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Digging into Last Week’s Sell-Off

May 23, 2017, 1:04 am

With former FBI director James Comey’s Congressional testimony looming, it would not be surprising to see the market panic if anything negative comes out of it. We’ve been stuck in a headline-driven environment for quite some time, and while I know it can be hard to tune out the noise, it’s more important to do so now than ever. I want to help you do that, and a good way to start is by digging deeper into last Wednesday’s sell-off.

While I know the sell-off caught many off guard, there was no real reason to panic. When you take a step back and look at the bigger picture you can see that the sell-off wasn’t nearly as bad as it looked. The market was only 2% off its recent all-time highs, and it had needed to consolidate those post-election gains for some time. The headlines out of Washington may have been the spark, but I believe what we saw was ultimately healthy. There’s simply been too much complacency, especially surrounding tech and small-cap stocks, and last Wednesday brought investors a little closer to earth.

While we may see some additional downside as the market works through things, I believe the S&P 500 will hold its April low of 2,322. The increasingly difficult political situation President Trump finds himself in is clearly something to keep an eye on, but it’s important to keep in mind that earnings are good, the economy is sound and interest rates are low – all of which will help support stocks.

What Wall Street is counting on from the Trump administration is tax reform to give earnings a boost and make current valuations more reasonable, which is still likely. If anything, Republicans may want to push the issue faster to get some relief from the Russian controversy. And even in the most dramatic scenario of President Trump leaving office, I believe a Pence administration would keep tax reform front and center so Republicans can claim a legislative victory prior to the mid-term election.

Remember, stock futures were down sharply when Trump was elected – the Dow initially fell over 800 points – but snapped back quickly when investors realized his pro-growth agenda, especially tax reform, would be a boon to stocks. The market is really pro-growth and higher earnings, not necessarily pro-Trump, and with Republicans still in control of Washington for now, the market can get what it wants.

Overall, stocks remain up for the year, putting the S&P 500 well above its 200-day moving average with significant support between 2,300 and 2,330. It didn’t even come close to those levels on Wednesday, with the low of the day at 2,356.21. And the index started this week off nicely above its 50-day moving average.

Given all these factors, it is especially important that you tune out the noise. And even if volatility does tick up, I urge you to stay calm and stay invested. In the longer term, you’ll be glad you did.

Should You Take a Bite Out of Apple (AAPL)?

May 16, 2017, 10:13 am

Despite continuing to notch new intraday highs, the S&P 500 has been a bit sleepy lately as stock performance has been mixed over the last couple of months. The same cannot be said for the NASDAQ, which has chugged along nicely. Since the previous peak of the S&P, the PowerShares QQQ ETF (QQQ) has been a strong performer as investors chase names like Facebook (FB), Alphabet (GOOGL) and Amazon (AMZN). And with interest rates low, valuations have become a secondary issue and can seemingly be pushed even higher.

The real star of the show has been Apple (AAPL), which is up over 25% since management reported fiscal first-quarter earnings in January. This is an incredible move for a company that became the first to reach an $800 billion market capitalization just last week. Companies that big don’t usually run that fast. Many in the financial media are chalking it up to the growth of AAPL’s services (digital content, Apple Care, Apple Pay) businesses. However, I believe the reason for the rally is largely because of an increased confidence that AAPL will be able to maintain margins on its iPhones, which will likely account for 70% of gross profits.

Despite an 8% sales decline in the September 2016 fiscal year in the absence of a new iPhone, the decline in gross margins (43.2% versus 44.6% last year) was relatively minor. Now, with the company realizing higher sales again and the iPhone 8’s impending release, investors have jumped into the stock as they wait for earnings to move meaningfully higher. Expectations are now for an increase to $8.95 a share this year from $8.30 a share last year, and then to a whopping $10.40 a share in fiscal 2018.

But I don’t think it’s quite time yet to take a bite out of Apple. I suspect questions about margin sustainability will come up again as meaningful improvements to the iPhone are harder to come by. And as for the cash balance, you often hear the number $250 billion thrown around. But more conservatively, I think that number is closer to $91 billion – the amount of current assets and investments less all liabilities. This is still worth $17.50 a share, which is over 10% of the current value of AAPL. However, I do not think it is enough to drive the stock significantly higher over the longer term in the event that companies are able to repatriate cash in a tax reform law and pay it out in a special dividend.

I also think we’ll see a little nervousness in the shares once the next iPhone is released, as the product is already expected to be a huge hit. Any disappointment would leave the stock vulnerable. Given this, I am keeping AAPL on my watch list but am not recommending it right now. That said, I believe that CEO Tim Cook is doing the best he can with a mature company, as its results have been more resilient than many had expected. Should the stock drop to a 12X or 13X PE range again, where margin risk is at least being partially discounted in the shares, AAPL could become a good stock for a value investor.

In the meantime, there are several other great value stocks I just recommended in my Value Authority service. If you’re looking to add more conservative positions with strong margins of safety to help diversify and balance your portfolio amid a choppier market environment, then Value Authority might be the right fit for you. Click here to claim a risk-free trial before it’s too late.

Have You Spring Cleaned Your Portfolio?

May 9, 2017, 10:27 am

With spring comes spring cleaning, and I’m not just talking about your home! It’s just as important to give your portfolio a good cleaning to evaluate where you stand, what your investments look like and most significantly, how you’re saving for the future. Whether you’re 25 or 65, you should be preparing for retirement.

I believe the best way to do this is through investing. I know it might be scary with stocks trading at all-time highs, but it’s not worth trying to time the market. After all, those who jumped out during the financial crisis would have failed to profit from the enormous recovery over the last 10 years. Over the long run, you will make money.

Make sure to watch the video below for my ideas on the sectors to invest in for long-term growth, including the top pick I think is a good buying opportunity right now. You don’t want to miss this!

[ Click here to play message from Hilary Kramer ]

Thanks for watching!

The First Step to Constructing Your Portfolio

May 1, 2017, 4:02 pm

Among the questions investors ask me most often, those having to do with the mechanics of building a portfolio are at the top of list. However, constructing a portfolio is a bit like a fingerprint. Everybody’s situation is unique. For that reason, I can’t recommend a specific one-size-fits-all solution, but I can share my thoughts on the bigger picture to help you align your portfolio with your goals and financial needs.

Most money management firms distinguish between three broad types of investors: Conservative investors rely on their portfolio for current income and so need to maintain cash flow across a rolling two-year window, which is generally as long as it takes even in an extended downturn to play out. Moderate investors have outside income sources and a little more time for the market to recover from a bad year, so they can afford to take on more risk and aim for more reward. And everyone else is generally considered Aggressive.

The main focus is the time you have before you’ll need to draw down the assets in order to pay the bills, but you should also consider how you tolerate risk and potential volatility. If you’re going to lose sleep over more aggressive investments, dial the risk down a bit by focusing on more moderate and conservative strategies.

If you’re already living off your investment portfolio or plan to start spending it down in the next year or so, I highly recommend a more conservative approach. You may want to allocate at least enough funds to pay a year of expenses into relatively stable assets that are unlikely to decline in value much or at all, such as cash, bonds, CD, money market accounts, and so forth. At that point, you could consider riskier assets like stocks that might decline substantially in a given year but have always bounced back strong in the past. And if you need income, dividend-paying stocks can help generate it throughout most of the cycle.

Your goal here is not to live on the minimal interest that cash accounts and Treasury bonds pay. Most of the time, the rest of the portfolio should appreciate enough to help fund your current income needs. What this does is create a cushion to give those other assets time to recover from a bad year without forcing you to draw down the account for external purposes. Sometimes you’re forced to sell, but ideally you want to avoid that situation.

Over the last 20 years, a one-year cushion has been enough to withstand every market downswing with at worst minimal drag. Since this includes the 2008–2009 crash, the odds are statistically good that’s about as bad as it gets. And in the meantime, any longer decline will give you time to pivot your exposure as the market environment changes. If, for example, bonds and value stocks become the only good game in town for a multi-year stretch, most investors will catch on by around the second year.

Either way, if you’re retired or a year or two from it, it’s a good idea to keep that year of cash or fixed-income assets where you can get to it when the market goes south. It’s hard to put a percentage allocation on this because everybody has a different amount of cash and different cash needs, but I would say generally it shouldn’t be more than 30% of a healthy retirement portfolio – and odds are good that the percentage will actually be a whole lot lower.

Another rule of thumb some investors like is to subtract your age from 110, with the resulting number being the percentage you allocate to stocks. For example, if you are 60 years old, you could have 50% of your portfolio in stocks. The old formula was to subtract your age from 100, but with people living longer, many think 110 (or some even say 120) is better to make sure you get enough exposure to growth to increase the odds that your money will last as long as you need it to.

I hope this gives you some guidance on where to get started with your portfolio allocation!

How to Read (and Understand!) a Financial Statement

April 24, 2017, 4:05 pm

I go through extensive research when sizing up a new company, and thought it might be helpful to share my process with you, especially when it comes to financial statements. These number-heavy documents can be overwhelming, so I’ve simplified the process with a handy guide that you can use when researching any prospective names for your own portfolio.

Some of the terms and explanations are likely to be familiar to you, especially if you’ve been investing for a while. Others you may not be as familiar with, and I hope it gives you some helpful food for thought.

Please note that not every company displays every characteristic listed below. This is simply a guideline for choosing healthy business entities that have the wherewithal to continue growing. I want you to be able to look beyond the conventional P/E ratios, press reports or rumors when picking stocks. It’s important to understand what the numbers in a financial statement tell you – and it’s equally important to know that companies change over time, so their trends can change, too. When you know what to look for, you can continue to evaluate the worth of a stock on an ongoing basis.

The Income Statement

1) Revenues: Simply put, these are the sales that a company makes during a given period, quarterly or annually. Keep in mind that sales are recorded on an accounting basis and do not represent cash that is being earned. (More on this later when we discuss the cash flow statement.) I do like to see annual sales growing at least a high single-digit rate. And I especially like to see double-digit growth rates year-over-year, since that’s an even better indicator that a company is gaining traction among existing customers and/or growing their customer base.

2) Margins: There are two margin lines I like to look at: gross margins and operating margins (or EBIT, which stands for earnings before interest and taxes). Gross margins are equal to revenues minus the cost of goods sold, or COGS for short. COGS includes the cost of making a product, from software to machines to clothes, that a company sells to its customers. This line item typically includes material costs and direct labor costs. It does not include expenses like salaries, research and development, etc. It’s always good to see gross margins on the rise, because it means that a company is showing pricing power, controlling its production costs, or both.

Operating margins are one of the more important income statement line items because they take into account not just the direct costs of making a product, which are captured in gross margin, but also the impact of all the operating expenses a company must carry, including research and development, staff salaries and the like. I generally like to see double-digit operating margins on a longer-term trend of growth.

In some cases, though, operating margins may be negative. Newly-established companies just out of the gate often incur heavy start-up and operating costs before they see much in the way of sales or profits. Some industries show this trend more than others, particularly the biotech sector. In looking at biotechs, I want to see some real promise in the novel therapies being developed, their specific targeting of disease and advantages over existing treatments. This will translate into strong revenues, and eventually the company will generate some real profit and cash flow strength.

3) Net Income: This is the “bottom line,” which means the money that is left over to stock investors after all expenses are deducted. Net income is usually presented on a financial statement after one-time items – such as special charges for, say, a product recall, a win or loss in a lawsuit (with damages paid) or even failure of some equipment or due to a tornado or other weather-related event.

There are a million reasons why such special items may show up on an income statement, but they can have the effect of making net income turn into a net loss, or vice versa. So even though Wall Street looks at the bottom line perhaps more than any other place on an income statement, net income can be a misleading metric at times. Make sure you know what the earnings power of a business is before these items. Analysts and investors typically look at the tax-effective operating income when judging the success of a quarter’s earnings result.

4) Balance Sheet: This is a snapshot of a company’s financial position at a given point in time, whether at the end of a quarter or the end of the year. When I look at a balance sheet I generally want to see a rising cash and investments position, which indicates that a company is growing its business. I also want to see a quick ratio above one. The quick ratio lets us know that a company can cover its liabilities in a pinch. You can calculate this ratio on your own by dividing current assets by current liabilities. Ideally, the result will be at least 1.

There are also varying opinions about debt, but it really depends on the industry. In some cases, debt is a necessary cost of doing business. Biotechs and even some energy companies, for example, must get funding in place before they can get operations up and running – particularly if their products have yet to hit the marketplace.

5) Cash Flow Statement: There’s an old saying in the investment world that “cash is king.” That’s because a company must generate cash to sustain its operations. However, it’s also because over the past several years some unscrupulous management teams have manipulated income statements and balance sheets to hide deteriorating financial performance (Enron, anyone?). You MUST look at the cash flow statement in order to judge the financial soundness of a company during your due diligence.

In my experience, the most important part of the cash flow statement includes the first of the three sections typically listed on the financial statement, known as the operating cash flow segment. This shows how an accounting convention, net income, gets turned into cash. A simple rule of thumb is to look for increasing and positive operating cash, and then to subtract a line item from the next section, the cash flow from investing activities. This line typically reads “purchase of property, plant and equipment.”

That’s also known as capital expenditures (capex), or the cash that is being reinvested into the business through buying or building new production plants or even buying other companies in order to grow. Operating cash flow minus the capex equals free cash flow, or what is “left over” to fund future activities. The greater the free cash flow, the more likely it is that the company will see even better growth in the future as it has the resources to compete against peers.

I hope this helps to give you a better understanding of what I look for and the financials you should check out before investing in a new company. Keep these numbers in mind during your research, and you’ll be on your way to finding the right stocks that are worth your money!

The Best of Both Worlds: Fundamental and Technical Analysis

April 17, 2017, 4:14 pm

The market reacted with uncertainty to a mixed bag of bank earnings last Thursday, initially showing some resilience before taking a more pronounced turn lower in the afternoon. While the earnings results mostly beat expectations thanks to strong investment banking, there were some signs of worsening consumer credit conditions – although from very low levels. Comments from management indicated that business conditions as well as the economy remain sound.

With the first-quarter earnings season officially underway, results will continue to run Wall Street for the next two weeks. This week will be dominated by more financial company reports, but it’s the following one that will be critical as tech and industrials release their numbers.

The S&P 500 appears to have come under a bit of pressure recently after falling through its 50-day moving average (the blue line), but I’m not overly concerned about the action. In fact, I suspect the index will drift in a range between 2,320 and 2,360 (the black lines) until the full-year earnings outlook becomes clearer. With interest rates still low and no indication that they’ll move higher in the near term, I think the earnings bar is set low enough that any downside in the broad market is limited.

S&P Chart

Also helping limit near-term downside are the financials and large-cap tech stocks. The Financial Select Sector SPDR ETF (XLF) is nearing a point of support, and the PowerShares QQQ ETF (QQQ) is holding above its 50-day moving average. As long as tech leadership remains intact, I suspect the overall market strength will be tough to fracture.

I believe one of the best ways to play the current market environment is by analyzing both the charts and fundamentals and buying only stocks with the most favorable near-term technicals. This is exactly what we do in my Breakout Stocks service, and the strategy has put us in good shape to lock in solid gains. If you’re interested in learning how to win in the stock market with a mix of technical and fundamental analysis, Breakout Stocks could be a good fit for you. Click here to claim a risk-free membership before it’s too late

How to Grade Management

April 10, 2017, 4:28 pm

We’ve talked a lot about the fundamentals and technicals I watch when looking for potential investment opportunities. One factor we haven’t touched on very often is management, and I do get questions about judging management’s effectiveness, so I’d like to share some thoughts on ways to do that with growth companies in particular.

First let me say that I do not have specific criteria when it comes to evaluating management. Almost all CEOs are highly educated, intelligent and have enjoyed a lot of success in life. Since I tend to select stocks that have a solid history of growth, the CEOs have also had some measure of success in their position. In addition, most of the companies are growing while still investing big for their futures, so I do not think management tends to be focused solely on how much they can pocket in the near term.

Strong quantitative data is often a good indicator of the quality of management. However, we know that business is dynamic and not static in nature. Therefore, a good executive must be able to adapt to change. Growth businesses tend to attract more competition over time, and in technology, product obsolescence is often an issue. Given this, I look for management’s plans for future growth in their investor presentations and public filings, and how realistic they are. Companies that are slow to adapt to changing market conditions will at some point see their stock prices take a hit.

I also judge management by how they allocate incremental capital – the cash they take in each year in cash flow. Since they consider themselves as steering growth companies, most CEOs do not want to pay dividends, which is perfectly fine. But what I don’t like to see is a company buy back shares when its stock trades at above-average PEs. To me, this is not investing in growth, but actually a tool used to hide dilution (from issuing stop options). Unfortunately, this practice has become so ingrained among most U.S. companies it is hard to be critical of specific management, as this is an institutional issue.

It’s also important to gauge management’s ethical behavior. For years, Wells Fargo (WFC) was one of the most admired companies, not just in banking but in the market as a whole. In fact, Warren Buffett used WFC as a benchmark when evaluating other potential investments. It took decades to discover that the company’s strong growth in fee income was often achieved by illegal practices. While the bank was able to survive the crisis in decent shape, that may not be the case with smaller companies that do not have a franchise as strong as Wells Fargo.

Due to increased regulations, brokerage firms are spending less on conferences and instead disclosing everything over the Internet, so most investors have much less access to senior management than they did 20 years ago. Still, evaluating where a CEO is taking a company is an important part of determining a stock’s potential.

You Are Cordially Invited to Join Me Saturday, May 6, 2017 for my Live Investing Workshop!

April 7, 2017, 11:31 am


As a valued subscriber, it’s with a great deal of excitement that I would like to personally invite you and a guest to my 2017 Special Live Workshop at the Gaylord National Harbor located in the Washington, D.C. metropolitan area.

This exclusive event is typically only open to Inner Circle members, but this year, I’ve decided to open it up to all of my members.

Why you might ask?

Simple. Because there is enough uncertainty about this market right now that I want to offer you the reassurance you need to ensure you don’t miss out on any lucrative opportunities in the weeks and months ahead.

At this year’s intimate gathering, I will take you through two informative sessions.

Session #1: Market Analysis and my Top 10 Stocks for the Next 12 Months. I’ll take an up-close examination of the current state of the stock market and why I expect it to continue to rally under the Trump administration. Then we’ll dive into my Top 10 Stocks for the Next 12 Months. These are longer-term value and growth stock picks that are poised to explode in the next 12 to 18 months.

Session #2: How to Profitably Trade Stocks & Options in THIS Market. This session will strictly focus on our short-term trading strategies. We’ll dive into the best way to trade stocks right now, as well as cover how to safely invest in options. You won’t want to miss this highly informative session!

I’ll also personally answer as many questions as I can get to during our time together. I truly enjoy this one-on-one opportunity to discuss what is truly on your minds.

So make sure you have your pen and paper handy! I can guarantee you that you’ll leave this live event with actionable advice that you can put into play right away.

Here are a few event details for you:

WHEN? May 6, 2017

WHERE? At the Gaylord National Harbor in National Harbor, MD

HOW MUCH? Just $99 (This registration fee covers you and a guest. That’s an instant $200 savings off the regular $299 event price). But you must reserve your spot by this Thursday, April 13th.

Hurry, seats are filling up fast! I intentionally keep attendance to an intimate group so that I can spend as much time as possible with each of you. So please RSVP right away.

Once we have your reservation, we’ll email you with all of the details you’ll need to book your hotel room. A special room rate has been reserved for you the night of May 5th, at the rate of $219 per night.

I’m so pleased to provide you with this in-person session that will line you up for a very successful and profitable year of investing.

I look forward to seeing you on May 6th for a great discussion!

Sincerely,

Signed:
Hilary Kramer

CLICK HERE to Reserve Your Seat Today!

How to Profit from Trend Trading

April 4, 2017, 5:08 pm

There are many strategies you can use to make money in the stock market. One of my favorites when it comes to shorter-term investing is trend trading. With each trade, we are riding an already established trend – “established” being the key word. We’re not trying to call a top or a bottom in a stock.

This market has defied expectations already, going higher for a longer period of time than many thought possible. For trading right now, I’m not interested in trying to predict when a change will take place. I’m interested in profiting from what we know is already happening, taking what the market gives us.

So the trend really is your friend – and when it ends, you profit from a different trend. To give you a better idea of what I mean, let’s take a look at Advanced Micro Devices (AMD), a stock we made a quick 10% last quarter in my Absolute Capital Return service.

Let’s start with the chart below, which shows a general uptrend that began last November with a pretty sharp pullback to start the year. I love to buy strong uptrends on pullbacks to dampen risk and open up more profit potential, but this one was sharp enough that we needed confirmation the uptrend would resume before getting in. We got that confirmation with a strong bounce, at which point we were looking for the right entry point, which came on February 16.

AMD

I waited until we saw the action slide 9.5% from the established $14.27 trading top and then start at least tentatively forming a new base for a fresh move up. The test of 9-day support (the green line) gave me enough confidence to push the button.

AMD fell slightly and briefly below the 9-day moving average, but the balanced volume bars (below the price action) argued that the bears weren’t in control – those red lines would have to be a lot bigger than the gray ones to break the long bull trend. After that, the profit meter was running fast enough to let us cash out within the week.

I expect to scoop up more trades like this over the next few weeks – especially as stocks start to move heading into and out of their earnings reports. This period right around the start of earnings season is often a busy (and profitable!) one here in Absolute Capital Return. If quick-hit technical trades like the one I talked about today sound interesting to you, then you couldn’t have picked a better time to join us. Click here to claim a risk-free membership before it’s too late.

Should You Get Defensive with Defense Stocks?

March 27, 2017, 3:39 pm

It’s no surprise this industry has been on the top of investors’ minds given how long it’s been in the headlines. Not only did President Trump promise to build up the military while on the campaign trail, he proposed a “historic” increase in defense spending of $54 billion, bringing the Pentagon budget to a whopping $603 billion, during his first speech to Congress. Despite all this, I do not see a lot of growth investing opportunities here.

Due to budgetary restrictions imposed by the Budget Control Act of 2011, as well as the need to spend more on Social Security and Medicare as the population ages, there’s not much room for long-term defense spending growth. Even President Trump’s much talked about 10% increase in defense spending in the September 2018 fiscal year would only put Department of Defense expenditures back to 2007 levels, when spending declined as the Iraq war wound down.

In addition, there’s no guarantee that the president will get the increase he’s asking for, with even some Republicans uncomfortable with the amount of non-defense spending cuts that would be required to fund the additional budget. Barring another major war, I do not expect to see consistent long-term spending gains drive revenue growth for defense contracts.

The pure-play defense stocks are dominated by a few large names: Lockheed Martin (LMT), General Dynamics (GD), Raytheon (RTN) and Northrop Grumman (NOC). Top-line growth for these companies has been minimal the past several years due to lackluster defense budgets. And yet, the stocks have actually done well, with share prices more than tripling over the past five years. These names have used the low interest rate environment to aggressively buy back stock, with earnings also benefitting from margin expansion. However, engineering growth this way is not sustainable, and with the shares now trading around 20X this year’s earnings estimates, I don’t see significant upside in them over the next 12 months.

In fact, LMT, RTN and NOC have lagged the market considerably after rallying the day after the election. While GD has beaten this trend with strong margin performance in the fourth quarter, I believe the recent underperformance of the group as a whole is a “tell” that the great five-year run the stocks have been on will not repeat itself. The industry is more likely to not see meaningful earnings increases from incremental defense spending, or it at least has already been discounted into the stock price.