Tag archives for share trading

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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Two enormous recessions. Unparalleled government bailouts. An entire lost decade of growth.

It’s been more than 10 years since the tech boom, and most of us have about the same net worth as we had in the first place — or possibly less. The result of this flat and oftentimes irrational stock market has been a media rush to call “an end” for the average buy-and-hold investor.

The rumor mill is circulating and in full effect: Get out of the stock market before it’s too late!

Is this the beginning of the end for the stock market, or will predictions of stocks’ demise turn out to be the worst myth of the 2010s?

Where exactly are you going?
From 1980 to 2000, scholars like Jeremy Siegel and others were touting the wisdom of long-term, buy-and-hold investing; individuals and academics alike were virtually all on the same page. In fact, one survey by a Securities Industry Association in 1999 showed that most investors expected to earn a rate of return equal to about 30% — confidence was at an all-time high!

Nonetheless, according to a recent article in The Atlantic, the modern diversified portfolio, the ease of which we use technology, and the growing popularity of mutual funds have possibly combined to erode our equity premiums. In fact, while most savvy investors used to expect an annual return of 8%-10%, there’s plenty of chatter about that number being much closer to 4%-5% for years to come. Smithers & Co., an asset allocation firm, has forecasted that the next 10 years in the stock market will deliver a paltry 1.8%. So where do you go from here?

Savings: While it would be nice to allocate a large portion of our nest-egg in savings, CDs, or Treasuries, it just isn’t possible anymore. Savings accounts offer near-zero interest rates, and even the 10-year Treasury yields barely more than 2.5%.
Bonds: Corporate bonds and bond funds have had a great run. However, even the global bond guru Bill Gross expects lower returns. According to Gross, because rates have nowhere to go but up, “bonds have seen their best days.” And this comes from a man who manages a $214 billion bond fund. Ouch.
Government: There may have been a time when you could save what was possible and expect your employer and the government to fill out the rest. With pensions long gone and 70% of workers not confident in Social Security, those days are simply over. For the first time ever, this year, payouts to retirees and the disabled will exceed what the government brings in from payroll taxes.
The bottom line is that regardless of what pundits will say about the stock market, it’s the only real option you have left. You need individual stocks to protect your portfolio — period.

Get back to basics already
Years ago, investing in dividend stocks was all the rage. But then the market took off, technology and globalization changed the way we invested, and dividends became boring or old-school. Investors expecting those 30% returns certainly weren’t going to find them in dividends — hence the flock to the fast-growers and the small-caps with unlimited potential.

Yet things have changed, and if you’re not investing in dividend stocks right now, you’re missing out on an amazing opportunity. Throughout history, academics have proven that dividend-paying stocks outperform their non-paying brethren. In addition, from 1871 to 2003, only 3% of the market’s return actually came from capital appreciation — that means that 97% came from reinvesting in dividends!

So in order to avoid the greatest myth of our decade — that stocks can’t provide above-average returns — you’ve got to start investing in dividends. In particular, you need to find stocks that pay great yields, that have sustainable payout ratios, and that have illustrated a knack for increasing their dividends over time. To help you in your quest, I’ve identified seven stocks that not only fit the criteria above, but that are trading for dirt-cheap valuations (to help ensure value).

All seven of these stocks fit the perfect dividend mold — they pay good, sustainable yields, they have plenty of room to grow, and they are trading for more-than-reasonable prices. In addition, I tried to choose stocks that would help create a diversified portfolio, so every sector is covered, from technology to finance to health care.

Don’t believe the hype
There will always be people — whether it be friends, colleagues, or professionals — that employ fearmongering as a way to express their philosophy. However, while I agree that our investing world has certainly changed, I disagree with the notion that returns will be dismal and that you must avoid stocks to ensure your financial safety. Investing in dividend stocks is still a prudent, reliable, and wealth-generating way to keep you on the fast track toward retirement. You may not get rich overnight, but you can certainly sleep well knowing that you didn’t get bullied in the wrong direction.

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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Many traders and investors spend hours on end testing out lots of different technical indicators. However while many of them have their merits, there is a much easier way to generate winning trades and that’s to make full use of trend lines.

Trend lines are basically lines on a price chart that show you the current trend. These lines can be applied to your charts very easily. You simply connect the high points to form the upper trend line and connect the low points to form a lower trend line.

Once you have these trend lines in place you can then use them to time your entry and exit points. The first way you can put these lines to use is to use them to help determine areas of support and resistance. You will generally find that the price will reverse downwards when it approaches an upper trend line and reverse upwards when it approaches a lower trend line. This isn’t always the case of course, but it does tend to happen more often than not, particularly on the more popular shares.

Another way to use them is to wait until one of these long established trend lines is broken. For example if there is a clear upward trend and a solid lower trend line that has been sloping upwards for quite a while now, you may want to go short on the stock in question if the price closes firmly below this lower line at any point.

Finally if a stock has been trading sideways for several weeks or months, you should find that it’s possible to draw broadly horizontal lines connecting the high points and the low points during this period of consolidation. Then as soon as the price breaks above either of these lines, you can trade the prevailing trend which nearly always takes place after one of these breakouts. This is particularly true if the breakout is supported by above-average volume.

Whichever of these trading methods you decide to use, the point I want to make is that trend lines can provide you with better trading signals than any of the technical indicators that so many traders swear by. This is especially true on many of the most widely traded shares because so many other traders and investors are watching and trading the exact same trend lines. I personally like to trade those stocks where the long-term trend is finally broken after several months of a predictable trend, but all of these methods work extremely well.

Article Source: Articles Engine

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It’s natural to assume that if you are buying shares with a 5-10 year view, for example, then you don’t really need to worry about the timing of your initial entry point. However this isn’t actually the case, as I’m about to explain.

The fact is that timing is everything when it comes to stock market investing. Of course a small difference in the share price isn’t that significant if you are holding on to shares for several years, but nevertheless there are still bigger issues to worry about.

For example if you are investing in mid or large-cap stocks, then you need to think about the wider stock market index. Anyone can pick out the most profitable market-leading companies on the stock market that continue to boost both their dividends and their earnings each year. However if you invest in one of these companies at a time when the major stock market index is overbought and it subsequently heads lower, you can be sure that your company’s share price will be dragged down as well.

It’s generally best to attack the markets when the wider stock market indices have been massively oversold. It’s not always easy to call a bottom of course, but when the average P/E ratio for a particular index is very low, you should think about re-entering the markets. You should find that you can make money in the long run by investing in almost any major company when the stock markets are so cheap, but I personally would recommend that you look for strong companies with good earnings and dividend projections for the next few years, just to be on the safe side.

Another reason why timing is important is because there may be times where you invest in a very strong company, but at a time when the sector the company is a part of is either out of favour at the moment and heading downwards, or is at the top of a particular cycle and likely to fall back downwards in the coming years. In either case you should wait until the sector is relatively low and likely to head higher in the coming years based on anticipated demand and future forecasts.

The point is that if you invest in good quality companies when either the sector or the wider stock market is oversold, you can generate some very healthy long-term profits. As I said at the start of this article, timing is everything.

Article Source: Articles Engine

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