Stock Snapshots and Analysis
January 28, 2012Posted by on
Last time I checked, my “high interest” checking account pays less than a 1% interest rate. This is, well, just plain bad in comparison to historical rates, and even compared to inflation.
To top it off, the Federal Reserve has vowed to keep interest rates at historical lows in order to spur investment and lending, and to spur economic growth. Although this may be good for the economy as a whole, it doesn’t help to grow my savings account. And because savings account rates are low, CD rates are also low.
The result of all this is that, aside from my emergency fund, I need a better way to invest my money in a relatively safe way until savings account rates increase. There are a couple of options to do this. The first is bonds. The problem is that I don’t know bonds. That’s why I picked option #2: dividend-paying stocks.
There are plenty of stable, dividend-paying blue chip stocks that pay a dividend of 2% or more, which is much higher than the average savings account pays. There is, of course, the risk that stock prices can drop and that drop would defeat the original purpose of growing your money. And to that, I would simply say that nothing good comes without risk.
The upside of investing in dividend stocks is that, if you pick stable, blue chip, dividend-paying stocks, their prices are typically more stable than most other stocks. On top of this, a healthy dividend usually provides a cushion to downside potential. For example, most stocks pay a dividend of 1.5% and Diageo (DEO), which I own in my portfolio, pays a dividend of close to 3%. Diageo is currently priced at $89.15 per share. If Diageo’s price were to lower to $80 per share, its dividend yield would significantly increase, likely attracting new investors, assuming there was no change in its fundamentals.
Another great option to consider is dividend ETF’s. This is especially a good option if you aren’t comfortable investing in individual dividend-paying stocks or just need a place to keep your money temporarily. A few examples are the Vanguard Dividend Appreciate ETF (VIG), SPDR S&P Dividend ETF (SDY), and iShares Dow Jones Select Dividend Index Fund (DVY).
The bottom line is, if you 1. Have a sufficient emergency fund, 2. are comfortable keeping your money in the stock market and 3. don’t need the money within the next few years, then don’t settle for the measly rates that savings and checking accounts are paying. Put some money in dividend stocks and they will pay you a much better return than the banks.
December 17, 2011Posted by on
The economy can’t remain in a recession forever, right? Well, at least that’s what you have to assume if you’re interested in investing in a company that handles waste disposal. What’s more is that you would have to be extra confident about that assumption if you wanted to invest in a company that disposes of industrial waste.
Think about it…if the economy isn’t growing, as an industrial waste disposal company, you don’t have as much room to grow your revenues assuming your competition is strong. That is exactly the predicament that US Ecology, Inc. finds itself in right now.
The waste disposal business is very competitive. However, the relatively high barriers to entry prohibit new competitors from easily entering into the fray. There are 5 or 6 other waste disposal companies including Waste Management, Inc , Clean Harbors Inc., and Environmental Quality Company.
US Ecology, like some of its competitors, offers a relatively unique mix of services to both industry and government that distinguishes it from its competitors. It offers radioactive and hazardous waste removal, as well as recycling and other general waste removal services.
Finances and Management
The company has a strong balance sheet, with virtually no debt. In addition, it has added to its assets after its acquisition of Stablex in 2010. Its income and revenue have been decreasing since 2008, however profit margins have remained healthy. Cash flow has been steady, although it did expend a good deal of cash in the acquisition of Stablex.
The current P/E is fairly high at close to 20; however, the current dividend yield of over 4% will provide some cushion and limit downside. While this stock doesn’t scream value, I really like the dividend and think that this alone might justify pulling the trigger on this one.
With continued competition, I think this company is in good shape as the economy continues to emerge from recession. Cyclical companies like this will be some of the first to rebound as the economy improves.
Overall Grade: B+
Full Disclosure: I do not currently own this stock.
December 3, 2011Posted by on
Together, Home Depot and Lowe’s comprise a virtual duopoly in the home improvement retail industry. On the surface, there are many similarities between the two companies. But as you look deeper, there are some important differences that distinguish the two companies. Let’s first take a look at the similarities and then examine the differences.
November 28, 2011Posted by on
Apparently there were enough people out there who are willing to brave the lines and fend off other masochistic deal-crazed maniacs to get a good deal and give us a nice market rally today. Sales were significantly up from last year, especially online sales, which rose more than 25% from last year based on initial estimates.
Finally some good news on the homefront to temporarily shroud the constant barrage of doom and gloom coming from the ever-looming European debt crisis.
Keeping in mind the 3rd quarter GDP report that said that GDP growth was fueled mostly by credit, I can’t help but think that credit is also the force that is fueling the surge in Black Friday sales. This means two things: 1. banks are likely continuing to loosen lending standards following a prolonged period of tightening of epic proportions and 2. people are becoming more willing to spend on credit.
So, what should you do? This is definitely not a buying opportunity in my opinion. The European mess will continue to rear its head at inopportune moments, so my take is that this is a short-term opportunity to sell, especially if you own positions in stocks with exposure to the European debt crisis.
November 12, 2011Posted by on
Aside from being occupied by protesters and recovering from a bout of volatility due to the Greek crisis that has not yet been completely resolved in the minds of most investors, Wall Street continues to wrestle with volatility brought on by a new source – Italy.
All three major indexes saw gains of around 2% on Friday following the resignation of Italian prime minister Silvio Berlusconi and announcement of the passage of a measure related to austerity in the Italian Senate.
Overall, it was a mixed week as the Dow gained 1.4 percent and the S&P 500 gained 0.8 percent, while the Nasdaq slipped 0.3 percent. Financial stocks, which have been seen as most vulnerable to the European debt situation, performed the best following the good news from Europe.
As economic news continues to flow out of the wide open spigot of Europe, expect the market craziness to continue. It seems like the EU has been able to contain the issues of its problem children so far, but the unpredictability has been driving investors crazy and I expect it to continue to do so for at least the next couple of months as volatility reigns supreme.
A couple of other good blog posts about Italy and this week’s market activity:
It’s Not the Heat; It’s the Liquidity
Greek PM Sworn In; Italy Pushes through Austerity Law
November 6, 2011Posted by on
This is not a political blog. Having said that, I feel the need to express my views on two of the major political movements happening in the US and how they impact our political environment, which in turn impacts the economy, which in turn affects how your investments perform.
There is one thing that almost everyone can agree on – our political system is broken, and no one is really trying to fix it in a meaningful way. What is actually happening is that there are two groups yelling really loud trying to make a statement about what they think is wrong with the system. In the end, all that is boils down to is that one of these groups is right, and the other couldn’t be more wrong.
I agree with the tea party on one thing. The federal government needs to work on balancing its budget. I disagree with them on just about everything else. To explain why I disagree with them on everything else, I want to take apart their major claims (stated or unstated), and explain why their influence has been significantly detrimental to the U.S. taking any meaningful steps toward economic recovery.
Tea Party Claim #1: Government is Bad and Should Be Eliminated (or at least most of it).
My Claim: Government is not perfect. In fact, it is far from perfect. Institutions such as government that don’t face competition are by their nature inefficient to a certain degree.
In fact, in a perfect world, I would prefer to pay no taxes and hope that everyone could live in a world filled with peace and harmony where private enterprise formed alliances to build roads and bridges out of mutual interest and allowed everyone to use them free of charge. I would love to live in a world where we didn’t need policemen because everyone was so busy with running their own business that they didn’t have time to get in trouble with the law. I would love to live in a world where there are no poor because anyone who was left behind in this altruistic entrepreneurial paradise was taken into the homes of the well-to-do and served caviar off the very same plates from which their wealthy hosts eat until they were able to get back on their feet and start their very own successful small business.
The problem is that you and I don’t live in this dream world. We live in reality. Reality means crime. Reality means poverty. Reality means corporate profits wax and wane, thereby making infrastructure construction and maintenance solely the domain of government. Reality means many other countries around the world subsidize industry at the federal level to gain strategic advantages over other countries. To the tea partier, this may sound Marxist. It’s not. It’s reality.
Taxes are too high
My Claim: Taxes are too low Yes, I said it. The reality is that I hate taxes. So should you. I work hard for my money, and hope you do too. But the problem is that, although I hate taxes, during virtually every recession in recent history, the policy of the US government has always been to spend our way out of it. It’s very simple. If you don’t put people back to work, confidence stays low and as long as confidence is low both people and corporations don’t want to spend money. To put people back to work and inject confidence back into the economy, you need to raise employment, which requires spending money.
The real question is what is the best way to do this? Cutting taxes even more from historically low levels is, in my opinion, not an option. Nor should it be for any other rational person. In a time when the top 1% of the population owns 40% of the country’s wealth, this one is a no-brainer. Forget all the old lie of trickle-down economics. The wealthy invest their money in their businesses, luxury items, stocks, and bonds. When they do this, thier money is spread all over the world via the international corporations they invest in, which in then return most of their money to their highest-paid employees. It all sounds so very Marxist, but again, we are talking about reality and not fantasy.
In my opinion, the rational answer is to raise taxes on the extremely wealthy to their former levels during the economically prosperous 90’s and redirect that income to invest (see I told you this would be relevant to investing, didn’t I?) in our economic future. Build roads, fix bridges, build a viable national mass-transit rail system, put teachers back to work and reduce class sizes, help every high school student who wants to college by expanding the federal student loan program. Do the things that will help us emerge from this recession and emerge as a stronger nation.
Tea Party Claim #3: “Tea Party” is a good name for a political movement.
My Claim: It’s not. It’s the opposite of good. I would never go to a tea party. In fact, I would argue it is a textbook example of an oxymoron. I don’t trust people who go to tea parties. They are either pretentious or British, which ironically of course was the group of people who we were trying to avoid paying taxes to in the first place back in the late 1700’s.
So, to summarize…the tea party is like a petulant child that wants to have his cake and eat it too. It wants to both lower taxes and balance the budget. This is impossible. And yes, it is that simple.
Enough about the Tea Party. My next post will be about Occupy Wall Street Movement and why some of their claims make much more sense than the Tea Party. Stay tuned…
November 3, 2011Posted by on
The next stock that I will analyze, Allegheny Technologies, is one that I own in my portfolio. ATI is a diversified producer of specialty metals, predominantly nickel-based alloys, titanium-based alloys, and steel-based alloys. Its metals are used in a variety of specialized applications in a variety of industries, including oil and gas, chemical process industry, electrical energy, automotive, food equipment and appliances, machine and cutting tools, construction and mining, aerospace and defense, and electronics, communication equipment and computers. This might sound boring on the surface (and it does to me), but this is a stock that I really like.
ATI is one of the larger and more diversified companies in its industry. Its operations are focused on being able to efficiently produce specialized alloyed for very specific applications and needs. Many of its competitors are overseas, and do not have the same flexibility to meet the needs of such a wide variety of industries.
By its nature, Allegheny Tech is a cyclical stock. This means that as the economy revs up, so does ATI. The flipside is that when the economy hits a rough point, ATI’s stock usually follows suit. That said, revenue took a major hit in 2009 (around a 40% decrease compared to 2008) when the economy was in the toilet, but has bounced back to healthier levels since then as the economy has risen out of said toilet.
Allegheny Tech has a seasoned and stable management team that has successfully steered the company to success over the past 10 years. Since its business is seasonal by nature, its stock was overvalued when the economy was doing well in 2006 and 2007, but took a tumble when the economy turned sour. This is not in my opinion a result of bad management, but simply market forces putting too much of a premium on the company’s growth at the time.
Management has created partnerships with a diversified array of industries, so as to not become completely reliant on any one industry. Additionally, it has manufacturing and distribution facilities all over the world. Therefore, although it isn’t necessarily resistant to economic cycles, its global footprint and diverse revenue sources should in my opinion allow ATI the flexibility to withstand even the worst economic conditions.
The current value proposition is murky. I think that ATI is currently being treated as a growth stock. Its stock price swings wildly based on market and company news. Its trailing PE ratio based on last year’s earnings is around 26, but its forward PE is closer to a much more palatable 13. Its margins are improving, and ROE and ROA are still catching up as its revenues and earnings continue ramp up while the economy emerges from recession.
Overall Grade: B+. While I like Allegheny Technology’s competitive position and management, I think that both the company’s finances and its current value proposition are less than ideal and will hold off on buying any more of the stock until the value position improves.
Full Disclosure: I currently own shares in ATI.
November 1, 2011Posted by on
Greek debt is going bad, then a bailout agreement is reached, and now news that the bailout agreement might be rejected by the Greek people? Have the Greeks lost their minds? What is really going on in Europe?
These are just a few of the many questions you may have about the state of affairs in Europe. Since admittedly this is not my area of expertise, I thought I would post links to a few interesting blog posts that I found on the topic.
October 30, 2011Posted by on
Weather forecasters are warning of another uncommonly cold and snowy winter due to the la nina effect. While they aren’t quite expecting last year’s brutal cold and barrage of storms to repeat itself this year, they still say that certain areas of the country will be hard-hit, especially the Midwest and Great Lakes.
October 27, 2011Posted by on
Stocks zoomed upward today following some long-awaited good news. GDP grew at an annualized rate of 2.5% during the third quarter of 2011, and we finally heard some good news from Europe about the European debt crisis. This double dose of good news was exactly the prescription that the stock market needed today to break out.