Posts tagged with: Stock selection

Should you buy when corporate insiders are buying, and sell when insiders are selling?  Do insider transactions mean anything at all for the future direction of stock prices?  What about the market as a whole?  Join me today as I cover the topic of insider trading.

 

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corporate boardroom

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Section 1: Insider Ownership

Founders or controlling shareholders

C-suite executives

Boards of directors

Executive compensation: performance-based incentives

Warrants vs. options

Restricted stock as a retention incentive

Employee stock purchase plans (ESPP)


Section 2: Common Types of Transactions

Exercise of stock options

Open market purchases

Open market sales

What’s legal and what isn’t


Section 3: How to Trade in Response to Insider Buying & Selling

A review of the research on insider trading

Figure out who the major insiders are, and how they typically transact

Routine vs. non-routine trades

Isolated vs. sequenced trades

Look for anomalies and follow suit (if everything else checks out with the company and its chart – always do technical analysis)

 

 


 

References

 

List of Insider Transactions (finviz.com)

SEC Info: Insider Trading Reports

Institutional Holdings: NASDAQ.com

Trends in Board of Director Compensation: Harvard Law


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How can you and I profit from corporate mergers and acquisitions?  What should you do when one of your stocks gets a buyout offer?  Today I’ll be discussing all kinds of corporate deals and what they mean for investors.  I’ll also present a couple ETFs that allow you to emulate the merger arbitrage strategy used by many hedge funds.

 

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Pac-Man eating

(CC image by Pierre Boisonnet on Flickr)


Section 1: Transaction Types & Examples

Cash buyouts

Stock-for-stock transactions / mergers

Combinations (cash + stock)

Merger of equals

Spinoffs


Section 2: How to React to a Buyout Offer

Terms: – what are you getting for your shares, what are the tax consequences, and what’s the chance the deal gets done?

Valuation (two of the best books are by Aswath Damodaran: The Little Book of Valuation and Investment Valuation: University Edition)

Likelihood of a bidding war

Recent price history of the stock


Section 3: Profiting from Corporate Deal-Making

Merger arbitrage strategies: active & passive

ProShares Merger ETF (MRGR)

IQ Merger Arbitrage ETF (MNA)

Buying stocks in anticipation of a deal


 

References

Largest corporate spinoffs – Wikipedia

Largest corporate acquisitions – Wikipedia

Paper on merger-arbitrage strategy by Brenda Kahn, University of Southern Indiana (PDF)

The Hedge Fund Journal – Ride the M&A Wave With Merger Arbitrage (PDF)

Fairmark.com – tax consequences of cash received in mergers


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An Income Opportunity for the Long-Term


open road ahead

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on Flickr)


Check out the video below, which is from my live stream for traders and active investors, to learn why I like Ford Motor Company (F).


 

As I explain in the video, Ford is the most forward-looking of the major automakers.  (Tesla is not a serious automaker yet – don’t believe all the hype.)  Ford has been willing to take a chance on future mobility technologies because their largest voting shareholder, the Ford family, understands that if a company doesn’t innovate, it dies.  The tech titans of the world, like Google and Apple, would love to sink their teeth into the auto industry.  And they are already trying to do it.

Wall Street has frowned upon Ford’s approach, so they’ve pushed the stock price down so far that the dividend yield has reached 5.3%.  Why?  Wall Street tends to have a “value-extraction” mindset instead of trying to build long-term value.  For instance, activist investors and private equity firms constantly push for more debt, buybacks, and acquisitions to drive short-term value.  They are less concerned with the company’s cash flows over a period of many years, and more concerned with rewarding companies like GM that churn out gas-guzzling trucks and SUVs with no regard for tomorrow.  But if you want to build wealth over your lifetime, like I do, you should love a company like Ford that has the courage to take control of its future instead of waiting until it is too late.   They have begun to transform Ford into a company that will not just build cars as we know them today, but will provide various forms of transportation that meet society’s needs in 2020 and beyond.  In February, they invested $1 billion into Argo AI, a startup focused on developing technology for self-driving vehicles.   Learn more about Ford’s initiatives around future mobility.

As with any investment, make sure to review the company’s annual report and other SEC filings to get a good understanding of the company before investing.  Pay particular attention to the disclosures of potential risks in those filings.  You can find investor info for Ford here.  Just because this company is right for me right now doesn’t mean it is necessarily right for you.

I own shares of Ford Motor Company as of the publishing of this post.  View other important disclaimers on this page.


Be Selective

Most stocks are priced at lofty valuations right now, so we’ve got to be selective.  While the bull market may last a bit longer, stocks whose values have grown out of line with their true cash flow potential will suffer a hard landing as deflationary pressures resume.  So, don’t just blindly buy the market index.

I’m still on the hunt for long-term portfolio holdings that can give me a reliable yield and are fairly valued or undervalued – so stay tuned for future Dividend Stock of the Month posts.

In case you missed it, here’s the last dividend stock I highlighted.  It’s had a nice run since I released the video!


The Torpedo Trading Live Stream

Watch more live streams like this at https://www.twitch.tv/torpedotrading and interact with me in real-time.  Follow the channel, and you can receive notifications when I go live.

If you miss a stream, highlight clips like this one can be found at my YouTube channel.


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A Long-Term Income Play in Korea, Available to US Investors!

 

Disclosure: I own shares of KT Corporation as of the date of this posting.

I’ve already got a Dividend Stock of the Month for May 2017, so I’m calling this my “Investment of the Week!”  But let me be clear, I intend for this to be a long-term investment.

In this video, I explain what this company does and why I selected it from a long list of dividend-paying stocks in the telecom sector.  The stock has gone up by about 5% in the two weeks since I released the video – so far, so good!

 


Shortly after I made this video, Moon Jae-In won the Korean presidential election.  As I anticipated, he is already talking tough on the chaebol conglomerates, one of which is KT Corp.  Should we be worried?  Just the opposite – we should be excited about this!

Korea’s chaebol are generally well-managed, conservatively-run companies that are built for survival over the long run.  What they lack are high dividend yields, big stock buybacks, or fully transparent management.  Therefore, many institutional investors have not given as much weight to Korean stocks in their portfolios as they should.

After the recent scandals involving Samsung’s Lee Jae-yong, impeached president Park Geun-hye, and others, the new President Moon finally has the momentum he needs to push for reform of these massive conglomerates.  The main goal of the reforms will to be to increase transparency, which will help these companies gain trust and attract more capital from abroad.  Sure, they’ll probably create some extra compliance costs for KT and other chaebol, but I expect that negative to be far outweighed by the benefits of more capital rolling in.  I think we’ll see the dividend payouts increase as part of this process too.  After all, KT is sitting on over $8 billion of cash.  In Korean won, that’s something like 88 zillion.  (Just kidding)  Note: Most Korean companies pay dividends annually, not quarterly, and they are variable from year-to-year.

Here’s another point I forgot to make during the video: Like many Korean companies, KT Corp is a good value relative to its earnings-per-share.  Here are the trailing and forward P/E ratios for KT Corp relative to its biggest peers in the US telecom sector, even after the recent rally (data from Yahoo Finance):

  • KT Corp: 12.6 trailing, 11.8 forward
  • AT&T (T): 18.7; 12.9
  • T-Mobile (TMUS): 34.7; 27.8
  • Verizon (VZ): 15.2; 11.8

As I always say, due your own due diligence before investing and don’t rely solely on my conclusions.  Other necessary disclaimers can be found on this page.

I’m still on the lookout for good quality dividend-paying stocks that can withstand market turmoil, so stay tuned to the live stream and YouTube channel to discover them.

 

 

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An Income Opportunity for the Long-Term


Check out the video above, which is from my live stream for traders and active investors, to learn why I like this company and non-traditional REITs in general.

If you’ve followed the live stream lately, you know I’m bearish on the stock market.  Most stocks are priced at lofty valuations right now, and it’s likely we’ll see a hard landing as deflationary pressures resume.  Therefore, I’m currently net short the market.  I’ve sold short more stocks than I own.

Despite the bearish forecast, I’m still on the hunt for long-term portfolio holdings that can give me a reliable yield.  Real estate investment trusts (REITs), with the exception of certain commercial REITs (retail and office buildings), will outperform the market going forward.  I also feel I’m personally underinvested in real estate.  I recently found a company in this space that I liked enough to take a position in: Iron Mountain REIT (IRM).

You may have seen Iron Mountain trucks driving around your town, or their secure storage bins in your office.  This company is in the business of storing, protecting, and managing records, both physical and electronic, for their business clients.  Iron Mountain owns or leases space in over 1,400 facilities across the globe.  They lease this space out to other businesses for storage of their data and records.  They also provide information management services to diversify their revenue base beyond simply lease payments.  What’s more, they’ve picked up some fine art storage facilities to meet the specialized needs of art investors and wealthy individuals.

Document retention is a secure business with good prospects for growth as well.  Companies are required to maintain physical and/or electronic records by law.  Not to mention, it’s a vital part of any firm’s disaster recovery and contingency planning.

This company is more like a traditional stock than a REIT, but it adopted a REIT structure in 2014.  Therefore, it must pay at least 90% of its taxable earnings back to investors as a dividend.  This is great news for investors seeking income.  The dividend yield on IRM is currently 6.2%.

Whenever you see a yield over 5%, you’ve got to do extra diligence to figure out why the yield is high.  In other words, why is the price low when compared against the dividend?  In the case of IRM, I think it is simply because of the company’s high debt levels.  They’ve issued a substantial amount of debt in the last year to finance their international expansion.

I usually avoid highly indebted companies, but I’m not worried about this one because:

  • They acquired another company, Recall Holdings, in 2016.  Recall has a similar business to Iron Mountain, but in Australia.  The integration costs hit earnings in the last several quarters, but Recall will provide significant cost savings for Iron Mountain.
  • Along these same lines, Iron Mountain has been financing international expansion.  This expansion has diversified Iron Mountain’s revenue base, enhancing the stability of the company’s total revenue and net income.
  • The company’s debt is at reasonable rates and its maturities are mostly after 2020, so there is limited risk associated with rolling over the debt at maturity in the event of a near-term credit crunch.
  • A significant portion of the debt is denominated in currencies other than the US dollar.  This reduces the company’s exposure to foreign exchange risk.  If they had financed overseas growth with US dollar-denominated debt, we’d have to worry about a rising dollar making those interest payments more expensive.  Not an issue here.
  • They recently hiked the dividend from 48 cents per share to 55 cents per share, which is a huge increase.  Management would not have done this if they were not highly confident the dividend could be maintained at this level, or grown further.

As long as they don’t start to over-reach in their acquisitions of other companies, Iron Mountain should be exactly the kind of long-term holding I’ve been hunting for.

As with any investment, make sure to review the company’s annual report and other SEC filings to get a good understanding of the company before investing.  Pay particular attention to the disclosures of potential risks in those filings.  You can find investor info for Iron Mountain REIT here.  Just because this company is right for me right now doesn’t mean it is necessarily right for you.

As I disclosed above, I own shares of IRM as of the publishing of this post.  View other important disclaimers on this page.


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Trading should not be a solo venture, even if it sometimes feels that way.  In this episode, I present a framework for holding a fun and productive meetup or online trading session with other investors.  It’s important to discuss the markets with other people so you get to hear other ideas and have your own views challenged.  It makes you a better trader.

 

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Section 1: A General Meeting or Progress Report

  • Check-in with a couple friends or a small group, at least once per month
  • Start with macro trends, the big-picture view
  • One main topic per meeting: 15-minute discussion
  • Discuss your favorite investment ideas: no more than 5 minutes per person plus 5 minutes discussion time
  • Share results (profit/loss) as much as you’re able: builds accountability
  • Each participant should set a personal goal to reach before the next meeting
  • Suggest topic ideas for the next meeting

 Section 2: An Investment Club

  • Many different structures; members usually pool funds or agree to invest separately in the same things
  • More formal structure than other groups would have; more pre-planning involved
  • Longer meeting: aim for 3 hours or more
  • Always start with macro trends; choose one member to present for 5 minutes, can open up to discussion
  • Open the floor to discussion about any of the club’s current investments
  • Any member can propose a new investment idea to the group, giving a presentation of up to 20 minutes then allowing 30 minutes for discussion and vote
  • Designate a treasurer to report profit/loss if funds are pooled

Section 3: A Working Session: Trading Live

  • In-person or virtual
    • In-person: what to look for in a meeting site – Rent out a meeting room or use one at your local library
    • Virtual: Premium services provide full screen-sharing & collaboration tools; otherwise use Discord, Skype, Google Hangouts for just the basic chat & voice capabilities
  • Spend at least half the trading day observing other traders, rather than trading yourself
  • Start before the open: pre-market setup & discussion
  • End after the close: pick one trade to share with all; summarize lessons learned


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An Income Opportunity for the Long-Term


Check out the video above, which is from my live stream for traders and active investors, to learn why I like this company and residential real estate in general.

If you’ve followed the live stream lately, you know I’m bearish on the stock market.  Most stocks are priced at lofty valuations right now, and it’s likely we’ll see a hard landing as deflationary pressures resume.  Therefore, I’m currently net short the market.  I’ve sold short more stocks than I own.

Despite the bearish forecast, I’m still on the hunt for long-term portfolio holdings that can give me a reliable yield.  Residential real estate is an area that should hold up much better than most commercial real estate (especially retail and office buildings) going forward.  I also feel I’m personally underinvested in residential real estate.  I recently found a company in this space that I liked enough to take a position in: Bluerock Residential REIT (BRG).

This company owns interests in many apartment complexes, most of which are in the southeastern United States.  They also own a bunch of developments that are currently under construction.  Their target areas for investments are premium locations in and around “second-tier cities”: those that are smaller than New York, Los Angeles, etc. but big enough that they are attracting substantial corporate investment and/or residential demand.  We’re talking Austin, Houston, Charlotte, Atlanta, and Orlando, for instance.

The company is structured as a real estate investment trust, or REIT.  Find out more about investing in REITs on this episode of my free investing podcast.

They’ve got several series of preferred stock with different yields and terms attached to them.  I actually chose to invest in the common stock though.  The common stock pays a yield of 9.2%, whereas the preferreds are in the 7%-8% range and two of the three series are priced at a premium over par.

Whenever you see a yield over 5%, you’ve got to do extra diligence to figure out why the yield is so high.  In the case of BRG, I think there are two reasons:

  • They plan to internalize their management in 2017, which may involve an up-front payment.  The managers are currently employed by Bluerock, not by the REIT itself.
  • The recent trend in earnings hasn’t been stellar, but I see this as largely a byproduct of rapid growth.

Upon reviewing the financials, I believe that the majority of the dividend is secure going forward.  Maintaining the dividend is a stated priority of the management team.  Although a slight reduction is possible (along with a temporary disruption in the quarter during which they internalize management), I think they are well-positioned overall to deliver on their goal of maintaining the full dividend.  If you’re more concerned about this than I am, consider buying the preferreds instead.  Preferred stockholders have to be paid before common stockholders, plus the preferred dividends accumulate forward if they are not paid.

As with any investment, make sure to review the company’s annual report and other SEC filings to get a good understanding of the company before investing.  Pay particular attention to the disclosures of potential risks in those filings.  You can find investor info for Bluerock Residential REIT here.  Just because this company is right for me right now doesn’t mean it is necessarily right for you.

As I disclosed above, I own shares of BRG as of the publishing of this post.  View other important disclaimers on this page.


The Torpedo Trading Live Stream

Watch more live streams like this at https://www.twitch.tv/torpedotrading.  Follow the channel, and you can receive notifications when I go live.

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(CC image by Core Media Product Demo on Flickr)

(CC image by Core Media Product Demo on Flickr)

 

If you trade stocks, you’ve heard it before.  We all have.  From a colleague, family member, friend, or a mainstream investment advisor.

“You can’t beat the market.”  “Picking stocks is a fool’s game.”  “Stick to low-cost index funds.”  “Buy and hold for the long run.”

The list of prominent names who advocate for passive investing over active investing includes, to name just a few:

  • Jack Bogle, founder & former CEO of Vanguard Group;
  • Warren Buffett, founder & CEO of Berkshire Hathaway, who bet $1 million that a basket of 5 hedge funds would not beat an index fund;
  • Burton Malkiel, Princeton economist and author of Random Walk Down Wall Street;
  • Dave Ramsey, radio host and author of personal finance books including The Total Money Makeover. (Dave seems to be OK with actively managed funds, as long as you don’t do anything besides buy-and-hold the fund)

These folks would have us believe that the recipe for building wealth through investments is the following:

  1. Shovel money into low-cost indexed mutual funds and exchange-traded funds (ETFs) that mimic a broad market index, such as the S&P 500, FTSE 100, Euronext 100, DAX, or the S&P/ASX 200.  Or better yet, a global fund that includes all of them.
  2. Sit and wait for many years, while trying really hard not to look at your broker or retirement provider’s statements, lest you be tempted to sell.
  3. Retire rich.

Sounds simple, right?  It is!  Being somewhere between “mediocre” and “below average” isn’t too tough, if that’s your goal.

Why “below average”, not average?  If you hold a broad market index, aren’t you achieving the same return as the average market participant?

No.

 

Why holding index funds puts you at a disadvantage

Some companies perform better financially than other companies.  (Duh!)

There are exceptionally well-run companies, terribly-run companies, and many in between.  As a passive investor, you’re the last to discover which are the good ones and which are the bad ones.  Active investors are constantly researching these firms to separate the wheat from the chaff.  Accordingly, they bid up the prices of the stronger ones and sell the shares of the weaker ones, so that over time their market values move in the right directions.  This process generally happens over a period of time, with the first movers getting the rewards for their work and the late movers stuck on sinking ships or chasing trendy companies that have already reached stratospheric levels.

Some companies are a disaster waiting to happen – a powder keg that will blow a hole in the value of your portfolio.  What if you could avoid them?

As an example, let’s examine the performance of the Energy Select SPDR Fund (XLE) starting with the major peak that occurred on July 24, 2014.  This fund is the largest ETF tracking the energy sector.

The chart below illustrates the XLE (the black line) and ten of its largest holdings (the colored lines) in 2014, all indexed to a starting value of 100 for clearer comparisons.  The XLE fell by over 40% to a low in January 2016, followed by a recovery of about half its losses.  However, all energy stocks are not created equal.  A sharp investor could have avoided the pain, or even experienced gains during this tumultuous period.

xle-2014-16

After initially being sold off alongside the rest of the sector, independent refiner Valero Energy (VLO) had vaulted to a gain of over 50% by the end of 2015, thanks to strong refining margins, low debt, and productive capital investments.  Refiners like Valero actually benefit from declines in the price of oil, the raw material for its refineries, as long as profit margins hold steady.

Other components of the XLE fared better than the index, including Exxon Mobil (XOL) (10% decline) and EOG Resources, Inc. (EOG) (15% decline) compared to a 29% decline in the XLE as a whole.

On the flip side, Chesapeake Energy (CHK) collapsed, shedding 90% of its value and dragging down the energy ETF along with it.  The natural gas producer suffered steep drops in the value of its shale assets, many of which could not produce at a profit as oil and gas prices plunged.  It continues to suffer under the burden of substantial debt.

You didn’t need to be a professional investor to see the potential for huge differences in how these companies would perform.  Two tools – (1) a simple stock screener filtering on debt levels and (2) an understanding of the basic differences between a refiner, pipeline company, an explorer, and a producer – would have helped you hang on to 15 or 20 percent of your investment that would otherwise have been lost in XLE.

But because index funds have all the stocks, and there tend to be more winners than losers, it all works out in the long run, right?  Wrong, because…

Most indexes are capitalization-weighted

What does this mean?  Each stock’s share in the fund is proportional to its market capitalization (the price per share multiplied by the number of shares outstanding) relative to the market capitalization of the index.  So, the stocks that make up the highest weight in the index are the ones that have already been bid up by the market to the point where they are worth more than the others.  By investing in a fund that mirrors one of these index, you’re piling into the stocks that already have reached celebrity status.  You don’t own tomorrow’s Amazon or Facebook, or enough of it to matter, because they are too small today to get much (or any) weight within the large ETFs.

For some companies with strong cash flows and well-established business models (think: Exxon Mobil, Wal-Mart, Boeing), high valuations can make sense.  But for every one of those, there is an overvalued dud.  Remember Enron, Eastman Kodak, Woolworth’s, Trans World Airlines, Pan Am, WorldCom, RCA, Compaq, or Pets.com?   At one time, each of these was a hot stock with a very high market capitalization, but now they are all confined to the history books.  Which of today’s high flyers will join that infamous list one day?  Apple?  Volkswagen?  BP?   All of the above?

The “illusion of diversification”.

It is easy to be lulled into a false sense of security by thinking you are diversified because you hold 20 or 30 of the biggest publicly traded companies in a sector instead of just one.  But, it’s typical for the largest 4 or 5 to comprise over half of the weight in a sector ETF.

What about holding all the sectors?  If you own many retailers, chemical companies, oil refiners, banks, wireless providers, technology firms, and mining companies, surely that is enough diversification?.  In 2008 and 2009, that didn’t work so well.

S&P 500 Index, from 2006 to 2009

S&P 500 Index, from 2006 to 2009

 

Correlations between different stocks and sectors always increase during times of financial stress – which are precisely the times when you need true diversification the most.

Another way of saying this is that when the markets are panicked, everything gets sold – the baby, the bathwater, the tub, the copper pipes in the bathroom, the house itself, and the land it rests on.  Imagine if you had just retired in 2007 with a “diversified portfolio” full of stocks.  By 2009, half your assets had vaporized.

True diversification requires owning multiple asset classes, including alternative assets, in proportions that are optimal for today’s investing environment.  I also encourage investors to consider using options to manage portfolio risk.  This will be a topic for future posts.

 

ETFs are more popular than ever, creating opportunity for active investors

Hedge funds are closing at an increasing pace.  Institutional money managers and individual investors are flocking to ETFs in record numbers.  Since gaining mainstream status in the 1990s, index funds have captured a larger share of overall stock assets nearly every year since 2000, according to CNN Money.  There are over 1,000 ETFs today, with new ones released every week.  They track a mind-boggling number of indexes, with tongue-twisting names like the “Dow Jones FEAS Titans 50 Equal Weighted Index” and the “Dow Jones Europe Developed Markets Select Real Estate Securities Index.”

This article, from Julia La Roche at Yahoo Finance, is a reminder of how dangerous this phenomenon can be for buy-and-hold index fund investors.  In it, independent researcher Steven Bregman warns of an “indexation vortex that’s distorted clearing prices in every type of asset in every corner of the globe.”  He emphasizes the systemic risk that ETFs pose, an argument that has become more mainstream lately as ETF “flash crashes” become a more common occurrence.  But I’d like to focus on what I feel is the critical point here – the tremendous opportunity the ETF boom provides to active investors.  That is, the “golden age of active management.”

Every dollar that moves OUT of an active fund (e.g. hedge fund or actively managed mutual fund) or an active strategy-based approach INTO a passive, indexing plan puts you and I one step closer to being one of the “first movers” I mentioned earlier.  It’s as if you own a home improvement store in your city, you’ve just watched Home Depot close its doors, and Lowe’s has announced a going-out-of-business sale.  Fewer investors identifying mispriced stocks leaves more money on the table for savvy active investors.

It’s a fantastic time to manage your own investments!

 

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