Market Recap - January 23, 2009

The market was conflicted today, as financial and technology stocks rose while industrials dropped.  The Dow Jones Industrial Average fell 45.24 points (-.56%) while the S&P 500 gained 4.45 points (.54%). The biggest stories on Wall Street recently have been the release of earnings reports, and the overall decline in the markets has been a result of worse than expected numbers in these reports. Today was no exception, as poor numbers were released yet again.

General Electric (GE) reported a 4^th quarter net income of 35 cents per share, or $3.7 billion dollars compared to 66 cents a share, or $6.7 billion from the last quarter of last year. The reported income was slightly less than analysts’ expectations that were at 36 cents per share. While some argue that investors already anticipated the lowered earnings and have already factored the drop into stock prices, when numbers do come in below expectations, the markets still fall. GE’s shares fell $1.45, or 10.76%, on the day.

Financial stocks rallied today, as Citigroup (C) gained 36 cents, or 11.58%, Bank of America (BAC) rose 53 cents, or 9.28%, and JP Morgan chase jumped $1.18, or 5.11%.

Investors are still nervously looking towards Washington, waiting to see if Obama will pass his stimulus plan despite increasing Republican dissent. In the mean time, the main indexes seem set on continuing their volatile and uncertain path. In the season of dismal earnings reports and unsure political expectations, investors are attempting to hold their ground.

Have a great weekend,

 

Matt Schwartz

College Trillionaire

 

CT Note – We were not able to write a Stock of the Day or a Term of the Day due to time constraints.  We will post them tomorrow morning, so check back over the weekend!  

Stock of the Day - January 22, 2009 - INTC

Intel Corporation (INTC)

While we’re in the midst of rough times for the economy, we’re also in one of the best times ever to take advantage of bargains in the stock market. Economic instability and investor fear has caused many blue chip stocks (well established companies with little risk) to plummet in value. If you still have faith in American capitalism and the markets, then now is the perfect time for you to scoop up these stocks while the discounted prices are still available. Today’s Stock of the Day is a perfect example of a blue chip company that has been undervalued by the market because of macroeconomic conditions: Intel Corp. (INTC). The near future for the stock will be incredibly shaky, but in the long run I’m confident that the microprocessor developer will rise to the levels it was trading at in the past and possibly even exceed those values.

INTC last traded at $12.82, very near its 52-week low of $12.06. Prior to the economic mess that was 2008, the computer chip developer and producer held steady around the mid-to-low $20s for several years. Intel itself should not be held accountable for the drop in stock price or its decrease in sales for 2008. The company has fallen victim to the constricted wallets of customers as a result of the credit crisis. Intel released its 4^th quarter earnings report today and the numbers were far from attractive. Their 4^th quarter net income for 2007 was $2.27 billion and $234 million in 2008. Intel has recently announced that they will be closing four of their plants worldwide, and the closing will affect 5,000 to 6,000 jobs. CEO Paul Otellini has recently admitted that Intel may even post a loss in the first quarter of 2009.

I don’t put INTC at fault for the dramatic drop because the company rests on a very solid base and has made significant advancements. Intel is sitting on $11.84 billion in cash and has a $71.3 billion market cap. They will be around for a long time to come and they will hold their dominant position in the industry over their main competitor Advanced Micro Devices (AMD). Most importantly, INTC is not stagnant and has not become content with their status. In the middle of their late-2008 fall they introduced their Core i7 Processor. The new chip has been proclaimed by technical analysts to be the fastest and most advanced processor on the planet.

The more I researched Intel’s business moves, the more I grew confident with the way that the company is managed. INTC has not limited itself to only making microprocessors; they’ve created a branch called Intel Capital thats sole purpose is to invest in companies that advance technology. Notable investments are WebMD and Smart Technologies. A recent investment that highlights Intel’s forward thinking is SpectraWatt. The company will produce solar cells and provide them to solar panel manufacturers. It’s well known that Obama will be supporting alternative energy sources, and Intel is capitalizing on this knowledge.

All in all, I see no fundamental problems with the way that Intel is doing business. The company will suffer as the general economy suffers, but when the stock market recovers, INTC’s share price will bounce back to much higher levels. It is for these reasons that I believe INTC is a great long-term investment that can be made with confidence.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 22, 2009 - Diversification

Diversification

A diversified stock portfolio consists of a wide variety of investments.  Diversification is one of the best ways to reduce risk, as a diversified portfolio will ensure that the performance and fluctuation of a single stock will have less of an impact on your entire portfolio. 

So what are some ways to diversify your stock portfolio?

The first way is to invest in stocks that have different risk levels.  For example, you could invest in a combination of large cap stocks, mid cap stocks, and small cap stocks.  Large cap stocks are generally less risky than small and mid cap stocks, as large caps usually are stable companies that have been around for a long time.  Small and mid cap stocks are more risky than large caps, as they are smaller and/or newer companies that are still relatively unstable.  An example of a large cap stock is McDonald’s (MCD), while an example of a small cap stock is WuXi PharmaTech (WX). 

The second way to diversify your portfolio is to own stocks in many different industries.  By investing in companies in different sectors, you will minimize losses if one industry absolutely tanks.  For example, if your portfolio consisted solely of technology stocks in 2001, you would lose a ton of money when the tech bubble burst and many tech companies went bankrupt.  But, if you owned a tech stock, along with stocks in other sectors, then your losses would be minimized and would not destroy your entire portfolio. 

Because you should own shares in companies in multiple sectors and with various risk levels, it follows that you need to own more than one company in your portfolio. I actually think that the ideal number of companies to own in a portfolio is between 5 and 10.  Less than 5 companies will not allow you to be diversified enough, and more than 10 makes you too diversified.  So, learn to spread your risk and you will keep yourself from losing everything. If you pick solid stocks and stay diversified, the profits will surely follow.

 

Niki Pezeshki

College Trillionaire

Market Recap - January 22, 2009

The stock market has been acting like an unpredictable and dangerous rollercoaster this week.  We saw huge losses on Tuesday, followed by big gains yesterday, and today the markets decided to drop again. The Dow Jones fell 105.3 points (-1.28%) and the S&P also dropped 12.74 points (-1.52%).  The Nasdaq was hit also hit hard, as the index shed 41.58 points (-2.76%). 

Fear and anxiety about companies’ earnings were the main catalysts for the drop in the market today.  As earning reports continue to be released throughout the next few weeks, investors have a feeling that the news will not be pleasant.  Microsoft (MSFT) set the gloomy tone today, as it reported an 11% drop in profit over the last quarter.  The company also announced it will cut 5,000 jobs over the next 18 months.  eBay (EBAY) also posted its first year-over-year quarterly loss in the company’s history. 

Jobless claims also increased to 589,000 from 527,000 a week earlier, much worse than the expected 543,000.  A report on home construction activity was also extremely disappointing.  And, while two House committees have prepared Obama’s stimulus plan for a vote next week, it is becoming more clear that it will be harder than expected to garner enough Republican support to pass the bill. 

Tomorrow, General Electric (GE) is releasing its 4^th quarter earnings.  GE is one of America’s biggest companies and its services are spread out across many sectors, so its earnings report will be especially important in determining the direction and state of our economy.  Volatility across the overall market is increasing, as investors become more and more unsure about what the future holds for the economy and for the stock market. At this point, I don’t think anyone can make a solid prediction for what the future holds.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire 

Stock of the Day - January 21, 2009

Pfizer Inc (PFE)

Pfizer Inc (PFE), the world’s largest pharmaceutical company, engages in the discovery, development, manufacturing, and marketing of prescription medicines.  The company produces well-known drugs such as Lipitor, Viagra, Celebrex, Zyrtec, and Zoloft.  Pfizer’s stock price is currently trading at $17.48, and it is 26.52% off of its 52-week high of $23.79.

Pfizer has many positives that make it seem like a great investment.  First of all, demand for major drugs are generally independent of macroeconomic factors due to the fact that people always need medicine, rich or poor. Thus, Pfizer is a largely recession-proof stock and has not been hurt as badly as companies in cyclical sectors, such as construction and technology. 

Pfizer is also very financially flexible, as the company currently has $26 billion of excess cash.  This extra money will allow Pfizer to potentially buy another pharmaceutical or biotechnology company.  With the acquisition of another company, Pfizer will add more popular drugs to its pipeline of products, and will increase revenues as a result.  In order to cut costs and become even more profitable, Pfizer is also cutting some jobs.  The company recently cut one-third of its sales force and also cut 800 research jobs.  The company also pays a higher dividend to its shareholders than any other pharmaceutical company, as it pays out a huge 7.36% yield. 

So, what is there not to like? The first problematic issue for Pfizer is an issue that all companies in the pharmaceutical industry must face: Patent expirations.  Drug companies like Pfizer obtain patents when they invent a new type of drug, but these patents do not last forever.  Once the patent expires, generic drug makers enter the market, and due to the competition, the price of the medicine is drastically reduced.  The issue of patent expirations is staring Pfizer directly in the face, as the company’s patent on its most popular drug is set to expire in 2011.  Lipitor, Pfizer’s cholesterol-lowering medication, is the world’s highest-selling drug.  Pfizer makes $13 billion per year from Lipitor, and the drug is responsible for 26% of the company’s revenue! With the company’s patent on the famous drug set to expire in two years, many investors are afraid that Pfizer will have no way of making up that loss of revenue.  Zoloft, a medication for depression, was a huge drug for Pfizer until its patent expired in 2005.  After Zoloft’s patent expired, sales of the drug were absolutely crushed.  The example of Zoloft could foretell what is to happen to sales of Lipitor once the drug’s patent expires.  If Pfizer does not find a new drug on the same level as Lipitor in the next two years, the company will have a hard generating enough revenue to produce a profit.

Another problem for both Pfizer and the entire pharmaceutical industry is the issue of political threats to pricing power.  Barack Obama has stated on numerous occasions that he is planning on making it easier for generic drugs from overseas to be bought in the United States.  While this may end up being great for the average American, as medicine will become much cheaper, pharmaceutical companies will suffer.  Companies like Pfizer will no longer be able to charge high prices for their brand-name drugs, as generic drugs will come into the market and create a price war.  Without their high profit margins on their famous brand-name drugs, companies like Pfizer will be financially hurt. 

So, while Pfizer is the biggest pharmaceutical company and while it is sitting on a huge pile of cash, it is clear that the company’s future is anything but bright.  Its biggest drug is set to lose its patent very soon, and the new administration in Washington is threatening to severely cut into the company’s profits.  The only hope for growth that Pfizer has at this point is to either come up with a drug with earnings potential on the level of Lipitor in the next couple of years, or to use its huge amount of excess cash to buy another pharmaceutical company that could potentially provide the company with the next all-star drug. 

Although the stock does provide investors with a nice dividend yield and it is recession-proof, I believe that the negatives weighing on the company’s future make Pfizer a bad long-term investment.

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 21, 2009

Based on the huge gains in the market today, it sure seems like investors were making up for yesterday’s huge sell-off. The Dow gained 279 points (3.51%) and the S&P 500 advanced 35 points (4.35%). The jump in the market was spurred by the very same financial stocks that were the basis of the yesterday’s market collapse.

The banks have brought a new meaning to the word volatility. Both Bank of America (BAC) and Citigroup (C) gained about 31%. Wells Fargo (WFC) moved up 17% and JP Morgan Chase (JPM) jumped 25%. It’s impossible to tell whether yesterday’s financial fall was too strong or if today’s climb is exaggerated, but regardless there is one obvious conclusion: we are far from finding stability of any kind in the markets.

The other piece of big news today was IBM’s surprising success. The tech company reported good news with the release of its 4^th quarter earnings. IBM earned a 12% increase in its 4^th quarter profits year-over-year. Investors jumped on the company’s success and the stock saw an 11.5% increase in price.

It was very heartening to finally see some positive movement in the market today. And while the process of finding a bottom is still in progress, it’s comforting to know that the market can rally after suffering in such a bad way the day before. Hang in there.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 21, 2009

Debt/Equity Ratio

When companies want to grow, but don’t have enough capital to support their own expansion, they take on debt. They borrow money in an attempt to make their gains bigger than they would be otherwise. The Debt/Equity Ratio (D/E) can be used to determine the extent to which a company takes on debt compared to how much capital it already has.

The most practiced way of calculating the D/E ratio is:

                                                                Total Debt

                                                ------------------------------------

                                                        Stockholder’s Equity

The total debt number is generally comprised of long-term debt. Accounting statements don’t usually include other liabilities, such as accounts payable, in the ratio because the ultimate goal is to calculate how leveraged a company is (how much of their capital is based on debt). You can find Stockholder’s Equity by checking the company’s most recent balance sheet (check Yahoo Finance). Stockholder’s Equity can be described as the total amount of money invested in the company from the initial investors and stockholders.

Let’s take yesterday’s Stock of the Day, Yum! Brands (YUM), to calculate an example D/E ratio. YUM has total debt of 3.62 billion and Stockholder’s Equity of 366 million (both numbers found on their balance sheet). Their D/E ratio is (3,620,000,000)/(366,000,000)= 9.89.

So now that we know how to calculate D/E, we need to be able to interpret it and implement it in our analysis of a stock. A high D/E ratio may mean that a company is taking on a lot of debt to finance more growth. For example, YUM might borrow money and take on debt in order to build more restaurants. Undertaking large amounts of debt to advance opportunities can be risky business, because while gains are multiplied exponentially, losses are also augmented. A low D/E signifies that a company is taking a more conservative route and expanding mostly with the money that they have in current equity.

So should you be looking for a high D/E ratio or a low one when looking into buying shares of a company? The best answer is that it depends on each individual situation. If you’re confident that a company’s expansion will be well received by consumers, a high D/E can be very good. If you believe that more growth would do more harm than good, a high D/E would spell trouble. Let’s use the ratio to analyze YUM.

As we calculated earlier, YUM has a D/E ratio of 9.89.  If you checked out yesterday’s article on YUM, you know that the fast food chain is rapidly expanding on an international level. They’ve taken on a lot of long-term debt to finance their growth. YUM’s is a solid company and it has been doing extraordinarily well overseas. The risk of working with debt is well founded for this company because it is very likely to succeed and increase profits as a result of its growth. In this case, the high D/E ratio is a beneficial aspect.

One last caveat that you should remember is that you must consider what a company does before determining whether a D/E is high or low. Companies that are in industries that require a lot of invested capital (such as airplane manufacturers) have higher D/E’s than companies that don’t require much capital to expand (e.g. tech companies).

The Debt to Equity ratio is yet another device you can use to get a look at what is going on behind the scenes of a company. Understanding and implementing the ratio will bring you one step closer to becoming a superior investor.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - January 20, 2009

YUM! Brands (YUM)

In a time of economic darkness and recession, Yum! Brands (YUM) shines through with the light of expansion and development. YUM has not just been surviving… the fast food corporation that parents KFC, Taco Bell, and Pizza Hut has been thriving. It’s very hard to find anything that the company is doing badly and very easy to spot the positive aspects of the company. Let me tell you why I think you should join me as I invest heavily in YUM.

If I had to describe YUM with one word it would be growth. This is because they’ve been growing in every aspect of their business. Their Earnings Per Share has been growing for the past 20 straight quarters. The distance in popularity between YUM and competitors like McDonalds (MCD) and Burger King (BKC) in China has been increasing in YUM’s favor. To cap it off, their overall international business has been growing dramatically for the past few years and will continue to grow throughout this year.

2008 should mark YUM’s seventh straight year of double-digit EPS growth with projected growth of 12%. The company has boldly stated that, despite macroeconomic conditions, they predict EPS will grow another 10% in 2009. The best part about this prediction is that most analysts agree that it’s possible! It’s possible because YUM has been increasing same-store-sales for 20 straight years, they opened 1445 new international stores in 2008, and none of their debt will mature for many years to come.

Numbers aside, you should love YUM simply because of the quality of their brand. Taco Bell, KFC, and Pizza Hut are staples in the global fast food industry. They make cheap food that tastes great and satisfies their customers. They have also been adding more items to their menu recently. Pizza Hut introduced its new pasta line last year, and it quickly became a $500 million dollar addition for the company. This year, KFC will introduce its new Kentucky Grilled Chicken, which should significantly help the company’s sales by giving consumers a healthier option.

Their popular food and amazing growth rate hasn’t changed at all, but their stock price has… this fact should key you into the company’s real value. YUM’s stock price has jumped up to $28.66 since it dropped to the low 20’s in late November. Before the market slid disastrously, the company’s shares were trading at around $38. I believe the drop in share price was not justified, and I expect the company to reach the high $30 levels again and eventually surpass that level in the long run. The market is simply undervaluing this precious and growing business. Investors have had their confidence shaken because of the recent volatility in the market, but to be successful we have to capitalize on that fear. I advise you to put some effort into analyzing this stock, and I hope that you’ll come to the same conclusion that I have.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 20, 2009

Hedge Funds vs. Mutual Funds

I have always wondered what the major differences were between hedge funds and mutual funds, so I thought you might have been wondering as well. I have broken down the basic differences into four categories. There are more intricate differences between the two, but this article will provide you with a simple overview.  Enjoy...

Regulatory Requirements

Because mutual funds must register with the U.S. Securities and Exchange Commission (SEC), they are subject to a lot of regulatory oversight.  They are subject to regulation under four different federal laws, and they are also forced to follow a certain standard for portfolio diversification and distribution of earnings.  Hedge funds do not have to register with the SEC, so they are not as regulated as mutual funds are.  They do not have to make forced periodic earnings reports, and they have freedom to invest however they want to invest their funds. 

Fees

Most mutual funds charge a fee of 1.3%-1.5% of assets, and this fee includes a management fee to pay the salary of the fund manager, administrative costs to pay for customer service and record keeping, and the occasional 12B-1 fee which pays for advertising.  The average management fee is around 1% of assets.  This means that if a mutual fund has $250 million in assets (a pretty small fund), the fund manager gets paid $2.5 million a year.  It seems clear that mutual funds strive to get as many investors and as many assets as possible.  Hedge funds have no limits on how much they can charge investors, but the usual hedge fund manager charges 2% of total assets and 20% of gains.  So, while it is much more expensive to invest in a hedge fund, most people do it because they are expecting higher returns.

Investing Practices

Mutual Funds are much more conservative in their investing techniques.  Because they are subject to strict federal guidelines, they are restricted from leveraging or borrowing against the value of the securities in their portfolio.  Hedge Funds, on the other hand, are known for their higher-risk investment strategies. They short sell and conduct options trading regularly, and they can often be highly leveraged. 

Types of Investors

It is easy to invest in a mutual fund, as you must only have the minimum investment (around $1,000) in order to open an account.  Almost anyone can invest in a mutual fund, as the minimum investment is very reasonable and there are no additional investments required after the initial investment.  Investing in hedge funds is much more difficult and selective, as a higher minimum investment is required from hedge fund investors.  Hedge funds require a higher minimum investment because they are only allowed to have 100 investors per fund.  So, if a hedge fund manager wants to control large amounts of money, he can only accept investors who are willing to invest a lot.

Niki Pezeshki

College Trillionaire

Market Recap - January 20, 2009

So much for an Obama rally.  While some people thought that the national optimism stemming from Obama’s inauguration would have a positive impact on the market, stocks actually took a complete nosedive today.  Today’s drop made for the worst inauguration day in the Dow’s history.  The Dow Jones fell 332.13 (-4.01%) and ended below the 8,000 level, and both the S&P 500 and the Nasdaq dropped over 5%.

Financial stocks were the worst performing stocks of the day, as many of them fell by double-digit percentages.  One of the reasons for their poor performance was the continuing worry about the health of Bank of America (BAC) and Citigroup (C), but also because the Royal Bank of Scotland (RBS) forecasted that its losses for 2008 could top $41.3 billion (its stock plummeted 69% as a result).   

The markets and the U.S. economy continue to look worse by the day, and Obama definitely has a lot of work ahead of him.  There really is no indication of a market bottom right now or any time in the near future, and the overwhelmingly poor performance by the banking industry is cause for more concern.  The fact that the U.S. Government is thinking about nationalizing Citigroup and the British Government is also thinking about nationalizing a few banks, such as RBS, truly scares me.  Let’s hope Obama’s bailout plans go through Congress quickly and are implemented as soon as possible. 

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 19, 2009

Best Buy (BBY)

Best Buy (BBY) is a computer and electronics retailer that sells entertainment software, appliances, consumer electronics, and home office products.  The company currently operates over 900 stores in the United States, and also has multiple locations in both Canada and China.

Best Buy shares are currently trading at $29.57, off considerably from their 52-week high of $49.65, but also much higher than their 52-week low $16.42.  There are two crucial factors that influence Best Buy’s stock price, and these two factors are in a constant tug-of-war, pulling the stock price higher and lower.

The end of the rope that is pulling Best Buy’s share price lower is the increasingly weakening consumer demand caused by the ongoing global recession.  Best Buy, which sells relatively expensive products such as televisions, computers, and other costly electronic devices has definitely felt the affects of the recession.  Analysts are expecting same store sales for Best Buy to decrease by 5% in 2009, as consumers have less money to spend on discretionary items.  Although the company has not yet released its 2008 4^th quarter earnings report, it is expected to be very ugly. 

The end of the rope that is pulling Best Buy’s share price higher is the fact that Best Buy is the best company in the U.S. consumer electronics retail industry, and it will use its strength in the industry to continue to expand and grow its business.  The company plans on expanding to 1,200-1,400 stores in North America, which translates to a growth rate of about 100 new stores per year. 

Not only is Best Buy growing, but its biggest competitors are shrinking.  Circuit City, which was one of Best Buy’s competitors, declared for bankruptcy in November.  Just last week, after months of trying to keep its operation from going under, Circuit City announced that it is planning on completely liquidating all of its 567 U.S. stores.  Basically, there will be no more Circuit City (if you have a Circuit City gift card, I strongly suggest you go use it ASAP).  While Circuit City’s bankruptcy may seem scary for Best Buy, as it shows how poorly electronic retailers are doing in today’s economy, it can also be seen as a great opportunity for Best Buy.  Best Buy will surely increase its market share in the electronic retail industry, and I believe that it will buy many of the closing Circuit City stores and convert them to Best Buys.  When the news was announced on Friday that Circuit City is liquidating its stores, shares of Best Buy jumped $2.20 (8.11%). 

So, what is the smart play for investing in Best Buy? I believe the short-term for Best Buy will be rough.  The company’s 4^th quarter earning results are going to be abysmal, and the current macroeconomic conditions will continue to hinder the company’s sales.  Investors have jumped on the Best Buy bandwagon prematurely due to the liquidation of Circuit City, and they have forgotten that Best Buy sells expensive discretionary items in a recession.  In addition, Circuit City will be selling its products for very cheap during its liquidation sale, and this will also have a negative short-term effect on Best Buy’s sales.  Having said this, I believe that once the recession is over and people begin looking to buy televisions and computers again, Best Buy has a ton of potential.  It has increased its market share in the electronic retail industry, and it will continue to expand its business.   So, give Best Buy some time.  Be patient and let the share price fall as people start realizing that the company is being hurt by the recession, and then snatch it up in anticipation of many years of solid growth.  $29 per share is way too high for me, but when it hits the low $20’s, it would be foolish to not invest in Best Buy.

Be patient,

 

Niki Pezeshki

College Trillionaire