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

Market Recap - March 9, 2009

Last week’s major sell-offs and occasional rallies made today’s market action seem weak, as investors gradually sold stocks. The Dow Jones industrial average fell 79.89, or 1.2%, while the S&P 500 fell 6.85, or 1%. Both indexes have dropped 25 percent this year alone.

The United Auto Workers (UAW) approved contract changes for Ford (F) today. The unions agreed to allow Ford to freeze wages and cut benefits for laid off workers in an effort to stay competitive amid harsh economic conditions. Ironically, Ford is the one American automaker that has not asked for government assistance. General Motors (GM) and privately owned Chrysler LLC have yet to make contractual changes with workers. If and when they do make changes, the Ford contract will serve as a model for alterations.

On an unusual note, the financial sector actually rallied today! Bank of America (BAC) gained 61 cents, or 19.43% while Wells Fargo (WFC) was up $1.36, or 15.80%. These gains come after the stocks were completely battered by nationalization fears in the past few weeks. Analysts don’t believe that today’s financial rallies can be attributed to any sort of fundamental change, as investors are probably scooping up the stocks while they’re down in hopes that long term returns will be made.

Pharmaceutical company Merck (MRK) announced today that it will be buying Schering-Plough (SGP) in a $41.1 billion deal. The acquisition will make Merck the second largest pharmaceutical company and help it expand its business while cutting costs. This deal comes several weeks after pharmaceutical giant Pfizer (PFE) announced a buyout of Wyeth. Increased pressure from the troubled economy and difficult healthcare regulations announced by President Barack Obama have led drug companies to come together to stay economically viable.

While stocks still lost today, it was good to see the markets act more tamely. Investors are tentatively buying and selling in hopes of discovering a bottom.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - March 8, 2009 - WMT

Wal-Mart (WMT)

In the midst of some of the worst economic times the United States has ever seen, consumers are saving in efforts to maintain a certain quality of life. One company’s motto reflects this mindset: “Save money. Live Better.” Wal-Mart (WMT), the retailer of all retailers, has over 7,800 stores in 16 worldwide markets. Should this mega-corporation be a part of your portfolio?

Wal-Mart has become the master of slashing prices and providing variety to its customers. The company’s superstores have become a one-stop shopping place where all living necessities can be satisfied simultaneously. From groceries, to electronics, to furniture and beyond, Wal-Mart provides shoppers with cheap prices and diversity of products.

The company can consistently beat the prices of its competitors because of its gigantic economic moat. As a retailer, Wal-Mart simply takes the products of other manufacturers and sells them at its stores. Wal-Mart has become so massively popular and successful that retailers actually compete to be in its stores! This allows Wal-Mart to effectively decide what prices the manufacturers will give them. Other retailers do not have this luxury, and those companies cannot deliver prices that compare.

As the bad economy gets worse, customers will continue to leave expensive retailers and seek bargains at Wal-Mart. This idea is no longer a hypothesis; the numbers are proving it. Wal-Mart released its February sales report last week. The company’s U.S. same-store sales increased by 5.1% compared to February sales in 2008.

Even better, Wal-Mart is beating out its competition. In the company’s most recent earnings report, CEO Mike Duke stated, “Our performance relative to competitors was exceptionally strong in the 4^th quarter. We expect this momentum to continue.” Indeed it has. Both Target (TGT) and Costco (COST) missed expectations in February, when the companies’ sales dropped 6% and 3% respectively. The only retailer, other than Wal-Mart to increase same-store sales was BJ’s Wholesale Club (BJ). BJ’s still missed expectations when its sales increased by a mere .6%.

Wal-Mart rests on incredibly solid fundamentals. The company has $7.28 billion in cash, and it’s currently the second largest company in the S&P 500, with a market capitalization of $191.92 billion. On the same day as the February sales report, the company increased its dividend by 15 cents to $1.09. Currently, this is a 2.2% yield.

My biggest concern for Wal-Mart was international sales. The company’s international sales decreased 10.8% in February. My worries were alleviated when I learned that the drop could be completely attributed to higher foreign exchange rates brought on by the strength of the U.S. dollar. If the exchange rates were the same now as they were in February 2008, international sales would have actually increased by 9.9%! This means that Wal-Mart’s international business will start bringing in more cash as the dollar loses ground against other foreign currencies.

Wal-Mart’s stock price is currently down 21% from its 52-week high of $63.85 set on September 19, 2008. At $48.91, the stock is currently trading at 14.42 times earnings. While this P/E ratio makes the stock more expensive than many of its competitors, I don’t believe that WMT is overvalued.

Wal-Mart is thriving in a time when most companies are cutting dividends, laying off workers, and closing stores. The company is hitting its stride while everyone else is tanking. When people say that we’re witnessing some of the best buying opportunities in history, they’re referring to Wal-Mart. I encourage you to do some research of your own and discover the potential money to be made.

-Matt Schwartz

College Trillionaire