Stocks to Watch - 9 Feb 2016 - 5 stocks to defy the downturn

VTG - Vita Group (Retailing)
DRM - Doray Energy (Gold)
AGL - Australian Gas Light
IGB - iShares Treasury
IAF - iShares Composite Bond

The Share Market has had one of those down days today - worldwide. Just up until today, things seem to be settled a little, then the dramatic drop today. In such a market, the one advice is to stay out, unless one plan to short some stocks.

Surprising the five mentioned above has been doing quite well recently. And for investors who wish to park their money somewhere, then these five are worth investigating further.

AGL - a venerable gas company, whether you call it blue chip or not, it has been around for years. It has all the advantages of incumbency over new players who would face barriers of entry. It is not recognized as a growth stock usually - but take a look at its graph below - growth chasers wouldn't complain about AGL's recent performance while others are falling. Good for small growth and to ride out the storm.

Doray Energy - Gold miners have been doing well in the past 6 months due to the worldwide market downturn. This small gold miner is interesting in various respects. Not only is it trending up nicely, it does have positive earnings and a low PE. Definitely warrant deeper investigation. Aimed at the Speculator.

VTG - This group has been doing well recently. Though the last few days, it has been retracing, the general performance has been good over the past year. May be a good choice for moderate growth and to hold during periods of uncertainty.

IGB and IAF - both of these are ETFs in Bonds. For those who really want to play it safe, yet may still want a positive outcome during market downturn, these are two ETFs worth looking at. As the general rule goes, if the stock market is going down, people tend to switch asset classes and bonds is one class to consider.

How to beat Hyper-Inflation

Here is a collection of notes from various sites on hyperinflation.

http://seekingalpha.com/article/96723-what-effect-will-hyperinflation-have
An excellent article on inflation, with examples from recent history. It does a good comparison between modern US and the Weimar Republic of Germany in the 1920s. At the end it has some brief tips of what to do in case hyper inflation hits your country. Some suggestions include:
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Cash in the form of government and/or corporate bonds, money in CDs and other bank accounts, will be hit the hardest. General index fund type of investments, such as DIA, SPY, QQQ, and the like will also be very bad investments. Stocks, in general, do not do well in a highly inflationary environment. However, if the Weimar experience is any guide, stocks will do much better than bonds or cash. Financial and retail stocks, however, will be the worst investments of all equities sectors. The best investments, in contrast, will be gold, silver, shares of companies whose assets consist of modern plant & equipment, productive lands, and other hard assets that will retain value.
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Some other articles:
http://crisistimes.com/inflation.htm#survive
http://www.peakprosperity.com/forum/understanding-effects-hyperinflation-and-debts-personal-level/10599

Post a comment if you know of more articles.

When to Invest in Bonds.

Bonds can be confusing at first to anyone new to it. The common features in bonds which may cause confusion are:
- When Bond yields go up, the Bond price comes down and vice versa.
- When Stock Market goes up, the Bond Market goes down and vice versa.

There is nothing special about the Bond Price which is the amount you pay to buy a bond or amount you receive when you sell a bond, just like anything else in any market.

Also there is nothing special in the definition of the simple yield of a Bond. The yield is like the fixed interest you get at regular periods (when you are still owner of the bond) divided by the price you paid.

To get to the point of when to invest in bonds, we should clear up why yield going up will lead to price coming down. Say I buy a 10year bond with 5% yield at $1000. By definition, at the end of the life of the bond (10 years), the owner will get back $1000. Along the way, the owner will get 5% interest or $50.

Imagine sometime before the 10 years, the bond on the market is priced at $800. If I need to sell the bond, and someone else buy it, it would be $800. The new owner will still get $50 interest based on the price of $800. Hence the yield has increased.

In the reverse case, when the price on the market for the same bond is $1200, the new owner still get $50 interest at regular period. Since the new owner paid $1200 but get only $50, so the yield is lower than the original 5%.

So that is the mechanics of why bond yield is inverse to bond price. But what drives the market, that is the people, to want to pay such different prices to the bond face value? There are many complex reasons which interact with each other. But here is just a list of simplistic reasons to help make sense of it:
- When the general interest rate go up, say Reserve Bank increases interest rate, so banks also increase interest rates. To remain attractive, the bonds which are still not matured, need to attract investors by giving better yield. It can only do this if it sells for a lower price.
- Inflation also drives the interest rate up thus also lowering bond price.
- When the economy is booming, interest rate in general goes up, thus bond yield need to go up to be competitive. This makes bond prices lower. Hence when stock market goes up, bonds go down.
- The reverse is also true. When inflation is low, interest rate low, stock market is down, then bond price goes up.

A real example in the Australian market. Given current market conditions of relatively high interest rate compared to other countries, and a stock market that is not improving, there is a greater chance that the Reserve Bank would decrease interest rates. If this happens, then bond prices should go up. But be wary of holding bonds long term as the inflation risk will slowly reduce the value of bonds.

Conversely, there is talk in the news that the US bond market is reaching a bubble. That may well be true given the historic low interest rate. When the US interest rate starts to increase, then that make break the bond bubble and send prices tumbling down.

This article covers the very basic of bonds. There are various types of bonds like Government Bonds, Corporate Bonds, etc. Please investigate further before investing......

References:
http://finance.yahoo.com/education/bond
Goldman Sachs: Best Time in a Generation to Buy Stocks, Sell Bonds

Valuation - the VectorVest way.

This is an explanation of how the VectorVest system calculates the value of a company.
(For other ways of valuation, see:
Warren Buffet's 1981 Formula for quick valuation   )

The P/E ratio is a common and simple ratio used to estimate the value of shares. It can be used to compare with P/E ratio of different companies in the same sector to see if the share is overprice or underprice. However, the PE ratio is very inaccurate as many stock analyst would know, but still uses from time to time.

The other funny result from P/E ratio is that for companies with No Earnings or making a loss, then the P/E ratio is infinite, hence not published. A better way is to look at the E/P ratio, for companies with no earnings, then the E/P ratio is zero.

Another quantity is the Earnings Yield, calculated like:
        EY = 100 x P/E
but we can use the E/P ratio in there like:
        EY = 100 / (E/P)

The E/P ratio is more intuitive because it is like Dividend / Price which is the Dividend yield, since earnings is like dividend.

Another very important relation that the VectorVest founder discovered is like investors will invest in bonds when stocks are performing poorly and then return to stocks when they perform better. So investments cycle back and forth between bonds and stocks. In the overall picture the yield from both are the same. Bonds yield are determined by interest rates (IY), so
         EY = IY

Now using the previous equations for Earnings Yield (EY), we have
         100 * (E/P) = IY

To find the actual value of the company, instead of price, we use the Value variable (V)
         100 * (E/V) = IY

So the value of a company is:
V = 100 * (E / IY)

This gives a value of a stock such that if we assume we want to get at least the interest rate of fixed bonds, then this formula tells us the value or price to pay. So if the price of the stock is much lower than V, then it is undervalued.


Here are a few useful strategies:
- Look for Green light
- RT 15 SMA > RT 10 SMA
- VST Mighty Mites

Buy and Hold Strategy - Pros and Cons

The so called buy and hold strategy has been popular for amatuer investors or those looking to park some money into the stock market believing that in the long run, they will have greater return on their investments than other asset classes such as property, government bonds or term deposits. There are various indications that show that this is in fact a failed strategy as investors who adopt this will be worse off.

Here is a list of arguments both for and against the Buy and Hold Strategy summarized from the book by Leslie N. Masonson

Buy--DON'T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk

For:
1. Stocks perform better over the long run compared to bonds, treasury bills, cash and is the only way to beat inflation.
2. A diversified portfolio of stock, bonds, mutual funds will provide positive return over the long term.
3. It is better to stay in the market all the time since no one can predict up or down.
4.Stock market always recover and go to new highs, so it is better to be patient and stay with it.
5. If investors miss the best rallies, they will miss out on the best returns so it is better to stay invested in the market.
6.Picking high and low points to sell and buy does not work, so might as well stay invested and also to avoid frequent buy or sell commissions.
7.Only commission is the initial purchase so better to be invested for the long term.
8.Buying no load active and / or passive funds does not incur commission.
9. Rebalancing a portfolio annually to achieve a certain stocks to bonds ratio yearly is good. There are no tax consequences if this is for retirement account (for US holders?).
10. Tax only need to be paid when stocks are sold. For the case of mutual funds, they do pass on capital gains yearly and investors need to pay some tax on this. This is more relaxed for retirement accounts. (for US holders?).


Against:
1. Sometimes may take up to 20 years to break even since there is usually bear market in this time frame. Historically some 20 year period may return negative after inflation is accounted for.
2. Exposed to bear markets and crashes. If you just buy and hold, you will lose what you have gained and need to wait for the recovery.
3. From 1998 to 2009, buy and hold strategy did not return positive return after inflation is accounted for.
4. Diversification may not help as some bear market or crashes affect all industries.
5. There is no defense in a bear market. Buy and hold is only effective during a bull market.
6. Missing out on strong market rallies is not as bad as avoiding the worst daily, weekly drops in the market. Movement of prices in a crash is much more severe than in a charging bull market.
7. Commissions on buying and selling stocks have dropped. ETFs in particular allow exposure to diversified set of stocks.