Tag archives for stock market investing

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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A lot of people start investing in stocks because they are naturally drawn to the idea of making money. For that reason they will often do their research in order to find or two really promising companies that they can put their money in to in order to make big returns. However this is very often a flawed strategy.

It’s all too easy to be excited about young start-up companies because if they come good in future years, they could easily double, treble or quadruple your money. However the reality is that most of these ‘jam tomorrow’ companies will never make it big. Some will remain very small companies whilst others will simply run out of money and go bust. So as an investor you will often find that your long-term investment makes no money at all or it ends up being completely worthless if the companies you invest in go under.

This is why it’s not generally a good idea to put your money into just a small handful of companies. Okay you may see huge returns if one of them develops into a large and hugely profitable company, or is taken over by a larger competitor, but you may also lose a huge chunk of your capital in the more likely scenario that they don’t make it.

I personally think the best strategy as an investor is to invest in a large number of different stocks (across a number of different sectors) so you spread your risk and protect yourself from any major losses. That way you can afford to put your money into a few of these small-cap stocks because you know that your portfolio will not be too badly hit if these companies never fulfil their potential.

Furthermore if you assign most of your portfolio to good quality mid or large-cap stocks, you should benefit from regular dividend payments. This also cushions any losses you may incur from these smaller stocks. Plus it’s also worth noting that many of these young fledgling companies do not pay any dividends so you are relying purely on capital growth.

Anyway the point I want to get across is that stock market investing is not easy. It can destroy your capital very quickly if you’re not careful, and this is particularly true when you only invest in a small number of companies. Successful investing is all about risk management. You need to think like a fund manager and make sure you never expose yourself to too much risk, particularly in these highly volatile markets.

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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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

Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his millionaire investing secrets and claim your FREE bonus chapter of his latest bestselling book ‘Secrets Of Millionaire Investors’ at Secrets Of Millionaire Investors.

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