Stock of the Day - May 22, 2009 - PM

Finally a new article! It has been over a month since we last posted a Stock of the Day, but now that finals are over and summer break has started, expect new articles multiple times a week.  So, keep checking for new posts and let me know if there are any specific stocks that you want to learn about or want to invest in so that we can write about them.  Since it has been so long since our last post, we thought we would write about one of our favorite companies today.  It is a pretty long article, but we didn't want to leave out any of the positives.  Enjoy! -CT

Philip Morris International (PM)

A couple of months ago, I wrote about how much I loved Altria (MO), and how I believed that it was one of the best stocks that you could purchase.  While I still think Altria is a great company and a good stock, I now have a new favorite tobacco company, and potentially a new favorite stock.  Philip Morris International (PM) actually spun off of Altria in March 2008 to become its own entity, and I am very upbeat about the outlook for this relatively new company.  Philip Morris manufactures and sells tobacco products strictly outside of the United States.  Some of its most popular cigarette brands include Marlboro, Parliament, and Virginia Slims.  The company’s products are sold in around 160 countries, and it continues to expand its global reach.

I love this company for many reasons, and I believe that its stock price has much more potential than Altria’s to move higher. Throughout the rest of this article, not only will I point out why Philip Morris is such a great investment, but I will also prove why it is a better investment than Altria.

The first aspect of Philip Morris that excites me is its growth opportunities.  Philip Morris has the whole world to sell to, and this freedom to sell its products across the globe will ensure high growth for years to come.  While the cigarette market has been shrinking in some markets, such as Japan, and smoking bans and higher taxes have lowered cigarette demand in other parts of the world, such as the European Union, Phillip Morris has the unique ability to move its operations out of these areas and focus on places where cigarette demand is increasing.  Philip Morris actually saw its strongest revenue growth in the first quarter of 2009 in emerging markets.  The company grew its revenue in the Latin America and Canada region by 28% compared to the same period a year ago, and revenue also grew in Eastern Europe, the Middle East, and Africa by 6%.  As the middle class in these developing nations become wealthier, they will have more money to spend on cigarettes, thus boosting the prospects for Philip Morris’ profits down the road. 

Because Altria sells its products strictly in the United States, it does not have the ability to focus on selling in new and growing markets.  Actually, cigarette demand in the U.S. has been steadily decreasing by 3% for a while now, thus leaving Altria with less and less demand for its core product every year. 

Not only does Philip Morris have the ability to grow by expanding its operations to new regions and emerging markets, but the company also has a lot of room to boost its popularity and gain more market share.  While Altria has a commanding 50.7% of the domestic cigarette market, Philip Morris only controls about 16% of the market for cigarettes outside of the United States.  Philip Morris International is still a relatively young company, and I believe that it can greatly increase its market share up from 16%, while Altria has pretty much peaked at 50.7%.  One of the main reasons that Philip Morris will have the ability to continue amassing market share in the international markets is because there are a lot fewer regulations for advertising cigarettes internationally.  Altria, on the other hand, cannot promote its brands because advertising for cigarettes is illegal in the United States. 

The topic of government regulation is another reason why I like Philip Morris more than Altria.  The United States continues to enforce massive taxes and strict regulations on the tobacco industry.  It seems like almost every month a new law against smoking is passed in the United States, and just recently, the U.S. imposed an additional 61-cent tax on every cigarette pack sold.  There are also constant litigation fears that keep investors uneasy about investing in Altria, as the fear of a massive lawsuit against tobacco companies always seems to be in the process.  Foreign governments, on the other hand, are usually more lenient towards the tobacco industry, as they realize that cigarettes have the ability to bring in a lot of tax revenues.  So, Philip Morris has more freedom to advertise, it is vastly less concerned with lawsuits, and if any government wants to start getting tough on cigarettes with anti-smoking laws and higher taxes, Philip Morris always has the option of just ending operations in that country and moving into a new region that seems more profitable. Altria has no such option.

Another crucial factor to Philip Morris International’s future success has to do with the U.S. Dollar that is bound to become weaker as the U.S. faces more inflationary pressure.  Basically, because the U.S. Government is printing so much money to keep our country out of a depression, many believe that there will eventually be too many dollars in the system when the economy rebounds.  This excess supply of dollars in the system will make each dollar worth less compared to foreign currencies.  And, because Philip Morris makes its money in foreign currencies and books its profits in U.S. Dollars, the company’s profits will be larger as a result.  So, if you believe that inflation is a very real possibility in the future, which I definitely do, then investing in a company that does all of its business overseas is a very wise choice.  Altria, on the other hand, has no exposure to foreign currencies, and thus will not be able to take advantage of the currency fluctuations.  Instead, Altria will probably suffer due to the upcoming inflation, as domestic cigarettes will continue to become more expensive, and demand will continue to decrease as a result.

The positives for Philip Morris seem to never end.  The company has extremely high cash flow, which will allow it to continue expanding without worrying too much about debt levels.  The stock also pays a very high and very safe 5.05% dividend.  Without including currency fluctuations, sales for the first quarter of 2009 rose 6.3% and the company’s EPS also grew 12.7% compared to the first quarter of 2008.  The company was able to improve its profitability and obtain its highest quarterly revenue ever by raising the prices of its products.  It is clear to see that Philip Morris has been unaffected by the global recession, as it continues to raise prices and boast higher revenues and profits as a result. 

With such great growth prospects, looming inflation for the U.S. Dollar, and the great dividend and cash flow, Philip Morris seems to be a definite buy.  It is currently trading at $42.81, and I believe it is very cheap right now.  Having said this, I think an overall market pullback is on the horizon, so I would probably wait until it hits $40 to buy some shares.  This is one of my favorite stocks, and I believe it would be smart to buy some shares and hold on to them for a long time. 

 

Niki Pezeshki

College Trillionaire

Stock of the Day - April 16, 2009 - MMM

3M Corporation (MMM)

3M (MMM) is the company that manufacturers Scotch tape and Post-it notes. But to limit the gigantic industrial company to two well-known products would misrepresent the organization. 3M is constantly developing and producing new products that are viable in categories varying from health care to security systems. These products range from the reflective materials that make highway signs visible at night, to automated library systems, to the films placed on LCD televisions that increase brightness. The company does business internationally in 60 different countries and is constantly innovating. 3M gains value from its multiple types of diversification: diversity in products, in customers, and in geographic regions.

The wide variety of the company’s products allows 3M to sell its goods to multiple entities. To illustrate this point, consider the previous examples. 3M would sell highway signs to governments, automated library systems to institutions, and LCD televisions to retailers or end consumers. This is advantageous for 3M because if one product purchaser is suffering from macroeconomic conditions, another type of customer may still need to buy its products.

3M is diversified geographically as well. The company does two-thirds of its business outside of the United States with 30% in Asia and 25% in Europe. This form of diversification allows the company’s revenues to remain stable when currencies waver in strength or weakness. If the yen is strong, 3M will capitalize on its strength. Likewise, if the U.S. dollar is weak, the company will make up for domestic sales with international sales.

With roughly 30% of its sales coming from Asian markets, 3M is well poised to take advantage of China’s economic recovery. China’s government is investing heavily in infrastructure and technology. 3M’s industrial products account for 31% of the company’s overall business with products such as industrial tapes and special abrasives for construction.

3M’s diversified product portfolio is grounded by an incredibly stable balance sheet and overall business structure. The company has a market capitalization of 37.28 billion and rests on $2.22 billion in cash. It is currently paying out a dividend of $2.04, a current yield of 3.9%, and has steadily increased dividends for the past 51 years with the most recent boost made in February.

The company fared better than most throughout the dismal year that was 2008. Sales were up 3.3% on the year over 2007, while net income was down .4%. Earnings per share actually increased by 3.8% to $5.17 in 2008 due to stock buybacks. Despite this relative success, the company’s forecasts for 2009 are not as optimistic. 3M expects sales to drop between 6% to 7% and full-year earnings per share to drop from 9% to 17%. The company based these projections on a lack of economic visibility for the future.

3M is not merely waiting for the economy to turn around. The company trimmed 2,400 jobs in the fourth quarter of 2008 as part of a restructuring program that the company is undertaking to save over $700 million in 2009. More recently, the company offered 3,600 employees retirement packages, and it will be cutting capital expenditures by 30% in 2009.

The company’s stock has most recently traded at $53.73 after hitting its 52-week low of $40.87 in March. The company’s stock price steadily fell after the release of lowered projections in February until it hit is low, and has since bounced back. 3M will announce its earnings for the 1^st quarter of 2009 on April 24^th. While analysts’ expectations are low, I still expect the stock price to take a hit after that date due to lower earnings numbers.

I would wait till after the earnings report and a subsequent pullback in stock price to buy 3M. The company is a powerful international player that is incredibly well diversified. I believe that 3M is currently undervalued and positioned for a great deal of long-term growth. With this said, it would still be preferable to purchase stock at a lower level: ideally in the low-to-mid 40s.

 

-Matt Schwartz

College Trillionaire

The Value Investor's Handbook

This is a link to an Investopedia article about Value Investing, one of my favorite investing strategies.  This investing style helped Warren Buffet become the richest man in the world, and it should help you a little more with your own investments as well.  Enjoy! 

http://investopedia.com/articles/fundamental-analysis/09/value-investing.asp

Stock of the Day - April 12, 2009 - LMT

Lockheed Martin Corporation (LMT)

Lockheed Martin (LMT) is the world’s largest military weapons maker, and it is the Pentagon’s biggest contractor by sales.  The company’s main competitors include Boeing (BA), Northrop Grumman (NOC), and General Dynamics (GD), all three of which are also defense companies.

Lockheed Martin, which is currently trading at $73.32, is around 40% below its 52-week high of $120.30, and it has lost 15% of its stock value in 2009.  I think Lockheed Martin is undervalued right now in the $70’s, as the lack of certainty about the company’s future earnings power has kept the share prices down.

Companies like Lockheed Martin are extremely dependent on government decisions in regards to military spending, as 85% of LMT’s sales come directly from the U.S. Government.  So, while investors and analysts eagerly anticipated Defense Secretary Robert Gates’ defense budget plans that were announced last week, there was heavy selling pressure due to uncertainty about the budget plans.  Many investors and analysts believed that the Obama administration would be drastically cutting the defense budget, as the current administration’s agenda seems to be focused less on the military than George Bush’s was. 

But, Gates’ proposed budget plans came as a surprise to many people who thought he would cut spending, as he proposed a $534 billion defense budget (up 4% from last year).  While this might sound great, a 4% increase implies that spending will essentially stay flat when accounting for inflation.  So, what did the budget plan include that will directly affect Lockheed Martin?

One of the most controversial issues in the proposed budget is Gates’ plan to limit Lockheed Martin’s F-22 Raptor fighter jets at the 187 already ordered, essentially cutting the extra 60 that were supposed to be purchased.  The F-22 is the most technologically advanced fighter jet today, as it is capable of hovering in place and detecting and killing an enemy from more than 200 miles away.  But these fighter jets cost $354 million each, and in this recession in which the government is spending trillions of dollars, we just cannot afford to make more fighter jets than is completely necessary.  But all is not lost for Lockheed Martin, as Gates’ budget plans included details that will counteract the decrease in spending on the F-22.  Gates said that the government would begin focusing on Lockheed-made F-35 Joint Striker jets, as they are cheaper and more suitable for today’s war environment.

With Obama in charge and an understanding that war has changed in the 21^st century from conventional warfare to more irregular conflicts with enemies that are more unpredictable, defense spending will continue to change.  Gates has made a point in his new budget to move away from equipment used in more conventional wars, such as heavily armored tanks, to weapons that are more fit for defending ourselves against the new-age enemies.  With technologically advanced weapons and jets such as the F-22 and the F-35, Lockheed Martin should continue to be a dominant player in the defense industry. 

Another aspect of today’s economic and political landscape to consider when investing in a defense company is to realize that we are in a recession, and that the government has to make a conscious effort to reign in unnecessary spending like never before.  While the proposed defense budget did increase by 4% this year, many cuts were made to the most expensive projects, and to many of the projects that were deemed as unnecessary or too speculative.  The U.S. Government has made it a point to produce weapons that are necessary for today’s wars, and I believe that this is great news for Lockheed Martin.

In terms of the company’s stock price, I think it was unfairly brought down on speculation that Obama and his team would drastically lower the defense budget.  Now that it is clear that the budget has increased instead of decreased, it seems ridiculous to me that Lockheed Martin shares are still trading 40% below their 52-week highs.  Last time I checked, there is still a lot of conflict in countries like Afghanistan, and the problems in the rest of the Middle East do not seem to be ending anytime soon.  As long as there are wars to be fought, Lockheed Martin’s services will be in high demand.  At these depressed prices, and with continued demand from the government, I believe that Lockheed Martin is a definite buy. 

(Having said this, I will not be investing any money in Lockheed Martin, as I have a moral issue with owning shares of military and weapons companies.  But, if you feel no moral issues with investing in a defense company, then I would highly suggest buying some shares of Lockheed Martin.)

 

Niki Pezeshki

College Trillionaire

Stock of the Day - April 5, 2009 - CFSG

China Fire and Security Group, Inc.

We’re giving you a look today at a small, speculative company that deals overseas. China Fire & Security Group (CFSG) manufactures and installs industrial fire safety products (think fire extinguishers and smoke detectors) and systems to organizational customers in China. With a small market capitalization of $228.96 million, buying this company’s stock may be risky, but it sure has a lot of potential.

The driving factor behind China Fire is the location in which it works: China. The communist nation is expanding and industrializing at a rapid rate. Every factory that opens is a potential customer for China Fire. China is seeing its GDP grow at a rate of 7.5% per year currently. When you consider that the United States’ GDP grew only 2.5% in 2008, it is easy to see that China is moving at a fast clip.

But a GDP growth rate of 7.5% per year does not satisfy the needs of China’s economy. Analysts estimate that roughly 24 million Chinese people enter the work force every year. China’s GDP growth needs to be around 9%-10% to provide enough jobs for these new workers. So its current growth rate of 7.5% (roughly three times as fast as ours) is too slow! The Chinese government is smart, so they are attempting to bump the GDP up by 2 to 3% by implementing a $586 billion stimulus package that was announced at the end of last year.

Now, with the Chinese economy lesson aside, it is important to note that China Fire is poised to capitalize on all of China’s growth and the stimulus package. The company’s main customers are members of iron, steel, power, and petrochemical industries. These industries are at the heart of China’s stimulus package. All of the smelting, electrical power, and increases in labor will definitely require new fire protection systems and equipment. In fact, China Fire just secured a contract with Dongbei Special Steel Group this March valued at $4.4 million.

We take a lot for granted in the United States, including legalities that require fire safety systems in all buildings. Many buildings in China do not have the fire safety systems or equipment that every U.S. building does. China’s middle class is growing, and it is also growing discontent with the lack of safety. As the market leader in China’s fire safety industry, China Fire will be at the source of improvements in safety.

The potential for growth is backed by factual data that shows the company has been actually growing. CEO Brian Lin, in China Fire’s earnings announcement on March 12^th, reported record revenues of $61 million, a 47.8% increase year over year. Additionally, net income of $24.7 million was an increase of 47%. In a time when most American companies were seeing large declines in income, and even significant losses, China Fire is surging.

CFSG was trading around its 52-week low of $5.62 in early March when this earnings report was released. After the announcement, it jumped to the $8 range, and has been trading there since. I don’t think that its current price reflects the company’s true value and potential for growth. China Fire has a ridiculously juicy PEG ratio of .31, meaning that investors have yet to factor the company’s growth rate into its current stock price.

Now is the time to buy China Fire. The country in which it operates is rapidly expanding and making big moves, and the company reported record financial numbers in 2008 and appears to be able to continue its growth. Finally, China Fire is largely unknown by investors and is an opportunity for you to buy before everyone else gets in. While waiting for a pull back after the recent extended rally may be wise, buying China Fire now would still be a great move for your portfolio.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - March 31, 2009 - CX

Cemex, S.A.B. de C.V. (CX)

Cemex (CX) is a Mexican cement company that engages in the production, distribution, and sales of cement and other construction materials.  It is the third largest cement company in the world, and it operates in more than 50 countries.  Cemex is actually the United States’ number one cement supplier!

Cemex’s stock price, which is currently trading at $6.25, has been crushed in the past year.  The stock is around 80% percent lower than its 52-week high of $32.61! While you might think to yourself that Obama’s infrastructure plans and an economic recovery will surely drive this company’s stock price higher in the near future, it is crucial to understand the financial hardships that Cemex currently finds itself in. 

The company is dealing with massive debt, and if it does not sort out its financial situation very soon, bankruptcy is a very real option for Cemex.  As of December 2008, Cemex was $14.2 billion in debt, and for 2008, the company owes its creditors around $4 billion!  For a company with a market cap around $4.5 billion, these debt numbers are unbelievably large and very hazardous.

How did it get itself into these debt levels? When the economy was great, construction was booming, and people were in need of cement, Cemex felt invincible.  The company continued to make acquisitions and buy other cement companies in order to increase its capacity and grow its business.  Unfortunately though, the money Cemex used to buy the other cement companies came from loans that had to eventually be paid back.  The problem now is that construction has come to a halt, demand for cement has drastically decreased, and Cemex isn’t making the same money that it used to in order to be able to pay back its creditors. 

The best example of this reckless expansion comes from Cemex’s last acquisition.  Cemex bought Rinker Materials, the largest Australian cement producer, for a little more than $15 billion in mid-2007.  At the time of the purchase, many people celebrated Cemex’s decision, as Rinker experienced most of its sales in booming construction states like California and Florida, thus giving Cemex more exposure to these revenue-generating areas.  The deal raised Cemex’s net debt to $17.8 billion, but many analysts still liked it because they did not see the coming economic and housing crisis.  Unfortunately for Cemex, the housing crisis in the United States came very soon after its acquisition of Rinker.  Since then, it has been a steeply downward sloping trend for Cemex’s stock price. 

So, the question now is not whether or not Cemex’s stock is a good buy in anticipation of a market recovery, but the real question is whether or not Cemex as a company can last long enough to make it out of the global recession without having to go through bankruptcy.  Many experts are predicting that there is a good chance Cemex will run out of money by this summer if it does not restructure its debt or find another way to make some money. 

One option for Cemex to raise some cash is to issue bonds, but because of the company’s distressed situation and with the overall poor health of the economy, the interest rates that it would have to pay on those bonds would be around 15-16%, rates that would end up causing even more problems in the future.  Cemex is not going the bond route, but is instead trying to restructure its debt with the banks that it owes money too.  If that does not work out, there is a lot of speculation that the Mexican government would step in and bail out the company with enough money to repay its debts so that it can avoid bankruptcy.  The claim is that Cemex is too important of a company for Mexico, and letting it go bankrupt would be a disaster for the already weakened Mexican economy.  This situation is very similar to the U.S. government bailing out the large financial institutions, as letting some of the big banks go bankrupt would have a very large negative impact on the rest of the economy. 

If Cemex can stay afloat through this recession, it will be a great company to own for an economic recovery.  The company has a great core business model, and with an increase in construction, demand for Cemex’s cement will surely increase.  But, the risks for owning Cemex are extremely high.  This is one of those stocks that can be double or triple in price by June, but it can just as easily be at zero if the company goes bankrupt.  A wait-and-see approach is less risky, but the rewards will be much less, as you will probably be late to jump in.  If you are a speculator, this is the stock to invest in.  Personally, I can’t handle the risk so I am staying away.    

Niki Pezeshki

College Trillionaire

Market Recap - March 27, 2009

Stocks traded lower on Friday, as investors sold some shares and took in profits from the big gains over the past couple of weeks.  The Dow Jones Industrial Average fell 148.38 points (-1.87%), and the S&P 500 also dropped 16.92 points (-2.03%). It was a bad way to end such a great week, as the Dow rose 6.8% this week, and the S&P also climbed 6.2%. 

 

The Dow has surged 21% over the past 13 days, and to think that this unbelievable rally could continue without any profit taking or slight reality checks would be unrealistic.  Although investors are definitely more optimistic about the markets and the economy than they were a month ago, it seems like 21% in 13 days was just too much.  There is still some worry that Wall Street will be disappointed when companies release first quarter earnings.  Another argument that many investors have is that the markets need to retest the lows from a couple of weeks ago and bounce up again in order to truly indicate a market bottom.  As great as this rally has been, I still don’t think that it has convinced anyone that things have officially turned around.  Until that happens, volatility will remain high and investors will continue to debate what to do next.

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 22, 2009 - DEO

Diageo (DEO)

Guinness, Smirnoff, Jose Cuervo, and Captain Morgan are just a few of the alcoholic beverages that Diageo (DEO) produces. Many people believe that sin stocks, or stocks of companies that produce goods considered by some to be immoral or unethical, are recession-resistant. As an alcoholic beverage producer, Diageo finds itself in that category. Is there money to be made from this beer-brewing, wine-bottling, liquor-distilling corporation?

Diageo’s net profit increased 16% to $1.63 billion in the six months ending December 31^st, 2008. At first glance, these numbers make it seem like the company actually is recession-resistant. But, the increase in income can mostly be attributed to a strong U.S. dollar. Although Diageo is based in Europe, the United States is one of the company’s largest markets. Because the company trades its beverages for strong U.S. dollars, it has benefited from exchange rates.

Analysts actually expected much higher results from DEO. The company itself stated that profit from operations was weaker than desired at the end of 2008. CEO Paul Walsh stated that, “the global economic slowdown has affected business in the period, and in November and December this impact was more pronounced.” Diageo cut its growth forecast for full-year operating profit, citing a lack of visibility for the rest of 2009. The report that missed expectations, when combined with an admission of vulnerability to a weakened economy, caused investors to stray away from DEO.

Diageo’s stock has a 52-week range of $40.93-86.19. It most recently traded at $44.18, very close to its 52-week low. While I believe that some drop in share price was necessary to accommodate for weakened macroeconomic conditions, the current price leaves DEO undervalued.

It’s important to note that Diageo maintains a great deal of strength from its top brands. The names are incredibly popular: Smirnoff is the world’s number one vodka, Jose Cuervo is the leading tequila, and Guinness is the top stout. The majority of DEO’s other alcoholic beverages also maintain large market shares. These brands will not suddenly disappear because of slow economic times.

The company’s statistics are also enviable. Diageo bears a large market capitalization of 27.52 billion, pushes out a reliable dividend yielding 3.6%, and most recently generated a free cash flow of $1.24 billion. Add in the fact that the company currently has $3.45 billion in cash, and it’s easy to realize that DEO is a real powerhouse.

My main fear for Diageo is the weakening of the U.S. dollar. Just as DEO benefits from a strong dollar, a weak dollar hurts it. Its sales and large market share in the U.S. would become less valuable if the dollar becomes less valuable. We’re beginning to see a decrease in value of the dollar resulting from a large amount of government spending, a dramatic increase in the printing of money, and shrinking demand for treasuries and debt from foreign countries.

Nevertheless, the U.S. is only one of Diageo’s many markets. The company acts in about 180 countries in North America, Africa, Europe, and Asia. Considering the company’s powerful brands, international diversification, and financial backing makes DEO a great buy at current levels. Diageo is sitting at a relatively cheap price in an industry that does well in harsh economic times, and now is the time to scoop it up.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - March 24, 2009 - Stock Buybacks

Stock Buybacks

Stock buybacks, which are also called share repurchases, occur when a company buys back its own shares from the marketplace.  This action by the company reduces the number of outstanding shares that the public is able to buy and sell. 

So, how do stock buybacks benefit investors? Because stock prices are determined by multiplying the P/E ratio by the Earnings per share (EPS), then it would make sense that a higher EPS would lead to a higher stock price.  EPS is calculated by dividing a company’s net income by the number of outstanding shares. So, when a company repurchases its shares, it is decreasing the number of outstanding shares.  This action decreases the denominator in the EPS formula, thus increasing the company’s EPS.   Because the EPS increases, the overall stock price for the company also increases. 

Let’s do an example.  If Company A has a P/E ratio of 10 and an EPS of 2, the company’s stock price will be $20.  Let’s also assume the company has a net income of $200 and has 100 shares outstanding, thus explaining the EPS of 2 ($200 NI / 100 shares).  If Company A decides to repurchase 50 shares, it will only have 50 shares outstanding.  So, the new EPS will be 4 ($200 NI / 50 shares).  So, if the P/E ratio remains at 10 and the EPS has increased to 4, then the new stock price will be $40 (P/E ratio 10 * EPS 4).  When Company A repurchases half of the outstanding shares, the company’s share price doubles!

It should be clear by now that share repurchases are great for investors.  But, why do companies repurchase shares, and what kind of companies repurchase shares?  Companies with a lot of excess cash are more likely to repurchase shares, mainly because they have the money to buy back their shares.  For cash-rich companies, the best way to directly reward investors is through dividend payouts or through stock buybacks. 

Most of the time, companies that repurchase shares do it because they believe their stock price is undervalued.  By buying their own shares at the perceived discounted prices, companies believe that they will be able to greatly profit in the long run when the stocks that they have purchased appreciate in price. 

Make sure to stay on the lookout for companies that have already repurchased shares or are potential candidates to do it.  When a company buys back shares, it shows that it has a lot of excess cash, but it also shows that the company thinks its stock price is undervalued and that it will go up in the future.  Stock buybacks are a very solid indication of what the company thinks about its own future, as a company would not repurchase shares if it thought that its share prices were on the way down.

Niki Pezeshki

College Trillionaire

Market Recap - March 24, 2009

The same financial stocks that pumped the Dow up 500 points yesterday were responsible for dragging the markets down today. The Dow Jones industrial average lost 115 points (-1.5%) to end the day at 7659.97, while the S&P 500 fell 16.57 points (-2%) to 806.35.

The chairman of the Federal Reserve, Ben Bernanke, and Treasury Secretary Timothy Geithner spoke to the House Financial Services Committee today. The top officials will be asking the committee and, in turn, Congress to provide them with stronger regulatory powers over non-bank financial institutions. AIG is a perfect example of a non-bank financial institution. The ‘insurance’ company engaged in many financial acts, but was exempt from the regulations that affect banks. Bernanke claimed that stronger regulatory powers would have prevented much of the crisis that we are now facing.

While a report yesterday stated that February sales of existing homes increased by 5.1%, a report released today showed that home prices fell 6.3% January compared to the January of 2008.

Oil prices rallied today to $53.98 per barrel while the U.S. dollar continued a three-week decrease in value. Currency traders are fleeing to commodities like oil as a method to avoid potential inflation.  These investors believe that the government’s multiple plans to inject trillions of dollars into the financial system will cause inflation. Oil, gold, silver, and other commodities tend to act as safe havens when inflation is rampant.

The drop in the markets today can be mostly attributed to profit taking. The gigantic rally yesterday provided investors with an opportunity to sell off and receive some juicy profits. Nevertheless, the Dow gained three times as many points yesterday as it lost today. I’ll take that ratio any day.

 

-Matt Schwartz

College Trillionaire

Market Recap - March 23, 2009

The stock market skyrocketed on Monday, as Treasury Secretary Timothy Geithner announced the details of the government’s plan to help the troubled financial system.  The Dow Jones Industrial Average gained 497 points (6.84%) and the S&P 500 surged 54.38 points (7.08%)!

The government’s plan is called the Public-Private Investment Program (PPIP), and it will provide banks with up to $1 trillion in financing in order to get them to start lending again.  The great thing about this plan is that it involves the private sector.  It is a very confusing plan, but if you want to read a good summary of it, check out this link: http://www.thestreet.com/story/10476062/1/geithner-plan-may-aim-1-trillion-at-bad-assets.html.

Another catalyst for today’s jump came from the housing sector.  The National Association of Realtors’ reported that home sales greatly increased in the month of February.  From the month of January to February,  home sales grew 5.1%.  While home prices are still at 10-year lows, many people took the jump in home sales as a sign that people are taking advantage of the low prices.  While this might dilute the impressive numbers, it is still good to know that people are starting to spend more on bigger purchases. 

Today’s jump was unbelievable, as the S&P 500 doesn’t always increase by 7% in one year, let alone in one day!  The good news continues to flow out of Washington and the economy seems to be turning around for the better.  A lot of people are saying that this is a temporary rally, and that we need to retest the lows one more time in order to ensure a bottom.  Right now might be a great time to take some profits and sell some shares.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 22, 2009 - HSY

Hershey Co. (HSY)

Hershey (HSY) produces and distributes a variety of chocolate and confectionary products, including Hershey’s Kisses and Reese’s.  The company is the largest American chocolate producer, with around 45% of the domestic market share.  It is no longer the largest candy producer though, as Mars Inc. recently surpassed Hershey with its $23 billion acquisition of Wrigley. 

Hershey’s stock price only fell 12% in 2008, and it is currently trading at $34.93.  Its share price has actually only dropped 9.04% since exactly one year ago.  Comparing that to the S&P 500, which has lost 43.07% of its value from the same time one year ago, it is clear to see that Hershey has been doing some things right. 

One of the reasons that Hershey’s stock price has not been hurt too badly in this recession is because chocolate is a largely recession-resistant good.  The company actually increased its sales in 2008 by 4% compared to 2007, and chocolate sales continue to do well, as chocolate is considered to be a very affordable luxury.  Eating chocolate is a cheap way to make yourself feel good, and people have turned to it throughout this recession in order to give themselves a treat. 

While I do think that Hershey’s stock price is currently overvalued, I believe that the chocolate company is setting itself up very well for long-term sales growth and profit growth through many different strategic avenues.

The first way in which Hershey is increasing sales growth is by expanding into international markets, something relatively new to the company, as it has historically operated mainly in America.  The company is currently focusing on expanding its operations into Mexico, Brazil, Canada, and Asia.  With its recent purchase of “Van Houton”, a consumer chocolate business in Asia, the candy maker has started its aggressive attempt to increase its presence abroad.  Hershey is also planning on increasing sales through more advertising.  The company has announced that it will take advantage of lower advertising costs by increasing its ad spending by 20% this year. 

In addition to increasing sales growth, Hershey is focusing heavily on increasing its profit growth.  Understanding that its products are more inelastic and recession-resistant than most other products, Hershey has been raising the prices for its most popular products.  This has worked very well for the company, and it has not hurt sales.  Hershey’s raw costs (Cocoa, plastic, oil, etc.) for producing its chocolate and other candy products have also dropped as a result of the recession.  When combining higher selling costs with lower production costs, it is clear to see that the company’s profit margins are increasing.  This means that for everything that Hershey sells, it is making more profit than it used to.  The company’s increase in profit margin, combined with its increase in sales will lead to solid income growth for the company.   

While the fundamentals look great, I have some issues with the company’s stock price.  First of all, Hershey’s shares have increased by 13.6% since March 10^th, far too drastic of a move for a company that usually has a very stable and slow-moving stock price.  This sudden increase has to do with the recent overall market rally, but it also has a lot to do with the fact that Jim Cramer has been promoting the stock heavily on his show.  The company also has a P/E ratio of 25.65 and a PEG ratio of 3.42.  These numbers are ridiculously high when comparing them to other food processing companies, as the average P/E ratio for the industry is 12.12 and the average PEG ratio is 1.47.  Hershey’s valuation numbers are so high, especially compared to its industry, that its stock price seems to be unbelievably overvalued.  People are starting to notice that Hershey’s stock is too pricey, and 7.4 million shares (4.84% of total shares outstanding) are currently being shorted as a result, compared to only 6.1 million shares last month.  Right now might actually be a great time to short Hershey’s stock, before more people catch on to the fact that it is grossly overvalued and pull the stock price down. 

Hershey’s share price would have to drastically decrease for me to even consider buying it.  But even then, I would hesitate for one simple reason.  With a Beta of .25 (Beta was the term of the day on February 6^th), Hershey’s stock price is usually very stable and moves much slower than the overall market.  If the market has bottomed already, or if it is close to bottoming with the expectations of a huge rally coming up, I would not want to be invested in a company with a Beta of .25.  Instead, I want to be invested in companies with Betas of over 1 that I can really profit off of when the markets do start to rally. 

Although Hershey is doing some things right and is slowly growing both sales and profits, I still think that it is overvalued.  If you are looking for another company in the food processing industry, maybe you should check out Heinz (HNZ).  Heinz is giving out a 5.1% dividend yield and is trading with a P/E ratio of 11.17, making it a much better value than Hershey.

Niki Pezeshki

College Trillionaire 

Stock of the Day - March 19, 2009 - AZO

AutoZone (AZO)

AutoZone (AZO) is a specialty retailer of automotive parts and accessories that aims its goods at do-it-yourself customers. The company provides products for consumers to replace or fix broken parts of cars, trucks, and other vehicles. AZO is a very interesting stock that has seen a lot of positive action in the past few months.

The downfall of car manufacturers like General Motors (GM) and Ford (F) has been the catalyst for AutoZone’s growth. People can’t afford to buy new cars, so they’re driving their current cars for a longer amount of time. The older the car, the more repairs and parts are needed to maintain it. In this sense, the recession and economic instability we’re currently witnessing has been beneficial for AutoZone!

Indeed, the company reported fiscal second quarter earnings that blasted through analysts’ expectations. The quarter ending February 14 saw an 8.6% increase in net income and 21.1% increase in earnings per share. The large jump in earnings per share came after the company bought back roughly $375 million worth of its stock.

Investors rewarded the company’s ability to outlast recessionary conditions by buying AZO and driving the stock price upward. AutoZone skyrocketed to its current price of $162.31 after hitting its 52-week low of $84.66 in November. Due to popular sentiment, the stock has potential to keep rising, but I believe that we will soon see AZO drop in price.

My main concern for AutoZone is the large amount of debt that the company is carrying. AZO is currently lugging over $2.2 billion in debt with a very low amount of stockholder equity: it has a high debt/equity ratio at .378. This means that the company has borrowed a lot of money and doesn’t have a comparable amount of growth potential and backing to match its debt. In the financially crippled environment we’re facing, large amounts of debt are far from desirable.

It’s also important to note that AutoZone is a retailer. The retail sector has taken an absolute beating during the economic downturn. AZO should be grouped with discount retailers like Wal Mart (WMT) and Family Dollar (FDO). AutoZone provides secondary products that most customers only buy if they can’t afford to have a mechanic do work for them. Even though discount retailers have been faring better than regular or premium retailers, the entire group is still suffering.

We must also consider the massive rally that AZO has already made. Unfortunately, if you don’t already own the stock, you’ve probably missed the jump on this one. I think that the company is overvalued at its current price. When all the information surrounding AutoZone is boiled down, we’re left with a retail company that is carrying a lot of debt. Even though the company’s stock may increase in the short term, it won’t be able to sustain its current price in the long run. I would even consider selling AutoZone short at these levels.

 

-Matt Schwartz

College Trillionaire

Market Recap - March 18, 2009

Investors saw stocks gain today as the Federal Reserve announced that it would be taking some major steps to stabilize the economy. The Dow Jones Industrial Average gained 90.88 points (1.2%) while the S&P 500 rose 16.23 points (2.1%). Continuing a remarkable rally, the markets have ended in positive territory for 6 of the last 7 days.

Ben Bernanke and the rest of the Federal Reserve’s leading committee are making moves… big moves. The Fed announced today that it would be spending $1.2 trillion (yes, with a ‘T’) in a gargantuan effort to stabilize the financial markets. It will use $300 billion to buy long-term government bonds, $750 billion to purchase mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, and $200 billion to buy debt from those two companies.

The Fed already bought $500 billion in similar mortgage-backed securities from Fannie and Freddie last year. These two government-created companies own or guarantee between 40% and 60% of all American mortgages. Economists and analysts believe that the $500B purchase was the major factor behind a decrease in mortgage rates from about 6% down to 5%. Purchasing $750 billion more in these securities should drive mortgage rates even lower. This would provide a major incentive for people to buy homes.

The purchases of mortgage-backed securities and long-term government bonds were made in efforts to encourage lending. The Fed believes that buying bonds and securities will lower interest rates. Lower interest rates will allow banks to give credit at lower costs to borrowers.

It’s important to understand that the Federal Reserve funds these purchases by simply printing money. From a long-term perspective, adding cash to the money market will devalue the U.S. dollar. While preventing deflation is the Fed’s current goal, many analysts and experts believe that the massive amount of government spending will cause inflation in the future.

Criticisms aside, investors reacted positively to the Fed’s announcement by sending the markets higher. Federal Reserve Chairman Bernanke has a good head on his shoulders, and knows the Great Depression like the back of his hand. If there is one man we can trust with the economy, it’s him. Let’s hope the good news keeps coming in and the markets keep moving up.

Until tomorrow,

 

-Matt Schwartz

College Trillionaire

Market Recap - March 17, 2009

Stocks continued their unbelievable rally on Tuesday, backed by some great news on the housing market! The Dow Jones Industrial Average finished higher 178.73 points (2.48%), the S&P 500 increased 24.23 points (3.21%), and the NASDAQ jumped 58.09 points (4.14%)!

The government reported today that home construction picked up in February, and the market responded very favorably to the unexpected news.  Investors saw this news as another piece of evidence that the economy has bottomed and is starting to turn around.  With Citigroup (C) and Bank of America (BAC) both reporting recently that they were profitable in the first two months of the year, people began to sense a turnaround in the economy.  Now it seems like good news, like this most recent housing report, comes out every day to give the markets even more momentum to the upside.

The tone in the markets is almost unrecognizable, as people have moved from a state of never-ending gloom to a state of hope that this rally has the potential to be sustainable.  Whether or not this rally will be sustainable and we truly have moved up from the bottom is still yet to be seen, but the fact that this rally has been backed by upbeat economic news makes it seem much more realistic than the 20% rally that occurred from November 21^st to the end of 2008. 

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 16, 2009 - APP

American Apparel, Inc. (APP)

American Apparel (APP) is a vertically integrated manufacturer, distributor, and retailer of basic apparel products.  The company, which also operates a wholesale business that sells T-shirts to distributors, employs around 10,000 people and has more than 260 retail stores in 19 countries.

American Apparel’s stock has been massacred this year.  The company’s share price, which is currently trading at $2.40, is down over 75% from its 52-week high of $10.25.  In the past year, the company has flirted with bankruptcy, dealt with a very tough retail market, and has seen its CEO be charged for sexual harassment.  These three factors have pulled the stock down, but looking at the future for American Apparel is very interesting.

The company has been in the news a lot recently.  Before last week, American Apparel was seriously considering filing for bankruptcy, as the company has taken on over $111.6 million in debt to help expands its operations over the past five years.  With the recession causing a lower-than-expected revenue stream, the company was having trouble paying back its loans.  But, American Apparel announced last Friday that private-equity firm Lion Capital was providing it with $80 million in exchange for an 18% stake in the company.  American Apparel will use this money to repay much of its debt, and this cash infusion will likely resolve the company’s debt concern for the next five years.  Investors loved this news, as the threat of bankruptcy is no longer looming, and the company’s shares shot up 68% on Friday.  I also think this cash infusion is great for the company, as American Apparel can take its mind off money problems and back onto the unique designs and efficient operations that make it such an interesting brand.

American Apparel’s sales have actually held up relatively well throughout this recession compared to other retail companies.  The company’s 2008 fourth quarter same-store sales were up 10% compared to a year ago.  December same-store sales were higher 3%, January same-store sales were up 2%, and February same-store sales were down 9% compared to one year ago.  So, while the growth rate of same-store sales has fallen dramatically compared to years past, it is still very impressive that a retail company in such poor economic times has been able to post positive changes in same-store sales numbers until February. These numbers are extremely impressive for American Apparel, and it proves to me that the company has a very devoted and solid consumer base, and that its products are worth buying, even in a recession.

The problem with American Apparel that keeps me from buying its stock is the company’s CEO, Dov Charney.  Charney, who is the face of American Apparel, is infamous for doing things his own way and acting very strange, and his peculiar ways have gotten him into trouble.  A former employee is suing Charney for allegedly walking around the workplace in his underwear, attending staff meeting completely nude, and padding inventory numbers to entice potential investors.  While these allegations may or may not be true, Charney’s reputation and the fact that he seems to always be in the news for the wrong things makes me uneasy about the whole situation.  Walking around nude at work is one thing, but to pad numbers to entice potential investors is unacceptable. The factor that magnifies the issue is that American Apparel is a vertically integrated company, meaning that Charney plays a major role in all aspects of the company, and has more control over the overall business operations than the average CEO.  The fact that a loose cannon like Charney has so much power in American Apparel raises a huge caution flag for any potential investor.  Anytime he makes a mistake or gets in the news for the wrong reasons (which is often), American Apparel’s stock price takes a drastic hit. 

So, while I do think American Apparel is a great brand with room to grow, I still have my doubts about the company’s management team, and specifically about Dov Charney.  I do think that the company’s share price will increase in the future, but the bumpy road to profits that investors will have to deal with as a result of the CEO’s behavioral problems will not be worth it.  If you want to buy retail companies that will be safer, less volatile, and much more certain bets to increase in share price, go with either Wal-Mart (WMT) or Best Buy (BBY).  Both of these companies were previous Stocks of the Day on College Trillionaires, so make sure to read those articles as well.

 

Niki Pezeshki

College Trillionaire

 

CT Note:  Max Siskin, a good friend of mine, owns a lot of shares in American Apparel and thinks very highly of the company’s future prospects.  He will post his response to this article in the near future, so make sure you check out what he has to say about American Apparel on College Trillionaires!

Market Recap - March 16, 2009

The markets edged slightly lower today, ending a four-day rally that began last week. The Dow Jones industrial average fell 7.01 points (-.10%) and the S&P 500 dropped 2.66 points (-.35%).

Stocks continued their gains today until the Dow was up 169 points. After reaching this level investors steadily sold off, taking gains until the indexes closed in negative territory. The profit taking was a part of normal market behavior, analysts said.

American International Group paid out an estimated $165 million in bonuses last Friday to top executives. These extra payments came after taxpayers have given the company $170 billion in bailouts since September of 2008. President Obama asked, “How do they justify this outrage to the taxpayers who are keeping the company afloat?”

Even though the markets ended the day lower than they began, we witnessed a good sign in the form of investor optimism this morning. Traders weren’t given much in the form of news today, yet stocks still rose until the afternoon. Confidence is key in the process of discovering a bottom.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - March 12, 2009 - COP

Conoco Phillips (COP)

Conoco Phillips (COP) is the 3^rd largest integrated energy company in the United States. The company explores and produces oil, natural gas, and natural gas liquids in several countries around the world. Conoco Phillips’ stock price has been absolutely battered since the economic downturn, and I believe now may be a great time to buy.

COP traded around its 52-week high of $95.96 in June of 2008. Since then, the company’s stock price has tanked as the prices of oil and natural gas have plummeted. The stock last traded at $37.39, about three dollars above its 52-week low of $34.12. Was there merit to this steep drop in price?

Conoco Phillips posted a massive $31 billion loss in the 4^th quarter of 2008 that resulted from a $34 billion write down of asset value. COP suffered from horrible timing. The company rapidly expanded its oil exploration and production when crude oil was valued above $130 a barrel. At the same time, the company acquired major natural gas fields when natural gas was worth over $17 per 10,000 mmBtu (measuring units for natural gas).

Now, crude oil is valued at $46 a barrel and natural gas is worth $4. Conoco bought while prices were very high, and as a result, the company lost billions of dollars in the value of its assets. I have trouble determining whether or not to place the blame on the company’s executives. Current CEO, James Mulva, entered the company a few years ago and was a major proponent of expansion. Nevertheless, few people were able to predict the downfall of energy products, and I would chalk up the losses to poor timing instead of poor management.

The company has responded to the drop in oil prices by reducing capital expenditures. After releasing the tragic 4^th quarter earnings report, Conoco announced that it would be cutting capital spending by 37% in 2009. This troubles me. While I understand that the company simply cannot afford to be expanding its business right now- after all, it does have to stay afloat- it is again falling victim to poor timing. COP is buying high and selling low! Expansion would be cheaper than ever now that oil and natural gas are priced so low, but the company isn’t making any moves.

Despite unfortunate circumstances that resulted from terrible timing, I think Conoco Phillips is still undervalued. The company boasts a massive balance sheet with almost $143 billion in assets. Even though the purchases made in recent years were overvalued, they still will generate cash for COP in the future. The success of the company ultimately boils down to the movement of oil and natural gas prices.

As I stated earlier, oil is trading at $46 a barrel and natural gas is trading at $4. While I can’t see oil and natural gas rising to the high levels seen in early 2008, I think they are bound to rise by late 2009 and early 2010. Oil production has steadily been cut by many companies around the world, so supply is down. The demand for energy products have dropped as the economy has headed south. Basic economic principles tell us that low supply and high demand equates to high prices. When demand for oil picks up, Conoco will be able to provide it for more money.

If you agree that oil will pick up in the coming months, Conoco Phillips is the single most valuable major energy play you can make. Chevron (CHX) and Exxon (XOM) are off 35% and 30% from their 52-week highs respectively, while Conoco has dropped a dramatic 60%. When you consider Conoco’s potential for improvement compared to its competitors, the $37 ticket for a share of COP begins to look very cheap.

 

-Matt Schwartz

College Trillionaire

Market Recap - March 12, 2009

The stock market rally continued today, as the major indexes were up for the third straight day.  The Dow Jones Industrial Average increased 239.66 points (2.46%) and the S&P 500 was higher 29.38 points (4.07%).  Over the past three days, the Dow has jumped 622 points (9.5%)!

One of the major reasons for the continued uptrend came from the announcement that accounting rules for companies, especially banks, may be eased.  This is great news for banks, as their bottom lines will greatly improve with the ability to avoid mark-to-market accounting practices. 

Investors were also very happy with General Electric (GE), as Standard & Poor’s cut the company’s credit rating less than expected.  GE was up 12.7% on the day.  General Motors (GM) was also up big today (17.2%) on news that the company will not need the $2 billion of government aid that it had originally asked for. 

This was a great week for the market and, for the first time in a long time, investors were treated with more good news than bad news about the economy and about specific companies.  With so many people on the sidelines with cash waiting for the right time to get into the market, there is no reason to think that the rally won’t continue as long as the good news keeps flowing. 

Also, Bernie Madoff pleaded guilty today and was sent to jail without bail.  He could get up to 150 years in prison. 

Until next week,

 

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - March 11, 2009 - Uptick Rule

Uptick Rule

In order to gain any sort of understanding about the uptick rule, you need to have a basic appreciation of short selling. Short sellers bet against the success of a stock by selling stocks that they don’t own. If successful, they sell the stock at a high price and then make the payments on the shares at a lower price to cover the sale. If you’re interested in learning more about short selling, read our Term of the Day from January 26. 

The uptick rule was created in 1938 by the Securities and Exchange Commission in an attempt to stop short sellers from driving down the markets. The rule required short sellers to wait for a stock to move upward one-eighth of a percentage point before making a short trade. Before the rule was instated, traders could short a stock at any time, regardless of whether or not someone bought it long (the usual method of purchasing stocks) before them.

The SEC believed that the uptick rule would prevent short sellers from gaining momentum and driving down stock prices. This is because short sellers not only bet that a stock will go down, but the very act of selling a stock short actually moves the price downwards. When investors sell a stock short, the bid price of the stock is lowered. If many people sell short at the same time, a steep decline is very possible.

The uptick rule was successfully enforced from 1938 until June of 2007. The SEC eliminated the uptick rule to determine whether or not the rule actually had any effect on the markets. The SEC’s Office of Economic Analysis determined that the rule wasn’t necessary to prevent short sellers from manipulating the markets.

Well, now that the financial system is tanking, short sellers have been actively trading in the financial sector. Naturally, when things go bad, people start to point fingers to find out why. Many analysts have placed the blame on the elimination of the uptick rule. While the credit crisis and a basic lack of fundamentals have caused investors to sell out of financials, many argue that short sellers have driven the stocks of banks such as Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) down past appropriate levels.

The advocates of reinstating the uptick rule believe that the regulation would take away a lot of the firepower of short sellers. The shorts would have to wait for long buyers to make a purchase before making their trades. This would take away the momentum that rapidly drives stocks downwards.

People tend to look down upon short selling because it essentially involves betting on failure. Nevertheless, shorting is an important market tool that helps bring stocks down when investors become overly enthusiastic and place too much value in a stock.

There are two main arguments against reinstating the uptick rule: efficiency and freedom. The nature of the uptick rule forces short sellers to wait some time before making a purchase. It is possible for this waiting period to create some lag in the markets. Supporters of free markets dissent to almost every kind of regulation or inhibition of people’s rights. The uptick rule would be a limitation on the right to short sell.

Despite these points, it’s very difficult to argue against the uptick rule, as the stock markets functioned just fine during the 70 years in which it was upheld. It appears that its elimination will be temporary, as Representative Barney Frank of the House Financial Services Committee said yesterday that he hopes the rule will be back in effect within a month.  Part of yesterday’s rally can actually be attributed to Frank’s announcement, showing that most investors want to see the uptick rule come back. It will be very interesting to see what influence the uptick rule, if reinstated, will have on the markets, and especially on the bank stocks.

-Matt Schwartz

College Trillionaire

Market Recap - March 11, 2009

Yesterday’s uplifting rally didn’t see much of a continuation today, as the markets barely held on to a gain. The Dow Jones industrial average rose 3.91 (.1%) to end the day at 6930.4 and the S&P 500 rose 1.76 (.2%). The Dow’s two-day trip into positive territory marks the first consecutive gains since February 5-6.

Investors, optimistic after hearing good news yesterday from Citigroup and the government (regarding the possible reinstatement of the uptick rule), battled hard to keep the indices in the green today. The Dow flip-flopped a remarkable 37 times today between gains and losses.

Holding onto Tuesday’s gains was difficult because investors didn’t hear any good news today. Renewed worries surrounding the housing market were incited as Freddie Mac announced that it will be asking the government for $31 billion in additional aid. The company is one of two housing entities that were seized by the government last fall. Along with the other company, Fannie Mae, Freddie Mac owns or guarantees over 50% of all U.S. home loans. The company’s need for aid points to continuing trouble in the housing sector.

Investors were also informed of escalating unemployment. At least 5.1 million people are currently receiving state unemployment insurance. Four states posted unemployment rates above 10% in January: California, South Carolina, Michigan, and Rhode Island. The crucial indicator of an economy’s strength, national unemployment, has steadily increased for the last several months.

Nevertheless, it is apparent that investors are ready to buy. One drop of good news from Citigroup yesterday sent them on a purchasing spree. While the fundamentals behind the economy are still moving downward, we’re beginning to see a trickle of beneficial signs. I would definitely expect investors to react positively to any good information that comes their way.

Until tomorrow,

 

-Matt Schwartz

College Trillionaire

Opinion - Going Global

Thank you Shriftman for the article! Remember, if any of you readers want to write anything about the stock market, about the economy, or about anything even semi-related to those topics, just send your article to collegetrillionaires@gmail.com and we will post it for you.  Thanks!  - Trillionaires

Going Global

“History does not repeat itself, but it rhymes.”  Mark Twain, a 19^th century writer and philosopher, uttered those words without the slightest knowledge or inclination that their true meaning would be revealed 150 years later during one of modern history’s toughest times.  The current economic crisis exhibits one simple premise; today foreshadows tomorrow, for society follows trends.  This concept of “history rhyming” is the single most imperative idea that the Y generation should apply for success and safety in the increasingly difficult, global environment.

Today’s global marketplace is seamlessly interconnected, or “flat”.  Unfortunately, this integration is epitomized by the current global financial meltdown.  In order to prevent another crisis from reoccurring in the future, the actions of companies and governments alike need to be more utilitarian – creating the greatest good for the greatest amount of people.  Safeguards must be implemented to protect humankind from its greed in the future; safeguards rooted in the understanding of prior bubbles, creating awareness of their symptoms and signs, and resulting in a self-preserving, ethical oversight.

Now how do bubbles apply to technology, the Internet, multinational corporations, and ultimately the global marketplace?  If one country today experiences a crash following a boom, then this effect will magnify itself exponentially onto its trading partners.  For instance, the United States, now with fewer funds, shrinking demand and enormous debt, can no longer purchase as many goods and services from its significant trading partner, China. That decrease in demand from the US will cause China to generate less income, therefore making them unable to trade to get their desired needs as well, say oil, with the Middle East.  That loss of revenue and shrinking demand in the Middle East will in turn cause a cut in the supply in oil, therefore affecting every country that needs this rare commodity.  This trend continues, creating a domino effect.  Essentially, today’s flattened global environment results in each country having a vested interest in every other country, regardless of intent.

For these reasons, a country and its citizens must be aware of global bubbles and economic trends.  All bubbles share consistent attributes and traits; primarily, there is an abundance of easy credit applied to an industry where historical criteria is ignored, and every person is doing “it” with full confidence.  “It” can easily be replaced with purchasing a dot-com stock, an interest free mortgage, or dating back to 1637, the Tulip Bubble where the bulb of the flower was the most desired product in the world, only to have it become worthless almost overnight. 

Given this relationship between countries, one must ask, “What is next in the global environment?”  For the next decade, the world will be in a poor status quo due to government bailouts and inflation, and sadly, we are all wedged in it together.  To escape this global meltdown, essentially and oddly enough another bubble, or two, will save us.  They will inevitably be the “Alternative Energy Bubble” and the “Nanotechnology Bubble”.

The world can no longer rely on overpriced oil (some believe Peak Oil is here) nor should stable nations deal with irrational, terrorist funding entities. Additionally, the burning of fossil fuels is destroying our planet causing global warming. Clean, renewable, cheap technology will spawn in the next decade that will change the way the world functions. This alternative energy boom will birth new companies, create modern jobs, and save the planet.

The nanotech bubble will also emerge. While still in its earliest stage, this micro sized technology will be used to manufacture new medicine, electronics, and energy production.  For example, nano-tech has already been utilized to purify and desalinate water, improving the quality of life for millions in third world countries that now have access to uncontaminated drinking water.  Just for perspective and range of use, it has also been used for cosmetics, bacteria-proof knives, and stain-resistant pants.

The future of the global environment lies in the hands of technology, which has an expanding curve of innovation. Utilizing the rhetoric of  “history rhyming”, we must acknowledge these future bubbles, capitalize on them, and figure out a safe, pragmatic exit strategy in order to ultimately return to a normal period of steady growth between all countries.  It is evident the world will continue to make technological progress, but hopefully it will only be a brief matter of time until countries unite and follow in the words of Greek philosopher, Socrates where he states, “ I am not an Athenian or a Greek, but a citizen of the world.”

 

Jonathan Ross Shriftman

College Trillionaire

Market Recap - March 10, 2009

It was a great day on Wall Street, as the major indexes skyrocketed upwards on great news from the financial sector.  The Dow Jones Industrial average ended higher 379.44 points (5.8%), the S&P 500 increased 43.07 points (6.37%), and the NASDAQ jumped 89.64 points (7.07%)!  The market hasn’t seen a rally this big since November of 2008!

The rally really started today on news that Citigroup (C) was profitable in the first two months of 2009.  The company’s CEO, Vikram Pandit, also said that he is confident about the bank’s capital strength.  Citigroup ended the day 38.1% higher as a result of the good news.  Other banks and financial companies also traded much higher, with Bank of America (BAC) gaining 27.73%, General Electric (GE) gaining 19.7%, and Capital One (COF) gaining 15.12%. 

Another piece of news that greatly helped the financial sector was that the uptick rule might soon be restored.  The uptick rule essentially makes it so that you can only short sell a stock after the last trade of the stock was positive.  Investors are big supporters of the uptick rule, as the ability to short beaten down financial stocks throughout this economic downturn has continued to pull shares of bank stocks lower and lower.  With an uptick rule, less people will be able to short bank stocks, and thus confidence will hopefully be restored. 

The question now becomes, was this just a one day rally, or did today mark a bottom in the stock market?  It is important to note that throughout the ongoing stock market crash, experts have been saying that until the financial system and banks are fixed, the market will not recover.  With Citigroup’s announcement today, is it proof that the banking companies are starting to turn around?  One thing that is for sure is that the economy is still very problematic, and that the unemployment rate is still very high.  Having said that, it has been noted on many historical occasions that the stock market usually recovers six months before the economy does after a recession.  So, it will be very interesting to see how the markets react tomorrow after today’s huge rally.  Will people continue to be optimistic, or will people take some profits and sell stocks tomorrow knowing that the economy is still in shambles?

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 9, 2009 - MO

Altria Group, Inc. (MO)

Altria Group (MO) manufactures and sells cigarettes and other tobacco products in the United States through its subsidiaries.  Through Phillip Morris USA, Altria sells cigarette brands such as Marlboro, Virginia Slims, and Parliament.  Through John Middleton, Altria sells Black & Mild cigars.  And, through its recent acquisition of UST, Altria sells smokeless tobacco brands such as Skoal and Copenhagen.  The company’s stock price is currently trading at $15.86, and while it is off from its 52-week high of around $22 per share, it has held up relatively well throughout the economic downturn.  Altria is actually only one of nine stocks in the S&P 100 that is up so far in 2009. 

Altria is easily one of my favorite stocks for 2009 and for the long-term! There are many factors that go into my adoration for this company, so hear me out while I take you through the many positives.

Altria’s first advantage is its dominance in the U.S. tobacco industry.  In 2008, Altria had a commanding 50.7% share of the domestic cigarette market, with Marlboro (its most popular brand) gobbling up 41.6% of the cigarette market.  With Altria’s recent acquisition of UST, the company also has a 57.4% market share of domestic smokeless tobacco.  Second place in the industry is nowhere even close, and with tobacco advertising illegal in the U.S., I don’t see how any company could ever take a big chunk of market share from Altria’s dominant brands. 

Let me talk more about Altria’s recent acquisition, as the addition of UST is the biggest growth prospect for the tobacco giant.  Altria’s subsidiary, Phillip Morris USA, bought UST for $10.3 billion in January.  UST is the nation’s biggest smokeless tobacco maker, with famous brands such as Skoal and Copenhagen.  This acquisition was huge for Altria, because while cigarette consumption has been dropping about 3% a year, smokeless tobacco sales have been increasing by about 5% or more a year.  In 2007, U.S. consumers spent $78 billion on cigarettes, and only spent $4.77 billion on smokeless tobacco. So, from the numbers, it is clear that the smokeless tobacco industry could be the next big thing for tobacco companies such as Altria.  And, with its recent acquisition of UST, Altria has set itself up well to take advantage of the growth of smokeless tobacco consumption. 

You might be wondering how I could love a tobacco company when cigarette sales are falling 3% per year.  The answer is that, because tobacco is addictive, tobacco companies like Altria can make up for the drop in consumption by increasing the price of cigarettes without worrying too much about their customers quitting smoking.  For example, the federal government just announced a federal excise tax on cigarettes effective starting March 9 that will increase the tax on cigarettes from 39 cents to $1 per pack (61 cent increase).  Instead of worrying about the increase in taxes, Altria simply transferred the tax to its customers.  The company has raised the prices of its famous Marlboro cigarettes by 71 cents a pack.  So, not only did the company make up for the tax, but with an increase in selling price of 71 cents per pack compared to a tax increase of 61 cents per pack, Altria will actually make 10 cents more per pack than it used to.  This extra 10 cents per pack will greatly help the cigarette maker’s profits, and it should send the stock price higher and higher in the future.

For the same reason that Altria can raise cigarette prices without worrying too much about a drop in cigarette consumption, investors can be confident that Altria’s sales will remain generally immune from the economic downturn, as smoking is addictive and hard to stop.  I have even read some studies that show during recessions like the one we are currently experiencing, more people start smoking and less people feel the need to quit.  So, unlike construction companies like Caterpillar (CAT) that are very cyclical and have their profits tied to the state of the economy, Altria’s profits are very stable, and that stability is very attractive in this environment.

The final, and possibly the most attractive, positive aspect of Altria’s stock is the dividend (past Trillionaire Term of the Day).  With a current dividend payout of $1.28 and a dividend yield of 8.30%, the stock could remain at its current price and you would still make a very solid and enviable return of 8.30% on your money.  In a market that has fallen around 50% in only one year, a high dividend yield like that is precious. In today’s economic environment, where companies are constantly slashing dividends to conserve cash, Altria’s dividend is also one of the safest in the stock market.  I can say this with confidence because the company has a lot of extra cash, and it has increased its dividend payout for 42 consecutive years!

The biggest knock against Altria is always litigation concerns, and worries that the government will do something ridiculous like impose a complete ban on cigarettes.  My argument against legal concerns from people suing Altria is that, after years and years of legal battles, Altria claims that it has only paid $108 million dollars in charges.  When considering how often tobacco companies get sued and how long Altria has been around, this number is unbelievably small.  Clearly, Altria has a great legal team.  In response to worries about federal and state governments banning cigarettes or imposing extremely harsh restrictions, my first response is that Altria has been dealing with harsh restrictions for a long time and continues to be successful.  Smoking in restaurants and bars has been banned in over 20 states, and Virginia (both Altria’s and tobacco’s home state) just recently joined the list of states banning smoking in restaurants.  Another thing to consider is that tobacco is a heavily taxed product, and it would be detrimental for state and federal budgets to ban smoking or even severely restrict its use.  For these reasons, I believe that worrying about litigation issues or harsh government bans are a little overblown, and should not scare away investors. 

Altria was the best performer in the S&P 500 for the 50-year period from 1957 to 2007, and I think that it is such a great company that this trend should continue into the future.  With a high dividend and a huge market share in the extremely stable domestic tobacco industry, Altria is a great defensive play for this recession.  But, with its acquisition of UST and the emerging popularity of smokeless tobacco, I think Altria has some great long-term growth prospects.  If you had to buy one stock right now for both the short-term and the long-term, I urge you to strongly consider Altria.

 

Niki Pezeshki

College Trillionaire