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Investing

Ideas and Strategies on Investing.

Previous Articles

October 2014 Investing Articles

10/31/2014

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Target Corp
Financial Freedom
Stock Selection
Parker-Hannifin
Coca-Cola
Earnings Estimates
The Price of Oil
The Microsoft Watch
Selling Cash Secured Puts
Eaton Vance Corporation
A Put-Call Strategy
Ares and Main Street
Three Stocks I'm Currently Avoiding
Redesigning the Home Page
Using Momentum Indicators
You Bought It For The Dividend
Re-Ordering those Stocks of Interest
Increasing Dividends Last Week
The Other Timber Companies
Chevron, the Dollar and the Price of Oil
SharpCharts Voyeur
Taking My Own Advice
Print and Save as a PDF Added
Translation Button Added
Inflation Is Your Greatest Risk

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Target Corp

10/30/2014

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Target's recent problems have been pretty well documented and publicized by Target Corporation as well as just about every financial writer on the internet. But as those problems begin to recede into the past, it's time to take a second look at the company and see if there's a light at the end of the tunnel.
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The Company
Target Corporation (TGT) operates general merchandise stores in the United States and Canada. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; music, movies, books, computer software, sporting goods, and toys, as well as electronics that consist of video game hardware and software; apparel and accessories, such as apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides food and pet supplies, including dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and home furnishings and décor, such as furniture, lighting, kitchenware, small appliances, home décor, bed and bath, home improvement, automotive, and seasonal merchandise comprising patio furniture and holiday décor. In addition, it offers in-store amenities. The company distributes its merchandise through a network of distribution centers, as well as third parties and direct shipping from vendors. Further, it provides general merchandise through its Website, Target.com; and branded proprietary Target Debit Card and Target Credit Card. As of September 15, 2014, the company operated 1,925 stores, including 1,795 stores in the United States and 130 stores in Canada. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. (Daily Chart) (Weekly Chart)
23 October
Price $60.65
1yr Target $59.32
Analysts 22
1yr Cap Gain -2.20%
Dividend $2.08
Yield 3.42%
1yr EST Tot Return 
     1.22%

Market Cap $38.44 Bil
Beta 0.55
EPS (ttm) $2.37
Payout Ratio 87.76%
EPS next yr $3.82
P/E 25.59
PEG 2.14
Forward P/E 15.90
Debt/Equity 0.86
ROA 3.40%
ROE 9.30%
ROI 8.80%
Sales $73.23 Bil
Income $1.51 Bil
Profit Margin 2.06%

The Fundamentals
There's a lot of information that can be gathered from the company's fundamentals listed below. My first impression is that despite the security breach that occurred last year, the poor entrance into the Canadian market, and the resulting news reporting that customers were staying away in droves, sales were down only slightly (-0.97%). This is actually remarkable. It demonstrates that Target's customers are a lot more loyal and resilient than previously reported. 

But looking at the earnings it's also obvious that the company's problems were very serious. A lot of the company's financial resources have been used this past year to solve those problems. The company's earnings took a minor hit in 2009 as the entire country experienced a relatively severe recession, and earnings took a major hit in 2014 as the company itself experienced its own unique problems. Fortunately earnings are estimated to increase going forward, but it'll be beyond 2016 before earning return to the level realized in 2013. 

Target's management, in order to protect their shareholders wealth, has graciously allowed the dividend to continue to increase by letting the payout ratio increase to levels above 50%. This has reduced the company's retained earnings and may have hampered their ability to increase future profits, but I think Target understands this and will slowly reduce the payout ratio as earnings once again expand. 
 
Year (January)
2016 Est
2015 Est
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Revenues
$76.00 Bil
$74.06 Bil
$72.59 Bil
$73.30 Bil
$69.86 Bil
$67.39 Bil
$65.35 Bil
$64.94 Bil
$63.36 Bil
$59.49 Bil
$52.62 Bil
$46.83 Bil
$48.16 Bil
Earnings
$3.82
$3.19
$3.07
$4.52
$4.28
$4.00
$3.30
$2.86
$3.33
$3.21
$2.71
$3.51
$2.01
Dividends
$2.29
$1.99
$1.65
$1.38
$1.15
$0.92
$0.67
$0.62
$0.54
$0.46
$0.38
$0.31
$0.27
Payout Ratio
59.94%
62.38%
53.74%
30.53%
26.86%
23.00%
20.30%
21.67%
16.21%
14.33%
14.02%
8.83%
13.43%
Revenue Growth Rate
1 year = -0.97%
2 year = 1.93%
3 year = 2.48%
4 year = 2.66%
5 year = 2.25%
10 year = 4.18%
Earnings Growth Rate
1 year = -32.08%
2 year = -15.31%
3 year = -8.37%
4 year = -1.79%
5 year = 1.42%
10 year = 4.32%
Dividend Growth Rate
1 year = 19.56%
2 year = 19.78%
3 year = 21.26%
4 year = 25.27%
5 year = 21.62%
10 year = 19.84%

The Technicals
Normally I use fundamental analysis to identify great companies and technical analysis to identify the best times to buy and sell stocks, but Target is a special case because of its recent history of problems. The real information to be gathered from the charts comes from the weekly chart rather than the daily chart. It's apparent from the weekly chart that Target has been looking for, and making, a long curving bottom. In fact there might have been a double bottom in February/March and May/June (see chart below). From those points the stock has been moving higher by making higher highs and higher lows. It appears that the worse may finally be over for Target. At least technically.

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Daily Chart
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Weekly Chart

The Competition
Target Corporation is part of the Discount, Variety Stores Industry which is part of the Services Sector of the economy. Below are a few of the major corporations included in this industry. They each pay at least a minimal dividend and they are listed in the order of their market capitalization.
  1. Walmart Stores Inc.  (WMT)
  2. Costco Wholesale Corporation  (COST)
  3. Target Corporation  (TGT)
  4. Family Dollar Stores Inc.  (FDO)
  5. PriceSmart Inc.  (PSMT)
  6. Big Lots Inc.  (BIG)
  7. Freds, Inc.  (FRED)

Conclusion
I don't normally disagree with the experts on estimating a future target price on stocks, but in the case of Target I think the analysts may be a little too pessimistic. I think the target needs to be adjusted higher. If I'm wrong, the worse that could happen to an investment I would make in this company is that I'm invested too early and the investment will take longer to pay off. 

I really think this stock bottomed earlier this year near 54/55 and that the stock is slowly but consistently moving higher. I could easily see this stock priced at $68/share within a year giving this company a P/E ratio of around 17, which is not unreasonable. This would also produce a one year capital gain in excess of 12%. Add in a dividend yield of 3.42% and this results in a return on investment of over 15%. These are excellent numbers for any type of investment.

Another reason to start a position in this company today is the fact that management has continued to raise the dividend at a rate close to 20% per year, despite its recent problems. This tells me that management believes that this situation can be managed and that they expect a positive conclusion to these problems. 

All in all, I think Target is a great company with a great future. Their security problems are being fixed and their expansion into Canada (and future international markets) is being overhauled. I think both of these events have been seminal events for this company and that the lessons learned will actually improve the company long term. 

I believe my assessment is correct and that the only mistake I may be making is one of pure timing. As a result, I intend to start a small position in this company and I'll add to that position as the numbers and the chart's indicators confirm my thesis. I think this will get me properly positioned in this security and keep my attention on this company's fundamentals and its future.
Life Interactive Chart
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Financial Freedom

10/28/2014

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Investing in dividend producing stocks provides a constant and regular stream of income over a sustained period of time. These dividends will in turn produce a constant stream of income which provides security and independence for the individual investor. For me, this is the true purpose of investing. 

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Companies usually declare their dividends quarterly during their quarterly earnings announcements and pay their dividends either on a quarterly or monthly basis depending on the company’s policies and the wishes of the Board of Directors. Reviewing the company’s earnings announcement will allow the investor to determine if the company’s sales and earnings are increasing and whether the amount of earnings are greater than the dividend distributed (obviously an important item to notice). This payout ratio should be calculated and compared to earlier periods. All of this is extremely important because a company that is increasing their sales and earnings over time will eventually increase their dividend if their payout ratio remains constant. This is exactly the kind of company that I am looking for when I do my research. 

I’m constantly looking for a company that is constantly and consistently increasing sales, earnings and dividends over several years. In fact, the more years of increasing dividends the better.  While I’m not aware of any lists of companies that have consistently increased their sales and earnings over time, there are lists of companies that have increased their dividends over time. These lists are labeled the Dividend Contenders, the Dividend Aristocrats, and the Dividend Kings.
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Dividend Contenders are companies that have not only consistently paid dividends for at least 10 years but have increased those dividends each year during that same period. Dividend Aristocrats are companies that have done the same for at least 25 years, and Dividend Kings are companies that have done this for at least 50 years. They’re three great lists but there are obviously fewer companies on the Dividend Kings list than the Dividend Contenders List. Personally I prefer the Dividend Aristocrats List when researching equities. Since these lists demonstrate a sustainable dividend policy, my main concern when researching these stocks is to discern a consistent demonstration of increased sales and earnings and a consistent payout ratio. I understand that sales and earnings are often affected by macro economic and seasonal factors so I look for increased sales and earnings year over year rather than quarter over quarter. I believe it’s a more reliable comparison. 

Conservative companies with an increasing amount of sales and earnings will increase their dividends over time for several reasons. One reason is that management and employees are typically equity owners in the company and the dividend financially helps these individuals. Another reason is that it benefits unaffiliated shareholders and also keeps them financially happy. Another reason is that dividends support the price of the stock because as the stock falls the yield increases and brings in more buyers of the stock. This helps support the price of the stock by affecting the supply and demand ratio. Each of these things are good for a stock as well as the company itself. 

As an individual investor of dividend growth companies, I look for companies that will not only pay a sustainable dividend but a dividend that will increase annually over time to ensure that my buying power is maintained in the future. It is this sustainability into the future that will provide a lifestyle with a level of security and independence that only the power of an independent source of income can provide. It is the freedom that only financial freedom can provide.
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When determining this cost of financial independence, it’s necessary to first determine an individual’s cost of living or cost of lifestyle. Security and independence can come rather quickly if your lifestyle is simple. It can take quite a bit longer if your lifestyle is extravagant. It’s each individual investor’s choice but it’s nice to know that independence and security is possible at all levels. When individual income is balanced against individual costs, security and independence is obtained and freedom begins.

Since the average income of a family of four was $50,054 in the United States in 2012, that seems to be a reasonable place to start. Luckily that amount can be easily obtained by simply having a portfolio of companies worth $1.25M that pay an average of 4% in dividends. If you have a portfolio of companies that pay an average of 3% in dividends you’ll need a portfolio worth $1.66M. 

While that may seem overwhelming, the requirement to produce $50,054 may be somewhat misleading. If an investor has alternative streams of income like social security benefits or a company sponsored retirement. It may also quite realistic to learn that if an entire family of four can live on this amount, then maybe a retired couple can live on much less.

Good Luck and Good Trading.

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Stock Selection

10/26/2014

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When looking for companies to invest in I’m most interested in companies that grow both the business as well as the dividend. I'd like to see a company increase its revenue and earnings 8% per year because I’d like my portfolio to increase 8% per year. There’s nothing magical about 8%, it’s just the threshold that produces a nice list of candidates for research.

As companies increase their revenues and earnings over time, management has to make the decision of what to do with their increasing earnings. I like the ones that pay out part of those earnings as dividends and take the other part and invest it in the business. If a company pays out none of its earnings as dividends, I’m not interested in that stock at all. If the company pays out all of its earning in dividends then it tells me that management doesn’t know how or is unable to grow the company. For the most part I’m not interested in these companies either. 

Most companies that I’m interested in pay out part of their earnings in dividends and keep part of their earnings to grow the company. The part that they pay out in dividends can vary anywhere from 1% to 99% and this percentage is called the Payout Ratio. Companies that payout more than 70% are not desirable because they retain very little earnings to expand the business or develop new products. Companies that payout less than 20% had better have a great track record of using their earnings to increase profits going forward. I prefer companies that payout between 20% and 70% in dividends.

I also look at the growth rate of the dividend itself. If management is retaining part of earnings for the purpose of growing the profits of the company and they maintain the same payout ratio then the dividend should increase every year. I look for the dividend to increase at least at the rate of inflation. This rate of increase is necessary to maintain my purchasing power in the years ahead. If the cost of living is increasing at 3% per year, I need my stocks to increase their dividends by at least 3% per year to keep up with that cost of living. And more than the cost of living is better. I would like to think that in the future I will be making more relative to the cost of living than I’m making today.

I also expect to take those dividends and invest them back into those companies that are increasing my dividends going forward. I don’t subscribe to any dividend reinvestment programs because I prefer not to be locked into buying a specific stock. I prefer to invest dividends into companies that produce the best opportunities at the moment I receive the dividend which may or may not be the company that’s paying the dividend. It’s a level of control over my investments I’m unwilling to concede.

In the end, dividends are dependent on the revenues and earnings that the company generates, the payout ratio that management puts in place, and the annual dividend growth rate that enhances my future purchasing power. It’s all a trade off but as a general rule the farther out retirement is the lower the payout ratio and the greater the dividend growth rate the better. If retirement isn’t that far away then the higher the payout ratio and the less the dividend growth rate the better. It’s all a manner of life span. The older I get the more I want dividends now and the less growth I need in the future. The reason should be obvious.

Therefore the more an investor begins to understand all the variables involved in investing, the more he begins to understand how investing is connected to both the point he's at in his life as well as his expectations of when and how he'll spend his retirement. These are all individual decisions but they are things that have to be constantly considered and reevaluated. Otherwise, there won’t be a retirement and I’ll end up working the drive thru window at the local hamburger joint.

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Parker-Hannifin

10/25/2014

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Parker-Hannifin is the bluest of the blue in the eyes of dividend growth investors. This company has been raising its dividend annually for the last 57 years and this week they raised it once again another 31%. Parker-Hannifin is one of the premier companies on the list of Dividend Kings.

The Dividend Kings are a select group and there's only one company (Diebold) that has been increasing its dividend longer and only three others (Dover Corp, Genuine Parts, and Proctor and Gamble) have been raising it an equal number of years. 
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The Company
Parker-Hannifin Corporation (PH) manufactures and sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. It operates through two segments, Diversified Industrial and Aerospace Systems. The Diversified Industrial segment provides pneumatic, fluidic, and electromechanical components and systems; filters, systems, and diagnostics solutions to monitor and remove contaminants from fuel, air, oil, water, and other liquids and gases; connectors, which control, transmit, and contain fluid; hydraulic components and systems for builders and users of industrial and mobile machinery and equipment; critical flow components for process instrumentation, healthcare, and ultra-high-purity applications, as well as components for use in refrigeration and air conditioning systems, and in fluid control applications for processing, fuel dispensing, beverage dispensing, and mobile emissions; and static and dynamic sealing devices. This segment sells its products to original equipment manufacturers and their replacement markets in manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural, and military machinery and equipment industries. The Aerospace Systems segment offers flight control, hydraulic, fuel, fluid conveyance, and engine systems and components for commercial and military airframe, and engine programs. It also provides electronics thermal management heat rejection systems, and single-phase and two-phase heat collection systems for radar, ISAR, and power electronics. This segment markets its products directly to original equipment manufacturers and end users in the commercial and military aerospace markets. The company markets its products through direct-sales employees, independent distributors, and sales representatives. Parker-Hannifin Corporation was founded in 1918 and is headquartered in Cleveland, Ohio. (Daily Chart) (Weekly Chart)
23 October
Price $116.39
1yr Target $125.07
Analysts 15
1yr Cap Gain 7.45%
Dividend $1.92
Yield 1.64%
1yr EST Tot Return 
     9.09%

Market Cap $17.32 Bil
Beta 1.57
EPS (ttm) $6.86
Payout Ratio 27.98%
EPS next yr $8.60
P/E 16.97
PEG 1.65
Forward P/E 13.53
Debt/Equity 0.35
ROA 8.00%
ROE 16.30%
ROI 11.60%
Sales $13.22 Bil
Income $1.04 Bil
Profit Margin 7.86%

The Fundamentals
The fundamentals are pretty solid on this company, but that's to be expected from a Dividend King. Investors should note that the rate of growth in revenues and earnings have slowed during the last few years. This is down from those solid levels in the early part of the 2000s. Estimates for company growth rates going forward show revenues returning to the 3-5% level and earnings returning to the 11-12% level over the next couple of years (see below). In addition, dividends are estimated to grow at a rate in the low teens. These are solid numbers all across the board. 

Year
2016 Est
2015 Est
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Revenues
$14.13 Bil
$13.56 Bil
$13.21 Bil
$13.01 Bil
$13.14 Bil
$12.34 Bil
$9.99 Bil
$10.30 Bil
$12.14 Bil
$10.71 Bil
$9.38 Bil
$8.21 Bil
$7.10 Bil
$6.41 Bil
Earnings
$8.60
$7.67
$6.87
$6.26
$7.45
$6.37
$3.40
$3.13
$5.53
$4.67
$3.71
$3.34
$1.94
$1.12
Dividends
$2.75
$2.52
$1.89
$1.74
$1.58
$1.35
$1.03
$1.00
$0.88
$0.72
$0.63
$0.54
$0.51
$0.50
Payout Ratio
31.97%
32.85%
27.51%
27.79%
21.20%
21.19%
30.29%
31.94%
15.91%
15.41%
16.98%
16.16%
26.28%
44.64%
Revenue Growth Rate
1 year = 1.53%
2 year = 0.26%
3 year = 2.27%
4 year = 7.23%
5 year = 5.10%
10 year = 6.40%
Earnings Growth Rate
1 year = 9.75%
2 year = -3.98%
3 year = 2.52%
4 year = 19.22%
5 year = 17.02%
10 year = 13.47%
Dividend Growth Rate
1 year = 8.62%
2 year = 9.37%
3 year = 11.74%
4 year = 16.38%
5 year = 13.57%
10 year = 14.22%

The Technicals
The technicals are showing that this stock probably should have been bought two weeks ago when the overall market was getting trashed. As the market has come back, so has Parker-Hannifin. Fortunately the MACD is still below the zero line and moving up so I would expect the stock to continue higher from here. Personally I would look for a pullback to a point closer to the lower Bollinger Band. However, this is such a great and consistent company I would be buying this for the long term so I'd try to get the best price that I could but I wouldn't stress over trying to find the absolute bottom. Others obviously would differ with my me on these types of decisions.

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Daily Chart
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Weekly Chart

The Competition
Parker-Hannifin Corporation is part of the Industrial Equipment and Components Industry which is part of the Industrial Goods Sector of the economy. Below are a few of the major corporations included in this industry. They each pay at least a minimal dividend and they are listed in the order of their market capitalization.
  1. Parker-Hannifin Corporation  (PH)
  2. Pentair PLC  (PNR)
  3. Watts Water Technologies, Inc  (WTS)
  4. Barnes Group Inc  (B)
  5. Mueller Water Products, Inc  (MWA)
  6. CIRCOR International, Inc  (CIR)
  7. Standex International Corp  (SXI)
  8. Sun Hydraulics Corp  (SNHY)
  9. General Cable Corp  (BGC)
  10. Chase Corp  (CCF)

Conclusion
While there are other companies that have a better one year estimated capital gain and a better dividend yield, it's hard not to be interested in a company that's been growing its dividend for the last 58 years. And while I don't invest on faith, I've got to give this company the benefit of the doubt in forward looking estimates. I am in no hurry to begin accumulating this company since it has moved up from its recent lows, but I'm going to monitor this stock for future pullbacks. This is exactly the kind of company I want in my portfolio. I like companies that will continue to make money and pay dividends for years to come. 
Live Interactive Chart
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Coca-Cola

10/24/2014

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The Coca-Cola Company may not be on every investor's lists of favorite stocks, but if investors dig into the numbers and the charts for even a small amount of time, they may find that this company might possibly put a smile on every investor's face. 

The Company
The Coca-Cola Company (KO) manufactures and distributes coke, diet coke, and other soft drinks worldwide. The company primarily offers nonalcoholic beverages, including sparkling beverages and still beverages. Its sparkling beverages include nonalcoholic ready-to-drink beverages with carbonation, such as carbonated energy drinks, and carbonated waters and flavored waters. The company’s still beverages comprise nonalcoholic beverages without carbonation, including noncarbonated waters, flavored and enhanced waters, noncarbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. It also provides flavoring ingredients, sweeteners, beverage ingredients, and fountain syrups, as well as powders for purified water products. In addition, the company licenses its technologies to suppliers and third parties. The Coca-Cola Company sells its products primarily under the Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Minute Maid Pulpy, Del Valle, Ayataka, Bonaqua/Bonaqa, and Schweppes brand names. The company offers its beverage products through a network of company-owned or controlled bottling and distribution operators, as well as through independently bottling partners, distributors, wholesalers, and retailers. The Coca-Cola Company was founded in 1886 and is headquartered in Atlanta, Georgia. (Daily Chart) (Weekly Chart)
22 October
Price $40.62
1yr Target $45.46
Analysts 20
1yr Cap Gain 11.91%
Dividend $1.22
Yield 3.00%
1yr Est Tot Return
      14.91%

Market Cap $178.16 Bil
Beta 0.48
EPS (ttm) $1.87
Payout Ratio 65.24%
EPS next yr $2.19
P/E 21.72
PEG 5.05
Forward P/E 18.53
Debt/Equity 1.18
ROA 9.10%
ROE 25.40%
ROI 11.20%
Sales $46.22 Bil
Income $8.37 Bil
Profit Margin 18.10%
Coca-Cola may be providing an opening for long term investors to grab a great company at a reduced price. Most of the carbonated beverage companies' (Coke, Pepsi and Dr Pepper) problems are well known and documented elsewhere on the internet. Most analysts are blaming the millennial generation for their changing tastes in beverages. The next generation is, in fact, drinking more non-carbonated beverages and the cola companies have been slow to react. 

It's also recognized that these companies have finally woken up to this fact and are now trying to change their product mix as quickly as possible. Have no doubt that they'll be successful (as they have many times in the past) but these companies are so large that it is going to take time for this to occur. As a result, earnings have taken a short term hit causing the stock price to take a hit as earnings are announced and progress is being gauged. 

For the smart long term investor this is an opportunity to accumulate shares in a great company at a temporarily depressed price. I expect KO to grow at a similar rate (10%) as it has in its past for many years into the future. I also expect KO to continue to distribute a very similar and generous dividend (yield of around 3%) as it has in the past. 

Coca-Cola also looks like a great opportunity for the dividend growth investors. KO has been growing its dividend at a rate of about 8-9% per year for a decade and it's been increasing its dividend without a break for the last 51 years. Over the years this company has become the near perfect definition of a dividend growth company. 

With a P/E ratio of just over 20 this year and just under 20 next year, this company is fairly priced and great companies like this rarely become cheap. A 3% dividend growing at 8% per year is hard to walk away from. Add in an estimated one year capital gain of 10% and this is a real gem.

Revenue Growth Rate
3 year = 9.98%
5 year = 7.96%
10 year = 8.33%
Earnings Growth Rate
3 year = -9.02%
5 year = 8.91%
10 year = 8.00%
Dividend Growth Rate
3 year = 8.28%
5 year = 9.85%
10 year = 9.79%

The Technicals
Looking at the price charts below it's obvious that this stock is a great trading stock for slow swing traders. A trader could trade using the Bollinger Bands, the Relative Strength Index, the MACD or the ADX. They're all pretty much in sync and the signals confirm the price movement of the stock and each other. As long as the swing trader has the patience and discipline to trade at the reversing points every couple of months, there's a lot of money to be made here. 

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Daily Chart
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Weekly Chart

My Perspective
I see opportunities for the entire spectrum of investors. This stock is suited for long term investors, dividend growth investors, as well as swing traders. And that's just about everybody. It's just a matter of understanding the timeframe and perspective. I actually could see doing all three of these things with this stock and I could see myself ending up with a nice little nest egg. 

I see very little downside here except for those very short periods that would allow me to get in at a very pleasant price. With its high liquidity and the ability to use options with this security, it's possible to use puts and calls to get into and out of positions and therefore enhance the position's income above the normal yield of the dividend. 

If you're the type of investor that notices trading volume, you'll see a few more of my buys going across the ticker real soon. 
Additional Articles:
Swing Traders and Options Sellers, dated 4 August 2014
Soft Drink Companies, dated 12 June 2014
Six Companies On My Want List, 7 June 2014
Coca-Cola, 16 March 2014
The Coca-Cola Company, 3 March 2014
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0 Comments

Earnings Estimates

10/23/2014

0 Comments

 
Annual and quarterly estimates are just estimates. They may be educated estimates, but in reality they're just guesses made by really smart people. No one really knows, not even these really smart people, what the actual results are going to be until the quarter or year ends and all the numbers are in. Only then is the truth known. 

Most analysts spend their days reading SEC documents, company press releases and past quarterly and annual reports to try to determine the financial aspects of a company's performance. They also review the strategic aspects of the economy as it relates to the specific company they're following. But in the end, it's the specific guidance provided by the companies themselves that often determines the analyst's projections. And probably rightfully so since I would expect that no one should know the company's financials any better than the management of the company. And when management puts out guidance, analysts listen.

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When the analyst's estimates accurately predict the information in the company's quarterly or annual announcement, the price of the stock generally doesn't move much at all. And that's probably the way things should be. Estimates are revised and adjusted throughout the quarter and analysts guide investors toward the inherent value of the security. Estimates meet reality and the price of the stock is on par with its value.

Sometimes estimates and announcements are out of sync and the market reacts and it usually reacts immediately and at times violently. Sometimes the guidance is wrong, sometimes the estimates are wrong, and sometimes both are wrong. Regardless, the disparity between the two items can cause the price of the stock to move abruptly. If the announcement is higher than the estimates, the stock can open higher than the previous day's close. Alternatively, if the announcement is lower than the estimates, the stock can open lower than the previous day's close. Either way, it can present an outstanding investment opportunity for investors. 
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Investors who consider themselves fundamental analysts will look at the historical data and try to determine if the rate of growth in revenues and earnings is changing causing the value of the company to change. They may also look for changes in the company's debt level, the number of shares outstanding, changes in the economy, changes is company expenses and profit margins, or any of a number of other accounting changes. 

Investors that consider themselves technical analysts will look to the price chart to see if there's been any movement or changes to the various momentum indicators. He'll ask himself if the stock over bought or over sold? Is the stock reversing? Has it hit support or resistance levels? To this technical analyst the price chart will visually demonstrate what the fundamental analyst calls sentiment. Changes in the charts will often be referred to as changes in sentiment by the fundamentalists. And those are the changes in the sentiment or the price chart that create the opportunity for investors to make a lot of money.

It's why investors like the earning seasons. 
 
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The Price of Oil

10/21/2014

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As the price of oil falls to a level not seen since 2012, it's easy to think that it hasn't found the bottom and the price of oil is going to fall forever. When investors start to think that way, it's important to look at a long range chart and see today's price in respect to previous prices. Only then can an investor put things in perspective. 

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5 Year Weekly Price Chart of Crude Oil

Looking at the chart above it looks like there's support for the price of Crude Oil in the area of $80/barrel. In fact oil bounced of this area in both 2011 and 2012 making a bounce here a triple bottom. Technically this is a triple confirmation that this is the bottom of the price cycle. It should also be noted that as the price of oil rose in 2009 and 2010 it met resistance at the $80 level. Once it broke through in late 2010 that resistance became support just one year later. This is a classic chart for demonstrating resistance and support levels.

As most investors have seen over the last few months, companies whose market capitalization is based on owning crude oil in the ground have had their stock prices reduced (exploration and production oil companies) while those companies who buy oil to manufacture into another product have had their costs reduced and their market capitalization has increased (downstream oil refineries). Outside the oil industry, the consumer is seeing a reduced cost of heating oil and gasoline so they're going to have more money in their pocket to spend in other areas of the economy. One such area is Consumer Goods. And with Christmas just around the corner we could see increased spending for consumables and durable goods over the next two months. 

If oil goes back up, the reverse will occur. And this is really not an if. Oil will eventually go back up and the oil companies will once again rise in price. The only answer is when. If $80 is going to be the bottom, if support has already started to come into the market, then the integrated oil companies as well as the upstream oil companies will benefit. 

Now could be just the right time to start, or add to your position, in the exploration and production oil industry.  
Additional Articles:

"Re-Ordering those Stocks of Interest" dated 12 October 2014
"Chevron, the Dollar and the Price of Oil" dated 7 October 2014
"Chevron - When High is Too High" dated 25 June 2014
"Chevron and ExxonMobil" dated 30 May 2014
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The Microsoft Watch

10/20/2014

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The average investor may not understand the significance of the "soon to be released" Apple Watch but the competition does. Microsoft is set to announce a smart watch in the next few weeks and I'm expecting others to quickly do the same.

Most of the things that the Apple Watch will initially do already exist in other multiple hardware solutions or as downloadable apps. So what's the big deal. It's the Apple solution. Apple's going to bring it all into one gadget and make the technology intuitive. And it's going to be beautiful. Look for the Apple watch to revolutionize the health monitoring industry as well as the way we pay for everyday purchases. And this is just the beginning. 

Apple is never the first to market but when they arrive they crystalize the market and bring others along with them. They'll grow the pie and every industry it touches benefits. The competition, and especially Microsoft, know this all too well. That's why Microsoft will be announcing a smart watch. 

Let's hope it doesn't turn out to be another Zune.
Data as of 19 October 2014
Apple Inc.
19 October
Price $97.67
1yr Target $112.64
Analysts 44
1yr Cap Gain 15.32%
Dividend $1.88
Yield 1.92%
1yr Set Tot Return
 17.24%

Market Cap $584.84 Bil
Beta 0.89
EPS (ttm) $6.19
Payout Ratio 30.37%
EPS next yr $7.32
P/E 15.78
PEG 1.37
Forward P/E 13.34
Debt/Equity 0.26
ROA 17.90%
ROE 31.20%
ROI 25.50%
Sales $178.14 Bil
Income $38.56 Bil
Profit Margin 21.64%
Microsoft Corp.
19 October
Price $43.63
1yr Target $48.31
Analysts 29
1yr Cap Gain 10.72%
Dividend $1.24
Yield 2.84%
1yr Set Tot Return
 13.56%

Market Cap $359.50 Bil
Beta 1.01
EPS (ttm) $2.63
Payout Ratio 47.14%
EPS next yr $3.19
P/E 16.59
PEG 2.31
Forward P/E 13.68
Debt/Equity 0.25
ROA 14.10%
ROE 25.70%
ROI 19.50%
Sales $86.83 Bil
Income $22.07 Bil
Profit Margin 25.41%
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Selling Cash Secured Puts

10/20/2014

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Selling cash secured puts is just one part of my investing strategy, but it's an integral part of it. Selling naked puts, however, has never been a part of my investing strategy. And whenever the stock market has been pushed down as fast and as far as it has been lately, I begin to look more closely at the list of companies I'd like to own. Selling cash secured puts is a strategy for getting into a stock at a very desirable price.

Whenever I can determine that a stock has been priced below its intrinsic value, I have the option of simply buying that security or selling a cash secured put that will get me in at my chosen price or pay me for waiting. Selling puts will not guarantee that you'll become a shareholder of that company, but the strategy will pay you for waiting to see.

The difficulty with determining whether a stock is below it's intrinsic value. Fundamental analysts will look at future estimated revenues and earnings and calculate P/E ratios and PEG ratios. They'll look at debt, return on equity and profit margins to see if they're increasing or decreasing. And they'll look at product cycles. They may look at numerous fundamental factors and determine inherent value and if its less than the current price they'll declare it undervalued and issue a buy. 

Technical analysts will look at the various technical indicators. They'll look for over bought or oversold areas on a price chart and try to determine if the price is about to reverse. Most technical analysts use, at a minimum, the RSI and the MACD but there are dozens of others available. Contrary to fundamental analysts, technical analysts generally won't determine the inherent value of a security but instead simply look at the direction that traders are pushing a stock. They let the traders determine if a stock is overvalued or undervalued and simply buy or sell based upon the price activity of the security.

For those who are unfamiliar with cash secured puts, here's a nice review. 
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Click to Enlarge

Cash Secured Puts

Selling cash secured puts is a tactic I use in order to bring income into my account other than my own hard earned cash. I also use this strategy to enter a position at a price below the currently quoted price and at a price more appropriate to the underlying value of the stock itself. Similar to call options, a put option is, at its core, simply an option contract. It's derivative in nature and it’s value exists in its contractual obligation between the buyer and the seller. It’s also considered a long position and is therefore related to buying (going long) stock. 

The cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either be assigned and acquire the stock below today's market price or to collect the premium income for use in later trades.

When an investor is bullish on an underlying stock he can sell a cash secured put and hope for a temporary fall in the price of the stock. If it falls below the strike price, the put will most likely be assigned and the put would buy the stock at the strike price less the premium received.

What are the Risks?

One possible risk is that the stock may fall significantly below the strike price and the investor will be locked into a loss at assignment. Any investor in this situation must be comfortable prior to selling the put with being assigned the stock at the strike price.

Another possibility is that by waiting for a price dip for entry, the investor may miss out on a stock that continues to climb upward. Subsequent decisions would obviously repeating the short put strategy or closing out and buying the stock outright.

What kind of Investor Sells Cash Secured Puts?

This is primarily an income producing or a stock acquisition tactic for a price-sensitive investor. As a stock acquisition tactic, the goal is to collect the premium income and then acquire the underlying stock by assignment at a strike price less the premium received.

Unfortunately the assignment of stock is not guaranteed. If the stock’s price remains above the strike prior to the expiration of the option, the stock will never be purchased. The result would be pocketing the premium received for the put.

What is the Maximum Loss?

The maximum loss is limited but substantial. The worst that can happen is for the stock to become worthless. In that case, the investor would be obligated to buy stock at the strike price but the loss would be reduced by the premium received for selling the put. The maximum loss, however, is lower than it would have been had the investor simply purchased the stock outright.

What is the Maximum Gain?

The maximum gain from the put option itself is limited to the premium received at the time of sale. Gains in addition to the put option may include gains received after assignment when the stock appreciates in value. The best scenario would be for the stock to dip slightly below the strike price at the put option's expiration, trigger assignment and then rally immediately afterwards to record heights. The put assignment would have allowed our investor to buy the stock at the strike price minus the premium just in time to participate in the following rally.

What about Time Decay?

The passage of time will have a positive impact on this strategy, all other things being equal. As expiration approaches, the option tends to move toward its intrinsic value, which for out-of-money puts is zero. If the original forecast and goals still apply, the investor keeps the premium and is free to either buy the stock outright or write a new put.

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    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.

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