The following article was written by Elliott Wave International’s Senior Instructor Jeffrey Kennedy to show what you can expect from a market at the completion of various Elliott wave patterns. Jeffrey, a Chartered Market Technician and highly sought-after speaker and teacher, will host a free Trader Education Week, August 20-27. Learn more now.
Some people think the Wave Principle is complicated.
But, in reality, all you need to know to find trading opportunities are
the five core patterns: impulse waves and diagonals move
in the direction of the larger trend; the zigzag, triangle
and flat are corrective waves that move against that trend.
What is most important to understand about the Wave Principle is that each
wave pattern implies a path for future price movement. For example,
a completed impulse wave implies that prices will retrace into the span
of travel of the previous fourth wave, most often to near its terminus.
As countertrend wave patterns, zigzags, flats and triangles imply that once
they end, a complete retracement will follow. (See graph.)
This chart shows a corrective pattern called a zigzag. It is a three-wave
move that is typically contained in parallel lines, which I call the corrective
price channel. Whenever you see an A-B-C decline such as this where, ideally,
wave C equals the distance travelled in wave A, the implied forecast is
a move to the upside back to beyond the origin of the pattern.
example, the May through September pullback in SolarCity Corporation (SCTY)
consists of three waves (a zigzag), which forecasts a rally beyond the May
The price chart of Pfizer Inc. provides another example of the forecasting
ability of the Wave Principle. A triangle is a wedge-shaped corrective,
or countertrend, wave pattern that is fully retraced upon completion.
As it stands, this pattern is incomplete and requires additional subdivisions.
Even so, this structure implies that the larger uptrend is still intact
and that new highs beyond $31.15, the point at which the triangle began,
will ultimately develop.
By now, many investors have heard about the massive gambling mecca in the Chinese protectorate of Macau. Billions of dollars have poured into the strip, creating a similar amount of profits for investors. Yet investors may not have heard of the prologue to this story. The “Macau story” is played out: growth has sharply slowed and investment opportunities have dried up.
Or so the financial press would have you believe.
The truth is quite different. For far-sighted investors, a fresh chance at upside has emerged, especially for my favorite Macau gaming stock, Melco Crown Entertainment (Nasdaq: MPEL). A nearly 40% plunge since early March, paired with a still-robust growth outlook, means it’s time to buy.
I first looked at Melco Crown four years ago and I encourage you to read what I wrote back then before continuing. The expansion strategy laid out then exceeded my wildest expectations. Shares went on to deliver a nearly 1,000% gain.
Maturing, not slowing
The era of rapid growth for Macanese casinos is nearing an end. Chinese citizens — especially the high-rollers — are feeling more circumspect these days, especially as the Chinese government cracks down on corruption and conspicuous signs of wealth. It’s an issue for 2014, but longer-term, the Chinese economy will keep minting new millionaires. And many of them will be leaving mainland China — where casinos are prohibited — and hopping on the boat for Macau. In effect, think of Macau as maturing, from a phase of rapid growth to moderate growth.
Recent quarterly results gave investors a scare. Labor costs unexpectedly surged, right at a time when the casino’s hold rate diminished, which is generally attributed to good luck by gamblers. That led to a profit shortfall. Investors were also concerned about a slowdown in gaming revenues across Macau, though that now appears increasingly attributable to the World Cup. Gaming activity has picked up in recent weeks, according to management.
For its part, MPEL still has ample room for growth in Macau and elsewhere. Right now, the company is planning for the launch of a new casino complex in the Philippines, known as Belle Grande. The company is also still building a massive new complex on Macau, known as Studio City, augmenting its existing City of Dreams complex. Those new casino complexes set the stage for sales to rise from around $5 billion this year, to roughly $8 billion by 2016, according to Merrill Lynch.
While shares are out of favor, management has decided to earmark some if its cash towards a $500 million share buyback. “This is in addition to commitment to a regular quarterly dividend payout of 30% and potential for special dividends, both announced earlier this year,” said an UBS analyst.
Merrill Lynch has a $43.70 price target while UBS expects shares to reach $43. Note that both of those price targets represent more than 50% upside.
UBS extends the view of MPEL’s growth out to 2018. By then, the company is expected to generate $10.4 billion in sales, or roughly twice its 2014 sales base. And by 2018, per share profits are expected to exceed $3.50, while the dividend is expected to approach $2. That’s a 7% yield, in today’s dollars.
Risks to Consider: The greatest risk is that MPEL has not yet received a gaming license for its new Macau casino, slated to open mid-2015. The Chinese government tends to move slowly when reviewing license applications, but has ultimately approved all of the company’s previous license requests.
Action to Take –> The key takeaway for this stock is not just its growth strategy, which should yield solid revenue gains. Once the business model ripens, it’s the level of profits on those sales that should really get your attention. This is a company that is in the midst of a $10 billion, decade-long capital plan, which should eventually generate more than $2 billion in annual operating profits. Don’t let the broken stock chart fool you, Melco Crown remains as one of the most compelling gaming and entertainment stocks you can buy.
Melco Crown has a solid dividend yield and is repurchasing shares… it’s one step away from a phenomenal “Total Yield” score. My colleague Nathan Slaughter developed a way to find the most stable, profitable companies in the world by looking at three key metrics to produce a Total Yield. Since 1982, these dividend payers returned an average of 15% per year. Last year, this group of stocks more than doubled the S&P 500′s return. To find out which companies have the best Total Yield, click here.
Retail sales grew just 2.9% in the first six months of 2014, according to the National Retail Federation. And whatever sales growth that can be had is often sucked up by Amazon.com (Nasdaq: AMZN), which is expected to boost revenue $15 billion this year and another $20 billion in 2015 to nearly $110 billion in sales.
It’s only once you realize that shares of Amazon.com are off 20% this year, that you begin to understand that every corner of the retail sector is hurting.
Many retailers now realize that they should have devoted more resources to their e-commerce portals. Bed, Bath & Beyond, for example, is just now taking its web presence seriously — and that came only after its shares were pummeled. While some firms such as Walmart are spending hundreds of millions of dollars to internally boost their online sales platforms, others lack the money or skill to create a world-class website. And they are increasingly turning to young tech upstarts to help them expand their global online sales footprint.
Here’s a closer look:
1. Demandware (Nasdaq: DWRE)
This company is a one-stop shop for all things e-commerce: It can build websites, handle back-end transactions and develop a retailer’s mobile presence — an increasingly important platform. Though the company was founded only a decade ago (and went public in 2012), its business model has reached a clear inflection point. After boosting sales 30% in 2013, analysts expect sales to rise 40% in both 2014 and 2015. In 2015, sales are expected to exceed $200 million. Not bad for a company that had less than $40 million in sales in 2010.
Despite that rapid growth, the market’s retrenchment from high-flying cloud-based stocks has left a dent on the stock chart above. Indeed shares fell sharply after Q2 earnings results, even as analysts generally applauded the quarter and outlook. But that sell-off appears to have been an over-reaction: “The company continues to grow the top line north of 45%, and with consistent execution, we think shares will bounce back,” wrote a Barclays analyst in a recent report.
As Demandware’s revenue base grows, its skill set is evolving in tandem. For example, the company once needed several months to help a new client establish a digital presence in Europe. Yet with stronger regional expertise, Demandware was able to build out sites for footwear and apparel retailer Timberland in Spain, The Netherlands and Italy in a fairly short time. “With our solution, customers were able to get to market faster than with the traditional on-premise or build-and-run solutions. “Speed to market is one benefit of our cloud platform,” said Demandware CEO Thomas Ebling in a recent conference call. The company now helps oversee more than 900 client sites, up from 667 in the middle of 2013. Considering the number of retailers that have yet to establish a strong international digital presence, the company’s runway for growth appears to be extended furthermore.
2. Borderfree (Nasdaq: BRDR)
I profiled this company when I looked at recent IPOs. As I noted then, “Borderfree helps online retailers conduct global transactions, handling customer care, risk management, localized website customization and other services for clients such as Neiman-Marcus, Visa (NYSE: V) and others.” The more I look at this business model, the more there is to like.
The clear appeal is global trade. As any economy develops, an appetite for U.S. goods starts to build. It happened in Japan and South Korea in the 1980’s and 1990’s, respectively, and in Russia and China more recently. In the years ahead, U.S. retailers are counting on rising demand for their goods in places like Kenya, Thailand, Peru and other emerging markets that are quickly developing a middle class.
By taking advantage of its own fixed network of shipping and logistics, Borderfree can offer very competitive shipping and fulfillment rates. When retailers go it alone, they find such costs can eat deep into their profit margins. Right now, the company is working to pass on savings to customers to boost the appeal of the service. In the second quarter of 2013, shipping costs equated to 12.9% of sales. A year later, that figure dropped to 10.7%.
3. Zulilly (NYSE: ZU)
This company has become a top player in the field of “flash sales” which are also known as “deal of the day” sales. Zullilly caters to mothers in search of clothes for themselves and for their kids. The catch: many of the brands on the site would have a hard time getting noticed in the crowded field of women and children’s apparel. For new and unproven brands, Zulilly has become an essential platform for exposure.
This company took its niche by storm: Sales hadn’t reached $150 million in 2011, but are now on pace for $1.2 billion this year. Still, investors may have gotten carried away and, at one point, assigned Zulilly a $10 billion valuation.
That was a bubble that needed to be pricked. Now the company needs to focus on sharp growth to justify its still-considerable $5 billion market value, and management will need to show that sales growth brings profit leverage. Zulilly generated a mere $27 million in EBITDA last year, but that figure is expected to exceed $100 million next year and approach $200 million by 2016. Merrill Lynch, which rates shares as neutral, sees a rebound from a recent $35 to their $46 price target, which anticipates a rather robust 52 times EBITDA multiple, based on 2015 forecasts.
Risks to Consider: These companies have likely already experienced their most torrid growth spurts. Though they should keep growing at a respectable clip, investors need to focus on their long-term results and not their 2015 targets, as they tend to look fairly pricey in that context.
Action to Take –> Even as retail sales appear to be stuck in low-growth-mode, online sales keep rising at a fast pace, as evidenced by these three firms. Their role as facilitator of other company’s internet sales platforms helps to insulate them against the fickle winds of fashion that any particular brand may produce. Investors have come to shun high-growth tech stocks in recent quarters, and the pullback in these three stocks enables a fresh entry point for investors that missed them before they surged.
Some stocks just don’t fit the mold. And they are also the companies that can offer the biggest gains. My colleague Andy Obermeuller calls them “Game-Changing Stocks” and he’s just released his latest report on the subject, “The Hottest Investment Opportunities For 2015.” To find out which firms Andy considers to be the next market disrupters, click here.
You don’t have to be a contrarian to have investment success, but it certainly helps.
From 2005 through 2007 — when it was fashionable to invest in real estate — the reality was that real estate was the last place you should have been putting your money. Then after housing bubble popped in 2009 — when it was terrifying to invest in real estate — investors should have been betting their life savings on residential properties.
You can’t expect to reach your full investment potential by merely following the majority. In fact, going against the crowd is often the best place to look for investment ideas.
Today there isn’t much that is more out favor than Russian stocks. It’s well-known that Russia has a problem with corruption making it a frightening place to invest in already. Now with the developing Ukraine crisis and the U.S. imposed sanctions — many investors find it even more unnerving.
But as Warren Buffett says “you pay a rich price for a cheery consensus.”
In fact, the doom and gloom that surrounds Russian stocks makes them extraordinarily inexpensive. Now could be the perfect time for a contrarian move — here’s why.
After several months of sanctions that targeted only individuals and small firms, the United States recently upped its measures to target Russia’s largest oil producer Rosneft. And Rosneft wasn’t alone. Russia’s second largest gas producer Novatek and its third largest bank Gazprombank have also been put in jeopardy.
These specific companies were targeted because they’re run by close allies of Vladimir Putin. The sanctions are meant to shut these firms out from medium to long term dollar funding.
One firm not specifically targeted by these sanctions but still sporting a dirt cheap valuation is colossal natural gas producer Gazprom (OTC: OGZPY) — the single largest producer of natural gas in the world.
In 2013, Forbes listed the largest energy producing (oil and natural gas combined) companies as the following:
1. Saudi Aramco – 12.7 million boe/day
2. Gazprom – 8.3 million boe/day
3. National Iranian Oil Company – 6.1 million boe/day
4. Exxon Mobil – 5.3 million boe/day
5. Rosneft – 4.6 million boe/day
As you can see, Gazprom is the second largest energy producer in the world. But it’s not just Gazprom’s size that has me thinking it will not be going anywhere and will not be “sanctioned” out of business.
The main reason is because Gazprom produces so much energy that it is crucial to global energy security, especially that of Europe.
It’s no exaggeration to say that Gazprom is the reason many of our closest European allies don’t shiver through the winter. Over twenty countries are heavily reliant on Gazprom’s services.
Source of image: Morgan Stanley
In short, a big chunk of Europe gets all of its natural gas from Gazprom, and the continent as a whole is fully reliant on the Russian giant.
I wouldn’t be interested in Gazprom if shares of the company were not shockingly inexpensive. And that’s what Gazprom currently offers.
To put size and price into perspective, let’s compare them to the largest western energy company — Exxon Mobil (NYSE: XOM). It becomes strikingly evident how cheap Gazprom shares truly are.
In 2013, Exxon produced 5.3 million boe/day, which is slightly less than two thirds of the 8.3 million boe/day that Gazprom produced. All production isn’t created equal of course. A greater percentage of Gazprom’s production is in natural gas, while Exxon’s production is more heavily weighted to oil. So while Gazprom had more production, the actual net earnings of each company in 2013 were very similar at roughly $32 billion.
Despite having very similar earnings, Exxon has an enterprise value (market capitalization plus net debt) of $440 billion, while Gazprom has an enterprise value of $131 billion — one-third of Exxon’s. And on a price to earnings basis Exxon trades at 13 times while Gazprom trades at a shockingly low 2.5 times.
That basically means that as an investor you can buy $1 worth of Exxon’s earnings for $13 or pay $2.50 for $1 worth of Gazprom’s. The firm’s stock price could double and its price to earnings ratio would still not be even half that of Exxon’s.
If there wasn’t fear surrounding Gazprom the share price would be two or three times where it currently is. On top of that, Gazprom is paying investors a 5% dividend yield to wait.
So Russia may be full of corruption, but the truth is that dominant companies like Gazprom aren’t going anywhere. I believe sentiment about Russia will lessen, in months to come, and even a modest price to earnings valuation increase would make this a rewarding investment.
Don’t get me wrong, there is plenty of hair on this dog. The company is run by cronies of Putin, a dictator who is not afraid to do whatever he wants. But that’s what makes the stock so cheap.
Is this a comfortable investment? Certainly not. But the best investments seldom are. I think Gazprom’s share price could double quite easily while, at the same time, it’s hard to see shares going much lower from here.
Risks to Consider: There is political risk involved with owning anything in Russia, and literally anything is possible. Gazprom also carries with it commodity price risk.
Actions to take –> Buy shares of Gazprom (OTC: OGZPY) while there is blood in the street, and enjoy the dividend while you wait for Russian stocks to come back into favor.
This article originally appeared on InvestingAnswers.com: This Dominant Global Company Is Selling For Cheap
P.S – The bottom line is that if you’re looking for higher yields, then it’s time to start looking at foreign markets. Consider this… Out of 118 companies that pay dividend yields over 12%, 93 of them are located outside the U.S. To see the list of these high-yield stocks, or to learn more about investing in international dividend payers, follow this link.
Corporate America’s “wealth giveaway” continues.
Ever since America’s largest corporations hunkered down and began hoarding unprecedented amounts of cash to protect themselves in the aftermath of the 2008 financial crisis, investors have been hounding companies to put that money to work.
Fortunately for investors, companies have responded. But not in the way you might expect.
You see, rather than putting their cash to work through expanding product lines, opening more stores and investing for growth, many large companies have been rewarding shareholders through record amounts of dividends and share repurchases.
For the most part, this is good news for investors. But there’s a hidden element to share about buybacks that you need to be aware of… because behind the scenes some companies are actually using this effective tool to erode shareholder wealth.
Let me explain…
As we’ve pointed out several times in StreetAuthority Daily (here and here), share buybacks are clearly in style. Corporate America uses this technique to boost stock value to reward shareholders, and it is being favored even above dividends.
In fact, since 2009, the largest 500 companies in America have increased buyback spending by 245% — compared to just 60% growth in dividend payouts since then, as you can see in the chart below.
And this buyback trend isn’t slowing down. In the first quarter of 2014, S&P 500 companies spent a whopping $159.3 billion buying back shares of their own stock. That’s nearly twice what they spent on dividends and just below the $172 billion high set in Q3 2007 before the financial crisis and market crash.
This isn’t a bad thing — share buybacks can be one of the single most effective value-boosting measures a company can take to reward shareholders.
As Nathan Slaughter — our resident expert when it comes to buybacks and income investing — explained in an earlier issue of StreetAuthority Daily:
|While they aren’t necessarily as instantly gratifying as a cash dividend, stock repurchases often hold more value for shareholders.
You see, when a company buys back its own stock, it effectively reduces the pool of shares available.
Think of it in terms of your share of a company’s earnings. If you own 10% of a company that earned $1,000, your share of earnings would be $100. But if that company bought back half of its shares, your portion of the earnings would double to $200.
In other words, if you’re invested in a company that reduces its total share count through stock buybacks, your shares become more valuable. And more valuable shares typically translate into stock gains. (Nathan shows several examples of this in his latest “Total Yield” research.)
But be warned: Just because many large U.S. companies have been repurchasing shares doesn’t mean they all have the best of intentions for their shareholders.
There’s a buyback trick that large corporations have been trying to pull on investors simply to make their stock look good in the headlines… with the sole intention to luring money from less-informed investors.
It’s a type of “window dressing” on financial statements that could prove to be dangerous for shareholders down the road.
Buybacks boost a company’s earnings per share. So, many large companies with stagnant or falling revenues in previous years have been using share buybacks to inflate their profitability image.
Take International Business Machines (NYSE: IBM) for example. The legendary company has been the poster boy of buybacks for years now. Since 2010, IBM has purchased 200 million of its own shares, shrinking its count a whopping 16% from 1.29 billion shares to 1.08 billion shares today.
But at the same time, the company’s annual sales have stayed flat over the past four years. In fact, the company’s revenue over the past 12-months are actually lower than they were in 2010 — $98.8 billion now compared to $99.8 billion in 2010.
The value added per share from these buybacks have no doubt made some shareholders happy, at least for now. But it remains to be seen if investors will remain optimistic with large companies like these that aren’t actually growing their top lines — buybacks or not.
Nathan also recently shared another story involving the parent company of job-hunting website Monster.com — Monster Worldwide (NYSE: MWW). One of his readers was attracted to the stock, noting that the company has bought back 25% of its own shares over the past year.
But as Nathan explained to his readers, it’s about far more than just buybacks:
|Once upon a time, Monster was a disruptive force. Millions of jobseekers and recruiters relied on the firm’s popular website to peruse job openings and fill positions.
But something clearly sidetracked the company’s growth plan and sent it careening into a ditch. You’ll note that the stock, which peaked during the 2000 dot-com mania, has since lost more than 90% of its value. That drop coincides with a stunning deterioration in traffic, sales and other key business metrics.
Revenues have plummeted to just $800 million last year from $1.3 billion in 2008…
Nathan gives a parting word of advice: “I’m reminded of the words of Warren Buffet that turnarounds seldom turn… stock buybacks could help bail out the sinking stock, but ultimately that won’t matter if the craft isn’t seaworthy.”
Bottom line, always remember that buybacks are great, but only if they come from a company that has a growth plan and is ultimately enhancing shareholder value — and not simply trying to attract the attention of foolish investors that follow flashy headlines.
Shares of Micron Technology (NASDAQ: MU) have been under pressure during the past few weeks, which puts the stock in an excellent position for us to set up an income trade using our put selling strategy.
For the past 18 months, MU climbed steadily — in line with its peers. Since the beginning of 2013, the PHLX Semiconductor Index (SOX) gained more than 55%.
The group's advance has been fueled by a steady improvement in the technology against a backdrop of an economic recovery and growth for the global economy. In particular, the creation of new DDR4 memory modules has caused a stir as these drives are reportedly twice as fast as their DDR3 predecessors and use 30% less power. This breakthrough is part of what analysts are looking at to help fuel future growth for Micron.
?Unfortunately for shareholders (but fortunately for us), MU sold off in July. The pullback was largely due to competitive issues with Samsung, which made a surprise announcement that one of its new manufacturing lines would be used to produce DRAM chips, raising supply concerns.
Of course, when greater supply hits the market, prices are expected to decline. Analysts worried that Micron could struggle with less pricing power, thus experiencing tighter profit margins. However, Micron's commitment to the DDR4 technology should allow the company to rely less on the DRAM market and potentially expand profit margins by being one of the few offering this advanced technology.
After pulling back from a high of $34.85 to a recent low of $29.38, MU appears to have found support and may be ready to rally. Considering the fact that the company has maintained a long-term bullish trend, momentum investors are likely to give MU the benefit of the doubt for now and buy the dip.
This presents us with a nice income opportunity to sell out-of-the-money put options. Even if the stock closes below our strike price, we will be left holding shares of a leading semiconductor company as it rolls out an exciting new technology.
Today, I want to sell the MU Sep 30 Puts for a limit price of $1.10. By selling these puts, we agree to buy 100 shares of MU per contract at the $30 strike price provided the stock is trading below this level when the puts expire on Sept. 19.
Since MU is currently priced near $30.70 and the supply concerns are already known, it seems unlikely the stock will fall much further. So the probability of us being required to buy MU is relatively low.
Since we are receiving $1.10 per share ($110 per contract) for selling these puts, our net cost will be lowered to $28.90 per share ($2,890 per contract). This is the amount of our own capital (along with the $1.10 in option premium) that we will need to set aside in case shares are assigned.
When calculating the rate of return on this trade, we divide the $110 in income by the $2,890 in capital we set aside for a 3.8% gain in 38 days. This nets out to 37% a year, which is very attractive as far as income trades are concerned. And given the fact that the market has already priced in the DRAM supply concerns, it appears the risk for this trade is relatively low.
With a low level of risk, a strong long-term outlook for this company and the technology it is producing, and the global demand for memory in conjunction with sales of smartphones, tablets and computers, this trade gives us two strong potential outcomes. Either we will be able to generate a 37% per-year rate of return, or we will be able to pick up shares of a strong memory producer at a significant discount to the current price.
Note: My colleague Amber Hestla has closed 52 straight winning trades using this strategy. You can see her entire track record and learn exactly how you can make the same winning trades yourself by following this link.
This has been a bad month for Dan Hesse. The sharp plunge in Sprint (NYSE: S), which wiped out more than $10 billion in market value over the past month, cost him his job as the company’s CEO. And this embattled former executive isn’t alone.
Dozens of other companies saw their shares plummet over the past month in the face of dismal quarterly results and other setbacks. You can expect to find more executive departures in many of the upcoming board meetings — especially at firms where problems surfaced during Q2 and will likely heed the call for a major business overhaul.
Yet, the outlook for some of the companies with falling stock prices doesn't look so bleak. A select few possess the ingredients for a solid snapback in coming months, easing the pressure on the embattled management teams. Here’s a look at three stocks that plunged at least 25% over the past month, but now appear poised to make up for lost ground before the year is out.
1. Insmed (Nasdaq: INSM)
This biotech stock had been building an impressive stock chart. It has set higher highs and higher lows for nearly a year as investors anticipated fast-track approval for the company’s new product, Arikayce. Yet in early August, the FDA told Insmed that it would need to provide more extensive testing data before receiving approval.
The news sent shares plunging right back to levels seen when I profiled the company roughly a year ago on our sister site, ProfitableTrading.com. As I wrote then, “Insmed has developed Arikayce, which is an inhalable antibiotic that brings medicine right to areas where lungs are infected.”
The good news: there is no reason to believe that Arikayce won’t eventually be approved in the United States. The better news: European approval for Arikayce may come before the year ends. Still, the setback is a clear negative, recently forcing the company to raise more money to complete further testing. With those negative catalysts now behind Insmed, shares are likely to move back into the mid-to-upper teens as the eventual U.S. approval of Arikayce comes back into focus.
2. Maxwell Technologies (Nasdaq: MXWL)
That revenue ramp will have to wait. Maxwell recently told investors that key customers were slow to place orders and that sales are expected to fall by 10% this year. Analysts expect a double-digit rebound in sales growth next year, but this is obviously now a “show-me” stock.
The reason to keep tracking this stock — which plunged 33% in the past month — is that ultracapacitors may play a significant role in the next generation of electric cars and buses. And Maxwell, after investing huge sums in R&D in recent years, is the best-positioned supplier for that trend.
3. SkyWest (Nasdaq: SKYW)
Serving as a regional air carrier is a tough business these days. Traffic is mostly derived from a
From this came an unusual outcome: shares now trade for around one-third of its tangible book value. In fact, the company’s cash balance is equivalent to its market value, which means that the fleet of airplanes that it owns, which are carried on the balance sheet for more than $2 billion, are assigned zero value.
As long as bankruptcy isn’t a concern, which it is not in this instance, then SkyWest merely needs to restructure its operation to shed money-losing routes and focus on money-making routes. And that is exactly what management is doing. It’s unclear when this stock will rebound. Investors likely need more details around the carrier’s retrenchment and path back to profitability. But no matter the timetable for a turnaround, this asset play is now too compelling to ignore.
Action to Take –> As Warren Buffett and others consistently note, you can make great profits on stocks when they are hated, and these three firms surely are. But they are each facing a better year in 2015, which should set the stage for a second half rebound in 2014.
Wouldn't it be nice if investing were as easy as buying a stock, forgetting about it and reaping all the benefits? My colleague Dave Forest was so intrigued by the idea that he found a group of companies that fit those criteria. These are world-dominating firms that pay investors a fat dividend, dig a deep moat around their business to fend off competitors and buy back massive amounts of stock, boosting the value of remaining shares. They're rock solid companies that you can buy, forget about and hold "Forever." To learn more about Forever stocks, click here.
With the market getting knocked around more this year, investors are understandably on edge.
A recent American Association of Individual Investors (AAII) survey found the highest level of investor pessimism in nearly a year, with 38% of respondents saying they were bearish and 31% being bullish. The last time bears outnumbered bulls by such a margin was in late August 2013, according to the AAII.
But why shouldn’t investors be in a sour mood, with global tensions risings and widespread calls for a market correction? These are just the sorts of things that can take the wind out of the market’s sails.
Nobody needs that, especially retirees. With the market and economy so iffy, how are they supposed to generate the equity returns necessary to sustain them during a phase of their lives that could last many years, even decades?
Of course, they’ll need reliable dividend-paying stocks, but now more than ever it’s crucial not to pay too much for such investments. Because if there is a big correction, the loss of principle on overpriced shares will be all that much greater — and retirees certainly don’t need that, either.
What they do need are stocks with generous, reliable payouts and attractive valuations that provide extra downside cushion in a big selloff. Here are three such stocks every retiree should consider for the equity portion their portfolio.
Sanofi (NYSE: SNY)
Recent price: $52.70
Per-share dividend: $1.91
Forward P/E: 13.5
France-based Sanofi is the world’s fifth-largest drug company by sales, which have averaged $44.8 billion a year for the past five years. The firm has a wide portfolio of medicines — such as Docetaxel for cancer, Allegra for allergies and many vaccines. SNY's biggest product is its branded insulin Lantus with sales approaching $8 billion a year. SNY also has an animal health segment with $2.7 billion in annual sales.
The firm’s dividend has been trending upward for a decade and is now more than three times 2004’s payout of $0.58 a share. For shareholders, that’s a raise of about 13% a year, and SNY is quite capable of delivering comparable dividend growth in the future.
With 2.62 billion shares outstanding, the firm’s annual payout currently totals $5 billion. Yet it has current assets of $32 billion, including $11.3 billion in cash. Free cash flow has averaged $9.5 billion a year for five years now, and net income typically well exceeds $5 billion annually. With Lantus as a top insulin brand, a strong pipeline (which includes the cholesterol drug alirocumab), and projected earnings per share (EPS) growth of 9% a year, SNY should have no problem generating more than enough liquidity to maintain attractive and rising payouts.
Although the stock is trading for 27 times trailing earnings, it’s very attractively priced on a forward basis because of consensus estimates for EPS of $3.88 next year.
Lockheed Martin (NYSE: LMT)
Recent price: $169.29
Per-share dividend: $5.32
Forward P/E: 13.7
A dividend of more than $5 a share is pretty uncommon, but Lockheed Martin can comfortably afford this. Its present payout ratio is only 55%, leaving ample room for more raises in coming years (the firm has delivered increases every year for over a decade).
Investors may need to temper their outlook for the rate of growth, though, as LMT likely can’t keep up the 21%-a-year pace it logged from 2008 through 2013. With the U.S. government as by far its largest customer, the firm will find it difficult to escape the effects of the nearly $1 trillion in defense cuts scheduled to occur during the coming nine years under the so-called sequester.
Most worrisome would be big order cancellations for the aeronautics segment’s state-of-the-art F-35 fighter widely seen as LMT’s key revenue source at 16% of net sales. Government budget cuts will also present major obstacles for the other four business units — missiles and fire control; mission systems and training; information systems and global services; and space systems.
However, LMT is moving to reduce its dependence on the U.S. government by seeking more international business, a task Uncle Sam is simplifying by easing restrictions on weapons sales to foreign customers. One of LMT’s latest foreign buyers is Australia, which recently announced an order for 58 F-35s at a cost of $11.6 billion.
Because of these and other diversification efforts, analysts see LMT increasing EPS by 7.7% a year through 2019 — only slightly slower than the 8% growth rate of the past five years. Assuming the same 55% payout ratio, this suggests LMT’s dividend could climb to $7.72 a share within five years.
Total SA (NYSE: TOT)
Recent price: $64.08
Per-share dividend: $3.35
Forward P/E: 10.1
Now is an especially good time for dividend seekers to invest in this large, integrated French energy firm, which has annual sales of $234.6 billion. That’s because Total is scaling back a costly phase of capital spending averaging about $30 billion a year for the past few years.
The spending has been for a good purpose — funding new oil and gas projects to help drive future growth. One such project, expanded development of Total’s Laggan-Tormore deep-water assets west of the U.K.’s Shetland Islands, could add more than 65 million barrels of oil equivalent (BOE) to proven reserves, management estimates. The firm also plans to spend hundreds of millions more to continue its push into South Africa, an area with vast shale gas reserves.
Still, with major capital spending reductions planned and new projects set to bear fruit during the next few years, Total should soon see cash flow spike substantially. For instance, Morningstar analysts estimate operating cash flow will climb to $31.5 billion in 2018 from $25 billion this year, a 26% increase. This should help support a dividend growth rate in the mid-single-digit range in coming years, these analysts say.
Risks to Consider: Whereas LMT will be contending with enormous military spending cuts, Total is vulnerable to falling energy prices. Sanofi may soon see a reduction in revenues from its blockbuster Lantus, which is scheduled to go off-patent next year.
Action to Take –> Sanofi, Lockheed Martin and Total are three of the best dividend opportunities available to retirees right now. They're all cheap on a forward basis and they all yield more than 3%. What’s more, they’re all capable of overcoming the obstacles I’ve described and remaining the types of reliable, generous income payers retirees need.