Last year was one of many ups and downs in the market, but interestingly the stock indices ended the year right where they started, with the S&P 500 index ending just 0.04 points lower than the beginning of the year. We enter 2012 with a mix of factors. America’s economy appears to be strengthening, but our Congress remains as stagnant as ever. Europe’s financial problems, while temporarily quiet, have not been resolved and will likely reap their ugly heads again. Meanwhile, Iran is threatening to blockade the Strait of Hormuz, the only way for oil to go from the Persian Gulf to the Arabian Sea. This would stop the flow of oil from the Middle East to the rest of the world. Iran is making this threat as a counterattack on Europe and the United States increases sanctions to prevent them from building a nuclear bomb. This is a very volatile, unpredictable and dangerous situation with no easy fix. May calm prevail. With the death of Kim Jong IL in North Korea, no one knows how his son Kim Jong Un will act as the new leader of this wayward communist country. The first signs are that he will be as despotic as his father … time will tell. Nationwide, interest rates are at record lows, unemployment rates are falling, albeit at a glacially slow pace, holiday retail sales beat expectations, corporate earnings have been good overall, troops have returned In Iraq, the Occupy Wall Street movement has caused the populace and Congress to stop and think, and of course it is an election year. Like last year, we enter 2012 without clear direction and many variables, most of which are unpredictable, all of which will affect the markets.
There are some things that are predictable. The Fed has told us that they will not raise interest rates until 2013, so it is reasonable to believe that the current environment of favorable rates will remain as it is for at least the next 12 months. This is good for all borrowers and for businesses large and small. In the short term, it is good for high-yielding stocks that are sensitive to interest rates, such as home equity investment trusts, commercial development companies, and oil and gas master limited partnerships. The tricky part is that when rates start to rise, which they eventually will, these high returns will be negatively affected. When the market begins to anticipate the next rate hikes, these stocks will most likely fall before the interest rate increase 6-12 months in advance. So now is the time to be very vigilant and perhaps start reducing investments in these asset classes. Clearly, bonds will be affected in the same way to the extent that bonds that pay low interest rates will suffer significant capital losses when new bonds with higher yields are issued.
It is also reasonable to believe that the current global dependence on fossil fuels will continue at least for the near future. The US is likely to take important steps to become less dependent on Middle East oil and will improve our energy relations with Mexico and Canada, but more importantly, the US will likely allow for increased domestic oil production. and natural gas. With the development of new “fracking” techniques and the exploitation of the Bakken Shale, Marcellus Shale, Utica Shale, and other recent oil and gas discoveries, it is highly likely that the United States will not only significantly reduce its dependence on the Middle East, but they can become net exporters of natural gas and liquefied natural gas. This will mean a build-up of drilling, pipe, storage, etc. infrastructure and will be a boon for this industry.
We know for sure that this is an election year. I will not make any predictions about the outcome of the election, but I know that all the incumbents believe that re-election is more likely when the economy is strong and growing. Additionally, improving consumer confidence bodes well for those seeking reelection, and both the White House and our Congress will do everything in their power to improve the economy, reduce unemployment, and increase consumer confidence for those who are in power stay in power.
We also know that there are many large, blue-chip companies that have been growing for the past 10 years, quietly raising their dividends, increasing productivity, and expanding globally, but their stock prices have remained stagnant. You don’t have to look any further than our largest retailers and conglomerates to see this. My experience has been that “water always seeks its own level” and that in the end a strong fundamentals will outperform everything else, which means we should expect to see some strong movement between some of the biggest and best first-class stocks. . A little research will show you exactly where. Lists like Dividend Aristocrats, Dividend Champions, and actually the Dow 30 are good places to find a lot of these “underperformers.”
There are still plenty of opportunities in “accidental” high-yield stocks. These are stocks that have fallen along with the market or their segment, but have individually maintained solid fundamentals. The problem is, not all high-yield actions are high-yield accidentals. Many are high-yielding because they are high-risk. The key for each individual investor is to determine their own tolerance for risk and then perform the necessary due diligence to find the right actions to meet their own individual goals. Then, based on your assessment of the market, start spreading your funds accordingly, either through dollar cost averaging or some other strategy you’ve chosen.
Whether you choose through annual reports, 10K, quarterly finance, etc. Or choose to review financial information from secondary sources such as Google Finance, Yahoo Finance, MSN Money, to name just a few of the most important, it is important that you understand the most fundamental facts about any company you are considering as an investment. Essentially, you need to understand what a company does well enough that you can explain it to someone else. You must know what type of operation it is, its management style, relevant facts about the company’s growth, profits, business cycle, risk factors, rating versus competition, etc. There are a number of metrics that are very helpful in rating a company against its peers and determining whether a particular equity meets its own specific criteria. These data points and ratios are available on virtually every financial site that follows equities.
Income: look at the trend. Where is the company in its growth cycle?
Profits: Is the company making money? Is income increasing or decreasing? What is the trend of the P / E (price / earnings ratio)? How does the P / E ratio compare to the competition? What are EPS (earnings per share)? What percentage of EPS is paid in dividends? How much is available for R&D, growth, etc.? It is important to note that in some high-yield tax-advantaged companies, such as real estate investment trusts, major limited partnerships, and business development companies, the rules governing their operations are quite different from most companies. corporations. Other metrics such as coverage, DCF (distributable cash flow), and interest rate trends can be just as important to consider as income when evaluating these entities. For details on these companies with special tax advantages, any search engine will provide detailed information on their structure and operations.
Debt / Equity Ratio: In a healthy business, when equity capital is divided into debt, the results should normally be less than one. Comparison with your peers is important to evaluate this metric.
Assets and Liabilities: While there is a wide range of healthy or unhealthy possibilities, as a general rule, you’ll want to see the assets at least twice as many as the liabilities. The division of assets by liabilities results in the Current Ratio, which generally must be at least 2.
Book Value Per Share: Determined by dividing the net worth of a company by the outstanding shares, the book value per share is a metric that indicates how the general market views the success of that company. If the stock is selling above the books, it generally means that the market sees future growth. Sometimes the market is wrong and a company sells below the book, providing a buying opportunity. Different categories tend to have different relationships between book value and share price, so it is important to review other stocks in the same field when evaluating book value per share.
Insider and Institutional Information Use: Are insiders (corporate officers and other insiders) buying or selling? Why? Do they know more than you about the probable future of an equity?
How many times have you heard that what happened in the past is no guarantee of what will happen in the future? Well, the fact is, generally speaking, unless you have a crystal ball, past performance is probably the best place to look as you determine what may happen in the future. This information is available to everyone, but relatively few take advantage of it. It’s much easier to just buy or sell what your broker or financial advisor suggests, but do they really know your risk tolerance, financial goals, and investment parameters? What financial interests are they most concerned with, yours or theirs? Are they willing to take the time to develop a specific plan for you, or will they try to fit it into a pre-existing “canned” plan that your company markets for people like you?
Given the fact that there is no clear direction for the markets in 2012, doesn’t it make more sense than ever to take the time to truly assess your current portfolio, due to due diligence on the stocks you are considering buying in the future? And then staying on top of things so you can make appropriate adjustments midway through as circumstances change? Does anyone care more about your money than you? Seriously? It is not so difficult!
Copyright 2012 Boyd Investment Holdings LLC, All Rights Reserved Worldwide
