Last Sunday, 6.26.11, I visited the Mono Lake / Mammoth Mountain area. I’ve posted some of the photos taken during the drive on Fickr. Take a minute or two and check them out. The area you’re seeing is on the far east side of California around where highway 120 meets highway 395. The elevation ranges from nearly 10,000 – 7,000 feet. The eastern side of the Sierra’s is made up mostly of high elevation desert.
Economists predict that American households will have to contribute an average of $1,398 per year to fulfill pension promises, according to a new study…READ MORE
My Take: If the graph below and the information in the linked article are correct, then we’re most likely going to have some serious adjustments in the country sooner than later. Assuming pension problems create some serious problems for State governments, expect a period of time short or extended where heavy amounts of uncertainty exist in the market. Uncertainty makes people nervous and thus brings about sell offs.
Remember to continue to think defensively when investing. I’m not a chicken little type, but it’s important to have a plan for good and bad weather. How will you respond if the market takes a sharp dive? Where will you want to look for shelter? Where will you want to look for oversold opportunities?
A day after Google launched its answer to Facebook, News Corp sold MySpace, the social networking site displaced by Facebook, for $35 million – $545 million less than it purchased it for in 2005…READ MORE.
My Take: One of the main lessons to learn from the downfall of MySpace is that which seems certain online, is often not certain. Myspace for a number of years was king of the social media world. Who would have thought this would have changed in 2006?
It’s easy to switch services online, which makes online customer loyalty relatively fickle. AOL was once king of Internet providers, then the game changed and they were left out in the cold. MySpace was king of social networking until Facebook’s momentum increased and aced out the trendy MySpace social media platform. Other examples exist and others will follow.
I talk a lot about trends on this site, but I believe a difference exists between a trend and being trendy. When you speak of that which is trendy you’re often talking about what’s in fashion or what is popular with the “in crowd.” When you talk about trends, you might be discussing demographic forecasts for example. Yes, a relation exists, but you can certainly differentiate between the two.
When investing in a company that provides a product or service that you believe is trendy, you should make sure you have an established exit strategy. Your strategy can make or break you when investing. If you’re investing in trendy stocks, but lack a short-term exit strategy, then you’re allowing failure to brew within your portfolio.
Understand that investing in trendy products or services is not a bad idea. The idea though must be properly aligned with a clear strategy that ensures that you’re ready and willing to cash out of a position based on specific positive or negative movements in the stock’s price.
Sometimes swinging for the fences isn’t the best idea. It would be nice to get rich quick over night, but the reality is the odds are heavily stacked against you. For a moment, let’s think about the long-term; 10 or 20 years. Over that time period you want to grow your portfolio’s value and create a foundation that is going to reap larger rewards in the future.
Often times some of the best investing ideas are just around the corner. Big stable companies with a proven track records and a history of dividend increases often prove to be a simple recipe for preserving and growing wealth.
What great investment is right around the corner? Most of us live not too far from a gas station that is owned by a very large and stable company. These companies have more stability than many governments around the world. They provide a product that the world needs to run and they have the excessive amounts of capital needed to continue development and delivery.
Are you familiar with the company named Chevron (CVX)? You’ve probably seen a Chevron gas station or two and you obviously know they’re involved with energy products. The company’s market cap is over 200 billion. CVX’s market cap is larger than companies like Johnson & Johnson and Proctor & Gamble.
CVX currently yields 3.2% annually from its dividend distributions. On top of that the company has shown a commitment of maintaining and growing their dividend payments. In 1990 the company paid a quarterly dividend of .175 cents. In 2000 the company paid a quarterly dividend of .325 cents. In 2010 the company started paying a quarterly dividend of .72 cents. Today the quarterly dividend is at .78 cents.
If you had bought Chevron in the early ‘90s, you probably would have entered in to your position in the mid to high teens. For example, let’s say we bought 625 shares at $16 for an initial investment of $10,000. At the time we would earn .70 cents in dividends annually (.175 x 4 = .70), which would equate to roughly a 4.4% yield (.7 / $16 = 4.4375%).
Now, let’s fast forward 20 years. We assume you’re still holding the 625 shares and have only realized gains from the dividends you’ve collected. Today you’re earning .72 per quarter, which equates to $2.88 in dividends annually. Based on your original investment, your dividend yield is now 18% ($2.88 / $16 = 18%)!
Eighteen percent is impressive enough, but let’s look at one more item that’s relevant before we end. We’re assuming that you’re holding this stock in perpetuity, so we won’t talk about stock price appreciation. Instead, let’s explore how much you would have gained from the sum of all your dividend distributions.
From the start of 1990 until today you would have earned a total of $32.3115 in dividends per share. Multiply you total dividends by your initial 625 shares and you end up with $20,194.69 in dividends. That’s comes to on average over a $1,000 in dividend payments annually for a 20 year period. What did you have to do for this return to fall into your lap? You did nothing, except invest $10,000.
Do not sleep on companies that are boring. Some of them have proven track records of increasing dividend payments, appreciating in price and, at the end of the day, paying off handsomely.
Disclosure: No Position
A couple weeks ago I wrote about the significance of the dividend growth rate for long-term investors. Since that time I’ve given more thought to the subject. It should not be forgotten that companies that are able to consistently raise their dividend distribution are demonstrating, through tangible actions, that their company is a success.
One area that new and experienced investors worry about is earnings. First, investors worry about positive earnings because we all want to be part of a company that is alive and not moving towards death. Second, we want to believe that the earnings we’re being told about are legitimate. Yes, the number looks great, but is it an accounting scheme or is this some oddity that we’re not aware of? No one wants to be deceived.
A company that has a history of growing its dividend yield has demonstrated growth and earnings legitimacy. If you’re looking at historical data to evaluate a company, a growing dividend is a very strong sign that the company has a business model that has been proven successful.
In my previous example I looked at Pepsi, which had an extensive track record of dividend increases. When a company is able to year over year boost its dividend distribution, it’s showing real performance. Sure dividend payments can be maintained and even grown for a short period, if a company has a large cash holding, but after a few years reality will set in. In such cases you may have a company with an enormous dividend yield based on its current offering price. Why would this be the case? It would be the case because its payout ratio indicates that the dividend it’s paying is unsustainable! Unsustainable dividends do not increase the demand for a stock.
Look at the World Wrestling Entertainment Company (WWE). The company’s payout ratio has for over a year has been astronomically high (near 300%). The earnings of the company have not been sufficient to cover the quarterly dividend distribution paid out (.36 per share). To continue the dividend payout the company’s founders reduced the dividend amount paid to their class B shares and reallocated the dividend funds to the class A shares. This worked out great for a while, but when you’re not bringing in enough money, eventually the cosmetics ware off. The most recent quarterly dividend payment from the WWE declined from .36 per share to .12 per share.
What is stated above may sound confusing, yet it’s not. When earnings come out you will typically see in a press release a figure quoted saying something like, “…in the 3rd Quarter X company earned .xx cents per share.” Okay, great information. Now, go and look at what they have historically paid per quarter as a dividend. Is the amount paid per quarter as a dividend more or less than the earnings per share? If the earnings are less than the dividend a red flag should go up.
I know a lot a investors have a fear about the legitimacy of companies for sale on the public market. To a certain extent this fear is healthy. One way to help negate such fear is to fish in the waters of companies that have a track record of increasing their dividend payments. The longer the track record typically the better, but if I was pushed to say, I’d go with 5 years or more of annual increases to feel pretty comfortable with the legitimacy of a company’s dividend growth.
The simplest answer I could give someone if I was asked, “How do you know X company is legitimate?” would be to say “X company has increased its dividend distribution for Y years now.” Certainly there are other things that need to be evaluated when considering buying a company, but if you want something quick and dirty; look at the dividend track record and determine where it shows growth or not.
Note: If you’re looking at companies that do not pay dividends this obviously will not work.
Disclosure: No Position
When I was an undergrad I remember the college I went to had an “American Dream” lecture series. The business department brought in various speakers each semester to discuss some type of business venture they were involved in. It was an event that engaged both the community and student body. One semester the speaker was an owner of a petroleum distribution company. The lecture was interesting, but what sticks with me most was his discussion about the prospect of importing liquid natural gas (LNG).
At the time of the lecture the price of natural gas was around $7 MMBtu. This was a significant increase over what it had been only a few years before. Since that time the current and projected supply of natural gas in the U.S. as increased dramatically. The price of natural gas now rests around $4 MMBtu and energy companies across the U.S. are looking to export their supply.
Japan’s recent earthquake and nuclear fallout have causes some European countries to take a staunch anti-nuclear position. Some ‘green’ energy sources will make up the slack, but some other major energy source will need to fill the bulk of the void. The Russians in the past few years have used their natural gas lines for political purposes. No country wants to be a position of being held hostage by another country. Across the Atlantic the U.S. finds itself in a position of having an oversupply of natural gas. Do you see an emerging need and solution?
Last month the Department of Energy gave approval for Cheniere Energy Inc. (LNG) to export 2.2 billion cubic feet of natural gas per day from its Sabine Pass, La. port. This is the first time the U.S. has approved the export of natural gas from a source in lower 48 states. Exports are set to start in 2015.
The prospect of exporting natural gas overseas could potentially gain momentum depending on how other sources of energy and geopolitical situations change in the coming years. A number of variables are at play here, so the end result is not clear, yet you should be aware of the current trend/direction that the natural gas markets in the U.S. are moving.
I always find information such as what I’ve discussed above as a helpful tool in terms of placing other events in a more accurate perspective. For example, if I have somewhat of a handle on the natural gas industry, it will help me better understand the potential impact of the growth or demise of another form of energy. Knowing how players relate to one another is important. In this case, knowing the potential of an energy source can help you as you process additional information about the limits or potential of competing energy sources.
Disclosure: No Position
Related post: Mexico’s Need for Natural Gas Spells Opportunity
Earlier this week I wrote a blog about the growing need for online security. Now it is time to explore a few companies that provide solutions to an ever more dangerous online world. Though this is a tech heavy realm, you may be surprised that you can find a dividend paying company in this online security category.
Intersections, Inc. (INTX) is a company that has its focus set on curtailing identify theft. Just a few days ago it announced that it had entered into a contract with Comcast, one of the largest providers of Internet connectivity in the U.S. Per the agreement, INTX will provide Comcast Internet customers with their online identify theft prevention solution Identity Guard. Identify theft is a real problem for Internet users and something almost everyone fears. Establishing this contract with a major player like Comcast will help the company grow its customer base and establish itself as an online ID theft solutions provider.
In terms of investing, INTX’s current dividend yield is at 3.7%. The payout ratio is 32% and its beta over a 5 year period rests at .17. The trailing Price to Earnings ratio rests slightly under 12. Remember, this company has a large credit monitoring and analysis operation. The reason why you have the dividend is that it’s not a relatively new software company that is throwing all their earnings back into R&D and general operations growth. With the growing need for online identify theft solutions, INTX is integrating a new growth component into their business model. People wish to be proactive in preventing ID theft problems and INTX is helping meet that need.
When you move away from individual Internet user needs, you look toward what is commonly referred to as the cloud. Cloud computing is a growing trend that will continue to grow at a fast pace in the coming years. Whether you realize it or not, if you’re using Yahoo! Mail or GMail, you’re most likely utilizing a form of cloud technology. That example is only the tip of the iceburg.
If the cloud will be a game changer in terms of how we gain access to certain applications, don’t you think that it will have some security implications? Of course it will. Cloud computing shifts the majority of processing and storage to a centralized location. Therefore, if someone hacks the main location, the implications for all users feeding off of that location are huge. If your computer gets a virus, it’s a bad day for you. If a cloud server gets a virus it’s a bad day for all users on that server.
Commtouch (CTCH) is an Israeli company that is providing a cloud computing security solution for cloud computing service providers. Their current software offering enables cloud based systems to stop spam and viruses that are distributed via email. CTCH processes 2 billion email messages daily and see their business growing 35%-40% annually. More recently they’ve entered into the web security realm that is focused on identifying malicious sites. Just recently this technology has been expanded to encompass mobile browsing.
CTCH is a small company. It has a market cap of around $77.5 million. The product offering of the company is very focused on a specific niche. Assuming that their technology keeps developing to meet the ever changing needs and dangers of online connectivity, the company should continue to grow as at the same or faster pace than the industry it operates in. It’s certainly the more risky pick of the two, but success would mean more upside.
These two stocks are a starting point in the realm of online security. Many more companies exist. As you can see, this investment area does offer some variety. INTX is a company many value investors would gratitate towards. When I first started my research I really did not expect to come across a stock that’s paying 3.7% annually in dividends. You never know what’s out there until you look.
Disclosure: No Position
Whether it’s television, radio, newspapers or a magazine, you likely come into contact with some form of mainstream investment commentator on a regular basis. In our present day Jim Cramer of CNBC is the most well known investment commentator. He has a nightly show and writes for his website, www.TheStreet.com. Since Cramer is the biggest dot on the radar screen, I’ll use him to convey my point regarding how to use mainstream commentary to come up with your own investment ideas.
Cramer is often picked on by other commentators and other people in general. It’s either his style, track record or a combination of both that are at the root of their disdain. I don’t take part in such bashing because I don’t expect Cramer to be the key to my investment dreams. The man has a show he does during the weeknights in which people expect him to throw out a variety of buy or sell calls on a number of stocks. Anyone operating under such circumstances is going to be prone to constant failure.
You cannot depend on someone that is forced to constantly throw out stock ideas for the sake of ratings to guide your portfolio to the promised land. Think about this…Do you think Cramer invests like he runs his 1/2 program? Throwing out stocks and seeing what sticks? I doubt it.
Whether it’s Cramer’s show or some other regular stock recommendation installment, you need to first sit back and relax. We’re not at a horse race. The information provided does not need to be acted upon NOW. No one is forcing you to rush. There are many stocks in the sea.
What you should do is remember those ideas (trends) and/or specific stocks that were mentioned. What sounded good to you? What sounded promising? Based on that information go out and look around for more information. As you’re looking around related ideas/stocks may show themselves.
My point is that you should use commentators as a spring-board to other investing ideas. When you hear BUY X STOCK! Don’t stop with X. What’s the rational behind the recommendation? What other areas are positioned to prosper if this X stock is really a smart buy? The market, like the economy and everything else in life, is an interconnected web. No company stands alone.
Don’t fixate on catching wind of the next big stock from your favorite commentator. Instead focus on identifying general ideas/themes that can help you on your own path to finding where you need to be to thrive.
The quest for specific types of energy sources can cause one country or company to be at an advantage over another country. Mexico is a country that over the past decade, and into the foreseeable future, is planning to expand its reliance on natural gas. For energy companies in the U.S. this need poses an opportunity. Where a need exists an investment opportunity is born.
For over the past decade Mexico has substantially increased its capacity to generate energy via natural gas power. Between 1999-2009 natural gas power generation in Mexico has increase 257%. The Federal Electricity Commission of Mexico is still continuing its push for more natural gas powered plants. According to Barclays, in 2024 an additional 19,000 MW of natural gas plants could be brought online.
The Barclays report goes on to discuss how the push for natural gas fired plants is causing a surge in liquid natural gas (LNG) imports via various sea ports in Mexico. Though shipping is effective in getting greater supplies to Mexico, the more efficient way would be direct pipeline transfers from the U.S. The capacity exists and if the expansion of natural gas plants in Mexico continues, the lines will be utilized to a greater extent than ever before.
Assuming that Mexico is years away from establishing domestic production to counteract the need for substantial imports, how can an investor benefit from Mexico’s natural gas need? If pipelines make the most sense in terms of efficiency and economics, then what companies exist that already have lines running into Mexico for natural gas transfers?
One company that operates in the San Diego area of California, but has natural gas pipeline exposure in Mexico is Sempra Energy (SRE). SRE is utility company with a market cap of 12.5 billion. It has a 3.6% annual dividend yield. Its last quarterly dividend payment increased its dividend from .39 to .48 (a 23% increase). Its payout ratio is 45% and has a beta of .5
|Company||Price (6/22/11)||Yield||Payout Ratio||Beta|
SRE is a value stock, but is likely to find itself in a beneficial situation with Mexico’s increasing demand for natural gas. A portion of SRE’s business lines are dedicated to the operation of LNG receipt terminals in the U.S. and Mexico and the pipeline and gas storage facilities that run from the U.S. into Mexico. SRE is well positioned to capitalize on growing Mexican hunger for natural gas.
As I have written before, I constantly look for value companies that have some form of a growth component in their business model. In such cases investors can capitalize on the best of both worlds; growth and value. In a climate where Mexico needs more natural gas and the U.S. has an oversupply, SRE is one company that already has the infrastructure necessary to fulfill the need.
Whether it is SRE or another company with pipelines or some other natural gas exposure in Mexico, you are aware of a trend for at least the next decade. Now is the time to find well positioned companies and begin to place your portfolio in a position to thrive.
Disclosure: No Position
Over the past week the largest publicly traded Mixed Martial Arts (MMA) company changed hands (95% of the company at least, market cap = $6.7mil). This big news has caused a renewed push for ProElite (PELE.PK) to reinstate its operations as a MMA promotion with the goal of becoming the #2 MMA promotion in the U.S. behind the Ultimate Fighting Championship. The details of this transaction are not the subjected of this blog. What I want to emphasize is the incredible volatility a low volume stock can achieve with a very small amount of interest or disinterest amongst investors.
When a stock has ‘low volume’ I am speaking about the frequency at which it is traded. When a share of a stock trades the transaction generates volume. The higher the volume the more active or liquid the market is for a certain stock. Many penny stocks have a relatively low volume. Even the companies that appear to have a high amount of volume might not actually have much money trading hands. Keep in mind that volume is reflective of shares changing hands. When the dollar value of a share is very low, then it takes a greater amount of volume to constitute a large amount of money moving amongst traders.
Today ProElite began trading again (trading had halted until the deal was finalized). If you check the stock’s percentage change today you will see that it increased by over 70%. This is impressive, but what you need to look at is the volume that caused this change to happen. The volume was 61,984. If you multiply the volume by the closing price, .12, you will see $7,438 worth of the company moved today.
A stock that is able to jump +70% off of such low volume tells me that the stock is not very liquid. It’s hard to get in and get out of the stock under such conditions. The 70% gain investors booked today could be easily crushed tomorrow. The company actually has 55.85 million shares outstanding, which is tad higher than the 61,984 shares moved today. Therefore, if a large player tips his/her hand, the stock could fall like a rock. Conversely, if a large player wanted in the stock, it could jump without much resistance given current owners are not engaging in any selling. It’s classic supply and demand, but you must understand that conditions like those noted above are very dangerous to any investor looking to make a quick buck. If you’re stuck in an illiquid stock your quick buck can disappear without you being able to escape.
The bottom line is that you should look at a number of factors when you see a stock that has significant price movement. Volume is one of the main factors to consider. Low volume stocks can move up or down very fast. It doesn’t mean a whole lot when $7,000 worth of a stock trades in a day and generates a significant return. Big moves based on minimal volume should trouble rather than entice you.