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In early 2008, falling home prices and a declining stock market caused consumer spending to plummet. This lasted for about 18 months. But soon consumers started to realize that the economy wasn't going to remain in freefall forever. Today, the retailing industry has recovered quickly, is on much more solid footing, and certain players are set for a big move forward in terms of sales and earnings.
In 2011, higher food, fuel and commodity costs are keeping consumers focused on more basic necessities, including food, gas and clothing. But the fact that demand has recovered from the recession a couple of years ago means customers are again paying up for more fashionable and pricey merchandise. Near term, gas prices have already moderated recently, and the consumer spending climate is likely to continue to improve in the next couple of years along with the overall economy.
With that, below are three retailers that offer a decent combination of fashionable merchandise but also focus on selling products that consumers will need no matter the economic climate. Reasonable valuations combined with growth potential and a growing economy suggests big upside potential for investors within the next one to two years.
Business: Off-mall department store operator
Like all retailers, Kohl's (NYSE: KSS) was adversely affected by the plummet in consumer spending that occurred during the credit crisis. However, sales dipped only slightly in 2008, falling less than 1% to $16.4 billion. Profits fell a more severe 14.7% to $885 million, or $2.89 per diluted share, but have come roaring back and hit $1.1 billion, or $3.65 per diluted share, in 2010. Growth should be very strong this year. Analysts project $4.39 in earnings for year-over-year growth of almost 20%.
Kohl's has it all as a retailer. Its focus on basic apparel fashion is a major reason it did well during the financial crisis. It also continues to open new stores across the United States, which now total about 1,100. It also does this profitably, with net margins of 6.1%, impressive for a retailer. Kohl's also generates strong operating cash flow that leaves enough to spend on maintaining or opening stores and plenty left over to buy back stock. The company even recently initiated a dividend, which amounts to a current yield of 1.8%. Finally, its valuation is appealingly low, with a forward price-to-earnings (P/E) multiple of 12.3.
Business: Big-box general retailer
Target (NYSE: TGT) also did well during the credit crisis on a sales basis, growing by 6.5% to $63.4 billion in 2008 from the previous year. A focus on general merchandise helped, but a more fashionable attitude toward its products did not. As a result, profits dipped a rather dramatic 14.1% to $2.86 per share but have come back in strong fashion, rising to almost $3 billion, or $4 per share last year. Analysts project a further recovery this year with earnings of $4.17 for modest year-over-year growth of 4.3%.
For reasons I detailed in a past article, Target's growth prospects recently perked up even further. In January, it announced ambitious growth plans in Canada and plans to open 100-150 stores in that country by 2014. Target has also acquired the leasehold interest for a total of 220 store sites that will allow it to grow the store base by more than 12%. The company also plans to grow quickly in Mexico and Latin America.
Domestically, Target is remodeling its store base to add more grocery products in order to bring customers in more often and steal market share from archrival Wal-Mart (NYSE: WMT) and local grocery store chains. At a forward P/E below 12, I see a rally of at least 50%, which is based off a P/E of 15 and $5 per share in potential earnings within three years.
This week, the markets are fidgety, making twists and turns. Not unexpected for all the chaos going on throughout the world. And every investor without access to top-shelf research and timely recommendations is struggling to decide: What to buy? What to sell?
Safe Money subscribers don’t have those problems …
You see, they receive crystal-clear views of the financial landscape and how it will impact their financial future. Plus they get specific guidance on “what,” and “when,” and “how” to buy. And since the markets can turn on a dime, we’re always ready to send a Flash Alert to protect and grow their wealth.
If you’re not on board yet, we hope you’ll take a look at some of the insights we shared with subscribers this week.
We’re sorry we can’t give you the investments’ specific names … that wouldn’t be fair to our loyal subscribers! But we think you’ll get a good sense of the value Safe Money subscribers receive, whether the market is up or down.
Dear Safe Money Subscriber,
Just a few days ago, I recommended you bag partial profits on two positions. My tracking indicates you bagged about 9.82% on the “utility fund,” assuming you bought on my original recommendation in October 2010. You should have also pocketed about 16.13% on half your “nutrition company” shares, assuming you bought them on my first recommendation last November.
Now it’s time to take the scalpel out again! Many of my fundamental and technical indicators suggest the market’s underlying health is weakening. The news on the economy continues to get worse, too. We just learned today that housing starts plunged almost 11% in April, while building permits slumped anew. That came on the heels of news that the service sector is weakening, while jobless claims are rising.
I don’t think it’s time to sell everything and run for the hills yet. But I do believe it’s time you reduce your stock exposure further. So at the earliest possible opportunity, I recommend you …
* Bag gains on half your shares of the “food company!” You should have open profits of more than 7% since early April, when I first recommended purchasing this food company. Hold your remaining shares.
* Sell your entire position in the “home appliance manufacturer” at the market! You’ll take a very small loss of about 1%. But I’m concerned that the lousy housing market news we keep getting will continue to weigh on this appliance company. Yes, it’s cheap … but it could get even cheaper in a weak market.
Hold your remaining positions … but definitely stay alert. I may have more additional recommendations in the weeks ahead.
Until next time,
Read more here:
Cut Your Exposure as Stock Markets Weaken!
When analysts received word on March 30 that Medicare would cover Dendreon's (Nasdaq: DNDN) pricey drug Provenge, used to treat prostate cancer, shares of the drug maker steadily rose from $35 to $43 in just one month. Many biotech watchers had expected the move and set themselves up for a nice and quick gain. Some analysts even suspect Dendreon will eventually power into the $60s, though profit-taking has pushed the stock back down to $38 for now.
Here's the charm of health care: the Food and Drug Administration (FDA) establishes clear dates for when it will approve or reject a drug or a medical device. If you have a clear sense of the odds and can stomach a high degree of risk, then investing ahead of such dates can be wise — and profitable.
Friday's employment report has created an even hazier backdrop for stocks. Recent economic data showed an economy starting to cool, but with 244,000 jobs created in April — the best showing in 11 months — this expansion still may have legs after all. The key distinction: the economy's areas of support are not what you would have expected a few months ago.
In recent weeks and months, investors have been trying to assess stocks in the context of a sharp spike in commodities — from oil to silver to wheat. Only recently, we've seen how the massive flooding in the Midwest is leading to forecasts of sharply falling farm output and eventually, higher food prices. Consumers didn't need to hear that while gasoline prices were eating a hole in their pocketbooks.
Despite that, stocks were able to rally through much of April, thanks to a declining dollar that was boosting prospects for U.S. blue chips. In effect, the domestic economic picture looked troubling, while the rest of the world promised to provide at least a decent tailwind.
That scenario now looks backward, as former global growth pillars are starting to wobble. Efforts to slow the Chinese economy may be taking effect, as a range of data points in that all-important economy imply that growth in 2011 may move down to the mid single-digits from a seemingly never-ending run of nearly double-digit GDP growth. Brazil is trying to curb inflation, efforts of which have not always yielded soft landings. And in just a few trading sessions, high-flying commodities such as silver and oil have sharply pulled back while the dollar has begun to rebound. Many are suddenly shifting their sights back to the United States as an engine of growth. Friday's jobs report simply underscores that notion.
GM's (NYSE: GM) first-quarter results help tell the story. The automaker earned $908 million from its foreign operations a year ago. That figure dropped to $480 million in the recent first quarter. The company's chief financial officer, Daniel Ammann, told investors that GM's growth rate in China “is at 10% to 15%, down from the 40% to 50% we've been seeing.” Profits also fell sharply in South America from a year ago and Europe remains unprofitable. Here in the United States, GM is doing quite well: Earnings (before interest and taxes) at the North American division were about $1.3 billion, $100 million higher than a year ago. Merrill Lynch thinks North American earnings before interest and taxes will average around $2 billion for each of the next three quarters.
What it means
For investors, the question is whether today's jobs report (and the subsequent rally after four straight down sessions) means it's time to keep fully-exposed to the market. The answer is a qualified yes (I never like to be fully exposed, as it's nice to have cash set aside for major pullbacks that create value). Yet even as it pays to stay invested, the investing themes are now changing.
These changes include the following:
1. Airline stocks could really move into favor if oil keeps pulling back and U.S. job creation remains respectable. Oil has quickly moved from $114 last week to just under $100 late this week. It's no coincidence that the Amex Airline Index (AMEX: XAL) has surged 10% since April 19. [My colleague Ryan Fuhrmann profiled airlines a month ago.]
In a rising market, bad news for a company can be shrugged off as investors focus on the positives. But in recent weeks, investors have been less forgiving, meting out punishment to any company that delivers bad news. Let's take a look at all of the companies that have lost at least 25% of their value in the past month (and that have at least $200 million in market value) to see which ones might bounce back nicely when investors change their mood.
If you're seeking worthy biotech stocks, don't let the industry's high price-to-earnings (P/E) ratio of 28 deter you. Though generally expensive, the biotech sector still has great values.
In fact, there are biotech stocks with P/E ratios less than half the industry average. I foresee some of these stocks delivering absolute returns of up to 80% in the next three to five years. That's roughly 12% to 22% annually through 2016.
Here are two stocks which currently fit that description.
Gilead Sciences (NDQ: GILD) is a large cap that develops drug treatments for HIV, the virus that causes AIDS. It's trading at only 12 times earnings — just 43% of the industry average — because key HIV drug patents will begin expiring. But that's not for five years, which gives the firm time to address the problem — a process that's already underway. Meanwhile, earnings are expected to grow an average of 11% to 12% annually.
Future depends on HIV meds
Gilead's patent concerns are related to Truvada, an HIV drug that accounts for a large portion of revenue (33% in 2010). Truvada is actually a combination of two other HIV drugs made by Gilead — Emtriva and Viread — whose patents expire in 2016 and 2017, respectively. While years off, the expirations could severely hinder long-term profitability by allowing rivals to introduce competing products.
However, there's a new “quad” medication in the works that combines four of Gilead's HIV drugs. The quad drug's efficacy hasn't been conclusively proven yet, so the Phase III clinical trial results expected late this year will provide crucial data.
Favorable findings would likely push Gilead's stock up immediately even though the quad drug wouldn't be on the market before late 2012. Because the HIV epidemic keeps growing, strong demand is certain as soon as the drug is available — provided it does well in the Phase III trial. If it does, then the stock could pop 5% to 10% right off the bat followed by additional gains of 50% to 70% in the next several years.
A lot rides on the new drug, but Gilead also has other meaningful revenue sources like royalties on the influenza drug Tamiflu, a line of hepatitis B therapies and new heart-disease drugs. The company is also looking for acquisitions to enhance the heart disease and hepatitis B franchises, and reduce reliance on HIV medications.
Amgen (NDQ: AMGN), also a large-cap biotech company, has three key drug types: anemia medications for patients with chronic kidney failure, infection fighters for chemotherapy recipients and autoimmune therapies for diseases like rheumatoid arthritis and psoriasis. This stock trades at only 11 times earnings, a mere 39% of the industry average.
Why so cheap?
Two of the firm's blockbuster anemia drugs, Epogen and Aranesp, were found to have safety issues. On Feb. 16, 2010, the Food and Drug Administration (FDA) confirmed reports beginning in 2007 that both drugs can increase tumor growth and shorten survival in cancer patients at higher doses. They can also raise the risk of heart attack, heart failure, stroke and blood clots in non-cancer patients.
As a result, shares have been trading in a fairly narrow range despite rising profits and measures to address the risks of the drugs. It's a value opportunity you don't see that often, especially three years into a bull market.
Controlling risk through REMS
To avoid further safety issues with Epogen and Aranesp, Amgen has developed an FDA-mandated Risk Evaluation and Mitigation Strategy (REMS). That simply means patients treated with Epogen or Aranesp have to get a printed guide detailing all drug risks and benefits. Amgen must also ensure the drugs are only prescribed by hospitals and health care providers who've completed an FDA-mandated training program.
Despite the Epogen and Aranesp headaches or perhaps because of them, Amgen's stock has 80% upside potential through 2016. It's very much a case of the stock price catching up with prior earnings, which grew an average of nearly 11% annually during the past four years even as the stock went virtually nowhere.
Importantly, earnings growth for Amgen is expected to remain solid, averaging an estimated 7% to 8% annually in the coming three to five years on existing product sales and new acquisitions. In January, for example, Amgen bought the Massachusetts-based biotech company BioVex for $1 billion, thus adding the promising cancer vaccine OncoVex to its product pipeline.
The list of current blockbusters includes five drugs, each with annual sales of more than $1 billion. Two examples are Neulasta and Neupogen, drugs used to prevent infection in chemotherapy patients. Prolia, an osteoporosis drug approved by the FDA on June 2, 2010, could easily join that list.
And while safety issues have hurt sales of Epogen and Aranesp, both are still bringing in big bucks — about $2.5 billion each last year. Epogen faces growing competition from generic alternatives in Europe though, and its U.S. patent expires in 2013. Aranesp's U.S. patent expires in 2014.
Action to Take –> Of the two stocks I've described, Gilead is obviously more speculative because its future depends so much on the new quad drug it's developing. The drug has shown lots of promise and could be highly profitable if proven effective.
Previous study findings have been mixed, though. So it's up to the Phase III trial to provide the definitive results that either help propel the stock to large gains or prompt the market to mete out some more severe punishment.
I'd wait for those results and buy Gilead stock if the findings are positive. Since key patents begin expiring in five years, I'd also evaluate the stock regularly to see if it's worth holding beyond the intermediate term.
Amgen seems a surer bet because of its impressive list of blockbuster drugs and more varied product pipeline. I suggest buying it now before the market realizes it overreacted to the troubles with Epogen and Aranesp.
– Tim Begany
P.S. — I don't know if you're aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America's electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…
Read more here:
2 Cheap Biotechs With up to 80% Upside
It can pay to keep an eye on companies that have been public for only a few quarters. Many of them stumble out of the gate and get lost in the crowd. By the time these companies start to get back on track, you may be one of the few investors still looking at them. I specifically focus on companies that have been public for about a year. That's just enough time to iron out the kinks.
The table below highlights seven companies that went public in the second quarter of 2010, all of which are now trading below their offering price (with one exception, which I'll soon explain). For this exercise I'm looking only at companies with market capitalizations larger than $150 million, because companies with market values below that level may toil in anonymity for a long while to come. Of the group, several stand out as clear rebound candidates.
â€œHigh oil prices start to apply the brake on drivers,â€ says a headline in The Financial Times.
As predicted, the fedsâ€™ easy money policies are turning into hard times for the middle and lower classes. Oil prices have gone up with the Fedâ€™s balance sheet. For every dollar the Fed added, the price of oil ticked up too.
Now, the Fed has three times the monetary base it had before the crisis. And oil is three times as expensive.
Of course, youâ€™d be hard-pressed to prove a direct cause and effect linkage. We wouldnâ€™t even try.
But hereâ€™s something else. Whereâ€™s the price of gold? It hit a new record yesterday. $1,458. Thatâ€™s up about 3 times too? What a coincidence!
Yeah, just a coincidence. No real connection between the feds pumping up the supply of money and prices going up….
Yeah…just a coincidence.
And not a happy one for consumers. The FT article tells us that drivers are driving less. Especially those who are looking for work.
Theyâ€™re â€œhome-bound.â€ Theyâ€™re stuck with houses they canâ€™t afford to leave. And theyâ€™re stuck in places where they canâ€™t find jobs â€“ distant suburbs built for a different world. America was built on cheap energy. Now that energy is no longer so cheap, a lot of what was built no longer makes sense.
That leaves a lot of people in a fix. Many have been unemployed for so long theyâ€™ve stopped looking and the government has stopped counting them. Theyâ€™ve disappeared into the vast mortgaged suburbs…the vast edifice of late, degenerate capitalism.
Uh oh…but whatâ€™s this…thereâ€™s trouble in Zombie City too. Yes Dear Reader, the zombies are getting nervous. Theyâ€™re worried….
â€œWashington Braced for a shutdown,â€ says another headline in the FT.
Experts say a shutdown of the federal government would cost the economy $8 billion per week â€“ much of it in the Washington, DC area.
Business leaders have expressed alarm. Theyâ€™re coming up with emergency plans. Zombies are in a state of â€œhigh alert,â€ says the news report.
While theyâ€™re worried about a temporary government shutdown, the bigger worry for the zombie world is that well-meaning budget cutters might actually succeed in cutting zombies off from their food supplies. Rep. Paul Ryan, looking either like presidential lumber…or easy-to-burn kindling… has proposed to take $5.8 trillion out of the deficit total over the next 10 years.
This is the first serious discussion of reforming federal finances. Could it have serious consequences?
The zombies are concerned. But they can sleep comfortably. According to our Daily Reckoning theory of How the World Works, once a system becomes degenerate it will continue to become more and more degenerate until it finally falls apart. Clear thinking, earnest reformers can try to put it right. But can they do it? Can they cut the zombies off the payrolls? Or are they only volunteering for martyrdom and taking their places on the scaffold?
If it comes to that, Paul Ryan wonâ€™t be the first reformer to sacrifice himself in vain.
The Gracchi brothers set the pace in the 2nd century BC. Born into a good family at a bad time, the Gracchis tried to reform the Roman economy in 123, which they must have thought was in as bad shape as the US in 2011.
They were actually the great grandchildren of Scipio Africanus, hero of the war against Carthage.
Older brother Tiberius began by reforming the system of landholdings, so small landowners could earn more money and employ laborers. But a mob caught up with him and killed him. Then, his brother Gaius took over. He was elected Tribune and tried to reform the judiciary…as well as continue his brotherâ€™s land reforms. He didnâ€™t last long either. In 121 BC he was set upon by his enemies…he fled and then committed suicide. Three thousand of his supporters were rounded up and killed.
The Coincidental Rise of Oil and the Monetary Base originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2
Read more here:
The Coincidental Rise of Oil and the Monetary Base
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
I keep pretty close tabs on the ETF industry. I’m not easily impressed, but I have to say that sponsors are on a roll in 2011. They’re bringing out innovative new products at a record pace.
Today I will highlight a few of the most promising new ETFs for you. I’ll also name a few you may want to avoid. You don’t want to miss this valuable information.
A New Crop of ETFs!
Back in February I wrote about The ETF Boom: 1,124 and Counting! As promised, I have continued to count. And as of April 5, the number of U.S.-listed exchange traded funds and exchange traded notes stood at 1,176.
So far in 2011 we’ve seen 77 new ETFs and ETNs listed — 74 in the first quarter and 3 more already this month. For the first time in years, we went an entire quarter without seeing any ETF or ETN products closed and liquidated.
Here are a few of the new crop that seem to be gaining traction. Note that I’m listing them in ticker-symbol order — no favoritism here.
WisdomTree Asia Local Debt (ALD) came out last month with an impressive $145 million in initial assets. An asset base of this magnitude at launch is unheard of — most new funds come to market with just $3 million-$5 million in seed money.
ALD will try to maximize its total return by investing in local debt denominated in Asia Pacific regional currencies, excluding Japan. Top holdings include paper from Indonesia, Malaysia, South Korea, Thailand, Singapore, and Australia.
PowerShares Senior Loan Portfolio (BKLN) is the first “floating rate” bond ETF. These are a tiny step up from high-yield or “junk” bonds. “Senior” loans are ranked higher than a company’s other debt and sometimes are secured by collateral.
The really interesting part about BKLN is that its portfolio consists of debt whose interest rate resets periodically — every three months or so — similar to an adjustable-rate mortgage. From the lender’s perspective (and the lender is you if you buy BKLN), the reset limits the risk of rising interest rates. It does not, however, remove the risk of borrowers defaulting.
IQ Global Agribusiness Small Cap (CROP) is another new niche. Several ETFs already cover the food production sector, but CROP zeroes in on the smallest 10 percent of such stocks. This is potentially a new way to profit from rising food prices.
FactorShares is a new sponsor with a new twist: ETFs that hold “spreads” in various markets. A spread is a trade involving simultaneous exposure to bullish (long) and bearish (short) positions in different securities or markets. The idea is to capture the performance difference between both sides of the spread.
For instance, maybe you are bullish on bonds and bearish on stocks. FactorShares 2X TBond Bull/S&P 500 Bear (FSA) gives you that trade in one simple package. You can also do the reverse. If you are bullish on stocks and bearish on bonds, look at FactorShares 2X S&P 500 Bull/TBond Bear (FSE).
FactorShares has similar funds that try to profit from the spread between stocks and the U.S. dollar, gold, and crude oil prices. All have a 2X daily leverage factor, so they aren’t for widows and orphans.
AdvisorShares Active Bear (HDGE) is the first actively-managed short selling ETF. The managers of HDGE use fundamental research to build a portfolio of 20-50 stocks they think are overpriced.
Inverse index funds have been available for years, of course. HDGE is the first to use the ETF format to pick individual stocks that seem likely to decline. We don’t yet know if they will succeed, of course, but the concept is a good one.
Bearish bond investors may want to look at Direxion Daily Total Market Bear 1x Shares (SAGG). Unlike Direxion’s previous inverse offerings, SAGG does not have a built-in leverage factor.
SAGG tracks a broad-based index of the entire investment-grade fixed-income market: Treasury bonds, corporates, asset-backed, and more. If you are broadly bearish on bonds but not comfortable with leverage, SAGG may be a good alternative.
Vanguard Total International Stock ETF (VXUS) isn’t exactly unique, but it is a new alternative. And because it comes from Vanguard, the ETF has low fees and will probably attract a base of support over time.
VXUS covers all the world’s investable equity markets except for the U.S. It includes both developed and emerging markets. Two groups of investors may find VXUS useful …
First, those who have a well-diversified portfolio of U.S. stocks can easily add an international slice without duplicating what they already own.
Second, if you happen to be bearish on U.S. stocks but bullish everywhere else, VXUS may be just what you need.
WisdomTree Managed Futures Strategy Fund (WDTI) is a very interesting new ETF, the first to track the S&P Diversified Trends Indicator (DTI).
The DTI is a rules-based index using a seven-month moving average to take long or short positions in 24 commodity and financial futures contracts. (Energy is an exception: It can be neutral but not short.)
This makes WDTI an “absolute return” ETF. The goal is to achieve positive performance in both up and down markets. This makes it a great diversification tool for those who want a well-balanced portfolio.
If all the above sound interesting, keep in mind that the ETF industry isn’t at all perfect. Some of the new ETFs are, in my opinion, duplicative “me-too” projects. A few are just harebrained ideas from people with too much time on their hands.
Here are some new ETFs and ETNs that seem to be going nowhere, at least so far …
- ESG Shares Pax MSCI EAFE ESG Index ETF (EAPS)
- Global X Russell Emerging Markets Growth ETF (EMGX)
- Global X Russell Emerging Markets Value ETF (EMVX)
- RBS US Midcap Trendpilot ETN (TRNM)
I’m not necessarily saying these are bad funds or bad concepts, but for one reason or another, investors are not putting money into them. Without assets, the sponsors cannot generate fees. Without sufficient fees, the ETF is not profitable and runs the risk of being shut down.
Read more here:
Nine New ETFs Rising Above the Noise