Sunday, August 31, 2014

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Saturday, August 30, 2014

Extra Income with Mortgage REIT's

Getting a Read on Mortgage REITs by Morningstar Investment Research

This high-income vehicle warrants close scrutiny given interest-rate uncertainty.

Question: I've heard that mortgage REITs can be a good way to get extra income. What are the pros and cons of investing in one?

Answer: Mortgage REITs have exploded in popularity in recent years, in part because their yields can be attractive. But as with any high-yielding instrument, there’s no such thing as a free lunch. Unless interest-rate conditions are just right, mortgage REITs can run into trouble.

Mortgage REITs (real estate investment trusts) are similar in nature to equity REITs, but with some key differences. Whereas equity REITs invest in commercial or residential properties, passing along to shareholders much of the income they receive, mortgage REITs invest only in commercial or residential mortgages and mortgage-backed securities. The interest payments made on these mortgages generates income for the REIT and, thus, for its shareholders.

Mortgage REITs use their equity or take out loans of their own--often at short-term rates--to initiate or buy mortgages as part of a leveraged strategy. The amount of interest the REIT earns on the mortgage minus its cost to fund or obtain the mortgage becomes the REIT's profit. For example, if the REIT owns a mortgage that requires the borrower to pay 4% interest over 30 years but the REIT can borrow the money to fund the mortgage at a short-term rate of 1%, the REIT banks a profit on this 3-percentage-point difference. Mortgage REITs typically use leverage (additional borrowing) to amplify this spread.

An Income-Generating Vehicle

As with all REITs, mortgage REITs are required by law to pass along most of their income to shareholders, and therein lies their appeal for income-oriented investors: Mortgage REITs offer some of the highest yields of any security type, some in excess of 10%. (It's also worth noting that while REITs don't pay taxes on the dividends they pass along to shareholders, the shareholders themselves must pay them and at ordinary income tax rates rather than at the lower rates applied to qualified dividends.)

In addition to generating income, mortgage REITs can be used to help diversify a portfolio. While REITs in general have become more highly correlated to stocks in recent years due partly to their inclusion in some widely tracked equity indexes, mortgage REITs are more loosely correlated to stocks than equity REITs are.

Some mortgage REITs trade on exchanges like stocks. At the end of 2013, there were 45 listed mortgage REITs on the New York Stock Exchange and NASDAQ with a total market capitalization of $62 billion, according to figures from the National Association of Real Estate Investment Trusts.

ETFs that invest exclusively in mortgage REITs include iShares Mortgage Real Estate Capped ETF (REM), an index-based fund that yielded 13.7% on average over the past year, and Market Vectors Mortgage REIT Income ETF (MORT), which yielded 12.6%. (By contrast, Vanguard REIT ETF (VNQ), our analysts' pick for ETF exposure to equity REITs and which excludes mortgage REITs, yielded just 3.1%.)

Now for the Warning Label

Before you rush off to buy mortgage REITs or mortgage REIT funds to get a piece of those juicy yields, make sure you understand the risks that come with them. In particular, mortgage REITs are highly subject to interest-rate risk. For example, as short-term interest rates rise, the REIT may have to pay more to borrow money, potentially reducing the spread between its borrowing costs and the income it receives from the mortgages it owns--thus, reducing its profit (and shareholder dividends). Generally, the more leveraged the mortgage REIT (that is, the more borrowing it does), the greater the potential to feel the squeeze when rates rise. At the same time, if long-term rates rise faster than short-term rates, this increases the spread and the REIT's profit may increase. However, rising long-term rates also could hurt the value of existing mortgages already in the REIT's portfolio, thus, hurting the REIT’s value.

Mortgage REITs typically try to account for various potential short-term scenarios by using hedging strategies based on derivatives such as interest-rate swaps. But their high degree of interest-rate sensitivity generally makes mortgage-REIT yields more volatile than those paid out by equity REITs or stocks.

The Best of Times--But for How Long?

In recent years, mortgage REITs have flourished amid historically low interest rates. However, during periods when rates have risen--or when fears of rising rates have taken hold--mortgage REITs have taken a beating. IShares Mortgage Real Estate Capped ETF's two biggest holdings--Annaly Capital Management (NLY) and American Capital Agency (AGNC)--lost 18.3% and 20.3%, respectively, in 2013, as worries about the end of the Fed's bond-buying stimulus program sent interest rates higher. As rates have drifted lower again this year these REITs have rebounded, with Annaly Capital Management up 24.1% and American Capital Agency up 27.8% as of Aug. 22.

Another potential interest rate-related pitfall for mortgage REITs is prepayment risk--the chances that borrowers will prepay mortgages in order to refinance at lower rates. In such cases, the mortgage REIT no longer receives interest payments at the higher rate and may have to settle for buying mortgages that pay lower rates. While prepayment risk has been a real concern in this era of historically low mortgage rates, it is less likely to be an issue should they continue to rise.

Most residential mortgage REITs are backed by the federal agencies Fannie Mae and Freddie Mac, which minimizes the credit risk associated with them. However, commercial mortgage REITs lack this protection and may carry some credit risk.

While no one knows for sure if or when interest rates will increase in the coming years, most investors seem to expect they will. How this will affect the performance of mortgage REITs is anyone's guess, but the fact that there is so much uncertainty should give any investor pause.

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Monday, August 25, 2014

This Weeks Free Stock Pick - Auto Parts

Visteon Corporation (VC) delivered strong results and provided bullish guidance for 2014 and 2015, leading analysts to revise their estimates upwards. Positive earnings momentum sent the stock back to Zacks rank #1 (Strong Buy) earlier this month.

About the Company

Visteon is a leading global automotive supplier of climate, electronics and interiors products for vehicle manufacturers. It serves original equipment vehicle manufacturers with its technical, manufacturing, sales and service facilities located in 29 countries.

It has corporate offices in Van Buren Township, Michigan; Shanghai, China; and Chelmsford, UK and employs about 24,000 people worldwide.

The company has been transforming from a US centric company with only one major customer to a predominantly Asia-based, multi-customer global enterprise.

Excellent Results and Guidance

On August 6, Visteon reported its Q2 2014 results. Sales for the quarter totaled $1.78 billion, up 11% from the same quarter last year. Adjusted EPS of $1.76 per share was much better than consensus.

Adjusted EBITDA excluding discontinued operations was $175 million, compared with $149 million for the same period a year earlier. The balance sheet position continued to be strong with global cash balances totaling $1.4 billion at the end of the quarter.

Hyundai-Kia accounted for approximately 39% of Q2 sales and Ford accounted for 30%. Among regions, Asia accounted for 51% of sales, Europe 27%, and Americas 22%.

The company now expects 2014 sales of $7.6 billion and adjusted earnings in the range of $2.98 to $3.62 per share. The company also provided preliminary guidance for 2015, which was better than expectations.

Visteon completed the acquisition of the electronics business of Johnson Controls (JCI) in July. The business acquired provides automakers with advanced driver information, infotainment, connectivity and body electronics products and makes Visteon one of the world's three largest suppliers of vehicle cockpit electronics. The company expects that future synergies from JCI integration will drive sales growth and margin expansion.

Business Transformation to be completed soon

The company is nearing the completion of its multi-year restructuring/transformation. After exiting its Interiors business, the company will be comprised of two high-growth / margin businesses—Automotive Climate and Cockpit Electronics

Solid Industry Outlook

Per Zacks Auto Industry Outlook, a strong pent-up demand due to aging vehicles on the U.S. roads along with falling unemployment rate and easier financing have been the key factors in driving the auto sales in the US..

Asian countries, especially China and India, are expected to account for a large portion of growth in the auto industry over the next five to seven years due to their rapidly growing economies. With its strong presence in Asia, VC will definitely benefit from the surging demand for automobiles in that region.

Further recent innovations in consumer electronics technologies will provide significant opportunities for automotive electronics suppliers.

Estimates Moving Upwards

After strong results and updated guidance, analysts have increased their earnings estimates for VC. Zacks consensus estimates for the current and next year are now $3.52 per share and $5.26 per share respectively, up from $3.18 per share and $4.55 per share, 30 days ago.

The Bottom Line

Highly diversified sales footprint (by products, regions as well as customers), offerings across all major cockpit electronics products and continued investments will help VC gain market share in its space and coninue its outperformance.

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Friday, August 22, 2014

Stock Market Winning Secrets

Why do some people succeed spectacularly in the market while others fail?

The market is the same for one person as it is the next.

Yet there are plenty of investors underperforming the market even while it's making new all-time highs like now.

So why the big difference in performance between one person and another?

It all boils down to two things:

1) Knowing what works, and

2) Doing what works

While the stock market isn't a perfect science, the fact remains that if you concentrate on what works and stop doing what doesn't, you will most surely succeed in the market.

Knowledge Is Power

We've all heard the old adage, 'knowledge is power'.

It's a great saying because it's true.

And that saying couldn't be truer than when it comes to investing.

Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that – 'had you known that, you never would have gotten into it in the first place'.

I'm not talking about things that are unknowable, like surprise announcements that can catch even the most professional of professionals off guard. I'm talking about things that you could have known about or should have known about before you got in.

This is part of 'knowing what works'.

Did you know that roughly half of a stock's price movement can be attributed to the group that it's in?

Did you also know that oftentimes a mediocre stock in a top performing group will outperform a 'great' stock in a poor performing group?

And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?

And did you also know that the top 10% of industries outperformed the most?

Was your last loser in one of the top industries or in one of the bottom industries?

If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.

That part is the 'doing what works'. (And not doing what doesn't work.)

That's not to say that stocks in crummy industries won't go up -- they do. And that's not to say that stocks in good industries won't go down -- because they do too.

But more stocks go up in the top industries, and more stocks go down in the bottom industries.

If you follow a set of proven profitable rules, you'll have a higher probability of succeeding.

Know What Works

Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?

Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?

Did your last loser have a spectacular growth rate?

If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?

Once again, this is the 'know what works' part.

It seems logical to think that the companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.

One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.

Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint. And there are growth rate ranges that have proven to work the best.

Did You Know?

Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 times as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they're for you or against you.

Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than those levels? And did you know that those with a Price to Sales ratio of greater than 4 have typically shown to lose money? That doesn't mean that all stocks with a P/S ratio of less than one will go up and those over four will go down, but you can greatly increase your odds of success by following these valuations.

Did you know that by adding two additional filters to the Zacks #1 Rank stocks, it narrows that list down from 200+ stocks to a more manageable 5 stocks? That's what we did with our Filtered Zacks Rank 5 screen that is up 38.4% so far this year vs. the market’s 7.4%.

Do you know how well your stock picking strategies have performed?

Whether good or bad - do you know why?

Do you know if your favorite item to look for is helping you or hurting you?


Click here to get the answers to these questions and more.

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Monday, August 18, 2014

This Weeks Free Stock Pick - Semiconductors

Yesterday I got a little bit excited and decided I’d look into the next generation of smartphones. They’re coming out next month. Apple will have another iPhone for you, and Samsung is coming out with a new Galaxy Note S4 for me. Among the fresh features of the next generation are 4k or UltraHD displays and curved glass. But what will remain the same is a great deal of the hardware that’s inside these devices. The computing power and the wireless data receiver semiconductor chips are being made by the same providers who stand to make big bucks when these phones are mass produced over and over again.

Among the chipmakers that are included is TriQuint Semiconductor (TQNT), our Bull of the Day. TriQuint designs, develops, manufactures, and markets a broad range of high performance analog and mixed signal integrated circuits for communications markets. The integrated circuits are incorporated into a variety of communications products, including cellular phones, fiber optic telecom equipment, satellite communications systems, high performance data networking products and aerospace applications.

Miniature Mobile Giant

The vast majority of TriQuint’s operations are focused on the mobile industry. With the world’s demand for mobile data growing exponentially, the wireless industry is rapidly changing to meet this challenge and build the next generation of mobile devices and network infrastructure. As a result, TQNT has an intense focus on LTE content expansion. They seek to deliver premium filters and high-efficiency broadband amplifiers as well as enable dense RF integration with ultra small packaging. Basically it means they are making their chips smaller, more efficient, and more powerful.

Not stopping with mobile devices, TriQuint is gaining exposure in the defense and aerospace business as well. Their transition to products and away from non-strategic foundry is driving revenue and margins for them. Their top customers on the defense front include Lockheed Martin, Boeing, Northrop Grumman, Raytheon, and the US Department of Defense. Their GaN technology offers greater power, smaller size, fewer parts, and higher efficiency then their current competition.

Zacks Rank #1 (Strong Buy)

The result has been very bullish earnings estimate revisions to go along with a stock price that has been on the rise. This Zacks Rank #1 (Strong Buy) has surprised earnings estimates to the upside for four quarters in a row.

Further, over the last 30 days, three analysts have raised their estimates for the current year and next year. This has pushed consensus up from 31 cents per share for the current year to 51 cents and bounced next year’s consensus up from 50 cents to 75 cents.

All this has contributed to one heck of a run for the stock. After gaping up to break the $10 mark in February of last year, TQNT has barely paused to take a breath on its ride upwards. A few times the stock traded sideways to touch the 25 day moving average shifted by 5 days. After brief consolidation periods and minor sell-offs, TQNT almost always rebounds to head even higher.

Recently the stock has formed a bit of a bullish triangle pattern. Stochastics are in overbought condition so you do have to use a bit of caution when jumping on board. However, you can expect to see stochastics like this during a breakout and that’s exactly what’s happening to TQNT right now. With the spike to a 52-week high intraday today, I’d expect to see an attempt at $20 over the coming weeks.

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Wednesday, August 13, 2014

The Financial Problem with Europe

The Problem with Europe that Investors are Missing by Market Authority

Europe is struggling, and trade sanctions with Russia are making a bad situation even worse.

Confidence in Germany (as measured by the ZEW index) plunged today to 44.3 in August from 61.8 a month ago. This was dreadful compared to the 54.0 expected by economists.

While the plunging German stock market hinted that weak confidence number was expected, this abysmal reading was categorized as “Grim” by Pantheon Economics’ Claus Vistesen. Here’s a chart of the German ETF over the past year:

As you can see, the selloff from mid-June has erased nearly all the gains in the past year.

Yesterday, we spoke of the paradox of thrift: the idea proposed by Keynes that total savings in an economy will actually decline if everyone chooses to save at the same time. In order to earn income to save, someone else needs to spend. Your savings is someone else’s spending, and vice versa.

This concept underlies the structural problems in Europe, where a unified currency cannot coexist with a stratified political system. While most investors dismiss Europe’s problems as originating in the social democracies of southern Europe- this could not be further from the truth. It’s a very common mistake to moralize the southern Europeans (Portugal, Italy, Greece, Spain) as “lazy, government-supported wine-drinkers relaxing on the Mediterranean”. After all, if you’ve spent time in vacation destinations along the Mediterranean, it clearly feels like a way of life.

Here’s the truth: Europe’s problems originate in a savings-consumption imbalance that a common currency cannot resolve in the traditional manner of flexible currency markets. I know this is a mouthful so allow me to explain.

In the late 1990s, the German government passed legislation to restrain the labor wage share of GDP. This made their labor markets among the most competitive in the world, increased exports, and forced up the savings rate. When the Euro was adopted in 1999, the fate of Germany’s currency no longer rested on its own economy.

As a result of these programs and a unified currency, German deficits of the 1990s quickly swung to surpluses. Remember, someone’s savings is also someone else’s spending. The belt tightening in Germany caused savings to flow to south Europe. This resulted in an unsustainable rise in consumption in Portugal, Italy, Greece, and Spain. German exports increased and manufacturing shifted from the rest of Europe to Germany. The inflow of capital to Southern Europe ignited real estate bubbles which resulted in even more consumption as sky-high housing prices made everyone feel rich.

Before the Euro, an inflow of German savings into Spain would be resolved by a drop in the Spanish peseta. A weakened Spanish currency would make their labor and export markets more competitive and the trade imbalance would eventually remedy itself. Unfortunately, there is no longer a mechanism to fix these capital imbalances as the currency is now shared by all. German savings gets trapped in Spain in the form of excess credit and higher real estate prices.

To compound the problems even further, the EU mismanaged matters from the start. Instead of identifying the problem and making southern Europe labor markets more competitive (and thus increase their exports), the EU administered strict austerity programs which weakened these economies and drove debt levels and interest rates even higher.

Again, the Germans are to blame here. To make southern Europe labor markets more competitive would have resulted in wage inflation in Germany. There is still an inflation paranoia among German central bankers since the hyperinflation of the 1920s Weimar Republic led to the rise of the National Socialists (the Nazis). Germans avoid inflationary measures like the plague.

The austerity measures forced on southern Europe pushed the Eurozone to the brink of collapse. Sovereign interest rates skyrocketed above the dreaded 7% level and creditors worried that governments would be unable to finance their runaway deficits. In July 2012, the Euro was briefly rescued when European Central Bank President Mario Draghi proclaimed they will do “whatever it takes” to save debtor nations.

To be certain, all is not well in Euro land. The austerity programs are causing a political shift as hard right-wing nationalist parties are increasingly winning seats in parliaments. This will lead to less political cooperation and more economic turmoil. Unless Germany takes it upon itself to allow domestic inflation and adjust the imbalances, there are more dark days ahead.

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Monday, August 11, 2014

Investing in Travel and Lodging Earnings Growth

Expedia, Inc. (EXPE) recently crushed the Zacks Consensus Estimate for the second quarter as demand for travel and travel services strengthened. This Zacks Rank #1 (Strong Buy) is expected to see double digit earnings growth both this year and next.

Expedia is one of the most recognizable online travel companies. It now has an extensive list of brands including,, Hotwire, Egencia,, trivago,, Expedia CruiseShip Centers and eLong, the second largest online travel company in China.

Expedia Beat By 38.4% in Q2

On July 31, Expedia reported its second quarter results and easily beat the Zacks Consensus by 26 cents. Earnings were $0.94 compared to the consensus of $0.68.

Revenue jumped 24% to $1.49 billion from $1.21 billion a year ago. The other metrics also showed solid growth with Room Night growth rising 28% versus 19% a year ago and Gross Bookings jumping 29% due to room night and air ticket growth.

The quarter was boosted by the marketing partnership with Travelocity, which it entered into in the fourth quarter of 2013. That deal contributed 400 basis points of the room night growth.

Analysts Are Bullish

The analysts liked what they heard as 6 estimates were revised higher for 2014 but it wasn't just 2014 they were excited about. Six estimates were also revised higher for 2015.

Expedia isn't cooling off. Earnings are expected to rise 39.6% in 2014 and another 23.6% in 2015.

The company also recently rewarded shareholders by raising its dividend by 20% to $0.18 a quarter. That's a yield of 0.8%.

Shares At 2-Year High

Expedia shares have been on the move for most of 2014. They recently hit a new 2-year high.

The company isn't cheap though, with a forward P/E of 24 but that puts it in line with its high growth competitors. You're buying it for the growth, which it has plenty of.

If you're looking to cash in on the strong demand in travel, Expedia is one stock to keep on your short list.

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