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Comments
in the BLOG |
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There were a couple of new BLOGs
for your review this past week. I had to comment on the consistent sell
off in Commerce Planet (OTC BB: CPNE), which appears to have run
its course. On a weekly chart, this stock has been down six out of the
last seven weeks. Absolutely pathetic. Also, Nighthawk (OTC BB: NIHK)
was the subject of some commentary. I believe that sell off has run its
course, and it's time to step back in.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG scrolls down from the upper right hand corner. The most
current journal entries appear on the right hand side of you screen. Check
back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
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New
Ideas |
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This Memorial Weekend's edition contains
some thoughts on the future of large cap stocks being driven up by a return
to the "Old Economy", fueled by Globalization. You really
don't need my help to decide if the DOW is the place to be, but
I have uncovered a few "Old Economy" micros who's business is booming.
The next few ideas will have a common theme: Understandable- understandable
businesses with understandable goods and services. Throwback ideas is where
the action is right now, and I've got two good ones in the works. With
the spring cleaning out of the way, we have made room for some new ideas.
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Dow Headed To
20,000? You Better Believe It! |
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I am so sick of hearing doom and
gloomers whine about inflation, commodity prices, currencies falling apart,
the mythical sub prime mortgage meltdown, collapsing home values, and the
death of the "overleveraged" American consumer. The "experts" have been
forecasting this for years, but so far their dire predictions have been
unmet.
If you don't get what globalization
is doing for the behemoth American companies, you are simply not getting
the way the world has changed. Guess what globalization means to the venerable
Dow
Jones Industrial Family? 20,000 in the next four years. That's
right- I'll say it- 20,000.
Let's look at some key factors driving
the big stocks:
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Valuations/Yields/Earnings:
DOW Currently Undervalued By 25% |
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When comparing valuation, you have
to compare to something. Stocks vs Bonds is time tested. Do you want to
own the most secure corporate bonds on Planet Earth?- you are going to
get a yield of about 5.5% in today's market. Lower interest rates lead
to expanding PEs and higher stock prices.
Now, if you took all the profits
generated by the companies in the DOW and divided by the price,
do you know what your yield is? About 6.5%. That's right: The
DOW's profit percentage yield is higher than the yield on corporate
insured bonds.
Over the past century, the DOW
profit yield has generally been lower than bond yields- about 10 basis
points (1%) on average. This means, just to get back to a normal profit
yield as opposed to bonds, the DOW would have to appreciate 20%
to 25%. Price up, yield down. Down to 4.5%.
Add another 10% per year for
earnings growth, and have the DOW finding its way to 20,000
in the next 4 years, and that's just one metric.
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Globalization
and Earnings Growth |
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Globalization changes the growth
potential picture for DOW companies. How did they get so big in
the first place? Providing goods and services for an expanding North American
economy throughout the 20th Century.
Fast forward to the 21st Century.
There are now about 2 billion new consumers emerging out of the Stone Age
into the world of free enterprise, with credit cards, jobs with benefits,
and prolific consumption. They need cars, homes, clothes, consumer electronics,
and junk food. It's a massive expanding market, and it's fueling the same
old economy names that serviced the infrastructure growth in North America
in the last century.
So, let's look at PE Ratios-
the time tested fundamental metric that every analyst loves. PE Ratios
are determine by dividing the price of a stock by its earnings. Higher
PEs assume higher growth, and greater risk as well.
Over the past 40 years, the DOW's
PE has averaged 14.4%. However, stocks generally support higher PEs when
bonds are high and interest rates are low. It seems interest rates will
remain low for the foreseeable future.
Companies become more valuable when
they have more customer opportunities- larger markets in which to sell
their goods and services. 2 billion more consumers is a lot of new customers-
just ask Caterpillar or Boeing- two old economy companies capitalizing
on globalization.
With interest rates low and likely
to stay that way, Globalization will lead to a new era of PE expansion-
it simply makes sense. Look for the venerable DOW to trade up into
the 18 PE range as it did in the 90's. That gives us another 25%
upside over the next four years.
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Cyclical
Nature |
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On a global basis, it's 1950 all
over again. Highways, bridges, roads, schools, office buildings- they're
being built with local labor, materials from all over the world, and good
old American know how and equipment.
Let's look at history- A look back
at the DOW since the 1950's is revealing. Circled in green is every
multi year pullback. They all led to higher levels. The stock market was
the place to be in the 90's as the wave of technology expansion crested
with the development of the Internet. The pullback since 2000 is the longest
on the chart, which suggests the next move up will be proportionately long
as well.
As we turned the century corner,
the tech Bubble burst, sending the market into a free fall. 911
followed and sent the economy into the toilet.
Condo flipping became the favored
investment for the masses, and the large cap stocks barely traded sideways
for five years. Commodity stocks roared as globalization created demand
for resources.
Now, large caps are coming back.
Old economy companies, fueled by a worldwide environment akin to the US
in the 50's, are moving. As further proof of the undervalued nature of
large caps, giant pools of capital known as "Private Equity" are
being assembled $20 billion at a clip, and simply buying large cap
companies at big premiums to take them private. These investors are not
stupid. They are buying value, and they know it. 12 companies are coming
out of the S&P 500 and going private by year's end.
Another factor limiting the supply
of stock is the roughly $12 trillion going into stock buy backs.
Large caps, flush with cash and looking to get better pricing in the market,
have figured out their shareholders get a better return if they use their
cash for buybacks instead of paying dividends. In a buy back, the shares
are retired, and EPS goes up without any profit improvement, making the
stock more valuable and leading to price appreciation.
Consider this: Warren Buffet,
considered perhaps the greatest long term investor of all time, is buying
railroads. Does it get anymore old economy than that? There were railroads
a century before the Henry Ford's first Model T rolled off the assembly
line in Detroit. DOW 20,000?- You better believe it.
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