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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 We urge all readers to print out this
newsletter each week for maximum benefit...
1. WEEKLY MARKET
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2. MARKET COMMENTARY Along with continued geopolitical uncertainty (my thoughts on a potential war with Iraq remain the same as in previous issues, so I will not repeat that analysis), the markets had to contend with a host of negative corporate and economic news last week. In a stark reminder that the fall of Enron and WorldCom did not mark the end of Corporate America's accounting and disclosure problems, Bristol-Myers Squibb (BMY, $22) restated its financials from 1999 to 2001, slashing $2.5 billion and $900 million from its previously-reported sales and earnings figures, respectively. In addition, General Electric (GE, $26) took it on the chin early in the week after disclosing a $5.25 billion pension plan investment loss in a footnote to investors. Bankruptcy woes also continued to plague Wall Street, as company insiders at AMR Corp (AMR, $1.52), parent of American Airlines, warned that the firm could file for Chapter 11 relatively soon. And finally, economic data turned from bad to worse after the University of Michigan reported that its gauge of consumer confidence fell to the lowest levels seen since October 1992. Still, it's worth noting that despite all the doom and gloom, the major indices DID manage to turn in a positive performance for the five-day period. Following two consecutive weeks in the red, the Dow, S&P 500 and Nasdaq gained 1.5%, 0.5% and 2.7%, respectively. And although most of those small gains can be attributed to short covering, other positive factors at work include the potential for an imminent resolution to at least some of the uncertainty surrounding Iraq, as well as the potential for a 25-basis-point Fed rate cut when the central bank's policy-setting committee meets early next week. Both of these factors could work together to send the markets sharply higher in the coming days/weeks. However, given the tremendous amount of uncertainty in the world right now, as well as the fact that the U.S. economy could be teetering on the brink of yet another recession, I'd urge you to remain cautious with your portfolio. Of course, using caution doesn't have to mean staying on the sidelines. After all, the markets have fallen far enough to present us with some attractive bargain opportunities in certain sectors. For example, even though we've decided not to consider any aggressive picks until the market stabilizes, my staff and I added two stable, high-dividend plays to our Income Portfolio recently (see article #4 below for details). We plan to add a number of similar value-oriented stocks to our various portfolios in the weeks ahead, so please stay tuned! 3. SEARCHING FOR VALUE IN THE BATTERED RETAIL SECTOR (PART II) Although it is sensitive to economic fluctuations and
tends to be somewhat cyclical, the Retail sector is chock full of
outstanding long-term investing opportunities -- if you know where to look.
Along those lines, in last week's issue I provided you with an introduction
to the Retail sector as well as an in-depth analysis of one of the sector's
fastest-growing segments -- discount retailers. If you didn't get a chance
to read last week's article, then you can find it at the following link: ELECTRONICS RETAILERS -- Thanks to the widespread proliferation of computers, DVD players, cell phones, digital cameras and other high-tech gadgets, electronics retailers have performed extremely well over the course of the last decade. In particular, two main companies have emerged as the clear leaders in this important retailing space -- Best Buy (BBY, $28) and Circuit City (CC, $4.99). However, both firms have struggled as of late, posting disappointing 4Q numbers during the sluggish holiday shopping season and weak sales in the first few months of 2003 (same-store sales tumbled 1% at Best Buy and 10% at Circuit City in February). In addition, both are grappling with a host of other tough issues at the moment, including increasing competition from discount retailers and continual price deflation for many of their high-tech product offerings. Going forward, Best Buy, which is now the nation's largest electronics retailer, looks well positioned to continue to steal market share from Circuit City. By expanding its footprint throughout the country through a long string of acquisitions and new store openings, Best Buy has managed to post compound annual earnings growth of over 40% since 1993. Yet even though the firm will continue to expand and grab market share in the future, the company's growth is likely to slow as it gets larger and as its store concept reaches the saturation point in the U.S. (Management has already indicated that it only expects to open new domestic stores for the next three or four years, so Best Buy's growth is likely to stagnate beyond that point.) With this in mind, this stock is probably fairly valued at current levels. It should hold steady in the years ahead, but I'm not expecting stellar gains here. Meanwhile, Circuit City is also wrestling with its own unique set of problems. Stiff competition has forced the firm to undergo a major restructuring campaign at its U.S. stores, and the company is now in the process of laying off 2,000 employees. Not surprisingly then, its shares have been on a downward trajectory over the past year and recently tumbled to fresh 10-year lows. The stock might have some appeal as a potential turnaround candidate at today's levels, but it remains to be seen whether or not Circuit City's restructuring efforts will be enough to enable the company to compete successfully against Best Buy and others. Since the risks associated with the stock are a bit too substantial for my liking, I'd pass on the stock. In addition to discount retailers like Wal-Mart and Target, which have stepped up their electronics offerings in recent years, other major competitors in the electronics space include RadioShack (RSH, $20) and Amazon.com (AMZN, $25). ------------ ONLINE RETAILERS -- Although nearly every online retailer seemed to have unlimited potential in the go-go 1990s, the Internet retailing boom has since turned to bust for most firms due to high shipping costs, stiff competition and overly-aggressive business plans. Yet despite these difficulties, thousands upon thousands of small retailers are still involved in this market, and many have found a way to reach profitability. However, the vast majority of well-known firms with large customer bases have virtually disappeared. For the handful of resilient firms with enough staying power to ride out the dot-com meltdown, the online retailing market has proven to be an extremely profitable one. Of course, "handful" might be somewhat of an exaggeration here. After all, only TWO main companies -- Amazon.com (AMZN, $25) and eBay (EBAY, $84) -- have managed to establish a dominant presence in a wide variety of online retail product categories. For its part, Amazon has positioned itself as the undisputed leader in the Internet retailing space, selling everything from books to electronics. And after years of struggling with high start-up costs, sales volumes have picked up and the firm has finally managed to swing to profitability. Amazon's long-term future looks bright thanks to the company's well-established position and key partnerships with traditional retailing giants. And while some investors have questioned whether or not Amazon will be able to remain in the black, I'm confident that the firm will remain a long-term winner. As I've mentioned before, however, that doesn't necessarily make Amazon a great stock. On the heels of recent gains, the shares are now trading at nearly 80X this year's EPS estimates. As such, I would not consider purchasing AMZN until I saw a drop back to the mid- or low-teens. Meanwhile, eBay has taken a commanding lead in the lucrative online auction market... a lead that it should have no trouble maintaining thanks to the host of advantages -- such as economies of scale and proprietary technology -- that the firm enjoys over the competition. And even though its shares also trade at a rich PE multiple, eBay's valuation isn't completely unreasonable. After all, this firm has managed to post 50%+ annual revenue and earnings growth consistently over the last several years. Still, with the stock now in the $80s and the firm expected to earn just $1.33 per share this year, valuation concerns could continue to weigh on the stock in the near term. But if you're a long-term investor and you believe -- like I do -- that eBay will remain one of the world's most impressive growth stories in the coming decade, then you may want to jump in now and continue to add to your position on any future price dips. A countless number of other players compete in the online retailing segment, include Barnes & Noble (BNBN, $1.28) and USA Interactive (USAI, $25), but Amazon and eBay have emerged as the two dominant leaders in this sub-sector. ------------ HOME IMPROVEMENT RETAILERS -- The housing market has been on an absolute tear in recent years, as low interest rates have spurred on a record level of mortgage refinancing. By lowering their mortgage payments, this refinancing boom has effectively put more money in homeowner's pockets each month. Many of these folks have turned around and spent this extra cash at home improvement warehouses like Lowe's (LOW, $39) and Home Depot (HD, $23), which sell everything from lumber to paint to gardening supplies. With roughly 1,5000 mega warehouses across the country, Home Depot is far and away the nation's leading home improvement chain. On its rise to glory during the 1990s, the firm managed to post a sensational string of 30%+ annual revenue and earnings growth. Yet as the company has gotten larger and its store base has approached the saturation point in its core U.S. market (the firm has already built stores in the most attractive metropolitan markets), Home Depot's growth has slowed significantly (sales and earnings growth came in at just 17% and 18% in 2002, respectively). In addition, top management has made some missteps along the way. For example, in an attempt to save on labor costs, management recently hired a large number of part-time workers. Yet after seeing its customer service quality wane and its same-store sales decline as a result, the firm has now been forced to rekindle its focus on full-time employees. Although its growth will continue to slow in the years ahead, Home Depot still has some room left to expand. In addition, the company is financially solid and management is now taking the necessary steps to improve performance at the firm's existing stores. But even though Home Depot still has quite a bit of life left in it, investors have seemingly left the stock for dead, sending it down to fresh five-year lows in recent weeks. Given the firm's dominant position in the growing home improvement market and projected earnings of nearly $2.00 per share next year, the stock looks extremely attractive at today's levels. As such, I may decide to add Home Depot to our Bellwether Portfolio in the coming weeks/months. Home Depot will remain the dominant player in the home improvement market for years to come, but the competition is heating up. Thanks to its quality management team, smaller size and the booming housing market, chief competitor Lowe's is quickly catching up to its larger rival. The firm currently operates over 800 stores in 43 different states, but has plenty of room left for expansion (particularly in metropolitan areas). Along those lines, the company expects to open over 100 new locations this fiscal year, helping it to expand its square footage of retail space by nearly 20%! And on the operational front, Lowe's management is working hard to cut costs, improve inventory management and move toward a more profitable sales mix. I've considered adding Lowe's to our Bellwether Portfolio, but with the stock still trading at nearly 20X this year's projected earnings, I'm a bit hesitant to add it right now. I'm therefore going to wait for a more attractive entry point, possibly in the low-$30s. Other major competitors in the home improvement market include Menard's and Ace Hardware, both of which are privately held. Retail giant Sears Roebuck (S, $19) also competes against these firms in many product categories. ------------------ Although we couldn't cover all of the numerous sub-sectors in existence, we hope that you've benefited from this week's in-depth look at the Retail sector. We will continue our coverage of this important sector in the months ahead, so be on the lookout for this in future issues. 4. THE PORTFOLIO TRACK -- INCOME "WATCH LIST" Below you'll find a table of companies that I'm now considering as possible new additions to our Income Portfolio. My staff and I here at StreetAuthority are constantly researching and following all of these picks, and we may add a few of them to this portfolio if and when their risk/reward profiles meet our stringent investment criteria. Company
Price ACTION TO TAKE: AIMCO (AIV) -- Apartment Investment & Management Company -- commonly referred to as AIMCO for short -- is one of the nation's largest owners of major apartment complexes. When investing in real estate investment trusts (REITs) like AIMCO, 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 over 318,000 apartment units, a market cap of $3.4 billion and properties in such major metropolitan areas as Washington, D.C., Chicago, Los Angeles and Boston, AIMCO fits the bill perfectly here. And in addition to the diversification-related benefits, the firm's large size also gives it a number of competitive advantages over its smaller rivals. For example, AIMCO can spread its fixed administrative costs over a wider property base, and the firm also boasts greater bargaining power when it comes to negotiating for such things as utilities and other important services. Along with these positive factors, AIMCO's shares now have another key advantage -- last Thursday Standard & Poor's added AIMCO to its coveted S&P 500 Index, replacing struggling airline AMR Corp. (AMR, $1.52). The move will not only bring greater exposure to AIMCO's shares, but has also forced money managers to add the stock to their index portfolios (thus boosting the share price). These index funds will be required to hold the shares as long as AIV remains part of the S&P 500. (FYI -- Overall, more than $1 trillion is currently indexed to this prestigious group of companies.) On the bear side of the equation, a number of cyclical factors are working against apartment REITS right now. For starters, mortgage rates are low and the housing market is booming, meaning that many of AIMCO's potential tenants are now opting to buy instead of rent. Secondly, the weak economy has put a damper on the job market. And since new job creation is one of the primary growth drivers for the apartment industry, this will continue to have a negative impact on AIMCO and other apartment REITS in the months ahead. Thirdly, new apartment construction has continued unabated throughout the downturn. Estimates show that apartment supply is ballooning at a rate of roughly 300,000 new units each year, and should this supply growth continue in the future, it could put pressure on rental rates at some of AIMCO's existing properties. And finally, AIMCO carries a great deal of debt on its balance sheet (a total of roughly $7 billion including preferred stock), meaning the firm is a bit more leveraged than most REITs. As with any stock, there are two sides to the equation here -- the "bull" and the "bear" stories, as I like to call them. The trick to successful investing isn't to discover perfect firms with NO risks or uncertainties surrounding their shares. After all, such firms simply do not exist (and if you think you've found one, then chances are excellent that you've either ignored some substantial risks in your analysis or that the stock is already trading at a ridiculous valuation). Instead, I've found that the key to successful investing is to carefully analyze both the "bull" and the "bear" arguments for a given stock, then decide whether or not it is a good investment based upon both that analysis AND a diligent examination of the firm's current valuation. With the stock now trading near a fresh 52-week low, bringing in over $4.00 in FCF (free cash flow) per share each year, paying out a healthy 9.0% dividend yield and carrying a net asset value of roughly $40 per share, the stock looks to be undervalued at current levels. Editor's Note: We decided to add Apartment Investment & Management Company (AIV) to our Income Portfolio last week before the shares became part of the S&P 500 index. Along those lines, my staff and I sent out a special News Flash on Thursday afternoon, adding AIV at an intraday price of $36.38 per share. We have initiated coverage of the firm with a "Buy" rating and a 12-month price target of $45. AMB PROPERTY CORP. (AMB) -- With a market cap of $2.3 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 AMB's shares. In addition, I like the firm's 6.0% dividend yield and its broad geographic reach. ARCHSTONE SMITH TRUST (ASN) -- Several years ago this REIT embarked on an ambitious plan to build and acquire a vast portfolio of apartment complexes in protected metropolitan areas. So far management has executed that plan to perfection, as Archstone now brings in over 80% of its annual income from such major markets as Washington, D.C., Boston and Southern California, all of which boast high average rents and substantial barriers to entry against new competition (due to limited land and development space). These major metropolitan markets not only tend to hold up well during economic downturns, but also offer superior long-term growth potential when it comes to both rental rates and property values. In recent action, Apartment REITs like Archstone have been hit hard by the dual effects of a weak economy and low interest rates (which have spurred home buying -- a substitute product for apartment rentals). Times have been tough, but in my humble opinion Archstone's shares have fallen much too far. With the stock now trading well below the company's net asset value, which currently stands at an estimated $28.50 a share, and the firm still paying out a healthy 7.9% dividend yield, I think the shares are a steal at today's levels. Editor's Note: We decided to add ASN to our Income Portfolio last week with a special News Flash. We added the shares at the opening bell on Thursday morning at a price of $21.85 per share and have initiated coverage of the firm with a "Buy" rating and a 12-month price target of $26. ROUSE COMPANY (RSE) -- This $2.9 billion company owns a diversified portfolio of 250 retail centers, office buildings, industrial buildings and mixed-use properties in 22 states across the country. Rouse 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.
5. NEAR-TERM SPOTLIGHT -- SHORT-TERM ETF TRADING IDEAS FROM EDITOR STEVEN POSER In today's issue I'm pleased to bring you another short-term trading recommendation from one of the most experienced members of our staff -- technical trading expert Steven Poser. Prior to joining StreetAuthority, LLC, Steven was employed for more than a decade at Deutsche Bank in New York City, where his main function was as a global markets technical strategist. After holding a series of increasingly important roles, Steven spent his last four years at Deutsche Bank working as the firm's Chief U.S. Technical Analyst. A regular guest on CNBC, CNNfn and Reuters Financial Television, Steven is frequently sought after for speaking engagements and trading seminars. STEVEN'S INVESTING PHILOSOPHY ---------------------- This week Steven has been kind enough to provide StreetAuthority Market Advisor readers with a potentially profitable trading opportunity in one of the most heavily-traded ETFs on the market -- the S&P SPDRS (SPY). Enjoy! TRADING IDEA: SELL SHORT S&P SPDRS (SPY, $84.13) ON A RALLY Please Note: The current geopolitical situation is very fluid. Therefore, if war starts or Hussein steps down before this trade is triggered, then please cancel it. Do not put any orders in the market to avoid getting filled on a news report. As I've been saying, I continue to expect further losses in the S&P 500 in the coming weeks, despite the apparent turn. But, after a brief dip to start the week, further gains are likely in the near term. As such, we will likely grab late and weak longs on a break above recent resistance near $85.74-$85.80. I recommend sales as those stops go off. As long as prices remain below the head and shoulders neckline (the thick blue line on the chart below, at $86.57 on Monday and falling about $0.01 per day), I would be willing to stick with the shorts. I expect a new low, but will place targets higher up first and will revise them as needed.
TARGET: $81.55 (this is our initial target, but I may
lower it as we move forward) SPECIAL NOTE: From time to time we provide our StreetAuthority Market Advisor readers with special articles from experienced experts like Steven Poser. However, if you'd like to receive short-term ETF trading ideas like the one above each and every week, then you might want to consider subscribing to our premium trading newsletter -- The ETF Authority. This weekly publication, which is separate from the StreetAuthority Market Advisor, is written by experienced technical expert Steven Poser and each issue is jam-packed with a host of trading recommendations similar to the one above. Click here to learn more. 6.
STREETAUTHORITY'S TOP TEN LIST
Company
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Current Total 7.
INSIDE THE NUMBERS -- STOCKS THAT ARE NOW TRADING WELL BELOW FAIR VALUE
With war jitters and a weakening economy as a backdrop, the three-year-long bear market sell-off has continued in full force in recent weeks, pushing hundreds of individual stocks down to fresh multi-year lows. And even though it started primarily in the over-inflated Technology and Internet sectors, the sell-off has broadened to nearly every industry and sector group in recent months, sending shares of just about every company sharply lower. The three widely followed domestic indices -- the Dow, S&P 500 and Nasdaq -- have already tumbled –6%, -5% and –0% on the year, and are now off -30%, -45% and -73% from their all-time highs, respectively. As these dismal figures indicate, the widespread bear market has had a negative impact on thousands of publicly traded companies. Of course, for many of the affected firms, the recent sell-off in their shares has been justified. After all, a countless number of stocks became grossly overvalued during the great bull market run, and thus were due for a major correction. In addition, many firms' share price declines have mirrored similar downfalls in their current business prospects, which have soured along with the weakening economy. Yet even though many stocks have been justly punished by Wall Street, a number of outstanding, fundamentally solid firms have seen their shares get swept up in the sell-off for no good reason. Meanwhile, other stocks have fallen too far, too fast, and are now trading well below their intrinsic values, providing investors with outstanding bargain-hunting opportunities. With the above analysis as a backdrop, this week my staff and I went "inside the numbers" in search of bargain-basement value stocks that have been unjustly punished by the market crash and are now trading well below fair value. Along those lines, we 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, heavily traded, and that are trading at a substantial discount to their intrinsic value based on recent sales, earnings, cash flow and projected growth figures. 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 eFunds (EFDS), Jakks Pacific (JAKK), Tech Data (TECD) and Veritas (VTS) are all worth a closer look. 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. 8.
COMING IN OUR NEXT ISSUE
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