Fears of a stock market correction & runaway oil prices… are these fears overblown, or justified?
U.S. military action in Syria appears imminent. Assuming it happens, what happens to the financial markets?
Investor reaction on August 27 (the day U.S. intervention was mentioned as a possibility) was not exactly surprising. Gold entered a bull market again, oil prices reached a six-month peak (surpassing $109 a barrel), the Dow fell 170 points and the CBOE VIX rose 12%. Overseas markets broadly slumped; emerging market stocks hit a 7-week low. India’s rupee fell to a record low versus the dollar. The yield of the 10-year Treasury dipped to 2.72%, decreasing for a third straight day. All of this left market analysts with major questions to consider.
Will oil hit $150 a barrel?
While U.S. investors keep an eye on the NYMEX, the international benchmark is Brent crude. Some analysts do see Brent crude hitting $120-125 in the coming weeks – Michael Wittner, global head of oil research for Societe Generale, told CNBC that he believes that will happen, in the event of military intervention. Wittner also thinks that Brent crude has about a 20% chance of pushing past $150, but not wholly on what goes on within Syria. “Our big worry is Iraq. The Sunni vs. Shiite conflict in Syria has a direct parallel in Iraq, and the violence in Iraq has reached levels not seen since 2008,” Wittner wrote in a note to investors. A key oil pipeline in northern Iraq ferrying oil to Turkey has endured multiple attacks since May, severely hampering Iraq’s daily oil exports. Other analysts worry about attacks on pipelines in Saudi Arabia.
On the other hand, U.S. oil output is at a 20-year peak, and Saudi Arabia and other major players in the oil market could tap strategic reserves or increase production in response to a short-term price spike. As business and consumer demand for oil and gasoline typically weaken at some point in response to price hikes, prices would likely moderate.
Greg Priddy, director of global oil at Eurasia Group, told CNBC that he doesn’t see a big disruption in the oil market ahead – he envisions a “very limited attack” that is “not going to change the situation in the region right now.” As toppling Bashar al-Assad’s government could put rebels in charge but also risk opening a door to al-Qaeda, the view of some analysts – Brent crude temporarily hovering around $120, U.S. oil prices keeping below that level – may prove correct. “This would have to turn into a region-wide conflagration in order for prices to stay [at that level],” John Kilduff of Again Capital remarked to CNBC. “If rockets start flying into Gaza and into Israel and other things happen, such as an attack on Saudi Arabia, all bets are off.”
Would U.S. stocks plunge?
The Dow is on pace for a decline of more than 5% in August, so bears wonder if a correction is in progress. No one has a crystal ball, but it is true that the U.S. equity markets have weathered geopolitical crises well in the recent past. Our stock market rose in the year prior to our military’s involvement in Libya in March 2011, fell that summer, then rose again. The fall coincided with the debt ceiling struggle on Capitol Hill, not the unrest in Libya. In the case of the Persian Gulf War and the War in Iraq, U.S. stocks were in the doldrums in the quarters preceding the fighting yet rose about the time hostilities began.
As MarketWatch columnist Mark Hulbert commented this week, “Rising interest rates and above-average valuations are a bigger threat to the stock market than the possibility of U.S. military action in Syria.” Opening a wide historical window, he cites a fundamental article from the Journal of Portfolio Management co-authored by none other than Larry Summers, who stands a chance of being our next Federal Reserve chairman. It looked at the impact of 49 major geopolitical events on the stock market from 1941 to 1987, measuring the S&P 500’s absolute return on those momentous days (Pearl Harbor, the assassination of JFK, etc.). The S&P’s average movement across those 49 days was 1.46% : significant, but not radically removed from the average 0.56% variance occurring across all other market days in a 46-year period. For the record, the S&P rose 0.60% on August 28 while the CBOE VIX dipped 3.6% to 16.17.
Could this crisis make the Fed reconsider tapering? Recent days have seen a real flight to quality – to gold, to the dollar, to Treasuries. You have a couple of currencies seemingly in freefall: the Indian rupee and the Turkish lira. For that matter, Brazil’s real recently hit a five-year low versus the greenback. Indonesian stocks just dropped 5% in a single market day. In short, some key emerging markets/developing economies are having it rough – and a lack of economic growth in those nations may not bode well for America. If the trouble in Syria worsens and leads to further trouble for them, some analysts think the Fed might postpone the careful unwinding of QE3 – either out of caution, or out of global economic necessity.
As Ron Florance, a deputy CIO at Wells Fargo Private Bank in Scottsdale, Arizona, told Reuters on August 28: “Yesterday was a little overdone but investors need to be ready [and realize] that volatility is going to be here for a while.” Just think twice before letting short-term volatility affect long-term investment plans.
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How to Find Growth Companies
Growth companies are companies that are expected to grow substantially faster than others. Often growth companies are young companies in strong growth mode or established companies in expanding industries or those involved in new technologies. Most growth companies do not pay a dividend so investors, instead, focus on earning profits through capital gains.
Growth investors are concerned with a company’s future growth potential, and there are many formulas and methods to find such companies. Let’s look at five of the things I look at when searching for growth opportunities.
1. Strong historical earnings growth
I start by looking at a company’s past. Though past results are no guarantee of future results, it is still a great place to start. As a growth investor I start by looking to see if the company’s annual revenues have been growing in the past. I specifically look for companies with strong Earnings Per Share (EPS) growth over the last five years. Ideally, I like to see strong 10-year EPS growth as well. If a company has displayed good growth over the last five- or 10-year period, there is a strong possibility that this trend is likely to continue.
2. Strong forward earnings growth
My minimum projected five-year growth rate is at least 10-12%, but I prefer companies that show a growth rate in excess of 15%. Though forward estimates are only expectations, it still helps to see how analysts view the company’s future prospects.
3. Strong management team that is controlling costs and growing revenues.
I tend to look very closely at profit margins. This is an assessment of a firm’s income as a percentage of its revenue. If a company has margins at 25% that means it is earning 25 cents for every dollar’s worth of products or services it sells.
Margins will vary by industry with retailers often having thin margins due to tight competition. Technology and health related companies tend to have wider margins with more price flexibility. I look for firms with the best profit-to-sales ratios in its industry with expanding margins quarter-by-quarter and year-by-year.
I find that those with the highest margins tend to have stronger pricing power for their products or better control inputs to produce their products at a lower cost than the competition.
By comparing a company’s present profit margins to its past margins and its competition’s profit margins, it helps gauge whether or not management is controlling costs and revenues and improving or lowering margins. To make things easier I look to pretax margins (simply divide the firm’s income from operations before taxes by its net sales). If a company exceeds its previous five-year average of pre-tax profit margins and also is above the industry average, it certainly makes a good growth stock candidate.
4. Strong, efficient business operations
Here I look at return on equity (ROE). If a company is efficiently using its assets you will see stable or rising ROE. To get a good pulse on a company, I compare a company’s present ROE with its five-year average ROE and with that of the industry. If it beats both criteria, again it’s a good growth stock candidate.
5. Stocks with a strong chance of doubling in price over the next five years
If a stock cannot realistically double within the next five years, it’s not really a growth stock. So that is why I focus so heavily on a 15% annual growth rate, which would enable the stock to double within the next five years.
At Wall St Renegade, we have three portfolio strategies that focus on growth investing. Our Dueling Duo Portfolio (DDP) invests in large cap momentum stocks. Our Contrarian Strategies Portfolio (CSP) buys mid cap innovative growth companies, and our Tomorrow’s Treasures Portfolio (TTP) focuses on up and coming small companies.
There are three growth stocks worth a closer look for investors seeking to maximize returns:
From our Dueling Duo Portfolio (DDP), Biogen (BIIB) is a stand out growth stock. It is a global biotechnology company that discovers, develops, manufactures and markets therapies for the treatment of multiple sclerosis (MS) and other autoimmune disorders, neurodegenerative diseases and hemophilia. The stock has been growing at a 20% annual clip for more than a decade.
From our Contrarian Strategies Portfolio (CSP), Green Mountain Coffee (GMCR) is a favorite of mine! It boasts a nearly 50% annual growth rate over the past 15 years. Green Mountain Coffee Roasters, Inc., is engaged in the specialty coffee and coffee maker businesses. It has three business segments, the Specialty Coffee business unit (SCBU), the Keurig business unit (KBU) and the Canadian business unit (CBU).
From our Tomorrow’s Treasures Portfolio (TTP), Neogen Corporation (NEOG) is a stand out growth stock. It develops, manufactures, and markets a diverse line of products dedicated to food and animal safety. It has been growing by nearly 25% a year for the past decade.
If you are looking for more aggressive, up and coming growth stocks that don’t quite have the track record yet, but have explosive growth potential, take a close look at Ubiquiti Networks Inc (UBNT), LinkedIn (LKND), and Tesla Motors (TSLA). All three of these have produced triple digit returns over the past 12 months!
Bottom Line: Growth stocks offer investors a great way to potentially double their portfolios in five years or less. Though it is not always a smooth ride with these stocks having a lot more volatility, for those who are disciplined and patient, growth stocks can help you turn small investments over time into a large nest egg in retirement.
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This small cap stock is up over 650% since Baby Boomers started retiring and the trend is just heating up…
With over 76.4 million Baby Boomers who have either already retired or have begun the countdown, now is the time to catch onto some of the greatest investment trends. Baby Boomers turn 60 every eight seconds so this trend will not slow down any time soon. Think about this, in 2000 there were 35 million Americans 65 and older. By the time 2030 rolls around that number will have doubled (70 million Americans will be 65+). Not only that, but this segment will comprise 20-25% of the U.S. population.
Boomers, as a group have accumulated a lot of wealth. With the average Boomer predicted to retire with $500,000-$1,000,000 in assets, this group is estimated to possess $7 trillion in wealth, nearly 70% of the total wealth in the United States.
Most of the individual clients I counsel fall into this Baby Boomer age bracket. My typical new client is a Boomer with most of his accumulated assets in his former employer’s 401(k), IRAs, and his home equity. He used stocks to save for retirement, but now he is concerned with making these assets last the rest of his lifetime.
He is well aware that his investments are the key to his retirement, but he is afraid to make a mistake with them. He lived through the crash of 87, the dot.com bust, and the most recent subprime mortgage crisis. Some of these Boomers have an inheritance coming from parents, but they are also concerned about their aging parents’ long-term care. They may also be dealing with college funds for kids and have concerns that they may not have enough funds to cover everything. Thus they are becoming more and more risk adverse.
Now as this core group gets close to retirement, there is a natural shift toward lower risk investments, mainly fixed income. Many have already begun shifting their portfolios from stocks to fixed income securities. Investors who get ahead of this trend stand to make impressive gains. There is one company poised to explode as Boomers become more conservative with their investments. MarketAxess Holdings Inc. (NASDAQ: MKTX) is in perfect position to take advantage of this upcoming secular growth trend.
It operates an electronic trading platform that allows investment industry professionals to trade corporate bonds and other types of fixed-income instruments. It has over 900 active institutional investor clients and a market share of 12.5%. Through its proprietary Corporate BondTicker service, MarketAxess provides fixed-income market data, analytics and compliance tools that help its clients make trading decisions.
Here are three reasons I like MarketAxess:
1. It has a large cash position with no debt and very solid financially.
2. If MarketAxess becomes the largest liquidity pool for fixed-income trading, then market share gains may accelerate.
3. MarketAxess’ relatively high fixed-fee revenue will buffer revenue declines if trading volume decreases.
Take a look at MarketAxxes since 2008 when Boomers started retiring:
MarketAxess Inc. probably has more cash than necessary to fund its operations so holding large amounts of cash can lower returns on equity. It has focused on becoming a swap execution facility and though this strategy is in its infancy, it may not pan out. Additional concerns are with overall total trading volumes for high-grade U.S. corporate debt. From 2003 through 2008 trade volumes dropped significantly and with rising interest rates, we may start another downward, which could reduce the company’s profitability.
MarketAxess Inc. (MKTX) is a good buy up to $56 a share. It is a part of our Tomorrow’s Treasures Portfolio. It is a strong pick for any long term investor who is looking for a safe dividend paying investment, with the potential for long-term growth from the upcoming trends of increased fixed income trading and the growing popularity of corporate bonds.
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