Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘investment strategy’

Drop in This Company’s Stock Price Makes It Very Attractive Now

By for Profit Confidential

Top Company for Dividend ReinvestmentJohnson & Johnson (JNJ), which is one of my favorite long-term stocks for income and dividend-reinvesting investors, just dropped below the $100.00-per-share level and is becoming more attractive each day.

This stock has been doing extremely well over the last few years and should continue to do so. The position has been a worthy buy when it’s down and according to its recent trading history, it typically isn’t down for long.

If you’re a shareholder in this company or are considering a long-term position, you’ll want to take a look at the company’s recently filed Securities and Exchange Commission (SEC) Form 10-Q, which was submitted August 1.

This quarterly SEC filing reveals much more information over and above a company’s regular earnings press release. It gives a much better snapshot of a company’s financial position, where the sales are, which divisions are the most profitable, and where the company sees its operations in the near future.

In Johnson & Johnson’s recently filed Form 10-Q, the company’s overall profitability, that is its net earnings as a percentage of total sales, leapt higher from 20.7% to 24.1% in the first half of this year compared to last.

This is a huge accomplishment for a company this large and a major reason why stockholders should feel so confident about increasing dividends in the future, along with more share buybacks.

The company’s average common shares outstanding in the first half of 2014 dropped by approximately 3.3 million shares on a diluted basis compared to the same period last year.

Johnson & Johnson’s two-year stock chart is featured below.

Johnson & Johnson Chart

Chart courtesy of www.StockCharts.com

Johnson & … Read More

Simple Wealth-Creating Strategy for Long-Term Investors

By for Profit Confidential

Compounding Strategy Every Investor Should ConsiderAs a strong believer in the wealth-creating effects of large-cap, dividend paying stocks, I’m also an advocate of dividend reinvestment, which is the purchasing of a company’s shares using the cash dividends paid.

This can be done commission-free from your broker and/or through the company itself if it offers such a program.

Dividend reinvestment is a powerful wealth creator if you do not require the income paid out by a corporation. It is a great way to invest and to grow your money over the long-term.

As the timespan increases, the percentage return produced by the S&P 500 becomes weighted to dividends. It’s kind of old school, but the numbers add up. Even over a few short years of good broader market performance, total investment returns can increase substantially over simple capital gains.

For example, if you bought shares in Intel Corporation (INTC) at the beginning of 2010, that stock would have produced a capital gain to date of approximately 50%.

But if you reinvested the dividends paid by Intel into new shares each quarter, your total investment return, including dividends and new shares, jumps to approximately 75%, which is a very big difference!

In the utility sector, Duke Energy Corporation (DUK) increased on the stock market about 30% over the last three years. But by reinvesting the company’s dividends into new shares during that same time period, your total return could have climbed to around 49%. Again, this is a material improvement.

Of course, dividend reinvestment excludes the potential returns to be had with the income being applied to other potential assets.

But the process is so easy, and … Read More

How to Put Your Assets to Good Use in a Stalling Market

By for Profit Confidential

How to Profit in a Stalling MarketThe stock market appears to want to go higher, but it’s going to take a push by investors. While we could see the S&P 500 edge higher, I’m not convinced the gains will be that great unless the underlying stock market fundamentals improve.

I am talking about the economic renewal that appears to be stalling. The International Monetary Fund (IMF) slashed the country’s estimated gross domestic product (GDP) growth to an even two percent this year from the previous 2.8% in April. Growth in 2015 is expected to rise to three percent. These are OK numbers, but they’re not great and they indicate that the economy will likely struggle to find ground in the short-term. As far as the global economy goes, the World Bank cut its estimates, too.

Moreover, you also have the recent weaker-than-expected housing starts and building permits numbers. Both readings for May came in below both the estimates and the readings in April. The decline in building permits by 6.4% to below one million annualized units suggests there could be some stalling in the months ahead.

Geopolitically, you have the escalating conflict in Iraq and the continued standoff in Ukraine. Oil is above $107.00 a barrel and could head higher should the internal conflict escalate in Iraq and impact the flow of oil, which could affect global economic growth.

So here we have the stock market, namely the S&P 500 and the DOW, coming off record-highs.

If the stock market fails to find its footing (namely a fresh catalyst), we could see mixed and volatile trading in the months ahead as the stock market looks for … Read More

Fear of Stock Market Declining Almost Non-Existent

By for Profit Confidential

Complacency of Investors Near Record LowThere’s one long-term investing adage that has shown a great amount of success over the years: buy when everyone is fearful and sell when optimism is over the top. This theory worked extremely well when key stock indices fell to their lowest levels. It worked in 1987, in 2000, and then in 2009—three of the greatest times to buy stocks in history.

With this in mind, take a look at the long-term chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) below. This index is often referred to as the “fear index” for key stock indices, since it is a gauge/measure of how fearful investors are about the stock market declining. The higher the index goes, the more fear in the market; the lower the index goes, the more optimism in the market.

 Volatility Index Chart

Chart courtesy of www.StockCharts.com

The VIX clearly shows investor concern about key stock indices declining, sitting close to the same point it was at back in 2007—just a few months before stocks started to collapse.

Aside from the VIX flashing red…there are two other key stock market indicators in the trouble zone.

According to the CNBC Market Insider Activity, insiders of companies on the key stock indices continue to sell billions of dollars worth of stock monthly. The sell-to-buy ratio—that is how many shares they sold compared to how many they bought—was 10 to 1 in May, meaning they sold 10 shares for every one share bought. (Source: CNBC Market Insider Activity, last accessed May 27, 2014.) Corporate insiders have been selling their shares at an accelerated pace for some time now.

And corporate earnings … Read More

My Simple, Safe Investment Strategy for Playing Risky Stocks

By for Profit Confidential

Here's a Strategy to Play Momentum Stocks While Limiting RiskThere’s some hand-holding required out there in the stock market. We have seen destruction in the momentum biotech and Internet stocks that have corrected by more than 30%.

Now we are hearing some analysts on Wall Street saying to jump back in—but I’m hesitant at this juncture, as the downward risk is likely not over yet.

The reality is that, given the superlative gains recorded in 2013 by many of these biotech and technology momentum stocks, you shouldn’t be surprised to see the current malaise.

The fact that many of these highflying stocks in the stock market have more than doubled in a year should be a red flag. My simplest advice is to wait for the selling to subside in the stock market before you jump into these stocks.

You also need to be careful when hearing the bullish comments by Wall Street firms on these momentum stocks. Many of these firms have investment banking relationships with these stocks; it’s only natural to support your clients in the bad times.

Don’t get fooled by the stock market rhetoric. Instead, take a prudent approach to the stock market.

You don’t want to be caught exposed on this stock market unless you are fine with losing money should the selling intensify. Like I wrote at the beginning of the year, making money on the stock market will not be easy this year and capital preservation should be your objective.

Now, if you are willing to risk some capital and feel a stock market bottom is near, then what I suggest you do is consider using call options as a risk … Read More

Time for Investors to Create an Exit Strategy?

By for Profit Confidential

Should You Be Considering an Exit Strategy at This TimeWe have Russia annexing Crimea from Ukraine and interest rates set to float higher sometime in early 2015, but the S&P 500 continued to edge up to another record-high on Friday.

Federal Reserve Chair Janet Yellen is continuing to pull back on the quantitative easing that the former chair, Ben Bernanke, put in place. By year-end, the bond buying will likely be eliminated as the central bank allows the economy to try to stand on its own two feet. Of course, if everything goes well, Yellen also plans to begin ratcheting up interest rates as soon as early 2015. This could impact the stock market.

The upward move in interest rates and the elimination of quantitative easing means the easy money that had been pumped into the economy by the Federal Reserve will come to an end. This is concerning for the stock market, as the easy money has largely been the key reason why we are in the fifth year of this superlative bull stock market.

While it’s enticing to sit on all of the gains achieved so far, you should also be conscious of the profits made and should look at several risk management strategies.

The most important lesson is to take some money off the table and avoid soaking a possible downdraft in the stock market that could severely reduce your gains.

Making sure you have an exit strategy is paramount at this time.

I fully expect another downside move in the stock market sometime in the upcoming quarters. (Read “Stock Market Setting Up for Its Next ‘Fire Sale’?”)

You can also set a … Read More

Strategies for Defending Your Portfolio in a Down Market

By for Profit Confidential

What Investors Can Learn from the Super BowlIf you watched the boring Super Bowl game on the weekend, you’d have realized that a strong and superior defense can go a long way against a sound offense. But the battle in the trenches was easily won by the defense, and it’s an analogy I use in my trading strategy.

January ended on a sour note, being the first down month since August 2013. With the losses, we are now witnessing an uprising of the bears suggesting 2014 will be a negative year for the stock market. This reasoning is based on the Stock Traders’ Almanac that suggests there is a 46% chance of losses this year. I’m not convinced the stock market is heading lower, but the current stalling and inability of the stock market to move higher is a red flag. Despite an extremely oversold technical condition, I have yet to see any signs of strong buying support emerge—and in my view, this is worrisome and likely means more losses.

The irony in January was that the S&P 500 and Dow Jones Industrial Average actually lost more ground than the higher-risk NASDAQ and Russell 2000, which only lost 1.76% and 2.89%, respectively.

The key will be to watch how the S&P 500 reacts at its key support levels around 1,750 to 1,775. We already saw a bounce off this level, and now the index is staging a retest. As I have said in a recent commentary, failure to hold could see the index fall to 1,700, based on my technical analysis.

The stock market is failing to see any major positive catalyst. Earnings season has been average … Read More

Stock Market: The Great Collapse Back to Reality Begins

By for Profit Confidential

The Great Collapse Back to Reality Begins“The trade” was very easy to do not long ago. Anyone with the basic knowledge of how money flows could have done it and profited.

Of course, I’m talking about the Federal Reserve “trade.” The investment strategy was straightforward: borrow money at low interest rates in the U.S., then invest the money for higher returns in emerging markets and bank the difference. If you could borrow money at three percent per annum in the U.S. and invest it for a six-percent return in emerging markets like India, why wouldn’t you?

The “trade” created a rush to emerging markets. And if you didn’t like the emerging markets, you could have invested in the stock market right here in the good old U.S.A. Again, borrowing money at a low rate to buy stocks from companies that were buying back their own stocks at the same time the Fed flooded the system with cold hard cash…how could you go wrong? (No wonder the rich got richer during the Fed’s quantitative easing programs.)

But, as I have written so many times, parties can only last for so long. Eventually, someone takes away the punch bowl. And from the looks of it, the Federal Reserve has pulled its own punch bowl.

In its statement yesterday after its two-day meeting, the Federal Reserve said, “…the Committee (has) decided to make a further measured reduction in the pace of its asset purchases…” (Source: Federal Reserve, January 29, 2014.)

In summary, the Federal Reserve will be buying $65.0 billion worth of bonds in February following its reduced $75.0 billion in purchases in January following its $85.0 billion-a-month bond … Read More

Proactive Approach Is Key to Investing in This Stock Market

By for Profit Confidential

investment strategyImagine letting a losing trade run, and before you even realize it, the position is down 20%, 30%, or more. Your $10.00 stock declined 30% to $7.00; you decide to hold the position, hoping for a rebound, but deep down you know the stock would need to rally more than 40% just for you to break even. Clearly, it’s not easy when a stock falls to greater depths.

But that’s why you should take the opportunity to dump losers when the stock market rallies, as is the case at this time. Avoiding a loss is just as good as making profits.

As many of you know, I believe the stock market is vulnerable to some selling and a stock market correction, based on my technical analysis of the charts. The S&P 500 is fighting resistance to advance higher, and the Dow Jones Industrial Average, while setting anther record-high on Monday, continues to show the potential of a stock market correction of at least six percent.

Think about how the stock market has moved to these levels. The easy money policy pushed by the Federal Reserve has been a key driving force behind this four-year run-up. But now, with the Fed expected to begin tapering in December or early 2014, the focus will shift to the economy and corporate revenue growth—which aren’t so stellar. In fact, in both cases, they’re flat.

Even the surge in the initial public offering (IPO) market is a red flag in my view. When I see an IPO double on its first day, it reminds me of the euphoria that I witnessed in late 1999, just … Read More

Stock Advisors Saying Buy Eurozone Stocks; Here’s Why It’s a Bad Idea

By for Profit Confidential

There have been many instances when the adage “buy when there’s blood on the street” has turned out to be the best investment strategy. March of 2009 was one great example of this—there were not a lot of stock advisors saying buy stock back then as panic had set in. In the midst of this panic, the greatest buying opportunity was born.

These days, I hear stock advisors saying companies operating in the eurozone are a good buy. The words I hear thrown around are “good value” and “cheap.” My opinion on the eurozone stocks is very different. I feel the worst is yet to come for many companies operating in the weaker eurozone countries, especially the Italian banks.

I’m sticking to my original belief that the euro region is still in outright trouble and that the economic slowdown the region is experiencing could continue for a long time.

Yes, there is speculation the euro region is slowly getting out of its economic slowdown, but that opinion is not backed by the statistics—the numbers are telling a different story.

The unemployment picture in the area is not improving! In September, there were 19.47 million people unemployed in the eurozone. The unemployment rate remained at 12.2% in September, unchanged from August. (Source: Eurostat, October 31, 2013.)

What’s worrisome is the fact that the biggest economic hubs in the eurozone are seeing their unemployment rate increase. In France, the second-biggest economy in the region, the unemployment rate has risen seven percent from the same period a year ago. In September, the jobless rate in France stood at 11.1% compared to 10.4% in … Read More

Why Silver Prices Could Easily Double from Here

By for Profit Confidential

Silver Prices Could Easily Double In the first 10 months of this year, the U.S. Mint sold 39.2 million ounces of silver in coins. In the same period last year, the Mint only sold 28.94 million ounces of silver in coins. A general negativity by investors surrounding silver this year has not stopped people from buying silver coins. In fact, demand is up 35% so far in 2013. (Source: U.S. Mint web site, last accessed November 1, 2013.)

Meanwhile, if I look at the chart of the gold-to-silver ratio—which shows how much silver is needed to buy one ounce of gold bullion—silver prices look undervalued. (I’ve posted the chart for my readers below.)

gold spot price silver

Chart courtesy of www.StockCharts.com

At present, it would take 60 ounces of silver to buy one ounce of gold bullion. The 200-year historical average is 37 ounces of silver to buy one ounce of gold bullion. (Source: Market Watch, July 19, 2013.) If we go back to the historical average, and we eventually will, silver prices would have to rise to $35.00 an ounce given the current price of gold bullion.

And if we look at the “natural gold-to-silver ratio,” that’s the amount of silver in the earth’s crust compared to gold, then the ratio is 17 to one. Yes, in that case silver would have to increase in price to $77.00 an ounce!

The more realistic picture, dear reader, is for silver to go back to its record high reached in April 2011 of $48.70 an once—that’s more than twice the current price of silver.

Since silver prices fell this spring, silver producers don’t have much incentive to explore … Read More

The Last Standing Stock Market Bear?

By for Profit Confidential

If you are a stock market investor, you’ve probably come to the same realization I have: the stock market is behaving irrationally. These days, the fundamentals don’t really matter. What’s even more frustrating is that when you do talk about the fundamentals behind the market’s continued advance missing, you are ridiculed.

Soft revenues at public companies are just one area of concern. As of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings; only 52% of them registered revenues above the expectation, which means companies are selling less than they expected—not a good sign. Third-quarter corporate earnings growth is now expected to be just 2.3%. A month ago, the same number stood at an even three percent. (Source: FactSet, October 25, 2013.)

We are seeing some of the well-known bears of the stock market turning bullish. “Dr. Doom” is suggesting investing in stocks, and others like David Rosenberg, who has been bearish for years, are turning bullish.

Is this the peak optimism?

As it stands, investors believe the stock market is a safe place to be again. The charts of key stock indices only show an upward trajectory.

S&P 500 Large Cap Chart

Chart courtesy of www.StockCharts.com

What will happen once the euphoria comes crashing down again? After all, irrationality cannot go on forever.

The most recent and best example of a stock market crash we have is from the financial crisis of 2008. We saw key stock indices come down like a rock. That stock market crash wiped out consumer confidence. Those who were retiring and saving each dollar for their golden days (by investing in stocks) saw their … Read More

Trouble Putting Food on Table for 17.6 Million American Households?

By for Profit Confidential

Trouble Putting Food on Table for 17.6 Million American HouseholdsI harp on about this over and over again: economic growth is when the average consumer is optimistic about their future; they are spending money, they know they will have a job tomorrow, and they are saving. In the U.S., we are seeing the opposite of all this.

In fact, consumer confidence in the U.S. continues to plummet; the Conference Board Consumer Confidence Index, an indicator of consumer spending, plunged more than 11% in October from September. (Source: Conference Board, October 29, 2013.)

But the misery doesn’t just end there for consumers in the U.S. economy. They are struggling to even buy the most basic of needs—food.

According to a recent study by the United States Department of Agriculture (USDA), in 2012, 17.6 million households in the U.S. economy were “food insecure”—they had difficulty bringing food to the table due to a shortage of resources. (Source: United States Department of Agriculture, September 2013.)

And as a result of so many Americans having trouble putting food on the table, it is costing taxpayers significantly. According to the U.S. Senate Budget Committee, over the last five years, the U.S. government has spent $3.7 trillion on 80 different poverty and welfare programs. The amount of money spent on these programs was five-times greater than combined spending on NASA, education, and all federal transportation projects over the time period. (Source: U.S. Senate Budget Committee, October 23, 2013.)

When I look at all these statistics showing how Americans are suffering, talk of economic growth or economic recovery just doesn’t sit well with me. I tend to focus on facts, rather than the noise. The noise … Read More

Perfect Opportunity for Investors to Liquidate Some Positions?

By for Profit Confidential

Perfect Opportunity for InvestorsWhat the heck is with this stock market? The ability of the stock market to hold and avert a major correction over the past two weeks and then follow this with an upward move on the charts is a surprise—at least in my view it is, as it clearly shows the bullish bias controlling this stock market.

The NASDAQ and Russell 2000 are at new recent highs as the desire for growth by investors continues, which has largely been the story this year.

The S&P 500 is within striking range of its September record high.

The focus on the debt ceiling is important but also way overdone, in my opinion, given that we are in the midst of the third-quarter earnings season and, well, it has been subpar early on.

Yes, it’s still early in the earnings season, but I expect more subpar results. Of course, what I expect doesn’t matter—momentum and speculation are what drive this stock market.

So far, about six percent of S&P 500 companies have reported, and a dismal 55% of these companies have beaten estimates. That’s just not good. The results are also well below the historical average at just over 60%, and to make matters worse, the results were compared to estimates that were already lowered by Wall Street. Revenue growth is also lackluster, as I expected, which is not what we should be seeing with an upward-trending stock market.

The big banks reported decent results, but much of the easy money in this stock market sector has been made. The retail sector, which I view as critical due to its impact on … Read More

Four Strategies to Protect Your Profits in a Falling Stock Market

By for Profit Confidential

Four Strategies to Protect Your Profits in a Falling Stock MarketWith the S&P 500 rallying back above 1,700 last Friday and perhaps closing in on yet another record high, it’s again time to step back, pause, and reflect on the easy gains to date.

The availability of easy money flowing into the economy has propelled the stock market higher. And with the new Federal Reserve chairman appointee Janet Yellen to take lead in January, we could likely see the continuance of easy money and stock market gains into 2014.

While it hasn’t been all that difficult to make money over the past four-plus years of the current bull market, it could get tougher. This means that you may be able to make money on stocks deemed bearish by traders. (Read “How to Profit by Buying ‘Bad’ Companies.”)

Right now, you may be sitting on a heap of gains, and the stock market could likely move higher if the government resolves all of its issues. But you need to understand that being prudent is important for protecting your gains and achieving success in the stock market. If you get too greedy, you’ll likely see your profits sink.

It all comes down to risk management and the way you run your financial assets.

While things may seem great as the stock market advances higher, as we’ve seen over the past few weeks, when turmoil arises, stocks are quickly sold off. To help avoid major cuts to your gains, you should always think of a potential exit investment strategy. Optimism in a bull stock market can turn extremely quickly, even with the whispering of a single word like “tapering.”

I would … Read More

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