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Six Things That Have Completely Changed for Investors

StreetAuthority — Sat, 07 May 2011 10:00:00 EST

Filed under: General Motors, Best Buy, Market News, Economic Recovery, China, Unemployment, Computer Industry, Economy, Investing

By David Sterman, StreetAuthority

Friday's employment report has created an even hazier backdrop for stocks. Recent economic data showed an economy starting to cool, but with 244,000 jobs created in April -- the best showing in 11 months -- this expansion still may have legs after all. The key distinction: the economy's areas of support are not what you would have expected a few months ago.

In recent weeks and months, investors have been trying to assess stocks in the context of a sharp spike in commodities -- from oil to silver to wheat. Only recently, we've seen how the massive flooding in the Midwest is leading to forecasts of sharply falling farm output and eventually, higher food prices. Consumers didn't need to hear that while gasoline prices were eating a hole in their pocketbooks.

Despite that, stocks were able to rally through much of April, thanks to a declining dollar that was boosting prospects for U.S. blue chips. In effect, the domestic economic picture looked troubling, while the rest of the world promised to provide at least a decent tailwind.

That scenario now looks backward, as former global growth pillars are starting to wobble. Efforts to slow the Chinese economy may be taking effect, as a range of data points in that all-important economy imply that growth in 2011 may move down to the mid single-digits from a seemingly never-ending run of nearly double-digit GDP growth. Brazil is trying to curb inflation, efforts of which have not always yielded soft landings. And in just a few trading sessions, high-flying commodities such as silver and oil have sharply pulled back while the dollar has begun to rebound. Many are suddenly shifting their sights back to the United States as an engine of growth. Friday's jobs report simply underscores that notion.

GM's (GM) first-quarter results help tell the story. The automaker earned $908 million from its foreign operations a year ago. That figure dropped to $480 million in the recent first quarter. The company's chief financial officer, Daniel Ammann, told investors that GM's growth rate in China "is at 10% to 15%, down from the 40% to 50% we've been seeing." Profits also fell sharply in South America from a year ago and Europe remains unprofitable. Here in the United States, GM is doing quite well: Earnings (before interest and taxes) at the North American division were about $1.3 billion, $100 million higher than a year ago. Merrill Lynch thinks North American earnings before interest and taxes will average around $2 billion for each of the next three quarters.

What It Means

For investors, the question is whether today's jobs report (and the subsequent rally after four straight down sessions) means it's time to keep fully-exposed to the market. The answer is a qualified yes (I never like to be fully exposed, as it's nice to have cash set aside for major pullbacks that create value). Yet even as it pays to stay invested, the investing themes are now changing.

These changes include the following:

1. Airline stocks could really move into favor if oil keeps pulling back and U.S. job creation remains respectable. Oil has quickly moved from $114 last week to just under $100 late this week. It's no coincidence that the Amex Airline Index (XAL) has surged 10% since April 19. [My colleague Ryan Fuhrmann profiled airlines a month ago.]

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2. In a similar vein, the automakers such as GM and Ford (F) have been penalized for the fear that $4 gasoline will hurt truck sales. If gasoline falls back to $3.50 in coming weeks, then these stocks could get a relief rally. The same logic applies to auto-parts makers. American Axle (AXL), for example, trades for just six times projected 2012 profits after a recent slide. Shares of RV maker Winnebago (WGO) took a big hit from rising oil prices. Might the converse also be true?

3. You can't ignore retail. Consumer spending remains subpar, but if the private sector can create a million more jobs between now and year's end, then spending is bound to get a boost. Big retailers don't appear especially cheap, so I'm focused on the names that have had poor execution up until now such as Best Buy (BBY), and Aeropostale (ARO), along with small caps Casual Male (CMRG) and CitiTrends (CTRN).

On the downside of the ledger:

4. Commodity plays may have further to fall until they are bargains -- especially if concerns build that the Chinese economy is slowing. For example, I suggested in mid-April that shares of silver miner Couer D'Alene Mines Corp. (CDE) were due for a pullback. Shares have dropped 20% since then and will soon enough represent a bargain. But we're not there yet.

5. You also need to avoid the temptation to try to spot bargains in Japan. The country's blue chip exporters are dealing with the effects of the continued plant shutdowns as well as a super-strong yen that is making companies' exports less competitive. I hate to be alarmist, but Japan may be headed for a deep financial crisis if its economy doesn't generate the growth required to tackle its massive government debt.

Any such crisis in Japan, which holds a good chunk of the United States' debt, could create indigestion for U.S. stocks.

6. A dimming outlook for Europe and Asia could also create headwinds for high-tech companies, many of which derive a substantial amount of profits from foreign markets. As this chart shows, the iShares DJ Technology Index (IYW) has benefited from expectations that global economic growth will take off in the periods ahead.

It's not time to be bearish on tech stocks, but many of the biggest tech firms such as Oracle (ORCL) will be hard-pressed to generate double-digit profit growth in coming years -- unless they pull off major acquisitions or buy back a lot of stock. You want to see this sector newly-cheapened before jumping in again.

Action to Take: A little-noted item in the jobs report bears watching. The headline figure showed that 244,000 jobs were created, which is even more impressive when you consider that government payrolls continue to shrink. Job creation in private sector was really robust: 268,000 private sector jobs were created in April -- the best monthly showing in more than five years. That figure may cool in coming months, but as long as private-sector job creation stays above the 200,000 monthly mark, then the economic upturn will become self-reinforcing. Dropping food and gas prices could help really brighten the outlook for the U.S. consumer in coming quarters. And if you keep the six points I mentioned above in mind, you should be well-positioned to avoid pitfalls and profit accordingly.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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This 'Fear Trade' Could Bring You 87% Gains

StreetAuthority — Wed, 27 Apr 2011 07:00:00 EST

Filed under: Investing Basics, Market News, Federal Reserve, Bonds, Economy, Investing

By Deborah O'Malley, StreetAuthority

With a slew of bad news recently hitting the streets, it appears fear is on the rise.

Unemployment rates remain high at 8.8%, housing sales are still sluggish and, despite an already weak U.S. dollar, the Federal Reserve is expected to keep interest rates near zero -- making the currency less attractive to outside investors.

On top of all this, on April 18, one of the most recognized credit-rating agencies, Standard & Poor's, lowered its U.S. debt outlook from "stable" to "negative." The downgrade means an increased likelihood the United States could lose its coveted "AAA" credit rating within the next two years.

The outlook was lowered because S&P believes the U.S. government isn't taking aggressive-enough action to reduce its massive debt load, especially in comparison to other debt-ridden countries.

Of the 17 countries deemed by S&P to have "AAA" status, the United States is now the only one to have a negative outlook -- a trend that could very well buck.

The notion that the United States could lose its credit rating has all-around negative economic implications. For starters, it means the cost of borrowing could increase. But worse yet, the U.S. dollar could lose its status as the world's reserve currency, causing a potential economic breakdown.

Fortunately, as a trader, there are ways you can benefit from these worries. As billionaire value investing guru Warren Buffet famously said, "be fearful when others are greedy, and be greedy when others are fearful." And by all accounts, now is a great time to be greedy -- with a reliable trading instrument.

But don't just take my word for it. Look to the Volatility Index (VIX) to make the call -- one of the best ways to assess objectively market fear levels.

The Volatility Index is calculated by the Chicago Board Options Exchange. The CBOE takes into consideration a number of trading factors to determine the market's volatility level. In essence, low volatility typically indicates traders feel calm and bullish about the market. But when bad news pushes the market lower -- as is currently happening -- trader fear tends to increase, along with bearish sentiment.

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To determine when market complacency and fear are at their height, fixed levels can be assigned to the Volatility Index (although these levels are historical and change from time to time). Generally, if the index is below 15, fear is relatively low. As the index rises toward 30, fear is increasing. And anything above 45 shows a strong level of fear.

After hitting a two-year low of 14.30 during the April 18 trading week, the index is currently hovering around 15-19. But the index appears as if it might rise, due to the recent S&P downgrade and other events triggering perceived economic instability.

Because the VIX cannot be directly traded, one way to profit from rising fear levels is to play the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ).

This ETN (exchange-traded note) targets mid-term four-, five-, six- and seven-month VIX futures contracts and appears to closely mirror the activity of the VIX. So when the VIX rises, so does VXZ, and when the VIX falls, so does VXZ.

VXZ currently trades for about $53.50 and carries an expense ratio 0.89%. The security has a market cap of about $5.6 million.

Technically, VXZ appears to be on the rise.

The index peaked at $104.32 in May 2010, following the "Flash Crash," which caused volatility and fear levels to spike.

As 2010 progressed into what many perceived as a bull market, fear subsided, causing the security to steadily drop to a two-year low of $51.61 in early February 2011.

Touching support near this level, the security quickly rose to a height of $65.04 in early March, as tensions in the Middle East escalated, causing fear to rise.

Testing a shelf of resistance near $65, the security fell to around the $55 as traders tuned away from the Middle Eastern conflict.

However, during the April 18 trading week, on news of the S&P rating downgrade, VXZ jumped once again -- this time breaking resistance marked by the Intermediate downtrend line. The break of this trendline is significant, as it suggests the security could once again be on the rise.

VXN has pulled back during this April 25 trading week. But if the security again tests and breaks the trendline, it could very well move to nearby resistance at $60.05. If VXN were to test and break nearby resistance at $60.05, the security could easily soar to around $75 before encountering any substantial historical resistance.

The major downtrend line currently intersects at this level. Should VXZ break the Major downtrend line, the security could rocket to the $100-range -- a level it hit nearly a year ago.

If the security were to once again reach the $100-range, traders tuning in at current levels could make a hefty profit.

Action to Take: Recent economic events, especially the S&P rating downgrade, appear to be reigniting fear. The VXZ security provides a great instrument to potentially profit from rising fear levels. The recent pullback provides an attractive entry point. Traders taking a position now could potentially make returns of up to 87%.

Disclosure: Neither Deborah O'Malley nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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This IPO Could Be The Next Exxon Mobil

StreetAuthority — Sun, 24 Apr 2011 08:00:00 EST

Filed under: Energy, Goldman Sachs, Green, Financial Services, Oil & Gas Industry, Investing

By Andy Obermueller, StreetAuthority

Big Oil is accustomed to a high return on investment. It makes some sense. After all, it costs millions to drill a conventional oil well and hundreds of millions to drill offshore, with no guarantees. With that in mind, it would be foolish to shoulder that amount of risk without commensurate reward potential.

That means the majors don't invest a dime without the promise of $1, or even $10. And the fact that Big Oil is putting a serious chunk of its capital to work in alternative energy implies that major oil companies think they can get a similar rate of return with "green" energy as they do with good ol' crude.

But let's cut to brass tacks here and just ask the question: "Really?" Can the world's leading petroleum companies honestly expect biofuel to mirror the same sorts of returns that a gusher can produce?

Exxon Mobil (XOM) thinks it can.

The company bet $600 million on a form of biofuel that few people have even heard about. It's not based on conventional agriculture such as corn, but on so-called "micro" crops, which is a nicer way of saying pond scum. That's right, Exxon is betting big on nothing more than algae.

This Exxon business unit -- run, incidentally, by one of the most recognized and influential scientists in the world -- isn't something ordinary investors like you and me could get a piece of. And that's too bad, because I think, along with Exxon, algae could indeed morph into a multitrillion-dollar-a-year industry.

The good news is that Exxon isn't the only company working on this technology. And now, one of the private companies I mentioned in my Feb. 22 issue of Game-Changing Stocks has announced plans to go public.

Super Algae and a $3.1 Trillion Ppportunity

Solazyme owns a unique process when it comes to producing biofuel. Instead of allowing the algae to make their own food through photosynthesis -- that is, harnessing the power of the sun to turn CO₂ from the air into sugar to feed itself -- Solazyme turns off the lights. So instead of expending energy making sugar from sunlight and CO₂, Solazyme tricks the algae by growing them in total darkness. The algae eat sugar that other plants already have converted. All of the dark algae's energy goes into growing -- fast.

Shutting the lid has other effects, too. It allows Solazyme to put the algae to work in an enclosed and tightly-controlled environment, one that eliminates variables such as temperature, acidity and contamination that can reduce the plant's productivity.

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And what, exactly, is the plant producing? Simply put, Solazyme locks a special strain of algae into a drum, throws in biomass -- that is, high-sugar plant matter -- and closes the lid. Just a few days later, the algae have gobbled up the sugar and the resulting mass of algae can be dropped into a conventional refinery and processed into diesel or jet fuel.

The key here is that it doesn't take a geologic age to produce this oil. It only takes a matter of hours. And the process can be carried out in standard fermentation equipment, commercial space that can be rented from lots of industrial manufacturing companies.

Best of all, Solazyme's special genetically engineered super algae yields much more oil than plain old wild algae. This can be quantified. Wild algae will produce oil with a volume equal to 5% to 10% of the organism's dry cell weight. But Solazyme's super algae produce and accumulate oil that's more than 80% of the dry cell weight. In other words, it's eight times more productive.

The markets for oils Solazyme can make is an astonishingly gigantic $3.1 trillion industry annually. What's more, algae-based oil can be created on an extremely large scale and at an extremely low cost.

Don't miss out on what I'm saying here: This is a legitimate contender in the race to replace conventional crude.

Another fact that will help erase your remaining skepticism:Goldman Sachs (GS) and Morgan Stanley (MS) are the lead underwriters on the deal. We all know they aren't going to take a flyer on anything that's not likely to make them gobs of money.

The biofuel revolution isn't science fiction or just an interesting idea. It's happening -- now. And with this IPO, investors will finally have a chance to get a piece of the action.

Stay tuned for more details about when the initial public offering (IPO) will hit The Street.

P.S. -- I've created a free webcast, 6 Financial Surprises That Will Create Huge Opportunities in 2011, that will give you more insight into the sectors -- like biofuels -- where we're going to see massive investment shifts in the months to come. If you're interested in discovering what these megatrends trends are and how to play them, click here.

Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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Three Reasons to Still Own Gold (or Finally Buy Some)

StreetAuthority — Wed, 20 Apr 2011 16:00:00 EST

Filed under: Inflation, Economy, Investing

By Steven P. Orlowski, StreetAuthority

I recently watched the classic man-eating fish movie Jaws and the latest action in the precious metals space reminded me of the tagline for the film, "Just when you thought it was safe to go back into the water..."

Is it safe to swim in the water? Or is Jaws still lurking out there, the physical embodiment of a financial world gone lethal? Can gold still protect us?

Gold has had a magnificent run during the past 10 years, doubling in value since 2008 alone. Gold has set and broke several new price records, most recently reaching $1,500 per ounce on the Comex division of the New York Mercantile Exchange in Tuesday's trading.

The most commonly-traded gold exchange-traded fund, the SPDR Gold Trust ETF (GLD), followed suit, closing just shy of $146.00 a share, an all-time high. Mirroring these moves was gold's less valuable (and possibly more appealing sibling) silver, which has been hitting 31-year highs almost daily.

Gold "mania" is seemingly at full strength. But questions remain. Is profit taking the next move? What if you are among the majority of investors who have yet to dip a toe into the water? Is it safe to dive in?

Let's look at three fundamentals regarding gold, along with the rational outlook that should correspond with these facts:

1. Inflation

Naturally, I'm not referring to core inflation, also known as the government's consumer price index. The CPI is like the calm surface water that hides the beast beneath.

Headline inflation, which is the measure of the total inflation in the economy, is running very hot. There is increased demand for resources thanks to growing economies worldwide and corresponding shortages developing in food, energy and elsewhere. Gold is benefiting from inflation and there seems to be little reason to expect it to slow down.

Money creation in the United States has excess dollars chasing these aforementioned goods. Some think this is a good thing. Some will argue that the Federal Reserve will eventually sop up the extra liquidity. But the reality is they never really will. The dollar has lost 95% of its purchasing power since 1913, the birth-year of the Fed. I see no circumstances under which the dollar will not continue to fall long-term. It will bounce up now and then, but if nothing else, the past 40 years have cemented the dollar's future -- and the trajectory is to the ocean floor.

2. Demand

From people, institutions and governments -- gold is wildly in demand like the cheesy Jaws merchandise sold during the record run of the movie in the 1970s.

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Faith in virtually all currencies has been shaken, if not destroyed, and will probably never be restored.

The dollar's reserve currency status is threatened. More than threatened, it is visibly on the way out. What was once mere speculation has evolved into blatant measures to see it replaced. It will happen, but it will also take years. When we see countries like Venezuela and China trading with each other without using dollars (or any other currency) the evidence is irrefutable.

We also see many countries increasing their gold holdings (China's has increased from 600 metric tons to 1,054.1 metric tons since 2003), the logical defensive strategy when saddled with hundreds of billions in depreciating dollar reserves: stockpile commodities and natural resources. I give you dollars and you give me gold, oil, or steel -- that's a fine exchange for me.

3. Government spending

The U.S. government is losing its credibility. Speculation that the United States will have its credit rating lowered was fueled this week after ratings agency Standard & Poor's lowered its outlook on U.S. debt from "stable" to "negative".

The United States is the largest debtor nation in the world, nee, in all of human history. Once upon a time, it was the largest creditor nation in the world. In the 1980s, it loaned other countries money, money it really had. Now it borrows massive amounts to service its debt. The nation's well documented entitlement obligations are helping to catapult its annual budget to fantastical extremes.

Action to Take: Keep your gold or buy some.

The facts argue that gold should continue to rise; and not just in dollar terms. Many of these observations can be applied to other countries and currencies as well. I'd love to be optimistic regarding the United States' financial future, but right now things look grim. Jaws is still out there.

P.S.: We found an obscure mining company that tossed back 19% in dividends last year (plus another 34% in capital gains). If you think that's impressive, wait until you see this video...

Disclosure: Neither nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

Steven P. Orlowski is a certified financial planner and a veteran investment adviser. He has helped retire hundreds of people while educating his clients on the methods of retirement income planning, estate planning and investment planning. Steven has expert knowledge of the financial markets -- notably commodities, precious metals and emerging markets -- as well as the domestic economy.

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Move Over Starbucks, Hello Caribou Coffee

StreetAuthority — Wed, 30 Mar 2011 06:30:00 EST

Filed under: Company News, Starbucks, Market News

By Ryan Fuhrmann, StreetAuthority

The life cycle of a company follows four distinct steps. The last two are maturity and decline, and both are generally not the stages when you want to invest. The first is introduction and covers the period when a company is in its start-up phase and progresses to introducing some product or service on the market. The second is the growth stage and is the sweet-spot for investors. This stage covers a period of time when a company is expanding briskly and starts to throw off decent profits. It's also where investors can make quite a lot of money...

Take coffee chain Starbucks (SBUX), for example. The company is still growing in its own right, but shares trade for a lofty price-to-earnings (P/E) ratio over 25 and a free cash flow (FCF) multiple just over 25. After a rough stretch during the credit crisis, Starbucks is again growing briskly, but the rich valuation means much of this growth is already reflected in where the stock price is trading.

Starbucks now boasts nearly 17,000 stores across the globe. In the past 12 months the company reported sales of almost $12 billion, $1 billion in earnings and $1.3 billion in free cash flow. So while Starbucks is highly profitable and still growing respectably, its rapid-growth days are over. The company is well along the growth cycle of development. Additionally, its valuation is rich and high both compared to peers and based on its historical average range between 20 and 26 in the past four years.

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In stark contrast, Caribou Coffee (CBOU) operates a comparatively small amount of stores, 534 to be exact, all of which are in the United States. In the past 12 months, total revenue was just shy of $300 million, even though it has grown by close to 20% annually in the past decade. A small existing store base means Caribou's expansion prospects remain wide open.

In terms of profits, the company has reported cumulative losses of just over $71 million since it was founded in 2002. But Caribou may have turned a corner last year. On sales of $262.5 million, it reported $5.1 million in net income, or $0.26 per diluted share, compared with a $16.3 million loss in 2008, or $0.84 per diluted share. The profit was the company's first since 2002.

Caribou has ambitious targets to increase new store openings to as much as 10% of its total store base annually and projects modest same-store sales growth between 2% and 4%. Much of this growth will stem from franchisees, which leads to lucrative royalty and franchise payments and should allow the company to leverage fixed costs, which means management can grow profits faster than sales.

Based on the $0.26 in trailing earnings, Caribou still trades at a lofty earnings multiple over 37. However, free cash flow came in at $12.6 million, or $0.63 per diluted share. This puts the free cash flow multiple at just over 15, which is quite reasonable in comparison to Starbucks' 25 and also in absolute terms given the growth projections I estimate for Caribou.

Action to Take --> I expect Caribou to continue growing sales at a 20% annual clip. The company has entered a period where it can consistently grow cash flow, which I project to grow 20% in each of the next five years, which, based on my discounted cash flow model, implies the stock is undervalued more than 46% from current levels. Management projects long-term earnings growth of 25% and means my cash-flow targets could prove conservative. Overall, there is much upside for Caribou investors as it continues along the early and middle stages of its growth life cycle for at least the next five to 10 years.

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