Category Archives: Kiplinger

6 Stocks to Sell Now

Notwithstanding the stock market’s March 6 swoon, investors have enjoyed solid profits so far this year. Most stocks have seen their prices rise, with the lowest-quality companies performing the best. Still, companies with problems will eventually see their share prices fall. So now is a perfect time to get rid of the dogs in your portfolio — before they shed their fleas.

We think the stocks of the six companies below are unattractive because they have fundamental problems with their businesses, not just high stock prices. Although a few have already experienced significant share-price declines, we think you should get out now if you still own them. And if you’re an aggressive investor, consider these stocks prime candidates to sell short.

Start with Groupon (symbol GRPN). The Chicago-based daily-deals company has been one of the biggest beneficiaries of the hype surrounding social media. It arranges deals with local merchants, e-mails the bargains to its millions of subscribers, then splits the revenues with the merchants. Groupon’s initial public offering debuted at $20 in November. The stock peaked at $31.14 on its first day of trading, but within a month tumbled below $15. It now trades at $18.13 (all prices are as of the March 3 close).

Groupon may be the first company in this business, but there are no barriers to entry and competition is heating up. In addition to other start-ups, such as Living Social, deep-pocketed giants Amazon and Google have entered the market, as well as big media firms, such as the Washington Post and New York Times.

Groupon’s numbers are starting to reflect the tougher climate. Although its revenues soared 419% in 2011, quarterly revenue growth in North America declined every quarter last year. Operating expenses jumped 149% in 2011, and the company has yet to post a profit.

Most worrisome is the company’s history of using the bulk of early venture-capital funding to buy stock from insiders, instead of investing in the business. That leads one to believe the shares could crater on May 4, when the 180-day lock-up ends and insiders get their first chance to sell stock in the public market.

It’s risky taking on a Wall Street darling, which Salesforce.com (CRM) became after moving into cloud computing, a technology that lets companies access their data from anywhere over the Web. Since November 2008, shares of the San Francisco-based provider of customer-relationship-management software have surged nearly six-fold, to $142.08.

But we see storm clouds on the horizon that many investors are ignoring. For the fourth quarter that ended January 31, Salesforce reported that revenues jumped 38%, to $632 million. That’s not bad. The problem is that operating expenses grew just as fast. Moreover, Salesforce’s balance sheet shows that the company has only enough short-term assets on hand to cover 72% of its short-term debts, suggesting that Salesforce could soon experience a cash crunch.

Much more disturbing is the company’s own view of the future. For the fiscal year that ends next January, Salesforce predicts that revenue growth will fall to 29% from 37% last year. The stock, meanwhile, sells for 90 times the $1.60 or so per share that Salesforce forecasts it will earn in the January 2013 fiscal year. Investors may well have their heads in the cloud to award Salesforce’s shares such a stratospheric price.

For the other four stocks go to Kiplinger.com.

Hennessy Continues Cautious View on Economy

Even as the stock market surged on Thursday, Neil Hennessy, chairman and chief investment officer of the Hennessy Funds, continues to hold a cautious outlook for stocks and the economy.

The Dow Jones Industrial Average jumped 340 points Thursday, or 2.9%, to 12209, while the S&P 500 soared 43 points, or 3.4%, to 1285 after bondholders of European debt were browbeaten by politicians into accepting at 50% write-down to their Greek debt.

While the bondholders’ new Greek haircut removes one black cloud hanging over the markets, Hennessy believes there’s enough negativity in the U.S. economy to remain wary of the near future.

On Tuesday, Hennessy announced the rebalancing of his portfolio for his Focus 30 Fund. He screens for five variables, market cap between $1 billion and $10 billion, no foreign stocks, price-to-sales ratio below 1.5, growth in annual earnings, and stock price appreciation over last six months. This strategy has given the fund a 21.7% annualized return over the past three years, beating the S&P 500’s 17.4%. But over the past year the fund underperformed the index by 50 basis points to 10.37%, as of Oct. 27.

A closer look at the portfolio changes gives an idea of what Hennessy thinks will be the growth sectors next year. The biggest changes were consumer discretionary fell from 50% of the portfolio to 30%, while utilities jumped from 0% to 30%, and consumer staples from 0% to 10%. Meanwhile, financials, health care, and materials all fell to zero. With consumer discretionary down and utilities and consumer staples up this long-term growth mutual fund is so defensive it looks like they’ve battened down the hatches for a big storm.

Much like when I spoke with Hennessy a year ago, he continues to feel one of the biggest problems for business is the lack of leadership in Washington.

One of the biggest issues is that the Dodd-Frank regulations remain mostly unwritten. Without a clear understanding of what the government plans to do about new regulations, taxes, or the new healthcare plan, Hennessy says few companies are willing to hire. And with the presidential campaign picking up steam, he has little hope of clarity before the election.

With unemployment high, economic growth remains low, he added. Highlighting his sentiment is U.S. consumer confidence fell in August to its lowest level since March 2009. Also in August, investors pulled the most money out of mutual funds since October 2008, right after the Lehman Brothers bankruptcy.

With the yield on the Dow Jones Industrial Average at 2.9%, Hennessy says, just like last year, companies will focus on dividends, either initiating or increasing existing ones, as a way to drive their stock prices higher. Meanwhile, the Dogs of the Dow, the ten highest-yielding stocks in the Dow industrials, currently yield 4.1%, or 30% higher than the 3.2% yield on the 30-year U.S. Treasury Bond. The Hennessy Total Return Fund is a mutual fund that tracks the Dogs of the Dow strategy.

Hennessy says stocks are cheap because market fundamentals, such as price-to-sales, price-to-book, price-to-cash-flow and price-to-earnings, are significantly below their 5-year and 10-year averages. The market’s P/E ratio is currently a multiple of 13, compared to its 5-year average of 16.

If you want to focus on the two main sectors of the Focus 30 Fund check out the Utilities Select Sector SPDR ETF (XLU) or the Consumer Staple Select Sector SPDR ETF (XLP).

Five good ETFs for dividend investing:
SPDR S&P Dividend ETF (SDY)
WisdomTree Emerging Markets Equity Income Fund (DEM)
iShares S&P U.S. Preferred Stock Index Fund (PFF)
First Trust DJ Global Select Dividend Index Fund (FGD)
Guggenheim Multi-Asset Income ETF (CVY)

For my full analysis of these five ETFs go to Kiplinger.com.

When Exchange-Traded Notes Trump ETFs

On the surface, exchange-traded notes appear similar to their more popular cousins, exchange-traded funds. Both seek to match some sort of market barometer, and both offer similar advantages over actively managed mutual funds: lower fees, lower investment minimums and greater tax efficiency. And, like stocks, you can trade them throughout the day.

But don’t be misled. ETFs and ETNs are very different animals. ETFs mimic the indexes they track by holding a diversified collection of securities, such as stocks or bonds. ETNs, however, don’t own anything. An ETN is an unsecured debt that is typically issued by an investment bank. Like an ETF, an ETN tracks an index. But when you invest in a note, you’re merely buying a promise from the issuer to pay you the index’s return, minus fees.

So when you buy an ETN, you not only take a chance on whatever index the note seeks to copy, you also assume the risk that the issuer could fail to make good on its promise. Investors in three ETNs sponsored by Lehman Brothers got a taste of that sort of risk after Leh­man went belly up in 2008. So far, none of its creditors, including its ETN investors, has received a penny.

So Why Buy ETNs?

Even with all that extra risk, notes do have some advantages. For starters, ETNs offer access to hard-to-reach asset classes and investment strategies (we’ll discuss some of them later). Moreover, although ETFs are subject to tracking error — that is, the chance that the fund will not move precisely in sync with the index it’s designed to match — ETNs are not.

ETNs are also more tax-friendly than ETFs. ETFs, like mutual funds, must distribute annually to shareholders all the interest and dividends they collect from the securities they hold. Investors who receive these distributions in taxable accounts must share their earnings with the IRS at rates as high as 35%. An ETN, by contrast, reflects the collection of dividends and interest by adjusting its net asset value, so you don’t pay taxes until you sell the ETN. And if you hold an ETN for more than a year, you pay the long-term capital-gains tax rate of 15%.

Commodity-oriented ETNs also have a tax edge over similar exchange-traded products. With a commodity ETN, you pay taxes when you sell, allowing you to pay the favorable capital-gains tax rate if you hold the ETN for more than a year. Most exchange-traded commodity funds invest in futures contracts and are set up as limited partnerships. That means investors have to tackle potentially complex Schedule K1 forms. Moreover, you must pay taxes on any capital gains the ETF realized during the year, even if you didn’t sell any shares. In addition, ETFs that hold precious metals, such as gold, are taxed as collectibles, at a maximum rate of 28%, not 15%. (Currency ETNs don’t have the same advantage as other ETNs; interest from these ETNs is taxed as ordinary income on an annual basis.)

4 ETNs Worth a Look

In each case we list below, the ETN either offers advantages over comparable ETFs or provides a strategy that is unavailable with an ETF.

Commodities. Because of the tax pluses, investors may find Elements Linked to the Rogers International Com­modity Index — Total Return (RJI) the best way to invest in stuff. Issued by the Swedish Export Credit Corp., RJI is the fourth-largest ETN in the U.S., with $919 million in assets. It follows a benchmark of 38 commodities created by Jim Rogers, a commodity expert and author. The index has a 44% weighting in energy, 35% in agricultural products and 21% in precious and base metals. Over the past year, the ETN returned 40.4%, compared with 37.9% for PowerShares DB Commodity Index Tracking Fund (DBC), the largest commodity-oriented ETF (all returns are through June 3). The ETN’s annual expense ratio is 0.75%.

For the full story and other three ETNs, go to Kiplinger.com.

RGI Gives an Industrial-Strength Performance

Rydex S&P 500 Equal Weight Industrials ETF (RGI) offers investors an uncommon, but potentially lucrative, way to diversify their exposure to the stocks of large and midsize industrial companies.

This exchange-traded fund tracks the industrial sector of Standard & Poor’s 500-stock index. But instead of weighting the stocks by their market capitalizations, the approach used in most indexes, the Rydex fund assigns each stock an equal weighting.

In traditional market-cap-weighted benchmarks, large companies are much more influential than small firms. For example, the five biggest S&P industrials account for 32% of the index, with General Electric alone representing 11%. In the Rydex ETF, each stock counts for about 1.8%. The effect is to give smaller companies, such as Cintas and Masco, as much weight as Goliaths such as GE.

So far, Rydex’s approach has paid off. From the ETF’s November 2006 launch through May 6, it gained 6.2% annualized. That compares with 3.9% annualized for the Dow Jones industrial average and 5.2% for the market-cap-weighted S&P industrials. (The fund charges 0.50% in annual expenses.) And with manufacturing output having jumped at an annual rate of 9.1% in the first quarter of 2011, industrial stocks look appealing.

Big moves in individual stocks can throw an equal-weighted index out of whack. Rydex seeks to keep positions close by rebalancing its holdings quarterly.

For the full story with chart go to Kiplinger.com.

5 Excellent ETFs for Emerging Markets

Emerging-markets stocks are short of breath, which is understandable. Over the previous two years, and for most of this millennium, the stock indexes in up-and-coming countries blew away the Dow Jones industrial average, the Nasdaq 100 index, Standard & Poor’s 500-stock index and other popular benchmarks in the developed world. But now it’s 2011, and emerging markets are backtracking. The benchmark MSCI Emerging Markets Index, which measures 21 emerging-markets country indexes, has lost 5.2% so far this year. The S&P 500, by contrast, is up 1.7% (all return figures are through March 17).

This might warn you to stay away from emerging markets, or if you’ve been investing profitably in these nations, to bring your money home. We disagree. Instead of cashing out, this is an excellent time to enter emerging markets or to increase your stake, and using exchange-traded funds is a great way to do so. The future remains bright for Asia, Eastern Europe and South America, a group of markets headed by the BRICs — Brazil, Russia, India and China — and also featuring such prosperous countries as South Africa, South Korea and Taiwan.

There’s no denying the present problems. A big reason for the emerging markets’ decline so far in 2011 is high inflation, fueled by record or near-record prices for oil and other basic materials, plus soaring food costs. To keep inflation from getting out of control, central banks in some developing countries have raised interest rates and may push them higher. Rising rates slow economic growth by increasing the cost of borrowing. At least one analyst fears that the emerging nations may not raise rates enough to tame rising prices. “We think the primary driver [for the stocks’ decline] is a lack of emerging-market central-bank inflation-fighting credibility in the face of mounting food-driven pricing pressure,” says Alec Young, Standard & Poor’s international stock strategist.

Turmoil in the Middle East and North Africa and the devastating earthquake, tsunami and nuclear-power-plant crisis aren’t helping matters. Though most African and Middle Eastern countries are classified as frontier markets, which are less liquid and more lightly regulated than emerging markets, some investors worry that non-democratic countries that do have the status of emerging markets may also suffer disruptions. And the disaster in Japan has the potential of slowing growth all over the world because of disruptions in the global supply chain.

Nevertheless, the reason to invest in this group still holds: Most of the world’s growth for the next ten years will come from emerging economies. With a few exceptions, they are not drowning in debt, and they didn’t suffer badly from the credit meltdown. They have young, growing middle classes that are buying cars and houses and like to spend their newly earned discretionary income as they please. If all pans out, says Michael Gavin, Barclays Capital’s head of emerging-markets strategy, developing-markets stocks will return an annualized 10.5% through 2021. Those kinds of returns are worth shooting for.

A Broad Index ETF

To earn the return of the MSCI Emerging Markets Index, buy Vanguard MSCI Emerging Market Stock ETF (VWO). You start with the advantage of the lowest expense ratio in the emerging-markets sector, 0.22%, plus you get a dividend yield of 1.8%. The top countries by weighting are China, 17.6%; Brazil, 16.3%; South Korea, 13.7%; Taiwan, 11.2%; South Africa, the only African country in the index, 7.5%; Russia, 7.4%; and India, 7.2%. The fund is down 5.2% this year, but has returned an annualized 43.8% over the last two years, and 12.7% annualized since its creation in 2005.

This ETF doesn’t carry the risks that a manager may pick the wrong stocks or the wrong countries. The drawback is that because it invests only in large and mega-size companies, many of which do big business in the U.S. and Europe, you aren’t making a pure and direct investment in the growth of emerging nations. But so far that hasn’t been much of a drag on results.

To read about the other four ETFs:

  • WisdomTree Emerging Markets Equity Income Fund (DEM)
  • WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)
  • SPDR S&P Emerging Asia Pacific ETF (GMF)
  • iShares S&P Latin America 40 Index Fund (ILF)

Go to Kiplinger.com.

6 Cult Stocks to Buy and Sell

Mythic status is typically reserved for sports heroes and Oscar winners, but lately a bunch of stocks have acquired the mantle. These issues are sitting on astronomical price gains and have a cult-like devotion among their followers, I mean, shareholders.

You know the type: true believers intent on convincing you their company is changing the world and destined to grow forever. With a religious fervor, they tweet and blog and paint Facebook walls to defend their investments. It’s no surprise cult stocks are the most dangerous kind to sell short (try to profit from a falling stock by selling borrowed shares with the intention of buying them back for less).

That’s not to say these companies don’t deserve special status. “They become cult stocks because they pass the uniqueness test,” says R.J. Hottovy, Morningstar’s director of consumer research. This comes from creating a unique product or retail or food-service concept. Some are fads, like Crocs, and blow up fast, taking late-arriving speculators for every last dollar. Others succumb gradually to knockoffs, changing tastes, or some rival’s better technology. But enough develop their brands into icons and accumulate immense financial firepower.

No wonder, then, that such companies’ shares don’t just appreciate steadily. They soar far beyond what is realistic if you link the stock to fundamentals such as the profit margin or the earnings growth rate. Eventually, it gets tough to reach ambitious targets for year-over-year sales and earnings growth. But in a market starved for stories, who is to say a cult stock cannot go ever-higher on momentum?

So we decided to study six to see if the business remains on the cutting edge and if their devotees still drink the Kool-Aid. (All prices and stock-related data are as of March 16.)

Apple (AAPL, $330.01)

It’s no shock that the king of the cult stocks is Apple. Whenever Apple launches a new product — think iPod, iPhone, iPad and iTunes — it changes the consumer electronics industry and a lot of others, including Wall Street. As we pass the two-year anniversary of when the stock market bottomed in early March 2009, Apple stock has more than quadrupled from its 2009 low of $78. The Standard & Poor’s 500-stock index only doubled.

While Apple’s product lines have seen phenomenal growth, Apple only owns a small share of its growing markets. The iPhone holds 16% of the global smart-phone market, and the Mac claims less than 5% of the world’s personal-computer volume. Apple shares trade at just 15 times this year’s earnings estimate, almost a five-year low for the price-earnings ratio. Compared to the S&P 500’s P/E of 15 times 2011 estimates and 23 for big tech stocks, Apple actually looks cheap. We rate it BUY

The other five cult stocks are Netflix (NFLX), Amazon.com (AMZN), Priceline.com (PCLN ) Chipolte Mexican Grill (CMG) and Polo Ralph Lauren (RL).

For the full article go to Kiplinger.com or if you prefer go to the slideshow for this article.

How to Buy Into Facebook Before It Goes Public

Goldman Sachs caused a stir in early January when word broke that it would invest $450 million in Facebook. Even more intriguing, though, was the news that Goldman would create a fund through which its clients could buy some $1.5 billion worth of shares in the fast-growing, privately held social-networking company.

But you don’t have to be a well-heeled Goldman client to get in on Facebook or other hot, privately held companies before they go public. Two Web sites — SharesPost.com and SecondMarket.com — provide electronic platforms that allow qualified investors to buy shares from company insiders and employees who want to cash out before a company goes public. By offering a way to enter an area previously open only to Wall Street’s elite, “we democratize the opportunity to invest in private company stocks,” says David Weir, chief executive of SharesPost.

Since 2004, SecondMarket, a registered brokerage, has been offering a marketplace for alternative investments, such as asset-backed securities, mortgage securities and limited-partnership interests. Last year, $400 million worth of transactions closed on SecondMarket, up from $100 million in 2009. At present, 40 private stock issues trade on the platform, with Facebook, Twitter and LinkedIn the most active.

SharesPost, founded in June 2009, is not a brokerage but works with brokers to manage transactions. Currently, it lists 150 privately held companies, with the total number of buy and sell orders available (not actual trades) worth roughly $400 million.

For the full story go to Kiplinger.com.