Stock of the Day - May 22, 2009 - PM

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

Philip Morris International (PM)

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

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

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

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

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

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

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

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

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

 

Niki Pezeshki

College Trillionaire

Stock of the Day - April 16, 2009 - MMM

3M Corporation (MMM)

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

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

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

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

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

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

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

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

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

 

-Matt Schwartz

College Trillionaire

The Value Investor's Handbook

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

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

Stock of the Day - April 12, 2009 - LMT

Lockheed Martin Corporation (LMT)

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

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

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

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

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

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

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

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

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

 

Niki Pezeshki

College Trillionaire

Stock of the Day - April 5, 2009 - CFSG

China Fire and Security Group, Inc.

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

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

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

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

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

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

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

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

 

-Matt Schwartz

College Trillionaire

Stock of the Day - March 31, 2009 - CX

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

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

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

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

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

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

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

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

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

Niki Pezeshki

College Trillionaire

Market Recap - March 27, 2009

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

 

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

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 22, 2009 - DEO

Diageo (DEO)

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

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

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

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

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

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

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

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

 

-Matt Schwartz

College Trillionaire

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

Stock Buybacks

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

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

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

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

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

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

Niki Pezeshki

College Trillionaire

Market Recap - March 24, 2009

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

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

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

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

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

 

-Matt Schwartz

College Trillionaire