Tuesday, January 3, 2012

Stocks and Finance

So I was originally going to write this last night BUT when I got home, the power was out so I couldn't. So instead of today looking really smart, I am going to write and hope you believe me.

One of my many interest, as I've said, are finance and business. Now I am no day trader and don't think I will be a "buy today, sell today" kind of person, but I do like to see returns and cash them in when they hit certain levels. And the longer I hold on to a position, the higher I expect my return to be.

For this year, I expect the markets to still go through a nauseating amount of turmoil. Weekly gain wiped out in a day and heavy losses broken by a rally. Volatility is the word for the year - again. The one thing we do have going for us is that among the "modern economies" we still seem to be the safest. But I mean, artificially creating heavy demand for the greenback by infusing hundreds of billions into foreign banking systems will have a stabilizing effect on our currency and lack of coordination and agreement will continue (theoretically) sending government investors our way. Until it doesn't. But putting all of that aside...

What am I looking at this quarter and year?

First off, my core investments are in the financial sector. There are a lot of regional banks with no exposure to Europe and improving balance sheets and growing lending ratios that I believe will begin to see a sharp rebound. Banks like Huntington Bank (HBAN) - which raised its dividend from 1 cent every quarter to 4 cents every quarter recently - to Peoples United Bancorp (PBCT) - which has raised its dividend every year for the past 16 years and recently acquired Danvers Bank, not to mention it's current yield of 4.86% - seem to be in line to begin posting very strong earnings. Now PBCT with it's high yield acting a bit as an anchor may not make you as much if you are looking at straight returns, but as a longer term stock, it's hard to pass this one up.

General Electric (GE) is one company that everyone wants to hate. "They don't pay taxes. They are too politically connected. They are 1%-ers." What more could you ask for then?! GE's finance arm is expected to begin paying "internal dividends" to the parent company again this year. GE has also raised its dividend 3 times in the past year - from 14 cents to 17 cents per quarter. Yes, it has some exposure to Europe and to contractions in military spending, but it's a conglomerate which has so many different business sectors that even a downturn in Europe may not stop this stock from rising further.

What wouldn't I touch with a 10 foot pole? Bank of America (BAC). I expect BAC to fail to be honest. I expect it to be split up among the larger regional banks who have the balance sheet to take over its operations. Warren Buffet couldn't save the stock and their CEO Brian Moynihan does not seem cut out to be running a company of this size.

A sector that I was a champion on last year - but have completely gotten out of as of the last week in December - are the utilities. I still believe there is a lot of money that can be made in them. As a whole, there are some huge winners that pay great dividends. Duke Power (DUK) and American Electrical Power (AEP) being two of them.

Now DUK is currently buying Progess Energy (PGN) and that deal should be closing sometime this or early next quarter. The word on the street is after the merger, DUK is going to be doing a reverse split on its stock at a 1:3 rate. Now a $65 stock sounds great, but I don't see much in the way of support for it. Find me a utility that is even in the $50's. PGN is because it's being purchased, but others like Excelon Corp (EXC), AEP, SCANA (SCG) - they are all in the low to mid 40's.

My warning is that DUK is being bought up so when it splits, it will have a nice price but it will not find support. Maybe in the mid 50's. Even at post merger $55, that would make it an $18.33 stock right now. Currently it's at $21.62. I just don't see it.

Other utilities are showing great returns, but a more mild winter so far is going to weigh on earnings. Not to mention costs due to EPA regulations and state regulators not allowing the full price increases that the utilities are requesting to offset these increased costs.

But one utility is very interesting to me. And yes, it popped today but I have been looking at it as a huge buying opportunity for a little while now. Chesapeake Energy (CHK) is a natural gas producer. It went up 5.88% today and I still see a lot of room for growth. It had been near its 52 week low, and being a low yielding stock, it has a lot of opportunity to reinvest its profits within itself and grow by exploration and acquisition. I don't see CHK as strong after today as I did before today, but if you are looking for something to buy and hold a year, I would definitely grab some at this price.

Other companies that I have either invested in or am watching very carefully include Hewlett-Packard (HPQ), Mircosoft (MSFT), Boeing (BA) and Yum Brands (YUM). And yes, these stocks may not make you rich, but HPQ has a very good chance with Meg Whitman as its CEO of popping into the low 30's by the end of spring - currently it's at 26.62.

Now the markets go up and down all the time. Tomorrow all of these may go down. A lot. But as I have learned from 2011, one month can really make your portfolio or break your portfolio.

There are a lot of good buys out there right now. Real Estate Investment Trusts (REITs) offer insanely high yields (but are taxed at your personal income rate) and as long as the interest rates are low, these can offer some great value. Just be careful and do your research. And keep an ear to the ground for possible rate increases.

Hopefully you all weren't too bored and hopefully I won't be too wrong. It's easy to be judged a moron when you go public with an opinion...

2 comments:

A Wild Imagination said...

Man, I hope your faith in the future for financials is right! Since writing this, you should have gotten a nice fat profit margin increase, since the financials had a nice run up. Did you cash out?

I am uncertain, mildly fearful, cynical, pissed-off about the near term future of our financial system. I've reduced my stock investments to 10-15% and have the rest in cash or currencies(horrible choice, if I say so myself) and hard assets. Now when the hard assets include antique cars (like Jay Leno? No.), then maybe hard assets acquire a little more sexiness. But when hard assets means trees and hay fields, the sexiness factor dips. And a FL condo in a senior village takes sexiness to zero.

I want your optimism for the near term future to be right and mine to be wrong.

PS - I like your idea of the loft/ commercial rental. That's back to the days of the ma and pa storefront, where the family lived upstairs. In your case, your commercial tenant pays your mortgage for your loft.

PSS - Some folks call American light lagers panther piss.

RJ said...

I am broadly optimistic about the economy. Banking is at least profitable again, manufacturing is slowly returning, and business spending in R&D and tech upgrades seem to be picking up. Still a low merger and acquisition rate (remember how 2011 was suppose to be the year of the bank mergers...), high unemployment/underemployment and a dependency on government spending does cause me to consider a large risk for downturn.

Being I'm a young gun, if I make some monetary mistakes, I have time to rebound from them and learn and hopefully not repeat them.

Tangible assets are key - but if you are only buying land/real estate/cars etc because of fear that paper money won't survive much longer, how do you go about being able to pay the taxes on these things? Definitely need to keep some cash, diverse into stocks/bonds (for as much as your risk appetite allows), and hard assets are great. But just like anything, moderation and ability to upkeep/maintain must be weighed.

I haven't cashed out yet - as I set predetermined return rates. Sometimes this is a good decision - utilities in 2011 - sometimes having a hard target isn't a good choice - Bank of America at the end of 2010 then it losing 60% of its value in 2011. But I am getting close on a few of them ;)