A Look Back: 5 Stocks For The Long Term

Hello again! The DOW is pushing towards 10K and October is less than a week away. The volatility seems to have been under control as of late, especially when compared to a year ago; when 2%-4% swings in a day were the norm and investors were bailing out left and right. Anyway, don't be surprised if the DOW does top 10K that you will see the institutions trim their positions in anticipation of October's options Friday (October 16th). If the market is still high by then, you'll see a spike in trade volume as call options will be exercised and a lot of shares will be trading hands. For example, if a investor purchases a contract (100 shares) for Exxon (XOM) at $65 per share and by the middle of the month of October, XOM is at $75 per share, the investor can exercise that option and take control of the 100 shares of XOM at a cost of $65 per share and can either hold the stock or sell it into the open market for $75 (or whatever the market price is at the time of sale) and have a taxable gain of $1,000. If prices are high across the board, you could see a flood of stock being sold into the open market and when that happens prices can nosedive (supply & demand). If the market is high, the pros simply increase their cash hoard and wait for the herd to act and then can scoop up relatively cheap priced stocks in the aftermath.

Ok, enough of that. Earlier this year, I authored a five part series describing what I felt were five stocks for the long-term and why (Feb. 27th-Mar. 26th). Since it has been six months since I finished the series, I thought it is a good time to check back in to see how those five beauties are performing. Let's have a look......

Stock #1: Cherokee (CHKE)

Feb. 27 Close Price: $13.94
Sep. 24 Close Price: $22.39
Percent Change: +60.62%

Looking at the numbers, it looks like the pick was a great one. However, remember that CHKE is a small company with a market cap of just shy of $200M. Also, this is short-term and things can change very quickly with a company this small. The good thing is that during the turmoil of this past winter, CHKE avoided taking on debt (current debt is $0) and has not missed a dividend payment. I still feel this stock is being ignored and still has a way to go, before it is fairly priced. With the current dividend yield of 8.8%, it is worth the wait.

Stock #2: Ticket Master (TKTM)

Mar. 2 Close Price: $4.30
Sep. 24 Close Price: $11.56
Percent Change: + 168.84%

Again, as will CHKE, TKTM is a small company with a market cap of about $650M. I'll be the first to admit this company was priced extremely low (about 50% of book value), when I wrote about this company back on March 2nd. I'll admit that I felt this company could not go any higher than $9 in the first 12 months and I subsequently sold my entire holding of it in August at just shy of $8, because I felt the company's financials and the price of the market made the company outside of my risk tolerance. It was a mistake to sell the whole position. I should have reduced my position by anywhere by 50% to 75% of my original position. Even though I picked up a 60% gain over a five month period (129% annualized gain), I missed out on the unusual spike in the price. My intention was that I felt the price was going to drop along with the rest of the market and then I would be able to pick it up again when it came back to $6. Anyway, you can't be 100% right 100% of the time. I'll take partially right any day of the week.

Stock #3 Terra-Nitrogen (TNH)

Mar. 9 Close Price: $119.49
Sep. 24 Close Price: $104.15
Percent Change: (12.84%)

The percent change is very deceiving with this company. The stock is extremely volatile. In the six months since writing about this stock, it has ranged from about $95-$140. In my portfolio, I've been reducing and increasing my position as the stock tops $130 and then goes below $100. Again, this company is relatively small, with it being on the boarder between a small and mid-cap company ($1.95B market cap). The current dividend yield of 8.88% makes it stock worth holding onto and with a P/E ratio of just under 10, it is very cheap considering it is an alternative energy company that will see its stock go much higher when the prices of natural gas recover. Keep an eye on this company and don't be too hasty to sell. This is definitely a company that you should definitely buy in slowly and exit slowly.

Stock #4 Exxon Mobile (XOM)
Mar. 20 Close Price: $66.09
Sep. 24 Close Price: $68.93
Percent Change: +4.30%

We've now are going from small companies to the largest (market cap) company on the planet. Despite the increase in alternative energy research, oil will still rule for the next quarter century and XOM will lead the way. As with extremely large companies, it is harder to grow more than a few percentage points per year, however, with oil still priced very cheap, it is a good time to get in. You can easily afford to get in slowly on this company and with the current dividend yield of 2.40%, you get a little bang for your buck. XOM has plenty of money to invest in new oil drilling and also has the ability to not only pay the dividend consistently, but also to increase it in order to attrack more investors. This is a company that is as solid as they come.

Caterpillar (CAT)
Mar. 26 Close Price: $30.78
Sep. 24 Close Price: $51.85
Percent Change: +68.45%

CAT is another large cap company ($32.5B market cap). Despite only about 10% of their revenues that can be tied to the housing market, the company took a beating when the housing bubble burst. What has really affected the company in terms of revenue is the credit crunch. The main function of this company is to sell and lease construction equipment. When the credit crunch started, companies and municipalities stopped expanding and starting or suspending projects. This caused the reveue of CAT to dry up quickly. By that time, the stock had taken a huge nose dive, because of the average investors misunderstanding of the companies main source of earnings. The company is still undervalued and that should reflect in the stock price when the housing market recovers, since the same folks that sold under the misconception, will buy back in under the same misconception. Regarless, the credit market will begin to loosen when the housing market starts to recover and the banks can unload some of those REO properties and get that expense off the books. Right now, I think CAT could go past 80 in the next 24 months. We'll have to wait and see.

Here is the overall results

Starting Stock Prices: $234.60
Sep. 24 Stock Prices: $258.88
Percent Change: +10.35%
Annualized Return: +20.70%
Overal Grade: B+

I give myself a B+ so far. The major blemish was on TKTM by selling my entire position rather than reducing my position. Some of this was offset by playing on the voltatility of TNH and treating it as a trade rather than an investment. You can still be long on this stock, but taking advantage of the spikes and dips in a stock such as this can pad your gains. If I went back to research my trades on this stock, my returns would be significantly higher, however, playing this game with stocks you aren't completely familiar with is a plan that will eventually fail. I do not recommend trying to trade a stock on dips and spikes over the long term. If you do decide to try this for a short period of time, be aware of the ex-dividend date in order to take full advantage of the dividend payout. Until next time.........

October's Coming....Hold On To Your Hats!

Ah, my favorite month is approaching. October might be the craziest month of the twelve in terms of investing. I should probably do a study to see if the suicide rate is highest in October. Why is it that October is so nutty for the market? No idea, it could be Halloween or it could be the start of the holiday shopping season. Last October, we saw the Dow drop about 1500 points, although it was just after Lehman went belly up. I'm not saying the market will have a huge pull back during October, but we typically see the biggest swings on a daily basis during that month. I'm going to throw a date out there for you.....October 16th. Why that day? It is the third Friday of the month, so that means that option contracts come due on that day, so the volatility tends to be large, particularly if the market has performed well, because if the market has done well, then people tend to exercise their call contracts and you see a bunch of stock dumped into the market and then picked up at reduced prices.

Anyway, what does this mean for the us? Me in particular feels the Dow is about 800-1000 points overvalued. And what do we do when we feel the market is overvalued? That's right, reduce your positions, sell your losers and stock up the cash so you are ready for the pull back. I have three sample portfolios that I started between Feb. 2008 and Nov. 2008. Each portfolio is valued at 1.5-1.8 million (each started at 1 million and dividends are not factored in). I'm currently carrying about 50-60 percent cash in each porfolio. That indicates how bearish I'm am currently. I'm very bullish, however, with alternative energy companies, oil and emerging country (mainly China and India) markets. Stay cool and devise a plan that eliminates the emotion of investing. Stick to the plan and you'll save yourself a lot of pain.

V Shaped Rally..............Not!

I'd like to welcome myself back from the layoff. No, I didn't lose my job. I went on vacation and was waiting for this short-lived, suckers rally to abate a bit. Now that we had a pull back late last week, I'd like to address all the experts out there who keep trying to figure out which letter of the alphabet the recovery is going to represent. The fact that people are focusing on trying to figure this out tells you they have no f'ing idea what is going on and what is going to happen, so they distract you with speculation about what kind of letter the recovery is going to represent. They do this, so that have a remote chance of getting it correct. They could pick a letter out of a hat and technically have a 1 in 26 chance of getting the right letter. Even still, they can eliminate certain letters like "T" and "O", because a graph showing the market ups and downs could never represent those two letters. The whole thing has about as much relevance as the "Doomsday Clock" developed post WWII.

The real issue is will we recover sooner or later. I tend to think that we may be treading water for quite some time, with the minor ups and downs. It remains to be seen if the government is going to cut spending and if consumers' confidence in the market returns and remains stable. There are also interest rate issues, government regulation issues and last and most important......inflation issues. I've been moaning and groaning about the printing of money and how the spending money is not a way to fix a problem rooted in spending too much money. Everyone has been telling me that I'm crying wolf, but now the Oracle has decided to put his two cents in and give my concerns about the subject some validity.

Read on.....

http://finance.yahoo.com/tech-ticker/article/306287/Buffett-We're-Going-to-Be-Crushed-Under-Mountain-of-Debt?tickers=tbt,tlt,udn,uup,brk-a,brk-b,spy&sec=topStories&pos=9&asset=&ccode=

Next up will be what to do now and where to look for some bargains before we start to see the slow and steady upswing.

Bam Bam’s HC Reform: WTF

Anyone who hasn’t been hiding under a rock during the past few weeks has heard of O’Bama’s healthcare reform bill. The basics of the bill are that healthcare be provided to at least 97% of the population. The tab for this overhaul is in the $600B range. The idea is that the bill will reduce the cost of treatments and medicine, which will reduce the premiums charged by healthcare providers. This means that folks with current health insurance will see a reduction in their premiums and folks that don’t have health insurance will have a choice of new and affordable plans. There are a myriad of other factors that go into this reform, such as making insurance companies accountable and increasing the competition. Also, the goal seems to be a McDonaldization of hospitals and other health care facilities. Basically, that means that no matter what hospital you go to, you’ll receive the same high quality care as any other place. One funny detail is the plan wants to require insurance companies to cover pre-existing conditions.

I, personally, have a few problems with this. One, the bill suggests that having health insurance is a “right”. The last time I checked the Constitution, it made no mention of health insurance being a right to every American citizen. There are people out there who take terrible jobs, simply because of the health coverage. It is not a right. Only about 60% of the jobs in this country offer health insurance as a benefit. The cost that this plan will have is going to be spread out amongst everyone in the form of increased taxes. The $600B price tag is simply the tip of the iceberg in terms of cost.

I am in favor of the tax on the “wealthy”, since there are so many loopholes in the tax code that the average percentage of taxes paid by the richest 1% in the country was about 17%, which is roughly the tax bracket shared by the average middle class person. Since the top 10% control 50% of the assets in the country, let them pay a few percentage points more. They can afford it and it will not affect their standard of living whatsoever.

To sum this up, O’Bama is 1/8th the way through his term and I did have high hopes for him. However, I give him an “A” for effort, but his ideas and performance are a lowly “D-“. Luckily, I’m and individual and my opinion means nothing in the grand scheme of things. Unfortunately for Bam Bam, if what he has put in motion does not yield any fruit in the next two years, we will have seen our first single term president since G.H. Bush (unless Palin gets the GOP nomination, then we’ll get him for another four years). Even if his plan does produce good results in the short-term, the full consequences of his actions will not be realized until well after he is gone from office. It will be a bit like the financial meltdown we are going through can be attributed to Clinton and not G.W. Bush, even though he is still an idiot.

So, what can we take away from all of this that can be used to our advantage? That’s as tough a question as there is at this point. You are kind of “damned if you do, damned if you don’t.” Staying totally in cash will subject you to inflation risk. Going all in the market can leave you open to market risk, especially since the jury is out on whether the economy is going to make a recovery sooner or later. Going all into bonds leave you open to interest rate risk. The yields are high, but the bigger issue is the reclassification of bond ratings that has taken place recently. You must understand the risk and weigh that against the interest rate. The spreads are still very large, so there is a lower risk than normal, but you still have to be vigilant in your research of the bonds you intend to purchase. As for myself, I’m still sitting on the side of the pool with my feet in the water; debating on whether I’m going to dive in or just wade in. It is times like this (and forgive me for sounding like a broken record) when flexibility is the key to being prepared for anything.

The market is approaching 9,000, but do not bet on it being at that level by the close of the year. Also, try not to look at the market overall, but rather the stocks you hold. Understand all the sectors and the industries within.

So……What Now?

It seems that everything is currently in a holding pattern as far as the market and the economy are going. The air breaks have been slammed and the free-fall is screeching to a halt. The question is, “When and will it reverse course? Let’s take a look at some of the big issues going on currently.

The answer is yes, no, soon and not for years, depending on what you are talking about. Let’s take the hottest topic that is currently being thrust into the news: Unemployment. Yes, it will reverse course and it will soon. However, the rate has a little further to go before we see it come back down. Bam Bam stated that if Congress put his stimulus plan through back in January that the unemployment rate would not increase beyond the then 8% rate. Oops! We are currently at 9.5% despite the approval of the stimulus plan. Most experts are calling for the rate to reach 10% or the popularly vague estimate of “double digits”. I’m calling for 11.5% is where it shall peak by the end of 2009. Despite new jobless claims that have been recently reported, many folks are taking temporary, part-time and contract jobs. To me, these jobs are short-lived and mask the true seriousness of the unemployment situation. When the market comes back, it will take time for companies to shore up their finances, before they start expanding again and adding jobs.

Next up is the housing market. Yes, housing prices overall will come back up, but they are likely to hang at these low levels for a long time (3-5 years), before you see any significant increase in home prices. This is good for folks that are starting their working careers and are looking to purchase a home. The lagging prices will present excellent buying opportunities, but on the flip side, more money down is required and credit isn’t as plentiful as it was back in 2006. It’s tough for folks who are retiring now, because the baby-boomers on average have about 60% of their net worth tied up as equity in their home. The dreams of retiring, selling their home and moving to a tropical location may not happen or will have to be put on hold. These folks got it from multiple sides, with their 401(k) getting spanked as well as the equity in their home shrinking at an alarming rate. Hopefully, they were diligent over the years to build up a healthy savings to access while their investments recover, rather than having to liquidate or move their investments around thereby taking either a realized loss or a paper loss.

Last up is the stock market. Yes, it will reverse course, but not as soon as you would like. The market will remain pretty flat for the rest of 2009. We should see a small recovery, but the market will be deflated for next few years before a significant and sustained rally occurs. Americans have changed the way they handle money. More folks are saving, which means less money is being put in the market, which should keep prices low. This offers a wonderful opportunity for anyone willing to continue to invest. The market should recover a little ahead of the housing market, but for now, we’ll have to wallow in this for a bit. But, remember to take advantage and keep buying, but also do your home work.