pretty good play on international growth. It manages some of the best emerging-market funds, and natural-resources funds, in the business. As global growth fuels global investments – and it will – U.S. global will see more money pour into its funds, boosting the management fees it collects, as well as its profits and stock price.

India: One of India’s titans is Tata Motors Ltd. (TTM), which recently sealed both ends of the consumer automotive spectrum with its forthcoming $2,500 Nano and its recent $2.3 billion acquisition of the Jaguar and Land Rover brands.

Another is option could be the pharmaceutical company Dr. Reddy’s Laboratories Ltd. (RDY). As many U.S. pharmaceutical patents expire in the next five years, this major generic-drugs manufacturer can expect to benefit.

South Korea: Back in October 2007, Buffett took a 4% stake in this country’s Number One steelmaker, POSCO Ltd. (PKX). Studies have shown that following Buffett’s investment moves, even months after the fact can be the pathway to profits.

Brazil: Companhia Vale do Rio Doce, now referred to only as Vale (RIO), is an iron-ore company with ancillary operations in gold, nickel, copper and other metals. It’s one of the true global blue chips, with a market capitalization of almost $200 billion.

Another Brazilian firm worth a look is Petrobras (PBR). It’s one of the few emerging market oil companies with access to modern technology – and the willingness to work with the oil majors.

Contrarian Investing Approach: How To Avoid Market Landmines When High Expectations Crush Stocks

Marc Lichtenfeld — Fri, 02 Nov 2007 16:20:03 +0000

Contrarian Investing Approach

When the moment is right, will you be ready? A lot of men are about to be. Any time. Any day. Every day, in fact. That’s because the Food & Drug Administration is expected to grant Eli Lilly (NYSE: LLY) approval for a daily version of its erectile disfunction drug, Cialis. This comes after the European Commission approved it in June.

Okay, first things first: Who the heck are these guys married to? Seems to me they have lofty and unreasonable expectations!

But it’s not just in the boudoir where expectations are high. The stock market lives on expectations. And at this time of year, many of them are unreasonable, too. For investors like us, it means we have to navigate a tricky minefield.

Here’s how to do it, I’ve said it here before – and I’ll say it again. I can’t stress to you enough how important it is to have a contrarian investing approach.

The Market Loves Forward Growth Not Past Results

The market is a forward-looking mechanism. Forget “What have you done for me lately?” Investors want to know, “What are you going to do for me tomorrow?” For the most part, stock valuations are based on forward growth and earnings, not on past results.

If you don’t believe me, just take a look at the next time a stock gets crushed – despite meeting or beating analysts’ earnings expectations. If a company does so, but also provides future earnings guidance that is below estimates, it’s Goodnight Irene!

This exact scenario actually happened yesterday to Crocs (Nasdaq: CROX), the makers of those funky foam shoes that everyone seems to be wearing. Propelled by the immense popularity of the shoes, the stock had soared from $37.50 a year ago today to $74.75 on Wednesday.

Happy Halloween, right? Not so much. Shares got absolutely mauled yesterday, plunging $27.01 (36.1%) to close at $47.74.

What could possibly have happened to cause such a drop? Did the CEO get arrested for cooking the books? Did somebody find lead paint in their new pair of Crocs?

Nope. Crocs actually beat analysts’ third-quarter earnings estimates and then raised full-year earnings guidance. Woo-hoo! Break out the champagne! On second thought, keep it on ice. The problem was that Crocs didn’t raise guidance high enough to meet analysts’ lofty expectations.

Tough break for them – and for shareholders. So how do we protect ourselves from unreasonable expectations?

Wanna Cash In? Have A Contrarian Investing Approach

I can’t begin to tell you how important it is to have a contrarian investing approach. If the fickle market loves a stock too much, you can bet that the majority of analysts will slap a fat “buy” rating on it, coupled with pie-in-the-sky earnings projections. They did exactly this for eToys back in the dot com boom days (and I still have the analyst report to prove it) that promised the company would be a “category killer” with huge profit assumptions. But the only thing eToys killed was its shareholders.

But if you invest in stocks that are out of favor, you’re likely to avoid those gut-wrenching 30% falls that result from failing to meet estimates. After all, out of favor stocks already have low expectations. So when they miss estimates, Wall Street simply shrugs it off and says, “What did you expect?” They barely give it a second thought.

But let me tell you something: Those stocks’ declines are far less than their well-loved counterparts.

The Father Of Contrarian Investing

David Dreman is known as the “father of contrarian investing.” And to prove how effective this contrarian investing approach is, he conducted a study that showed stocks with price-to-earnings (P/E) ratios in the bottom 20% (unloved) were down just 0.1% for the full year after they had a negative earnings announcement.

Alternatively, well-loved stocks with P/E ratios in the top 20% endured an 8.9% drop.

While that proves the point, how do we avoid or mitigate the risk that comes from earnings announcements? The simple solution is to use sell-stops. This eliminates emotion from your sell decisions.

Many times, investors freeze up when one of their stocks is plummeting. Emotions and pride take over and they can’t seem to sell while prices are falling. Instead, they wait for the rebound to kick in and end up watching the stock tank further. It’s a great way to lose money.

Use a stop-loss! When you do, the sale is automatically triggered when the stock hits a preset price that you’ve determined in advance (this can be anything – but is usually 20% or 25% lower than your entry price). This way, it’s much easier to cut your losses and move on to the next investment instead of waiting for your stock to bounce back.

But in a stock world where expectations can be so high, how do you get around this without paying over the odds and losing money? There’s a professional strategy for it…

Steer Clear Of Analysts High Expectations

If some analyst has clearly placed overly high expectations on a certain company, you should probably steer clear until the price declines to a more comfortable level for you.

But while most ordinary investors simply do this and then move onto the next candidate, there’s a way you can actually walk away with some money while you wait.

I employed this contrarian investing approach on a flourishing medical device company for Xcelerated Profits Report subscribers in the most recent issue. And my colleague Lee Lowell has also used it twice in recent months.

In my case, I liked the prospects of the company, but because the stock had taken off recently, I argued that there was actually too much optimism. This made buying the stock outright a much riskier bet.
Instead, I suggested selling put options at a lower strike price, thus giving the buyer the right to sell us the shares at that strike price. If the stock retreats to that level, we’ll own it at the lower price we wanted. Not only that, we get to keep the premium that we received for selling the put. And if the stock continues to rise, we still don’t buy it, but we do keep the premium.
Bottom line: We like the company but we don’t chase it when the share price goes up. But we do get free money for trying to own it at the price we want.
Today, the company I recommended issued a stellar earnings report. It really knocked the cover off the ball. However, the stock didn’t rise that much because those expectations I talked about a moment ago were already sky-high.

Find out what this company is here. And if you want to know what this approach is – and how to employ it in your investing – check out today’s “Action Center” below.

Know The Expectations… Know The Limits

When you’re evaluating stocks, make sure you use all your regular methods of due diligence:

Look at the company’s fundamentals,
See what the technicals show you,
Know what projects/products it has and what its future prospects are.
But make sure you also understand what kind of results Wall Street analysts are predicting.
As much as we like to make fun of them for being a bunch of lemmings, it’s their estimates that the Street uses as a guidepost as to whether a company is missing, meeting or exceeding expectations.

Yep, life would be much simpler if expectations were more reasonable – whether we’re talking about individual relationships like a marriage, diplomatic relations between countries or the stock market. But understanding and knowing how to deal with those expectations, especially the unreasonable ones, can keep you out of trouble – with your spouse and your portfolio.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld