J.W. Jones: The hallmark of a professional option trader is the ability to use a wide variety of trade structures in order to exploit opportunities to profit from specific situations the market presents. One of the opportunities routinely presented multiple times yearly is the impending release of earnings. Read more…
byÂ Chris Georgopoulos, SmartStops contributor
Reading financial articles can be, letâ€™s say boring at times. This article we are going to try to spice it up, letâ€™s play a game of role playing.Â Famed speculator, Jesse Livermore once was quotedâ€¦
â€œIf I were walking down a railroad track and saw an express train coming at me at 60 miles an hours.Â I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track, if I desired.â€ â€“Reminiscences of a Stock Operator, Edwin Lefevre. Â
For this game letâ€™s rename the train, Best Buy stock (BBY: NYSE), the â€œâ€œIâ€ in walking down the trackâ€ we can call the shareholders of Best Buy and the speed of the train, the issues.Â The game is scored by the costs of each decision. Whoever has the best return wins!
It is the end of summer 2005, Best Buy is approaching $80/share and the future couldnâ€™t be brighter. The tech bubble burst is ancient history, the housing market is hot, interest rates are low and every house in America is an ATM for consumer spending.Â You are on the railroad trackâ€¦there isnâ€™t a train in sight!Â
It is now the beginning of fall 2008; Best Buy has fallen to the mid $40s in defiance of the market making new highs and there are rumors of problems in Mortgage backed securities. Â (Note: Â Sidestepping risk is now made possible with the release of SmartStops.netÂ which if had been available would have had you out in the $70 range in 2005).Â Your friend has made a fortune flipping speculative properties in south Florida and Las Vegas, but you see he is worried. He still has five houses on the market with almost no personal incomeâ€¦ (You know how this story ends) Â You can hear a train coming and it sounds like itâ€™s really moving!
Only a few months later, Best Buy is trading under $18/share! Â Â The rumors are true; the housing market has crushed the stock market. It seems nobody thought housing prices would ever go down and the economy is on the verge of total failure. You can now see the train, its moving fast and finally you start to consider if you should actually get off the tracks.
(SmartStops.netÂ Â issued two Long-Term exit signals in 2008 the first January 4, 2008 at $46.80 and on September 16, 2008 at $40.68. Thatâ€™s aÂ $22 per share savings by sidestepping risk.)
It is two years later; Best Buy is trading back in the mid $40s. The US Government stepped in and back-stopped the entire financial system, confidence has been temporarily restored. The train has slowed to almost a complete stop; you are relieved and continue your stroll. Â
(SmartStops.netÂ Â issued two Short-Term reentry triggers starting on December 17, 2008 at $28.88 and on March 17, 2009 at $30.89. Stock protection of $15/share.)
Its September 13th 2011, Best Buy has once again been cut in half and is trading around $23/share. They have just announced another disappointing earnings release.Â Best Buy unlike its failed competitor Circuit city, is still profitable and is forecasted to grow, (Yahoo finance has 5 year growth estimates just over 9%) but their business model has been questioned. Online rivals such as Amazon.com (AMZN: NASDAQ), Overstock.com (OSTK: NASDAQ) andEBAY.com (EBAY: NASDAQ) have taken away market share and lowered margins. These questions are shown in the technical breakdown of the stock which has been in a downtrend since April of 2010 and is now approaching new 52 week lows. Â The train has started moving again, at top speed! Itâ€™s so close you know what color the eyes of the engineer are!
SmartStops.net Â Â has issued multiple risk triggers in the past year, with the first one on December 14 2010 at $40.19 thus offering protection of $16 per share if the first one was acted upon.
It's one of the first rules of investing: find stocks with strong earnings growth and reasonable valuations. We're even taught a simple formula: look for stocks that have a price-to-earnings (P/E) ratio that is lower than the earnings growth rate, or, a PEG ratio (P/E divided by the earnings growth rate) lower than 1.0.
Yet the converse is also true. Stocks with a PEG ratio over 1.0 can be overvalued. It happens without many investors even noticing. A stock rises and rises until its value becomes disconnected from the reality on the ground. A high PEG ratio can limit further upside and make a stock especially ripe for a pullback in down markets. On the flip side, it can also make for a nice stock to short.
Here's a look at three stocks with alarmingly high PEG ratios. Each of the stocks on this table trade at least 50% above fair value when the PEG ratio test is applied.
Salesforce.com (Nasdaq: CRM)
This provider of contact relationship software has seen its shares fall roughly 10% since I profiled it two months ago. Yet shares still look really expensive. If you assume that the company can boost profits by 20% every year, it would take eight years for the P/E ratio to fall down to the earnings growth rate — assuming the stock went nowhere in that time.
Salesforce's bulls are counting on the company's current initiatives to help set the stage for accelerating growth. But they're ignoring “the laws of big-ness.” As a company gets larger, it gets harder and harder to maintain aggressive growth rates. Just ask eBay (Nasdaq: EBAY) or Wal-Mart (NYSE: WMT). Years of torrid growth have been replaced by ever-slowing growth for those firms. That may not happen for Salesforce.com in 2011 or 2012, but counting on nearly a decade of very strong growth yet to come seems foolhardy.
Mary Meeker, known as the “Queen of the Net” during the heady 1990s, is back. Her latest prediction is that the mobile Internet will be a huge wealth generator. She even thinks it will surpass the Internet and that mobile commerce will overtake traditional e-commerce.
Over the recent holiday period, the e-commerce sector witnessed exceptional growth as many consumers opted to shop on-line, as opposed via the traditional brick and mortar storefronts, paving the path to opportunity in the near future for the sector.Â
According to a recent article in Barronâ€™s, U.S. e-commerce spending accelerated 13% during the holiday season, pushing total e-commerce growth in 2010 to 10% year-over-year.Â Furthermore, the article also contends that US e-commerce is expected to witness another 10% year-over-year growth in 2011, pushing spending to over $150 billion for the year.Â
Additional support to e-commerce should also come from increased consumer spending which is likely to be driven by an improving US economy and governmental decisions which is expected to lead to increased disposable income.Â The US economy is showing signs of growth indicated by the recent rise in the Institute for Supply Managementâ€™s non-factory index, which constitutes nearly 90 percent of the economy, to a 57.1, signaling growth, and also indicated that measures of new orders and business activity increased to their highest levels since August 2005.Â Further support in the US economy came from a report today from ADP Employer Services indicating that companies increased payrolls in December by 297,000, the most since records began in 2001.Â These positive trends in the US economy are likely to boost consumer confidence and hence consumer spending.Â
In regards to increased disposable income for consumers, the extension of the Bush-era tax cuts as well as the trimming of payroll taxes are both expected to increase disposable income and hence give consumers the ability to increase spending and with current trends, companies that are involved in e-commerce should bode well.
Some ETFs to play the e-commerce trend include:
- Internet HOLDRs (HHH), which allocates a whopping 42.13% to Amazon (AMZN), the current leader in e-commerce and 18.45% to e-Bay (EBAY), another company that is heavily involved in the space.
- First Trust Dow Jones Internet Index (FDN), which boasts Amazon, eBay and Priceline (PCLN) in its top holdings.
- PowerShares NASDAQ Internet (PNQI), which similar to the HHH and FDN boasts as its top holding and also includes Netflix (NFLX) in its top holdings.
- Retail HOLDRs (RTH), which is a diversified play on the retail sector and allocates 11.88% of its assets to Amazon.
Disclosure: No Positions
Read more here:
4 ETFs To Play Surge In E-Commerce
HERE IS YOUR FOOTER
Although it is hard to say that the US economy is in a sustainable recovery, there are plenty of signs showing that economic growth is accelerating, paving the path to opportunity for the Retail HOLDRs (RTH), the PowerShares Dynamic Retail (PMR) and the First Trust Dow Jones Internet Index (FDN).
The most promising and upbeat news recently came from a decline in new applications for jobless claims in the week ending November 20, 2010.Â The 407,000 applications were far lower than expected and is aiding in easing concerns about job security and income growth.Â This can further be supported by an increase in personal spending, which jumped to 0.4% in October, marking the fourth consecutive month of increased consumer spending.Â
As for income growth, wages and salaries witnessed there largest jump in five months, increasing 0.6% while personal income jumped 0.5% in October.Â This, in conjunction with non-existent inflation, is expected to increase purchasing power which is resulting in improved consumer sentiment.Â According to the University of Michigan/Reuters consumer sentiment index increased to a 71.6 from 67.7, the highest level in nearly 20 months.Â
To further support the notion that the US economy is in growth mode, many suggest that, aggregately, Americans have increased their credit-card debt for the first time in nearly two-years in such a manner that is consistent with increases in household income.Â The consumer is such a critical factor in US economic growth because consumer spending constitutes nearly 70% of US GDP.
As mentioned above, three ETFs influenced by accelerated economic growth include:
- Retail HOLDRs (RTH), which allocates a significant portion of its assets to Wal-Mart (WMT), Amazon (AMZN) and Target (TGT).
- PowerShares Dynamic Retail (PMR), which allocates a significant portion of its assets to Bed Bath & Beyond (BBBY), Limited Brands (LTD) and Costco Wholesale Corp. (COST).
- First Trust Dow Jones Internet Index (FDN), which boasts Amazon, eBay (EBAY) and Priceline (PCLN) as top holdings, all internet-based companies that are highly correlated with increased consumer spending.
Disclosure: No Positions
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Three ETFs Influenced By Accelerated Economic Growth
HERE IS YOUR FOOTER
I don't want to bury the lead, so let me start with my prediction: the economy will add over 2 million jobs in the next 12 months.
But before we get to that, let's add some context.
To say that the job market is weak would be like saying the Saw horror movie franchise is a little gory. In fact, I'm not sure which has seen more bloodletting. Last month, The Los Angeles Times reported that 2.3 million California workers have been axed — and that's just in the Golden State.
Nationwide, the unemployment rate has remained at elevated levels above 9.5% for 15 consecutive months, the longest such drought on record.
The last time we saw a “jobless recovery” of this magnitude was in the aftermath of September 11, 2001. According to Challenger, Gray & Christmas, more than 2.5 million jobs were lost in the 18 months following the terror attacks. At that point, it seemed as if the labor market would never get in gear.
But by January 2004, payrolls around the country were already expanding at a rate of 150,000 per month. And before long, the severe labor slump was over. We've seen this same scenario play out many times over the decades.
In May 1975, in the wake of a painful recession, unemployment climbed above 9%. But then looser monetary policy (the Fed Funds rate was slashed from 12.9% to 5.2%) brought 10 million jobs in the next three years. The same thing happened in December 1982, when unemployment peaked at 10.8% before President Reagan's tax cuts kicked in and the ensuing expansion created 10 million jobs by the end of 1985.
Interestingly, the same two catalysts that triggered those previous turnarounds will both soon be in place. In this case, money is nearly free and could get even cheaper thanks to the Fed's second round of Quantitative Easing, known as QE2. [For more, see our primer on QE2 at our sister site, InvestingAnswers.com] And I strongly suspect we'll see an extension of the Bush tax cuts in the next 60 days.
Boom and bust. Bust and boom. Even my kindergarten son could tell you what's coming next in the cycle.
Given the deteriorating balance sheets of state and local governments, I think the public sector will continue to shed jobs. [For more on that, read David Sterman's excellent analysis here.] But the private sector is a different story.
When I first began writing this article a few days ago, I was emboldened to see the ADP report showing 43,000 jobs created last month (double what economists were expecting). Now, Friday's official tally from the Labor Department revealed that the private sector actually added 159,000 positions in October — while the figures from the prior two months were revised upward by 103,000.
Simply put, I think we've reached an inflection point. Intel's (Nasdaq: INTC) recently announced plan to spend $8 billion on new manufacturing facilities in Arizona and Oregon (which will employ up to 8,000 construction workers) could be a sign of things to come.
We still have a long road ahead to recoup the eight million jobs lost in the past two years, but it's a step in the right direction. And as we all know, the market is a forward-looking mechanism. So if you want to profit from a reversal, you need to act before concrete signs of improvement are blindingly obvious to everyone else.
If I'm right, and we do see sustained job growth of 200,000-plus each month by next summer, then there will be many beneficiaries, such as payroll processor Paychex (Nasdaq: PAYX) and Quest Diagnostics (NYSE: DGX), which handles drug screens for employment candidates.
But the two stocks below might have the most to gain.
1. Monster Worldwide (NYSE: MWW) — Anyone who grew up in the digital age is probably familiar with the Monster brand. The firm's well-known website is a popular gathering place that connects job seekers with potential employers.
Just as eBay (Nasdaq: EBAY) brings buyers and sellers together, Monster appeals to job hunters because of the abundance of postings, and to recruiters because the network reaches a pool of 84 million potential candidates. The company's recent acquisition of Yahoo! HotJobs will only widen the firm's footprint.
Last quarter, Monster's bookings jumped +26% to $235 million. And management is expecting that rate to be maintained throughout 2011. That uptick in orders not only means stronger revenue on the horizon, but it's a clear signal that employers are ramping up hiring.
The stock has had a nice run lately, but would have to climb another +200% from here to reach its former highs near $60.
2. Robert Half International (NYSE: RHI) — Robert Half is one of the world's largest staffing agencies and consulting firms. The firm helps fill vacancies in the accounting, finance and legal fields, billing clients for hours worked and then disbursing a portion of the proceeds to its workers — pocketing the difference.
Last year, the company found jobs for 157,000 temp workers — and that was in the teeth of a recession.
Whenever large companies sense an upturn (but don't want to pay the full salaries and benefits of new full-time positions), they often start by bringing in temporary help. And temp agencies have been growing briskly for months, adding 35,000 new workers in October.
This bullish leading indicator points to an improvement in the overall labor market, and Robert Half International will be one of the first to feel the winds change direction. Sales and profits plunged -34% and -85%, respectively, last year, but I suspect we'll see sharp improvements in the next few quarters.
Keep in mind, the last time we were on the cusp of a labor recovery, this stock surged +76% between April 2003 and January 2004.
Action to Take –> I see both stocks outpacing the S&P 500 next year. But don't wait too long — as I stated earlier, I already see upbeat signs underneath the dreary headlines.
Moving into a beleaguered sector where many other investors are fleeing takes nerves of steel — but bold predictions like this tend to reward investors the most.
– Nathan Slaughter
Nathan Slaughter's previous experience includes
Suddenly, using hefty cash balances to buy back stock or boost dividends is all the rage in the sector, and the chip giant wants in on the action. I took a look at this trend last week and since it shows no signs of abating, it's time to look at all the cash-rich tech companies to see how a stock buyback or a dividend move would impact their stock. [See: Why the Cheap Debt Frenzy is Great for Stocks]
I ran a screen to find the largest tech stocks that have at least $1 billion in net cash. I then also looked at their cash flow levels, and by combining cash and cash flow, looked to see how much they represented as a percentage of a company's market value. (Did you know that nearly half of Yahoo!'s (Nasdaq: YHOO) market value is accounted for in cash and cash flow?)
By using this as a yardstick, companies could theoretically reduce their share count by that percentage. For example, eBay (Nasdaq: EBAY) could afford to buy back 31% of its stock, and then simply let the cash balance rebound as future cash flow pours in.
Lastly, I was curious about potential dividend yields. In the past, tech companies usually loathed dividends because they were a sign that management no longer had compelling uses for the company's cash, which meant that growth opportunities were lacking. By now, we all know that the days of high-growth have ended (except for Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and a few others).
A few companies offer paltry dividends with meager yields (except for Intel's more impressive 3.4% payout), but all of these companies could offer fairly hefty dividends simply based on cash flow and leave their hefty cash balances intact. Symantec (Nasdaq: SYMC), Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ) could offer dividend yields in excess of 8%. More likely, these companies would seek to have lower payout ratios, so I looked at what kind of dividends could be offered up if these companies paid out 60% of their annual cash flow in dividends. For most of these companies, that would translate into a dividend yield in the 4% to 5% range. Not bad, but not overly impressive either.
With coming tax changes that hike the capital gains rate on dividends, companies may look to go the buyback route instead. [Read: What Could Happen to Your Favorite Income Spots]
Looking at the column “cash flow as % of market cap,” these companies could look to use all of their cash flow to buy back stock, leave the cash balance intact, and in the cases of Dell, HP and several others, could reduce the share count by more than 10% annually. That's just what HP is doing with its recently-announced $10 billion buyback. Microsoft (Nasdaq: MSFT) is rumored to have similar plans afoot.
What are the implications of a 10% annual share buyback? Well, at a minimum, it boosts earnings per share (EPS) by a commensurate amount. So a company that is only growing profits by +5% would see per share profits grow by +15%.
Action to Take –> Although firms like Dell and Yahoo have ample financial firepower relative to their market value, I'm especially intrigued by Symantec, which is now the largest standalone software security vendor, now that Intel has agreed to acquire McAfee (NYSE: MFE). The company also possesses a hefty data storage division, thanks to a 2005 acquisition of Veritas.
Symantec's shares now trade for half the value that they traded when that deal was announced, because the company has never been able to derive major synergies from the two divisions. But on a standalone basis, each of these businesses would hold real value to a suitor, and Symantec should look to shed one and focus on the other. Analysts seem to focus on a potential full buyout of the company. Jefferies thinks shares would fetch $19 or $20 if that happens, while UBS recently boosted its rating on Symantec to “buy” with a price target of $20 under the assumption that Symantec is “in play.” But I think a sale of one part of the business if more likely.
Even without any moves, Symantec is still quite undervalued, trading at 10 times next year's profits, and management should seize on that. It could buy back nearly 15% of its stock every year simply out of cash flow. Sales growth is expected to be flat in the current fiscal year, but based on very recent trends, are expected to rise more than +5% next year. That should fuel slightly higher bottom-line growth, and when coupled with a large buyback, could again make Symantec a real EPS growth story.
– David Sterman
David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…
This article originally appeared on StreetAuthority
Author: David Sterman
This Sector's Mountain of Cash Could Soon Line Your Pocket
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This Sector’s Mountain of Cash Could Soon Line Your Pocket