Always Bullish Blog

How To Invest When The Market Is At All Time Highs

Bryan — Sun, 24 Mar 2013 17:13:42 +0000

The Dow Jones is currently around 14,500 and has hit multiple all time highs in the past few weeks. Now this does, of course, mean that this bull market has made many investors happy. Simply put, it also means that stocks have never been this expensive. For many investors, buying at a low price and possessing a margin of safety is a critical factor. Right now, it is no secret that margins of safety are low. It is not a matter of if, but when the much anticipated correction will come. With these worries looming in the back of many minds, people are struggling to find out how to invest in our current situation.

Play It Safe

The best option for investors right now is to search for stocks with at least some, if not all, of the following features:

A great company with an established reputation.
A margin of safety.
The ability to remain strong, or at least bounce back, when a correction hits.
A steady flow of revenues and earnings.
An impressive dividend.

So with these facts in mind, I will get you started with a few companies that can be expected to do the trick.

Caterpillar (CAT)

Caterpillar is a world renowned manufacturer of construction equipment. For more than 85 years, it has been recognized throughout the world for its exceptional products, technology, and achievements. In its last report, that company stated that over $65 billion dollars of revenue was brought in. This was nearly a 7% year over year drop. The only problem that Caterpillar has experienced is maintaining strong earnings despite faltering macroeconomic conditions that are not so friendly to expensive projects such as construction. In the big picture, though, Caterpillar is still enjoying massive increases in revenue, which can be seen in the chart below.

CAT Revenue Annual data by YCharts

The company has significantly attractive valuation numbers:

P/E: 10.32
Price/Sales: 0.86
Price/Book: 3.24

On August 22, 2008, just weeks before the recession hit, Caterpillar was at $70.27. By March of 2009, it had fallen to the low $20′s. Despite this, because of the company’s reliability and dominance, the stock price was back up to about $70 in April of 2010. This is compared to the S&P 500, which at the time was still down about 8% from the pre-recession levels. Caterpillar is a stock that you can count on to bounce back in the face of adversity.

On top of all this, shareholders enjoy a dividend of $2.08 per share.

Coca-Cola (KO)

A second stock to buy in the face of economic uncertainty is Coke. Coke has become iconic in American culture, and is hugely popular in every corner of the globe. The company’s huge amounts of revenue have been increasing steadily for the past 10 years (see the chart below). Most importantly, Coca-Cola’s operations are, for the most part, recession proof. In July of 2008, Coca-Cola was around $25. By July of 2009, it was, once again, around $25. It experienced an impressively swift recovery from a drop down to about $19. At this same time in 2009, the S&P 500 was still down about 20% from a year prior.

KO Revenue Annual data by YCharts

Coke is at a fair price, and seems to be an attractive investment:

P/E: 20.32
Price/Sales: 3.72
Price/Book: 5.46
As a side note, Warren Buffett’s company, Berkshire Hathaway (BRK-A), holds 400 million shares. In other words, Buffett, one of the greatest investors ever, finds Coke as attractive an investment as anyone.

Coke offers a dividend of $1.12 per share.

Disclosure: I have no positions in any of the stocks mentioned, and no intentions to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Investing Basics: Three Common Mistakes To Avoid

Bryan — Fri, 08 Mar 2013 17:51:14 +0000

Everyone knows that practice makes perfect. But have you ever thought about why? One likely reason is that the more you try, the more you fail. And these failures give you an opportunity to learn and grow. Unfortunately, even the most experienced investors often forget the knowledge and wisdom they have acquired over the years. To ensure optimal return on investments, it is good to regularly review investing basics, determine the principles of a good investment, and adjust your current beliefs if necessary. It would surprise you to see just how often we let our emotions get to us and lose track of our goals and plans for reaching them. Here are a few points that beginners and experts alike can benefit from:

Is Speculation Always Bad?

One of the most common errors in investing is not investing at all, and speculating instead. Generally, speculating is a bad idea and should be avoided, especially for beginners. With inexperienced investors, speculation can often turns out to be a gamble, and not an investment that is based off of thorough analysis. Although what I have said is true, it is unfortunate that many people neglect the opportunity to enjoy large gains from risky strategies. Once a person is comfortable with the stock market, speculation can be an effective tool if utilized correctly.

If you see the potential for profit in a company, go ahead and take the shot. But be careful in your approach, and make sure you know it’s a speculation. As long as your speculations are seen as separate from your investments, it is appropriate to partake in them. But expect price swings to come with your speculation, and don’t let your emotions get to you. Most importantly, never make a risky investment unless you can afford to lose all the money you put into it.

Not Understanding The Concept Of Investing

The purpose of investing is so that a company will grow and prosper, thus increasing earnings, and these earnings will be sent to shareholders. Even for companies that don’t offer dividends, these earnings will benefit shareholders indirectly with capital gains, which are a result of the company’s success. Warren Buffett put it best when he, in a letter to Berkshire Hathaway (BRK-A) shareholders, stated, “Do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely”. When you buy a stock, simply make sure that you like the idea of having ownership in the company. You will both fail and succeed with the corporations you invest in, not with the tickers you check.

Worrying Too Much About Macroeconomic Conditions

This problem fits in perfectly with the idea of owning a business. When you invest, you shouldn’t do it entirely because you think the stock will go up, you should do it because you believe the business will prosper. In the face of national and worldwide financial struggles, investing in a company can be daunting. But just know that even if you must suffer through a decline in stock market prices, you have a good business to fall back on. In such a situation of financial panic, the stock you own is falling from grace not because the company is, but because investors have made the foolish decision of selling on irrelevant news. And if you were lucky enough to miss the crash? Congratulations, you’re just in time for the sale. Do not run after a panic has occurred. Other investors have mistakenly given up temporarily, giving you a chance to jump in and buy stocks that are significantly undervalued. During a panic, a contrarian mindset can be quite beneficial.

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The Futures of Google And Facebook

Bryan — Wed, 27 Feb 2013 22:16:59 +0000

In today’s world, the Internet provides a myriad of opportunities for people. And I don’t just mean money, either. The Internet can be used to entertain, to interact, to make money, to gather information, and much, much more. Simply put, the Internet is where the money is now, and capital will continue to flow steadily into its development, along with the development of other technologies. This is why nearly all of the hot stocks you see nowadays are tech stocks. But with new startups breaking through everyday and some of them going public, it’s hard to find which companies are going in the right direction. But with common sense, emotional stability, and a little bit of investing knowledge, it can be done.

All Hype

For a few years now, Facebook (FB) has been making a significant mark on social networking. There is no disputing this. But a little less than a decade ago, Myspace was “cool”. And look where it is now. It was sold for “only” $35 million to a company called Specific Media. Facebook has no specific advantages that indicate things will turn out differently for them. Already, people are making the move to new social media websites, most notably Twitter. Facebook had its time to shine, but it is simply a passing fad. While at one time earnings were constantly growing, they dropped off more than 75% in the last quarter. One might argue that the revenue growth of 40% makes up for this, but in reality, the company’s revenue growth percentage has been decreasing, as you can see in the graph below. This shows that the Facebook trend is, indeed, gradually coming to a halt. Many customers are being taken by Twitter, which is the latest fad to hit the social networking market. They are outpacing Facebook in terms of membership growth by a significant margin. Also, membership drops are already being seen in some places for Facebook. A specific example of this was the 600,000 member drop from the UK in December.

FB Revenue Quarterly YoY Growth data by YCharts

You do not need to be a financial expert to figure this one out. Considering the fact that Facebook generates most of its revenue from advertising, it is not in good shape for the future. With people constantly moving away from Facebook, the value of this advertising is diminishing as time goes on.

Facebook is currently overvalued and not in the greatest state of financial health. Facebook is trading at well over 1,000 times earnings. The price/sales is 12.77 and the price/book is 5.48. Also, Facebook has a 20.04 debt/equity ratio. The company has nearly 2 billion dollars in debt which you can see, based on the graph below, is going in the opposite direction of the net income.

FB Net Income Annual data by YCharts

A Proven Winner

Google (GOOG) has become a staple of life in our society. “Google it” has become synonymous with “look it up”. Billions of searches are done on Google each year, and traffic isn’t going to slow down, for the same reason that use of the wheel in our society won’t slow down. Google has become as much of a tool as it is a company. How often do you hear people say “Yahoo (YHOO) it” or “Bing it”? You don’t, and it’s because Google is king in the search engine business.

Although Google generates a significant portion of its revenue from ads, this is acceptable. The value of advertising with Google will never diminish, as the popularity of the search engine is unlikely to fall. The purpose of advertisements is to gain exposure for the advertised company. In the case of Facebook, which I have already shown is becoming less popular, this is not an ideal platform for ads. This can be seen by the fact that last year, General Motors pulled its account, worth $10 million, because the ads weren’t working for them. As of mid 2012, though, Google searches were still growing rapidly. With more and more people utilizing Google, ads get more exposure.

Google is successfully fending off other search engines, as it makes up 67% of its market. On a side note, Google and Yahoo present investors with one of those rare opportunities where such close rivals can simultaneously succeed. Google will find success in the fact that it is purely a dominant force in the search engine market, generating 50 billion dollars of revenue in the last year, and has 48 billion dollars of cash on hand. Yahoo, as I discussed in a previous article, will gradually continue to improve under the superb leadership of Marissa Mayer.

Google, despite sitting just below $800, is trading at only 25 times earnings. Its price/book is 3.66 and the price to sales is 5.20. The company’s profit margin is above 20% and the return on assets is 10%. With these effective operations and great valuation numbers, Google has a strong margin of safety and appears to be a great investment. Still, a pullback could occur for the stock, which has gained more than 31% in the past 52 weeks. Although this advance is justified, it came shockingly quick for the well established company. There is still a margin of a safety, although it is a bit thin. The company is currently at a fair price, but bearish investors could pull the price down to $750 or below, and this would be an even more fantastic time to pull the trigger. Despite this, investing right now is also likely to yield a great profit for investors.

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A Few Articles To Start With

Bryan — Mon, 11 Feb 2013 16:17:49 +0000

Just having started a few weeks ago, I’ve only got 3 articles up. You can see them here:

My opinion on 3D Systems and Panera

The past and future success of Nike

Why you should buy Whole Foods and Yahoo

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