Search

It always pays to be skeptical when a company claims to have a have a revolutionary new invention or technology. That’s because, when you invest based on company marketing claims, you risk becoming too focused on the innovation and failing to look at the stock’s fundamentals, such as p/e ratios and other measures of value and risk. Sound-bite-based investing also ignores (or glosses over) a company’s industry position and the conditions within its particular market.

Many investors ignored the risks of solar-power stocks

...

Members of our Inner Circle service increasingly ask us about investing in exchange traded funds (ETFs). These funds have gained popularity among investors in recent years, mainly because many ETFs offer very low management fees. Exchange traded funds are set up to mirror the performance of a stock-market index or sub-index. They hold a more-or-less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index. Exchange traded funds trade on stock exchanges, just like stocks. Investors can buy them on margin or sell them short. We recommend a number of carefully selected exchange-traded funds in our Canadian Wealth Advisor newsletter....

Some U.S. bank stocks have reported improved profits lately. And many banks have repaid some or all of the loans they received under the U.S. government’s Troubled Asset Relief Program (TARP) in 2008. That frees these bank stocks from government control, and improves their long-term prospects. However, the U.S. banking sector remains highly volatile. As well, the industry could face greater regulation and higher costs if the Obama administration moves ahead with its reform plans. For example, Senate Banking Chairman Christopher Dodd recently released a bill that proposes to tax the largest bank stocks and financial institutions. The proceeds would be used to support a $50-billion U.S. fund aimed at dealing with failing banks and financial firms in the future....

Here are four common mistakes investors make when buying (or selling) stocks. By avoiding them, you stand a better chance of improving your returns — and cutting risk — in your stock portfolio:

1. Failing to take a broad view: When making investment decisions, it pays to take a wide range of relevant facts — positive and negative — into account....

PETSMART INC. $32 (Nasdaq symbol PETM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 123.6 million; Market cap: $4.0 billion; Price-to-sales ratio: 0.7; Dividend yield: 1.3%; WSSF Rating: Above Average) is the biggest pet supply chain in the U.S. It operates 1,149 pet stores in the U.S. and Canada. It also has 162 in-store PetHotels, which look after pets while their owners are away from home. PetSmart focuses on selling premium pet foods and other products that most supermarkets don’t carry, including its own line of private-label products. It also plans to launch a new line of Martha Stewart pet-care products in the next few months. Exclusive items like these help the company compete with larger retailers — including Wal-Mart.

Long-term trends look positive

...

AMERICAN EXPRESS CO. $41 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $49.2 billion; Price-to-sales ratio: 1.9; Dividend yield: 1.8%; WSSF Rating: Average) gets most of its revenue from the the fees it charges merchants when consumers use its credit and charge cards. It also provides travel-agency services. American Express set aside $5.3 billion to cover bad loans in 2009. That’s down 8.4% from $5.8 billion in 2008. However, the 2009 figure is still up more than 100% from four years ago. In 2009, the company’s earnings fell 25.6%, to $2.1 billion from $2.9 billion in 2008. The company sold $555.5 million of new common shares in 2009 to help repay the $3.4 billion in loans it received from the U.S. Treasury under the Troubled Asset Relief Program (TARP). Because of the extra shares outstanding, earnings per share fell 37.7%, to $1.54 from $2.47. Revenue fell 13.5%, to $24.5 billion from $28.4 billion....

STATE STREET CORP. $45 (New York symbol STT; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 495.4 million; Market cap: $22.3 billion; Price-to-sales ratio: 2.7; Dividend yield: 0.1%; WSSF Rating: Extra Risk) makes most of its money providing accounting and record-keeping services to large institutional investors, such as mutual funds and pension plans. State Street has agreed to pay $313 million to settle lawsuits that accused the company of selling investors securities backed by subprime mortgages without warning of the risks involved. This latest payment is in addition to $350 million that State Street has already paid to settle earlier lawsuits. If you exclude these payments and other unusual items, State Street would have earned $2.0 billion in 2009. That’s down 14.9% from $2.4 billion in 2008. In May 2009, State Street issued $2 billion of common shares and used the proceeds to pay back its TARP loans. As a result of the extra shares, earnings per share fell 26.7%, to $4.11 from $5.61. Revenue fell 16.4%, to $8.8 billion from $10.5 billion....

T. ROWE PRICE GROUP INC. $55 (Nasdaq symbol TROW; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 259.0 million; Market cap: $14.2 billion; Price-to-sales ratio: 7.7; Dividend yield: 2.0%; WSSF Rating: Average) sells mutual funds and wealth-management services. The company’s assets under management rose 41.6%, to $391.3 billion at the end of 2009 from $276.3 billion a year earlier. Rising stock markets were the main reason for the increase. As well, the improving economy spurred higher demand for mutual funds. Despite these gains, average assets under management still fell 10.3% in 2009. As a result, T. Rowe Price’s revenue fell 11.8% in 2009, to $1.9 billion from $2.1 billion in 2008. Earnings dropped 11.7%, to $433.6 million from $490.8 million. Earnings per share fell 8.8%, to $1.65 from $1.81, on fewer shares outstanding....

H&R BLOCK INC. $17 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 329.2 million; Market cap: $5.6 billion; Price-to-sales ratio: 1.4; Dividend yield: 3.5%; WSSF Rating: Above Average) is the world’s largest provider of income-tax-preparation services. It also provides accounting services to businesses, as well as banking services to consumers. The slow economy and high unemployment are prompting more tax filers to turn to tax-preparation software or free online-processing services. That’s cutting into revenue at H&R Block’s traditional tax-preparation business. As well, the weak economy is hurting demand for its accounting services from businesses. As a result, H&R Block’s revenue fell 5.9%, to $934.9 million, in the three months ended January 31, 2010. Its revenue was $993.4 million a year earlier. Earnings fell 19.8%, to $53.6 million, or $0.16 a share, from $66.8 million, or $0.20 a share....

WAL-MART STORES INC. $56 (New York symbol WMT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 3.8 billion; Market cap: $212.8 billion; Price-to-sales ratio: 0.5; Dividend yield: 2.2%; WSSF Rating: Above Average) is the world’s largest retailer. The company has over 8,400 stores in the U.S. and 14 other countries, including over 2,700 supercentres, which sell groceries as well as general merchandise. Groceries now account for about half of Wal-Mart’s U.S. sales. The company’s sales rose 30.7%, from $312.4 billion in 2006 to $408.2 billion in 2010 (Wal-Mart’s fiscal year ends January 31). Earnings rose 29.0%, from $11.0 billion in 2006 to $14.2 billion in 2010. Earnings per share rose 39.2%, from $2.63 in 2006 to $3.66 in 2010, on fewer shares outstanding. Wal-Mart’s large size lets it negotiate better prices with its suppliers. That gives it a big advantage over its competitors. The company has also invested heavily in computer systems that track its customers’ buying patterns. This information helps Wal-Mart quickly adjust its inventories to respond to changing trends....

WESTERN UNION CO. $17 (New York symbol WU; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 682.8 million; Market cap: $11.6 billion; Price-to-sales ratio: 2.3; Dividend yield: 1.4%; WSSF Rating: Above Average) provides money-transfer and foreign-exchange services in over 200 countries. The company recently completed a restructuring that included closing some outlets and outsourcing certain administrative functions. These moves should save it $40 million a year. If you exclude unusual costs, Western Union earned $902.7 million in 2009. That’s down 7.0% from $970.6 million in 2008. The company spent $400 million on share buybacks during the year. Since it had fewer shares outstanding, its earnings per share fell just 1.5%, to $1.29 from $1.31....

BROADRIDGE FINANCIAL SOLUTIONS INC. $22 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 134.8 million; Market cap: $3.0 billion; Price-to-sales ratio: 1.3; Dividend yield: 2.6%; WSSF Rating: Average) serves the investment industry in three main areas: investor communications; securities processing; and transaction clearing. The company mails and processes 70% of all proxy votes. Broadridge stands to gain as more investors buy shares during the stock-market rebound. It should also benefit as securities regulations become more complex. As well, lower prices for computer hardware and software are driving down its operating costs. In its second quarter, which ended December 31, 2009, Broadridge’s earnings before one-time items jumped 76.2%, to $0.37 a share from $0.21 a year earlier. Revenue rose 21.1%, to $529.7 million from $437.5 million....

On Sunday, the U.S. House of Representatives passed the Obama administration’s massive overhaul of the U.S. health-care system, nicknamed Obamacare. On Tuesday, the president signed the bill into law. The non-partisan Congressional Budget Office puts the cost of Obamacare at about $940 billion over ten years. The administration plans to cover this cost with a new tax on high-income earners, Medicare savings and new taxes on health-care companies, including major U.S. drug stocks. However, a number of health-care firms, including drug stocks and medical-equipment suppliers, stand to benefit from Obamacare. That’s mainly because it will extend coverage to over 32 million Americans who are currently uninsured....

We take many different factors into account before we award a stock one of our Successful Investor Ratings (Highest Quality, Above Average, Average and Extra Risk). You’ll find our ratings displayed next to every stock we recommend in our newsletters — including our flagship publication, The Successful Investor. They’re designed to help you quickly and easily identify companies that have the ability to survive a business setback and go on to greater success when conditions improve. Here are three factors we take into consideration before awarding a rating. We think they can help you improve your returns and lower your risk when you invest in the stock market:...

Technical analysis (or reading stock market charts) can be a useful tool for picking stocks. However, some investors choose to make investment decisions based solely on charts. That’s when technical analysis can lead you to make poor (and sometimes disastrous) choices. Technical analysis is the process of analyzing a stock’s price movements in an attempt to determine its future price. It focuses on how a stock has behaved in the past, and the clues that could offer about future price movements.

It’s crucial to keep stock market charts in perspective

...

Right now, gold is trading at roughly $1,125 U.S. an ounce. That’s down from its all-time high of $1,214.80 U.S., which it reached in late 2009. But it’s still far above the fall 2008 price of roughly $700 U.S. We think gold could well move higher in the long term, although it will continue to be volatile. Rising gold would be mainly driven by investor fears that low interest rates and government stimulus spending will spur inflation. That could prompt many investors to seek security by investing in gold. The best way to profit from rising gold is by sticking with gold stocks, particularly shares of gold-mining companies with rising production, positive cash flow and strong prospects. Even so, because of their volatile nature, we continue to recommend that gold stocks only make up a limited portion of your portfolio’s resources segment....

Our Successful Investor Stock Picker Fund is one of four “pooled funds” we offer as part of our Successful Investor Wealth Management service. The fund takes its name from our Stock Pickers Digest newsletter, which focuses on investments that would be suitable for your aggressive portfolio. Our pooled funds operate like traditional mutual funds. They give us a way to offer investment management to investors with smaller portfolios. They also give investors with larger portfolios a way of investing in specialized areas of the market.

Our Successful Investor Stock Picker Fund brings a conservative approach to aggressive investing

...

These days, we see lots of ads for books, seminars and software that purport to show you how you can consistently make returns of 50% to 100% (or more) yearly in forex investments. Some even go so far as to say you can do it in a few minutes a day. Forex investments involve dealing in foreign currency futures and options. Futures and options on foreign-exchange investments (or anything else) offer a great deal of leverage. If you could get that leverage to consistently work for you, you could make the kinds of returns on your initial stake that promoters of forex investments claim. However, leverage works two ways: It magnifies your profits when the market moves in your favour, but it magnifies your losses just as effectively when the market moves against you. That’s because the amount you owe on your investment loan stays the same, so every dollar you lose comes out of your equity....

Members of our Inner Circle service often ask for investing advice on stocks they are thinking of buying that we don’t cover in our newsletters. A large number of these stocks fall into a grey area. Sometimes our investing advice is that they are “okay to hold,” but we wouldn’t advise buying them. When Inner Circle members ask about one of these companies, that’s what our investing advice would be: it’s “okay to hold.” However, when Inner Circle members ask about companies we think they should sell (or avoid if they don’t already own them), we say so. Here are three recent examples of our Inner Circle investing advice: Day4 Energy (symbol DFE on Toronto) designs and makes solar panels using its patented electrode technology and silicon cells....

TSI Network gives me a wide variety of ways to communicate with Canadian investors. It also gives you exclusive access to the very latest advice on investing in the stock market and a wide range of other financial matters. Through my free Daily Updates, I keep you up to date on the issues that are most important to you — the individual investor. Soon, we’ll be allowing TSI Network visitors to “comment” on each update. We hope this will create an ongoing discussion that will let the site’s visitors share their own views on the day’s update, and read other visitors’ opinions. We also publish our “Financial Question of the Week,” which is a weekly poll we use to see what the site’s visitors think of current financial matters. As well, we invite readers to submit their own poll questions. To submit your question, simply email it to pat@tsinetwork.ca under the subject line “Suggested Question of the Week.”...

Whether you’re an aggressive or conservative investor, we continue to recommend that you cut your investment risk by spreading your money out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). Generally speaking, stocks in the Resources and Manufacturing & Industry sectors expose you to above-average volatility, and stocks in the Utilities and Canadian Finance sectors entail below-average volatility. Consumer stocks fall somewhere in the middle. Most investors should have investments in most, if not all, of these five sectors. The proper proportions depend on your circumstances and whether you’re an aggressive or a more conservative investor....

LINAMAR CORP. $18 (Toronto symbol LNR; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 64.7 million; Market cap: $1.2 billion; Price-to-sales ratio: 0.7; Dividend yield: 1.3%; SI Rating: Extra Risk) is Canada’s second-largest auto-parts maker after Magna International Inc. Linamar specializes in engines, transmissions and other precision-machined parts for the North American, European and Asian car and truck markets. The company has 37 plants in Canada, the U.S., Mexico, Germany, Hungary, South Korea and China. The stock fell to $2.00 in March 2009. That’s because the recession hurt new-car sales. The bankruptcies of General Motors and Chrysler — both of which are Linamar customers — also added to the company’s uncertainty. In response, Linamar aggressively cut its costs, mostly by laying off workers. That should save it $60 million annually, starting this year. The company is also diversifying into non-automotive products. It now makes parts for lawnmowers, wind turbines and drilling equipment. It also owns Skyjack, which makes self-propelled, scissor-type elevating work platforms. Linamar now gets 10% of its sales from non-automotive products....

SHAWCOR LTD. $28 (Toronto symbol SCL.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 70.5 million; Market cap: $2.0 billion; Price-to-sales ratio: 1.6; Dividend yield: 1.0%; SI Rating: Average) gets 90% of its revenue by making sealants and coatings that protect onshore and offshore oil and natural-gas pipelines from corrosion. The remaining 10% comes from making industrial equipment, such as electrical wire and protective sheaths. Lower oil and natural-gas prices have hurt demand for ShawCor’s pipeline-coating services. The weak economy also dampened demand for its industrial products. That’s why ShawCor’s 2009 revenue fell 14.2%, to $1.2 billion from $1.4 billion in 2008. Despite the lower revenue, ShawCor’s 2009 earnings fell just 2.7%, to $131.1 million from $134.7 million. Earnings per share fell 1.6%, to $1.85 from $1.88, on fewer shares outstanding. ShawCor has upgraded its plants over the past few years. That has helped cut its operating costs. Lower prices for raw materials, such as steel and plastics, have also helped its earnings....

FINNING INTERNATIONAL INC. $18 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 170.9 million; Market cap: $3.1 billion; Price-to-sales ratio: 0.7; Dividend yield: 2.4%; SI Rating: Above Average) sells, rents and repairs tractors, bulldozers, trucks and other heavy equipment made by Caterpillar Inc. Finning’s major customers are mainly in the western Canadian mining, forest-products and construction industries. It also operates in the U.K. and South America. Many of Finning’s customers have cut or delayed spending on new equipment because of the weak global economy. In response, Finning has cut 750 of its 12,000 employees since the third quarter of 2008. The layoffs should lower the company’s annual costs by $200 million by the end of 2010. In 2009, Finning’s revenue fell 20.9%, to $4.7 billion from $6.0 billion in 2008. Earnings rose 36.3%, to $130.8 million, or $0.77 a share, from $96.0 million, or $0.55 a share. However, if you exclude severance costs and other unusual items, earnings per share fell 44.4%, to $0.85 from $1.53....

SNC-LAVALIN GROUP INC. $52 (Toronto symbol SNC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 151.2 million; Market cap: $7.9 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.3%; SI Rating: Average) is a leading Canadian engineering and construction company. SNC designs and builds large-scale public-works projects, such as roads, bridges, transit systems and water-treatment plants. It also builds mines, chemical plants and electrical-power systems. The company gets 55% of its revenue from North America. SNC also runs plants and facilities for its clients. For example, in 2009 the company received a 29-year contract from the Province of Quebec to build and operate a new concert hall for the Montreal Symphony Orchestra. The new hall should open in mid-2011. Steady revenue streams from deals like this help cut SNC’s risk. The company now gets 30% of its revenue from services. In 2009, SNC’s revenue fell 14.1%, to $6.1 billion from $7.1 billion in 2008. That’s mainly because the recession prompted many of SNC’s clients in the mining, electrical-power and chemical industries to put off investing in new plants. However, SNC’s 2009 earnings rose 15.1%, to $2.36 a share (or a total of $359.4 million) from $2.05 a share (or $312.5 million) in 2008. SNC’s earnings mainly rose because it paid less for building materials and labour....