Monday, December 30, 2013

Investing in Railroad Earnings Growth

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As the economy has come back, many cyclical sectors have seen impressive strength. This is especially true in the transportation industry, as surging demand has greatly helped this key market sector.

While many investors have likely keyed in on companies like Union Pacific (UNP) or CSX (CSX) to play this trend, some smaller rail firms might also be interesting plays. One such company is Kansas City Southern (KSU), a $13 billion railroad operator that has a focus on the Midwest and South.

KSU in Focus

Beyond its focus on the middle part of the U.S., KSU also has a heavy presence in the Mexican market. In fact, the company has a rail passageway between Mexico City and Laredo, Texas, serving several Mexican industrial cities, as well as a few of Mexico’s important seaports as well. And given how dependent Mexico is on America for trade, the resurgence in the U.S. market has been great news for both Mexican industrial production, and KSU as a shipper of these products.

Add in reports that Mexico is beginning to beat out China in terms of productivity-adjusted wages, and it becomes pretty obvious that industrial production in Mexico is going to continue to grow. Given this, it seems pretty likely that companies with the ability to get these finished goods to other markets, such as Kansas City Southern, will benefit immensely.

Thanks to this trend in KSU’s key market, and the broad positive environment for railroad operators heading into the coming year, it shouldn’t be too surprising that many analysts have been raising their estimates for Kansas City Southern’s earnings. Earnings have modestly increased for both the current quarter and the current year period, but the real story for KSU is the growth.

The company looks to deliver nearly 25.9% earnings growth (yoy) for the current quarter, and EPS growth of over 22% for the current year. Meanwhile, for the next year time frame, EPS growth is expected to come in just below 25%, suggesting that if anything, earnings growth is accelerating for this often-overlooked railroad operator.

And, as we alluded to earlier, KSU has some great company in the railroad space, as the Zacks Industry Rank for the segment is in the top 10% of all industries studied. In fact, no company in the space receives a Zacks Rank below #3 (Hold), meaning that there aren’t any bad picks in this strong segment.

Bottom Line

With that being said, KSU stands apart, as it is the only firm, at time of writing, in the railroad space that has a Zacks Rank #1 (Strong Buy). Plus, its Rank was #2 a week ago, suggesting it is surging up the charts, and is an interesting choice for investors seeking some rail exposure right now.

The company also has a bit of a competitive advantage in the crowded rail market, thanks to its solid position in the Mexican industrial space. This allows KSU to benefit from the surge in Mexican production, and to not be as concerned by American Heartland issues relating to commodities as many of its peers.

So if you are looking for a great choice in the railroad market heading into 2014, consider Kansas City Southern. You have probably overlooked this one in favor of some of its larger counterparts, but it could be well positioned to benefit from some of the strong trends in the market, and it is currently the only Zacks Rank #1 Stock in the space, meaning that good days may still be head for this overlooked rail operator.

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Monday, December 23, 2013

Investing in Real Estate Development Earnings Growth

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The St. Joe Company (JOE) is a real estate developer with more than 500,000 acres of land, concentrated primarily in Northwest Florida between Tallahassee and Destin.

Over the years, the company has developed successful residential and commercial projects and related infrastructure and is currently focused on growing its resorts, leisure and leasing operations.

JOE has five reportable operating segments: (1) residential real estate, (2) commercial real estate, (3) resorts, leisure and leasing operations, (4) forestry and (5) rural land. During Q3, about 50% of revenues came from resorts, leisure and leasing operations.

Solid Third Quarter Results

Joe reported its third quarter results on November 7, 2013. Net Income for the quarter came in at $4.2 million, or $0.05 per share, significantly ahead of the Zacks Consensus Estimate of $0.01 per share.

The resorts, leisure and leasing operations had a strong third quarter, with revenue up 30% from the same quarter of last year. Increased occupancy rates for JOE’s vocational rental program and overall cost management led to the improvement in the bottom-line. However timber sales for the quarter were impacted by unusually high amounts of rain over to summer months.

In November, the company announced an agreement to sell approximately 382,834 acres of non-strategic timberland. According to the management “this transaction will help the company concentrate on its core business activity of real estate development in Northwest Florida. The proceeds from the sales will provide the company with significant liquidity and numerous opportunities to create long term value for our shareholders".

Earnings Estimates Revisions/Recommendation Upgrade

After the strong results, analysts have revised their estimates for JOE. Estimates for FY 2013 and FY 2014 are now $0.04 per share and $0.02 respectively, up from ($0.01) and $0.00 share, 60 days ago.

Zacks upgraded the recommendation on JOE to “Outperform” from “Neutral” following its better-than-expected quarterly results. Also, “the company’s concerted efforts toward improving its bottom line by focusing on value enhancement of its resort communities, timberland sales and expense saving initiatives bode well going forward”.

The Bottom Line

JOE is a Zacks Rank#1 (Strong Buy) stock. It also has a longer-term Zacks recommendation of “Outperform”. Further improved outlook for resorts and leisure activities suggest strong chances of outperformance in the coming months.

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Friday, December 20, 2013

Profiting from Trading Bitcoins

Bitcoin was created in 2009 as an anonymous and secure way of exchanging money on the internet. It is an electronic currency that is completely decentralized - it isn’t backed by a government or other central authority – and is minted and exchanged entirely within a massive network of users.

Anyone with an internet connection can send and receive Bitcoins directly and privately with no transaction fees.

New Bitcoins are created with highly time-intensive computer-based algorithms which limits the rate at which they enter the market. The total amount of Bitcoins that will ever be issued is 21 million – making it a finite commodity like gold or oil.

As a result of its innovative structure and the hype surrounding it, Bitcoin is extremely volatile, making it an excellent currency to add to your portfolio.

With Bitcoin trading you can make a Long (Buy) or Short (Sell) trade instantly, 24 hours a day during the trading week, giving you the opportunity to trade your market view no matter which way the currency is heading

December 05, 2013 - China Bans Financial Companies From Bitcoin Transactions by Bloomberg

China’s central bank barred financial institutions from handling Bitcoin transactions, moving to regulate the virtual currency after an 89-fold jump in its value sparked a surge of investor interest in the country.

Bitcoin plunged more than 20 percent to below $1,000 on the BitStamp Internet exchange after the People’s Bank of China said it isn’t a currency with “real meaning” and doesn’t have the same legal status. The public is free to participate in Internet transactions provided they take on the risk themselves, it said.

The ban reflects concern about the risk the digital currency may pose to China’s capital controls and financial stability after a surge in trading this year made the country the world’s biggest trader of Bitcoin, according to exchange operator BTC China. Bitcoin’s price jumped more than ninefold in the past two months alone, prompting former Federal Reserve Chairman Alan Greenspan to call it a “bubble.”

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Wednesday, December 18, 2013

Profiting in Stocks from the January Effect

The January Effect — Another Strategy That Works (With a Twist)

By Dr Van Tharp Trading Education Institute

The Christmas season is a time of year that has a different vibe, regardless of one’s spiritual leanings. The pace around us quickens, expectations rise, and for those of us who can see past the blatant commercialization that seems to accost us from all directions, some of the joy and love of the season seeps in. I’m looking out my window right now at almost a foot of snow — that certainly seems seasonally correct. Family members are calling to arrange visits for later in month. And we have a few decorations set out that provide a pleasant reminder for our personal reason to celebrate. My kids are coming home from college in just two days; so when combined, I can say that I’m certainly in a state of joy. It’s a nice place to be.

The markets usually manage their own form of “joy” at this time of year as the optimism of the populace seems to bleed over into stock prices. This observation is backed up by the fact that the S&P 500 index has provided positive returns in December in 48 of the last 63 years for a win rate a little above 76%.

Has the January Effect Been Affected by Recent Events?

Many readers will have heard of the January effect where small capitalization stocks have historically outperformed their large cap brethren during the month of January. This was very clear in the second half of the 20th century with Hirsch and Hirsch reporting in the Stock Trader’s Almanac that small caps far outperformed big caps during January in 40 out of 43 years between 1953 and 1995. During that time, small caps gave a staggering absolute performance improvement. The Wall Street Journal reports that small cap outperformance of 5.1% vs large caps during the decade of the 1970s. To say it another way, a $100,000 portfolio invested in small caps would return $5,100 more than one invested in only large caps during the month of January. That’s a huge edge.

Since then, it seems like everyone has jumped on this band wagon and the edge has steadily diminished down to only a 1% edge in the 1990s.

However, there is good news (that is coming up fast upon us) on the small cap outperformance front. The Hirsch father and son team have reported that January effect is still working, it’s just working earlier. Since the 1987 crash, moving the entry date back to December 15th has worked wonders. The numbers show a small cap outperformance from 12/15 to 12/31 of 85% (3.5% vs. 1.9%). The effect remains viable, though weaker if held through the middle or end of January.

And the last two years have built on that outperforming tendency with December of 2012 having a very strong showing for the small caps vs. large caps.

In short, this is a seasonal tendency with a strong track record that is built on a broader foundation of overall market strength in December. Like all seasonals, it won’t work every year, but this one merits a close look and perhaps a trade with your normal risk parameters attached.

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Monday, December 16, 2013

Investing In Airlines Earnings Growth

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With a strong consumer, rising business confidence and stable oil prices, it should come as no surprise that the airline sector has been performing extremely well this year. In fact, many companies in this segment have more than tripled the market’s return from a YTD look, with gains in excess of 80% not uncommon.

The surge has been pretty widespread too, with both so-called legacy carriers and discount airlines seeing strong performances. One company in the legacy space that has been especially impressive and a great example of this incredible trend is undoubtedly Delta Airlines (DAL - Trend Report).

Delta in Focus

Delta is, following the merger between American and US Airways, the second biggest airline in the world. The firm is probably most famous for its hub at Hartsfield-Jackson airport in Atlanta, though it has a big presence in Detroit, Minneapolis, and New York City as well.

The stock was cleared for takeoff at the start of 2013, and it really hasn’t looked back besides some minor turbulence in April. DAL has actually more than doubled so far this year, putting up a 130% gain YTD, including a 50% move higher in the past six months alone.

This is obviously a huge move, and especially so for a company in a pretty cutthroat industry, but there is plenty of reason to believe that this can continue as we head into 2014 if you look at the company’s profit and growth outlook for the coming year.

Delta Earnings Outlook

Thanks to the strong industry outlook and the pressure that is currently on oil prices, many analysts are looking for DAL to continue to grow earnings in the months ahead. Current estimates peg this quarter’s earnings growth (yoy) at 121%, while current year growth is expected to be in the high double digits, hitting 70% year-over-year.

These figures also represent how bullish analysts have become on DAL’s earnings prospects in just the past few months. Estimates for the current quarter have surged from 50 cents a share 90 days ago to 62 cents a share today, while current year estimates have jumped by 11% over the same time period.

While this increased expectation might be troubling to some, DAL does have a pretty good track record in earnings season. This includes a pretty solid history of earnings beats—three straight beats and only one miss in the last eight reports—so there is plenty of reason to believe that DAL will have no trouble matching estimates once again next year.

Thanks to these factors and the impressive trend in the economy, DAL has earned itself a Zacks Rank #1 (Strong Buy). And since DAL was just added to the #1 Rank group on Friday December 13th, investors shouldn’t worry that they have missed their flight to profits with this impressive stock.

Bottom Line

The economy is humming along and cyclical sectors have been a prime beneficiary from this surge in sentiment. One segment that has really been a winner from a stock perspective is the airline industry.

And with some of the other factors at play in the economy—such as surging consumer confidence and lower oil prices—a play in this sector seems like a no-brainer. This is particularly true when you consider that the Zacks Industry Rank for the airlines is 27 out of 260, putting it within the top 10%.

Yet, while a broad play on the airline space could be a very interesting idea, a look to DAL could be even better. This has been one of the best performing airlines so far in 2013, and with its strong competitive position and huge scale, this could be a big winner—and top pick—for 2014 too.

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Wednesday, December 11, 2013

The Art of Selling Stocks

By Market Authority

Please note – this is not a missive to advise you to sell all your stocks. If you read my thoughts on the taper yesterday, you’ll know that I believe any selloff on taper fears is a buying opportunity.

Today we’re going to talk about the “art of selling.” No, not the Donald Trump art of “selling” – I’m referring to the art of selling your stocks at the right point to maximize profits and minimize losses.

Trading is about honesty. It’s about finding the truth within ourselves through a constant process that forces you to make difficult decisions about your future. You are deciding on your future because the decisions you make as a trader impact your lifestyle.

The main difference between a losing trader and a “master of the universe” is that the winning trader is skilled at knowing how (and when) to sell for a loss or a gain. In the same way expert poker players know when to hold’em or when to fold’em. I don’t believe this to be an innate skill, but can be learned by anyone with plenty of practice and a willingness to change their approach.

For now, let’s focus on taking losses…

The importance of taking a loss and moving on is neatly summed up by trading legend Larry Livermore in “Reminiscences of a Stock Operator…

Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.

As price starts to decline, rationalizing starts to increase, and the “troubles” compound into worse problems. And that’s why it’s psychologically more difficult to sell for a large loss rather than a small one. Bad traders will continue telling themselves, “Well, I held for this long. Might as well see it through now.”

Bad traders are not only unable to see the truth, but also afraid to face it. They begin to justify price action and hope that the stock miraculously comes back.

My old boss at Salomon Brother once told me, “If you feel yourself hoping the trade comes back in your favor, immediately sell half.” Hope is a trader’s worst enemy.

Selling early and often for a loss will leave you in a better position to make better decisions. If you’re holding and hoping, you are allowing emotion to overcome your decision-making process. Stop making excuses for bad behaviors.

Another understanding of why selling for a loss can be difficult comes from BF Skinner’s work on positive reinforcement. We buy something, it goes higher, and you get a reward for holding. If investors are rewarded for holding, they are more likely to try and hold again in another trade.

Let’s look at how this applies to stocks…

This is a 2 year chart of AAPL. You can see on the left side of this chart how AAPL went straight up from $400 to $650. Investors were rewarded for holding.

Now look at how much longer the selloff back to $400 took. Buyers of AAPL didn’t give up hoping that the stock would return to $700 because they were so heavily rewarded on the way up. They rationalized price action on the way down, in lieu of observing stop-losses. This led to a longer drawn-out period of sell-offs and bounces.

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Monday, December 09, 2013

Investing in Railroad Earnings Growth

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With decent levels of growth both in the U.S. and abroad, many cyclical sectors have rebounded quite strongly in 2013, with transports leading the way in this regard. This shouldn’t be too surprising to many investors, as this important market segment has a history of leading stocks out of sluggish market environments, and this recent rally has been no different.

However, as stocks have stabilized in recent sessions, some investors might be looking to other sectors for the next round of gains. While this could be a good strategy overall, investors may not want to give up on all the transports just yet, as Canadian Pacific Railway (CP) may still be a great pick going forward.

CP in Focus

Canadian Pacific Railway operates a transcontinental railway across over 14,400 miles in North America. The system stretches from Vancouver in the Pacific to Montreal in the East, and then down into the Midwest region of the U.S. and key parts of the Northeastern United States as well.

This network and strong demand for the movement of goods has really helped CP perform well so far in 2013. The stock has added more than 43% YTD, and has soared by nearly 25% in the past three months alone, suggesting great momentum.

And while some investors might be put-off by this recent surge, the stock’s forward PE of 24 suggests that earnings have kept pace for the most part. Plus, current earnings estimate revisions have been moving significantly higher as of late, implying that analysts believe this story is getting even better.

Estimates in Focus

For the current quarter, nine estimates have gone up in the past 60 days compared to zero lower, while 14 have gone up for the current year compared to zero lower. These figures have also pumped up the consensus estimate by a solid margin too, with the current year seeing an increase of about 4.6% in the past two months.

This has also translated into an amazing level of expected growth for this railroad company, with current quarter figures coming in at just under 47% (yoy) earnings growth projected. Meanwhile, current year figures are also quite good from a projection standpoint—45.5% (yoy) growth is expected—while next year’s numbers look to come in with growth of close to 29%, meaning that this doesn’t look to just be a phenomenon that lasts for a couple quarters.

Clearly, CP is growing quite strong and analysts are feeling great about the company’s prospects in both the near and long term. Recognizing this, we have given CP a Zacks Rank #1 (Strong Buy) and are thus looking for more outperformance out of this company heading into 2014 as well.

Bottom Line

CP has some impressive stats and a great network across Canada and into some of the key parts of the U.S. rail market. Add this in to the strong industry position and investors could have a recipe for success.

This is especially true when you consider that the railroad industry is currently in the top 20 (out of roughly 260) industries from a Zacks Rank perspective. So make sure to climb aboard this freight train before more gains are had, as it doesn’t look like anything will be putting the brakes on this growth story any time soon.

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Friday, December 06, 2013

The Burning Building Stock Investing Method

Buy, Buy, Buy: The “Burning Building” Theory by Ian L. Cooper Speed Retirement System

“Never buy a stock hitting a 52 week low…”

“Stocks in downtrends tend to stay in downtrends…”

“It’s too risky. It’s not safe…”

“Any stock hitting a 52 week low will always be weak…”

Or, “nothing is more destructive to amateur investors than thinking that a stock trading near a 52 week low is a good buy.”

I’ve seen it all before. And none of it makes much sense to me.

Amid the mind-numbing chatter of the alleged pros, I’ve been quietly buying up some of the biggest names on Wall Street at 52-week lows…before they pop.

When Apple (AAPL) hit a 52-week low under $400 a share, it was stuck in a solid downtrend, it was risky, and it looked weak.

But only a fool would ignore it just because it hit a 52-week low.

Using the above logic, here was a stock stuck in a downtrend that should have stayed in a downtrend. “Any stock hitting a 52 week low will always be weak.”

That’s stupid…

You’d actually pass up a monumental opportunity just because it hit a low?

Come on.

At least a dozen people have told me they absolutely knew a stock like Outerwall Inc. (OUTR) would run much lower, but a funny thing happened after each and every know it all told me that…

Outerwall surged.

The herd, and the experts, had it all wrong.

Every single time Outerwall plunged to new lows, investors ran scared.

We, however, knew better. We ran into the burning building and waited. We knew the stock would come back.

It was too big to fail – it was never going out of business.

I’ve learned over the years that the time to buy is “when blood is running in the streets…even if that blood is your own.”

Those were the very words of Baron Rothschild, whose family is now worth a staggering $400 billion. Time and time again, the family kept cool heads during times of absolute panic. They made a fortune from the Battle of Waterloo and countless other events.

I’ll admit it’s a hard maxim to follow – your instinct is to follow the herd.

It’s counterintuitive to run into a burning house not knowing if you’ll come out alive.

Investors run scared. They don’t know it but they’re selling everything at the wrong time. As Warren Buffett will tell you:

“Be fearful when others are greedy and greedy when others are fearful…”

Every one is afraid of the burning house.

But the best time to rush a burning house is when things look grim for big companies that will never see the inside of a bankruptcy courtroom.

Never listen to any “pro” or trusted analyst that tells you to run from, or avoid stocks at 52-week lows. They haven’t done their homework.

We have…

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Wednesday, December 04, 2013

Thank a Baby Boomer for this Stock Market Boom

By Ian L. Cooper Speed Retirement System

I’ve been buying this since $70 in 2007.

It just now hit a new high of $224… and likely to run higher after healthy pullbacks.

By the middle of 2014, the IBB will hit $255. Mark these words…

And much of this is because of baby boomers…

October 15, 2007

It was the day the very first baby boomer filed for social security benefits… with another 80 million waiting patiently behind her.

Baby boomers would begin retiring by the thousands shortly thereafter, clearing out their retirement accounts, spending trillions of disposable income just to keep their bodies going another 30+ years.

Every one knew this was coming…

But very few knew how to really trade it. For me, though, that was the easy part.

I was going to buy all of the biotech and pharmaceutical stock I could for just $70 a share.

And I think I did pretty well… because six years later, my $70 shares now trade at $224.

We all knew it was coming – the “silver tsunami.”

But what many don’t realize is that this major formidable, 20-year event will change just about everything. Not just because this generation holds trillions in wealth… not just because they’ll force massive changes in Social Security and health coverage…

But because this group expects to have longer, more active lives…

And that means they’ll spend heavily – at any cost – to keep their bodies in tip-top shape.

More than 10,000 baby boomers will hit retirement age every day over the next 20 years. And nearly 75% of them expects to live well into their 80s… even 90s.

Together, they’ll control 70% of the disposable income in the United States.

What’s more, they stand to inherit more than $15 trillion over the next 20 years. That’s trillion with a “t.” Retailers, marketers, doctors, gym equipment companies, and hair experts alike have already picked up on this very trend, as 80 million baby boomers spend whatever it takes to keep their bodies up to par.

GNC Holdings – a national retailer of supplements – just announced that baby boomers are one of its biggest buyers of its products for high blood pressure, digestion, eye and brain health, and muscle and bone density.

The market for skin care and anti-aging products is expected to balloon from around $80 billion today to more than $114 billion by 2015, according to Global Industry.

Companies and clinics are promoting hormone replacement drugs as a way to slow the aging process, too. Some cost as much as $15,000 a year. In 2011, consumers spent $1.6 billion on prescription testosterone therapies, almost triple the amount spent in 2006.

Even hair restoration – a $3 billion business on the rise — is popular among the baby boomer generation. Nobody wants to go bald or lose hair, but many of us will any way. In fact, according to the International Society of Hair Restoration Surgery (ISHRS), more than 800,000 men and women sought surgical or non-surgical help for hair loss in 2008 alone.

Bottom line – the baby boomers and the biotech indexes are screaming for us to buy in.

Forbes just reported that the global market for pharmaceuticals could soar from $950 billion to more than $1.2 trillion by 2016. Even the big boys are finally starting to catch on. Fidelity, Goldman Sachs, Black Rock, Vanguard and dozens more increased their holdings in biotech by more than $4 billion.

And if you’re in the right place at the right time, the windfall profits are endless. Because — let’s face it — making money from this solid, unbreakable couldn’t be any easier.

We’re seeing seismic shifts in a demographic that will change the face of biotech and pharmaceutical companies as we know it.

So why not profit from it?

With our economy in a constant state of flux, the opportunity to make great money from biotech has never been greater. Investors would be foolish to ignore the coming, massive demographic shift and growth that’s sending biotech and pharmaceutical companies to the moon.

The sector is even recession proof.

You can’t stop people from aging, from staving off death, or from visiting hospitals, right? Look, explosive gains are already being realized as revolutionary drugs are being developed. And there’s still plenty of time to jump on the wagon.

These are all trends that cannot be ignored.

Truth is – Americans are living longer than ever before because of medical care and new drugs on the market. As we age, we suffer from unwanted conditions, such as hypertension, diabetes, heart issues, arthritis, hearing and vision.

Take a look at biotech companies that are tackling Hepatitis.

The Centers for Diseases Control and Prevention has been calling for baby boomers to get tested for Hepatitis C. This came about because more and more seniors were testing positive for the disease. One in 30 baby boomers is thought to have it. Most don’t realize it.

Take a look at what’s been happening to the biotech stocks that are fighting for a cure.

Here’s Vertex (VRTX), for example.

When the company released its Phase II clinical trials, the stock jumped. The data had shown a 100% cure rate for patients treated with a particular drug over a period of 12 weeks. This meant that the drug stopped the virus from spreading and from causing any more damage to organs, like the liver.

Bottom line – the baby boomers and the biotech indexes are screaming for us to buy in.

For years, we’ve pounded the table for biotech. And the big boys are finally starting to catch on. Fidelity, Goldman Sachs, Black Rock, Vanguard and dozens more increased their holdings in biotech by more than $4 billion.

That’s the long-term view.

Ignore those that tell you biotech is highly speculative.

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Monday, December 02, 2013

Investing in Fiber Optics Earnings Growth

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Alliance Fiber Optic Products (AFOP) was profiled back on August 2, and since that time, the stock rose as much as 45%, but has fallen all the way back to the original price. The ride isn't over for this fiber optic play and it is again the Bull of the Day as a Zacks Rank #1 (Strong Buy).

More Broadband Required

Back in July I wrote about my "Best Tech Stocks For 2nd Half of 2013" and I discussed the idea of more devices coming soon and how they will create demand for more bandwidth. Since then, there have been several publications stating the same thing. What the others were missing is the idea that those devices will all drive the need for more bandwidth from the carriers.

Company Description

AFOP designs and manufactures components, modules, and subsystems that empower dynamic optical network, and facilitates the migration of fiber optics from the long haul through the last mile. That is all industry jargon for they make a fiber optic connection to your business or home a reality.

Earnings History

The most recent quarter was viewed by Wall Street as a beat of two cents. Zacks has the quarter and the two before it as a meet.

The main idea with a company the size of AFOP is to look at revenue growth. Revenues has started to increase, coming in at roughly $19M for the June 2013 quarters and $23M for the September 2013 quarter. That topline growth is likely to continue.

Stock Split

The company recently split its stock 2 for 1. Some investors like when this happens as the stock appears to be "cheaper". Savvy investors understand that the split is a mathematical equations that does nothing to the valuation of the stock or the amount of dollars invested in the stock before the spilt. The end result of a split like this is that there are more shares, and thus the divisor in the EPS equation requires more net income to move the needle in a meaningful way.

Earnings Estimates Adjusted

In March the Zacks Consensus Estimate for 2013 was calling for $0.49. The number bumped up to $0.53 in April and was again raised to $0.66 in May. The consensus now stands at $0.96.


The valuation has become much more attractive as the stock price has fallen. The forward PE moved from 18.6x to 26.6x and is not back to 15x while the industry average has held still at roughly 20x the next twelve months earnings. Price to sales also jumped from 5x to 7.4x and back again to 4.1x as the industry average has held still at 6x. One metric that stands out to me is the expected revenue growth rate. Estimates are calling for 21% growth compared to 12% for the broader industry. That sort of growth on the top line should lead to impressive earnings growth as well.

The Chart

The price and consensus chart for AFOP shows how the earnings movements have helped push the stock higher. Over the last year or so, the stock has seen a dramatic increase in price as estimates have risen. The estimates have not decreased while the stock has seen a healthy correction. The fundamentals and story look to still be intact and this recent move lower has presented a great buying opportunity.

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Friday, November 29, 2013

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Wednesday, November 27, 2013

Paradigm Shifts for Trading Success

By Dr. Van Tharp Trading Education Institute

When the topic of paradigm shifts came up at a workshop, I suddenly started talking about the all the paradigm shifts that were in my book Trade Your Way to Financial Freedom. I had never before thought about the book in terms of paradigm shifts, but suddenly all of the information about the shifts discussed in my book was pouring out of my mouth. After being totally amazed, I decided to spend some time thinking about what I’d said. At the time of the workshop, I remarked that there were four major paradigm shifts in my book. I have no idea where that number came from, but I was able to elucidate four of them very well. Since that time, with considerable thought, I’ve only been able to come up with two more. Nevertheless, these are major paradigm shifts for most traders and investors.

Trading success has very little to do with what’s outside of you, such as what the market does. Instead, you must determine who you are and what your objectives are. Once you have done that, you can design a trading system that fits you.

Most people believe that trading success has to do with the markets, with indicators and analysis, and with finding some magical edge that will help them perform slightly above their competitors. This is totally wrong! Instead, trading success is an inner search. It has to do with finding yourself. Who are you and who do you choose to be? When you’ve answered those questions, you can then decide how to express the new you through the markets. However, this is a major decision. Most people give it no credence or, even when they are aware of it, no time.

There is no Holy Grail in the markets outside of you. But there is a Holy Grail and that comes from developing a trading system that fits you. When you do this you can do much more than outperform the majority of market players. You can achieve levels of performance that others might think are impossible.

Academic psychology is full of people who have done marvelous research studying the shortfalls of the average trader. As a result, economists are beginning to say perhaps the markets are not efficient. And, perhaps by studying human frailties, one can begin to predict how the markets are not efficient. Thus, the field of behavioral finance has been born.

I consider myself to be a student of behavioral finance and one of the few people who is really helping others to apply it. However, applying behavioral finance doesn’t mean predicting the inefficiencies in the market. Applying it means working on yourself to make sure you don’t have these inefficiencies. However, that is too much of a major shift for most people who are into what the markets are doing. But, when I talk about traders making consistent 50-100% returns in the market with little risk, the people who believe it is all outside of themselves think we’re doing the impossible.

You don’t have to predict the market to make money. Instead, making money comes from controlling your exits.

I’ve discussed this one extensively many times. The golden rule of trading is “Let your profits run and cut your losses short.” What does that have to do with prediction? Absolutely nothing. Instead, it has everything to do with getting out of the markets using a systematic plan. Enough said! However, this one can stimulate an argument in many of my students—even those who have read Trade Your Way to Financial Freedom several times and think they understand it.

The fourth paradigm shift is simply an elaboration of the third.

You don’t have to be right to make money. Instead, you must understand R-multiples, expectancy and opportunity.

Suppose you trade high priced stocks that are going up consistently. You get into the stock, but get out immediately if it goes against you by more than $1. Thus, your risk per share is $1, which I’ve defined as 1R.

Suppose you enter a rising stock and get stopped out. You’ve lost a dollar or 1R. Suppose this happens five more times. You’ve now had six 1R losses. On the seventh trade, the stock takes off on you. You ride the stock for a $30 profit. That’s a 30R profit.

You’ve now had seven trades—six 1R losses and one 30R profit for a net of 24R. Let’s even say that your transaction costs amount to 0.5R per trade, so we must subtract another 3.5R. Even now, we still have a total profit of 20.5R. If that’s your average for seven trades, what if you make 21 trades each month? You’d have a profit of 63R while being right on only about 14% of your trades.

If you have not made this paradigm shift yet, you’ll probably find all sorts of reasons to refute the logic of my example. I’ve heard them all. And all of them have come from people who were having trouble with this paradigm shift and needed to defend their position.

Big money does not come from any of the factors that most investors and traders focus their attention upon. Instead, big money comes from having a position sizing strategy that is designed to meet your objectives.

Let’s use the example given above. Suppose you risked 0.5% of your equity on every trade. After six losers in a row, you’d be down about 3%. However, after your 30R gain, you would be up 12%. And in the scenario above (even assuming huge transaction costs of 0.5R or 0.5% of your portfolio), you’d be up over 30% in a single month on 21 trades.

Again, if you haven’t made this paradigm shift, you’ll find lots of flaws in my logic to support your position. That’s okay and it won’t bother the people who regularly make big profits while giving up being right.

Let’s assume that three 30R trades in a month is unrealistic. Three 15R trades is not. It would still give you a net profit of 27R per month. That’s 13.5% with our 0.5% risk per trade scenario. And, let’s add in the unrealistic transaction costs. That would give you a net return of 16.5R per month—or 99% per year. And again, you are still only right 14% of the time and not risking more than 0.5% of your account per trade.

While my purpose in writing this article has simply been to get you to think and step outside of your own perspective, I’d like to point out that I’ve only scratched the surface on the paradigm shifts most of you could make. There are probably at least five major paradigm shifts (not covered in this article) in each of the volumes of my Peak Performance Course for Traders and Investors.

How to Make Your Own Paradigm Shifts

One of the greatest skills I can give you is the ability to make your own paradigm shifts—to look at the box you’ve put yourself in by your thinking and then step out. For those of you who would like maximum benefit and are really willing to “go for the moon,” here is a five-step program for creating your own paradigm shifts.

Step 1: Examine who you are and what you are doing from multiple perspectives. NLP (Neuro Linguistic Programming) suggests that there are at least three perspectives of every event: your perspective, another involved person’s perspective, and the perspective of an outside observer watching what is going on during the event. If you were to continually observe yourself from perspectives two and three, then it would not take long at all to jump out of the box.

A simple exercise you might do is to simply replay each day at the end of the day from the perspective of an outside observer. Amazing changes will occur in you when you do so.

Step 2: Examine your beliefs. Your beliefs might form a set of concentric circles. In the middle are the beliefs that you know are true. Around that are the beliefs you think are true. The next circle contains beliefs that might be true. The fourth circle contains the beliefs that you have real doubts about—things on the fringe like the existence of ghosts or UFOs. And the final circle might be beliefs that you know are not true.

Most people tend to spend their lives rejecting beliefs on the outside of the circle and finding evidence to support the beliefs on the inside. There is even a journal called The Informed Skeptic, which devotes itself to debunking fringe beliefs. While I’m all in favor of questioning fringe beliefs, I think the beliefs that are probably the most damaging are the beliefs in the inner circle—those we know to be true. Spend time questioning those beliefs and you’ll begin to make major paradigm shifts. In fact, try questioning one or two of your major assumptions about life that you know are true. What would life be like if those assumptions were not true? Questioning of this sort is what would be most profitable and evolutionary for most people.

Step 3: Notice your projections. One of my true beliefs that is on the “fringe” for most people, has deep psychological underpinnings. It is that what you see “out there” really reflects what is going on inside of you. If you operate as if the world is a mirror to your own mind, then you will really begin to find out what your boxes are. And when you know where a box is, it is a simple step to get out of the box and make a paradigm shift.

Step 4: Keep a daily journal of your emotions and experiences. One of the best ways to observe yourself is to look at the way you were at some prior point in time and to compare that version of you with another version. You can do this through journaling and reading your journal on a regular basis. Doing so will really help you observe your paradigms and then step out of them.

Step 5: Meditate regularly. Meditation is all about listening. When you listen, you get intuition and immense guidance. As a result, twenty minutes of quiet meditation is probably the best thing you can do for yourself. Simply pay attention to your breathing for twenty minutes. Think of breathing in as “inspiration,” for it very well may be that. And when any thoughts come to you, simply notice them and let them go. If you get stuck in your thoughts, when you notice that, let it go and return to watching your breath.

These five steps should help you to make immense paradigm shifts on a regular basis. Plan to do it for the next 30 days.

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Monday, November 25, 2013

Investing in China Automotive and Internet Industries

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There are many ways to play the growth of China's middle class and BitAuto Holdings (BITA) may offer a combination of two of the best: cars and the Internet reports Zacks Investment Research.

BitAuto provides Internet content and marketing services for the automotive industry in China. Its and websites provide consumers new and used automobile pricing information, specifications, reviews and consumer feedback.

New Name, Experienced Player

Since China overtook the US as the world's largest automobile market in 2010, Chinese companies have of course been scrambling to capitalize on the boom. While you may have never heard of BitAuto and you may be skeptical about "another Chinese Internet company," their roots in the auto industry go back more than a decade.

BitAuto was originally an advertising agency focusing on the automobile sector before they expanded into an integrated online vertical/portal model. They operate and websites for dealers, automotive advertisers and consumers to converge.

According to analysts at Oppenheimer, "With China's emerging auto sector coupled with strong secular tailwinds of increasing Internet ad spend, rising domestic consumption, Internet penetration growth, and greater reliance by consumers on the Internet for car information, BITA is positioned to maintain its leading position in the automotive online advertising and agency business."

The BitAuto Model

The company operates in three segments: business, business and digital marketing solutions business. business provides subscription services to new automobile dealers and advertising services to dealers and automakers on the website.

Bitauto's business provides listing and advertising services to used automobile dealers on website. And their business services division provides automakers with digital marketing solutions, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services.

High-Speed Growth

In 2010 through 2012, BITA grew revenues at average annual pace of 57%. And while 2013 looks to be slowing down quite a bit to 38%, that's still taking the company from 2012's topline of $170 million to an estimated $234 million this year. And 2014 full year estimates are for 29% revenue growth to top the $300 million mark.

After a strong 3rd-quarter report, Oppenheimer analysts raised estimates for the this quarter and next year citing "BITA’s ad sales continued to benefit from robust auto sales growth in China and marketing dollar shifts from offline to online by auto OEMs and dealers."

Encouraged by gross margin expansion of approximately 122bps year-over-year to 74.4% on a mix shift to higher margin and EP businesses, the analysts raised Q4 EPS estimates to 34-cents from $0.31 and full year 2014 EPS estimates to $1.18 from $1.10.

Innovation and Partnership

The Chinese have made it clear they like to build their own dominant companies in key industries, like the Internet for instance. For this reason, hedge fund manager John Burbank of Passport Capital has major investments in Baidu (BIDU), Qihoo 360 (QIHU), which specializes in Internet security, search, and mobile apps, and SouFun (SFUN) which he calls the "Zillow of China."

On November 7, the day of their last quarterly report, BitAuto also announced a joint venture with Kelley Blue Book and the China Automobile Dealers Association (CADA) to provide data on the Chinese used car market. But not only did BITA pick a great US partner, they are also launching these services in mobile applications to meet the country's increasingly high-tech consumer demand.

"Bitauto is delighted to cooperate with Kelley Blue Book and CADA to bring innovative vehicle valuations to China's used car market," said Mr. William Bin Li, chairman and chief executive officer of Bitauto in the company press release. "We see increasingly strong demand for vehicle valuation products particularly in China's used car market which is currently under-served and is now entering a period of rapid development.

"We believe that consumers will greatly benefit from the joint venture's products and services which will offer quick and easy access to the most market-reflective vehicle valuations, helping them make informed decisions on their vehicle transactions. We are confident that these will become the starting point for consumers and dealers seeking used vehicle pricing information."

Mr. Li added, "Our combined experience, technology and brand will drive the development of this joint venture and allow us to deliver trusted values to China's used car market. We believe this joint venture will further solidify Bitauto's leading position in China's online used car market."

The new Web and mobile-based products will be the direct access point for China's most comprehensive and up-to-date car valuation information and is expected to serve as a central hub for the development of China's new and used car industries.

If you are looking for a high-growth play on the Chinese consumer, BitAuto may be a good option. While the forward P/E looks pricey at 33X, dips below 30X look worth accumulating for this key player in the Chinese automarket.

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Wednesday, November 20, 2013

What the Low Stock Market Volatility is Indicating

Why is Market Volatility So Low? By Dr. Van Tharp Trading Education Institute

“Complacency is a state of mind that exists only in retrospective: it has to be shattered before being ascertained.” — Vladamir Nabokov, Russia-born U.S. novelist

Volatility Measures at the “Bottom of the Page”

Complacency in the markets is most often measured using the CBOE’s Volatility Index, or VIX. To simplify the concept, VIX really measures how much option premium is being paid for S&P 500 options. If options buyers and sellers think the market will be jumpy (volatile), then they bid up the price of options — market pundits call this a fear premium. On the other hand, if options buyers and sellers foresee smooth markets, then the price paid for options drops and complacency rules.

Over time, markets cycle from higher to lower volatility and back again. But over the past two years, the range of those swings (the amplitude of the cycles) has been severely reduced. In fact, since December of 2011, the VIX has never been above 30 — the traditional “line in the sand” that classically defined an oversold or “volatile” market. Let’s look at a long term chart:

As you can see, we’re in our 23rd month of volatility contraction. Now for all those perma-bears who are screaming that this is a long time and we should expect a massive correction soon — I direct your attention to the period on the chart from April 2003 through July 2007 (a massive 52 month stretch!) when there wasn’t a single VIX reading anywhere close to 30.

Here’s another graph from Lance Roberts of STA Wealth Management that tells the volatility story in a slightly differ manner:

ere we see that Roberts breaks the VIX readings into three categories: Capitulation, Complacency and a Greenspan-esque “Irrational Exuberance”. Again, notice that from 2003 to 2007 the market stayed “irrational”, calling to mind the quote from John Maynard Keynes that most everyone has heard, “The market can remain irrational longer than you can remain solvent”.

So volatility is really low already and then, early this week, it approached its lowest point of the last few months. In fact, VXX and similar volatility exchange traded funds/notes did reach their all-time lows due to contango issues with the instruments they hold.. Note: an all-time volatility low does not point to an immanent market top because this low VIX environment (what I’ve called a grinding bull market) can last for very long periods as recent history shows. There are some trading implications, of course, which we’ll discuss below. But for now, let’s discuss why this period of low volatility persists.

What’s Keeping VIX Depressed?

As we discussed above, low VIX shows a high level of complacency in the market. A simple explanation might be the so called Bernanke Put. The Fed chairman has essentially given investors a put option (the right to buy the market at a particular price at some time in the future), thus backstopping the market. Indeed, after markets had stabilized following the Great Recession of 2007-2009, Operation Twist plus QE’s 3 & 4 seemed to convince market participants that the Fed in particular and central banks in general would keep the liquidity train chugging at full speed. This has led to ongoing and ever-increasing complacency in the markets.

As traders and investors, what are the effects of this low volatility environment? Most obviously, anyone who has a strategy that includes selling options has issues to deal with right now. Covered calls, credit spreads, iron condors and the like are producing much smaller returns for those writing them. Players in this end of the trading world that I know are either using extreme caution or standing aside completely.

For those with a shorter-term time horizon and a small grasp of recent history, you’ll recall that, for the last three years we have had market drops either in the week before or the week of the U.S. Thanksgiving holiday. With VIX at a very low point relative to even the past 22 month’s depressed rates, one might look for a low-risk way to play a potential short term expansion in volatility.

Next week we’ll dig back into our series on monetary policy.

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Monday, November 18, 2013

Investing in Property and Casualty Insurance

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Although recent troubles with the Affordable Care Act’s rollout have called into question some in the insurance world, companies in the property and casualty segment are looking quite strong. And with some positive trends on the interest rate front, this could definitely continue into the near future.

That is why investors might want to consider this impressive industry for exposure, as it currently has earned itself a top five (out of over 250) industry rank, putting the property/casualty space into the top 2% of all industries. While there are a number of great choices in this space, one company, CNA Financial (CNA), stands out as a great pick at this time.

CNA in Focus

CNA is a Chicago-based firm (which is actually a Loews (L) subsidiary) that provides insurance products to businesses and middle market organizations both in the U.S. and internationally. It focuses on property insurance, management and professional liability insurance, and also risk management services as well.

This has been a pretty solid combination for the company, and CNA had another great quarter at its latest quarterly earnings release. In this release, the company easily beat estimates, reporting earnings of $1.00/share, crushing our consensus estimate of 76 cents a share.

"CNA's third quarter results reflect improved earnings and sustained progress in our core P&C business performance," said Thomas F. Motamed, Chairman and CEO of CNA Financial Corporation. "We are pleased with these results and are encouraged by the margin improvement, the ongoing favorable rate trends, and the continued shift in our book of business toward focus customer segments."

Can this continue?

Given the positive trends in the P&C corner of the insurance market, there is plenty of hope that CNA can continue to increase earnings and push its stock to new heights. And if you look at the recent earnings estimate trend, analysts are clearly believers as well.

All the estimates we have on the company have gone higher in the past 60 days, with not a single estimate going lower. This has pushed the consensus sharply higher too, with the current year earnings consensus moving from $3.11/share 30 days ago to $3.36/share today.

Investors should also note that while the company doesn’t have a spotless track record at earnings season, it is definitely on the right track as of late. It has put up three consecutive (and solid) beats at earnings season, suggesting that the issues of last year are far behind this surging company which appears well-positioned for further growth.

Other factors

Investors should also note that 2013 has been pretty kind to insurers in general, as there have been few major disasters in the U.S. which would cause a hit to claims. This is in sharp contrast to last year, and it is one of the chief reasons for why CNA is going to see such solid earnings growth for the current quarter when compared to last year.

CNA also has an extremely low forward PE suggesting that it is a pretty solid value, as this comes in at just 12.2. This is especially impressive considering that earnings are expected to grow by double digits this year, while the dividend yield here is a robust 2%, suggesting it could be an interesting pick for investors looking for a lower risk play.

Bottom Line

Events are shaping up pretty nicely for the insurance industry thanks to rates, few payout events, and surging investment portfolios. There are certainly a number of companies that play off of this trend, but one that you may have overlooked is CNA Financial.

Thanks to the above factors, CNA has earned itself a top Zacks Rank #1 (Strong Buy), and could definitely continue to outperform.So while CNA might not be as famous as some other insurers in the space, its solid earnings outlook and value characteristics could make it a great buy to close out the year for investors who want to get on this impressive trend.

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Wednesday, November 06, 2013

Where Does the Fed’s Stimulus Money Go? Part V

Where Does the Fed’s Stimulus Money Go?

Part V – A Bigger Picture

By Dr. Van Tharp Trading Education Institute

My high school chemistry class was actually a lot of fun. Half of the students in the class were my good friends and I liked chemistry very much (hence the subsequent chemical engineering degree). I vividly remember one class when the teacher and one of the sharpest guys in school were debating a point — okay, arguing really — about a completely inconsequential topic and the whole class was becoming annoyed.

The teacher, Ms. Duncan, was seriously smart. The student arguing with her was even smarter (he’s now the radiology Chair at Boston Children’s Hospital and a Professor at some Medical School up there that goes by the name of Harvard). They only were arguing to top the other, hold their ground and prove a point. Meanwhile, the rest of us were bored stiff. So I stepped in and offered a baseball analogy — the rest of the class had just made a clean base hit straight up the middle, and those two were arguing over where the foul lines were drawn. Ms. Duncan said, “That has nothing to do with the base hit!” I said, “Exactly.”

I love the saying “can’t see the forest for the trees” because it applies so often in real life. People just naturally seem to get caught up in the minutiae, the immediate problem at hand or their own little problems and fail to recognize the big picture. See where I’m going with this?

Welcome to the world of Washington politics and the high holy keepers of the worst examples of “can’t see the forest for the trees”.

Kicking the Can Down the Road (Again)

The biggest news of the last week was the refunding of the federal government’s day-to-day operations. Non-essential government employees returned to work and the politicians got to delay really debating the debt ceiling again until early 2014. Hear that can a-rattlin’ down the pavement?

If we all step back calmly and look at what just happened without any political party prejudices, we quickly see that we don’t have a budget problem, we have a governance problem. We have lost the ability to efficiently and effectively legislate. And I’m pretty sure I’ll never see a national political body make a difficult decision again in my lifetime. All decisions are vetted through the lenses of entitlement groups — whether they receive a government handout directly (those on the left can yell nasty things about me) or whether they receive special treatment by the government like the financial institutions and the industrial-military complex (those on the right can now say ugly things about my lineage).

The Big Picture in One Cool Graphic

Now, let’s all hold hands and solemnly repeat, “The problem is not about raising the debt ceiling, the problem IS the debt ceiling”. We are in the midst of the largest financial engineering experiment in the history of economics as we know it. The unwinding of this will be ugly, barring some technology / productivity quantum leap that allows the global economy to rapidly expand and grow our way out of part of the problem.

In one graphic we see a startling depiction of the big picture (it’s from the Ricochet blog — a conservative gig, but I did vet the numbers which seem reasonably accurate):

First of all, it’s pretty clear that the debt problem (or more appropriately, the rate of debt growth relative to revenue growth) exists on both sides of the aisle — it is a national problem that doesn’t belong to one political party more than the other.

I now firmly believe that a government that can’t make tough decisions on how to slow spending or increase revenues will have tough decisions thrust upon them by another financial crisis. Whether that crisis is bad, like 2008 or really bad like 1929+, it’s tough to see us getting a resolution that looks or sounds anything like a “soft landing”.

In weeks to come, we’ll look at some things that traders can reasonably do between now and then (like continue to enjoy the stock market climb until price tells you otherwise).

Click Here to Read Parts 1, 2, 3, and 4 of Where Does the Fed’s Stimulus Money Go?

Monday, November 04, 2013

Investing in Solar Power

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Thanks to strong demand and a turnaround in key international markets, solar power investments have been quite strong for much of 2013. ETFs tracking the sector have led the way for much of the year, including nearly a 120% gain for the top fund in the space, (TAN).

And with a series of earnings beats lately, the short term future could be looking very bright for the sector as well. This is particularly true when looking at one of the top names in the space, SunPower (SPWR).

SunPower in Focus

SunPower is California-based company that designs and manufactures solar systems for residential, commercial, and utility purposes around the globe. The company is actually majority owned by European energy giant Total (TOT), but it has been trading on its own for nearly a decade.

While some take strictly a low cost approach, SPWR zeroes in on high efficiency panels. According to their latest 10-Q, the company has among the most efficient panels in the industry, making this a key selling point for SunPower when compared to its competitors. This has been a great approach in the current solar power bull market, especially if you consider the company’s latest earnings results.

Recent SPWR Earnings

At the end of October, SPWR reported EPS of 33 cents a share, compared to a loss of 5 cents a year ago. Meanwhile, the company also crushed the consensus estimate, which called for earnings of 24 cents a share.

Although guidance disappointed some investors, SPWR is laying the groundwork for longer term gains. In fact, the firm announced that it was going to expand solar cell manufacturing capacity by more than 25%, bringing their total capacity to 1.8 GW, and suggesting to many that SunPower’s products remain in high demand.


Thanks to this capacity expansion and the strong anticipated demand, SunPower is looking to have another high growth quarter. Year-over-year growth is currently expected to be 182%, while the full year growth is looking to come in at nearly 700% earnings growth when compared to the previous year.

Estimates have also moved higher in recent days, suggesting an increasingly bullish take by analysts. And with a strong history of beats—all of the last four have been beats—there is plenty of reason to believe that SPWR can live up to the hype next quarter as well.

Due to these factors, SunPower has earned itself a Zacks Rank #1 (Strong Buy). This means that we are looking for more outperformance from this strong stock to finish up 2013, and for this company to continue to move higher.

Bottom Line

SunPower is looking great from several different angles. Its products are high quality and the industry is booming. The solar power industry is actually ranked in the top 20% overall, so there is pretty strong trend underlying the bull case here.

So if you are looking to get in on solar stocks, this high quality manufacturer—which has plenty of support from Total—could be an excellent choice. It is expanding capacity and if its efficient panels stay in demand, the stock may continue to rise as we end 2013.

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Friday, November 01, 2013

Why Your Wrong About the Stock Market

Why Everything You're Told About the Stock Market is Wrong by Market Authority

This is a picture worth 10,000 media stories...

SPY 5 year

Click Images to Enlarge

Please view the above chart of the SPY (S&P500 index ETF). This is the benchmark of the stock market. In the late 90s, the SPY replaced the Dow Jones Industrial Average as the main benchmark as it included more companies (500 vs 30 for the Dow).

The SPY is now trading 150% higher than the March 2009 lows, ranking it among the best 5 year returns in stock market history. On top of this performance, there are no signs of a significant correction (re: a pullback between 10-20%) in the near future. I will cover these bullish indicators in future missives. Today I want to tell you why you've missed one of the greatest rallies of the past 3 decades.

Please take a moment and ponder this question . . . Why were you not involved?

Well, if you happened to buy the lows and were fully invested - fantastic job! You're in the small minority of investors who saw the panic in early 2009 as a generational buy-signal.

To those of you who didn't catch a big chunk of this move, I have this advice for you...

It's not your fault so don't beat yourself up over it. The information you were given was not only misleading but (at times) blatantly false.

Let me explain by teaching you the Allegory of the Cave. In Plato's Cave, there exists a gathering of people, who for all of their lives, have been chained up and facing a blank wall. On this blank wall, they're only able to see shadows of things passing in front of a fire behind them. As these shadows are all they've ever seen, they represent their reality. According to Plato, the philosopher is a prisoner freed from the cave and realizes that the shadows don't make up reality at all.

You, the average investor, are cave dwellers and the shadows you see on the wall is the misinformation from modern-day media. The signals you are receiving in that cave don't represent the reality of what's happening to the market. What you are seeing on CNBC and reading online is just noise.

There are a few reasons for this:

1. The main goal of the 24-hour cable news cycle is to increase viewership, not to provide accurate information. CNBC only exists to sell 30 second infomercials for Cialis, P90X, and Propecia.

2. The only way to keep viewers engaged is a continuous cycle of fear-mongering that will leave you worried enough to continue watching.

This persistent fear-mongering has kept investors on the sidelines and created a "wall of worry", a necessity for a broad stock market rally. There are many ways to follow this sentiment, so stay tuned for future missives when I explain them.

For now,take a look at the 1-year chart of the SPY to see what I'm talking about.

SPY 1 Year

In Dec 2012, there were fears of going over the "fiscal cliff" and the market pulled back.

Guess what? We went over it and the market went higher.

In February 2013, there were fears of the "Sequester" and the market pulled back.

Guess what happened? We "sequestered" and the market went higher.

In June 2013, there were fears of a Bernanke "taper" and the market pulled back.

Guess what? The fed actually didn't taper and the market continued higher.

Finally, this past month, there were fears of a government shutdown and breaching the debt ceiling and the market pulled back.

See a pattern here?

You will never realize your financial dreams if you stay in that cave and listen to media that exists to sell you Cialis. So forget about all the information you've heard over the past 5 years that hasn't made you money. Stop listening to the "noise", and start learning how to find accurate signals.

How do you find signals? The best place to start is to find a system that fits your investment style and profits in various market conditions.

Click here to review that type of system.

But for now, please contemplate what I said about financial media and "make sure to call your doctor is headaches persist..."

Wednesday, October 30, 2013

Where Does the Fed’s Stimulus Money Go? Part IV

During the past few weeks, we’ve dug into some interesting topics surrounding the Fed’s stimulus. While many questions remain unanswered, one will have the most impact on traders and investors: How will central banks exit the “extraordinary measures” phase and head back toward normalcy? (The other market impact question is “when?” — but the answer to that question is likely to have more short-term effects.)

In May this year, the Geneva Conference on the World Economy focused on the topic of how central banks will unwind. A few presentations from that conference may provide us with some answers about the upcoming process. Once again, we’ll dig into the rich deposits of information that came from IMF consultants Singh and Stella in their white papers that we have referenced before. While the concepts apply broadly to central bank stimulus programs, we’ll simplify the explanation by talking about the exit plan for just the U.S. Federal Reserve.

A legitimate question that one might ask is why would the purchases made through the stimulus program have to be unwound at all? While a comprehensive answer is a little more complicated, the simple way to look at this is as follows: The Fed has lowered interest rates through securities purchases that manipulate the yield curve (and of course by changing interbank borrowing rates). As interest rates approached their lower bound of zero, stimulus efforts took the form of a massive expansion of liquidity. If things were just left “as is” — with the $2.2 TRILLION of added reserves sloshing around on the books, that added liquidity would pose of threat of sending inflation rates to unacceptably high levels, given a period of sustained economic recovery and even a bit prosperity.

To avoid this eventuality (or, in some peoples’ minds, to keep it from happening), the Fed will have to unwind a large portion of this massive liquidity. The Fed will do this by raising interest rates but not by directly reducing its balance sheet and the balance sheets of the commercial banks who have been the willing parties to the multiple QE phases. So then how to unwind trillions of dollars of stimulus? That subject has been debated and now a likely path seems pretty clear.

The Repo Man’s Mirror Image

Peter Stella outlines three ways that the Fed can raise rates: by declaration (or fiat, as he calls it), by raising rates on borrowed bank reserves, or by raising the rates of reverse repurchases.

The first option — raising rates by fiat — has little else going for it beyond simplicity of execution. Divorced from market forces, such changes could lead to significant unintended consequences and may not adequately move longer term rates, which are most important in the real world.

Raising the rates paid on term deposits would have the desired effect of incentivizing banks to reduce their reserve levels, but does little to help banks build back their stocks of tradable securities.

The last option, which most signs point toward as the logical conclusion, is the use of reverse repurchase transactions.

In last week’s article, we talked about the role that repurchase agreements play in providing liquidity to institutions. In essence, as Stella describes it, the Fed would sell Treasury bonds to financial players and agree to buy them back at a set time in the future for a set fee. This fee agreement would allow the Fed to effectively pay interest like it would with term deposits while offering the double benefits of putting more high-quality collateral (namely treasuries) back into play and also being able to include nonbanks in the loop.

Again, Stella emphasizes that the Fed has already spent time and effort to put the infrastructure in place to facilitate these reverse repos including expanding the list of approved (nonbank) counterparties who could buy and then re-sell the reverse repos.

So What?

That’s a fairly quick but head-spinning dive into the minutiae of stimulus unwinding. Still, we can glean a couple of key points from this. First, central banks do have a chance of creating a soft landing coming out of this unprecedentedly massive monetary policy experiment. The mechanisms exist for prudent exit strategies. But — and this is a big but — the global economy is going to have to cooperate. A mild recovery will not produce the financial cover to unwind this gently and any hiccups in the system could lead to 2008-stlyle market plunges.

The size and scope of central bank interventions over the last five years have created a financial compression that may only be relieved by an explosion rather than a process of letting the air out bit-by-bit. And many questions remain unanswered — for example, as interest rates necessarily rise and bond prices drop, who will absorb the losses in those securities as they pass through the repo cycles? More public sector burdens? Will private parties have exposure to some of this risk? We’ll dig into these tough questions next week.

Click Here to Read Parts 1, 2 and 3 of Where Does the Fed’s Stimulus Money Go?

Monday, October 28, 2013

Investing in Insurance

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It has been a pretty great time to be in the property/casualty insurance business. There has been a lack of disasters—so little in terms of payouts—while many items in an insurer’s investment portfolio (like stocks and some bonds) have surged in value.

This has kept many bullish on the sector, and especially so when compared to the shaky health insurance space. In fact, the property casualty insurance industry currently has a Rank in the top 5% according to our models, suggesting a pretty widespread bullish case for the segment.

In particular though, one company could be a solid pick in this segment, Cincinnati Financial (CINF). This company just delivered a strong earnings beat, and could be well-positioned to gain further in the months ahead.

CINF in Focus

Cincinnati Financial operates in several segments including commercial, personal, and life insurance giving it a diversified mix. However, CINF is definitely focused on the commercial segment, as this accounts for the bulk of its revenues.

The company has seen strong growth in its earned premiums when compared to 2012, while payouts have stayed pretty stable despite having more policies on the books. This has led to decent sized gains for CINF when compared to the year ago period in terms of earnings, and it has been further compounded by strength in the company’s investment portfolio as well.

Thanks to this strong trend, analysts have started to bump up their expectations for the company’s future earnings. Now, the yearly earnings estimate is up to $2.65/share from $2.22/share 90 days ago, while we have also seen positive moves in other time periods as well.

CINF also has a great track record when it comes to earnings beats, including a solid beat for the most recent quarter of 27%. The company has actually averaged a 64% beat in the past four quarters, and hasn’t missed in more than two years, so clearly it knows how to beat in earnings season.

Due to these factors, Cincinnati Financial has earned itself a Zacks Rank #1 (Strong Buy), suggesting that more outperformance is in the cards for CINF. And with a 6.7% move higher in the past month, this is definitely a solid momentum play as well.

The company is also expected to see 10.4% growth in earnings for the full year, while it is still has a PE below 20, suggesting it is a value pick. Plus, the company pays out a robust 3.3% in yield, so there is definitely income potential in this stock too.

Bottom Line

CINF is in a great industry that has a lot going for it thanks to strong asset performances and a lack of big natural disasters as of late. Due to these factors, analysts and investors have become more bullish on the insurance industry bidding up some names in the space.

Cincinnati Financial could be a great choice to play off this trend as it just beat earnings and it has a top Rank to boot. Add these factors in to a growing portfolio and a solid dividend, and investors may have a winner on their hands with this Ohio-based company.

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