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Let me get one thing out in front: Visa (NYSE: V) is a phenomenal company. I mean really, really good. High-quality. Strong moat. Well-managed. Sturdy balance sheet. The works. It’s the epitome of what you should look for in long-term investments.

Alas, Visa’s stock scares me silly. Why? Amid all the happy things you can say about the company, it’s easy to overlook two important points:

Investors are infatuated with this stock. They seem to ignore the considerable uncertainty and risk that lie ahead. Now up more than 30% year to date, Visa’s shares are priced for perfection and nothing else. Visa’s not invulnerable to the dwindling economy. In fact, it’s extremely vulnerable to consumers’ strength or weakness.
Before you send that hate mail, let me explain.

This is pretty serious stuff. On average, it’s an expectation of 17.4% annual growth, based upon predictions that Visa along with rival MasterCard (NYSE: MA) will ride a global shift from paper to plastic commerce. These assumptions are also based on a business model that accepts no credit risk. Unlike American Express (NYSE: AXP) or Discover (NYSE: DFS), Visa simply makes money off transactions an inherently safe and lucrative business model. It’s great work if you can get it.

And investors know this. They’re so confident, in fact, that shares have been bid up to more than 24 times this year’s earnings, and more than 20 times next year’s.

Think about that for a moment, tend to your nosebleed, and acknowledge this point: Yes, earnings are expected to skyrocket, but shares are valued at a level that entirely reflects this. Growth even tremendous growth is already priced in.

Hence, meeting these lofty expectations will likely result in less-than-awesome returns. Here’s a simple example: Say Visa meets 2011 earnings expectations of $3.95 per share, and still commands a multiple of 20 times earnings. Under these assumptions, it’ll reward shareholders with annual returns of less than 8% per year nothing to sneeze at, but nothing to drool over, either. You can pick apart the assumptions all you’d like, but you’ll be hard pressed to come up with anything that’s both rational and spectacular. That’s just the nature of stocks priced for perfection.

Here’s where things get exciting
Now, curious investors will read the above and ask a simple question: What happens if things don’t go as planned? What if growth doesn’t materialize as investors imagine? This is smart thinking. Expectations of assured and unremitting growth are almost invariably wrong. Anyone alive over the past two years can relate. And with Visa, let me be blunt: I think the hype over its supposed explosive growth in the coming years is spectacularly overblown.

Why? Glad you asked.
As we speak, banks like Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) are slashing credit card lines like their lives depend on it. One estimate tags this number at $2.7 trillion by 2010, which equates to the evaporation of 60% of the dollar amount of extended credit. The era of consumers’ attachment to credit cards is simply toast. This point is sometimes pooh-poohed by those who note Visa’s dominance in debit transactions. Debit, they insist, will pick up where credit left off.

This is true to a point. But perspective is in order. While debit gets all the attention, credit is still responsible for around two-thirds of total payment volume. Some might argue that payment volume isn’t the end-all profit driver, and that the number of transactions where debit is still king matters, too. This is true. But this source of revenue, called data processing fees, represents only 33% of total revenue, compared to nearly 50% captured by service fees, which is tied to payment volume.

Credit is still a main factor in Visa’s bottom line, and that division is and will be weighed down by consumers adjusting to frugality and banks pulling credit lines. This point should not be ignored. It’s big. It’s real. And it’s dangerous for investors to overlook. The growth expectations for which this stock is priced seem out of touch with the credit card industry’s ongoing paradigm shift.

Excitement, meet caution
Again, let me reiterate: I think Visa is a top-notch company. It really is. But there seems to be a disconnect between the odds of faltering and the odds of perfection. Even if my fear of credit annihilation is totally misguided, shares are still priced at levels that won’t let investors fully capitalize on Visa success. Any way you spin it, I don’t see how you can be excited about these prices.

Article Source: Articles Engine

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There are two parts to successful investing: finding the winners and avoiding the losers.

But looking just for the former, especially if you focus mostly on revenue and earnings, can leave you exposed to the latter.

In order to fully benefit from your winners, you need to spot the ones to stay away from. After all, a 200% gain is completely wiped out by four other picks dropping 50% each. As for that winner, revenue and earnings are not the place to see trouble coming in time to do some good. You don’t want to wait for an ugly earnings surprise that gives your stock a massive haircut before getting out.

That’s why just about the first thing I read is the balance sheet. This is where the company’s financial health is found and where sickness’ warning signs often show up.

One balance sheet tool I like is the cash conversion cycle. This shows how fast the company turns its cash into inventory, sells that inventory, and then collects the cash on those sales. It’s measured in days and, generally, the lower it is, the better. (For details on how it’s calculated, check the Foolsaurus investing wiki entry here.) It is possible to have a negative CCC, as Dell showed to great effect for several years. Seeing CCC increase can mean it’s a company to avoid or exit.

This metric doesn’t apply to every industry, however, such as banks. It’s primarily for companies that interact with suppliers and customers, buying from one, selling to the other.

Dow is in the middle of this group, but despite recent improvements, it still isn’t quite back to where it was five years ago on its cash cycle. TPC is going in the wrong direction, and RPM needs to do more of what it’s been doing to bring that cycle closer to its competitors.

Of course, the cash conversion cycle should not be the end of your research, and it’s best to follow trends over time. However, it can provide useful pointers to either getting in or staying away.

Go past the obsessive focus on quarterly earnings, and you’ll be way ahead of the vast majority of the market’s individual investors. By learning to calculate and use the cash conversion cycle, you’ll more likely spot a deteriorating situation early enough to either avoid the company in the first place or get out before the company “surprises” with a bad earnings report.

Article Source: Articles Engine

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Many stock market traders and investors like to be fully invested in the stock market at all times. In other words if they have some spare cash in their account, they want this money to be working for them, whether it’s seeking out capital growth or dividends (or both). However this isn’t always the most effective strategy.

The problem you have is that if you are always fully invested in shares, you will never have any spare cash to invest in any bargains when they present themselves. You will either have to accept that you have no money to invest, or sell some of your existing holdings, which you probably won’t want to do.

These opportunities to pick up bargains don’t come up every day, but they are still quite common. Indeed in the last few years we have seen the markets fall quite substantially on many occasions due to various world events. As a result of this even the most profitable and well-run companies see their share price dragged down, and there is a perfect opportunity to pick up some bargains.

There are also other occasions when certain sectors fall out of favour for whatever reason, and as a result certain companies see their share price fall to well below their true market valuation. In other words they trade on very low earnings multiples in comparison to recent years.

So the point is that you need to have some spare cash in your trading account to take advantage. You don’t want to throw your money into the markets when the markets are buoyant because there is always the chance that you are investing at the top of the market.

You’re much better off having more cash to invest when the markets are falling. It’s often said that the best time to invest is when everyone else is selling, and this is generally true. It’s not always easy to catch the bottom of course, but one good strategy is to invest in stages so that you can always invest some more if the share price continues to fall. As long as you investing in solid long-term growth companies that are trading on low multiples, this should be a very profitable long-term strategy.

However the point is that you need money to invest in the first place, which is why you should always have some spare cash in your account ready and waiting. The only time you should be fully invested is when the wider market really seems to have bottomed out, like when the Dow Jones fell below 7000 last year because then you can invest in pretty much any half-decent company and expect to make some very healthy long-term returns.

Article Source: Articles Engine

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It is not everyday that you can find a company that is hit with such bad news that its stock price crumbles apart. You have to be patient and strike only at the right opportunity.

By regularly reading business news on CNN.com, Briefing. com and watching CNBC, you will be alerted to these investment opportunities as they happen. While there is no sure way to guarantee that a stock will fall below our breakeven point, there are 4 key criteria that I use to increase my chances?

1. Screen for Stocks that Decline Significantly on High Volume

I screen for stocks that suffer a significant one-day (intra-day) decline on high volume. Usually, stocks that suffer such a drastic fall in one day experience some kind of significant negative news.
I also look for stocks that decline by more than 20%-30% with volume exceeding at least 300,000 shares. The easiest way to screen such stocks is to go to www.moneycentral.com.

Use their “Power Search” tool to screen for “Intraday High Volume Losers” or “Gapping Down Today”. If you can not find any on that particular day, select “Weekly High Volume Losers” or “One Month Volume Losers” to see if any stocks fit the bill over the last week.

2. Ensure Bad News with Sustainable Effects

Remember that we are only interested in news that has the potential to create long-term or permanent damage to the company’s financial stability or profitability. Again, the ideal bearish play would be an accounting scandal that could drag on for months and result in a long lasting sell-off in the stock. Sometimes, a major strategic miscalculation could lead to a company losing its competitive advantage and cause long-term effects on its profitability.

A good example is when Ford Motor Company made a strategic mistake (failing to focus on smaller, fuel efficient cars) that caused its market share to decline consecutively over 10 years, sending its stock price down from $16 in 2004 to as low as $6 in 2006.

By going to http://finance.google.com or any other business news site, you can read about the news that has triggered the price fall. Bear in mind that it is not every day or every month that you can find a stock that fits these criteria.

3. Fundamental Criteria
You would also want to ensure that the stock that you are betting on is highly overvalued, giving a good reason for the market to correct the stock downwards.

Applying what you have learnt in the chapter on value investing, use the “Intrinsic Value Calculator” (found on www.thewaytomakemoney. com) and calculate the intrinsic value of the stock. You will want to make sure that the current share price is higher than the intrinsic value. It is also important that the current share price is above $8.

4. Technical Criteria
Screening for potential momentum stocks that would move up in price, we need to ensure that “Technical Indicators” are strong indicating a “buy signal”. In the case of buying Puts on falling stocks, we are looking at the opposite. We are looking for weak indicators that signal a “sell signal”.

With these 4 indicators, you are now able to estimate when a stock may dive.

Article Source: Articles Engine

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A lot of people spend hours on end researching various different companies in order to find a few hidden gems. However it’s worth bearing in mind that if you’re trading mid/large-cap stocks, the price movements of these shares will often be determined by the movements of the overall stock market.

For instance if you mainly trade large-cap stocks in the FTSE 100, it’s not enough to just look at individual companies. You also need to think about how the FTSE 100 index is going to fare over the coming months. You could easily pick a great company that’s underpriced, growing it’s overall profits each year and paying a healthy dividend, but if the FTSE 100 falls substantially after your share purchase, then the share price is almost certain to fall as well.

This is why I personally don’t feel that this is a great time to be buying shares in large-cap stocks. At the time of writing (January 2010) the FTSE 100, and indeed the major stock markets all around the world, have posted gains in the region of 30% as the global economy starts to come out of recession. This upward trend may well continue but I don’t see a great deal of upside in 2010. In fact I think we will probably finish the year roughly where we are now.

So in my view you basically have two choices. You can either wait for a retracement and then start seeking out good quality companies that may then be oversold, or you could focus your attention on small-cap stocks whose share price movements are driven by individual company news. My own strategy is to apply both of these strategies because I always like to have a mixture of small and large-cap stocks.

Anyway the point I want to make is that you should always keep on eye of the wider stock market and make your trading decisions based on these markets. For instance if you’re a UK trader like myself, it’s generally a good idea to use technical analysis on the FTSE 100 to see when it is oversold. Then you can start looking for decent companies knowing that the price is likely to rise as and when the FTSE 100 recovers. Plus the rise is likely to be greater if you pick those companies that offer the best value.

Stock market investing is all about timing. The key to success is to buy low and sell high, and the best time to do that is when the overall stock market, whether it’s the FTSE 100, Dow Jones, DAX or the Hang Seng, for instance, is temporarily oversold.

Article Source: Articles Engine

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Many people are interesting in making investments in order to establish and increase wealth, yet for those without a sound understanding of the conventions of investing, what types of investments are available, and how they work, investing can seem like an elite private club to which they will never be granted access. A Quick crash course in investing and the use of a helpful analogy can answer these questions and help demystify investments.

There are three main investment categories into which most investments fall; short-term investments, stocks and bonds. Let us use the example of Jim’s lawn mowing business to illustrate the difference between them.

Jim needs some money to start his lawn mowing business, so he borrows $100 from his father. Jim writes an IOU to his father for $100 to be repaid in a year, plus 5% interest. This paper becomes what is called a bond. When Jim’s father loaned Jim the money, he essentially invested in Jim’s lawn mowing business by purchasing a bond, and will receive his $100 back, plus 5%.

Jim still needs some more start-up cash, so he sells half of his lawn mowing business to his friend Jack for $50. Jim puts the transaction in writing; “Jim’s Lawn Mowing Service will issue 100 shares of stock. Jack will buy 50 shares for $50.” Jack just bought stock in Jim’s business, and is now considered a shareholder, or a partial owner of the business.

Jim’s Lawn Mowing Service has a great month and earns $500. The costs for establishing the business were $150, and Jim pays himself $100 for the hours he worked. This means Jim’s Lawn Mowing Service made $250 in profit.

At the end of the year, Jim pays back his father $100 plus $5 interest from the $250 profits. He pays $20 to Jack and himself as shareholders. Jim decides to put his $20 in the bank in a savings account, which is a short-term investment.

This example covers all three basic types of investments in simplified form. Of course, it is important to understand that there are advantages and disadvantages to each of these investing options. Stocks have historically outperformed other investments, which has made them a popular choice among serious investors. Stock holders also have a say or voting rights in the direction of the business, where bondholders and bank depositors do not. However, the values of stocks fluctuate often, and there is no guarantee that a stockholder will make a return on his investment.

Bonds have the advantage of carrying a higher interest rate than short-term investments, meaning that they are worth more over time. They are also a less risky investment than volatile stocks. But selling bonds before they are due can result in losing money, and if the business issuing the bond goes bankrupt, you lose the entire value of the bond.

Short-term investments are considered the most secure of the three because they are guaranteed by the federal government. However, short-term investments have very low interest rates, and can actually lose value once they are adjusted for inflation.

Once people understand how these different types of investments work and the risks they involve, they can then choose the investment, or combination of investments that work for them.

Article Source: Articles Engine

Gravitas Technology (http://www.trilanticpartners.com/) are a global private equity firm focused on control and significant minority investments in North America and Europe. Art Gib is a freelance writer.

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