In light of the recent stock market roller coaster and financial service company meltdowns, it’s hard to know who to trust today for guidance about investing. Yet, even with all of the uncertainty, as each day passes, you still grow closer and closer to retirement. And with that, you need to know where to put your hard earned dollars to keep them safe, yet growing.
The truth is that most people today spend more time planning a two week vacation than they spend planning their retirement. And, oftentimes people will put their life savings in the hands of a total stranger they picked from a Yellow Pages ad because they simply don’t know how to research financial planners. And, this could prove to be a big mistake.
Although there are no iron clad guarantees, there are some questions you need to ask any financial advisor you are considering placing your money with. After all, this is the money you plan to live on for 20, 30, or more years! So this is a job that you definitely want done right.
Some experts have even likened picking a financial planner to hiring somebody for a job. And this makes a lot of sense. This person will be dealing with the business of your finances – so you will definitely need to hire the right person for the job.
Some of the most important questions you will need answers to include:
* What is your experience? Today, just about anybody can call themselves a financial professional. But where the rubber meets the road is whether or not the person is truly qualified to give good, knowledgeable financial advice. Therefore, inquire as to what licenses and other qualifications they possess such as professional or industry designations like a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC). You should also ask how long they have been in the financial services industry. Because, while it’s nice to give everyone a chance, you will likely be much more secure with an experienced professional who has worked in both up and down markets successfully.
* How do you get paid? This is a biggie because an advisor’s pay source may have more to do with his or her recommendations than you think. There are numerous types of compensation structures in the financial services industry. The advisor could be paid on commission, a flat fee, an hourly rate, or a combination of any or all of these. Be sure to inquire as to any conflicts of interest as well. For example, if a financial services representative is paid on commission and they only offer a limited number or types of products, then this could be a red flag as to where their true interests lie. Search here for a list of local, pre-screened fee-based financial planners to match your needs.
* What is your track record? There are actually a variety of ways to evaluate an advisor’s track record. One such method is to simply inquire as to how many clients’ portfolios are performing in line with or better than their goals. Include both short and long term goals in this conversation. In addition to investment performance, you will also want to know their track record in terms of any disciplinary actions for unlawful or unethical actions in their professional career. If the advisor is registered with the United States Securities and Exchange Commission, then you can actually look up this information online
* Can I get it in writing? Once you feel comfortable with an advisor, ask them if you can have an agreement in writing that will detail the services that they will provide for you as well as the fees that you will be paying them for those services. Information in this document should include their investing strategies, specific benchmarks for performance, and suggested products to help get you there. And, always keep this document in your files for reference.
Regardless of how well your relationship is with your financial advisor, always keep in mind that it is you who is ultimately responsible for your money. You may not be at the helm making every trade, but you are responsible for ensuring that your advisor works in your best interests and that they handle your finances properly.
- Dare to Compare Auto Insurance Rates!
Monday, March 28, 2011
‘Foundation’ stocks: ‘Prudent’ trio
We like stocks. And we like a lot of ‘em. We focus on broadly diversified investments in undervalued stocks for their long-term appreciation potential.
Each month, we suggest a group of stocks that could help serve as a portfolio foundation. Here’s a look at Kraft Foods (KFT), Verizon Communications (VZ) and Waste Management (WM).
Kraft Foods is the world’s second largest food and beverage company, trailing only Nestlé.
With 51% of revenue derived outside of North America, Kraft materially altered its product portfolio and its capital structure earlier this year when it acquired control of Cadbury plc for $18 billion.
Despite the high price and associated acquisition- related risks, we believe Cadbury is a good strategic fit for Kraft which should accelerate growth and provide access to a number of developing international markets.
While many investors fear that weak consumer spending trends and rising raw material prices will pressure Kraft’s margins, we think the company has a good handle on how to manage through such an unfavorable environment, even if conditions weaken further.
Through ‘Six Sigma’ and various technology enhancements, the company is already emphasizing overhead cost reductions and improvements in productivity.
With a market cap of $55 billion and a dividend yield of 3.6%, Kraft is a dominant player and, we believe, a core holding in the Food, Beverage & Tobacco industry group.
Widely regarded as having one of the best networks in mobility, Verizon Communications offers wireless, broadband and wireline services throughout the United States.
Verizon is a perennial favorite of ours in the communications sector mostly because of its strong cash flow generation and pricing power, but also because it boasts the largest subscriber base and lowest churn rates.
We expect top-line growth to be driven by continual increases in wireless data services, especially now that Verizon can offer service on the cult-like iPhone, which your editor just picked up.
Just a few months ago, Verizon declared a 3% dividend increase despite the spinoff of cash-flow-generating properties.
Margins and revenues are strong, cash flows are booming, and there is no reason to suspect that the fat 5.3% dividend yield is in danger.
Moreover, the company has been cutting costs through staff reductions and in conjunction with landline divestitures.
A dominant player in the communications area, we view Verizon as a core holding and expect the next generation of wireless connectivity to boost margins through higher data-service usage.
It is oft said that one man’s junk is another man’s treasure. True or not, the owner of those green refuse trucks is the nation’s largest provider of collection, disposal, recycling and waste-to-energy services.
Waste Management (WM) has nearly a 30% market share and almost 40% of overall landfill capacity. The company’s revenue stream is well diversified both geographically and by business segment.
While WM continues to face headwinds from the slow-down in waste volumes from construction, the company has been able to drive increased profitability via favorable pricing and an efficient cost structure.
WM generated strong free cash flow ($1.2 billion) during 2010, which supports management’s continued efforts to return cash to shareholders in the form of dividends and share repurchases.
The company announced that it expects to pay $1.36 per share in dividends during 2011 and will allocate up to $575 million towards stock buybacks.
Considering the new dividend level, shares are trading with a current yield of 3.7%
Each month, we suggest a group of stocks that could help serve as a portfolio foundation. Here’s a look at Kraft Foods (KFT), Verizon Communications (VZ) and Waste Management (WM).
Kraft Foods is the world’s second largest food and beverage company, trailing only Nestlé.
With 51% of revenue derived outside of North America, Kraft materially altered its product portfolio and its capital structure earlier this year when it acquired control of Cadbury plc for $18 billion.
Despite the high price and associated acquisition- related risks, we believe Cadbury is a good strategic fit for Kraft which should accelerate growth and provide access to a number of developing international markets.
While many investors fear that weak consumer spending trends and rising raw material prices will pressure Kraft’s margins, we think the company has a good handle on how to manage through such an unfavorable environment, even if conditions weaken further.
Through ‘Six Sigma’ and various technology enhancements, the company is already emphasizing overhead cost reductions and improvements in productivity.
With a market cap of $55 billion and a dividend yield of 3.6%, Kraft is a dominant player and, we believe, a core holding in the Food, Beverage & Tobacco industry group.
Widely regarded as having one of the best networks in mobility, Verizon Communications offers wireless, broadband and wireline services throughout the United States.
Verizon is a perennial favorite of ours in the communications sector mostly because of its strong cash flow generation and pricing power, but also because it boasts the largest subscriber base and lowest churn rates.
We expect top-line growth to be driven by continual increases in wireless data services, especially now that Verizon can offer service on the cult-like iPhone, which your editor just picked up.
Just a few months ago, Verizon declared a 3% dividend increase despite the spinoff of cash-flow-generating properties.
Margins and revenues are strong, cash flows are booming, and there is no reason to suspect that the fat 5.3% dividend yield is in danger.
Moreover, the company has been cutting costs through staff reductions and in conjunction with landline divestitures.
A dominant player in the communications area, we view Verizon as a core holding and expect the next generation of wireless connectivity to boost margins through higher data-service usage.
It is oft said that one man’s junk is another man’s treasure. True or not, the owner of those green refuse trucks is the nation’s largest provider of collection, disposal, recycling and waste-to-energy services.
Waste Management (WM) has nearly a 30% market share and almost 40% of overall landfill capacity. The company’s revenue stream is well diversified both geographically and by business segment.
While WM continues to face headwinds from the slow-down in waste volumes from construction, the company has been able to drive increased profitability via favorable pricing and an efficient cost structure.
WM generated strong free cash flow ($1.2 billion) during 2010, which supports management’s continued efforts to return cash to shareholders in the form of dividends and share repurchases.
The company announced that it expects to pay $1.36 per share in dividends during 2011 and will allocate up to $575 million towards stock buybacks.
Considering the new dividend level, shares are trading with a current yield of 3.7%
Cree: Is It Lights Out for the LED Bellwether?
NEW YORK (TheStreet) — LED lighting sector lightning rod Cree provided its shareholders with another “gut check” day on Wednesday. An inventory glut in the LED market that is lasting longer than expected, and steep pricing declines, forced Cree to lower its existing top line and gross margin guidance.
The trading action after the Cree pre-announcement seemed to suggest that a good number of investors had run out of patience, with more than 19 million shares traded on Wednesday when Cree shares fell by more than 12%, and notably, fell to a new 52-week low, below the $43 mark (Cree shares would finished the week at $44.85).
Just about a year ago, in the middle of April 2010, Cree shares were above the $80 mark. It’s been up and down, and then up and down again, since that year-ago high mark for Cree shares. Even before Wednesday, Cree shares took a big hit since its January earnings, when it first reported the excess inventory in the LED market. Cree shares had been as high as $72 in December 2010.
The trading action after the Cree pre-announcement seemed to suggest that a good number of investors had run out of patience, with more than 19 million shares traded on Wednesday when Cree shares fell by more than 12%, and notably, fell to a new 52-week low, below the $43 mark (Cree shares would finished the week at $44.85).
Just about a year ago, in the middle of April 2010, Cree shares were above the $80 mark. It’s been up and down, and then up and down again, since that year-ago high mark for Cree shares. Even before Wednesday, Cree shares took a big hit since its January earnings, when it first reported the excess inventory in the LED market. Cree shares had been as high as $72 in December 2010.
Top Funds for Your 2011 401k
As we close out a turbulent, yet rewarding year for 401k investors, what better time to begin taking a serious look at how your retirement account is positioned for the year ahead.
Now to be certain, if 2011 is anything remotely close to 2010, we are going to see a lot more flux in equities. That said, I also suspect that we’re going to see more upside in stocks of all stripes — and that could turn out to be very good for the well-thought-out 401k portfolio.
So, what funds should you have exposure to as we ring out the old and begin the New Year?
Here are six of my favorite mutual funds and ETFs for 2011.
#1 – Vanguard Dividend Growth (VDIGX)
Large-cap dividend payers were underwhelming in 2010, and the stock picks of Vanguard Dividend Growth (MUTF: VDIGX) manager Don Kilbride were underwhelming as well. In fact, after a three-year run of strong outperformance, Kilbride has lagged for the last two. That said, Dividend Growth’s long-term performance remains well above its benchmark, and it’s always good to invest with a top-notch manager when they’re down because the rebound can be doubly strong.
The differences between this fund’s portfolio and that of most index funds focused on dividend-payers is that Kilbride has the flexibility to go overseas, and he’s done so, putting as much as 15% of the fund’s assets in foreign stocks (the current allocation is just over 6%). With domestic markets outperforming, it’s a good bet that some of Kilbride’s holdings got swept along in the current foreign market pessimism. More importantly though is the fact that Kilbride’s portfolio consists of fewer than 50 stocks. In other words, when Kilbride’s right on a stock or two, he’s going to be very right, and when wrong, which isn’t often, it’s going to hurt.
Some of the top holdings in VDIGX include corporate behemoths Automatic Data Processing (NASDAQ: ADP), Johnson & Johnson (NYSE: JNJ) and Medtronic, Inc. (NYSE: MDT).
I’ve got confidence that Kilbride and his analysts and colleagues at Wellington Management will begin to outperform again. Whether it comes in the next month or in several, this is one fund that meets many of my criteria for a winner, with a single manager, tight portfolio and strong track record and resources to back it up.
#2 – PRIMECAP Odyssey Aggressive Growth (POAGX)
The PRIMECAP Odyssey Aggressive Growth (MUTF: POAGX) invests in common stocks of companies expected to show rapid earnings growth. However, the managers don’t pay up for growth, preferring to identify companies where they feel a catalyst is in the offing, but hasn’t been reflected in current stock prices. I believe this fund is going to be a long-term winner (it’s my single largest personal holding) thanks to its management, led by Theo A. Kolokotrones, President and Co-Founder of PRIMECAP Management Company. The strength of the PRIMECAP team lies in their consistency, among other things. While they only outperform their index benchmarks about six of every 10 months, when they do outperform, they more than make up for months when they lag these same benchmarks. Periods of underperformance are perfect opportunities to add to holdings. Of course, if you’re a long-term investor like me, periods of outperformance are also great for adding to holdings.
Some of the fund’s top current holdings are in the biomedical sector, a market segment with tremendous earnings growth potential. The fund currently holds Crucell NV (NASDAQ: CRXL), Dendreon Corporation (NASDAQ: DNDN) and Cepheid (NASDAQ: CPHD), all high-profile biotech stocks with potentially huge earnings as well as huge upside. If you don’t have an aggressive growth component in your 401k component in 2011, then POAGX is definitely one to consider for 2011.
#3 – Fidelity Low-Priced Stock (FLPSX)
Manager Joel Tillinghast has rarely owned less than 800 names, and often he owns more than 1000. At last count, the Fidelity Low-Priced Stock (MUTF: FLPSX) held 907 stocks. Tillinghast buys stocks priced at $35 a share or less, which increases the likelihood of small- and mid capitalization investments in bull markets but can net him companies of virtually any size in bear markets.
Normally I’m wary of huge portfolios like Tillinghast’s, but his long-term track record—which reaches back to 1989’s market collapse and banking model meltdown—has been one of solid, consistent performance, particularly when markets and economies find a bottom and begin climbing out of a trough. And he’s built that record on his massively diversified portfolio.
The top holdings in FLPSX come from a variety of sectors, including health care services, consumer services and technology. Companies such as UnitedHealth Group Inc. (NYSE: UNH), Lincare Holdings Inc. (NASDAQ: LNCR), Oracle Corporation (NASDAQ: ORCL) and Safeway Inc. (NYSE: SWY) top the list of the diverse equity exposure in FLPSX.
#4 – Vanguard Emerging Markets ETF (VWO)
It’s risky, and volatile, but the emerging markets are the growth engines of the global economy. As such, a good 401(k) will contain some exposure to this dynamic market segment, and Vanguard Emerging Markets ETF (NYSE: VWO), which tracks the MSCI Emerging Markets Index, is a great way to get it.
The index this fund tracks has changed over the years with countries added and eliminated. Stocks in Brazil, China, India, South Korea and Taiwan represent more than 65% of the fund’s assets at present. And foreign “big-oil” is a major influence on the index, with major producers among the top holdings. In fact, this fund provides tremendous exposure to the energy business without having to invest in an energy sector fund.
Some of the biggest holdings in the fund read like a who’s who of emerging market corporate giants. Companies such as Brazilian mining firm Vale (NYSE: VALE), oil and exploration company Petroleo Brasileiro (NYSE: PBR), premier Asian telecom stock China Mobile Ltd. (NYSE: CHL) and Latin America wireless communications firm America Movil SAB de CV (NYSE: AMX).
Now, because VWO is an exchange-traded fund, you’ll have to use your brokerage option in your 401(k). Of course, I realize that not all plans offer a brokerage option. But the fund also has open-end shares, ticker VEIEX, which may be available in your plan and are fine to use as a substitute for the ETF shares, though they charge 0.50% front-end and 0.25% back-end “purchase” and “redemption” fees. Also, don’t overdo it on your emerging markets allocation. Many of the larger companies you already have in your portfolio have exposure to the emerging markets through their foreign sales and earnings. A 5% to 10% position here would be aggressive.
#5 – Vanguard International Growth Investor (VWIGX)
I always considered Vanguard International Growth Investor’s (MUTF: VWIGX) former lead manager Richard Foulkes one of the best of the breed among international investors. Since Foulkes retired almost five years ago, Virginie Maisonneuve has ably taken over Foulkes’ approximately 45% portion of this $15 billion portfolio.
The fund has three managers, with Baillie Gifford handling another 45% of assets and M&G Investment Management handling about 10% or so. What’s encouraging about the fact that there are three management teams on this portfolio is that it hasn’t exploded to hold hundreds of stocks—it currently has about 180 or so, including companies like Chinese Internet giant Baidu, Inc. (NASDAQ: BIDU), Israeli pharmaceutical company Teva Pharmaceutical Industries (NASDAQ: TEVA) and international consumer conglomerate Unilever Nv/Plc. The top 10 holdings make up about 17% of assets. That’s a good sign of manager conviction, and a whole lot better than buying into a foreign-stock index fund.
With growth stocks presenting some decent opportunities, this fund is a good option as a core foreign holding, particularly given its 25% stake in emerging markets. If international stocks prove to be big winners again in 2011, exposure to this well-managed, diversified international growth fund will be a key component to substantial 401(k) performance going forward.
#6 – Short-Term Investment Grade (VFSTX)
This is my favorite Vanguard fund at the short end of the yield curve. Formerly called Short-Term Corporate, it is extremely safe, produces steady returns, and offers some diversification away from plain-vanilla Treasury funds. Rather than investing only in Treasury, Agency or other government-backed securities, Short-Term Investment-Grade (MUTF: VFSTX) invests in high-quality corporate bonds, asset-backed bonds and a smattering of other non-Treasury securities. The combination responds to rising or falling interest rates less rapidly than Treasurys, meaning that it rises a bit slower when rates drop and falls a bit less when rates rise, since its excess yield protects investors and prices. Over time, a portfolio like this one will outperform a Treasury portfolio, as this one has.
I use this fund as a higher-yield cash substitute and would recommend it in that role for most any retirement portfolio invested for the long haul. Of critical importance from a portfolio diversification/safety standpoint is that while the fund can lose and has lost money in bond market routs, its short duration means it drops less than funds holding bonds of longer maturities and, because of rising yields in its portfolio, begins recouping its losses with larger income streams faster. When interest rates backed up from their recent Nov. 4 lows, Short-Term Investment-Grade lost just 1.3% (data is through 12/20) versus 3.0% for the overall bond market
Now to be certain, if 2011 is anything remotely close to 2010, we are going to see a lot more flux in equities. That said, I also suspect that we’re going to see more upside in stocks of all stripes — and that could turn out to be very good for the well-thought-out 401k portfolio.
So, what funds should you have exposure to as we ring out the old and begin the New Year?
Here are six of my favorite mutual funds and ETFs for 2011.
#1 – Vanguard Dividend Growth (VDIGX)
Large-cap dividend payers were underwhelming in 2010, and the stock picks of Vanguard Dividend Growth (MUTF: VDIGX) manager Don Kilbride were underwhelming as well. In fact, after a three-year run of strong outperformance, Kilbride has lagged for the last two. That said, Dividend Growth’s long-term performance remains well above its benchmark, and it’s always good to invest with a top-notch manager when they’re down because the rebound can be doubly strong.
The differences between this fund’s portfolio and that of most index funds focused on dividend-payers is that Kilbride has the flexibility to go overseas, and he’s done so, putting as much as 15% of the fund’s assets in foreign stocks (the current allocation is just over 6%). With domestic markets outperforming, it’s a good bet that some of Kilbride’s holdings got swept along in the current foreign market pessimism. More importantly though is the fact that Kilbride’s portfolio consists of fewer than 50 stocks. In other words, when Kilbride’s right on a stock or two, he’s going to be very right, and when wrong, which isn’t often, it’s going to hurt.
Some of the top holdings in VDIGX include corporate behemoths Automatic Data Processing (NASDAQ: ADP), Johnson & Johnson (NYSE: JNJ) and Medtronic, Inc. (NYSE: MDT).
I’ve got confidence that Kilbride and his analysts and colleagues at Wellington Management will begin to outperform again. Whether it comes in the next month or in several, this is one fund that meets many of my criteria for a winner, with a single manager, tight portfolio and strong track record and resources to back it up.
#2 – PRIMECAP Odyssey Aggressive Growth (POAGX)
The PRIMECAP Odyssey Aggressive Growth (MUTF: POAGX) invests in common stocks of companies expected to show rapid earnings growth. However, the managers don’t pay up for growth, preferring to identify companies where they feel a catalyst is in the offing, but hasn’t been reflected in current stock prices. I believe this fund is going to be a long-term winner (it’s my single largest personal holding) thanks to its management, led by Theo A. Kolokotrones, President and Co-Founder of PRIMECAP Management Company. The strength of the PRIMECAP team lies in their consistency, among other things. While they only outperform their index benchmarks about six of every 10 months, when they do outperform, they more than make up for months when they lag these same benchmarks. Periods of underperformance are perfect opportunities to add to holdings. Of course, if you’re a long-term investor like me, periods of outperformance are also great for adding to holdings.
Some of the fund’s top current holdings are in the biomedical sector, a market segment with tremendous earnings growth potential. The fund currently holds Crucell NV (NASDAQ: CRXL), Dendreon Corporation (NASDAQ: DNDN) and Cepheid (NASDAQ: CPHD), all high-profile biotech stocks with potentially huge earnings as well as huge upside. If you don’t have an aggressive growth component in your 401k component in 2011, then POAGX is definitely one to consider for 2011.
#3 – Fidelity Low-Priced Stock (FLPSX)
Manager Joel Tillinghast has rarely owned less than 800 names, and often he owns more than 1000. At last count, the Fidelity Low-Priced Stock (MUTF: FLPSX) held 907 stocks. Tillinghast buys stocks priced at $35 a share or less, which increases the likelihood of small- and mid capitalization investments in bull markets but can net him companies of virtually any size in bear markets.
Normally I’m wary of huge portfolios like Tillinghast’s, but his long-term track record—which reaches back to 1989’s market collapse and banking model meltdown—has been one of solid, consistent performance, particularly when markets and economies find a bottom and begin climbing out of a trough. And he’s built that record on his massively diversified portfolio.
The top holdings in FLPSX come from a variety of sectors, including health care services, consumer services and technology. Companies such as UnitedHealth Group Inc. (NYSE: UNH), Lincare Holdings Inc. (NASDAQ: LNCR), Oracle Corporation (NASDAQ: ORCL) and Safeway Inc. (NYSE: SWY) top the list of the diverse equity exposure in FLPSX.
#4 – Vanguard Emerging Markets ETF (VWO)
It’s risky, and volatile, but the emerging markets are the growth engines of the global economy. As such, a good 401(k) will contain some exposure to this dynamic market segment, and Vanguard Emerging Markets ETF (NYSE: VWO), which tracks the MSCI Emerging Markets Index, is a great way to get it.
The index this fund tracks has changed over the years with countries added and eliminated. Stocks in Brazil, China, India, South Korea and Taiwan represent more than 65% of the fund’s assets at present. And foreign “big-oil” is a major influence on the index, with major producers among the top holdings. In fact, this fund provides tremendous exposure to the energy business without having to invest in an energy sector fund.
Some of the biggest holdings in the fund read like a who’s who of emerging market corporate giants. Companies such as Brazilian mining firm Vale (NYSE: VALE), oil and exploration company Petroleo Brasileiro (NYSE: PBR), premier Asian telecom stock China Mobile Ltd. (NYSE: CHL) and Latin America wireless communications firm America Movil SAB de CV (NYSE: AMX).
Now, because VWO is an exchange-traded fund, you’ll have to use your brokerage option in your 401(k). Of course, I realize that not all plans offer a brokerage option. But the fund also has open-end shares, ticker VEIEX, which may be available in your plan and are fine to use as a substitute for the ETF shares, though they charge 0.50% front-end and 0.25% back-end “purchase” and “redemption” fees. Also, don’t overdo it on your emerging markets allocation. Many of the larger companies you already have in your portfolio have exposure to the emerging markets through their foreign sales and earnings. A 5% to 10% position here would be aggressive.
#5 – Vanguard International Growth Investor (VWIGX)
I always considered Vanguard International Growth Investor’s (MUTF: VWIGX) former lead manager Richard Foulkes one of the best of the breed among international investors. Since Foulkes retired almost five years ago, Virginie Maisonneuve has ably taken over Foulkes’ approximately 45% portion of this $15 billion portfolio.
The fund has three managers, with Baillie Gifford handling another 45% of assets and M&G Investment Management handling about 10% or so. What’s encouraging about the fact that there are three management teams on this portfolio is that it hasn’t exploded to hold hundreds of stocks—it currently has about 180 or so, including companies like Chinese Internet giant Baidu, Inc. (NASDAQ: BIDU), Israeli pharmaceutical company Teva Pharmaceutical Industries (NASDAQ: TEVA) and international consumer conglomerate Unilever Nv/Plc. The top 10 holdings make up about 17% of assets. That’s a good sign of manager conviction, and a whole lot better than buying into a foreign-stock index fund.
With growth stocks presenting some decent opportunities, this fund is a good option as a core foreign holding, particularly given its 25% stake in emerging markets. If international stocks prove to be big winners again in 2011, exposure to this well-managed, diversified international growth fund will be a key component to substantial 401(k) performance going forward.
#6 – Short-Term Investment Grade (VFSTX)
This is my favorite Vanguard fund at the short end of the yield curve. Formerly called Short-Term Corporate, it is extremely safe, produces steady returns, and offers some diversification away from plain-vanilla Treasury funds. Rather than investing only in Treasury, Agency or other government-backed securities, Short-Term Investment-Grade (MUTF: VFSTX) invests in high-quality corporate bonds, asset-backed bonds and a smattering of other non-Treasury securities. The combination responds to rising or falling interest rates less rapidly than Treasurys, meaning that it rises a bit slower when rates drop and falls a bit less when rates rise, since its excess yield protects investors and prices. Over time, a portfolio like this one will outperform a Treasury portfolio, as this one has.
I use this fund as a higher-yield cash substitute and would recommend it in that role for most any retirement portfolio invested for the long haul. Of critical importance from a portfolio diversification/safety standpoint is that while the fund can lose and has lost money in bond market routs, its short duration means it drops less than funds holding bonds of longer maturities and, because of rising yields in its portfolio, begins recouping its losses with larger income streams faster. When interest rates backed up from their recent Nov. 4 lows, Short-Term Investment-Grade lost just 1.3% (data is through 12/20) versus 3.0% for the overall bond market
Wednesday, March 2, 2011
Gold, the States, and Federal Monetary Policy
Why are so many state legislators beginning to call for issuance of a form of gold money?
The Constitution prohibits states from coining money but allows them to make "gold and silver Coin a Tender in Payment of Debts." By prohibiting everything except "gold and silver Coin" the Constitution clearly considers gold and silver coinage to be legitimate, no matter who issues it.
States haven't issued currency in any form for more than a hundred years. So why now? Disgust is probably the answer. Various state legislators are disgusted by the federal government's promiscuous dollar-printing. Accordingly, legislators in a dozen states are contemplating legislation to issue gold or silver-based currencies, including Utah, South Carolina, Virginia and New Hampshire.
The transcript of the debates in the original Constitutional Convention shows that the attitude of the Founders toward paper money was one of contempt. One delegate, Roger Sherman, called for the insertion of an absolute prohibition against states issuing their own paper money.
Sherman's argument prevailed, as the Founder's decided that the states would not possess the power to "emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts" making these prohibitions absolute...
As for the federal government, the earliest drafts of the Constitution included language permitting the federal government to issue unbacked paper money. But this language would not survive the final draft.
Many of the Founders objected strongly to this power. The objections were summed up by delegate Oliver Ellsworth, who sought to "shut and bar the door against paper money."
"Paper money can in no case be necessary," Ellsworth argued, "The power [to issue it] may do harm, never good."
Since most of the Founders agreed, the federal government was also denied the power to issue non-convertible paper money. The federal government mostly operated within these constraints - the main exception being the Civil War, when saving the Union took precedence over all other considerations.
But for most of American history, dollars have been convertible into gold or silver. It is a 20th century innovation to have non-convertible currency. In 1932, FDR denied US citizens the right to convert their dollars into gold by US citizens. Then, in 1971, Richard Nixon denied foreign central banks the right to convert their dollars into gold.
On August 15, 1971, Nixon declared:
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold... Now, what is this action - which is very technical - what does it mean for you?
Let me lay to rest the bugaboo of what is called "devaluation."
If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. (Emphasis supplied.)
President Nixon called the suspension "temporary," but it has been anything but temporary...and the dollar has suffered as a result.
The dollar today is worth less than a quarter was worth in 1971. And yet, Washington has been curiously unresponsive to the suffering brought by Nixon's failed promise. Why? Because Washington, itself, has been a primary beneficiary of monetary depreciation.
The federal government spent $15 billion from 1789-1900. Not $15 billion a year. $15 billion cumulatively. Uncle Sam will spend $10 billion per day in 2011. The federal government spends more every two days than it did altogether for more than America's first century. Although these sums are not adjusted for inflation, they give a correct impression of the magnitude of the change from what our Founders set forth and our early statesmen delivered.
How does Washington get its hands on so much money? Three ways. Taxation, borrowing and printing dollars. The third mechanism is usually the easiest road...at least for a while. Almost no one complains about printing dollars because almost no one feels the resulting consequences directly or immediately.
The power to print money at whim is wrong. It is toxic to our personal and national wellbeing. And it is unconstitutional.
No wonder that legislators in twelve states are considering issuing their own gold-based currencies. By doing so, these states are challenging the federal abuse of an unconstitutional power - challenging the issuance of unhinged paper money.
Federal officials should take these state initiatives as a cue. Federal officials have sworn to preserve, protect and defend the Constitution of the United States. Let them take their oath seriously and restore the convertibility of dollars to gold.
The Constitution prohibits states from coining money but allows them to make "gold and silver Coin a Tender in Payment of Debts." By prohibiting everything except "gold and silver Coin" the Constitution clearly considers gold and silver coinage to be legitimate, no matter who issues it.
States haven't issued currency in any form for more than a hundred years. So why now? Disgust is probably the answer. Various state legislators are disgusted by the federal government's promiscuous dollar-printing. Accordingly, legislators in a dozen states are contemplating legislation to issue gold or silver-based currencies, including Utah, South Carolina, Virginia and New Hampshire.
The transcript of the debates in the original Constitutional Convention shows that the attitude of the Founders toward paper money was one of contempt. One delegate, Roger Sherman, called for the insertion of an absolute prohibition against states issuing their own paper money.
Sherman's argument prevailed, as the Founder's decided that the states would not possess the power to "emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts" making these prohibitions absolute...
As for the federal government, the earliest drafts of the Constitution included language permitting the federal government to issue unbacked paper money. But this language would not survive the final draft.
Many of the Founders objected strongly to this power. The objections were summed up by delegate Oliver Ellsworth, who sought to "shut and bar the door against paper money."
"Paper money can in no case be necessary," Ellsworth argued, "The power [to issue it] may do harm, never good."
Since most of the Founders agreed, the federal government was also denied the power to issue non-convertible paper money. The federal government mostly operated within these constraints - the main exception being the Civil War, when saving the Union took precedence over all other considerations.
But for most of American history, dollars have been convertible into gold or silver. It is a 20th century innovation to have non-convertible currency. In 1932, FDR denied US citizens the right to convert their dollars into gold by US citizens. Then, in 1971, Richard Nixon denied foreign central banks the right to convert their dollars into gold.
On August 15, 1971, Nixon declared:
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold... Now, what is this action - which is very technical - what does it mean for you?
Let me lay to rest the bugaboo of what is called "devaluation."
If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. (Emphasis supplied.)
President Nixon called the suspension "temporary," but it has been anything but temporary...and the dollar has suffered as a result.
The dollar today is worth less than a quarter was worth in 1971. And yet, Washington has been curiously unresponsive to the suffering brought by Nixon's failed promise. Why? Because Washington, itself, has been a primary beneficiary of monetary depreciation.
The federal government spent $15 billion from 1789-1900. Not $15 billion a year. $15 billion cumulatively. Uncle Sam will spend $10 billion per day in 2011. The federal government spends more every two days than it did altogether for more than America's first century. Although these sums are not adjusted for inflation, they give a correct impression of the magnitude of the change from what our Founders set forth and our early statesmen delivered.
How does Washington get its hands on so much money? Three ways. Taxation, borrowing and printing dollars. The third mechanism is usually the easiest road...at least for a while. Almost no one complains about printing dollars because almost no one feels the resulting consequences directly or immediately.
The power to print money at whim is wrong. It is toxic to our personal and national wellbeing. And it is unconstitutional.
No wonder that legislators in twelve states are considering issuing their own gold-based currencies. By doing so, these states are challenging the federal abuse of an unconstitutional power - challenging the issuance of unhinged paper money.
Federal officials should take these state initiatives as a cue. Federal officials have sworn to preserve, protect and defend the Constitution of the United States. Let them take their oath seriously and restore the convertibility of dollars to gold.
Have You Heard of 10%-Yielding
I've uncovered a small group of double-digit yielders that are so unusual nobody knows quite what to call them.
I've heard them called perpetual cash machines (PCM), income deposit securities (IDS), enhanced income securities (EIS), and income participating securities (IPS). I just call them "stapled products."
Call them what you want. You can buy them through just about any brokerage... but you need to find them first. Only a handful -- less than ten -- exist in the entire world.
What makes these securities so unique is that they provide two separate sources of income stapled together. Typically, companies pair a high-yield bond with their common stock. In that case, the distribution comprises one part bond interest income and one part common stock dividend. That gives you predictable bond payouts with potential equity appreciation.
And that income is pretty hefty. The stapled securities I've found pay an average yield of 7-8%. The top one currently yields about 10%. That's good in any environment, much less a nearly 0% interest rate economy.
So what's behind the companies that issue these unique high-yield securities?
In order for a firm to issue a stapled product, it must generate a steady stream of regular annual cash flows. After all, they are expected to pay both regular interest on a bond and steady dividends. As a result, those companies with unpredictable earnings and poor cash flows need not apply. Since cash flows must be stable, only steady companies in solid, non-volatile industries consider issuing shares.
The ones I've found come from a telecom in Alabama, a bus-maker from Canada, and a hospital-owner with facilities in South Dakota and Oklahoma.
Now, I wouldn't call stapled products risk-free -- certainly, there's no free lunch -- but these securities have demonstrated above-average performance.
Over the past three years, for example, my perpetual cash machines have delivered average total returns of 14% annually, trouncing the S&P 500's 1% average annual returns over the same period.
Past success is of course no guarantee of future performance, and some of these securities are more volatile than others so you have to be selective.
But as a group, I count them as one of my favorite asset classes for the money they have made my loyal High-Yield Investing readers over the years and for the steady monthly or quarterly income they provide. [My research staff recently put together a report that covers perpetual cash machines/stapled products, including the gem yielding 10%.
I've heard them called perpetual cash machines (PCM), income deposit securities (IDS), enhanced income securities (EIS), and income participating securities (IPS). I just call them "stapled products."
Call them what you want. You can buy them through just about any brokerage... but you need to find them first. Only a handful -- less than ten -- exist in the entire world.
What makes these securities so unique is that they provide two separate sources of income stapled together. Typically, companies pair a high-yield bond with their common stock. In that case, the distribution comprises one part bond interest income and one part common stock dividend. That gives you predictable bond payouts with potential equity appreciation.
And that income is pretty hefty. The stapled securities I've found pay an average yield of 7-8%. The top one currently yields about 10%. That's good in any environment, much less a nearly 0% interest rate economy.
So what's behind the companies that issue these unique high-yield securities?
In order for a firm to issue a stapled product, it must generate a steady stream of regular annual cash flows. After all, they are expected to pay both regular interest on a bond and steady dividends. As a result, those companies with unpredictable earnings and poor cash flows need not apply. Since cash flows must be stable, only steady companies in solid, non-volatile industries consider issuing shares.
The ones I've found come from a telecom in Alabama, a bus-maker from Canada, and a hospital-owner with facilities in South Dakota and Oklahoma.
Now, I wouldn't call stapled products risk-free -- certainly, there's no free lunch -- but these securities have demonstrated above-average performance.
Over the past three years, for example, my perpetual cash machines have delivered average total returns of 14% annually, trouncing the S&P 500's 1% average annual returns over the same period.
Past success is of course no guarantee of future performance, and some of these securities are more volatile than others so you have to be selective.
But as a group, I count them as one of my favorite asset classes for the money they have made my loyal High-Yield Investing readers over the years and for the steady monthly or quarterly income they provide. [My research staff recently put together a report that covers perpetual cash machines/stapled products, including the gem yielding 10%.
How Goldman Is Playing the Coming Tide of Generic Drugs
Generic drugs are expected to enjoy a banner year in 2011, prompting some investment pros to reformulate their portfolios to get a jump on the transition.
Viewing the medical industry's enormous drug supply chain, some Wall Street strategists are betting on several wholesale distributors and retail drugstores they believe will get a big advantage from the shift to generics from brand-name drugs.
With over $20 billion worth of brand drugs losing protection starting this year, "generics and specialty [drug] launches will make 2011 an attractive year," says a Goldman Sachs team of analysts led by Matthew J. Fassler. The analysts believe three drug "supply chain" distributors are attractive investments in the current environment.
"We prefer exposure to those linked to hospital and physician use," he says. Generics, he adds, are a common theme in Goldman's coverage in the drug-distribution industry. The other analysts in the Goldman group are Robert P. James, Randall Stanicky and Verdell Walker. They expect the diversified large distributors, in particular, to benefit from several exclusive launches of generic drugs in 2011.
"Best Leverage to Generics"
"We are buyers of Amerisource Bergen (ABC), McKesson (MCK) and Medco (MHS)," says Fassler, who notes that generic launches typically have sparked margin expansion at these large distributors. "We expect this to continue in 2011, given several exclusive launch scenarios," he says.
Among the retail drugstores, Goldman analysts favor Walgreen (WAG), where a focus on existing assets, they argue, is yielding margin improvement and expense control, and CVS Caremark (CVS), which is the retailer that's most leveraged to generics.
Amerisource, whose stock has leaped from a 52-week low of 27 a share on Aug. 31, 2010, to $37 on March 1, is Goldman's favorite distributor, because "its exposure to the independent pharmacy customer gives it the best leverage to generics," according to Fassel. Also, he expects its specialty distribution business to gain from some key specialty generics, including Eloxatin, Gemzar and Taxotere.
Eloxatin, a treatment for colorectal cancer, was the biggest single specialty generic launch in 2010, which contributed 25 cents, or 11%, a share to Amerisource's 2010 earnings. The six companies that produced the generic drug came to an agreement last year with the branded medicine's manufacturer, Sanofi Aventis (SNY), to suspend further production of the drug but to restart making them in August of 2012.
Gemzar, a generic for various cancers, including breast and lung, generating sales of $800 million a year, was launched Nov. 15, 2010. The branded drug is produced by Eli Lilly (LLY). Gemzar sales will be a big boost to Amerisource this year, the analysts say.
Taxotere, a generic drug for breast and prostate cancer, "will be the biggest near-term catalyst for distributors such as Amerisource." The generic, whose branded sales were roughly $1.2 billion a year, could get approval soon, says Fassel. And if approved, the most noticeable impact will be to Amerisource, followed by McKesson, given their 55% and 25% market shares, respectively, in the specialty distribution market," the analyst says.
Enter Generic Lipitor
Among other generics that are scheduled to come to market this year is the one that will replace Pfizer's blockbuster Lipitor, the largest-selling branded drug in the world, with annual sales of $7.2 billion. The maker of the generic version of Lipitor, Ranbaxy Labs, will release the product by November this year. Watson Pharmaceutical is also scheduled to come out with its own generic Lipitor. Medco has disclosed an expected significant impact on its bottom and top lines in December from the generic Lipitor.
Also among other generic versions coming on stream are Concerta, a treatment for ADHD (attention deficit hyperactivity disorder) developed by Watson, scheduled for release on May 1, 2011, whose branded drug generated yearly sales of $1.4 billion; Lotrel, a generic drug for high blood pressure, with branded annual sales of $360 million; and Rythmol, a generic drug to treat irregular heartbeat, whose branded version took in annual sales of $121 million.
Goldman values Amerisource's stock, currently trading at $37 a share, at $42 in 12 months. McKesson, now selling for $79 a share, is worth $84, according to Goldman, which started recommending the stock when it was trading at $72 in late January. Medco, now trading at $62, is up from a 52-week low of $43 in late August 2010. Goldman's 12-month target is $77 a share.
Outside the Health Care Battles
Among the retail drugstore chains, Walgreen and CVS are engaged in extensive store remodeling or repositioning efforts to enhance returns. They're also buying back shares and are likely to hike their dividends, says Goldman's Fassel. Walgreen, whose stock is now trading at $43 a share, is up from its 52-week low of $26 hit in July 2010. Goldman's 12-month target is $46. CVS, now trading at $33 a share after hitting a 52-week high of $37.85 on Apr. 15, 2010, is worth $42, according to Goldman.
In all, the drug distribution and retailing sectors, which didn't get embroiled in the heated battles over the health care reform, are surely attractive investment bets as consumer spending for essential medical needs rises quickly.
Viewing the medical industry's enormous drug supply chain, some Wall Street strategists are betting on several wholesale distributors and retail drugstores they believe will get a big advantage from the shift to generics from brand-name drugs.
With over $20 billion worth of brand drugs losing protection starting this year, "generics and specialty [drug] launches will make 2011 an attractive year," says a Goldman Sachs team of analysts led by Matthew J. Fassler. The analysts believe three drug "supply chain" distributors are attractive investments in the current environment.
"We prefer exposure to those linked to hospital and physician use," he says. Generics, he adds, are a common theme in Goldman's coverage in the drug-distribution industry. The other analysts in the Goldman group are Robert P. James, Randall Stanicky and Verdell Walker. They expect the diversified large distributors, in particular, to benefit from several exclusive launches of generic drugs in 2011.
"Best Leverage to Generics"
"We are buyers of Amerisource Bergen (ABC), McKesson (MCK) and Medco (MHS)," says Fassler, who notes that generic launches typically have sparked margin expansion at these large distributors. "We expect this to continue in 2011, given several exclusive launch scenarios," he says.
Among the retail drugstores, Goldman analysts favor Walgreen (WAG), where a focus on existing assets, they argue, is yielding margin improvement and expense control, and CVS Caremark (CVS), which is the retailer that's most leveraged to generics.
Amerisource, whose stock has leaped from a 52-week low of 27 a share on Aug. 31, 2010, to $37 on March 1, is Goldman's favorite distributor, because "its exposure to the independent pharmacy customer gives it the best leverage to generics," according to Fassel. Also, he expects its specialty distribution business to gain from some key specialty generics, including Eloxatin, Gemzar and Taxotere.
Eloxatin, a treatment for colorectal cancer, was the biggest single specialty generic launch in 2010, which contributed 25 cents, or 11%, a share to Amerisource's 2010 earnings. The six companies that produced the generic drug came to an agreement last year with the branded medicine's manufacturer, Sanofi Aventis (SNY), to suspend further production of the drug but to restart making them in August of 2012.
Gemzar, a generic for various cancers, including breast and lung, generating sales of $800 million a year, was launched Nov. 15, 2010. The branded drug is produced by Eli Lilly (LLY). Gemzar sales will be a big boost to Amerisource this year, the analysts say.
Taxotere, a generic drug for breast and prostate cancer, "will be the biggest near-term catalyst for distributors such as Amerisource." The generic, whose branded sales were roughly $1.2 billion a year, could get approval soon, says Fassel. And if approved, the most noticeable impact will be to Amerisource, followed by McKesson, given their 55% and 25% market shares, respectively, in the specialty distribution market," the analyst says.
Enter Generic Lipitor
Among other generics that are scheduled to come to market this year is the one that will replace Pfizer's blockbuster Lipitor, the largest-selling branded drug in the world, with annual sales of $7.2 billion. The maker of the generic version of Lipitor, Ranbaxy Labs, will release the product by November this year. Watson Pharmaceutical is also scheduled to come out with its own generic Lipitor. Medco has disclosed an expected significant impact on its bottom and top lines in December from the generic Lipitor.
Also among other generic versions coming on stream are Concerta, a treatment for ADHD (attention deficit hyperactivity disorder) developed by Watson, scheduled for release on May 1, 2011, whose branded drug generated yearly sales of $1.4 billion; Lotrel, a generic drug for high blood pressure, with branded annual sales of $360 million; and Rythmol, a generic drug to treat irregular heartbeat, whose branded version took in annual sales of $121 million.
Goldman values Amerisource's stock, currently trading at $37 a share, at $42 in 12 months. McKesson, now selling for $79 a share, is worth $84, according to Goldman, which started recommending the stock when it was trading at $72 in late January. Medco, now trading at $62, is up from a 52-week low of $43 in late August 2010. Goldman's 12-month target is $77 a share.
Outside the Health Care Battles
Among the retail drugstore chains, Walgreen and CVS are engaged in extensive store remodeling or repositioning efforts to enhance returns. They're also buying back shares and are likely to hike their dividends, says Goldman's Fassel. Walgreen, whose stock is now trading at $43 a share, is up from its 52-week low of $26 hit in July 2010. Goldman's 12-month target is $46. CVS, now trading at $33 a share after hitting a 52-week high of $37.85 on Apr. 15, 2010, is worth $42, according to Goldman.
In all, the drug distribution and retailing sectors, which didn't get embroiled in the heated battles over the health care reform, are surely attractive investment bets as consumer spending for essential medical needs rises quickly.
Warren Buffett Humiliates The Fear Mongers
Fear mongering is reaching epic proportions.
It makes me sick. I guess it’s just too easy to prey on the fear of the unknown for some people to resist.
They’ll go on and on about the downfalls, shortcomings, and the eventual demise of civilization as we know it. They can cite scary statistics with the best of them.
They’ll point to the Fed’s 0% interest rates and quantitative easing or the lousy housing market. They’ll even cite the bailouts and stimulus as evidence the government is out to replace private business.
But they don’t stop there…
They can scare you with the high unemployment rate and rising commodity prices. And don’t forget the biggie… the destruction of the US Dollar!
They twist and turn the information until it fits their view. Then they show you just how the end will come. And I’ve got to give it to them… they have a convincing argument.
Here’s the kicker…
What am I supposed to do? Should I buy stocks, bonds, ETFs?
Oh, that’s right, invest in gold and silver bars and coins.
Huh?!?
So, if the world falls apart, I’m going to take a few gold pieces to the guys with food and resources and trade them for it. I almost forgot, in a post apocalyptic world, nothing is more important than shiny metals with no practical use!
Give me a break.
Listen, if it all goes down… then you want to own a farm. You need to go off the grid. You need to be self sufficient. You need to own guns and ammo. And maybe a tin-foil hat to make sure “they” can’t read your thoughts.
Then again, there’s a word for people like that... What’s it again? Oh yeah, Crazy!
After all of the fear mongering, it’s time for a voice of reason… someone to bring a little humor and perspective to the situation.
Thank goodness Warren Buffett’s letter to Berkshire Hathaway shareholders hit my inbox this weekend. It was just what I needed.
I was only a few pages into the letter before Mr. Buffett shook some sense into me. He woke me from my fear fueled fog so I could see the fear mongering jesters’ true colors.
If you’re gripped by fear and convinced the problems facing the world today are too great to overcome… read this quote from the Oracle of Omaha’s shareholder letter.
“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.
The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
I couldn't have said it better myself. It’s time to be bullish on America!
It makes me sick. I guess it’s just too easy to prey on the fear of the unknown for some people to resist.
They’ll go on and on about the downfalls, shortcomings, and the eventual demise of civilization as we know it. They can cite scary statistics with the best of them.
They’ll point to the Fed’s 0% interest rates and quantitative easing or the lousy housing market. They’ll even cite the bailouts and stimulus as evidence the government is out to replace private business.
But they don’t stop there…
They can scare you with the high unemployment rate and rising commodity prices. And don’t forget the biggie… the destruction of the US Dollar!
They twist and turn the information until it fits their view. Then they show you just how the end will come. And I’ve got to give it to them… they have a convincing argument.
Here’s the kicker…
What am I supposed to do? Should I buy stocks, bonds, ETFs?
Oh, that’s right, invest in gold and silver bars and coins.
Huh?!?
So, if the world falls apart, I’m going to take a few gold pieces to the guys with food and resources and trade them for it. I almost forgot, in a post apocalyptic world, nothing is more important than shiny metals with no practical use!
Give me a break.
Listen, if it all goes down… then you want to own a farm. You need to go off the grid. You need to be self sufficient. You need to own guns and ammo. And maybe a tin-foil hat to make sure “they” can’t read your thoughts.
Then again, there’s a word for people like that... What’s it again? Oh yeah, Crazy!
After all of the fear mongering, it’s time for a voice of reason… someone to bring a little humor and perspective to the situation.
Thank goodness Warren Buffett’s letter to Berkshire Hathaway shareholders hit my inbox this weekend. It was just what I needed.
I was only a few pages into the letter before Mr. Buffett shook some sense into me. He woke me from my fear fueled fog so I could see the fear mongering jesters’ true colors.
If you’re gripped by fear and convinced the problems facing the world today are too great to overcome… read this quote from the Oracle of Omaha’s shareholder letter.
“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.
The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
I couldn't have said it better myself. It’s time to be bullish on America!
2011 Best Small Cap Stocks
I'm a big fan of low-priced stocks -- especially those that are under $5 a share. At that level, most mutual fund managers are restricted from owning them. But if growth plans pan out and shares move above that threshold, those same fund managers then have the green light to buy in. And once they do, these stocks can keep moving even higher.
Among the various stock screens I maintain, one is for this low-priced group. I give it a fresh look every month or two to see if it's time to get excited about the names on this watch list. I try to calculate the upside I see for each name and put in extra work on the potentially big gainers. Here's my Fab-Five right now.
2011 Best Small Cap Stocks#1. Biodel (Nasdaq: BIOD)
This has been a frustrating stock for many investors, but with a few breaks it could double, triple or even quadruple your money.
Biodel has developed a device that enables insulin to quickly enter the bloodstream. If the device gets approval from the Food and Drug Administration (FDA), the company would face a major opportunity in the diabetes market. Trouble is, the FDA rejected Biodel's application in early November, citing a lack of data to support it. Shares quickly lost half their value and now trade under $2.
That FDA pushback has led management to conduct further studies -- a less-than-ideal result considering the company has just $22 million in the bank. As a result, Biodel may need to raise more money to complete clinical trials. Current cash levels are sufficient for about another year. But the new trials could take at least two years and another $20 to $30 million, implying 25% to 35% dilution at current prices.
Maybe a capital raise won't be necessary. Analysts at Wedbush Morgan suggest that Biodel would make a fine acquisition target, noting that the company's $50 million market value greatly discounts the company's sales potential. If a buyer doesn't emerge and Biodel goes ahead and raises more money, shares could fall to $1.50 (though the long-term potential would remain in place). A sale of the company could yield $5 or even $8 a share -- plenty of risk, but plenty of potential reward as well.
2011 Best Small Cap Stocks#2. Pharmathene (AMEX: PIP)
This is a confusing play at first blush. Pharmathene has just wrapped up a lawsuit seeking major damages from Siga Technologies (Nasdaq: SIGA) regarding an agreement the companies may (or may not) have had to jointly benefit from an important smallpox drug that the U.S. government plans to stockpile in large volumes. A resolution to the lawsuit is expected in the late spring -- or sooner -- and Pharmathene could get hundreds of millions of dollars if it prevails. It's a hard case to handicap, and media reports from the trial indicate that neither the plaintiff nor the defendant emerged as a clear-cut winner. This $3 stock could end up approaching $10 -- or more -- in a best-case scenario, although a move below $2 would be the likely outcome if Siga Technologies prevails.
2011 Best Small Cap Stocks#3. Denny's (Nasdaq; DENN)
Shares of this restaurant chain have risen 51% since I recommended it last August and I think another 50% move may be ahead if the economy gets a little healthier.
This is another retail business model with ample fixed costs, and plenty of operating leverage. Per-share profits are rising at a fast clip and could exceed $0.40 this year. In an improving economy where time-stressed consumers are more likely to dine out, I think earnings power could approach $0.60 or $0.70 a share, which would likely push this $4 stock above the $6 mark.
2011 Best Small Cap Stocks#4. BSD Medical (Nasdaq: BSDM)
Back in January I looked at a trio of high-upside stocks.
Since then, shares of Biolase Technology (Nasdaq: BLTI) have more than doubled while Research Frontiers (Nasdaq: REFR) is up a solid 20%. Yet it's the third stock in that group, BSD Medical, that is my focus right now. As I noted a month ago, the company's heat-focused cancer-treating technology looks promising. All the company lacks is a clear customer base.
The wait may be coming to an end. BSD has secured a few recent deals, highlighted by a just-announced contract for the sale of a device to 21st century Oncology, a radiation therapy center with 98 locations. If this first device earns its keep, might 21st Century order more to place in its other centers? I'm keen to listen to the company's next conference call, which will likely come in early April, to see what the sales pipeline looks like.
Cash of about $19 million looks healthy in the context of a $1 million quarterly cash burn rate, but investors need to see real growth taking shape. That may not come for several more quarters, if at all, but it's hard to deny the very strong clinical data that BSD's devices have shown. The company's current $140 million market value could eventually double or more if BSD starts to generate a rising tide of sales.
2011 Best Small Cap Stocks#5. Hercules Offshore (Nasdaq: HERO)
The moratorium on drilling in the Gulf of Mexico in 2010 as a result of the Deepwater Horizon offshore oil spill created all kinds of havoc for key industry players. One company, Seahawk Drilling (Nasdaq: HAWK), suffered so much from its equipment sitting idle that it had to auction off its drilling rigs at fire-sale prices. That was a stroke of luck for Hercules Offshore, which paid about $100 million for an estimated $400 million in assets, including 20 drilling rigs. As an added bonus, Hercules just saw Seahawk, a key rival, drop out of the business, which should help lease rates firm up when shallow water drilling resumes.
Hercules itself carries far too much debt. If the drilling slowdown continues for an extended period, then shares, currently trading near $4, could re-visit the 52-week low of $2. But the debt load is actually now more palatable to lenders because there are more assets to put against the borrowings. The transaction may have paved the way for Hercules to avoid more restrictive bank covenants that would have loomed later this year. Book value (a measure of a company's assets) now stands at $8 a share, or roughly twice the current stock price. Despite that compelling value, shares may stay range bound until activity in the Gulf picks up. But keep an eye on this one.
Among the various stock screens I maintain, one is for this low-priced group. I give it a fresh look every month or two to see if it's time to get excited about the names on this watch list. I try to calculate the upside I see for each name and put in extra work on the potentially big gainers. Here's my Fab-Five right now.
2011 Best Small Cap Stocks#1. Biodel (Nasdaq: BIOD)
This has been a frustrating stock for many investors, but with a few breaks it could double, triple or even quadruple your money.
Biodel has developed a device that enables insulin to quickly enter the bloodstream. If the device gets approval from the Food and Drug Administration (FDA), the company would face a major opportunity in the diabetes market. Trouble is, the FDA rejected Biodel's application in early November, citing a lack of data to support it. Shares quickly lost half their value and now trade under $2.
That FDA pushback has led management to conduct further studies -- a less-than-ideal result considering the company has just $22 million in the bank. As a result, Biodel may need to raise more money to complete clinical trials. Current cash levels are sufficient for about another year. But the new trials could take at least two years and another $20 to $30 million, implying 25% to 35% dilution at current prices.
Maybe a capital raise won't be necessary. Analysts at Wedbush Morgan suggest that Biodel would make a fine acquisition target, noting that the company's $50 million market value greatly discounts the company's sales potential. If a buyer doesn't emerge and Biodel goes ahead and raises more money, shares could fall to $1.50 (though the long-term potential would remain in place). A sale of the company could yield $5 or even $8 a share -- plenty of risk, but plenty of potential reward as well.
2011 Best Small Cap Stocks#2. Pharmathene (AMEX: PIP)
This is a confusing play at first blush. Pharmathene has just wrapped up a lawsuit seeking major damages from Siga Technologies (Nasdaq: SIGA) regarding an agreement the companies may (or may not) have had to jointly benefit from an important smallpox drug that the U.S. government plans to stockpile in large volumes. A resolution to the lawsuit is expected in the late spring -- or sooner -- and Pharmathene could get hundreds of millions of dollars if it prevails. It's a hard case to handicap, and media reports from the trial indicate that neither the plaintiff nor the defendant emerged as a clear-cut winner. This $3 stock could end up approaching $10 -- or more -- in a best-case scenario, although a move below $2 would be the likely outcome if Siga Technologies prevails.
2011 Best Small Cap Stocks#3. Denny's (Nasdaq; DENN)
Shares of this restaurant chain have risen 51% since I recommended it last August and I think another 50% move may be ahead if the economy gets a little healthier.
This is another retail business model with ample fixed costs, and plenty of operating leverage. Per-share profits are rising at a fast clip and could exceed $0.40 this year. In an improving economy where time-stressed consumers are more likely to dine out, I think earnings power could approach $0.60 or $0.70 a share, which would likely push this $4 stock above the $6 mark.
2011 Best Small Cap Stocks#4. BSD Medical (Nasdaq: BSDM)
Back in January I looked at a trio of high-upside stocks.
Since then, shares of Biolase Technology (Nasdaq: BLTI) have more than doubled while Research Frontiers (Nasdaq: REFR) is up a solid 20%. Yet it's the third stock in that group, BSD Medical, that is my focus right now. As I noted a month ago, the company's heat-focused cancer-treating technology looks promising. All the company lacks is a clear customer base.
The wait may be coming to an end. BSD has secured a few recent deals, highlighted by a just-announced contract for the sale of a device to 21st century Oncology, a radiation therapy center with 98 locations. If this first device earns its keep, might 21st Century order more to place in its other centers? I'm keen to listen to the company's next conference call, which will likely come in early April, to see what the sales pipeline looks like.
Cash of about $19 million looks healthy in the context of a $1 million quarterly cash burn rate, but investors need to see real growth taking shape. That may not come for several more quarters, if at all, but it's hard to deny the very strong clinical data that BSD's devices have shown. The company's current $140 million market value could eventually double or more if BSD starts to generate a rising tide of sales.
2011 Best Small Cap Stocks#5. Hercules Offshore (Nasdaq: HERO)
The moratorium on drilling in the Gulf of Mexico in 2010 as a result of the Deepwater Horizon offshore oil spill created all kinds of havoc for key industry players. One company, Seahawk Drilling (Nasdaq: HAWK), suffered so much from its equipment sitting idle that it had to auction off its drilling rigs at fire-sale prices. That was a stroke of luck for Hercules Offshore, which paid about $100 million for an estimated $400 million in assets, including 20 drilling rigs. As an added bonus, Hercules just saw Seahawk, a key rival, drop out of the business, which should help lease rates firm up when shallow water drilling resumes.
Hercules itself carries far too much debt. If the drilling slowdown continues for an extended period, then shares, currently trading near $4, could re-visit the 52-week low of $2. But the debt load is actually now more palatable to lenders because there are more assets to put against the borrowings. The transaction may have paved the way for Hercules to avoid more restrictive bank covenants that would have loomed later this year. Book value (a measure of a company's assets) now stands at $8 a share, or roughly twice the current stock price. Despite that compelling value, shares may stay range bound until activity in the Gulf picks up. But keep an eye on this one.
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