Trading Tips

The start of the year brings new companies into focus for investors, particularly those that had a poor showing in the prior year. There are a few different ways to classify these opportunities, but most are based on being a “dog” of some sort.

Originally, the strategy was to buy the five highest-yielding companies in the Dow Index—hence the name Dogs of the Dow. But there are variations, like using 10 names, or using the S&P 500 index, or sorting by other means.

One of those means should include companies that had operational struggles in the prior year, but could see their shares soar as those troubles go away.

When we add in that factor, Boeing (BA) looks like a great buy for 2020.

The company’s problems are well-known, and seemingly aren’t going away. But the company is part of a global oligopoly for airline production, and that gives it an attractive operating structure due to minimal competition.

We also know that the 737 Max problems are solvable, even if they aren’t solved yet.

And we know that, despite the drop in revenues and earnings in the past year, a recovery is likely as soon as the fear dissipates.

The only question is whether Boeing can survive that long. Many companies don’t have the financial firepower to deal with a major crisis without having to deal with some stark cuts.

Thanks to Boeing’s low net debt, however, the company isn’t so leveraged that today’s problem creates an existential crisis. That makes Boeing a buy up to $350 per share—with the possibility to hit $450 or $500 as the 737 Max issues get solved.

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With the end of the year, there are all sorts of predictions about the next. But more important than predictions are specific investment ideas.

There are a few ways to take advantage of the changing calendar and find profitable investments. By focusing on a few key areas and concepts, traders can find specific investments that play to these opportunities. 

First, investors can look to buy stocks that have been out of favor with the market. By doing so, investors are taking advantage of the market’s propensity to revert to the mean, where underperforming assets catch up with the rest of the market.

One obvious area for that is in the technology space. Many of these names are still off their all-time highs of a few years back, and have room to push the market higher even as some of 2019’s top winners become laggards.

Another area is in companies that had some specific issues with the operations that held back shares in the past year. There are always some solid companies dealing with some short-term events likely to keep their share price out of favor with the market. But when those fears dissipate, investors will get huge returns as the fear subsides.

Finally, there are areas where instability is brewing. That’s usually the most obvious in the commodity market, where supply and demand imbalances can set up for some sizeable profits in a short amount of time. 

By taking advantage of these areas, investors can ensure they make a profit, no matter what the overall market is doing.

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One of the best-performing stocks of the 2010’s was Netflix. And, with 2019’s

big push for new streaming services, the competition is heating up.

The most interesting competitor to emerge this year was The Walt Disney 

Company (DIS), with its Disney+ streaming service launch.

Taking advantage of its massive library of content spanning nearly a century,

the company could have gotten away with pricing its service at a premium. 

But instead, Disney went with one of the most accessible prices on the 

market, with a $6.99 monthly fee, well below that of other competitors with 

fewer offerings.

And the launch has hit the ground running, with millions of sign-ups, as well 

as a handful of hiccups on the first day of launch. But the company got its 

tech issues resolved, and it’s also got a solid hit with one of its original 

programs, 

The Mandolorian, a show that takes place in the Star Wars 

universe. While that’s a great development, what does it mean for shares? After all, 

the announcement of the new service early in 2019 sent shares soaring. And 

the lack of any issues or challenges to the service right away also sent 

shares roaring even higher to close out the year.

That’s a potential sign that shares may have peaked. The billions of dollars in

cash flow from monthly subscriptions will help the bottom line. But the media

giant also just had a great year at the box office, smashing records. It won’t 

be able to have that kind of lineup anytime in the next few years.

Given that the Disney+ news this year has sent shares to 23 times earnings, 

it’s possible that the company may underperform for the next few years—

and investors would be better to wait for a sizeable pullback before looking 

to invest.

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Decades of investment data can reveal a lot of interesting patterns. A fun seasonal one right now is that of the Santa Claus Rally. Simply put, it’s the propensity for stocks to rally into the end of the year.

Originally, this trend was noticed in the last week of December and into the first few trading days of the next year. However, looking at the data, the last six weeks or so of the year tends to be good for the market on average.

Investors can expect an average move of 1.5 to 2 percent higher in the market. That’s enough of an historical trend to get investors excited.

Of course, there are a lot of other factors at play. At the end of the year, investors will book losses for tax purposes. As investors only do that on companies that have performed poorly, however, it simply means that those companies are likely to skip on the rally. 

But in a great year like this year, companies that have been doing well are likely to keep doing well. While some investors may shy away, many fund managers will want to load their portfolios with top-performing names, so that they can show their clients that they were in that top performing stock—even if they actually missed out on the rally!

Looking at the details, the Santa Claus Rally has a few caveats to it. The most important one, of course, we’re just talking about the average year. 2018 was a below average year, as the markets were tanking into Christmas day. While they recovered a bit in the last week of the year, it still bucked the trend. 

Investors looking for this type of seasonal rally need to look at how stocks have been performing in the autumn. This year, with the market heading up and near all-time highs, the rally is real. 

There’s still some time to play it this year, but starting next year, if the market is trending up the week of Thanksgiving, consider buying some call options on the overall market to follow the trade for leveraged returns.

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Tesla Motors Continues to Innovate, But Will Shareholders Benefit?

There’s no room in life for complacency. Capitalism has been described as a form of “creative destruction,” whereby new products and services lower costs and shift demand to new products.

In the past few years, Tesla Motors has shaken up the automotive industry. With a push for an all-electric car at a time when many of the major manufacturers were simply considering hybrid vehicles, Tesla’s existence has forced the industry to create all-electric vehicles of their own.

While the company has launched a number of cars, it’s now getting into the trucking space, thanks to the Cybertruck. 

With a sleek, aerodynamic design and steel look, it brings back memories of the DeLorean car. The design may not be the most attractive, but for a vehicle that can haul a lot of weight with a 250 mile range, and at a price point just under $40,000, it could be a serious contender for the space. That’s just the base model. Two and three-engine versions of the truck are available at higher prices.

Compared to the Ford F150 truck, which retails for about $10,000 cheaper, and gets a similar range on a tank of gas, the Cybertruck won’t win on price, but for the features it offers, it is still a serious contender.

With Tesla motors coming off a great year of improved production on its cars, the Cybertruck can add an exciting new offering once it launches in late 2020. While that’s some time off, shares have already moved higher as the company has moved past the news events in 2018 that sent shares tanking. We see further upside ahead, but also see the potential to buy shares on one of their inevitable pullbacks as the best way to profit.

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Markets often top out for a while—or go through a multi-month correction—when greed gets rampant. There are a lot of ways to look at this phenomenon. It can happen when everyday folks are suddenly interested in the stock market.

But a more important one comes from corporations themselves. Specifically, one warning of a market top occurs when there’s a record-setting buyout offer from one company to buy another.

When big companies merge, it takes big bucks to make it happen. And the acquiring company typically uses a lot of debt to make it happen. These big deals sound great in a roaring economy, when everything goes just right.

But in the real world, things don’t always go right. Taking two big companies, with their differing values and cultures, to work together will often take more time, energy, and cost more than on the clean spreadsheets prepared by analysts to justify a deal.

That’s when two companies merge. When one company is bought out by another as an investment, the danger is more acute. In that case, a buyout firm is typically based in the finance space, and may not have the operating expertise to understand how to best handle the company they’re acquiring.

That’s why the latest record-setting buyout offer from buyout firm KKR to buy Walgreens Boots Alliance is a troubling sign of a market top. 

It doesn’t mean a big crash in the market is going to happen anytime soon. But if history is any guide, it is a sign that this market has gotten ahead of itself and may be in for some poor performance going into 2020.

We’ve seen this trend before with the AOL-Time Warner merger in 2000, and even back in the 1980’s with the RJR/Nabisco merger. These record-setting buyouts saw some short-term market peaks. 

In the AOL-Time Warner deal, the combination of combining a tech company with a traditional media company was an early warning sign of the high valuations being placed on tech. The RJR/Nabisco Merger saw a food and tobacco conglomerate that had poor returns and profit margins due to high debt levels… leading to an eventual split of the two companies.

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Typically, celebrities and investing seem like two entirely different subjects. That hasn’t always been true. There’s actually been a rich history of celebrities getting involved with publicly-traded companies as investors, active partners, and even board members.

To use one historic example, actress Grace Kelly once served on the board of 20th Century Fox. 

Today, a myriad of celebrities can be seen as getting involved with a company. That may include a celebrity investment, like that of Leonardo DiCaprio and Orlando Bloom in digital bank Aspiration Bank.

Or it could include a far more active investment and board seat like Oprah with Weight Watchers or Shaquille O’Neal with Papa John’s Pizza. 

The fact of the matter is, there’s a blend between celebrities and companies, and there always will be. Celebrities are high-earners, and astute ones will make investments elsewhere. That’s why both Shaq and Michael Jordan have made far more money from their investments than from playing baseball. 

Knowing how to balance time and money can be a key factor in a company’s success. 

That said, there are a few differences. Like any enterprise, a business is a risky endeavor with no guarantee of success. Even with a celebrity bringing their skills to the table, a company could still falter. Weight Watchers had a difficult time with Oprah due to her demanding schedule. 

And a passive investment by a celebrity in a firm doesn’t give investors much of an indicator of success at all—Aspiration Bank is struggling and in need of more capital right now.

Those caveats aside, when celebrities take a big stake in a company, and commit to being a part of it, there’s a good reason to expect some big success ahead. That’s why it’s interesting to see Shaq’s involvement with Papa John’s, and more recently Drake’s involvement with pot stock Canopy Growth. 

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There are many ways to invest—and many potential ways to beat the market.

But one way, more than any other, will result in different returns than the market. Done right, it means beating the pants off of the index. Done wrong, it means underperforming.

This secret has to do with portfolio allocation.

While most investment professionals discuss the importance of diversification, they tend to do so to stress an investment that could go wrong. Having no more than 10 percent of your wealth in one position means never having to lose more than 10 percent if it goes to zero.

So far, so good. But if you’re focusing on investments with a great future, there may be times when having a larger allocation to a specific company or sector could get you a better return.

That’s the secret behind the wealth creation of Warren Buffett. A look just at the current stock positions in the Berkshire Hathaway portfolio shows that over 25 percent of the portfolio is in a single company—Apple. 

But on a sector basis, Buffett’s portfolio has over 35 percent invested in financials like big banks and credit card issuers. And that’s not including wholly-owned companies in the insurance space.

That large single stock position and sector position alone is over half of the portfolio of the greatest investor in history. That’s a level of concentration that many smaller investors may never reach—or if they do concentrate, it may be on smaller companies with higher volatility more likely to falter and lead to a forced sale at the worst possible time.

But the secret is right there, hiding in plain sight. For better market returns, focus your portfolio on areas with the best prospective future returns—especially where your specialized knowledge may come in handy as well.

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We all come into some extra money from time to time. Whether it’s from a birthday card from a relative, some cash found in the pocket of an old jacket, or even just literally found on the street, that extra money can be put to good use.

In today’s age, it’s easy to even take that money and invest it. While most say you need thousands to start investing, even with as little as $50 you can start to get yourself on a financial track to wealth.

Of course, even $50 that grows quickly will still only be worth a few hundred dollars after a few decades. 

But what if you could take that small sum and make a regular investment contribution to an index fund? $50 a month, for five years straight, or 60 months, will mean a total investment of $3,000. 

After just five years, the power of investing will already create a total portfolio over $3,700 assuming an 8 percent return.

Here’s the fun part: Say you keep that money invested for another 15 years with ZERO additional contributions. Getting that 8 percent average annual return will grow your balance to over $11,800.

At 25 years, it’s over $25,400. Not bad for a total contribution of $3,000 spread over five years.

Of course, that’s just one way to invest an extra $50. That kind of extra money could be put into more aggressive investments than just an index fund, especially if you’re already contributing to one. A mere $50 may not sound like much, but when used to buy an option contract trading at $0.50, an investor can potentially double or triple their money.

Of course, an option trade can also get completely wiped out, but when you have money that’s been “found” in the first place, the feeling of a loss is a lot lower than a loss coming from previously committed money in an investment account.

Those are just two ways to deal with found money. That’s the power—and importance—of growing your wealth by adding small sums at a time. And it goes to show that the extra cash in your pocket may be more valuable than you think.

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What Warren Buffett’s Investment Strategy Tells Us About Today’s Values

Only a few investors have come close to Warren Buffett’s track record. Over the decades, he’s beaten the market handily. That success all comes down to one factor: Value.

Whenever you buy shares of a company, if you don’t have an idea of what the company is worth, and will be worth in the future, it’s impossible to know if you’re buying at a great price or not.

In Buffett’s early investment years, the 1950’s, this could be taken to the extreme. Back then, stocks were still seen as a terrible place to invest following the Great Depression. As a result, values in general were a lot lower—and many companies could even trade for prolonged periods of time for less than the value of cash on the books! 

Under that kind of market sentiment, value investing is obvious. You could take control of a company, shut it down, and end up with more per share than when you started.

As the markets started regaining popularity, Buffett’s focus on value changed yet again, this time towards insurance companies, which have built-in capital advantages, as well as by focusing on companies with strong brands. While brands are a bit more intangible on a company’s balance sheet, they can usually charge more for their products than a generic peer.

Today, Buffett has been making a big mark in Apple—a company with a strong brand, but also one that has a lot more intangible assets as well. And it’s clear that such a company in the 21st century can still be a value play, thanks to the fact that it has also built itself a consumer culture around it. 

That kind of trend may become more important as companies become more intangible and hard assets like factories are no longer as important to building a long-term profit powerhouse. 

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