Wednesday, October 31, 2012

What Makes the Perfect Stock? Five Key Components.

There are a lot of different factors that combine to make the perfect stock, and even then, there is no guarantee of success. Nonetheless, this article will try to identify some key components every investor should consider when hunting for the next money-making opportunity.
What to look for in your next stock investment?
1. Growth: Healthy growth in revenue is a good start for any quality investment. Preferably, a rate of 15% over the last five years would be ideal, but sometimes there may be glitches along the way due to recessions and business restructuring.
2. Profit Margins: How much money the company actually earns in profit for each dollar the company generates in revenue. Somewhere in the range of 15% or more would be healthy, and provide some cushion for pricing pressure and new competition in the market. Some businesses, like grocery stores, however, have chronically low profit margins, which is evidence of stiff market competition.  
3. Balance Sheet: Essentially, the more money the company has borrowed, the less of a stake in the company its shareholders have should things turn south. Try to find a company that has a lot of assets compared to its liabilities. If a company has no long-term debt, that would be ideal, but of course this is rare. A debt-to-equity ratio is often utilized in this area, and if so, try and keep it below 50% debt.
4. Valuation: This is generally a comparison of the price of the stock in relation to its earnings. Anything over 20 times a 3-5 year earnings average is too expensive for most businesses, and under 15 times would be best as long as the company displays other signs of health, like those mentioned above.
5. Dividends: A dividend is how much money the company returns in cash to its shareholders. Dividends vary widely, and it is important to remain principled in this area. It is easy to go chasing stocks that do not pay a dividend, but it can become dangerous as dividends can be used as a good indicator of overall financial health. Ideally, a dividend of over 2% would be considered healthy.
Happy Investing Intelligent Investors, and please remember to share this blog with others!

Sunday, October 21, 2012

Why Gold? Inflation and the Dollar.

During economic uncertainty it has become essentially economics canon to purchase and stockpile gold as an investment or hedge. Why is this the case? Clearly, gold has little or no practical uses. Of course, it used as jewellery, and has a number of uses in the field of electronics manufacturing, but not nearly enough to support present-day production and supply. 

Prior to Nixon removing America from the gold standard in 1971, the U.S. dollar was pegged at $35 per ounce of gold. After 1971, the U.S. dollar essentially became a free-floating currency backed by nothing but our imagination. To help hedge against this uncertainty, it became increasingly important for a lot of investors and wealthy individuals to store a certain amount of their savings or reserves in the form of gold to prevent being stung by a collapse in the U.S. dollar. 

Currently at $1721, gold has continued its stratospheric move upward, primarily due to perceived instability and over-supply of the U.S. dollar. So why do people buy gold? They expect inflation, or a general decline in the purchasing power of their currency. One ounce of gold, for instance, could buy a fine suit in 1971 and in 2012, but in dollar terms, the same suit would have increased in cost from less than $100 to $1700... If someone had held their reserves or savings in cash during this period, their buying power would have essentially completely collapsed. If, therefore, you have a reasonable amount of savings, you do not want to hold it in cash or low-interest savings accounts for any extended period of time! It is almost guaranteed to lose its value.

Some other more generalized reasons for why people choose to invest in gold are as follows:

  • It is durable - it doesn't corrode.
  • It is divisible and homogeneous - you can break it up into smaller amounts.
  • It is easily recognisable and hard to counterfeit.
  • It has a stable supply because it is hard to get out of the ground.
  • It is portable.
  • It has a strong history accepted as a medium to facilitate exchanges. 
Keep in mind, however, that gold does experience wild swings in popularity amongst both central governments and investors, and thus can leave even astute and Intelligent Investors in substantial negative territory for some time in dollar terms. So buying gold is not a sure-fire way to curb against inflation, but included in a basket of resources it is a nice start.

Cheers and happy investing!


Saturday, October 20, 2012

HP (NYSE:HPQ): Un-Loved and Under-Appreciated.

Investors have driven shares in HP down over 41% this last year, and down over 71% in a five year period. The turnaround plan under Meg Whitman seems to be going nowhere, and investors are concerned that a trend toward tablets will destroy personal computer sales. We are seeing this same concern drive down shares in both Intel and Microsoft as well recently.
There are, however, some things to love about Hewlett Packard:
1) The company is expected to earn over $7 Billion in profits next year. With a market capitalization currently of about $28 Billion, that represents a multiple of only 4 times! Paying four times earnings for a company represents an earnings yield on your investment of 25%! Not bad for a brand-name technology titan that definitely has the balance sheet to stay competitive for some time to come.
2) The company recognizes that it is facing problems, is not in denial, and is actively engaging in cost-cutting and turnaround efforts.
3) The company pays a dividend of 3.65%. In today's low-rate environment a dividend over 3% represents a reasonable return on your savings, and since the company is currently trading at a low multiple to next year's earnings, there is up-side potential in the stock as well.
4) The company is #1 or #2 in a wide number of product markets. Though many think of HP as primarily a PC manufacturer, it has leading positions in servers, storage, networking, software, systems management, and printers as well. Essentially, the company began diversification efforts long-ago, and they have paid-off. As PC sales decline, other units of the company should be able to pick up the slack.
Of course, no technology investment is without a higher degree of risk, but HP is definitely worth a look for the Intelligent Investor.
Cheers, and happy investing!

Monday, October 1, 2012

Tim Horton's Rises in Zagat Survey. Now 5th in the United States. Expansion Continues.

Tim Horton's is now listed as one of the best fast-food restaurants south of the border. Having put itself up against stiff and entrenched competition from global super-powers, such as Starbucks and McDonald's, Tim's has proven itself to be a formidable Canadian competitor.

Last year, Tim Horton's was ranked 22nd in the same survey, so this represents a small victory for the Canadian chain. Brand recognition is still nowhere near as strong as it is north of the border, but it is successfully using its Canadian stronghold to pour resources into the American market.

There are now over 700 Tim's locations in the United States, and another 80 to 100 Tim Horton's stores will be added in 2012.

Intelligent Investors, be sure to keep a pulse on Tim Horton's shares as they further expand in the United States. The American market is huge and has lots of opportunity.



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