Sunday, December 23, 2007

Buying for the New Year

I hope that everyone is done their Christmas shopping. I had to dodge down to the mall last night to exchange a gift because the particular item I bought was just purchased by the person I was supposed to give it to. Bad Luck.

Anyway, as I was hemmed in traffic, I decided to counter my road-rage (to which I am easily prone) with some deep thinking. So I sparked a cigarette with my Tim Horton's (I have been a shareholder since its I.P.O.) and pondered away.

I sold my stop-loss point on DUG as of Friday, as it hit and carried on through the rest of the day. A small loss at the opportunity for great profit.

But buying opportunities are out there for me. By the time I got home I know what I was going to write about. After some scribbled notes last night, I will put a few generic stock tips out there for people interested in buying right now.

The first note to make is that we are in what is referred to as a sideways market. The S&P 500 has been hovering between 1400 and 1550 for almost a year now with subprime woes smashing it down and individual, surprising company growth pushing it back up. Many factors are involved in this situation but the main point to take away is that over 75% of large-cap stocks practically mirror the S&P 500 barring extraordinary circumstances either bad or good. I.e. the large-caps are moving sideways as well.

Charts on this page provided by Yahoo! Finance

This has created many buying opportunities for value-investors, but even more importantly it opens the doors for smaller companies to grow as the large-caps tighten down the screws to weather the storm.

There are a few things you as an investor can do:

1) Follow those large companies that have been most hurt by the economic woes of this sideways market. Citigroup (C) has lost over 44% of its share value because of the sub-prime problems of the last year. However they haven't lost 44% of their business. So, when the tables start to turn (i.e. watch the chart. If Citigroup finds a strong support that it bounces off of a couple of times, it might be a good time to buy and catch a chunk of that 44% downturn and maybe even scoop up a dividend while you're at it.

But more importantly is this: The entire financial industry has taken a very solid hit because of the sub-prime mess. Even banks that had very little sub-prime loans in their portfolio. So if you buy one of those at a good point and hold, it will retract and GAIN on the companies hurting from defaulted loan losses.

All it really takes is a good eye and an ability to take advantage of the panic of other investors who are less intelligent or rational than you are. If you look at SCSS, I have made over 1.00/share in less than a week from the panic-selling of other individuals.

2) This is the opportune time to buy small-cap companies that have been trying to squeeze precious market share from the big players. Well now is their chance to do just that as many of them are cutting back operations and budgets, laying off thousands of employees, and simplifying product offerings.

This is a small company's dream! One small cutback by a large company might let the little guy DOUBLE his market share overnight. And by doing that they suddenly have twice the revenue with the same or close basic overhead and the addition of only variable costs. The result: A huge spike in earnings which draws publicity, which means a flood of money from the two-steps-behind, news-following investors. But we've already beat them to the punch, and every time one of them is willing to pay a cent more for a share, that's another cent of profit to us.

On a side note I just purchased E*Trade Financial after hours on Friday. This is another of the companies that have been hammered the last year (-85%). But they are making big changes (I am happy for one because I make some of my trade with E*Trade) for the better and I see their share even doubling over the next 12-18 months. My favourite part of this purchase is a review of their key statistics. The company's intraday market-cap (the number of shares x the price of the shares) is only $1.5B, while their actual real enterprise value is $21.5B, and it is trading at a MEASLY 3.5 P/E (share price to earnings ratio). In a situation where people have been dumping this share left and right for as long as I can remember, I think it's finally time for a turnaround.

I got into the stock for $3.60 just before the close for 1000 shares. I am setting my stop in at $2.50 because I am expecting returns of $6.00 - $10.00/share over the next year, a 50% retraction on the past 12 month's massive decline. If you refer to the chart, you will see an outrageous increase in volume (i.e. panic selling) as the stock price plummets.

Many of these sellers will start to buy back the stock at the first sign of a few good headlines and I will profit because I am one step ahead of them. Even if this stock makes it halfway back to its valuation I stand to make a profit of $6,000 to $10,000 versus a maximum potential loss of $1100.

The final thing I like about E*trade is that is far smaller than the big players in the sub-prime losses. For example, Citigroup has 1.06 TRILLION in cash assets to manage and thousands of offices. E*trade is much more flexible and can innovate much faster to offset losses.

And finally,

3) Because the US market is in the middle of stagnation, for the near future, it pays to take a look at foreign markets.

China is not a good choice for the beginner or average investor, because it is so over-valued as a whole right now that you have a very high chance of hitting a bubble stock that will crash down on you. (On the flip-side, if you wait out for a while until the deflation starts, you can make a pile of money short-selling the overbought stocks).

Emerging countries like Brazil are an excellent place to look. This country is starting to develop at an exponential rate and there are billions to be made. I have been reviewing Brazilian stocks for almost a year now and have several companies in my long-term portfolio, every one I purchased at a steal and has made solid growth.

Just remember that there is always some place in the world where your money will grow. It just might not be as close to home as you'd think.

Merry Christmas everyone! I will post again before the new year.

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