Stock of the Day - February 13, 2009 - RIMM

Research In Motion, Ltd. (RIMM)

Research in Motion (RIMM), the company that makes Blackberrys, has been in the news a lot this past week. The news has been negative though, as the company reported on Wednesday morning that its 4^th quarter earnings would be at the low end of analyst expectations.  RIMM’s share price, which was barely under $60 as recently as Tuesday, plummeted 14.5% on Wednesday to $48.76.  The company, which is now trading in the high-$40’s, has had an unbelievably volatile year, as it has experienced a 52-week high price of $148.13 and a low of $35.09. 

So, what led to the 14.5% drop in stock price, and was it justified? RIMM, which was expected to obtain 4^th quarter earnings in the range of 83 to 91 cents per share, forecasted that its earnings would be at the low end of the expected range.  The company cited that lower profit margins due to its more costly new smartphones, the Bold and Storm, were the main cause for being at the low end of earnings expectations.  Simply put, the Bold and Storm are more expensive for RIMM to make, and this has caused the company’s profit margins to slip from 45.6% in the third quarter to lower levels of 40-41%.  This means that instead of making a 45.6% profit on every phone the company sells, it now only make a 40% profit.  If you think about how many phones the company sells, it is easy to see how this could really affect RIMM’s net income. 

But, the 4^th quarter report wasn’t all that bad.  While the company did report that earnings would be on the low side of the expected range, RIMM also announced that it added 3.5 million more subscribers in the 4^th quarter, 20% more than the 2.9 million that the company was expecting!  This number tells me that the company is clearly growing its customer base, and it is growing faster than anyone thought.  With Bold and Storm sales doing very well, and with the new Curve 8900 expected to come out soon, the growth should continue at a strong pace for a while.  RIMM’s global market share in the cell phone business has actually doubled in the past two years to 16%, and it continues to expand aggressively across the world. 

So, what do all of these numbers mean for RIMM’s future stock price? First of all, I think the market totally overreacted to RIMM’s earnings forecast on Wednesday, as the company was still within the expected range.  RIMM is in a war with Apple to gain dominance of the smartphone market, and the iPhone is providing some intense competition.  So, it is understandable that the company would take a slightly smaller profit margin for a while in order to obtain as many customers as possible.  By taking a small sacrifice now on the bottom line, RIMM will be able to sign people up to two-year plans and get cell phone users addicted to its crackberrys. People are also underestimating the fact that RIMM increased its customer base by 3.5 million in one quarter, and that this was 20% higher than expected!  I don’t really worry too much that its profit margins slightly dipped amidst the worst recession in recent memory, because as long as RIMM is growing its customer base faster than expected, I think it is an extremely positive sign for the long-term. 

The sell-off on Wednesday was very exaggerated, and now an aggressively growing company is trading at around one-third of its 52-week high.  With new phones that are very popular, and an extremely loyal customer base, I think that RIMM is a great investment at these discounted prices. 

 

Niki Pezeshki

College Trillionaire

Market Recap - February 12, 2009

The stock market today was volatile, as the major indexes rebounded from huge intraday losses towards the end of the day on news of mortgage payment subsidies from the government.  The Dow Jones Industrial Average ended the day down 6.77 points (-.09), much higher than its lows of over 200 points earlier in the day.  The S&P 500 ended up 1.45 points (.17%) as well. 

Stocks were propelled higher towards the end of the trading day, as Reuters reported that the government is planning on subsidizing troubled homeowners’ mortgage payments.  The plan, which has not officially been announced yet, will lower mortgage rates for borrowers on the brink of foreclosure.  This news was received very well by investors, because mortgage subsidies will allow people to spend less on their home mortgage payments and will allow them to spend more on other products and services.  The logical link is that with more spending on products and services by the American people, companies’ profits will increase and businesses will grow.

Another bright spot today came from the retail sector, as the Commerce Department announced that January retail sales increased 1%, the largest increase in 14 months.  This January increase comes after a horrible December, in which the retail sector experienced a 2.7% decline in sales. 

Oil prices also fell to their lowest level in 2009, as prices fell to $33.98 a barrel.  This is usually good news for investors that don’t have money in oil companies, as consumers have more money to spend on other products when oil and gas prices are lower.

Tomorrow, the House of Representatives will vote on the $790 billion economic stimulus plan, and the Senate is expected to follow either later tomorrow or over the weekend.  If the bill doesn’t get passed, considering the fact that almost everyone is expecting it to get through Congress, the markets will most likely make a sharp downturn.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - February 12, 2009 - CHK

Chesapeake Energy Corporation (CHK)

The Chesapeake Energy Corporation (CHK) is the number one producer of natural gas in the United States. Natural gas, which primarily consists of methane, currently accounts for about 22% of our nation’s energy consumption. The company engages in exploration for natural gas fields and drilling at wells that are being developed. Chesapeake has gained many competitive advantages in the natural gas sector, and future macroeconomic conditions may make the company a good long term buy.

Before we can analyze where CHK is headed, we need to take a look at the company’s history. 2008 was a year of extreme highs and lows for Chesapeake. CHK was trading at around $40 at the beginning of the year and steadily rose until it hit its 52-week high in July at $74. The increase in value was the direct result of increased demand for natural gas and rising natural gas prices: natural gas was selling for around $15 per mcf (unit of measure for natural gas) at that time.

The upsurge was short lived. Since July, natural gas has dropped to $4.50 per mcf, and CHK hit its 52-week low in December at $9.84. Since hitting the low in December, Chesapeake has bounced back up to $18.03. In order to determine the value of CHK as a company, we need to find out how it will respond to lowered natural gas prices in the short term. We also need to clarify the long-term demand for natural gas from a macroeconomic viewpoint.

It’s very important to note that Chesapeake has hedged about 82% of their gas sales at a price of $7.50. This means that even though the going rate of natural gas is $4.50 on the general markets, the company will be selling their gas to buyers at $7.50. CHK believes that it will gain 1-2 billion dollars for each of the next two years as a result of this hedge. The extra cash will be helpful while short-term macroeconomic demand for natural gas is low.

In reaction to the decrease in demand for natural gas, the company is also bringing down the number of operating rigs by 20-30%. Despite the decreased number of rigs being used, Chesapeake still estimates that it will increase production of natural gas by 5-10% in 2009. The company can maintain growth of productions because of recent acquisitions of four major natural gas fields. The gigantic fields will provide Chesapeake with growth potential for years to come.

Now we have to discuss the factors that are out of Chesapeake’s control. National and international demand for natural gas has decreased as a result of the widespread economic recession. Both industrial and residential usage of natural gas has declined. Even though the U.S. experienced an unnaturally cold winter this year, natural gas consumption did not increase. It is my belief that the demand for natural gas will remain low until at least the end of 2009 as a result of ongoing recessionary conditions… with one exception.

The exception has a name: Obama. The President has stated on numerous occasions that he wishes to decrease American dependence on foreign oil. Although he has not stated it explicitly, one way to dramatically lower our dependence on oil would be to increase our reliance on natural gas. If President Obama decides to press the issue on natural gas in an attempt to bolster the U.S. economy, shares of company’s like Chesapeake would skyrocket. Despite this, playing on the potential for government aid alone would be speculative at best.

Here’s the major point for Chesapeake: when natural gas prices begin to pick back up, they will do so dramatically. The trend of cutting back on natural gas production does not solely apply to CHK, as many other energy companies are lowering their natural gas production levels as well. So when the recession ends, and natural gas demand picks back up, supply will be very low. This is where I see money to be made: very high demand + very low supply = HIGH PRICE. It will take a while for the increase in demand to form, but when it does, expect prices to go up in a big way.

Short-term conditions will cause Chesapeake to struggle and long-term conditions will allow the company to thrive. As a result, I believe that you should wait a few months before buying CHK and allow the stock price to pull back a bit. The potential for this company in the long-run is limitless, as an economic recovery will undoubtedly cause an increase in demand for natural gas. Get in before the demand jumps, and you’re bound to make a profit.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - February 11, 2009 - GDP

Gross Domestic Product (GDP)

Simply put, gross domestic product (GDP) gauges the size and health of a country’s economy.  GDP represents the total dollar value of all goods and services produced over a specific time period.  GDP is calculated in two ways: The income approach and the expenditure method.  The income approach adds up what everyone (companies and people) earned in a year, and the expenditure method adds up what everyone spent (roughly similar numbers). 

Knowing a country’s GDP is important because it allows people to compare the sizes of different countries.  The European Union, as a whole, now has the largest GDP in the world.  The U.S. is number two, with a 2008 GDP of $14,580,000,000,000. China is also right behind the U.S. at number three now, with a GDP of $7,800,000,000,000. According to these GDP numbers, the United States produces almost two times as many goods and services than China in 2008. Obviously, these GDP numbers will be huge, as they account for all of the goods and services produced in a country throughout an entire year.

But, GDP is also very useful in determining the health of a country.  By comparing a country’s GDP yearly or quarterly trends, one can learn a lot about the country’s economic situation.  For example, if the year-over-year GDP increases by 5%, that is interpreted to mean that the economy has grown by 5% compared to the previous year.  When a country’s GDP increases at a higher rate than the period before, it usually signifies a growing economy.  In a growing economy, the unemployment rate is usually low as more businesses are thriving and hiring more people.  But, if a country’s GDP declines compared to the previous period, it means that the country’s economy is shrinking.  For example, U.S. GDP fell 3.8% in the 4^th quarter of 2008.  As most of you know, our economy is shrinking, people are losing jobs, and we are in a recession.  A recession is actually defined as two consecutive quarters of negative growth in GDP.  The U.S. had a declining growth rate of -.5% in the 3^rd quarter of 2008 as well, which explains why everyone says we are now officially in a recession. 

How does a change in GDP affect the stock market? As you can imagine, a shrinking GDP will have an adverse affect on the markets, as businesses and people are producing and spending less than the period before.  An increase in GDP will have positive affects on the markets, as businesses are growing and increasing profits and consumers are spending more. 

Knowing what GDP is and understanding how GDP trends affect the stock market are crucial concepts for any investor to understand. 

 

Niki Pezeshki

College Trillionaire

Market Recap - February 11, 2009

With news coming out of Washington towards the end of the trading day that lawmakers in Congress had agreed on a $790 billion economic stimulus plan, stocks managed to finish the day slightly higher.  The Dow Jones Industrial Average increased 50.65 points (.64%) and the S&P 500 also was up 6.58 points (.80%). 

The Congress and the White House didn’t take long to make the necessary compromises to pass the $790 billion economic stimulus bill, and Obama is expected to sign the measure within the next couple of days.  About one-third of the bill will be used to provide tax relief for families, as 95% percent of American workers will have their taxes cut.  The bill is also meant to create 3.5 million jobs in order to boost the economy and fix our high unemployment rate.  The bill also includes sections regarding health coverage, food stamps, and federal funding for distressed state budgets. 

Even with such positive news coming from Washington, it is clear that investors were not fully convinced, as the Dow only made a moderate climb of 51 points.  While investors might have been acting overly cautious, they have the right to be.  The government has been slow and inefficient for the most part in dealing with the recession, and even with all of the government intervention in the private sector that has been going on recently, we are still in the heart of one of the worst economic times in our country’s history.  So, while it is impressive that the economic stimulus bill was agreed upon this quickly, it will definitely be a while until we start seeing the effects of the government spending.

Tomorrow is the first time all week that there are no huge announcements expected to come out of Washington.  This lack of news from the government will likely lead to more people focusing on the economy and 4^th quarter corporate earnings. 

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - February 10, 2009 - SEC

Securities & Exchange Commission (SEC)

In reaction to the Crash of 1929 and the Great Depression, Congress passed the Securities Act of 1933.  Many people believed that a lack of regulation was the main cause for the crash that led the Depression, and the Securities Act of 1933 was made to cure this issue. In 1934, Congress also passed the Securities Exchange Act, which created the Securities and Exchange Commission (SEC) to enforce the rules of the Securities Act of 1933.

The responsibilities of the Securities and Exchange Commission are diverse and numerous. Every security that is traded on any stock market must be registered with the SEC. If you want to your company to become a publicly traded company, the SEC is responsible for analyzing and permitting an Initial Public Offering (see Trillionaire Term of the Day for IPO’s). If you ever purchase over 5% of a company’s shares, you would also have to report the transaction to the SEC.

The Securities and Exchange Commission’s main purpose is to regulate the securities markets and prevent companies from committing fraud and manipulation. The SEC requires publicly traded companies to submit quarterly and annual reports that contain financial statements. The publication of financial statements prevents fraud: having millions of eyes inspecting them makes it much harder to lie. These reports allow common and institutional investors alike to gain insight on the inner workings of a company.

Interestingly, the SEC requires publicly traded companies to publish a management discussion and analysis (MD&A) each year. In these statements, a selected executive will discuss the events of the year leading up to the report. The best part about these statements is that the executive usually explains the tough process behind major decisions. These statements are available to everyone (that means you), and they are a great way of understanding how a company does business and how it reacts to specific events.

The recent economic crisis has put the SEC in the public spotlight. The SEC has the power to bring civil enforcement actions against individuals and corporations that commit fraud. In the aftermath of the crash of the housing market they used this power to bring over $51 billion in settlements to individuals and institutions that bought auction rate securities from banks including Merrill Lynch, Bank of America, and Citigroup. Recently, the failure to discover Bernard Madoff’s $50 billion Ponzi scheme has been attributed to the SEC. Congress and the SEC are looking to change the rules that govern the Commission to prevent more fraudulent activity from occurring.

As a future investor and market player, you will constantly be dealing with the actions and regulations of the SEC. The legitimacy of the markets and investments lies in the Commision’s hands. It’s important to learn about the SEC because to play by the rules, you must first know them.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - February 10, 2009 - GOOG

Google, Inc. (GOOG)

Google Inc. (GOOG), the search website that helps people find basically any piece of information they want, is currently trading at $360.81.  It is considerably lower than its 52-week high of $602.45, but it is also well above its 52-week low of $247.30.  Google is a huge part of all of our lives, as we use the company’s services multiple times every day.  I believe that the company’s sheer size and our reliance on its services makes the company a solid long-term investment, but the faltering economy makes me hesitant to call it a buy for the short-term. 

Before I talk about Google’s current situation, we must identify how the company makes money.  97% of Google’s revenue comes from selling online ads!  The company makes money when people like you and me click on the ads scattered all over the internet.  So, as you can tell, Google relies almost solely on the ability and the desire for companies to advertise online and the willingness of internet users to click on ads.  This reliance on companies spending money on advertising and consumers being interested in buying products amidst one of the worst recessions in history is what makes me question Google’s upside potential for the near future.

Efficient Frontier (EF), a company that helps marketers run search campaigns on sites like Google, announced that spending on search ads by its biggest corporate customers fell 8% in the 4^th quarter of 2008.  This is the first drop in spending for online advertising that EF has ever recorded!  EF’s smaller search spenders paid even less for advertising last quarter, as its smaller clients cut their online advertising spending by 23%.  What’s worse, the company reported that the number of clicks that ultimately resulted in a sale, a ratio called the conversion rate, also dropped drastically.  If companies are paying Google for every time someone clicks on their ads, they expect that a solid percentage of the people that click on their ads will buy their products.  So, when consumers click on ads and don’t buy anything, it becomes unprofitable for companies to advertise online. 

But, why are people buying fewer products than usual when they click on ads? With this economy, and with people spending less than ever, it is pretty easy to understand why people are spending less online.  Consumers are preserving their cash, and they are looking less and less at online advertisements as a result. So, if 97% of Google’s revenue comes from online advertising, and if fewer people are clicking on ads, and fewer companies have incentive to pay for online advertisements due to lower conversion rates, it becomes clear to see how Google is dealing with some major issues in this economic climate. 

Google actually announced its 4^th quarter results on January 22^nd, and the results were better than expected because of the very low expectations that analysts had for the company.  While the company’s sales rose 18%, the number was considerably lower than the growth experienced in previous quarters.  The company’s 4^th quarter EPS was 1.21, over 60% lower than 2007’s 4^th quarter EPS of 3.79.  Many analysts are expecting earnings and revenue to decline again in the 1^st quarter of 2009. If this does happen, it will be the first time Google has posted a decline in earnings and revenues in two consecutive quarters!

While it is clear that Google is currently struggling due to its reliance on consumer spending and corporate advertising budgets in this recession, the long-term outlook for Google looks very solid. 

Google has a very firm grasp on the U.S. search market, and it is growing in international markets.  In December, 72% of U.S. internet searches were done on Google!  I believe Google will remain the online market leader for many years to come, and it will continue to aggressively expand into global markets.  Another positive that makes Google intriguing for the future is the expected online spending and advertising trends.  According to market research firm IDC, total U.S. internet advertising spending is expected to nearly double from $16.90 billion in 2006 to $31.40 billion in 2011.  In addition, the number of U.S. online shoppers is expected to grow from around 115 million in 2006 to around 200 million in 2012.  These numbers indicate much higher revenue for Google in the future!

Google’s many services and applications, such as Gmail, Google Maps, Google Earth, Google Talk, Google Finance, Google Chrome, Google Check-out, etc., have also increased the company’s customer base and have made the world even more reliant on Google and what it has to offer. 

In the short-term, I think the macro economy will continue to negatively influence Google’s earnings and revenue. The stock price for Google will most likely remain stagnant or be pulled slightly down for a while.  But, when we get out of this recession and companies begin spending on advertising again and consumers start buying stuff online, Google will continue on its path towards domination.

 

Niki Pezeshki

College Trillionaire     

Market Recap - February 10, 2009

A barrage of bad news created a gloomy mood on Wall Street today, as uncertain investors sold off stocks. The Dow lost 382 points (-4.62%), and the S&P 500 lost 42.73 points (-4.91%). Earlier today, Treasury Secretary Timothy Geithner announced his plan to help troubled banks by taking up bad assets. In other news, the Senate passed its version of the stimulus bill today, two weeks after the House passed Obama’s proposed economic stimulus package. Also, Federal Reserve Chairman Ben Bernanke participated in a question and answer session in front of Congress.

Timothy Geithner’s plan to help distressed banks was supposed to invigorate the markets by easing the currently tight credit situation. Instead, Geithner failed to relay specific details to listeners, and gave only a general outline of his plan. Investors that had previously led financial stocks upwards in anticipation of the announcement were disappointed by his lack of precision. As a result, the financial sector led today’s large sell off.

Head chairman of the Fed, Ben Bernanke, was grilled in front of Congress today. Representatives asked the chairman about the current situation of the economy and the steps that the Federal Reserve is taking to fix it. Investors were let down by Bernanke’s hesitant responses, as he stated “any fix to the worst credit crisis since the 1930s would take time to work.”

It appears that investors weren’t placated by the Senate’s passage of an $838 billion economic recovery package that includes $293 billion in tax relief and $546 billion in spending. The House passed its version of the bill two weeks ago with a total of $820 billion split between $182 billion in tax relief and $638 billion in spending. A committee of Senators and Representatives will reconcile the two packages to have a bill on Obama’s desk by next week.

Additionally, General Motors (GM) announced today that it will be cutting 10,000 salaried jobs this year.

Today was a horrible day on Wall Street, and the reaction to Timothy Geithner’s financial bailout plan was extremely negative.  It seems like many investors have lost faith in the government’s ability to make quick decisions to fix our current economic crisis, and the stock market represented this lack of confidence today.

Until tomorrow,

 

-Matt Schwartz

College Trillionaire

Stock of the Day - February 9, 2009 - FCX

Freeport-McMoran Copper & Gold Inc. (FCX)

Freeport-McMoRan Copper & Gold Inc. (FCX) explores, mines, and produces various types of metals including copper, gold and silver. It also smelts copper concentrates to sell refined copper products. Freeport-McMoRan is the world’s largest publicly traded copper company. The company’s stock has taken a huge hit recently, and I’ll discuss why its fall may present us with a great buying opportunity.

FCX traded around $120 for the first half of 2008. With July came the beginning of a gigantic drop in its stock price: by December, it hit its 52-week low of $15.70 and in doing so lost about 87% of its value. To comprehend the drop in stock price, you must understand that FCX is completely reliant on the value of commodities, mainly gold and copper. The second half of 2008 saw the U.S. dollar make a remarkable rally. The value of the dollar increased because demand for U.S. treasuries skyrocketed, and the combination of foreign and domestic support for the U.S. currency led to an uptick in its value.

Because of the inverse relationship between commodities and the dollar, an increase in the value of the dollar equates to a decrease in value of commodities. Copper was trading at an average of $3.61 per pound for the first 9 months of 2008, and by December it was trading at a four-year low of $1.26 per pound. The 65% decrease in value spelled bad news for Freeport-McMoRan, as the company relies heavily on the sale and refinement of copper. Its 4^th quarter earnings report for 2008 was disastrous: the company posted a loss of $14 billion, or $36.78 a share.  In order to compensate for the steep losses, FCX suspended its dividend in December and plans to cut capital expenses.

I hope that I haven’t scared you away from the company at this point, because FCX has a huge amount of upside. The company is sitting on reserves of 3.2 billion pounds of copper and 41 million ounces of gold. This means that FCX holds billions of dollars worth of solid assets (literally). The company still owns gigantic mines on four different continents, and it plans on producing 3.9 billion pounds of copper in 2009 and 3.8 billion pounds in 2010.  FCX has not slowed production of gold either: The company expects to produce 2.2 million ounces of gold for each of the next two years. It should be clear by now that the industry leader (FCX) will maintain through adverse times.

I believe the horrible times for commodities are ending, and this is where the amazing upside for FCX begins. Due to a decrease in demand for U.S. Treasuries and an increase in money printing from the Federal Reserve, the dollar rally is coming to an end. As a result, commodities such as gold and copper are beginning to gain. Additionally, if Obama’s enormous stimulus bill passes we will see a hike in government spending. Increased government spending, increased money printing, and a decrease in demand for U.S. Treasuries will add up to INFLATION. Inflation is a beautiful thing for commodities because a decrease in the value of money equates to an increase in the value of solid assets.

In the end, FCX is a commodity play. If you agree with me and believe that we will see a period of monetary inflation in the times ahead of us, then Freeport-McMoRan will be a great investment. The company is cutting costs while still producing massive amounts of copper and gold. If the value of copper and gold goes up, FCX will be cashing in on major profits. You owe it to yourself to do some research and determine if you want to buy some shares of FCX and profit with the company.

Finding an upside to every downside,

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - February 9, 2009 - Ponzi Schemes

Ponzi Schemes

Ponzi Schemes are a type of illegal pyramid scheme that basically take money from new investors to pay off earlier investors until the whole scheme collapses.  The fraudulent investing scam promises high rates of return at little risk, and works on the “rob peter to pay paul” principle.  The scam actually works if you are an early investor and new investors continue to be duped into joining the pyramid scheme.  The problem with the scheme is that eventually there are not enough new investors coming in to produce enough money for the earlier investors.  At this point, the whole scheme unravels and the people that came into the scheme late lose everything. 

Let’s do an example of a Ponzi Scheme with 4 investors (Investor A, B, C, and D), and me as the head of the whole illegal operation.  I go to Investors A, B, and C and tell them, “I promise you will each make a 30% rate of return on your investments if you each invest $1,000 with me.  So, at this point, I owe Investors A, B, and C their $1,000 principle plus $300 worth of returns each.  I know I can’t possibly make $900 ($300 in returns X 3 investors) to pay them their promised returns by doing anything legal, so I go to investor D and tell him the same thing I told the previous three investors.  I tell investor D, “I promise you will make a 30% rate of return on your investment if you invest $1,000 with me.” So, I use Investor D’s $1,000 investment to pay off the $900 in returns that I owed to Investors A, B, and C.  Now, in order to continue paying Investors A, B, and C their 30% returns every year, and now also Investor D’s 30% return, I have to keep on bringing new investors into my Ponzi Scheme to pay them their promised returns. 

As you can tell from the example, the only way that this system can continue to work is if the head of the scheme consistently brings in new investors to pay off the earlier investors.  Also, it is clear that the early investors can earn a lot of money through Ponzi Schemes, and later investors can be ruined.  In the previous example, Investors A, B, and C all got their 30% returns from Investor D’s initial investment, so they are happy.  But, let’s say that I could not find another investor to join my Ponzi Scheme after Investor D.  In this case, Investor D would end up with only $100 left to his name, as $900 of his initial $1,000 investment went to paying the 30% returns promised to Investors A, B, and C.   

This illegal practice is named after Charles Ponzi, who cheated thousands of people back in the 1920s with a fraudulent postage stamp scheme.  Ponzi Schemes are unfortunately still used today to swindle investors, and as many of you know, Bernie Madoff was recently arrested for orchestrating a $50 billion Ponzi Scheme.  Ponzi Schemes are extremely illegal, but they are definitely interesting to think about.

Don’t get any crazy ideas.

 

Niki Pezeshki

College Trillionaire

Market Recap - February 9, 2009

The stock market barely moved on Monday, as investors patiently waited for the monumental news that is set to break out of Washington tomorrow.  The Dow Jones Industrial Average finished the day down 9.72 points (-.12%) and the S&P 500 was slightly up by 1.29 points (.15%). 

There are two huge announcements planned to come out Washington tomorrow.  First, Treasury Secretary Timothy Geithner will come out with his new plan to overhaul the government’s $700 billion financial bailout package (TARP).  Geithner’s plans will be analyzed very closely, and the movement of the stock market will definitely reflect how effective investors believe his new plans will be in fixing the credit crisis.

Second, the Senate is expected to vote on an $827 billion stimulus bill tomorrow.  Even if the bill passes in the Senate, the government will be faced with the challenge of matching the Senate’s bill with the House of Representative’s $819 billion bill that was passed a couple of weeks ago.  While it is widely expected that the bill will pass through the Senate tomorrow, there is still some worry that the Senate Republicans might come together and defeat the bill.  Obama strongly warned the Senate Republicans from voting against the stimulus package, as he said that failure to pass the bill “could turn a crisis into a catastrophe.”

Today’s action in the stock market was the perfect example of the calm before the storm.  And, with all of the government news coming out tomorrow, the storm has the potential to be epic.  Whether the markets go up or down tomorrow is anyone’s guess, but with the monumental announcements about the stimulus package and the bank bailout plan set to be announced, it will definitely be an interesting day on Wall Street.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - February 8, 2009 - FWLT

Foster Wheeler, Ltd. (FWLT)

There are just so many reasons to like Foster Wheeler (FWLT)! The stock price is ridiculously cheap, the company is experiencing unbelievable growth, and Obama’s stimulus plans will keep this company in demand for a long time.  Foster Wheeler is a global engineering, construction, and project management contractor and power equipment supplier. Foster Wheeler operates through two groups: The Global Engineering and Construction Group, and the Global Power Group. The E&C Group constructs oil and gas processing facilities and many other types of infrastructure facilities.  The Global Power Group makes equipment for electric power generating stations and industrial facilities.

The first influence on Foster Wheeler’s stock price that I will analyze is Obama’s stimulus plan.  If you have checked out the news for over one minute in the past three months, you know that one of Obama’s first goals as president is to spark the United States’ economy by passing a bill that is worth between $800-$900 billion.  The stimulus package will focus mainly on tax cuts, creating jobs, and spending on infrastructure.  Obama has pledged that the infrastructure spending will be used to improve and build roads, highways, bridges, and other public works.  As an energy and construction company, Foster Wheeler will undoubtedly benefit from this part of the stimulus package, as the Government will need companies to help build more power plants and power lines to support the building of public works projects.

But, the question becomes: Have the positive affects of the stimulus plan already been factored into Foster Wheeler’s stock price? Well, the low point for the stock was $13.86 on November 20, 2008.  But, as news of the stimulus plan started to heat up, Foster Wheeler closed at a high of $27.60 on January 6, 2009.  While this is a huge jump, you must understand that the entire stock market has come back since the lows of Nov. 20^th, and that Foster Wheeler’s stock price is still way down compared to its 52-week high of $79.97.  In addition, the stock has come down again since it reached $27.60, and is now at $22.40 and has been hovering in that range for a while.  So, while the news of Obama’s stimulus package did bring up Foster Wheeler’s stock price, I don’t think it has been brought up enough.  Investors are still underestimating the positive impact that the infrastructure spending will have on Foster Wheeler, for now and for the long-term. 

What makes Foster Wheeler so intriguing, though, is that it has so much more to look forward to than just the stimulus plan.  The company is set to win contracts for eight megaprojects across the world in 2009! These projects, which include building oil refineries and huge industrial facilities, are each worth billions of dollars and will keep Foster Wheeler busy for many years to come.  If the company is able lock up even half of its megaprojects (although the CEO sounds confident that it will sign contracts to do all eight), Foster Wheeler’s stock price will shoot through the roof.  So, while this might sound a little speculative, it seems like the odds are that Foster Wheeler will be signing huge contracts throughout 2009, and that can only mean great things for the stock price!

The third and possibly most important aspect of Foster Wheeler that makes me so impressed with the company is its overall health.  The company’s balance sheet is very strong, and it has very low debt-levels.  Foster Wheeler is spoiled with cash, as it currently has an absurdly high $9 of cash per share!  Even cash-rich Microsoft (MSFT) only has $2.28 of cash per share, a number that is still considered very solid.  In 2008, Foster Wheeler had earnings growth of over 30%, and the stock price fell from almost $80 to the $20’s.  The company expects to have over 30% earnings growth again this year with help from its megaprojects and the stimulus plan, and if there is any logic and rationality left on Wall Street (which I question at times), Foster Wheeler’s share price will increase based on these growth numbers.  The company’s PEG Ratio (read Term of the Day, Jan. 30) is also a ridiculously low 0.28, meaning that the stock is undervalued when comparing it to the company’s future growth potential.  The company’s very smart and well-polished CEO, Ray Milchovich, has also recently announced that he will lead Foster Wheeler for another 3 years, a very positive indicator that he is expecting good things to come.

Foster Wheeler has a strong balance sheet and it will continue to deliver strong earnings growth as a result of its potential megaprojects and its participation in Obama’s infrastructure spending agenda.  The company is releasing its 4^th-quarter results on February 24^th, and I would suggest buying it before then.  At $22, Foster Wheeler is a definite buy!

Niki Pezeshki

College Trillionaire