Leading quick-service restaurant (QSR) chain, Dunkin' Brands Group, Inc. (DNKN), recently unveiled a Dunkin' Donuts/Baskin-Robbins combo unit in New York City, N.Y. This opening marks its position among the biggest restaurateurs in the city with 500 restaurants.
The unit's strategic positioning at the Times Square area coupled with its contemporary ambience will likely drive sales, going ahead. In addition to high-quality coffee beverages, the combo restaurant will offer its trademark donuts, breakfast sandwiches, ice creams, cakes and dessert-inspired frozen drinks.
The opening of this unit is in line with the coffee and baked goods chain's target to add 330-360 restaurants in the U.S. in 2013. This company also aims to double its portfolio by expanding in the lucrative domestic market over the next 20 years. Further, the company will remodel many more outlets in the Americas region in order to capitalize on the strong demand for Dunkin' Donuts' products.
Dunkin' Donuts has undertaken a series of initiatives for brand revitalization such as menu innovation, augmenting the food presentation and service to significantly enhance its operational efficiency and drive its revenues, going ahead.
Dunkin' will launch its loyalty initiative, the DD Perks Program, later this year to enhance value dining as well as improve top line. In this regard, the company entered into an agreement with Alliance Data Systems Corp.'s (ADS) operating unit, Epsilon, for the technology needed for the Program.
Apart from this, in order to improve its coffee beverage offerings, this Zacks Rank #3 (Hold) company has recently launched Original Blend Iced Coffee K-Cup. Coffee lovers can now sip these Iced Coffee K-Cups at any Dunkin' Donuts restaurant. These will be available in 14-count packs in several flavors. The launch also reflects the company's strategy to grow in the iced coffee segment.
Other Stocks to Consider:
Some other restaurateurs that are likely to p! erform well include AFC Enterprises Inc. (AFCE) and The Cheesecake Factory Incorporated (CAKE) both carrying a Zacks Rank #2 (Buy).
Wednesday, August 28, 2013
Sunday, August 25, 2013
Why Companies Stay Private
Some of the largest and most powerful companies in the world were created by raising capital in the public markets. Oil companies, utilities, food and beverage, and technology companies have all accessed the public market to fund their day-to-day operations and grow their businesses. By selling all or part of a business in a public offering, companies that go public receive an immediate influx of capital. While this might appeal to some companies, others understand that public ownership comes at a price. By choosing to stay private, they do not have to report to a large group of shareholders and are able to keep their business plans and finances private.
Going Public
Startups typically become established as private entities using capital from the owners or outside investors, cash generated from the business and bank loans. When the company's growth or survival requires more capital than those sources can offer, it may decide to sell all or part of the business through offering its stock to the public. By doing so, companies become subject to greater scrutiny by regulators and shareholders.
Companies may be willing to sacrifice control and privacy to access large amounts of capital they might otherwise not be able to obtain. They can use publicly traded stock as a form of currency for purposes that would normally require large amounts of cash, such as purchasing other companies or compensating officers.
Staying Private
For some companies, the drawbacks of public ownership outweigh the lure of accessing large amounts of capital. One of the major reasons a company stays private is that there are few requirements for reporting. For example, a private company is not subject to Securities and Exchange Commission (SEC) rules, which require annual reporting and third-party auditing.
Anyone who has held shares in a publicly traded company knows all about glossy annual reports that contain extensive information about a company's finances. Private companies do not need to produce such reports, or disclose important information about their finances to the public. While they must practice accurate and current accounting, they do not need to meet the stringent and complex accounting rules and standards applied to public companies.
Although private companies cannot raise capital in the public markets, they do have access to it through other sources like bank financing. Private companies that have been in business for long time periods have established relationships with their banks and can tap into commercial lines of credit when needed. The companies can also use their assets or inventory as collateral for the loan.
Investing in a Private Company
Private companies can also raise capital by offering stock ownership to outside parties or to employees. The value of a private company's stock is determined by private valuation. Some companies carry the stock at cost on their books, while others may use a different valuation method. Investors who own stock in a privately held company must be prepared to accept the valuations and terms that companies dictate.
Offering stock to outside investors usually comes as a prelude to going public, and the purchasers are often venture capital sources. A company may go public more gradually by offering stock to employees as incentive or as part of their compensation. This gives them incentive to devote their efforts toward one goal and raises needed capital. United Parcel Service (NYSE:UPS) remained private from its founding in 1907 until it went public in 1999. Prior to going public, UPS regularly offered its private stock for employees to purchase or as compensation. While the majority of the first shareholders probably didn't fully recognize the value of their shares, they found out when the stock started trading on a public exchange and its price was determined by public demand.
Conclusion
There are many reasons to take a company public; the most common one is to have instant access to large amounts of capital. However, that access also comes at a high price in the form of scrutiny by the SEC and shareholders. As a result, many private companies prefer to stay private and find alternate sources of capital. Traditional lending institutions provide collateralized loans and stock that can be used as private currency or sold to employees to raise capital. This means that while it is possible to invest in private companies, it usually requires close ties to the company. While remaining private suits a family company like S.C. Johnson well, UPS chose to go public in 1999 after 92 years in business to raise the amount of capital necessary to compete in the global delivery marketplace. Both companies p! erceive their choices as the right ones.
Going Public
Startups typically become established as private entities using capital from the owners or outside investors, cash generated from the business and bank loans. When the company's growth or survival requires more capital than those sources can offer, it may decide to sell all or part of the business through offering its stock to the public. By doing so, companies become subject to greater scrutiny by regulators and shareholders.
Companies may be willing to sacrifice control and privacy to access large amounts of capital they might otherwise not be able to obtain. They can use publicly traded stock as a form of currency for purposes that would normally require large amounts of cash, such as purchasing other companies or compensating officers.
Staying Private
For some companies, the drawbacks of public ownership outweigh the lure of accessing large amounts of capital. One of the major reasons a company stays private is that there are few requirements for reporting. For example, a private company is not subject to Securities and Exchange Commission (SEC) rules, which require annual reporting and third-party auditing.
Anyone who has held shares in a publicly traded company knows all about glossy annual reports that contain extensive information about a company's finances. Private companies do not need to produce such reports, or disclose important information about their finances to the public. While they must practice accurate and current accounting, they do not need to meet the stringent and complex accounting rules and standards applied to public companies.
Although private companies cannot raise capital in the public markets, they do have access to it through other sources like bank financing. Private companies that have been in business for long time periods have established relationships with their banks and can tap into commercial lines of credit when needed. The companies can also use their assets or inventory as collateral for the loan.
Investing in a Private Company
Private companies can also raise capital by offering stock ownership to outside parties or to employees. The value of a private company's stock is determined by private valuation. Some companies carry the stock at cost on their books, while others may use a different valuation method. Investors who own stock in a privately held company must be prepared to accept the valuations and terms that companies dictate.
Offering stock to outside investors usually comes as a prelude to going public, and the purchasers are often venture capital sources. A company may go public more gradually by offering stock to employees as incentive or as part of their compensation. This gives them incentive to devote their efforts toward one goal and raises needed capital. United Parcel Service (NYSE:UPS) remained private from its founding in 1907 until it went public in 1999. Prior to going public, UPS regularly offered its private stock for employees to purchase or as compensation. While the majority of the first shareholders probably didn't fully recognize the value of their shares, they found out when the stock started trading on a public exchange and its price was determined by public demand.
Conclusion
There are many reasons to take a company public; the most common one is to have instant access to large amounts of capital. However, that access also comes at a high price in the form of scrutiny by the SEC and shareholders. As a result, many private companies prefer to stay private and find alternate sources of capital. Traditional lending institutions provide collateralized loans and stock that can be used as private currency or sold to employees to raise capital. This means that while it is possible to invest in private companies, it usually requires close ties to the company. While remaining private suits a family company like S.C. Johnson well, UPS chose to go public in 1999 after 92 years in business to raise the amount of capital necessary to compete in the global delivery marketplace. Both companies p! erceive their choices as the right ones.
Saturday, August 24, 2013
4 Areas of Advisor Focus to Enhance the Client Experience
“The biggest challenge for the advisor is growing and attracting new business,” says Keith Johnson.
Johnson, vice president of practice management at Denver-based managed account provider Curian Capital, notes 49% of respondents said as much in a recent survey. The number hasn’t changed in three years.
“Where do they get most of their leads from? Referrals, obviously,” he adds. “But I feel the days of asking for referrals are over. The advisor shouldn’t have to ask for referrals; he should earn them.”
When asked if marketing budgets are therefore a waste of money, he explains that the resources should be reallocated for better results.
“Client birthday lunches, for instance. Let them invite a few friends. There should be no presentation and no sales pitch. Your job is to sing ‘Happy Birthday’ and pay the bill. On the way home, the friends will ask about you, and that is the referral.”
“Many advisors care more about their clients’ financial health than do the clients. I’d love to find out who said it first, but price is only an issue in the absence of value.”
With that, Johnson names four areas of focus that can enhance the client experience to gain referrals and grow the business.
1) Trust—Put clients above self, which goes to the advisor’s character
2) Service—Be proactive rather that reactive, which goes to the advisor's professionalism
3) Value—Provide clear solutions based on client needs, which goes to the advisor’s competence
4) Communicate, communicate, communicate, which goes to the relationship
Since top advisors do it every day, they might not realize the full extent of the value they provide to clients, he concludes, noting it’s almost "second nature."
“They help clients get organized, set goals and investigate areas of their financial lives about which many clients don’t even know.”
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Read 5 Tips for a Successful Referral Request on AdvisorOne.
Friday, August 23, 2013
U.S. Economy Grew at Sluggish 1.7% Pace in Q2
WASHINGTON (AP) — The U.S. economy grew from April through June at an annual rate of 1.7% — a sluggish pace but stronger than in the previous quarter. Businesses spent more, and the federal government cut less, offsetting weaker spending by consumers.
The government on Wednesday sharply revised down its estimate of growth in the January-March quarter to a 1.1% annual rate from a previously estimated 1.8% rate.
Though growth remains weak, the pickup last quarter supports forecasts that the economy will accelerate in the rest of the year. Economists think businesses will step up investment, job growth will fuel more consumer spending and the drag from government cuts will fade. If so, the Federal Reserve could scale back its stimulus later this year.
The April-June growth figure indicates that "the recovery is gaining momentum," Paul Ashworth, an economist at Capital Economics, said in a note to clients.
During the April-June quarter, businesses increased their spending 4.6% after cutting by the same amount in the January-March period. And spending on home construction grew 13.4%, in line with the previous quarter.
At the same time, the federal government cut spending only 1.5% after slashing it 8.4% in the first quarter. And state and local governments spent more for the first time in a year.
Still, government cutbacks have weighed heavily on the economy the past 12 months. Over the past four quarters, the economy has grown at just a 1.4% annual rate. But if you exclude federal, state and local governments, the private sector has expanded at a much stronger 2.3% rate.
The "ongoing fiscal drag is masking private sector health," said Joseph LaVorgna, an economist at Deutsche Bank, said.
The weaker growth in consumer spending last quarter was significant because consumers account for about 70% of the economy. And a surge in imports reduced growth by the most in three years.
Yet economists say steady job growth should provide enough money for Americans to spend more and help the economy expand at an annual rate of around 2.5% in the third and fourth quarters.
Some signs in the report suggest that companies expect demand to pick up. Businesses added to their stockpiles last quarter — typically a sign that they foresee higher sales.
On Wednesday, the government also released comprehensive revisions that updated the nation's gross domestic product, or GDP, over the past several decades. Those figures showed that the Great Recession wasn't quite as steep as initially estimated and that the recovery has been stronger than earlier thought.
The revisions showed that the economy grew 2.8% in 2012, up from an earlier estimate of 2.2%. Growth in last year's first quarter was revised much higher. And growth in the fourth quarter of 2012 was reduced to an annual rate of just 0.1%.
GDP is the broadest measure of the nation's output of goods and services. It includes everything from manicures to industrial machinery. But the government's comprehensive revisions included changes in how GDP is defined.
Research and development spending is now counted as investment, rather than an expense. So is spending on the development of entertainment products such as movies, music, books and TV shows. Those changes increased the size of the economy by about $470 billion, or about 3%, as of the end of 2012.
Pension benefit promises are now counted as income. That's a shift from the previous approach, which counted only actual cash payments by companies and government agencies into pension plans. This change boosted the savings rate by 1.5%age points in 2011 and 2012 to about 5.6%. In the second quarter, Americans saved 4.5% of their after-tax income, up from 4% in the first quarter.
Despite the still-sluggish economy, recent data have been encouraging and suggest that growth will strengthen.
Home construction, sales and prices have been growing since early last year. Americans bought newly built homes in June at the fastest pace in five years. That's helped raise builder confidence to a seven-year high, which should lead to increases in construction and more jobs.
Overall hiring has accelerated this year. Employers added an average of 202,000 jobs a month from January through June, up from 180,000 in the previous six months.
A separate report Wednesday pointed to solid job gains in July. Payroll provider ADP estimated that businesses added 200,000 jobs in July, the most since December.
And auto sales topped 7.8 million in the first six months of 2013, the best first-half total since 2007. Analysts expect sales to remain solid the rest of the year.
Unemployment is still high at 7.6%, limiting consumer spending. And budget fights in Washington could lead to a government shutdown this fall, potentially disrupting the economy.
Federal Reserve officials have forecast better growth in the second half of the year. And Chairman Ben Bernanke has said the Fed could scale back its bond purchases later this year if the economy strengthens. But Fed officials typically put more weight on employment and inflation data than on GDP figures.
The Fed ends a two-day policy meeting Wednesday, after which it could clarify its interest-rate policies in a statement.
Monday, August 19, 2013
Takeover Code: The basics
There have been similar kinds of situations not so long ago as well. Two of the major ones involved FMCG major ITC . The tobacco to hotels conglomerate increased its presence in the hotel space by acquiring shares of EIH and Hotel Leelaventure . The FMCG major did not cross the open offer threshold limit of 15% (at that time; explained later as well). The company continues to hold less than 15% stake in these companies as of the latest available data.
Anyways, with all these developments happening (and the probability of more taking place in the future) it would be good for investors to have basics understanding about the revised takeover code, which was released by the Securities and Exchange Board of India (SEBI) in mid 2011. The new takeover code came into force on October 22, 2011.
It must be noted that while the takeover code covers many aspects and in quite detail, we will touch upon the broader aspects of the code.
Trigger point
To start with, the trigger point of an open offer has been increased from 15% to 25%. What does this mean? If a person, individually or through PACs (persons acting on concert) acquires 24.99% of the shares or voting rights in a listed company, it will not trigger an open offer.
Definition of PAC
As per SEBI (Securities Exchange Board of India), 'PACs are individual(s)/company(ies) or any other legal entity(ies) who, with a common objective or purpose of acquisition of shares or voting rights in, or exercise of control over the target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly cooperate for acquisition of shares or voting rights in, or exercise of control over the target company.' If the acquirer or the PAC acquires more than 25% of the shares, then the acquirer(s) needs to purchase a minimum of 26% (from 20% earlier) of additional stake in the target company (also known as triggering an open offer). The takeover would be from the existing public shareholders of the target company.
Clarity required
As the new takeover code was released a while ago, the SEBI is believed to be reviewing some provisions of the code that have been identified by industry participants as impractical and hampering the deal-making process. To be precise, how 'PAC' is defined is what is being reviewed. As per The Takeover Regulations Advisory Committee (TRAC), the committee which submitted the report to SEBI in mid 2010 with the proposed new norms, acquirers or PACs should be disclosed as such for at least three years prior to the proposed acquisition. As per a leading business daily industry players believe the three-year period is too long and the definitions should be transaction-based rather than time-based.
Creeping acquisitions
While the above-mentioned are the rules to be followed by new acquirers, there is also a separate provision for existing stakeholders who already hold more than 25% of the shares of voting rights in companies. For such acquirers to increase their stake, they would be allowed to do so by acquiring shares to the extent of 5% in any financial year up to the maximum permissible non-public shareholding limit (i.e. 75%). The earlier limit for the same was 15% to 55%. This setting is termed as 'Creeping Acquisition'.
Acquisition of shares or voting rights in excess of this limit would trigger an open offer. Within this, there are certain rules related to the computation of this 5% creeping acquisition that have been included in the new code. These in brief include the consideration of gross additions and disregards sales and dilution.
Further, the Individual acquirer shareholding shall also be considered for determining the open offer trigger points apart from consolidated promoter shareholding. We will explain this with the help of an example. Suppose an individual holds 24.99% stake in a company. He is a part of a PAC that holds around 34.99% stake in the company. Suppose this individual were to acquire an additional 0.01% stake. Even though this is an individual action, it would still trigger the open offer under the takeover code.
Apart from creeping acquisition, existing acquirers (holding more than 25% stake in a company) can also make a voluntary offer to acquire a minimum of 10% of the total shares of the target company. However, this is applicable on two key conditions - the post offer shareholding should not exceed 75%; and, the acquirer would be eligible for the same only if he has not acquired shares of the target company in the previous 52-weeks (without attracting an open offer). Further, the acquirer can acquire more shares (except through a similar route) only after six months of completion of such an open offer. However, in the case of the acquirer's stake increasing beyond the permissible non-public shareholding limit, then he will be required to bring the stake down to 75% within a particular time period. Further, the acquirer is also not permitted to make a voluntary delisting offer under the SEBI Delisting Regulations, for a period of one year from the date of completion of open offer.
Some loopholes need to be closed
Similar to the uncertainty on how PACs are defined, SEBI is reviewing the provision related to the creeping acquisitions. The issue raised is mainly to tackle the situation of acquiring 5% stake in a financial year. A leading business daily reported that the new takeover code creates a strange situation wherein an entity can acquire 10% in a period of two days (as per the report, an entity can acquire up to 5% stake without triggering an open offer)- by acquiring shares on March 31 and April 1 of two different financial years. A clarification on the same is expected soon.
Acquisition of control
Next point we would like to touch upon is the acquisition of 'control'. The revised takeover code has exempted companies looking at gaining control by one acquiring substantial shares (when an acquirer acquires "substantial quantity of shares or voting rights" of the target Company) through a special resolution by postal ballot process. Now, any change in control of the listed company shall be only after the open offer.
Offer Price
With this, we come to the point of offer price calculation. The offer price shall be the highest of the negotiated price, volume weighted average price (product of the number of equity shares bought and price of each such equity share divided by the total number of equity shares bought) of the last 52 weeks prior to the public announcement, highest price payable or paid in the last 26 weeks before the public announcement or the volume weighted average market price (product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange) of 60 trading days prior to the public announcement.
Good for minority shareholders?
While the revised takeover code has its set of issues that still need to be resolved, on an overall basis the code is good for public shareholders. A key change in the revised code is the abolition of a non-compete fees. This is a welcome move for the minority shareholders as the new rule does not allow the promoters/sellers to receive a consideration, a non-compete fee or a control premium or otherwise. In fact the same shall be priced into the offer price, thereby giving all shareholders the highest of the offer price offered.
Equitymaster.com
Sunday, August 18, 2013
Technology Stock Roundup: Facebook Shines, Apple's in a ...
Last week saw technology stocks heading higher again, although some didn't quite keep up with the market.
Unlocking the Value in a Facebook "Like"
Facebook (FB) has announced a new service called Graph Search that allows users query-based access to social information in the form of posts, photographs and other content that others have shared. The service showcases the amount of personal and behavioral user data the company has accumulated, which along with its swelling monthly active users (MAUs), could be of great value to advertisers.
The single most important drawback is the quality of a Facebook like. Often, a "like" simply means "seen" or "acknowledged." Similarly, some sites require a user to "like" them for obtaining discounts. When the like doesn't reflect personal interest, it could affect the quality of search results the data generates, thereby leading to poor targeting of ads, which is the main concern. Facebook is roping in Microsoft's (MSFT) Bing to make good insufficient data, but only time will tell how effective this is.
Second, the mobile strategy has not been announced yet, although this is where it's likely to be more effective.
Another drawback is that the success of the service is dependent on the users' willingness to continue sharing personal information so advertisers can target them better. Since Facebook is more appealing to younger users who may care less about this, it is a lesser concern. It does of course mean that it is unlikely to replace the search services Google (GOOG) provides.
Microsoft's New Operating System
Microsoft announced its much-anticipated corporate shakeup last week to accelerate its conversion into a "devices and services" company. Its previous operating structure that highlighted product groups and created a good deal of infighting is now giving way to a more collaborative approach.
The device side of things – the new Devices and Studio Engineering Group --! will be headed by Julie Larson-Green. This group will include hardware development as well as games, music and entertainment. The goal is to get Microsoft devices on the same platform and create an ecosystem like that of Apple's (AAPL).
The Operating Systems Engineering Group will be headed by Terry Myerson, the Applications Services Engineering Group by Qi Lu, and the Cloud and Enterprise Engineering Group by Satya Nadella. The goal here is to develop the software and services that could position Microsoft strongly in the cloud computing market to deal with the growing competition from Amazon's (AMZN) AWS and others.
Microsoft hopes this dual focus on mobile and cloud will set up the company for future growth and help offset the persistent decline in its core computing market.
The entire company will be organized around eight functions: engineering (including supply chain and data centers), marketing, business development and evangelism, advanced strategy and research, finance, HR, legal and COO (including field, support, commercial operations and IT).
Sounds like a good plan.
Disorganized, Unprepared…Could This Be Apple?
Judge Denise Cote found Apple guilty of ebooks price-fixing back in 2010. Apple's defense was taken down systematically, but a central point was the "most favored nation," or MFN clause that served as the Trojan horse.
Apple denied that it was part of a plan to raise ebook prices, but it had an MFN agreement with the publishers that allowed it to match prices, if anyone charged less. Therefore, Apple's own actions showed that it was protecting itself from harm when prices were raised. So according to the doctrine of estoppel, Apple could not deny that it was a part of the conspiracy to raise prices.
The judge also noted that the testimony of some key witnesses was suspect inasmuch as they tried to skirt around the questions, practically perjuring themselves on occasion. On the subject of Amazon's leading m! arket pos! ition and monopolistic practices, the judge said that "Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."
Apple has a high price to pay. The lack of MFN clauses could redefine the way it has to strike deals for other content such as music as well. Moreover, a defeat in this case could result in triple damages (not such a hardship for Apple) and also bring on other damages from state governments and class action lawyers. Apple should have learnt a thing or two from Google, which had Schmidt looking after government relations a couple of years back.
Amazon shares gained 7.32% last week compared to Apple's 1.75% and the Nasdaq Composite's 3.05%.
The week ahead –
This is a huge week for the technology sector with many companies reporting earnings. Zacks methodology indicates that of all the companies reporting, Intel (INTC) has the best chances of beating estimates, although Yahoo (YHOO), eBay (EBAY) and Advanced Micro Devices (AMD) also have a fair chance. It's hard to tell if Microsoft, Google, International Business Machines (IBM) or Xilinx (XLNX) will beat, but read our previews on www.zacks.com to know more.
Unlocking the Value in a Facebook "Like"
Facebook (FB) has announced a new service called Graph Search that allows users query-based access to social information in the form of posts, photographs and other content that others have shared. The service showcases the amount of personal and behavioral user data the company has accumulated, which along with its swelling monthly active users (MAUs), could be of great value to advertisers.
The single most important drawback is the quality of a Facebook like. Often, a "like" simply means "seen" or "acknowledged." Similarly, some sites require a user to "like" them for obtaining discounts. When the like doesn't reflect personal interest, it could affect the quality of search results the data generates, thereby leading to poor targeting of ads, which is the main concern. Facebook is roping in Microsoft's (MSFT) Bing to make good insufficient data, but only time will tell how effective this is.
Second, the mobile strategy has not been announced yet, although this is where it's likely to be more effective.
Another drawback is that the success of the service is dependent on the users' willingness to continue sharing personal information so advertisers can target them better. Since Facebook is more appealing to younger users who may care less about this, it is a lesser concern. It does of course mean that it is unlikely to replace the search services Google (GOOG) provides.
Microsoft's New Operating System
Microsoft announced its much-anticipated corporate shakeup last week to accelerate its conversion into a "devices and services" company. Its previous operating structure that highlighted product groups and created a good deal of infighting is now giving way to a more collaborative approach.
The device side of things – the new Devices and Studio Engineering Group --! will be headed by Julie Larson-Green. This group will include hardware development as well as games, music and entertainment. The goal is to get Microsoft devices on the same platform and create an ecosystem like that of Apple's (AAPL).
The Operating Systems Engineering Group will be headed by Terry Myerson, the Applications Services Engineering Group by Qi Lu, and the Cloud and Enterprise Engineering Group by Satya Nadella. The goal here is to develop the software and services that could position Microsoft strongly in the cloud computing market to deal with the growing competition from Amazon's (AMZN) AWS and others.
Microsoft hopes this dual focus on mobile and cloud will set up the company for future growth and help offset the persistent decline in its core computing market.
The entire company will be organized around eight functions: engineering (including supply chain and data centers), marketing, business development and evangelism, advanced strategy and research, finance, HR, legal and COO (including field, support, commercial operations and IT).
Sounds like a good plan.
Disorganized, Unprepared…Could This Be Apple?
Judge Denise Cote found Apple guilty of ebooks price-fixing back in 2010. Apple's defense was taken down systematically, but a central point was the "most favored nation," or MFN clause that served as the Trojan horse.
Apple denied that it was part of a plan to raise ebook prices, but it had an MFN agreement with the publishers that allowed it to match prices, if anyone charged less. Therefore, Apple's own actions showed that it was protecting itself from harm when prices were raised. So according to the doctrine of estoppel, Apple could not deny that it was a part of the conspiracy to raise prices.
The judge also noted that the testimony of some key witnesses was suspect inasmuch as they tried to skirt around the questions, practically perjuring themselves on occasion. On the subject of Amazon's leading m! arket pos! ition and monopolistic practices, the judge said that "Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."
Apple has a high price to pay. The lack of MFN clauses could redefine the way it has to strike deals for other content such as music as well. Moreover, a defeat in this case could result in triple damages (not such a hardship for Apple) and also bring on other damages from state governments and class action lawyers. Apple should have learnt a thing or two from Google, which had Schmidt looking after government relations a couple of years back.
Amazon shares gained 7.32% last week compared to Apple's 1.75% and the Nasdaq Composite's 3.05%.
| Ticker | Last Week's Performance | 6 month performance |
| AAPL | +1.75% | -15.00% |
| MSFT | +4.20% | +32.65% |
| FB | +5.12% | -16.28% |
| GOOG | +2.70% | +27.62% |
| INTC | +1.01% | +8.64% |
| YHOO | +4.89% | +40.14! % ! |
| CSCO | +5.15% | +23.70% |
This is a huge week for the technology sector with many companies reporting earnings. Zacks methodology indicates that of all the companies reporting, Intel (INTC) has the best chances of beating estimates, although Yahoo (YHOO), eBay (EBAY) and Advanced Micro Devices (AMD) also have a fair chance. It's hard to tell if Microsoft, Google, International Business Machines (IBM) or Xilinx (XLNX) will beat, but read our previews on www.zacks.com to know more.
Saturday, August 17, 2013
Bull of the Day: Cree (CREE) - Bull of the Day
Top Blue Chip Stocks To Invest In 2014
Now that we are in the heart of earnings season, many investors are zeroing in on company reports to drive the market. While investors seem to be pretty bullish on financials for this quarter, one segment that may also provide some earnings growth is technology.However, not just any tech company will do, as you will need to drill down into a few key segments for strong earnings growth. In particular, the semiconductor segment could be an interesting choice, thanks to the high Zacks Industry Ranks for this space, and the surging stock prices of many companies in this corner of the tech world. A number of semiconductor firms fit this bill as solid investments during this time frame, but one stands out for its promise this earnings season; Cree (CREE).
CREE in Focus
Cree is a North Carolina-based company that focuses on LED products that are used in a number of applications including game displays, automobiles, signage, among others. Beyond their LED division, the company also makes power conversion products, Radio Frequency-based items, and semiconductor materials as well.
The firm is becoming increasingly well-known as demand increases for energy efficient applications across the board. Plus, it doesn't hurt that the firm's stock has risen by almost 200% in the past 52 weeks alone. While this is obviously an already amazing level of stock price growth, there is plenty of reason to believe that this trend can continue, especially if you look to earnings estimates for the company.
Estimate Picture
The consensus is looking for earnings growth of 87.5% for the current quarter and then 100% growth for the next quarter. Meanwhile, for the current year and next year periods, earnings growth is expected to come in at a robust 60%+ for both periods.
Estimates have also been rising lately, with all in the past 90 days risin! g. In fact, the most recent analyst estimates—for the next quarter and next year periods—were up 10%, suggesting that expectations are continuing to rise for CREE.
While this might be concerning to some investors, especially with the lofty growth that is baked into the company's projections, CREE does have a good track record of beating or meeting analyst expectations. The firm has met or beat expectations in all five of the last earnings reports, including double digit beats in two of the last four.
Thanks to these factors, the company has earned itself a Zacks Rank #1 (Strong Buy), suggesting that the firm could outperform in the months ahead as well. Plus, the stock has a Zacks recommendation of Outperform, meaning that the longer term look is also favorable.To top things off, the Zacks Industry Rank for this corner of the Semiconductor market is ranked extremely well. In fact, the industry is actually the highest ranked one, bar none, in our classification system, suggesting that the space is well poised to rise this earnings season too.
Bottom Line
As companies try to become more energy efficient, Cree's products look to become more in demand. This could continue to boost CREE's surging stock, and make this top ranked firm a solid investment.
This is especially true given how bullish many analysts are on the company and the firm's solid history at earnings season. And then when you add in the number one overall Zacks Industry Rank, investors could definitely still have a winner on their hands with this interesting tech company.
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Friday, August 16, 2013
Strong Buy on Newpark Resources - Analyst Blog
Best Penny Stocks To Buy For 2014
On Jul 6, Zacks Investment Research upgraded Newpark Resources Inc. (NR) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
The product and service provider to the oil and gas exploration industry delivered positive earnings surprises in three out of the last four quarters with an average beat of 3.8%.
With the international drilling market heating up, Newpark Resources has succeeded in winning quite a few contracts, thanks to its quality of products and services. In Jun 2013, Newpark Resources opened a state-of-the-art Laboratory Facility in Katy, Texas which will further ensure the supply of technically advanced products to its clients.
The company is scheduled to release its second quarter earnings in the latter half of this month. Newpark Resources' performance during the quarter indicates that it will again beat expectations this quarter.
In May 2013, Newpark Resources received a contract from the Kuwait Oil Company to provide drilling fluids and related services for land operation. This contract can generate $75 million for the company, depending upon the activity of its Kuwaiti counterpart.
These contracts show a steady demand for its products in both inland and offshore operations. In addition, consistent performance from the company enables it to reward its shareholders. The board of directors has again approved a $50 million share repurchase program for 2013 following the $50 million repurchased in 2012.
The Zacks Consensus Estimate for 2013 and 2014 are 81 cen! ts and 99 cents per share respectively. This reflects year-over-year growth of 22.35% and 22.91% in 2013 and 2014 respectively.
Besides Newpark Resources, other operators in the sector having a favorable Zacks Rank and are Exterran Partners, L.P. (EXLP) and Dawson Geophysical Company (DWSN). Both these companies currently retain a Zacks Rank #1 (Strong Buy).
Thursday, August 15, 2013
10 Commandments of Investment Failure
I wrote an article at the end of last month about Don Keough's fantastic book, "Ten Commandments for Business Failure." As Don notes in the opening, the idea for the book came to him when he was asked to speak about the secret to success, a task he found quite difficult:
"When I was asked to talk about how to win, my response was that I couldn't do that. What I could do, however, was to talk about how to lose and I offered a guarantee that anyone who followed my formula would be a highly successful loser."
Charlie Munger likes to quote the German mathematician Carl Jacobi, who said "Invert, always invert". At a 2008 event sponsored by Coca-Cola (KO) in Atlanta, Warren Buffett talked about this idea:
"You really want to reverse engineer your life. My partner Charlie Munger (who's 84 and drinks a lot of Coke's everyday too) says 'all I want to know is where I'm going to die so that I'll never go there'… If you engineer out of your life the habits of failure… what's left is success; it's not very complicated."
This applies to what I have been talking about recently, particularly in my article entitled "Buying Stocks on Sale" - most of us aren't looking to simply maximize our profits (despite what academia might think); in reality, we are looking for a risk-averse way to build our life savings at an attractive rate of return. For the great majority of people, an intelligent investment strategy that focused on buying great companies when they were attractively priced would generate returns that were more than satisfactory.
As such, I'm starting a list of "10 Commandments for Investment Failure", which outlines some things individuals should do if they hope to drain their brokerage accounts dry; I hope that others will help me build this list by adding their own two cents in the comment section of this article:
10 Commandments for Investment Failure
1. Buy and sell in and out of stocks; the more frequently, the! better.
2. Don't bother reading annual reports; EPS is all that matters.
3. While you're at it, don't read about business or financial history at all; this is the "great moderation", and the booms and busts of yesteryear are a thing of the past.
4. Spend the majority of your "research" time (if you feel the need to do research) watching CNBC.
5. Don't limit yourself to one area of expertise; diversify into commodities trading, currencies trading, etc.
6. Rely on spreadsheets; whatever number the DCF model spits out must be true…
7. Live in a bubble; find what agrees with your thesis and avoid that which doesn't
8. Look for the next big thing, especially in industries you know nothing about.
9. Avoid the advice of successful investors like Warren Buffett; everybody knows that "buy and hold" is dead anyways…
10. Use leverage; "2X" sounds a whole letter better than little old "X"
"When I was asked to talk about how to win, my response was that I couldn't do that. What I could do, however, was to talk about how to lose and I offered a guarantee that anyone who followed my formula would be a highly successful loser."
Charlie Munger likes to quote the German mathematician Carl Jacobi, who said "Invert, always invert". At a 2008 event sponsored by Coca-Cola (KO) in Atlanta, Warren Buffett talked about this idea:
"You really want to reverse engineer your life. My partner Charlie Munger (who's 84 and drinks a lot of Coke's everyday too) says 'all I want to know is where I'm going to die so that I'll never go there'… If you engineer out of your life the habits of failure… what's left is success; it's not very complicated."
This applies to what I have been talking about recently, particularly in my article entitled "Buying Stocks on Sale" - most of us aren't looking to simply maximize our profits (despite what academia might think); in reality, we are looking for a risk-averse way to build our life savings at an attractive rate of return. For the great majority of people, an intelligent investment strategy that focused on buying great companies when they were attractively priced would generate returns that were more than satisfactory.
As such, I'm starting a list of "10 Commandments for Investment Failure", which outlines some things individuals should do if they hope to drain their brokerage accounts dry; I hope that others will help me build this list by adding their own two cents in the comment section of this article:
10 Commandments for Investment Failure
1. Buy and sell in and out of stocks; the more frequently, the! better.
2. Don't bother reading annual reports; EPS is all that matters.
3. While you're at it, don't read about business or financial history at all; this is the "great moderation", and the booms and busts of yesteryear are a thing of the past.
4. Spend the majority of your "research" time (if you feel the need to do research) watching CNBC.
5. Don't limit yourself to one area of expertise; diversify into commodities trading, currencies trading, etc.
6. Rely on spreadsheets; whatever number the DCF model spits out must be true…
7. Live in a bubble; find what agrees with your thesis and avoid that which doesn't
8. Look for the next big thing, especially in industries you know nothing about.
9. Avoid the advice of successful investors like Warren Buffett; everybody knows that "buy and hold" is dead anyways…
10. Use leverage; "2X" sounds a whole letter better than little old "X"
Tuesday, August 13, 2013
Get An Academic Finance Career
If you've ever sat through a college class thinking that you could do as well as your professor, you're not alone. While teaching is a lot harder than it looks, there aren't many jobs where you can work nine months a year, do something you enjoy, get holidays, Christmas and spring break off, and earn a six-figure salary at the same time. To many it sounds like paradise, but like our friends the economists say, there is no free lunch. You may enjoy finance and investing as a student, but it is a long way from the student's desk to the professor's.
Teaching classes is only one part of a college professor's ongoing responsibilities. Depending on the school where they work, professors will also have committee meetings and research requirements. The old adage applies to business school professors as much as it does for anyone else in academics: it's publish or perish. Depending on the type of school where they work, professors could be asked to publish as many as two to three academic articles per year.
Why Do Business School Professors Have Such High Salaries?
Not to slight English or history professors, but there aren't many private sector jobs available for them, and there certainly aren't as many students lining up at every major college across the United States to get a master's degree in history as there are for the Master of Business Administration (MBA) degree. These two types of demand apply to finance professors and other disciplines like accounting.
What About the Supply of Professors?
While business school professors are in high demand, there is not a lot of supply. By some estimates, there are only 350 new grads each year and almost 500 new job openings (remember, Wall Street wants some of these people as well). Many Ph.D. programs in finance aren't very big and are also not found at many schools. There are very few smaller public universities, nearly no liberal arts schools and only a select number of the larger schools that even have finance Ph.D. programs. Many states have only one or two programs. In the existing programs, only a handful of students - often only five to 10 - are admitted every year. Another issue regarding the supply of business professors is that many college professors in the U.S. are baby boomers who earned their Ph.D.s in the 1960s and 1970s and will be retiring within the next 10 years. For those entering the field, this may mean big opportunities down the line.
What Does This Career Actually Entail?
Depending on the school where they teach, professors usually have a fairly flexible weekly schedule. The type of workload and research expectations should be an important factor when considering where to work. Here are a few points to consider: A typical teaching load is two to four classes per semester; these classes could involve instructing both undergrad and master level students. If the school has a Ph.D. program, the professor will likely be teaching these classes and/or advising these students.
Professors conduct their own research (often with graduate students assisting) for submission to academic publications and possibly to industry sources. The more prestigious the university, the more research tends to be emphasized over teaching.
Even though most students never see this side of their professor's work, professors also serve on faculty committees and advise students. For Ph.D. students, the professor might serve on dissertation committees, working on research with the students and helping to provide guidance in other ways. Many smaller state and local schools are teaching oriented, while more prestigious schools will expect a lot more in the way of research output. At top-rated schools, "teacher of the year" awards don't carry nearly as much weight as publications in the top journals. Parents of college-bound students should note this as well when considering where to send junior next fall.
Sounds Good, so Where Do I Sign Up?
Well, now that you know all about how to become a finance professor, there's just one small problem; in order to teach, you need a Ph.D. Sure, you can teach as an adjunct instructor for the thrill of teaching and a little extra money, but without a Ph.D. you can't get tenure or a good salary ($80,000 $120,000 per year for a nine-month contract). The traditional strategy is to go to the best school you can get into, and go out of state from where you want to end up. The out-of-state strategy is helpful due to factors of supply and demand. If one is in Iowa for example, then there are many more University of Iowa Ph.Ds looking for jobs than University of Michigan grads. In academics, intellectual diversity is big, but so is prestige.
If you want to work at an Ivy League school and get paid more than $200,000 per year, you'll a Ph.D. from an equivalent school. The general rule in academics is that you can always go down a notch for work, and usually sideways, but almost never upwards – unless you win the Nobel Prize or another prestigious award. The problem is that everyone in the field knows this and the spots for these usually small programs are extremely tough to get – often much more selective than for top MBA or undergrad spots.
What's Involved in Getting a Ph.D. in Business?
Depending on one's other graduate education, expect to complete four to five years of school before getting the opportunity to teach those eager young minds. During this schooling, you'll take advanced math courses, such as linear/matrix algebra and finite math, as well as a number of statistics-type courses such as econometrics, regression, multivariate and time-series analysis. This is required in order to do the statistical research for your dissertation and other independent research after graduation. This emphasis on math and statistics may be the single biggest hindrance for most considering this field.
The Bottom Line
If you want to go to a school that is in the mid to upper tier, then your Ph.D. work will have more in common with a math major than a money manager (unless you work at a quantitative hedge fund). If teaching is your passion and perhaps you don't really want to do research with your time, then plan on a teaching-oriented school. One handy rule is that if a university has a Ph.D. program in one or more business fields (not just finance), then research is usually emphasized. If not, then it's likely more of a teaching university. Even if you don't like research, plan on publishing some articles in academic journals if you want to get tenure.
Teaching classes is only one part of a college professor's ongoing responsibilities. Depending on the school where they work, professors will also have committee meetings and research requirements. The old adage applies to business school professors as much as it does for anyone else in academics: it's publish or perish. Depending on the type of school where they work, professors could be asked to publish as many as two to three academic articles per year.
Why Do Business School Professors Have Such High Salaries?
Not to slight English or history professors, but there aren't many private sector jobs available for them, and there certainly aren't as many students lining up at every major college across the United States to get a master's degree in history as there are for the Master of Business Administration (MBA) degree. These two types of demand apply to finance professors and other disciplines like accounting.
What About the Supply of Professors?
While business school professors are in high demand, there is not a lot of supply. By some estimates, there are only 350 new grads each year and almost 500 new job openings (remember, Wall Street wants some of these people as well). Many Ph.D. programs in finance aren't very big and are also not found at many schools. There are very few smaller public universities, nearly no liberal arts schools and only a select number of the larger schools that even have finance Ph.D. programs. Many states have only one or two programs. In the existing programs, only a handful of students - often only five to 10 - are admitted every year. Another issue regarding the supply of business professors is that many college professors in the U.S. are baby boomers who earned their Ph.D.s in the 1960s and 1970s and will be retiring within the next 10 years. For those entering the field, this may mean big opportunities down the line.
What Does This Career Actually Entail?
Depending on the school where they teach, professors usually have a fairly flexible weekly schedule. The type of workload and research expectations should be an important factor when considering where to work. Here are a few points to consider: A typical teaching load is two to four classes per semester; these classes could involve instructing both undergrad and master level students. If the school has a Ph.D. program, the professor will likely be teaching these classes and/or advising these students.
Professors conduct their own research (often with graduate students assisting) for submission to academic publications and possibly to industry sources. The more prestigious the university, the more research tends to be emphasized over teaching.
Even though most students never see this side of their professor's work, professors also serve on faculty committees and advise students. For Ph.D. students, the professor might serve on dissertation committees, working on research with the students and helping to provide guidance in other ways. Many smaller state and local schools are teaching oriented, while more prestigious schools will expect a lot more in the way of research output. At top-rated schools, "teacher of the year" awards don't carry nearly as much weight as publications in the top journals. Parents of college-bound students should note this as well when considering where to send junior next fall.
Sounds Good, so Where Do I Sign Up?
Well, now that you know all about how to become a finance professor, there's just one small problem; in order to teach, you need a Ph.D. Sure, you can teach as an adjunct instructor for the thrill of teaching and a little extra money, but without a Ph.D. you can't get tenure or a good salary ($80,000 $120,000 per year for a nine-month contract). The traditional strategy is to go to the best school you can get into, and go out of state from where you want to end up. The out-of-state strategy is helpful due to factors of supply and demand. If one is in Iowa for example, then there are many more University of Iowa Ph.Ds looking for jobs than University of Michigan grads. In academics, intellectual diversity is big, but so is prestige.
If you want to work at an Ivy League school and get paid more than $200,000 per year, you'll a Ph.D. from an equivalent school. The general rule in academics is that you can always go down a notch for work, and usually sideways, but almost never upwards – unless you win the Nobel Prize or another prestigious award. The problem is that everyone in the field knows this and the spots for these usually small programs are extremely tough to get – often much more selective than for top MBA or undergrad spots.
What's Involved in Getting a Ph.D. in Business?
Depending on one's other graduate education, expect to complete four to five years of school before getting the opportunity to teach those eager young minds. During this schooling, you'll take advanced math courses, such as linear/matrix algebra and finite math, as well as a number of statistics-type courses such as econometrics, regression, multivariate and time-series analysis. This is required in order to do the statistical research for your dissertation and other independent research after graduation. This emphasis on math and statistics may be the single biggest hindrance for most considering this field.
The Bottom Line
If you want to go to a school that is in the mid to upper tier, then your Ph.D. work will have more in common with a math major than a money manager (unless you work at a quantitative hedge fund). If teaching is your passion and perhaps you don't really want to do research with your time, then plan on a teaching-oriented school. One handy rule is that if a university has a Ph.D. program in one or more business fields (not just finance), then research is usually emphasized. If not, then it's likely more of a teaching university. Even if you don't like research, plan on publishing some articles in academic journals if you want to get tenure.
Monday, August 12, 2013
Can Whole Foods’ Organic Growth Continue?
Whole Foods Market (NASDAQ:WFM) opened its first store in Austin, Texas, in 1980 and it has since become the undisputed king of organic grocers. The company has laid out plans to open 1,000 stores in the U.S. in the coming decades, but it remains to be seen if its business model can support this kind of growth in the long term. Let's use our CHEAT SHEET investing framework to decide whether Whole Foods is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock's MovementShares of Whole Foods jumped almost 10 percent on May 7 as the company announced strong second-quarter earnings. The organic grocer improved its gross margin by five basis points in the second quarter. This alleviated some concerns by investors that Whole Foods margin would erode as the competition intensified in the organic food space. Additionally, some analysts thought that Whole Foods' investments in price discounts and promotions would hurt its margins. Instead, these investments were offset by a reduction in administrative expenses due to greater economies of scale and strong comparable store sales growth of 6.9 percent.
The company is scheduled to announce its third-quarter earnings on July 31. Greater capabilities in customer analytics and more investments in price discounts and promotions should give way to increased growth in same-store sales. Whole Foods continues to demonstrate a high return on invested capital, even in its oldest stores, and expects to open 32 more outlets this year. The company has opened 16 new stores in the first half of the fiscal year and bought the leases of six Johnnie's Foodmaster stores in the greater Boston area last quarter. While it is too early to tell whether Whole Foods can meet its ambitious goal of opening 1,000 stores across the country in the long term, new store openings will boost economies of scale, strengthen supplier relationships, and increase national brand recognition.
E = Earnings are Increasing Year-over-YearWhole Foods' earnings growth has been impressive: The company has increased earnings per share over the past 18 consecutive quarters on a year-over-year basis. The most recent quarterly number of 38 cents showed an 18.75-percent increase from the previous year's quarterly earnings of 32 cents. Administrative and selling expenses continue to compress due to greater economies of scale. Additionally, promotional endeavors such as its Team Member Appreciation Double Discount Day last quarter, along with the increasingly popular 365 Everyday Value line, have given more budget-conscious consumers a reason to shop at Whole Foods.
| 2013 Q2 | 2013 Q1 | 2012 Q4 | 2012 Q3 | 2012 Q2 | |
| Qtrly. EPS | $0.38 | $0.39 | $0.30 | $0.32 | $0.32 |
| EPS Growth YoY | 18.75% | 20.00% | 43.82% | 26.00% | 25.49% |
| Revenue Growth YoY | 13.37% | 13.71% | 23.64% | 13.65% | 13.59% |
Whole Foods' biggest competitors in the high-growth retail store space are Fresh Market (NASDAQ:TFM) and Vitamin Shoppe (NASDAQ:VSI). Whole Foods has the highest forward price-to-equity multiple of the three, implying that it is the most expensive. However, it has a reasonable price-to-sales ratio — an important metric in measuring retail stores. Whole Foods is a growth stock, so one should expect to pay a higher price for its future earnings potential. Also, it benefits from being a much bigger company than its peers and has a much lower debt-to-equity ratio than Fresh Market. Still, Whole Foods is expensive relative to the industry.
| WFM | TFM | VSI | |
| Forward P/E | 32.74 | 28.57 | 18.01 |
| Price/Sales | 1.68 | 1.90 | 1.50 |
| Operating Margin | 6.71% | 7.76% | 10.76% |
| ROE | 14.61% | 36.26% | 14.92% |
Whole Foods is currently trading at around $56.38, above both its 200-day moving average of $47.09 and its 50-day moving average of $52.50. The stock has experienced a strong uptrend in the past year — it's up 20.81 percent in the past 12 months. The Whole Foods management announced a two-for-one stock split along with its second-quarter earnings announcement, which provided the impetus for an almost 10-percent gain in the stock price on May 7. Additionally, the 50-day moving average recently crossed over the 200-day moving average, suggesting that investor sentiment is improving. The company is trading right around its 52-week high of $56.72.
Whole Foods continues to demonstrate profitability as a natural foods grocer. With an impressive expansion plan over the next several years and substantial investments in pricing discounts and promotions, the company will be able to cater to more customers than ever before and capitalize on the estimated 12-percent growth in the organic food industry over the next two years. While competition will certainly intensify as bigger-name retailers shift their focus toward natural foods, Whole Foods has built strong brand equity and a loyal customer base. There is certainly some downside risk if the macroeconomic picture darkens: Some customers will inevitably find cheaper substitutes to Whole Foods. However, because of the grocer's strong history of profitability and impressive growth prospects, Whole Foods is an OUTPERFORM.
Thursday, August 8, 2013
The Basics of Forex Leveraging
Leverage in trading simply refers to the ability to increase the size of your trade or investment by using credit from a broker. When trading using leverage, you are effectively borrowing from your broker, while the funds in your account act as collateral. This collateral is referred to as margin.
The amount of leverage available is based on the margin requirement of the broker. Margin requirement is usually shown as a percentage, while leverage is expressed as a ratio. For example, a broker might require a minimum margin level of 2%. This means that the customer must have at least 2% of the total value of an intended trade available in cash before opening the position. A 2% margin requirement is equivalent to a 50:1 leverage ratio. In practical terms, using 50:1 leverage, having $1,000 in your account would allow you to trade up to $50,000 worth of a given financial instrument. At a 50:1 leverage, a 2% loss in the instrument traded completely wipes out a fully leveraged account. Conversely, a 2% gain doubles the account.
Leverage by Market and Instrument
Leverage available differs substantially depending on what market you are trading and from which country you are based. For example, the degree of leverage available for trading stocks is relatively low. In the United States, investors typically have access to 2:1 leverage for trading equities, a margin level of 50%.
The futures market offers much higher degrees of leverage, such as 25:1 or 30:1, depending on the contract traded.
The leverage available in the forex market is higher still at 50:1 in the U.S. and as high as 400:1 offered by brokers internationally.
Leverage in Forex Trading
High leverage availability, coupled with a relatively low minimum balance to open an account, has added to the allure of the forex market to retail traders. However, excessive use of leverage is often and correctly cited as the primary reason for traders blowing out their accounts.
The danger that extreme leverage poses to investors has been recognized and acted on by the U.S. regulatory bodies, which have created restrictions on the amount of leverage available in forex trading. In August 2010, the Commodity Futures Trading Commission (CFTC) released final rules for retail foreign exchange transactions, limiting leverage available to retail forex traders to 50:1 on major currency pairs and 20:1 for all others.
As of 2013, brokers outside the U.S. continue to offer leverage of 400:1 and higher.
Examples of Leveraged Trades in the Forex Market
In our first example, we'll assume the use of 100:1 leverage.
In this case, to trade a standard $100K lot you would need to have margin of $1K in your account. If, for example, you make a trade to buy 1 standard lot of USD/CAD at 1.0310 and price moves up 1% (103 pips) to 1.0413, you would see a 100% increase in your account. Conversely, a 1% drop with a standard 100K lot would cause a 100% loss in your account.
Next, let's assume you are trading with 50:1 leverage and 1 standard $100K lot. This would require you to have margin of $2K (2% of 100K).
In this case, if you buy 1 standard lot of USD/CAD at 1.0310 and price moves up 1% to 1.0413, you would see a 50% increase in your account, while a 1% drop with a standard 100K lot would equal a 50% loss in your account.
Consider here that 1% moves are not uncommon and can even happen in a matter of minutes, especially after major economic releases. It could only take one or two losing trades using the leverage described in the examples above to wipe out an account. While it's exciting to entertain the possibility of a 50% or 100% increase in your account in a single trade, the odds of success over time using this degree of leverage are extremely slim. Successful professional traders often suffer a string of multiple losing trades but are able to continue trading because they are properly capitalized and not overleveraged.
Let's now assume a lower leverage of 5:1. To trade a standard $100K lot at this leverage would require margin of $20K. An adverse 1% move in the market in this case would cause a far more manageable 5% loss.
Fortunately, micro lots enable traders to use lower leverage levels such as 5:1 with smaller accounts. A micro lot is equivalent to a contract for 1,000 units of the base currency. Micro lots allow flexibility and create a good opportunity for beginning traders, or traders starting with smaller account balances, to trade with lower leverage.
Margin Calls
When you enter a trade, your broker will keep track of your account's Net Asset Value (NAV). If the market moves against you and your account value falls below the minimum maintenance margin, you may receive a margin call. In such an event, you could receive a request to add funds to your account, or your positions could simply be flattened automatically by the broker to prevent further losses.
The Use of Leverage and Money Management
The use of extreme leverage is fundamentally antithetical to the conventional wisdom on money management in trading.
Among the widely accepted tenets on money management are to keep leverage levels low, to use stops and to never risk more than 1-2% of your account on any one trade.
The Bottom Line
Data disclosed by the largest foreign-exchange brokerages as part of the Dodd-Frank financial reform legislation has shown that a majority of retail customers lose money trading. A substantial if not leading cause is the misuse of leverage.
However, leverage has key benefits, providing the trader with greater flexibility and capital efficiency. The absence of commissions, tight spreads and available leverage are certainly beneficial to active forex traders, creating trading opportunities not available in other markets.
The amount of leverage available is based on the margin requirement of the broker. Margin requirement is usually shown as a percentage, while leverage is expressed as a ratio. For example, a broker might require a minimum margin level of 2%. This means that the customer must have at least 2% of the total value of an intended trade available in cash before opening the position. A 2% margin requirement is equivalent to a 50:1 leverage ratio. In practical terms, using 50:1 leverage, having $1,000 in your account would allow you to trade up to $50,000 worth of a given financial instrument. At a 50:1 leverage, a 2% loss in the instrument traded completely wipes out a fully leveraged account. Conversely, a 2% gain doubles the account.
Leverage by Market and Instrument
Leverage available differs substantially depending on what market you are trading and from which country you are based. For example, the degree of leverage available for trading stocks is relatively low. In the United States, investors typically have access to 2:1 leverage for trading equities, a margin level of 50%.
The futures market offers much higher degrees of leverage, such as 25:1 or 30:1, depending on the contract traded.
The leverage available in the forex market is higher still at 50:1 in the U.S. and as high as 400:1 offered by brokers internationally.
Leverage in Forex Trading
High leverage availability, coupled with a relatively low minimum balance to open an account, has added to the allure of the forex market to retail traders. However, excessive use of leverage is often and correctly cited as the primary reason for traders blowing out their accounts.
The danger that extreme leverage poses to investors has been recognized and acted on by the U.S. regulatory bodies, which have created restrictions on the amount of leverage available in forex trading. In August 2010, the Commodity Futures Trading Commission (CFTC) released final rules for retail foreign exchange transactions, limiting leverage available to retail forex traders to 50:1 on major currency pairs and 20:1 for all others.
As of 2013, brokers outside the U.S. continue to offer leverage of 400:1 and higher.
Examples of Leveraged Trades in the Forex Market
In our first example, we'll assume the use of 100:1 leverage.
In this case, to trade a standard $100K lot you would need to have margin of $1K in your account. If, for example, you make a trade to buy 1 standard lot of USD/CAD at 1.0310 and price moves up 1% (103 pips) to 1.0413, you would see a 100% increase in your account. Conversely, a 1% drop with a standard 100K lot would cause a 100% loss in your account.
Next, let's assume you are trading with 50:1 leverage and 1 standard $100K lot. This would require you to have margin of $2K (2% of 100K).
In this case, if you buy 1 standard lot of USD/CAD at 1.0310 and price moves up 1% to 1.0413, you would see a 50% increase in your account, while a 1% drop with a standard 100K lot would equal a 50% loss in your account.
Consider here that 1% moves are not uncommon and can even happen in a matter of minutes, especially after major economic releases. It could only take one or two losing trades using the leverage described in the examples above to wipe out an account. While it's exciting to entertain the possibility of a 50% or 100% increase in your account in a single trade, the odds of success over time using this degree of leverage are extremely slim. Successful professional traders often suffer a string of multiple losing trades but are able to continue trading because they are properly capitalized and not overleveraged.
Let's now assume a lower leverage of 5:1. To trade a standard $100K lot at this leverage would require margin of $20K. An adverse 1% move in the market in this case would cause a far more manageable 5% loss.
Fortunately, micro lots enable traders to use lower leverage levels such as 5:1 with smaller accounts. A micro lot is equivalent to a contract for 1,000 units of the base currency. Micro lots allow flexibility and create a good opportunity for beginning traders, or traders starting with smaller account balances, to trade with lower leverage.
Margin Calls
When you enter a trade, your broker will keep track of your account's Net Asset Value (NAV). If the market moves against you and your account value falls below the minimum maintenance margin, you may receive a margin call. In such an event, you could receive a request to add funds to your account, or your positions could simply be flattened automatically by the broker to prevent further losses.
The Use of Leverage and Money Management
The use of extreme leverage is fundamentally antithetical to the conventional wisdom on money management in trading.
Among the widely accepted tenets on money management are to keep leverage levels low, to use stops and to never risk more than 1-2% of your account on any one trade.
The Bottom Line
Data disclosed by the largest foreign-exchange brokerages as part of the Dodd-Frank financial reform legislation has shown that a majority of retail customers lose money trading. A substantial if not leading cause is the misuse of leverage.
However, leverage has key benefits, providing the trader with greater flexibility and capital efficiency. The absence of commissions, tight spreads and available leverage are certainly beneficial to active forex traders, creating trading opportunities not available in other markets.
Wednesday, August 7, 2013
3 FTSE Shares Crashing to New Lows
LONDON -- The FTSE 100 (FTSEINDICES: ^FTSE ) may be down from the 13-year record high of 6,876 points it set on May 22, but it's also a long way from its 52-week low of 5,230 points. In fact, standing at 6,650 points as of 8:30 a.m. EDT today, the FTSE is up a strong 27% since its June 2012 nadir.
Sadly, there are quite a few companies of which the same cannot be said. Here are three doing pretty much the opposite of the FTSE.
Anglo American (LSE: AAL )
Mining shares have been having a hard go of it lately, but few of the big ones have suffered so badly as Anglo American, whose price hit a 52-week low of 1,512 pence yesterday. It has picked up to 1,557 pence today, but over the past 12 months it has dropped more than 20%. Anglo American has suffered more than most due to its high exposure to the iron ore market, where prices have fallen.
There's a small fall in earnings forecast for the year to December 2013, with a 16% rise penciled in for 2014 -- but forecasts for that far ahead based on commodities prices can be little more than guesswork. Still, with a P/E for this year of 11 and a well-covered 3.7% dividend expected, is this a bargain? That's up to you.
G4S (LSE: GFS )
G4S shares have a habit of regularly crashing to new lows. It happened in July last year, then again in November, and we've had another slump this month. This time it hasn't quite fallen to a record low, but with prices around 247 pence it has come pretty close.
The recent crash was triggered by the security firm telling us on May 7 that first-quarter margins were hurting and that pressure was "expected to continue for the full year." And just two weeks later, G4S announced that chief executive Nick Buckles will leave the group at the end of the month.
FirstGroup (LSE: FGP )
Full-year results from FirstGroup shocked the markets on May 20 with a profit warning, a dividend cut, and a rights issue. The result was a 30% fall in the share price, which ended the day on 156 pence. Since then, things have got even worse, and the price fell further to a 52-week low of 116 pence yesterday. Today it's back up to 125 pence, but that's still a 44% fall since results day.
With the final dividend suspended and no interim dividend due for 2014, the latest post-result forecasts suggest a 2014 full-year payment of only about 3 pence per share for a yield of just 2.4% even after the price crash.
What's the best way to deal with share price falls? One way is to focus on dividends, which can be spent or reinvested, according to your needs. Whether you're investing for income or growth, good old cash is always welcome. And that's why I recommend the brand-new Fool report "The Motley Fool's Top Income Share For 2013," in which our top analysts identify a share they believe will provide handsome dividend income for years to come. It will only be available for a limited period, so click here to get your copy today.
Tuesday, August 6, 2013
Best Energy Stocks To Buy Right Now
The Oklahoman reported last week about a movement out of Oklahoma City to get the United States Postal Service to switch from gasoline and diesel to natural-gas-powered vehicles. Natural gas is cheaper than either of those two fuels right now, which would be good for the USPS, but the real story here is in the power of demand. In this video, Fool.com contributor Aimee Duffy takes a look at what would happen if the Post Office pursued this idea.
The movement toward alternative energy is gaining momentum. One potential opportunity in this field is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Learn everything you need to know about Clean Energy Fuels in The Motley Fool's premium research report on the company. Just click here now to claim your copy today.
Best Energy Stocks To Buy Right Now: Albany Molecular Research Inc.(AMRI)
Albany Molecular Research, Inc. provides contract services to various pharmaceutical and biotechnology companies primarily in the United States, Europe, and Asia. The company offers a range of drug discovery services, including assay development and design, screening, screening library, natural product, medicinal chemistry, computer-aided drug discovery, in vitro ADMET, and bioanalytical services. It also provides chemical development services consisting of process research and development, custom synthesis, process safety assessment, scale-up capabilities, high potency and controlled substances, analytical services, preformulation services and physical characterization, preparative chromatography, IND support services, fermentation development and optimization, and building blocks collection and database services. In addition, the company offers chemical synthesis and manufacturing services. It manufactures active pharmaceutical ingredients (APIs)and advanced intermediate s. Further, the company provides contract manufacturing services in sterile syringe and vial filling for small molecule drug products and biologicals. Additionally, it offers formulation services, including neat API or pharmaceutical blend in capsules; PIB for solution and suspension; blending and sieving; milling; tableting; rheology; roller compaction; wet granulation; and fluid bed processing, including wurster coating; and associated analytical testing services for dosage formulation products, as well as provides analytical services, such as impurity identification and structure elucidation; method development, qualification, and validation; preformulation and physical characterization; quality control; stability services; analytical and preparative supercritical fluid chromatography; preparative chromatography; good laboratory practices bioanalytical services; and regulatory support/quality assurance services. The company was founded in 1991 and is based in Albany, New York.
Best Energy Stocks To Buy Right Now: Intrepid Potash Inc (IPI)
Intrepid Potash, Inc.( Intrepid), incorporated on November 19, 2007, is a producer of muriate of potash (potassium chloride or potash) in the United States and are engaged the production and marketing of potash and langbeinite (sulfate of potash magnesia), another mineral containing potassium, magnesium, and sulfate, that is produced from langbeinite ore and as Trio when it refers to sales and marketing. Its Carlsbad assets consist of underground mining operations, which are supported by surface processing facilities. It is also operators of solar solution mining operations, as its Moab and Wendover facilities both utilize these techniques for recovering potash. Its revenues are generated from the sale of potash and Trio. As of December 31, 2011, the Company owned five potash production facilities, three in New Mexico and two in Utah. Its two products are potash and langbeinite, which is marketed as Trio.
Potash
The Company derives revenues and gross margin are derived from the production and sales of potash. Its potash is marketed for sale into three primary markets: the agricultural market as a fertilizer, the industrial market as a component in drilling and fracturing fluids for oil and gas wells, and the animal feed market as a nutrient. Its sales of potash tend to focus on agricultural areas and feed manufacturers in central and western United States, as well as oil and gas drilling areas in the Rocky Mountains and the greater Permian Basin area.
Trio
Trio is marketed into two primary markets, the agricultural market as a fertilizer and the animal feed market as a nutrient. It markets Trio internationally through an exclusive marketing agreement with PCS Sales (USA), Inc. (PCS Sales) for sales outside the United States and Canada and through a non-exclusive agreement for sales into Mexico.
Best Warren Buffett Companies To Watch In Right Now: France Telecom S.A.(FTE)
France Telecom provides fixed telephony and mobile telecommunications, data transmission, Internet and multimedia, and other value-added services to consumers, businesses, and telecommunications operators. It also offers personal and home communication services, business network services, international carriers and shared services, and integration and outsourcing services for communication applications. The company operates in France, Spain, Poland, the United Kingdom, and internationally. France Telecom was founded in 1990 and is based in Paris, France.
Advisors' Opinion:- [By Chuck Carlson]
France Telecom (NYSE:FTE): Up 1.03% to $15.68. France Telecom SA provides telecommunications services to residential, professional, and large business customers. The Company offers public fixed-line telephone, leased lines and data transmission, mobile telecommunications, cable television, Internet and wireless applications, and broadcasting services, and telecommunications equipment sales and rentals.
Monday, August 5, 2013
Grab the Best Money Market Rates You Can
If you're looking to park some money in a money market fund, it makes a lot of sense to seek out the best money market rates. But before you actually commit any money, take some time to review the big picture.
The first thing to keep in mind as you look for the best money market rates is that money market accounts are best for short-term savings, not long-term investments. That's especially true today, in our low-interest-rate environment.
As an example, I looked up the prevailing interest rate for a basic money market account at my own bank, and found that for accounts with less than $10,000, the rate was just 0.15%. For those with $100,000 or more, it's still just 0.80%. Imagine that. If you had a whole million dollars in such an account, it would kick out just $8,000 per year! If you had a more typical $5,000 in the account and were earning 0.15%, you'd collect... $7.50 per year. Enough for a sandwich, perhaps.
Small differences add up
That's why it does pay off to find the best money market rates that you can. At sites such as Bankrate.com, for example, you can find the best rates near you, or the best rates nationally -- and there are plenty of financial institutions, such as Internet-based ones, that don't require you to live nearby.
A recent search turned up a 1.01% rate for accounts with at least $1,500 at EverBank, and a 0.85% rate from American Express. With a $5,000 account, you'd receive $50.50 from EverBank, and $42.50 from American Express. It beats the sandwich, at least.
Aim higher and longer
But here's a big problem: Historically, inflation has averaged about 3% annually. So even if you're earning 1% annually in interest, you're losing purchasing power over time. These days, even the best money market rates aren't likely to maintain the value of your investment, much less increase it.
Thus, consider alternatives. Dividend-paying stocks might draw your attention, since plenty of them have been consistently paying shareholders for many years, and frequently with yields above 3%. But be careful. The best of them will keep paying you no matter what the economy or stock market are doing, but at least over short periods, the value of even terrific stocks can sink temporarily. You don't want that to happen right before you need to sell and collect your proceeds. Money that you'll need within the next few years (and even 10 years, if you want to be very conservative and risk-averse) should not be in stocks.
A better compromise might be CDs. One-year CDs recently offered about 1% in yields, while two-year ones ranged up to 1.16% and five-year ones up to 1.6%. Those will likely beat the best money market rates you'll find, but they probably won't keep up with inflation, either. Other options include a variety of bonds, though there are cautions to heed there, as well.
If you're going to invest in a money market account, do seek out the best rates you can find, but if the difference between the best rate and your bank's more convenient rate is just a sandwich or two, perhaps stay put. Just don't park any long-term money in these accounts if you're looking for any kind of growth.
If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report, "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.
Sunday, August 4, 2013
How Apple Just Took Control
Between September and April, there was an overwhelming cloud of negativity surrounding Apple (NASDAQ: AAPL ) ; shares plunged for months on end. Investors focused solely on the bad, while wholly ignoring the good. Competition from Samsung has been escalating. Margins were facing a tough comparison to 2012 results. Apple's unreasonable cash position kept getting more unreasonable.
These are all valid gripes, but shareholders were still throwing the iPhone out with the bath water. The negativity has seemingly come to an end following Apple's last earnings release, in part because the company addressed the criticisms over its capital allocation program. I'm not the only one who thinks that Apple just changed the conversation.
Word on the Street
Barclays analyst Ben Reitzes was out this morning with a bullish note, reiterating an "overweight" rating while boosting his price target from $465 to $525. The analyst is encouraged by the healthy rally that Apple has maintained since earnings, downplaying some of the longer-term margin concerns. Gross margin last quarter took a big hit from depreciation and warranty accruals, the latter of which is a temporary hurdle.
More importantly, Reitzes believes that Apple is now "taking control of the narrative" following months of pessimism. Immediately after earnings, Apple set official dates for its Worldwide Developers Conference, which will highlight new software and services. It's been a dry spell between Apple product announcements, but the WWDC opening keynote is now on the horizon.
The analyst believes that WWDC has numerous potential catalysts in store. Apple could detail a new mobile payments solution to leverage its 500 million active iTunes accounts, unveil an iRadio music streaming service, or further beef up iCloud and Siri. The WWDC announcement should satiate investors and consumers until "this fall," when Apple is expecting to show off new hardware to integrate with those software and services.
Apple loves to control things, and it just took control of its news flow for the better.
Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.
Saturday, August 3, 2013
Brewers-to-Be: Beware
The craft brewing industry saw 15% volume growth in 2012, while the big guys -- led by Anheuser-Busch InBev (NYSE: BUD ) , SABMiller, and Molson Coors (NYSE: TAP ) -- are watching their megabrands lose market share.
This intoxicating craft growth is attracting new players in record numbers. While most don't see a beer bubble forming, brewers-to-be need to be careful. At the recent Craft Brewers Conference in Washington, D.C., Motley Fool analyst Rex Moore asked some established players what advice they have for newcomers. Today in this multipart series, we hear from Bill Butcher, founder of Port City Brewery in Alexandria, Va.
The biggest of the smalls
Boston Beer's Samuel Adams brand helped to redefine beer and kick off the craft beer revolution in the United States. Success breeds competition, though, and while just a few years ago Boston Beer had claim over most of the craft beer shelf, today the field is crowded. Can Boston Beer rise above the rest, or will it be squeezed between small local breweries on one side and global beer giants on the other? To help you decide, we've compiled a premium research report filled with everything you need to know about Boston Beer's risks and opportunities. Just click here now to find out whether Boston Beer is a buy today.
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