Sunday, December 30, 2007

Market Returns in 2007, Changing Growth/Value, US/Int'l, SmallCap/LargeCap

2007 Stock Market Returns
Returns from December 29, 2006 to December 28, 2007:

  1. DIA: [US]: Dow Jones Industrial Average ETF: +9.05%
  2. $NDX: [US]: Nasdaq 100 Index: +19.93%
  3. $COMPQ: [US]: Nasdaq Index: +10.73%
  4. SPY: [US]: S&P 500 ETF (Large Cap): +5.06%
  5. MDY: [US]: Midcap 400 ETF (Mid Cap): +8.04%
  6. IWM: [US]: Russell 2000 ETF (Small Cap): -1.91%
  7. EFA: [Int'l]: Developed International Market ETF: +10.64%
  8. EEM: [Int'l]: Emerging International Market ETF: +34.96%
  9. IVE: [US]: S&P 500 Value ETF: +0.17%
  10. IVW: [US]: S&P 500 Growth ETF: +8.55%
  11. IJJ: [US]: Midcap 400 Value ETF: +0.96%
  12. IJK: [US]: Midcap 400 Growth ETF: +13.15%
  13. IWN: [US]: Russell 2000 Value ETF: -11.08%
  14. IWO: [US]: Russell 2000 Growth ETF: +7.42%

Observation 1: 2007 International Returns Trounce US Domestic Returns

The Returns of International Markets, including those from the Developed World (mostly Western Europe, Japan, and Australia) and the Emerging Markets (including China, Brazil, Russia, Mexico, India, Taiwan, South Korea) are doing much better than the US markets. The Emerging Markets (EEM) have done much better than the Developed International Markets.

Observation 2: Outperformance of International Markets is Part of a Multi-Year Trend

The outperformance of International markets, especially Emerging markets, is part of a multi-year trend, where Globalization is a key trend.
  1. 2007 US SPY (S&P 500 ETF) Return: +5.06%
  2. 2006 US SPY (S&P 500 ETF) Return: +14.70%
  3. 2005 US SPY (S&P 500 ETF) Return: +5.13%
  4. 2004 US SPY (S&P 500 ETF) Return: +9.04%

  1. 2007 Int'l EFA (Developed Int'l ETF) Return: +10.64%
  2. 2006 Int'l EFA (Developed Int'l ETF) Return: +25.28%
  3. 2005 Int'l EFA (Developed Int'l ETF) Return: +13.94%
  4. 2004 Int'l EFA (Developed Int'l ETF) Return: +20.56%

  1. 2007 Int'l EEM (Emerging Int'l ETF) Return: +34.96%
  2. 2006 Int'l EEM (Emerging Int'l ETF) Return: +31.15%
  3. 2005 Int'l EEM (Emerging Int'l ETF) Return: +34.19%
  4. 2004 Int'l EEM (Emerging Int'l ETF) Return: +26.25%

Observation 3: 2007 Small Cap Returns lagged Midcap and Large Cap

Small Cap Returns, as represented by the IWM ETF, lagged midcap and large cap returns in 2007.

Observation 4: Small Cap Underperformance is a new trend, breaking multi-year trend

From April 11, 2003 to April 5, 2006:
  1. S&P 500 (Large Cap) Return: +54.77%
  2. Midcap 400 (Mid Cap) Return: +94.98%
  3. Russell 2000 (Small Cap) Return: +113.11%

From April 7, 2006 to December 28, 2007:
  1. S&P 500 (Large Cap) Return: +16.52%
  2. Midcap 400 (Mid Cap) Return: +9.77%
  3. Russell 2000 (Small Cap) Return: +2.99%

For many years, Small Cap stocks have outperformed Large Cap stocks. These trends tend to remain for many years, and we have recently seen the pendulum swing from favoring small cap stocks, to large cap stocks.

Observation 5: 2007: Growth Outperforms Value

In 2007, Growth outperforms Value through all US asset classes.

Observation 6: Growth Outperformance is a New Trend, Breaking Multi-year Trend

From July 28, 2000 to April 4, 2006:
  1. S&P 500 Value ETF: +31.08%
  2. S&P 500 Growth ETF: -24.2%
  3. MidCap 400 Value ETF: +132.78%
  4. MidCap 400 Growth ETF: +29.07%
  5. Russell 2000 Value ETF: +140.68%
  6. Russell 2000 Growth ETF: +7.29%

From April 7, 2006 to December 28, 2007:
  1. S&P 500 Value ETF: +13.47%
  2. S&P 500 Growth ETF: +17.63%
  3. MidCap 400 Value ETF: +5.76%
  4. MidCap 400 Growth ETF: 12.6%
  5. Russell 2000 Value ETF: -2.13%
  6. Russell 2000 Growth ETF: +7.4%

This makes sense. In the 1990s, Growth stocks prevailed and value lagged. From 2000 to sometime around 2006, Growth stocks suffered, and value stocks reigned supreme. Now that the value stock cycle has run its course, we are at the beginning of a multi-year growth stock run.

Observation 7: In 2007, the Large Cap Nasdaq Stocks outperformed

In 2007, the Nasdaq 100, 100 of the largest Nasdaq stocks (which is heavy in high tech stocks) outperformed the Nasdaq thanks to the performance of the larger capitalized stocks such as Apple (AAPL) and Google (GOOG).

Observation 8: The outperformance of Nasdaq stocks may be the start of a new trend.

From January 4, 1999 to July 21, 2000:
  1. Nasdaq 100 Index: +110.78%
  2. Nasdaq: +85.44%
  3. S&P 500: +20.06%

From July 20, 2000 to December 19, 2006:
  1. Nasdaq 100 Index: -55.32%
  2. Nasdaq: -41.94%
  3. S&P 500: +0.10%

From December 18, 2006 to December 28, 2007:
  1. Nasdaq 100 Index: +17.65%
  2. Nasdaq: +9.81%
  3. S&P 500: +4.81%

During the different periods, we see the Nasdaq outperform the S&P 500, then underperform the S&P 500 for many years. Recently, we've seen it change, and the Nasdaq is starting to outperform the S&P 500.

Typically the Nasdaq 100 seems to lead the Nasdaq either up or down. During the last period starting December 18, 2006, we notice that the Nasdaq 100 Index is leading the Nasdaq up.

Prediction over next several years:

If we assume that style trends tend to be multi-year trends, then over the next few years, we can predict that:

  1. Large Cap will outperform Small Cap Stocks (Early stages)
  2. Growth Stocks will outperform Value Stocks (Early stages)
  3. Nasdaq stocks and Nasdaq 100 stocks will Lead once again (Early Stages)
  4. International Markets will continue to outperform US stocks (Early to Middle Stages)

Wednesday, December 19, 2007

Are we really in Another Bubble? From the Popular Internet Video to

This hilarious internet video has been going around the internet lately. The singers, singing a song to the tune of Billy Joel's "We Didn't Start a Fire", sing a song asking if there is another Bubble.

Video Here

This video has been so popular, that even reputable Financial Services company has written about the video.

Marketwatch Article About the Bubble Internet Video

But are we really in a Bubble?

In 2000, Jeremy Siegel, in an article in the Wall Street Journal, wrote that of the 33 largest firms based on market capitalization, 18 of those were technology stocks, and their market weighted PE equaled 125.9. Mr. Siegel also mentions that half of the large cap technology stocks had PE ratios over 100.

Compare this with 2007, where even fast growth stock Google (GOOG), has a current forward PE of 32.74, a 5 year estimated growth rate of 34.41%, for a very low Price Earnings to Growth Rate (PEG) of 0.93, a very low ratio under 1.

So while some stocks now could be overvalued, this time it is different. This time there's real earnings, and prices, even for top growth stocks like Google (GOOG), seem fairly reasonable.

Yahoo/Google Revisited, Quick Valuation Update

We are in the middle of the great Information Revolution and some companies have to make sense out of all the data in the world and make it useful to the end user.

Google (GOOG) is an obvious play and so is Yahoo (YHOO).

GOOG is the one which is most likely a better investment.

GOOG has a forward PE of 32, 5 year growth rate of 34.4% for a Price to Earnings Growth Rate Ratio (PEG) of a very low 0.93 (under 1 is very cheap, over 2 is overvalued).

Ignore the actual price of the stock (GOOG is close to $700), and pay more attention to the other measures of valuation.

YHOO (Yahoo) has a forward PE of 42.63 and a 5 year estimate growth rate of 25.4% for a PEG of 1.70.

The PEG of Yahoo (YHOO) is still under 2, but Google (GOOG) is still a great value and worth investing in.

(Computer and Video) Gaming is still Strong

There's a Bull Market in Gaming. Three Major consoles are out such the famous Nintendo Wii, Sony PS3, and Microsoft Xbox.

There's also a strong growth area in online gaming (such as the networked version of World of Warcraft) especially in East Asia and China.

Some nominees

  1. GME (Gamestop): Why do you have to choose the winner between the console makers and the software makers? Their merger with Electronic Boutique, another gaming retailer is going very well.
  2. ERTS (Electronic Arts): Software Maker
  3. NVDA (Nvidia): They make graphic chips and other products used by computer gamers.
  4. SNDA (Shanda Interactive): Chinese online Gaming company.
  5. NCTY (The9 Limited): Chinese online Gaming company. They have rights to offer World of Warcraft in China.
  6. GA (Giant Interactive): Chinese Online Gaming company. Recent IPO. Speculative play.

My favorites (in this order), are:

  1. GME
  2. SNDA

Tuesday, October 16, 2007

Build Your Own High Gain Stock Portfolio, One Sector At a Time

There are many ways to construct your own stock portfolio.

One way to create a diversified portfolio is to choose stocks from different sectors that follow these criteria:

  1. The stock is in a good sector.
  2. The stock is a good stock in a good sector.
  3. The stock has Reasonable Valuation:
    a. PEG < 2.0 (Price-Earnings to Growth Ratio).
    b. Forward PE < 40
  4. The stock shows Strength:
    a. Stock is within reach of a 52 week high.
    b. Stock is above the moving averages (200 day, and even 50 day moving average).

Here are a few suggestions that mostly fit the criteria above. One could create a portfolio by choosing a stock or a few stocks from each sector below.

A. Tech: Internet and Information

We are in the middle of a society changing Information Revolution, and the Internet plays a central role.

SymbolStock NamePEGForward PE5 yr growth
GOOGGoogle0.91 3133.88%

B. Tech: Mobile Convergence and Mobile Devices

One of the major trends is the trend towards Mobile Convergence. Rather than have separate devices, such as a cell phone, a camera, and a music player, all these features are being integrated into a single mobile device. The Apple Iphone is a web browser, a music player, and a cell phone. Cell phones now come with cameras and music playing capabilities.

In addition, globalization is helping this sector out as international and emerging markets are adopting these mobile technologies in great numbers. One Indian person has even said that in India, even beggars have cell phones.

SymbolStock NamePEGForward PE5 yr growth
RIMMResearch In Motion1.0435.0633.61%

Aside from the Apple iphone, Apple (AAPL) has many other products as well such as the Apple iPod music player, and the Apple iMac computer.

Nokia (NOK), is also a play on Global Positioning as it is acquiring Digital Map Maker Navteq (NVT).

C. Tech: Networking/Digital TV/Telecom Equipment

Another trend is in the Network.
  1. There is a trend having greater Bandwidth for advanced services (for example, High Definition Video on Demand).
  2. There's the conversion of analog TV to digital TV. On February 2009, companies are supposed to stop broadcasting analog television, and are supposed to broadcast digitally.
  3. There is the Battle for the Digital Living Room. From IP Television (IPTV), to Digital TV, to High Definition TV sets, to Digital Video Recorder Technology (DVRs), to digital set-top boxes, to streaming content from computers to the big screen, the battle for the Digital Living Room is just beginning.
  4. The trend also includes wireless telecommunication systems that help bring advanced services (video on a cell phone) to mobile devices.

SymbolStock NamePEGForward PE5 yr growth
NNDSNDS Group0.6916.3923.75%

Cisco (CSCO) is the big company in Networking. They also have Set-Top Box exposure (access to the Digital Living Room) with their acquisition of Set Top Box maker Scientific Atlanta.

Corning (GLW) makes glass and equipment for higher bandwidth optical networking. They are also a play on the Digital Living Room as their products are needed by those who make flat panel displays and High Definition TVs.

NDS Group (NNDS) is the United Kingdom's version of the overhyped Chinese company China Digital TV (STV). The company engages in the supply of open end-to-end digital technology and services to digital pay-television platform operators and content providers worldwide. They even supply middleware and Digital Video Recorder Technologies, and Set-Top Boxes, and they support high definition TV.

Harris (HRS) is a company which operates in four main segments from Government Communication Systems, RF Communications, Broadcast Communications and wireless networking through Harris Stratex (HPTX). Their Broadcast Communications Group is involved Digital TV. They also benefit from a good win rate on government contracts.

D. Tech: GPS and Global Positioning

A major growth area in tech is in Global Positioning Technlogies. This technology is more than just turn by turn directions on a navigation device. In the future, as part of Mobile Convergence, GPS will be integrated into almost any device which can move, such as a cell phone.

SymbolStock NamePEGForward PE5 yr growth
SIRFSirf Technologies0.7720.4426.62%

Garmin (GRMN) mainly makes Global Positioning Devices. They are big in the car navigation and aeroplane navigation market. Recent concerns include the intended acquisition of their Digital Map Supplier Navteq (NVT) by Nokia (NOK).

Trimble Navigation (TRMB) makes GPS products. They are also a unique play on the good Agriculture market, as they even have GPS equipment for farm equipment and tractors.

Sirf Technologies (SIRF) makes GPS semiconductors. Their chips are finding their way into devices such as cell phones.

E. Tech/Consumer Discretionary: Computer, Video and Online Gaming

The strong Gaming cycle is continuing as three major console makers (Nintendo, Microsoft and Sony) have released major consoles.

There are also up and coming new trends such as online gaming, especially in East Asia (China).

SymbolStock NamePEGForward PE5 yr growth
SNDAShanda Interactive0.6421.2633.26%

Gamestop (GME) is the premiere gaming retailer. Why choose the winner of the console or software maker war when you can buy the retailer who sells all these products.

Shanda Interactive (SNDA) together with The9 Limited (NCTY) are dominant Chinese Online Gaming companies poised for great growth.

F. Energy: Oil and Oil Services.

Energy and Oil remain strong sectors. There's great demand as countries all over the world, especially the emerging market countries, need oil. Supply is limited as well, and harder to come by.

SymbolStock NamePEGForward PE5 yr growth
COPConoco Philips0.939.199.92%
NOVNational Oilwell Varco0.6017.8929.67%

Conoco Philips (COP) is an integrated oil company, while National Oilwell Varco (NOV) is an Oil Services and Equipment Company, and operates three segments: Rig Technology, Petroleum Services and Distribution Services.

G. Energy: Coal

Energy sources such as oil are in great demand. Coal, a very inexpensive fossil fuel, benefits from the great demand in energy.

SymbolStock NamePEGForward PE5 yr growth
BTUPeabody Energy0.939.199.92%

H. Materials

Freeport McMoran (FCX) is a gold and copper company, and both are needed by rapidly growing emerging market countries such as China.

Precision Castparts (PCP) manufactures metal components used in the aerospace, power generation, general industrial, and automotive markets. There's a bull market in aerospace and infrastructure, and Precision Castparts benefits.

SymbolStock NamePEGForward PE5 yr growth
FCXFreeport McMoran0.9810.8211.00%
PCPPrecision Castparts0.8518.1321.23%

I. Agriculture

There's a Bull market in agriculture, thanks to an influential US Farm Bill in 2002.

Monsanto (MON) makes seeds, including very specialized and drought resistant seeds. Deere (DE) makes agricultural equipment. Trimble Navigation (TRMB) is also an unusual play on agriculture as they provide GPS products to many places, including tractors and the agriculture industry.

SymbolStock NamePEGForward PE5 yr growth

J. Aerospace and Defense

There's a Bull market in Aerospace and Defense thanks to the aeroplane replacement cycle. Many of the older planes have to be replaced.

Boeing (BA) makes airplanes and is a better play than competitor Airbus. Transdigm Group (TDG) is a $2B company that supplies parts to the Aerospace industry. Lockheed Martin (LMT) is a defense contractor that makes many defense products, including military aircraft.

SymbolStock NamePEGForward PE5 yr growth
TDGTransdigm Group0.6418.2428.50%
LMTLockheed Martin1.3315.3111.52%

K. Infrastructure

With great global growth comes a great need for Infrastructure.

SymbolStock NamePEGForward PE5 yr growth
ABBABB Limited0.8320.6325.00%

L. Telecom: Emerging Market Wireless Telecom

Emerging Markets are using wireless products in large numbers. Many emerging countries have low wireless penetration so there is even more room to grow.

SymbolStock NamePEGForward PE5 yr growth
AMXAmerica Movil0.4915.8932.65%
VIPVimpel Communications0.7517.4923.37%
CHLChina Mobile0.9824.6625.14%

M. Financials

Goldman Sachs (GS) is the premier brokerage company, the gold standard.

Hudson City Bank (HCBK) is a fast growing regional bank that has very little exposure to the subprime problems, and some have speculated that along with other Northeastern banks, could be taken over by Canadian banks and other companies.

SymbolStock NamePEGForward PE5 yr growth
GSGoldman Sachs0.769.9113.12%
HCBKHudson City Bank1.0918.7317.15%

N. Asset Management Companies

Everyone is looking for the next Berkshire Hathaway (BRK.A), Warren Buffett's company.

One very good company in the mold of Berkshire Hathaway is the cash rich Leucadia (LUK), run for many years by super investors Ian Cumming and Joseph Steinberg.

Carl Icahn, another superinvestor, gives us Carl Icahn Enterprises (IEP), (Formerly American Real Estate partners (ACP)) and offers investors a way to invest with this great activist investor. Watch out for guru investors with a lot of cash to use.

SymbolStock NamePEGForward PE5 yr growth
IEPCarl Icahn EnterpriseN/AN/AN/A

O. Consumer Staples

SymbolStock NamePEGForward PE5 yr growth
PGProcter and Gamble1.6018.0711.31%

P. Consumer Staples: Drinks and Beverages

Hansen (HANS) is a fast growing beverage company specializing in Energy Drinks.

Central European Distribution (CEDC) is a Polish drink and Vodka producer.

SymbolStock NamePEGForward PE5 yr growth
HANSHansen Natural0.7630.0639.63%
CEDCCentral European Distribution1.2922.5217.50%

Q. Consumer Discretionary: Gambling Equipment

Scientific Games (SGMS) makes equipment for Lotteries, Printed Products, and Diversified Gaming. Some say this is a recession proof stock.

International Game Technology (IGT) makes Gaming Equipment for Casinos.

SymbolStock NamePEGForward PE5 yr growth
SGMSScientific Games1.0623.9422.66%
IGTInternational Game Technology1.6925.3617.20%

R. Industrials

SymbolStock NamePEGForward PE5 yr growth
GEGeneral Electric1.4716.3111.09%
UTXUnited Technologies1.4016.3911.72%

S. Healthcare

SymbolStock NamePEGForward PE5 yr growth

Friday, October 12, 2007

Another Global Positioning Company Gets Bought out: NGPS

The consolidation in the Global Positioning market continues.

Recent buyouts include:
  1. Pitney Bowes (PBI) buys GPS Software Maker MapInfo (formerly: MAPS)
  2. GPS Company Trimble Navigation (TRMB) buys @Road.
  3. Semiconductor Chip company Broadcom (BRCM) buys privately held GPS chip company Global Locate
  4. GPS Equipment company Tom-Tom (TOM2.AS) buys privately held Digital Map company Tele-Atlas
  5. Wireless handset maker Nokia (NOK) buys Digital Map company Navteq (NVT)

And the most recent company:

Novatel Inc. (NGPS), the Canadian high precision global navigation satellite system company (GNSS), is bought out by Swedish comgolomerate Hexagon for $390 Million.

Now, there are only three pure plays on Global Positioning publicly traded in the US:
  1. Garmin (GRMN): GPS Equipment
  2. Sirf Technologies (SIRF): Makes Global Positioning Semiconductors
  3. Trimble Navigation (TRMB): GPS Equipment

There should be high demand for these remaining companies as Location Based Services will continue to be a large growth area over many years.

Monday, October 1, 2007

Time to Take Profits in Garmin (GRMN) and Overweight Sirf Technologies (SIRF)?

The time to take some profits and underweight GPS device maker Garmin (GRMN) and overweight Global Positioning Chip maker Sirf Technologies (SIRF) might be now.

When cell phone maker Nokia (NOK) recently announced that they were buying Digital Map maker Navteq (NVT) for $8.1 Billion, Garmin's stock price went down around 10%.

Garmin had a close relationship with Navteq, and is a big customer of Navteq. Since the Digital Map space was a duopoly (Navteq (NVT), and privately held Tele-Atlas which was bought by European GPS Device Maker Tom-Tom (TOM2.AS)), Garmin (GRMN) might be squeezed out.

At the moment, Garmin (GRMN) is still reasonably priced with a forward PE of 27, five year analyst growth estimate of 20%, for a reasonable Price Earnings to Growth Ratio of 1.35 (a PEG over 2.0 is overvalued). In addition the automotive GPS market is growing very rapidly, and Garmin is ready to take advantage of this with around a 50% market share. There is also very low navigation device penetration of around 10%, so a lot of the growth is still ahead for Garmin (GRMN).

Garmin (GRMN) does seem to belong in a growth portfolio. But at the same time, the Nokia and Navteq deal signals a change in how the industry is positioning itself for the future.

Why would Nokia be interested in buying Navteq, a Digital map Maker? Global Positioning Services and Applications are a big growth area, and Nokia is aiming to position itself aggressively. GPS applications on cell phones and other mobile converged devices and anything that moves are the next big thing.

One big beneficiary of this is GPS chip device maker Sirf Technologies (SIRF). The company is the dominant GPS chip company and holds a 90% market share, though some say competition can reduce the market share to 70%. Still, a 70% market share in a very large growth business is still a very good market share.

For several months, SIRF's stock price had not been performing well, and has lagged other stocks in the location based service area such as Garmin (GRMN) and Navteq (NVT). Aside from earnings misses, they previously mentioned that there was a slow ramp-up with one wireless customer. Later news seemed to reverse this, as Motorola, the #2 cell phone maker, announced it was going to be using Sirf's GPS chips.

With many growth stocks with forward PE ratios above 30, Sirf Technologies (SIRF) has a PE of only 19, a five year analyst growth estimate of 26.6%, for a very cheap PEG ratio of 0.71 (PEG under 1.0 is very cheap).

There is also great consolidation in the industry (Tom-Tom Buys Tele-Atlas, Broadcom (BRCM) buys Global Locate, Nokia (NOK) buys Navteq (NVT), Trimble (TRMB) buys AtRoad, Pitney Bowes buys Mapinfo (MAPS)), and the demand for pure plays on Location Based Services will be at a premium. With a market cap of less than $1 Billion, who knows if Sirf Technologies (SIRF) will eventually be bought out.

Also, those mutual funds holding Navteq (NVT) and already owning Nokia (NOK), might have to take profits in Navteq and reallocate their capital elsewhere, so they don't overweight Nokia (NOK) too much. Are the mutual fund managers thinking of reallocating the profits in Sirf Technologies (SIRF) as well?

So yes, Garmin (GRMN) may still belong in a Growth portfolio, but maybe now is the time to take some profits and start overweighting companies such as Sirf (SIRF) Technologies.

Sunday, September 30, 2007

International Stock Exposure for Long Term Investor

There are many people out there who want International Exposure for their long term or retirement portfolio, but who do not want to choose individual international stocks.

One good way to approach this is through investing in ETFs, Exchange Traded Funds, which are usually indexed mutual funds that you buy and sell just like individual stocks.

Two core international holdings for a long term portfolio are Barlays' EFA and Vanguard's VWO:

1. EFA: Ishares ETF Covers Developed International Markets including Western Europe, Japan and Australia.

2. VWO: Vanguard's ETF Covers Emerging International Markets including Brazil, China, Russia, India, South Korea, Taiwan and Mexico.

EFA: Developed International Market ETF

EFA has a low expense ratio of 0.35% (the lower the better. Many actively managed mutual funds have expense ratios over 1%).

The top ten countries that the fund invests in are (as of June 30, 2007):

  1. United Kingdom: 22.93%
  2. Japan: 21.05%
  3. France: 9.74%
  4. Germany: 8.25%
  5. Switzerland: 6.61%
  6. Australia: 6.22%
  7. Netherlands: 4.10%
  8. Spain: 4.10%
  9. Italy: 3.81%
  10. Sweden: 4.10%

Top Sectors include:

  1. Financials: 28.48%
  2. Industrials: 12.02%
  3. Consumer Discretionary: 11.93%
  4. Materials: 9.43%
  5. Energy: 7.58%
  6. Consumer Staples: 7.57%

VWO, Vanguard Emerging Markets ETF

VWO has an expense ratio of 0.30%.

Top Countries:

  1. Korea: 16.2%
  2. China: 12.6%
  3. Taiwan: 11.9%
  4. Brazil: 11.1%
  5. Russia: 9%
  6. South Africa: 7.3%
  7. India: 6.5%
  8. Mexico: 5.6%
  9. Israel: 2.5%
  10. Malaysia: 2.5%
  11. Hong Kong: 2.3%
  12. Poland: 1.7%
  13. Turkey: 1.6%

Alternative to VWO: EEM: International Emerging Market ETF

EEM has an expense ratio (as of September 28, 2007) of 0.75%. This is higher than Vanguard's VWO ETF.

Some top countries that the fund invests in:

  1. South Korea: 15.03%
  2. China: 12.05%
  3. Brazil: 11.29%
  4. Taiwan: 10.50%
  5. Russia: 9.16%
  6. South Africa: 8.91%
  7. Mexico: 7.04%
  8. India: 5.98%
  9. Israel: 3.31%
  10. Indonesia: 2.28%
  11. Chile: 2.07%
  12. Thailand: 2.03%
  13. Czech Republic: 1.95%
  14. Hungary: 1.92%

Top Sectors include:

  1. Financials: 20.50%
  2. Information Technology: 15.46%
  3. Energy: 15.39%
  4. Materials: 14.58%
  5. Telecom Services: 12.17%
  6. Industrials: 5.88%

So in summary, for a long term investor who wants international market exposure without having to pick individual stocks, EFA, and VWO are two ETFs worth investing in as a core part of a long term portfolio.

Wednesday, September 26, 2007

Water, Energy, and Minerals with Layne Christensen (LAYN)

Today, on Mad Money, Jim Cramer seems to have offered no opinion on Layne Christensen (LAYN). While it may initially sound like a retailer, Layne Christensen is really a good $1 Billion industrial company.

Layne Christensen (LAYN) provides drilling and construction services for:
1. Water and Wastewater Infrastructure (largest part of the business)
2. Mineral Exploration (2nd largest part of the business)
3. Energy
4. Other

All sectors are in bull market mode. Water and water infrastructure is a critical need in the US and around the world. Some people consider water to be the next Oil.

Mineral Exploration is also very important. Basic minerals are important to help global growth. The same situation occurs with energy.

Layne Christensen (LAYN) has a forward PE of 26, 5 year estimated growth of 31% for a very cheap 0.83 PEG ratio (under 1 is very cheap).

Stock is very strong, and has reached its 52 week high.

Recently, however, the company announced that it may be selling $172 Million worth of shares. Having more shares in the market dilutes the value of each share.

Maybe, after more research, you should consider Layne Christensen (LAYN) on a pullback or after all the extra shares are offered on the market.

Tuesday, September 25, 2007

Growth Stock Valuation (September 25, 2007)

Growth Stocks such as Apple (AAPL) and Google (GOOG) have been doing well and have recently reached their 52 week or all time highs. But when are these growth stocks overvalued?

One rule of thumb that is very useful with stocks (especially growth stocks) is to use the PEG ratio, or the Forward Price Earnings ratio divided by the 5 year estimated growth. A PEG ratio over 2 is considered overvalued, and a PEG ratio under 1 is considered very cheap.

Table of Selected Growth Stocks

Here are a few growth stocks with different PEG ratios. Data from Yahoo Finance, Tuesday, September 25, 2007:

SymbolStock NamePEGForward PE5 yr growth
AMXAmerica Movil0.46 15.1232.65%
TDGTransdigm Group0.6518.5828.50%
WBDWimm Bill Dann0.6723.5335.00%
SNDAShanda Interactive0.7120.7329.39%
RIMMResearch in Motion1.1234.4630.82%
JSDAJones Soda1.1542.7737.07%
ISRGIntuitive Surgical1.3554.2040.05%

Chart of Growth Stocks

Here's a Chart of the different growth stocks sorted by PEG. In the graph, PEG is multiplied by 20. So an adjusted PEG of 15 means PEG is 15/20 or 0.75:

Monday, September 24, 2007

52 Week High Stock Scan (Sept 24, 2007)

Today, Monday, September 24, 2007, there are 98 Nasdaq stocks and 107 NYSE (New York Stock Exchange) Stocks hitting New 52 Week Highs at one point during the day.

Some selected stocks and sectors:

1. Technology

Technology is a very strong sector:

  1. AAPL (Apple): Forward PE: 33.55
  2. AMZN (Amazon): Forward PE: 60.12
  3. GOOG (Google): Forward PE: 29.08
  4. GRMN (Garmin): Global Positioning Product Company. Forward PE: 29.12
  5. BIDU (Bidu): The Google of China. Forward PE: 82.67
  6. EMC (EMC): Storage Company and Information Infrastructure. Forward PE: 25.01
  7. ARBA (Ariba): Software and Services: Forward PE: 24.11
  8. BCSI (Blue Coat Systems): Smallcap Security Software Company. Forward PE: 32.52
  9. GIGM (Giga Media): Taiwan Internet and Gaming Company. Forward PE: 18.93
  10. OIIM (O2Micro International): Fabless Semiconductor Company involved in power management, and security applications in many different markets. Forward PE: 18.10
  11. OVTI (OmniVision): Produces semiconductor image sensor devices such as CameraChip image sensors. Forward PE: 14.53
  12. SPIL (Siliconware Precision Industries): Taiwanese Semiconductor Company. Forward PE: 12.67
  13. ALVR (Alvarion): Israel based company produces wireless broadband acecss systems.

2. Telecom Providers and Wireless Providers

Telecom Providers especially Wireless Providers are also in Bull Market Mode.

  1. ROS (Rostelcom): Russian telecom company.
  2. CHL (China Mobile): Chinese Telecom Company.
  3. T (AT&T): US Based Telecom Provider. Forward PE 13.50, Yield: 3.40%
  4. VOD (Vodaphone): European Based Telecom Company. Forward PE 13.47, Yield: 5.00%

3. Aerospace

Aerospace is also another current bull market.

  1. TDG (Transdigm Group): $2B company supplies equipment for the aerospace industry. Forward PE: 17.69. 5 year estimate: 28.5%. PEG is a very good 0.62 (less than 1 is very cheap)

4. Biotech

  1. BIIB (Biogen Idec): Forward PE: 21.00
  2. CELG (Celgene): Forward PE: 42.98

5. Retail, Consumer Discretionary

  1. CROX (Crocs): Specialty footwear maker: Forward PE: 24.60
  2. FLWS (1-800 Flowers): Flower Retail Company. Forward PE: 25.80
  3. HLF (Herbalife): Nutritional Supplements, weight management, personal care products. Forward PE: 14.85

6. Computer and Video Gaming

  1. GME (Gamestop): Computer and Video Gaming Retailer. Forward PE: 28.66
  2. SNDA (Shanda Interactive): Chinese Online Gaming company. Forward PE: 19.89

7. Oil, Oil Services, Energy

Oil continues to be strong, including Chinese and emerging market oil.

  1. CEO (Cnooc): Chinese Oil Company
  2. CVX (Chevron): US Oil Company
  3. HAL (Halliburton): Oil Services Company
  4. NOV (National Oilwell Varco): Heavily involved in constructing and selling products for the oil and gas industry.
  5. PBR (Petrobras): Oil Company in Brazil
  6. PTR (PetroChina): Chinese Oil and Natural Gas Company
  7. SHI (Shanghai Petrochem): Process crude oil into synthetic fibers, resins, plastics, intermediate petrochemical products and petroleum products in China.

8. Beverages and Consumer Staples

  1. HANS (Hansen): Hansen, specialty energy drink maker. Forward PE: 25.35
  2. KO (Coca Cola): Drink company. Forward PE: 19.42. Yield: 2.40%
  3. PG (Procter & Gamble): Premiere Consumer Staple Company. Forward PE: 17.85

9. Industrial and Shipping

  1. DRYS (Dry Ships): Operates drybulk carriers including drybulk commodoties such as coal, iron ore, and grains. Forward PE: 8.15
  2. MMM (3M): Forward PE: 16.72

10. Healthcare

  1. SUNH (Sun Healthcare): Specialty healthcare for Seniors (Baby Boomers are aging!) Forward PE: 20.62.

11. Macau Gaming

There's a bull market in the up and coming Macau (China) market, to rival Las Vegas.

  1. WYNN (Wynn): Forward PE: 53.61
  2. LVS (Las Vegas Sands): Forward PE: 51.99

12. Infrastructure

The Global Growth Story needs Infrastructure.

  1. ABB (ABB): Switzerland infrastructure company. Forward PE: 19.43
  2. MDR (McDermott): Forward PE: 20.64

13. Minerals and Materials

The Global Growth story needs minerals and materials.

  1. BHP (BHP Billiton)
  2. FCX (Freeport McMoran): Gold and Copper
  3. RTP (Rio Tinto)
  4. NEM (Newmont Mining)
  5. PKX (Posco): Korean Steel Company

14. Casual Dining

  1. CMG (Chipotle Mexican Grill): Forward PE: 45.98
  2. THI (Tim Hortons): Restaurants and Donus. Forward PE: 21.65

15. Defense
Defense is another strong area.

  1. RTN (Raytheon): Forward PE: 16.81

16. Agriculture

  1. POT (Potash): Fertilizers and other products. Forward PE: 25.36

Sunday, September 16, 2007

Basic ETF Resouces and How to Use ETFs

What are ETFs?

An ETF is an Exchange Traded Fund is essentially a mutual fund (mostly indexed to a particular index. The ETF company just mirrors the index, and doesn't make active stock decisions) that trades on the major exchanges just like a regular stock. You normally buy and sell them and pay commissions. For example, the stock symbol "DIA", isn't really an individual company. The "DIA" ETF represents the Dow Jones Industrial Average ETF. It holds the 30 stocks in the Dow Jones Industrial Average. However, from your point of view, you are buying and selling "DIA" directly, a single trading instrument. You lose money and profit just as if you were holding a single stock.

How do I choose an ETF?

There are many types of ETFs that focus on broad based indices such as the Standard and Poors 500 Index (500 of the United States largest and most influential companies). Or, ETFs could focus particular sectors (such as Utilities), market capitalization (large cap or small cap), countries (Taiwan or Mexico), Region (Asia, or Western Europe), asset class (stocks, bonds, or real estate trusts), or any other combination.

Possible uses of an ETF

1. Your entire portfolio could be made up of ETFs! This is especially useful in retirement or 401k plans, but could be used in your discretionary taxable portfolio if you do not want to spend too much time researching individual stocks.

2. You could allocate much of your portfolio to a broad based ETF portfolio (let's say 70%), and for the other 30%, you can explore and choose individual stocks or sector ETFs. This is called the "Core and Explore" method.

3. You could use ETFs to supplement your portfolio. As an example, let's say you have a well diversified portfolio of individual stocks. However, you are lacking exposure to Retail, but you do not have expertise in retail, and you don't have the time to research or monitor individual retail stocks, so you can purchase PMR, the Proshares Dynamic Retail ETF. Or you may be very good at investing in small cap stocks, so you have a portfolio of individual small capitalization stocks, but you buy the broadbased SPY ETF which has exposure to large cap US stocks.

4. You could use ETFs as a hedge. Proshares has a series of inverse ETFs which increase in value as a sector or index goes down. Roger Nusbaum of writes an article about hedging with Double Short ETFs.

Major Companies that Provide ETF products and other Resources

  1. ishares: is part of Barclays and they offer a very wide range of ETFs. Very good place to start.
  2. Vanguard ETFs: Vanguard offers many broadbased and inexpensive ETFs.
  3. ProShares: Offers inverse and double inverse and double long ETFs and sector ETFs
  4. PowerShares: Offers unique ETFs that can include ETFs based on company buybacks, or specialized sector ETFs that do not overweight large cap stocks
  5. SectorSpdrs: Liquid Sector ETFs. Includes interesting Graphic Sector Maps and Sector Weightings.
  6. SSGA: SSGA is a company that provides many of the popular ETFs such as SPY (the original S&P 500 Spyders), and other sector ETFs.
  7. BLDRs: BLDRs are registered as unit investment trusts (UITs) and are based on The Bank of New York ADR IndexSM, a real-time index tracking U.S. traded depositary receipts.
  8. HOLDRs by Merrill Lynch: Sector Based ETF such as a Biotech Holder. You can only buy HOLDRs in round 100 share lots.

Other ETF Resources

  1. List of ETFs from AMEX: Very good list of ETFs
  2. SeekingAlpha ETF Resources Page
  3. ETF Trends

GPS Enabled Cell Phones: Find Friends/Businesses on Map, Emergency 911, and opportunity for SIRF, GOOG and others

GPS Chips inside Cell Phones: New Applications and How to Profit.

1. Find Friends on Map

Want to find friends and family on the map? It's easy.

There is a well funded startup called Loopt which does just that. Using selected cell phones with GPS (Global Positioning System) capability, mostly from Boost Mobile, Sprint, and Nextel, Loopt can let you find friends and family on a map (with their approval), for a subscription fee.

This Mobile Networking Application is just the beginning of location based services which take advantage of GPS chips inside a cell phone. This service allows users to be able to interact with other users based on geographical location.

2. Let Emergency 911 Responders Find People

Another important mobile application of the GPS chip in a cell phone is Emergency 911 service. With GPS chips inside cell phones, now, Emergency 911 Responders can easily find the location of the person who needs help. This will save many lives!

Aside from companies who setup the E911 system, companies which provide GPS chips to cell phones, such as Sirf Technology (SIRF), who makes the GPS chips, will benefit, as well as companies such as Navteq (NVT) who provide digital maps, which are especially useful to GPS location based service applications.

3. Connect Business to Mobile Users

Another important application of GPS chips on cell phones involves connecting users to businesses and advertisers. With the original Navigation Device (non-cell phone) from companies such as Garmin (GRMN) or Tom-Tom (TOM2.AS), one could use the device to search for a local business such as a restaurant, hotel, or gas station, even if that business is a few miles away from a major freeway. Businesses that have their information embedded in these Navigation Devices will see increased business and revenue. Any company that profits from having businesses pay to be included in the Navigation Device Search function also would benefit.

Now if this Portable Navigation Device would be extended to GPS enabled cell phones, this market would explode. Now, if a GPS enabled cell phone could somehow connect to a central information center to help connect mobile users to particular business, that would allow companies who provide local business information to mobile users to profit.

A company such as Google (GOOG) would profit. They already have Google Local Search, Google Maps, Internet Search, and mapping services. If a mobile user could interact with Google, Google would read the mobile cell phones GPS location, and connect the mobile user with businesses near that area.

Profit from GPS Chips on a Cell Phone

The GPS Chip on a Cell Phone is still in its infancy. Sirf Technologies (SIRF), previously cited some problems as a wireless customer was slow to ramp up to their GPS chip in a cell phone. Sirf (SIRF) has recently bounced back as Motorola, the #2 cell phone maker, will be using Sirf's GPS chips in their cell phones.

Sirf currently has a 90% share in the GPS chip market for Personal Navigation Devices. However, Bank of America analyst Sumit Dhanda says that Sirf's market share could go down to 70% share thanks to competition from STMicroelectronics (STM), Taiwan's MediaTek, and Broadcom (BRCM), which recently bought private company Global Locate for less than $200 Million.

Analysts have also said that GPS customers such as Garmin (GRMN) are looking for "dual-source key inputs."

While there is pressure on Sirf's market share, Sirf is still the dominant leader, and will continue to produce the best chips.

Current Valuation is still very reasonable. Sirf (SIRF) has a forward PE of 16.37, five year estimated growth of 26.62%, for a very cheap Price Earnings to Growth (PEG) ratio of 0.61, which is very cheap (PEG less than 1 is very cheap).

Compare this with Broadcom (BRCM) which has a forward PE of 25.36, 5 year growth rate of 22.37%, for a PEG of 1.13.

The company has virtually no debt, is cash rich ($4 cash per share for a $20 stock), and belongs to a very rapidly growing segment.

Sirf (SIRF) has shown recent momentum, and still remains a long term buy as its performance has lagged other Location Based Service companies such as Garmin (GRMN) and Navteq (NVT).

Location Based Service Companies

Thursday, September 13, 2007

Sector S&P 500 PE Ratios, and Earnings Growth

Sector S&P 500 PE Ratios

Based on 2007 Estimates, here are the PE Ratios of the different S&P 500 Sectors:

  1. S&P 500: 15.38
  2. S&P 500 Financials: 10.95
  3. S&P 500 Energy: 12.02
  4. S&P 500 Materials: 15.11
  5. S&P 500 Health Care: 16.61
  6. S&P 500 Industrials: 16.83
  7. S&P 500 Utilities: 16.38
  8. S&P 500 Telecommunication Services: 18.03
  9. S&P 500 Consumer Staples: 18.07
  10. S&P 500 Consumer Discretionary: 18.47
  11. S&P 500 Information Technology: 23.09

Based on 2008 Estimates, here are the PE Ratios of the different S&P 500 Sectors:

  1. S&P 500: 13.71
  2. S&P 500 Financials: 10.36
  3. S&P 500 Energy: 11.52
  4. S&P 500 Materials: 13.30
  5. S&P 500 Health Care: 14.84
  6. S&P 500 Industrials: 14.97
  7. S&P 500 Utilities: 14.79
  8. S&P 500 Telecommunication Services: 14.46
  9. S&P 500 Consumer Staples: 16.09
  10. S&P 500 Consumer Discretionary: 14.71
  11. S&P 500 Information Technology: 18.66

S&P 500 and Sector Earnings Growth

Financial Earnings Growth

Energy Earnings Growth

Materials Earnings Growth

Health Care Earnings Growth

Industrials Earnings Growth

Utilities Earnings Growth

Telecom Earnings Growth

Consumer Staples Earnings Growth

Consumer Discretionary Earnings Growth

Info Technology Earnings Growth

Sectors Sorted by 2008 Earnings Growth

  1. S&P 500 Consumer Discretionary: 25.6%
  2. S&P 500 Telecommunication Services: 24.7%
  3. S&P 500 Information Technology: 23.7%
  4. S&P 500 Utilities: 13.8%
  5. S&P 500 Materials: 13.6%
  6. S&P 500 Industrials: 12.4%
  7. S&P 500 Consumer Staples: 12.3%
  8. S&P 500: 12.2%
  9. S&P 500 Health Care: 11.9%
  10. S&P 500 Financials: 5.7%
  11. S&P 500 Energy: 4.4%

Chart Comparison of Sectors Earnings Growth 2006-2008


  1. Much of the data came from Standard and Poors Earnings Spreadsheet.
  2. Another View of Historical Sector PE Ratios Part 1
  3. Another View of Historical Sector PE Ratios Part 2
  4. Another View of Historical Sector PE Ratios Part 3

Wednesday, September 12, 2007

Overbought, Oversold, and Oscillators

Overbought and Oversold

Many pundits out there throw out the words overbought, and oversold when it comes to stocks or the major stock indices. Is there a way to keep track of overbought and oversold?


There are many technical indicators (special indicators by looking at the stock charts) to help determine oversold and overbought conditions. Oscillators are the most popular. At one point, a stock (or index) is overbought, and then at another point, it oscillates back to oversold.

S&P Oscillator

One popular Oscillator is the S&P (Standard and Poors) Oscillator, which is a proprietary Oscillator. In Jim Cramer's 'Real Money: Sane Investing in an Insane World', Jim Cramer mentions the proprietary S&P Oscillator as one way to spot a market bottom. He says that it costs around $1000 to subscribe.

On Jim Cramer's site, Jim Cramer Says:

"When the oscillator is over five, people must sell, regardless of how great it looks," Cramer recommended. "There have been some [times] where the animal spirits of the market have been so great that it's gone to plus nine and 10, but the percentages on the upside are that there's going to be a selloff. It may not be major, but I do believe it will happen."

When it's over five, if he were fully invested, Cramer said he would cut to being 75% invested. At this time, short-term traders should maybe go 50% invested, and "if you're a guy who is able to short, maybe 25% short," he said. "That's how much I have faith in this indicator. I have faith in almost no indicators other than this one.

"Helene Meisler, [a contributor to does] her own oscillator work," Cramer said. "She seems to agree with me on the site. When we both agree, we tend to have a pretty powerful correlation between right and wrong."

RSI Oscillator

For more inexpensive ways to determine oversold/overbought, one can use the RSI indicator. RSI stands for Relative Strength Index. When the RSI is over 70, the stock or index is overbought. When the RSI is under 30, the stock or index is oversold.

Of course, stocks or indices can remain oversold or overbought for long periods of times:

In the above example with Garmin (Chart of GRMN with RSI information here), we notice that when RSI is in overbought territory, GRMN is near its high, and when RSI is in oversold territory, GRMN is near its low.

Towards the middle of 2007, we do notice that GRMN remains in overbought territory, but GRMN makes very good gains during this time. This is an example of an overbought situation remaining overbought for long periods of time. The same can happen with oversold stocks or indices. Some technicians suggest to wait till the RSI goes down below 70 after remaining overbought, or wait for RSI to go up above 30 after remaining oversold.

Other Oscillators

There are many other oscillators as well such as using Bollinger Bands, or Stochastics. TradingDay has a good link to some of these oscillator methods.

Bottom Indicators

There are many other bottom indicators as well. Some oscillators above may be more suitable for traders and short term traders. But if one wants to find more long term investable bottoms, you can use some of these other methods:

  1. S&P 500 Stocks Above the 50 and 200 Day Moving Average (Low value = Bottom)
  2. S&P 500 High-Low Index (Low Value = Bottom)
  3. 10 Day Moving Average of Put-Call Ratio (High value = bottom)
  4. Ratio of Stocks Above 200 Day Moving Average to Stocks Above 50 Day Moving Average
  5. Bull-Bear Ratio and Bullish Percentage
  6. Index in Relation to 52 Week High and 52 Week Low

You would like to look at several of the different indicators and look at the support and resistance levels of a particular stock or index.

Seasonal Patterns in Interest Rates?

Previously, we noticed patterns in the stock market by Day of Week, by Day of Month, and by Month of Year.

Ryan, in a previous post, pointed out a research report showing seasonal patterns in interest rates. In the report, there's a table of interest rates (T-bills, Government Bonds, Corporate Bonds) grouped by Month of Year.

After looking through the data, what patterns do you notice?

Saturday, September 8, 2007

S&P 500 Returns By Month of Year

Previously, we've looked at performance of the S&P 500 index based by day of the week, and by day of the month.

Now, we look at S&P 500 performance (1926 to 2006) by Month.

Only one month has a negative return, and that is, September.


  1. Jan: 1.71%
  2. Feb: 0.26%
  3. Mar: 0.63%
  4. Apr: 1.49%
  5. May: 0.27%
  6. June: 1.37%
  7. July: 1.86%
  8. Aug: 1.27%
  9. Sept: -0.76%
  10. Oct: 0.66%
  11. Nov: 1.18%
  12. Dec: 1.79%

There is also a common saying, Sell in May, and Go Away. According to Stock Trader's Almanac if you invested $10,000 in the Dow Jones Industrial Average, and used the strategy of investing in Stocks from November through April, and switch to fixed income from May through October, over 56 years, that amount grows to $544,323. But if the opposite strategy was used (fixed income November through April, stocks in Dow Jones from May to October), compounded to a loss of $272.

The results from Stock Trader's Almanac and the Monthly Statistics of the S&P 500 seem to match. From November through April, we have:

  1. Nov: 1.18%
  2. Dec: 1.79%
  3. Jan: 1.71%
  4. Feb: 0.26%
  5. Mar: 0.63%

Not a bad return. November through January, seems to be a very good return period.

We also notice that June through August is also a good return period:

  1. June: 1.37%
  2. July: 1.86%
  3. Aug: 1.27%


  1. All Financial Matters Blog
  2. CNN article on Sell in May and Go Away
  3. Appendix B of Ken Fisher's The Only Three Things That Count

Tuesday, September 4, 2007

Harris (HRS): Specialty Communication Equipment Provider to Defense, Government and Private Sector

Harris (HRS) is worth investing in:

  1. Harris (HRS) is a Specialized Communication Equipment Provider that caters to Government, Defense, and Civilian Organizations.
  2. Harris is levered more to government and defense spending than consumer discretionary products.
  3. Harris operates four main segments:
    1. Government Communication Systems (46.2% of 3rd quarter fiscal 2007 revenue)
    2. RF Communications (28.2%)
    3. Broadcast Communications (12.8%)
    4. Harris Stratex Networks (12.8%)
  4. Market Cap: 9.16B
  5. Forward PE: 16.21
  6. 5 Year Estimated Growth Rate: 27%
  7. Price Earnings to Growth Ratio: 0.60 (under 1 is very cheap!)
  8. Current Ratio: 1.16 (anything over 1 is okay)
  9. 80% domestic, 20% international.
  10. Upgrading military communications and infrastructure is key driver.
  11. Analog to Digital TV is a key driver.
  12. Microwave communications needed for 3G cell technology.
  13. Broad product line and high government contract win rate (60%, and 80% in recent quarters).
  14. Since products are very specialized, Harris doesn't really have direct competitors.
  15. Harris remains subcontractor to companies such as Boeing (BA), and Lockheed Martin (LMT)
  16. Recently Raised Dividend by 36%
  17. $600 Million Buyback announced May 2007.
  18. Company is currently at or near its 52 week high.
  19. From the companies 10-K:

    Defense Markets: The U.S. President's budget proposal for the U.S. Government fiscal years 2008 to 2012 focuses on achieving a balanced budget while addressing the nation's most critical needs and the continuing trend by Federal agencies to reduce costs by outsourcing IT and communications related operations. The Administration's priorities include a continued and accelerated commitment to modernizing the military to focus more on the needs of its combat commanders and to develop portfolios of joint capabilities. As a result, the U.S. Government remains committed to funding intelligence, information superiority, special operations and support. Requirements to upgrade and modernize tactical radio communications capabilities and provide more secure, interoperable and reliable communications remain a funding priority. International defense forces continue to drive toward tactical communications upgrades and interoperability with the systems and equipment used by the U.S. Government.

To continue research, I recommend:
1. SeekingAlpha/Zack's Research on Harris (HRS)
2. Aug-27 10-K Summary.
3. Full 10-K June 29, 2007
4. Yahoo Finance Research on Harris (HRS)
5. Harris Corporation Website

Saturday, September 1, 2007

Recession Odds: 23% and How to Calculate Odds of Recession

Is there a way to calculate the odds of a recession in the US?

There is one model which takes into account the spread between the 10 Year Treasury Bond Yield, the 3 Month Treasury Bond Yield and the Federal Funds Rate. This model was created by Federal Reserve Board's Jonathan Wright in The Yield Curve and Predicting Recessions.

Some general points regarding the Yield spread and the Fed Funds Rate:
  1. The bigger the difference between the 10 Year Treasury Bond Yield minus the 3 month Treasury Bond Yield, the less likely a recession will occur within the next twelve months. This the the normal upward sloping yield curve. The bigger the difference between the 3 Month Treasury Bond Yield minus the 10 Year Treasury Bond Yield, the greater the chance of a recession within the next 12 months. This is the inverted yield curve case.

  2. The higher the Fed Funds Rate, the greater the odds of a recession within the next twelve months.

To Calculate

To Calculate, use the calculator on this website. The calculation is based on Jonathan Wright's work mentioned above.

You will need these:
  1. The 10 Year Treasury Bond Yield. Get the information from using $UST10Y. The value of the $UST10Y, is the Yield on the treasury. Currently, as of August 31, 2007, the 10 Year Yield is 4.54%

  2. The 3 Month Treasury Bond Yield. Get the information from using $UST3M. Currently, the 3 Month Treasury Bond Yield is 4.01%.
  3. The Fed Funds Rate. Go to to get the current Fed Funds Rate. It is currently at 5.25%. You can also estimate the odds of a Fed Rate Cut Here.

Chance of Recession as of August 31, 2007: 23%

Now to do the actual calculation, go to the website with the calculator.

Using the values mentioned above, we find out that there is a 23% chance of recession within the next twelve months. If the Fed cuts rates by 0.50%, then the odds of a recession (let's assume that the yield spread remains the same) goes down to 18%.

Friday, August 31, 2007

Stock Performance By Day of the Month

Is there any stock market pattern based on the day of the month?

Some people speculate that towards the end of the month, money managers pile money into stocks at the end of the month to anticipate 401k and savings money coming in.

To test this theory, Kevin Haggerty and researched this.

What they did is choose stocks above the 200 day moving average from January 1995 to September 2006, and back-test if the stocks were held for five days. Seven million trades later, those at showed that yes, stocks above the 200 day moving average and held for five days towards the end of the month (23rd to 30th) have performed very well. Stocks above 200 day moving average held for 5 days during the beginning of the month did not do as well (3rd through 8th of the month).

This is a very interesting result, indeed. Money managers do appear to want to purchase stocks towards the end of the month. By the time the beginning of the month comes, those money managers have already spent their investment money.

Best Day of Month to Dollar Cost Average?

Sunday, August 26, 2007

Effects of Falling Rates and Inflation on the Stock Market

In a previous article, we examined the historical Price to Earning Ratios of the US large cap index, the S&P 500.

Now, let us examine how a falling interest rate environment or low inflation situation affect stocks, stock performance, and sector performance.

Effect of Inflation on Stock Performance

Crestmont Research provides very interesting information on Inflation and Price to Earnings Ratios from 1900 to 2006.

When we look at Inflation (as measured by CPI) ranges, we see the average PE:

  1. CPI Range (less than 0%): Average PE = 14
  2. CPI Range (0 to 0.99%): Average PE = 16
  3. CPI Range (1 to 1.99%): Average PE = 17
  4. CPI Range (2 to 2.99%): Average PE = 22
  5. CPI Range (3 to 3.99%): Average PE = 19
  6. CPI Range (4 to 4.99%): Average PE = 16
  7. CPI Range (5 to 5.99%): Average PE = 15
  8. CPI Range (6 to 9.99%): Average PE = 13
  9. CPI Range (10% or more): Average PE = 8

During times of low inflation, especially in the range of 2 to 2.99%, the US equity market supports a high PE ratio of 22. As we have deflation, or very high inflation, the average PE ratios are much less. The historic average PE ratio of the S&P 500 is 14 or 16 depending on how you calculate it.

In addition, the link above shows the general inverse relationship between inflation and stock prices. As inflation rises, stocks tend to fall. And as inflation drops from high levels (so long as there is no deflation), stocks tend to rise.

As of July 2007, the Inflation rate (through CPI) is 2.36%. Based on the chart above, this is a good inflation rate for Price to Earnings multiple expansion. As long as inflation remains contained, the outlook for US equities remains bright.

Effect of Falling Interest Rates on Stock Prices

The Fed, according to Fed Funds Futures, is likely to start cutting the Fed Funds Rate, currently at 5.25%.

How does a Falling interest rate environment affect stocks?

The Business Week magazine has an article showing the effect of falling rates and rising stock prices.

Since World War 2, the Fed has started rate cutting programs 10 times, and in the six month period after the first cut, the S&P 500 advanced by an average of 11%, two percentage points better than the average of 9% price increase in all years since 1945.

In the 12 months after the first rate cut, the S&P 500 gained an average of 18.6% and posted an increase in 9 out of 10 cases.

So for the most part, except for a few cases (such as the big drop in 2000-2002 due to excessive valuations of Nasdaq and S&P 500 stocks), falling interest rates are good for stocks.

Effect on Different Indices in a Falling Interest Rate Environment

Since 1945, during a falling interest rate environment, Growth and Blend methodologies in the S&P 500 returned 11%. Value stocks in the S&P 500 returned 7.9%. During a falling interest rate environment, large capitalization US growth stocks outperformed large capitalization US value stocks.

The small capitalization stocks as represented by the Russell 2000 or the S&P SmallCap 600 returned 7.8% six months after first interest rate decrease. However, this still underperforms the US Growth S&P 500 Index during a falling interest rate environment.

During a Falling Interest Rate Environment, it would be a good idea to invest in large cap growth stocks.

Effect on Sectors in a Falling Interest Rate Environment

Which sectors outperform and underperform during a falling interest rate environment?

According to Standard and Poors and the Business Week Article, these sectors performed in the six months after the first rate reduction (since 1945). The average percent change is listed:

  1. Information Technology: +21%
  2. Consumer Discretionary: +18%
  3. Industrials: +17%
  4. Consumer Staples: +14%
  5. Energy: +12%
  6. Health Care: +11%
  7. Materials: +11%
  8. Financials: +10%
  9. Utilities: +7%
  10. Telecom Services: +4%

During a Falling Interest Rate Environment, it would be a good idea to overweight Information Technology (Growth), Consumer Discretionary, and Industrials and underweight utilities and telecom services.

How I reallocated a portfolio to take advantage of the Falling Interest Rate Environment