|
Click HERE to subscribe to this newsletter today! IN THIS WEEK’S ISSUE: 1. WEEKLY MARKET RECAP 2. STREETAUTHORITY MARKET COMMENTARY 3. FEATURE ARTICLE 4. THE PORTFOLIO TRACK 5. NEAR-TERM SPOTLIGHT 6. STREETAUTHORITY'S TOP TEN LIST 7. INSIDE THE NUMBERS 8. COMING IN OUR NEXT ISSUE
1. WEEKLY MARKET
RECAP INDEX
CLOSE CHANGE WEEK% YTD%
SECTOR
%CHANGE SECTOR
%CHANGE SECTOR
%CHANGE SECTOR
%CHANGE
2. MARKET COMMENTARY On the economic front we did see a bit of encouraging data, including a retail sales gain of +1.3% (ex-autos) and a +0.7% pop in industrial production. On the negative side of things though, consumer sentiment tumbled to a fresh low of 79.2 due primarily to heightened war fears and the risk of further terrorist attacks on U.S. soil. On balance, last week's economic data were fairly positive. Still, the numbers had little impact on a market that now seems to be focused exclusively on war and terror risks. I discussed this topic in great detail in last week's issue, so I'm not going to repeat that analysis. In short, my underlying thoughts remain the same -- I'm convinced that the major indices will post a short-term rally if and when the U.S. attacks Iraq, but that most market participants have yet to factor in the prolonged risks and uncertainties associated with a possible Iraqi occupation and the potential for additional terrorist attacks on U.S. soil. So despite last week's minor rally, the markets will most likely continue their downward march in the weeks ahead. The downtrend that began in early 2000 remains intact, and all signs are still pointing toward new lows. Remain defensive with your investments in the holiday-shortened week ahead, and have a safe and happy President's Day! 3. LOOKING FOR SAFETY AND HIGH DIVIDENDS? LOOK NO FURTHER THAN THE REIT MARKET For those of you unfamiliar with this unique asset class, Real Estate Investment Trusts -- or REITS -- are companies that own real-estate-related assets such as land, buildings and real estate securities. Most firms in this industry make their money by purchasing real estate properties and then renting them out to consumers and corporations. Meanwhile, others make money by purchasing real-estate-related securities such as mortgage bonds and/or lending money to fund real estate projects. In today's article my goal is to familiarize you with this unique investment class and to give you an idea of which REITs could be poised to post above-average returns throughout the rest of 2003 and beyond. Although some of this may be old hat for most of you, let's start off with a quick rundown of the advantages and disadvantages associated with investing in REITS... -------------------------------------------------- DISADVANTAGES: WHAT TO LOOK FOR IN A GOOD REIT With their high yields in mind, another important factor
that some investors might want to consider is whether or not their holdings
offer dividend reinvestment plans, or DRIPs. Among their many benefits, such
plans help to minimize or eliminate the transaction fees that one would
otherwise have to incur in order to reinvest their dividend payments. To view
a comprehensive listing of all REITs that current offer dividend reinvestment
plans, please click here: If you'll re-examine the analysis above (on what to look for when investing in REITs), you'll note that we listed dividend yields as just ONE of the many, many factors to consider. Although it might sound ridiculously obvious (so much so that it seems silly to even mention), it's important to remember that REITs are very, very different from other high-yielding investments such as, say, Treasury bonds. REITs carry greater risk, their share prices are often marked by significant volatility, and their dividend payments are not guaranteed. To invest in a company exclusively for its dividend yield (as calculated based on its most recent quarterly payout) would be akin to purchasing a stock based solely on the company's most recent quarterly earnings figure -- the data is already history, it's already been priced into the stock, and in most cases it tells you nothing about where the firm is headed in the future. And since stock prices are based largely on future expectations, this is not something you want to ignore! Last week a thoughtful investor asked me a variety of REIT-related questions. Although SEC regulations prohibit me from providing personalized investing guidance and I therefore cannot answer specific investing questions via email, at the risk of beating a dead horse I did have a general comment that I'd like to make in today's newsletter... Question: "What are your thoughts on Capstead Mortgage (CMO, $11.93)? The stock boasts a 39% dividend yield. Is this a safe play? Why so high a yield?" Answer: Although I'm not too familiar with CMO and I cannot comment on that company specifically, I feel compelled to issue some words of warning. When it comes to stocks with abnormally high dividend yields, the following maxim usually holds true... "There is no such thing as a free lunch." CMO isn't the first stock to pay an outrageously high dividend yield. There are usually two reasons why a stock boasts any sort of a yield greater than 15% or so...
The last time I saw a stock yielding 30-40%, it was MCI GROUP (part of WorldCom). A number of analysts were STILL pumping the stock at that time (a year or two ago), and all were pointing exclusively at its rich dividend yield. It's amazing to think that most of these analysts did NOT expect that yield to last, yet they still recommended the stock (shortsightedness seems to be a common problem among analysts). We all know what has happened to MCI since. The company has gone bankrupt, the stock has tumbled to about zero, the dividend has been eliminated, and the shares have now been delisted from the Nasdaq. That's not to say that the same will happen for CMO, but I'm always wary of things that look too good to be true. In a market as efficient as the U.S. capital markets, I think it's safe to say that you will almost NEVER see a stock yield higher than 15 or 20% for any extended period of time (if anyone can find an exception to that rule, then please let me know!). Either the stock will tumble, or the dividend will fall, or both. Alternatively, if the company is strong and investors expect the dividend to stay put for the long haul, then the stock will quickly rise until the dividend yield reaches a much more reasonable level (the current average for REITs is about 7%). With all of this in mind, if you see a company trade at a 20-40% yield for any long period of time, then I would urge you to be skeptical right from the get-go. -------- Although saying so isn't going to make me popular, and I do agree that a few of these stocks could be attractive, the above analysis pretty much sums up my current feelings on one of today's hottest sectors -- mortgage REITS (examples include such firms as Annaly Mortgage (NLY) and Anworth Mortgage (ANH)). These are companies that purchase mortgage-backed securities (MBS), earning their profits on the spread between their borrowing rates and the returns they reap from those MBS investments. According to data from the National Association of Real Estate Investment Trusts (NAREIT), the average mortgage REIT currently pays a rich -- I'd even go so far as to make a bold prediction and call it UNSUSTAINABLE -- 14.7% dividend yield. Yet if you look back over the course of the last 10 years, mortgage REITs have only delivered TOTAL (dividends plus capital gains) average annual returns in the neighborhood of 10%. And if you go back 20 years, that return drops to a paltry 5.96%. History usually repeats itself, and I see no reason to believe that mortgage REITs will provide us with an exception to that general rule by continuing to handily outperform their historic averages. As soon as the economy gets back on track, the Fed will hike interest rates and funding costs for mortgage REITs will soar -- leading to slower profit growth (and perhaps even lower profits altogether). When this occurs, these stocks are likely to take a hit and/or their dividend payments are likely to tumble. For this reason, I have yet to add any mortgage REITs to our Income Portfolio at current prices. LIST OF SOME OF OUR FAVORITE
REITS AMB PROPERTY CORP. (AMB, $27) -- With a market cap of $2.2 billion and a diversified portfolio of over 900 industrial properties throughout the country, AMB is one of the nation's largest industrial REITS. The firm focuses its attention mainly on properties near airports, seaports and highway systems in major metropolitan markets. Given my belief that the industrial sector will stage a solid turnaround in the coming year or two, now might be an excellent time to start accumulating shares of AMB. In addition, I like the firm's 6.1% dividend yield and its broad geographic reach. ARCHSTONE-SMITH OPERATING TRUST (ASN, $21) -- With roughly 180 garden communities and 50 high-rise properties under ownership, Archstone-Smith is one of the nation's largest apartment REITS. When investing in REITS, I generally look for fairly large companies with expansive geographic reach. Because their property portfolios aren't likely to take a big hit as a result of a slump in one particular property or geographic region, these diversified firms tend to deliver much more stable earnings year-in and year-out. With a market cap of $3.8 billion and properties in such major markets as Washington, D.C., Boston, Chicago, San Francisco and Seattle, Archstone fits the bill perfectly here. In addition, I like the firm's strategy of entering only "protected" markets around the country (markets where zoned apartment development land is very limited in supply). Although a number of cyclical factors are working against apartment REITS right now (mortgage rates are low and the housing market is booming, meaning that many of Archstone's potential tenants are now opting to buy instead of rent), the stock has fallen sharply over the past month, industry fundamentals look solid for late-2003, the firm pays out an above-average 8.1% yield, and I think current levels could represent an excellent buying opportunity. CAPITAL AUTOMOTIVE (CARS, $25) -- This REIT is
one of the nation's largest owners of land, buildings and other improvements
used by motor vehicle dealerships. The firm has a sensational track record of
above-average growth, and that streak shows no sign of slowing anytime soon.
I've said this before and I'll say it again, Capital Automotive is one of my
favorite picks for both short- and long-term investors. If you haven't
examined the stock already, then please read the company profile in my special
report: "High-Growth Gains From Low-Tech Stocks," which can be found
at the following link: MILLS CORP. (MLS, $28) -- This REIT owns and operates a portfolio of over a dozen mega-malls located primarily in North America. Consumer spending has held strong in the U.S. over the course of the last few years, helping Mills Corp. to post relatively stable financial results. Yet the real story here is the firm's long-term potential, as Mills Corp. is building several new giant discount malls across the country and overseas. As long as consumer spending holds firm and the firm's malls stay crowded, Mills should continue to churn out steady results. PAN PACIFIC RETAIL (PNP, $37) -- This firm owns over 100 neighborhood shopping centers throughout four western U.S. states -- California, Oregon, Washington and Nevada. Given Pan Pacific's projected FFO (Funds From Operations -- a common earnings metric for REITS) growth of 9% last year and 7% this year, its 97% occupancy rate and its well-managed expansion into new markets (over $100 million of acquisitions last year alone), I think the shares will continue to outperform the rest of the industry. ROUSE COMPANY (RSE, $32) -- This
$2.8 billion company owns a diversified portfolio of 250 retail centers,
office buildings, industrial buildings and mixed-use properties in 22 states
across the country. This company isn't flashy, but it IS a stable real estate
play that's selling at a steep discount relative to most other diversified
REITS. If you're looking to add a diversified REIT to your portfolio at a
reasonable price, then RSE is one to consider. LOOKING FOR MORE INFORMATION ON
REITS? A listing of all publicly-traded REITs, conveniently broken
down into categories (office, retail, residential, mortgage, etc...) 4. THE PORTFOLIO TRACK -- VALUE Company
Add Add Crnt Tgt Totl SUMMARY: ACTION TO TAKE: AMERICAN EXPRESS (BUY) -- American Express is one of the world's largest and most widely recognized providers of charge cards and traveler's checks. The firm isn't likely to reach its 8% revenue growth target this year thanks to the sluggish economy and geopolitical uncertainty, but over the long run I'm comfortable with management's stated financial goals of 8% revenue growth and 12-15% EPS growth per year. The stock has pulled back along with the overall market over the last few months, leaving investors with an exceptional buying opportunity. It's rare to see a franchise as valuable and profitable as American Express trading at 13 times next year's earnings estimates, which currently stand at over $2.50 per share. As such, the stock is an exceptional value play at current levels. The firm enjoys a number of lasting competitive advantages in the lucrative credit card market, and with this in mind, long-term investors should continue to scoop up this priceless franchise regardless of today's dismal market conditions. I'm likely to up my rating on the shares to "Top Pick" on any dips back into the high-$20s. MARSH & MCLENNAN (BUY) -- Marsh & McLennan is a major financial holding company that owns the world's largest insurance broker (Marsh & McLennan), a leading asset management firm (Putnam Investments), and a global consulting giant (Mercer Consulting Group). Going forward, company revenues and earnings should benefit from improving insurance rates, a rebounding economy and stabilizing equity markets in late 2003 and 2004. But while the firm's profits have more than doubled in recent quarters thanks to rising insurance premiums, you should not expect similar results going forward, as management has already indicated that it expects rate increases to moderate this year. With this factor in mind, as well as continued weakness in the firm's asset management unit, investors might want to wait for lower prices to give themselves a greater "margin of safety" in this stock. The shares have been extremely volatile in recent months -- dropping from the high-$40s down to a fresh 52-week low of $34.61 before rallying back to the $40s -- and I expect the stock to continue to oscillate wildly in tandem with the broader markets in the months ahead. I'm going to keep my "Buy" rating on Marsh and my 12-month price target at $56, but savvy value investors would probably be wise to wait for another dip back into the high-$30s before establishing new positions here. MOODY'S (HOLD) -- Moody's is one of the world's largest and most powerful credit ratings agencies. Although the firm continues to impress on the financial front -- most recently posting a 23% and 19% jump in fourth-quarter revenues and profits, respectively -- the stock has come under pressure over the past few months due to heightened concerns over an SEC proposal that could lead to increased competition in the credit-rating market. Should this proposal ultimately become reality, the stock would almost certainly take a near-term hit. But while this could have an impact on the firm's profitability over the long haul, it would take several years before any new entrants could even so much as make a dent in Moody's rock-solid franchise. As such, I have no doubt that Moody's will continue to post double-digit annual earnings growth over the next five years. With a huge market share, only two competitors, a well-known and well-respected brand name and a host of repeat customers, Moody's boasts one of the strongest franchises in the global financial services industry. At about 20X this year's EPS estimates, the stock is a bit more expensive than most of our other Value holdings, and you might want to use caution in the coming months due to the aforementioned regulatory risks. However, this franchise is well worth the premium. Over the long run I'm confident that Moody's will continue to grow as the financial markets expand and the company moves into additional overseas markets, and I would view any further dips in the firm's shares as an outstanding buying opportunity. PROCTER & GAMBLE (BUY) -- Marketing over 300 brands to 5 billion consumers in 140 countries, Procter & Gamble is the world's largest and most successful consumer products company. P&G is a rock-solid firm that should continue to do well no matter where the economy or geopolitical situation goes from here, so I'd view it as a stable value play for long-term-oriented, defensive-minded investors. In late January the company posted fiscal second-quarter earnings of $1.49 billion, or $1.06 a share, representing a 14% increase over the year-earlier period. In addition, P&G raised its third-quarter guidance to high-single-digit growth. For shareholders, this type of stellar performance has been par for the course in recent years, as P&G has managed to simultaneously boost sales (thanks to strong volume growth) and lower costs (thanks to an aggressive restructuring campaign). Although the shares could take a near-term hit if the highly acquisitive P&G announces another big acquisition, the stock looks attractive at current levels. UNITEDHEALTH GROUP (HOLD) -- With nearly 20 million customers and an expansive network that includes 350,000 physicians across all 50 states, UnitedHealth Group is the nation's largest health care management company (HMO). Health care costs have soared in recent years, yet UnitedHealth has managed to stay ahead of these costs by raising its premiums at a fast clip. Statistics show that health insurance prices jumped an average of roughly 12% over the past year, and UnitedHealth has been a direct beneficiary of that trend. I expect this to continue throughout 2003, so the stock might still be worth buying at today's levels. Word to the wise though -- HMOs can't continue to raise prices at 6-7X inflation forever. This market looks solid for the next six months to a year, but over the long run something is going to have to give. If health care costs keep expanding at a double-digit clip as they have been (and all signs -- including management's guidance -- are still pointing to that), then UnitedHealth and others could suffer over the long haul. In addition, this industry could be greatly impacted by a host of uncertain regulatory issues in the coming years. With projected earnings of over $6.00 per share next year, the stock remains a solid value candidate. However, given all of the aforementioned risk factors, I'm hoping to ride the stock up to my revised $100 target and then sell out. My staff and I have the shares under close watch. WASHINGTON MUTUAL (BUY) -- With nearly $300 billion in assets, Washington Mutual is the nation's largest savings and loan institution. The firm has also branched out into a number of traditional banking and other financial services industries in recent years. Investors still treat savings and loan stocks with a bit of skepticism, so many of them trade at a steep discount to most traditional financial plays. Washington Mutual is no exception to this rule, as its shares trade for well under 10X this year's EPS estimates of $4.34. In addition, the stock has come under pressure recently due to rising concerns about a housing market bubble. I agree that the housing market is likely to slow down in the coming years, but barring an all-out collapse of this market, WM should still perform well in the coming years. In addition, it's worth noting that the housing market will almost certainly remain robust over the long haul, and Washington Mutual is poised to take advantage of this through its sizable mortgage operations. I view the shares as a solid bargain in light of Washington Mutual's recent diversification efforts and its expansion opportunities in both New York and Chicago, and would accumulate the stock aggressively at any price below my $44 target. WELLS FARGO (BUY) -- Founded in 1852, Wells Fargo is one of the oldest and most revered banking institutions in the United States. The real story with this stock is the firm's stability. The company is highly diversified, its management is conservative, and the firm now derives about half of its revenues from recurring fee-based business lines. When a growing company with these attributes and a $1.20 annual dividend trades for less than 15 times this year's earnings estimates, value investors generally take notice. If you're looking for a stable value play to add to your portfolio, you'd be wise to do the same. To view our Value Portfolio holdings on the web, please
click here: If you're currently a Free Trial
subscriber to the StreetAuthority Market Advisor, then your
subscription is about to run out! Subscribe
today to ensure that you don't miss a single issue... 5. NEAR-TERM SPOTLIGHT -- SHORT-TERM SWING TRADING IDEAS FROM DR. MELVIN PASTERNAK In today's issue I'm pleased to bring you several short-term trading recommendations from the newest member of our staff -- technical trading expert Dr. Melvin Pasternak. Melvin comes to us with more than 40 years of investing experience, having made his first trade in 1961. Along the way, he has spent more than a decade teaching classes in technical analysis for TD Waterhouse and has designed and taught stock market classes at the college level. On the educational and journalistic front, Melvin holds both Ph D. and MBA degrees and has previously written regular financial columns for a leading international publisher. DR. PASTERNAK'S INVESTING
PHILOSOPHY This week Melvin has been kind enough to provide StreetAuthority
Market Advisor readers with a full sample issue of his upcoming
newsletter -- the STREETAUTHORITY SWING TRADER. In it, he delivers another
batch of potentially profitable short-term trading recommendations as well as
continued guidance on his picks from last week. Due to his extensive use of
charts and other visual aids, you'll need to visit the special link below in
order to view this week's recommendations. You can jump directly to Melvin's
sample issue by clicking on the following link: PLEASE SEND US
YOUR FEEDBACK! 6.
STREETAUTHORITY'S TOP TEN LIST
Company
Add Add
Current Total 7.
INSIDE THE NUMBERS -- EARN BUFFETT-LIKE RETURNS BY SEARCHING FOR
BUFFETT-LIKE STOCKS
Commonly referred to as "The Oracle of Omaha" due to his Nebraska roots, Warren Buffett is widely regarded as the world's most prominent value investor. Thanks to an uncanny ability to spot undervalued companies and purchase them on the cheap, Buffett has made many people very wealthy over the course of his five-decade career -- including himself. Buffett's sizable stake in Berkshire Hathaway -- the company he has managed for decades -- gives him a net worth of $35 billion, making him the second-wealthiest man in the world behind Bill Gates (according to Forbes' 2002 list of the world's richest people). He is also one of the very few who has amassed such astonishing riches primarily through stock market investments. Given his extensive track record of above-average investing performance, it's not surprising then that millions of investors around the world attempt to mimic Buffett's unique value-oriented approach. In doing so, they tend to look for companies with strong competitive advantages, positive free cash flow, above-average returns on capital and quality management that are trading at substantially discounted prices in the open market (relative to their actual estimated value, of course). In an effort to incorporate these and many other Buffett-related strategies into our own research, this week I went on a search for firms that currently meet many of his stringent investment requirements. With the above analysis as a backdrop, I searched through our universe of 10,000 stocks to find companies that met the following criteria: 1. Share price of above $2.00 My goal was to come up with a list of firms that are fairly large, reasonably valued, cash-flow positive with strong returns on equity and significant competitive advantages. After running this data through StreetAuthority's advanced screening software, I came up with the following list of companies: Company
Price Mkt Cap After having my research staff take a closer fundamental look at each of the above firms, we came to the conclusion that all five companies are all worth a closer look. But as always, please make sure to do your own due diligence on each of these firms to decide if they are right for your portfolio. INTERESTED IN OTHER WAYS TO
PROFIT FROM BUFFETT'S GENIUS? MORE ABOUT THE WISDOM FUND (WSDVX,
$9.89) When it comes to privately-held companies, things get a bit trickier. When Buffett buys a full 100% of a particular company (which he does quite often), it makes it impossible for The Wisdom Fund to invest in that exact same firm. In these cases, Davenport and his staff simply invest in the publicly traded company that most closely matches the firm Buffett invested in. For example, in 2001 Buffett purchased Shaw Industries, the world's largest carpetmaker. In an effort to mimic this investment, the Wisdom Fund bought Mohawk Industries (MHK, $50), another major carpetmaker. That stock has roughly doubled over the past two years. Thanks to the fact that many of these comparable investments have done extremely well, The Wisdom Fund has done an excellent job of mimicking the returns of Buffett's Berkshire Hathaway since its inception. In an effort to piggyback on Warren Buffett's investing brilliance, we now hold The Wisdom Fund in our Fund Portfolio. 8.
COMING IN OUR NEXT ISSUE
P.S. -- If you're currently a Free Trial
subscriber to the StreetAuthority Market Advisor, then your
subscription is about to run out! Subscribe
today to ensure that you don't miss a single issue... |
| ABOUT OUR
EMAIL POLICY You are able to access this page because you visited StreetAuthority.com and subscribed to our premium STREETAUTHORITY MARKET ADVISOR service. This newsletter is viewable on our web site only by paid subscribers and limited-time free-trial members. If you do not belong to one of those groups and have accessed this page, you are acting in violation of our terms of service and we reserve the right to take the appropriate legal action. We sincerely hope that you benefit from your subscription to our premium STREETAUTHORITY MARKET ADVISOR service, and we’re willing to do whatever it takes to keep you as a satisfied customer. If at any time you would like to contact us (for example, to make a recommendation or to inquire about your account), you can do so by visiting our Contact Us page. UNSUBSCRIBE REQUESTS If you feel that you have received this mailing in error, or if you're a FREE TRIAL subscriber and you do not wish to receive any further STREETAUTHORITY MARKET ADVISOR mailings from us, simply click on the following link: RemoveMATrial@StreetAuthority.com?subject=removematrial If the link above does not work, then simply send a blank email to... ADVERTISING INFORMATION SHARE THE WEALTH! ===================================== DISCLAIMER The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. StreetAuthority receives no compensation of any kind from any companies that may be mentioned in our newsletters or on our web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed in this report or on our web site, but are barred from trading any of these securities seven days before and after the initial publication of this report in accordance with our company policies. (c) Copyright 2003. StreetAuthority LLC All Rights Reserved. |
