Wednesday, January 03, 2007
Thursday, December 14, 2006
The smart way to use stock market analysts
That doesn't mean you should ignore analysts in managing your own stock investments. Their opinions can help - just not in the way you might think.
Analysts have some success in spotting gems among small growth stocks and similar opportunities. But their recommendations on the biggest stocks slightly lag the market. One reason is that leading stocks are so well followed, it's hard to discover anything that isn't known.
Another problem is that ratings are often months out of date. Even if most analysts rate a stock as a strong buy, many of those recommendations may have been made when the price was lower. Besides, if a stock has long been highly rated, most investors likely to buy it will already have done so. So where will new buying come from to push prices higher?
Changes in ratings are a better signal, since an upgrade attracts fresh investors. But there's an even better bellwether: changes in earnings estimates. It doesn't matter what analysts think about management or corporate strategy. What counts is how they size up the bottom line.
"Rising estimates are not only signs that the next year will be better; they're also indicators that a company's long-term growth rate may be increasing," says Adam Cohen, director of quantitative research at Zacks Investment Research in Chicago. "And when one analyst raises estimates, others are likely to follow."
The effect of rising earnings estimates can be substantial. Last year the 10 percent of companies with the most positive earnings revisions outperformed the bottom 10 percent by almost 20 percentage points.
Reaching your own financial goals still depends on finding solid companies with a generous combination of earnings growth and dividends. But not all such stocks are good buys at any moment.
To find the ones that are, look for low P/Es and upward earnings revisions.
MONEY asked Zacks to analyze changes in earnings estimates from mid-April to mid-July for stocks in the Sivy 70.
Fourteen of the stocks in the Sivy 70 got the highest scores from Zacks, which means that all the analysts who revised earnings estimates raised them. Among this group, companies such as Colgate, Schlumberger and Walgreen look fully priced. Their strengths are widely recognized by investors.
But there are also a few bargains. These are typically companies with price/earnings ratios that are low to moderate because of some challenge the company faces. If that problem is on its way to resolution, the stock stands to reap big gains.
Here's a look at three such companies, each a leader in its industry.
FedEx posted a 25 percent gain in net income for the fiscal year that ended May 31. Three of the company's businesses - air express, ground shipment and freight - are thriving.
One reason: FedEx has been very successful at passing increases in fuel costs along to its customers through surcharges. The challenge for the company is its 2004 acquisition, Kinko's, a copy and business-services chain that has been disappointing so far.
Systematic investment in Kinko's - including new outlets and revamped stores - should put the division on the track to higher profits.
Merrill Lynch enjoyed a 44 percent earnings rebound in the second quarter. But the share price is still down 14 percent since April, largely because a stagnant stock market generally depresses brokerage shares. Still, Merrill's three major businesses (brokerage, investment banking and asset management) are performing well.
Trading at a dirt-cheap P/E of 10.1 times estimated earnings for 2007, Merrill should profit substantially in the next bull market, and the long-term outlook appears bright thanks to the increasing number of affluent people worldwide.
Omnicom is a giant advertising and public relations conglomerate, owning three of the 10 largest ad agencies and a host of related businesses. Moreover, Omnicom is continuing to acquire smaller firms. In July it bought a majority interest in San Francisco ad agency EVB.
But soft advertising spending in many industries, and uncertainty about how the Internet and other new technology will change the ad game, are depressing the stock. Once the smoke clears, however, odds are that the world's leading agencies, Omnicom among them, will come out on top.
Wednesday, November 29, 2006
Tips for Online Investing
What You Need to Know About TradingIn Fast-Moving Markets
The price of some stocks, especially recent "hot" IPOs and high tech stocks, can soar and drop suddenly. In these fast markets when many investors want to trade at the same time and prices change quickly, delays can develop across the board. Executions and confirmations slow down, while reports of prices lag behind actual prices. In these markets, investors can suffer unexpected losses very quickly.
Investors trading over the Internet or online, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast-moving markets.
You can limit your losses in fast-moving markets if you
- know what you are buying and the risks of your investment; and
- know how trading changes during fast markets and take additional steps to guard against the typical problems investors face in these markets.
Online trading is quick and easy, online investing takes time
With a click of mouse, you can buy and sell stocks from more than 100 online brokers offering executions as low as $5 per transaction. Although online trading saves investors time and money, it does not take the homework out of making investment decisions. You may be able to make a trade in a nanosecond, but making wise investment decisions takes time. Before you trade, know why you are buying or selling, and the risk of your investment.
Set your price limits on fast-moving stocks: market orders vs. limit orders
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.
For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses as the stock drops later in the day or the weeks ahead.
Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying the stock at too high a price.
Online trading is not always instantaneous
Investors may find that technological "choke points" can slow or prevent their orders from reaching an online firm. For example, problems can occur where:
- an investor's modem, computer, or Internet Service Provider is slow or faulty;
- a broker-dealer has inadequate hardware or its Internet Service Provider is slow or delayed; or
- traffic on the Internet is heavy, slowing down overall usage.
A capacity problem or limitation at any of these choke points can cause a delay or failure in an investor's attempt to access an online firm's automated trading system.
Know your options for placing a trade if you are unable to access your account online
Most online trading firms offer alternatives for placing trades. These alternatives may include touch-tone telephone trades, faxing your order, or doing it the low-tech way--talking to a broker over the phone. Make sure you know whether using these different options may increase your costs. And remember, if you experience delays getting online, you may experience similar delays when you turn to one of these alternatives.
If you place an order, don't assume it didn't go through
Some investors have mistakenly assumed that their orders have not been executed and place another order. They end up either owning twice as much stock as they could afford or wanted, or with sell orders, selling stock they do not own. Talk with your firm about how you should handle a situation where you are unsure if your original order was executed.
If you cancel an order, make sure the cancellation worked before placing another trade
When you cancel an online trade, it is important to make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don't assume that that means the trade was canceled. Orders can only be canceled if they have not been executed. Ask your firm about how you should check to see if a cancellation order actually worked.
If you purchase a security in a cash account, you must pay for it before you can sell it
In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding, which violates the credit extension provisions of the Federal Reserve Board. If you freeride, your broker must "freeze" your account for 90 days. You can still trade during the freeze, but you must fully pay for any purchase on the date you trade while the freeze is in effect.
You can avoid the freeze if you fully pay for the stock within five days from the date of the purchase with funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.
If you trade on margin, your broker can sell your securities without giving you a margin call
Now is the time to reread your margin agreement and pay attention to the fine print. If your account has fallen below the firm's maintenance margin requirement, your broker has the legal right to sell your securities at any time without consulting you first.
Some investors have been rudely surprised that "margin calls" are a courtesy, not a requirement. Brokers are not required to make margin calls to their customers.
Even when your broker offers you time to put more cash or securities into your account to meet a margin call, the broker can act without waiting for you to meet the call. In a rapidly declining market your broker can sell your entire margin account at a substantial loss to you, because the securities in the account have declined in value.
Friday, November 24, 2006
How retail investors lose money
The reason is simple - a retail investor is driven by greed or fear. Never logic.
- Retail investors are always the last to enter a bull run
- "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
- When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
- Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
- At this time, the retail investor starts buying as he does not want to miss out the "action"
- The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
- This is also the time when "smart money" starts moving out
- When a correction happens, it is usually quite severe
- The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
- At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
- Sometimes the retail investor will do nothing but wait for the markets to rise
- When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run
Interesting facts you may not be aware of
- About 80% of retail investors in public issues sell their allotments within a week of listing. No one will wait and let their investment appreciate
- In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
- Those who have never participated when the rally started will invariably jump in towards the end of the bull run
- Whenever a fall happens, the retail investor is the first to buy as he does not want to "miss this chance" to buy a stock
- Retail investors hate to take a loss. Circumstances eventually force them to take a bigger loss sometime or other
- Lastly, retail investors rely on tips or broker advise and sometimes, company research when buying. This never works because the market has already discounted this news
Follow the trend for profitable investing
Thursday, November 23, 2006
Money for the Long Run: Learn About Online Trading
The price of cutting costs
Online discount brokerage firms, such as E*Trade or Ameritrade, allow you to conduct business on the Web or over the phone using a toll-free number. You'll pay less in commission fees for trades than you would if you used a standard brokerage firm.For example, Rapp pays a flat rate of $9.99 to make five to 49 trades per month. He'd pay a $50 minimum commission fee if he used a full-service firm to make such trades, says Antonio Porretta, 30, of Irondequoit, a financial adviser with Brighton Securities.
Low commissions are what attracted Rapp to E*Trade. While he's saving on fees, however, he doesn't have one-on-one contact with a personal financial adviser, which could cost him in the long run."A lot of people outside of our business think, 'You must hate service vehicles like E*Trade, because they're taking business' from us. But that's not necessarily the case," Porretta says. The financial adviser says his focus is more than just trades; he cares about creating client relationships.
"The No. 1 reason investors fail is emotion versus a rational decision. An adviser takes emotion out of the equation," he says.While discount firms provide a lot of historical information about individual stocks, they won't guide you in making investment decisions. And although Rapp does a lot of research before ordering a trade, he admits to making some blunders.
"There are some stocks that I take a dive on, but I have to look at it as part of the learning process," he says.
Another tricky element of online trading is timing. Stock prices can shift while orders are being routed and change before transactions are final.
Is online trading for you?
Researchers have long studied investors' trading habits, and it seems that women do better using online firms than men."The assessment is that the men suffer from significantly more overconfidence than the women, provoking them to trade much more, burning up more in trading costs," says Dan Burnside, a certified financial planner and lecturer at the William E. Simon Graduate School of Business Administration at the University of Rochester.
Burnside adds that, in general, online investors tend to buy too few stocks, when experts say that diversification - buying a range of stocks, bonds and mutual funds and participating in a 401(k) plan - is the key to successful investing.
Remember, you can afford to take some risks and make mistakes when you're young, but, in the long run, your goal should be a portfolio packed with all kinds of investments.