All I want is the GAZOLINE! Just walk away....

Thanks to Lord Humungus for his brilliant quotation! But that brings me to my recent trip to CA where I was able to firsthand experience the cheap gasoline at $3.50...yowzers! Then I read this in IBD:

May gasoline shot up 7.37 cents, or 3.3%, to $2.2826 a gallon, its highest close since Aug. 7. Stockpiles fell 2.79 mil barrels last week, a much bigger drawdown than expected. At 194.2 mil, those supplies are 7.2% below their 5-year average and at their lowest since Oct. '05, when Hurricane Katrina ravaged Gulf Coast facilities. June crude rose $1.26 to $65.84 a barrel.

Kind of makes you think that maybe, just maybe, someone is going to make some money this summer ;-)

Has the market reached a top?

So a few posts ago Flogger asked the following in a follow-up comment:

Do you think it is time to start selling at these lofty levels again so that we have some cash on the sidelines?

The short answer... No. Use stop orders to protect those gains.

The long answer... There are several market factors currently at play which are worth noting:

• Positive Factors: Interest rates have stabilized, higher oil prices are already factored into the market, many good earnings reports this quarter (many due to international growth), the dollar is weak which makes US companies more competitive, the housing mess is slowly deflating (that sub-prime concern did not tank the market), China growth may be slowing but is still strong and Iraq is already factored into the market.
  

• Negative Factors: Inflation could re-emerge due to higher energy costs --> driving higher interest rates. ("On Wednesday, crude oil futures settled up $1.26 to $65.64 per barrel and gasoline futures rose to 8 1/2 month highs on the New York Mercantile Exchange, after the Energy Department reported a decline in U.S. gasoline inventories.")
  

So all in all, the market seems positive to me at this time barring the potential for some higher interest rates on the horizon. Using the analysis above this helps me to formulate my investing strategy:

1. Own oil and oil drillers right now. It serves as a balance against the negative exposure of oil prices continuing to increase.
   
2. Own higher dividend paying companies. It provides a little insurance against any downward movement...and everyone loves dividend stocks right now.
3. Have overseas exposure. Most of the growth being shown by the current earnings reports are being sourced internationally.
   

I am sticking with this market until something really starts falling apart. And using any dips (like the one back in March due to the sub-prime and China scares) to buy some of the stocks on my watch list.

Cancel your memberships and get $$

The going rate for an annual Sam's club membership is $40 in the greater Fort Collins Area. Since we are moving to a country with no Sam's club, we decided to see if we could cancel our membership and get a pro-rated refund. Well, much to our surprise the membership policy at Sam's is a 100% guarantee. As such, we simply stated that we wanted to cancel our membership and they refunded all $40 even though we have been using this years membership for about 7 months. That was a nice surprise...

Do something yourself ... #2

A few months ago my Mr. Coffee coffee grinder suddenly stopped working mid-grind. So I says..."crap!", cause you never really want to run out of coffee. As I sit there staring at the darned thing...and banging it a few times...the wife immediately chimes in and suggests that we go buy another one...seeing as they are only like $25. So I think about it and immediately say...nah, I can fix this.

So I whip out the screwdriver and start taking it apart. It only takes a minute to get the cover off and the thing is darned hot. Hmmm, this is probably why it stopped. So I look around for anything that resembles a fuse...aha, there it is, on the wire lead located just before the motor. That's gotta be it. So I get the soldering iron out and cut the fuse off and solder the wire back together...put the case back on and voila! 15 mins start to finish...which turns out to be roughly $100 per hour savings...not even factoring in the saved trip to the store to buy a new one.

Logic: it's already broken...what more harm could I do but waste a few minutes of my life with a soldering iron...which by the way is NEVER a waste of time ;-)

10 Percent

As I was sitting in Barnes & Noble last night reading an exceedingly boring book about high yield investing strategies, I sat back and thought about the golden 10% assumption. I always use it..and why not...historically it is been proven to be reasonably accurate over the long haul. But when taken a bit further, if you deconstruct that into monthly gains required...amazingly it is only a paltry 0.8% per month return! Honestly that stuck me as a pretty low bar to try and cross every month. I think that we can do better ;-)


Now I know that we won't always pick stocks that go up...but geez...on any given day the price of a stock can go up or down a percentage point or two. Even the 3 GenX holdings are already up about 1% from the last update post I gave...just 4 trading days ago.

Having said this...I have absolutely no desire to become a day trader, seeing as the commissions tend to eat you alive and make profits exceedingly difficult. BUT... it does stress the point that if you can pick some good quality stocks which are cheap, and be selective in your holding of positions...you will likely see them rise. And when they do, you need to be willing to cash in and sit on the sidelines for another great opportunity to present itself. If this is the case...then it would appear to be reasonable to assume that we could beat that 10% assumption in any type of market.

PEG Ratio

I am seriously considering adding PEG ratio to my list of criteria for selecting an investment. It embodies the sentiment of assessing how expensive a stock is in a forward looking way:

PEG Ratio: A stock's price/earnings ratio divided by its year-over-year earnings growth rate. In general, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth.

Typically anything under 2 is considered good...but as always...we are looking for exceptional value. As such, I am always on the prowl for good solid companies with a PEG below 1.0 or even 0.5 if it can be found. Here are how the three GenX holdings stack up at the moment...

1. BP: PEG=0.94
2. GSF: PEG=0.19
   
3. TNE: PEG=0.51

As you can see, all three of these are still dirt cheap as measured by future earnings growth despite their recent run. It should be noted that the ENTIRE offshore drilling sector (GSF) is extremely cheap at the moment...all with very low PEG ratios due to the fact that they are all commanding great day rates on their rigs.

Easy way to stay on top of things...Part 1

This one will probably be pretty obvious to most everyone, but...

I thought I would quickly share the first method I use to keep a handle on my investments. This method monitors the daily performance and summarizes the news for my stocks. I use feeds from Yahoo Finance News in conjunction with Netvibes. This combination allows me to quickly scan the big news items for all my holdings in an efficient manner. This is obviously not where the research stops...but this will at least alert me to the big things that I need to watch for daily.

A move made a month ago...part 2

Now that we have discussed the selection criteria which I was employing last month...let's look at what happened.

Free up some cash: Get $27K to start.

• I sold $22K of INTC at $19.28. As I mentioned before, Intel does in fact meet my criteria as an investment. The issue is that I am extremely overweighted in Intel due to the fact that I work there. As such, I really want to diversify away from this position...aka, Enron-syndrome.
  
• I sold $5K of IBM at $94.20. IBM does NOT meet all my criteria (Market cap of $143B, been in business >5 years, current earnings $6.72, +9% earnings growth next year, 1.2% yield, +5% price target and a good balance sheet).
  

What I bought with the $27K:

• $12K was put into a 5% online savings account. Since some of the $27K was earmarked for "savings" I decided that it would be best to pay ourselves first.
  
• $5K was put into British Petroleum at $59.49 (price target of $73).
• $5K was put into Global SanteFe at $58.41 (price target of $72).
• $5K was put into Tele Norte Leste Participacoes at $13.19 (price target of $19.50)

Relative Success criteria over the past month: Beat the investments I sold as well as the indexes!

• Intel has moved up to $20.47 (+6%) and IBM has moved up to $95.16 (+1%). As such, the weighted average I need to beat is : +5.1%
• Dow is up +1.4%
• S&P is up +2.8%
  

Results:

• The $12K in savings only returned 0.4% for the month.
• BP is up +12.4%
• GSF is up +9%
• TNE is up +27.8%
• Weigted results: +9.3% ---> even with 44% "under the mattress".

Obviously this was a pretty good month...I do not expect things to go this well in the future.... but it does show how you can go with good companies and still make some money. Now the hard part comes...when to sell. My original thinking for when to sell was based on two things:

1. News which significantly alters the fundamental assumptions wrt EPS or EPS growth or
   
2. The stock has risen to within 5% of the 1 year price target.
   

On the news front: there was only one game-changing announcement and that was for TNE.

Moving higher on the ADR index were shares of Brazil's Tele Norte Leste Participacoes and Brasil Telecom Participacoes (BRP) . Stock in each company gained more than 5% following a local report that the government has given clearance for the two telecom services providers to merge.

I will poke deeper into the news on these three over the next week. I am not sure if news of a merger is enough to change my hold position on TNE. People do say "buy on the rumor and sell on the news"...but since TNE had so much headroom to begin and still has so much headroom to go, I am not sure that applies. I will have to think about this one over the weekend...any thoughts from the critics out there?

As for the second sell criteria: Getting within 5% of the target price...nothing is close yet. In fact, TNE still has the most room to target of the three despite a big run. For now I think I will wait out earnings season. I do not expect any huge negative news out of these three since they are consistent performers.

Dividend Terminology

I was originally confused by the three dates that we commonly see when it comes to dividends. Since the tax law changed (pro-dividend) the focus on dividends has become a hotter topic. As such, here is something I found on a forum board which helped clear things up in a jiffy:

EX DATE- anyone who has bought the stock up until the day prior to this date (whether the trade settles or not) is entitled to the dividend attached to the share. If a stock has an ex div date of 14th April, if you buy on the 14th, you aren't entitled to the div.

RECORD DATE- this is basically the date where the company registrars take a snapshot of their books and say "ok, whoever owns the stock according to what we see settled gets the dividend". As Don pointed out, this date is staggered after the Ex Date so that trades have time to settle and simplify the distribution of money and save us all passing the dividend on to the rightful owners in the case of unsettled trades. If your trade has not settled, for whatever reason, dont panic because you WILL still receive it as it is your legal right.

PAY DATE- Exactly what it claims to be i.e. the day the company distributes dividends to share owners.

That's all.

A move made a month ago...part 1

I was intending to post about this before I placed the BUY orders ... but I ran out of time with the Costa Rica trip...and thus no post. I will write about the experience anyway, seeing as how it demonstrates the new foundation which I have been using for picking investments. I am sure that I will make tweaks to it over time, but it definitely fits my current investing style pretty good. At the end of the day it makes sense to me...which is most important for keeping one's sanity.

Backing up... I have read numerous articles, books and online references attempting to find a good recipe for picking that next great stock. Just like everyone else I figured out that there is no secret sauce to make gobs of money...damn! I used to subscribe to the theory of ultra-speculative stock picking ... mainly in tech ... based on my experiences of the late 90s. Those days are long gone...and to be honest, I never ended up doing all that well in that vein anyway. So now what?

Since I am now in my early 30's, I can definitely still afford to be a high risk investor...and there definitely is a time and a place for that...but in general I find myself gravitating towards solid companies with proven track records. I also don't want to go the mutual find route since they tend to under perform after you take into account their true performance and expense fees. Index funds definitely have a time and a place for any sane portfolio but since our 401K and IRA already have exposure here...I figure my butt is already covered with my safe money. So out into the brave world of picking a small basket of individual stocks...

My stock selection criteria is very loose at the moment and still needs a lot of refinement. My basic guiding principles at the moment are:

1. Market cap >$1B: This one keeps me out of a lot of trouble and keeps me from thrill seeking with little stocks that tend to be more speculative.
2. Been in business for at least 5 years: I want something with a stable track record which I can research and analyze.
   
3. Positive EPS (current year): A company that loses money just fundamentally does not work for me.
4. Positive EPS Growth: Future estimated earnings better be showing me at least 10% growth if I want my investment to grow at >10%.
5. Non-Zero Dividend: If the stock is making tons of moolah in today's market, then they should be returning some of it directly to the investors. If the growth rate is high then this can be low...but if the growth rate is marginal to my 10% bar then I want some $$ back as an insurance policy.
   
6. >20% Headroom To Price Target: It is very easy to find the 1 year price target for a company on most financial websites. Since most analysts are crooks and generally wrong...I want a comfy margin on price target so I land in positive ground. When combined with bullets 3, 4 and 5 above...this absolutely screams undervalued stock to me.
7. A good balance sheet: This one comes from reading Jim Cramer's Mad Money: Watch TV, Get Rich book. He does a nice section on how to read the balance sheet to ensure the company can pay off its near term debt obligations. If it can't do this...then it goes overboard.

So what type of stocks does this unearth? Well, I have yet to actually find a stock screener which lets me search all 7 criteria above so there is no easy button there. What I can tell you are the stocks which I was evaluating a month ago which met this criteria:

• British Petroleum (BP): Market cap of $215B, been in business >5 years, current earnings $5.88, 10% earnings growth next year, 3.8% yield, +25% price target and a good balance sheet.
• Globalsantafe Corp. (GSF): Market cap of $15B, been in business >5 years, current earnings $7.18, 27% earnings growth next year, 1.6% yield, +22% price target and a good balance sheet.
• Tele Norte Leste Participacoes S.A. (TNE): Market cap of $6B, been in business >5 years, current earnings $1.67, 17% earnings growth next year, 5.1% yield, +48% price target and a decent balance sheet (higher percentage of debt due to phone network expansion projects). FYI - these guys are the number 2 telco company in Brazil with huge cellphone growth rates.
• Intel Corp. (INTC): Market cap of $119B, been in business >5 years, current earnings $1.08, 24% earnings growth next year, 2.3% yield, +18% price target and a good balance sheet.

So what do you notice? Nothing too sexy to be honest...except for maybe the Brazilian ;-) All are good companies with solid performance and future promise to deliver. I would gladly stand behind any one of these companies...although the Intel has been painful for a lot of people.

Well, it's getting late so I will fill you in on the actual trade and performance tomorrow. Also, we will discuss my daily post-trade analysis and the exit strategy plans which I have laid out for myself...

Do something yourself #1

A few weeks ago, I started working towards selling my truck. I took it into the Dodge dealership to finally get that coolant leak taken care of. They informed me that they needed to replace the water pump and it would be about $550. I said...sure...seeing as it would be exceedingly difficult for me to sell my truck with a puddle of fresh green liquid underneath. They also informed me that they could fix that broken passenger side mirror for a mere $350. So I said to myself: "Self, huh? $350 for a mirror???". So I respectfully declined. FYI - I later found the entire motorized passenger side mirror assembly for a mere $35 ($44 incl. shipping) on Ebay auto parts.

Fast forward to last weekend when I was cleaning my truck... I managed to pull the rear view mirror off my windshield...oops! So for a few days I was driving around town with two out of my three mirrors out of commission. It was really driving me crazy so I stopped at Checker Auto and picked up some adhesive. By Wed afternoon I had reattached the rear view ($4 adhesive and 5 mins labor) and also installed the passenger side mirror ($44 parts and 23 minutes labor). Afterwards I sat down in the truck, admired all three working mirrors and basked in the glory that I had saved myself $306 in just 23 minutes...~$800 per hour. I wish I could find a way to sustain that level of return ;-)

What can you learn from Herb?

This morning I dropped my truck off at the Dodge dealership to have a small repair done. A nice old man named Herb drove me back to work. We started by discussing the terrible weather lately and then got into a conversation regarding his retirement oddly enough. Here is his story in a nutshell:

He has been retired now for 12 years. He spent the first 9 years traveling Central America. He settled in Guatemala due to a host of reasons (Panama/Costa Rica too expensive, El Salvador/Nicaragua too dangerous, nothing to do in Honduras). He started a NY Deli business and employed 5 locals to help out. Apparently he lost money on the whole endeavor. After 9 years in Central America the money ran out and he returned to Fort Collins to become a shuttle driver for the local auto shop. His reason for running out of money: I never planned to live this long.

Now he could not have been much more than about 77 by my guess which fits pretty well with the standard retirement age of 65. I was sitting there thinking...what? You really expected to be dead by 77? Hmmm...so I went out and checked the stats. Sure enough the average life expectancy in the US is currently running about 77 - specifically w/ white males at 75.7. More interestingly, I ran across this little nugget:

Life expectancy changes as one gets older. By the time a child reaches their first year, their chances of living longer increase. By the time of late adulthood, ones chances of survival to a very old age are quite good. For example, although the life expectancy from birth for all people in the United States is 77.7 years, those who live to age 65 will have an average of almost 18 additional years left to live, making their life expectancy almost 83 years.

I bet you Herb had not heard about that one....and probably would have planned a little differently had he known that fact. Now I am not advocating that you only plan to live to the average life expectancy...I would think most of us plan to live to be a 3 sigma event. The point is that we should not make the same mistake... Don't forget that if you live long enough to enjoy the retirement you are currently saving for, then you are likely to live an extra 5 years longer on average!

As a side note to all this conversation about retirement planning, Herb also made me laugh at 8am...something not very easy to do before the first pot of coffee sets in. Here was what he said:

Herb: "You want to make God laugh?"
Rob: "Sure"
Herb: "Make a plan."

Back to GenX

Sorry about the long break (just when things were getting going) but the family had a few minor life things to attend to. But now most of those are straightened out and we can get back on with the show...and the parody website will have more fodder...

(Re)-Definition of an asset

The other day I ran across an interesting article on The Simple Dollar. It was buried in a book review but it really stuck with me. Here is the excerpt from The Simple Dollar review of the book "Rich Dad, Poor Dad":

"...this chapter redefines the term asset. For most, an asset is something that has value. For example, your home is an asset because it is something you own that has value...

...To Robert Kiyosaki [author], an asset is something that generates income, while a liability is anything that has costs. In other words, by this definition, your primary residence is not an asset but a liability. It may have cash value, but it doesn’t generate income. Instead, assets are forms of passive income that you control, like a rental property or intellectual property."

The reason this resonated with me was three-fold:

1. I always include the net value of our home as an asset when calculating net worth and this basically says you shouldn't....hmmmm. My take: I will continue to include the net value of our home in my net worth calculations since there is book value stored in a home. If the home has appreciated and you have been diligently paying down your loans then that counts damn it! But, one thing I did recently learn through the process of actually selling our home and "cashing out" that book value --> you need to not only subtract the amount of loans outstanding from the estimated market price, you also need to subtract the fees associated with the selling of your home...which can be up in the 8% range after everything is said and done. Seems intuitive, but I missed it...hope you don't.
   
2. Once I got past the assault on my home, I quickly realized that if you really think about it...this is true (appreciating homes excluded). You are not really going to become a millionaire if you do not have "assets" making money for you. In the simplest terms this ties directly back to investing...the more money you have invested and the better the return, the richer you will be...duh. But take it to the next level and you can apply this to every aspect of your life. With just some creative tweaking here and there why can't you turn a hobby or an interest into a revenue stream? And the more revenue streams the better...right? Just look at blogging...everybody always asks "why do you do it?". In the beginning I just wanted a way to share the little parts of our life with friends and family. While that is still the primary motivation, now it does actually pay a little (almost up to $50 now) every time someone clicks on the ads on the website. And I am still in shock that Jen is not selling her greeting cards...they really are incredible and I am sure if we did not have two kids demanding her time all day long, she would somehow find a way to make some moolah from her hobbies.
3. The last reason this resonated with me was simple...if you can displace your wage based income with other sources of asset based income...then you realize true financial freedom - plain and simple.
   

Now, clearly my blog ad revenue will not get me to financial freedom anytime soon ;-) but as we all find new and innovative ways to supplement our income, we all are working towards a more stable future, that is undeniable.