Friday, October 7, 2011

This Low-Risk Dow Stock Could Double in 2 Years: AA

In his famous book A Random Walk Down Wall Street, Burton Malkiel suggests that every stock is exactly fairly valued. There can be no such thing as an undervalued stock or an overvalued stock, since investors are armed with all knowledge impacting the value of a stock. With all due respect to the Princeton professor, he's wrong. Very wrong. Stock valuations are a function of supply and demand, and right now, demand for stocks is weak and stock prices have fallen far below their intrinsic value.

I was reminded of this once again as I was poring over the financial statements of Alcoa (NYSE: AA) as the aluminum giant gets set to kick off earnings season next week. The company's stock touched a two-year low on Tuesday, Oct. 5, and now trades at levels seen back in 1995. Make no mistake, Alcoa is a very healthy company poised for robust cash flow, regardless of what the stock price may tell you.

Why the sell-off?
Investors are surely concerned about the global economy and what that might mean for pricing and demand for Alcoa's three main businesses: alumina, aluminum and finished aluminum products.

The rising tide of economic concerns has surely impacted the industry lately. Aluminum prices have traded off in recent weeks, down to $1 per pound on September 30 (the last available reading).

Falling aluminum spot prices

The recent drop in the stock off should tell you two things. First, the consensus EPS (earnings per share) forecast of $0.27 simply won't happen. Analysts had been basing their profit forecasts on aluminum in the $1.10 to $1.15 range. If I had to make a guess, Alcoa will earn closer to $0.15 a share. (That's not to say shares will take a hit when the numbers come out -- the recent stock selloff already anticipates a shortfall, in my opinion.)

The other thing to infer from the recent selloff: this stock is now absurdly cheap by so many measures and can pay off big for those with a multi-year timeline.

2009 Redux?
Investors may be bracing for a return to the brutal industry conditions of 2009, when aluminum prices skidded to around $0.65 per pound, leading Alcoa to lose $1.05 a share for the full year. Since then, several factors have changed, and although Alcoa's pricing and profits may indeed slump further in coming weeks and months, they shouldn't hit 2009 levels. And when demand rebounds, Alcoa's financial performance should be outstanding. Remember: you should buy a stock when an eventual bottom is in sight, not when the bottom has already passed.

The China factor

Alcoa's financial results peaked in 2007, when the company generated 21% EBITDA margins and earned $3.24 a share. The robust results masked the fact that China was wreaking havoc with the aluminum industry by producing more than it consumed. Not anymore. For the first time since 2002 (with the exception of 2009), China now consumes more aluminum than it produces, which means Alcoa faces less pressure in terms of Chinese aluminum imports. It can now count on China as an export market.

Why the change? Because policy planners in China have belatedly realized that it's more economical to rely on aluminum imports because Chinese smelters consume far more energy than those operated by Alcoa and others. High-cost Chinese smelters are being shuttered, and the country's total output is expected to shrink in 2012 and again in 2013.

Alcoa has made a series of investments during the past five years to open smelters where power costs are very low, such as Iceland (hydro-electric), Trinidad (natural gas) and Saudi Arabia (natural gas). The company's low-cost production base is finally turning into a competitive weapon. On the upcoming quarterly earnings conference call, listen for management's discussion of its own costs compared with the rest of the industry, and you'll see a bright picture emerging.

There's another reason to focus on the brightening long-term outlook for Alcoa. This is no longer just about soda cans. Aluminum is becoming a major component in airplanes, and more notably automobiles. In the next two years, a wide range of automakers will roll out vehicles with an increasing percentage of lightweight aluminum in their bodies. Audi and Jaguar started the trend, and others are now following suit. In response, Alcoa recently invested $300 million in a plant in Iowa that will produce more aluminum panels for automakers.

Running through the numbers
Clearly, Alcoa's shares are responding to near-term concerns. But as the market finds a bottom and investors go in search of value, they'll start to focus on just how cheap this stock is in relation to its long-term outlook.

For example:

  • Alcoa sports $15 billion in book value, but is valued at just $9.4 billion on the market. Goldman Sachs sees book value per share rising to $17.91 by the end of 2013 -- twice the current stock price. Their target price is $16, up from a current $9.
  • Citigroup anticipates Alcoa's operating cash flow will rise from $2.7 billion in 2010 to $3.7 billion by 2012.
  • UBS, which sees shares rising to $13, notes shares are simply too cheap at 4.5 times projected 2013 EBITDA, on an enterprise value basis. They look for a big breakout in 2013, predicting net income will nearly double and free cash flow rises by half to $5.2 billion.

Risks to consider: China remains the wildcard. A major slowdown in its economy would keep aluminum prices depressed. As a silver lining, a period of low prices would shake out Alcoa's higher-cost rivals, helping the company to expand market share.

Action to Take --> This is a good company with an ugly stock. Shares have been in freefall for weeks now and have lost more than half their value in the past 52 weeks. Yet the long-term picture is inarguably bright for Alcoa. Investors may get a modest relief rally when quarterly results are released next week, and in the next few years, shares could well return to that 52-week high, at least double current levels.

Madoff Whistleblower Tells KWN Banks Stealing From Pensions

from King World News:

In a King World News exclusive interview, the man who brought down Bernie Madoff’s $65 billion Ponzi scheme informed KWN, “Bank of New York is going to go down, Eric. Between Bank of New York Mellon and State Street, these two institutions have stolen between $6 to $10 billion from tens of millions of Americans retirement savings accounts. It’s been a hell of a crime spree for the bank, but now they are being brought to justice.”

Harry Markopolos has lead the team that spearheaded this investigation from the beginning. Harry and his team were the first to expose this fraud. Markopolos also told KWN, “The New York Attorney General filed suit on Tuesday (against Bank of New York Mellon) for stealing money from pension funds on currency transactions. This theft has been from tens of millions of Americans, policemen, firemen, librarians, municipal workers, judges and the list goes on and on and they’ve been doing it for decades.

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Historic Value in Energy Stocks: APA, BHI, SGY, HAL

It always amazes me how hard energy stocks get hit when the market gets nervous. That dynamic has been on display for the last few months, with investors dumping energy stocks by the boat load on concern over slower growth, or even worse, an economic contraction.

The thinking goes that slower growth means sharp declines in demand for energy resources like crude and gasoline, therefore pushing estimates and earnings lower. Under normal circumstances that might be true, but the energy market is anything but normal.

Supply Limited

The relationship between supply and demand is already incredibly tight as existing crude reserves below the ground become more difficult to extract and consumption ticks higher on emerging market growth. That means even marginal demand growth has a serious impact on supply and prices.

Is Consumption Elastic?

Here's another thing to consider. How elastic is energy consumption? Even if the domestic or global economies fall back into a recession, does that mean people will stop driving their cars and heating their homes? Absolutely not. Energy is one of the last places anyone can afford to pull back on because it's an essential component of everyday life.


And don't forget the inflation component. With the Fed committed to a long-term strategy of devaluing the Dollar to stimulate exports and the economy, hard assets become a bastion of safety and wealth preservation. Crude is at the top of that list.

But investors don't seem to care about that right now, because energy stocks are one of the worst performers of the last two months on profit taking and sector rotations. And it has created incredible opportunity, with more than a few good stocks trading at historically low valuations. Here are four of the best.

Top 4 Cheap Energy Stocks

Apache Corp looks insanely cheap right here, trading at 7X forward earnings, just a touch above its all-time low of 6X. That's because shares have taken a nose dive over the last few months, falling from $134 to $80 in the weak market. But that 40% decline comes as the current-year estimate is down 27 cents to $11.84. Get out your calculator, that's a 2.23% decline. The divergence pattern between shares and earnings is a buying opportunity. As you can see below, shares have taken a real beating.

Baker Hughes has also been weak, falling from $81 to as low as $42. But in the meantime, estimates have ticked higher, with the current year now up to $4.37. That means BHI's forward PE of 11 is half its median over the last ten years of 22X. As you can see below, BHI is trading well below its range from before the financial crash. Take a look.

Stone Energy is another rare stock that has seen its share price fall while estimates and earnings have remained mostly the same. That has SGY trading deep into value territory, with a ridiculous forward P/E of 4.8X.

Haliburton is another energy stock trading deep into value, with a 2012 P/E of 7.5X. With a median P/E of 18X over the last ten years and low of 6.2X, HAL is trading at a deep discount to history. Take a look below.

The Take Away

Energy stocks are currently trading at historically low valuations. That provides a unique buying opportunity for anyone bullish on energy.

Investing 101 — When to Change a Financial Adviser

It has been my experience that most individuals, once they make a financial decision, stick with it. No matter what the performance, people have a difficult time changing course. Wall Street loves that fact because financial advisers sometimes can make money despite poor performance.

In the business, they call this “sticky assets.” But if the same work that goes into hiring a professional adviser went into the evaluation of an adviser along the way, sticky assets would cease to exist.

While I do not believe in knee-jerk reactions, especially in relation to performance, I do think there are perfectly good reasons to change advisers. One of the biggest reasons — customer service — has nothing to do with performance.

If you find that your adviser has disappeared on you and is not available to answer difficult questions, it might be time to make a change. If an adviser is dismissive of your concerns, make a switch. I don’t want to be an alarmist, but if you look at those that previously perpetrated financial frauds, being dismissive of customer complaints is part of the modus operandi.

It simply is bad form to ignore a client’s concerns. You pay good money for your financial adviser’s time, and thus you deserve the best possible treatment. If you aren’t getting the best treatment, it is time to find a new adviser.

But don’t ignore performance. Bad performance certainly should be a catalyst for a change. But instead of a quick reaction, only make a switch after multiple quarters of performance that fail to meet your goals and objectives. This could be difficult if your relationship with your adviser is friendly. Nobody wants to fire a friend, but that’s exactly what you must do if your friend is failing you.

A final reason to change is too much success. This might be counterintuitive, but if your adviser is becoming a star, it might be time to move on. Adding too many clients puts pressure on the adviser. Time with you might be reduced as the adviser works with a glut of newer customers.

Even worse is if the adviser begins pawning your account off on a junior adviser. You deserve top-notch service — or at least the maintenance of the service you previously received — and if you don’t have access to the adviser because of time constraints, consider moving on. The timing might end up being perfect, as peak performance tends to go in cycles. Much like selling a stock at the top and buying at the low.

Gerald Celente: Engineered fall in gold and silver; Trying to scare people out of precious metals; Started buying silver - Radio Nugget

Gerald Celente & Chris Waltzek, Radio - September 28, 2011

To download this show in Mp3 format: Click Here

So glad you’re back with us for another Radio Gold Nugget Segment. Today’s special guest, Gerald Celente, from the Trends Research Institute.

[Bells Ringing]

Chris Waltzek: It’s a pleasure to welcome back Gerald Celente to GoldSeek Radio to help make sense of the epic market volatility we’re seeing today. Gerald is Director of the Trends Research Institute. His team produces the The Trends Journal with cutting edge analysis of the global economic trends. Hello, Gerald.

Gerald Celente: Hello, Chris.

Chris Waltzek: Let’s begin our dialogue, if we could, with the eurozone sovereign debt issue. You know, as debt-strapped nations start to fall like dominos, their officials are struggling to hold the EU together. Moody’s Investors Service downgraded eight Greek banks last week. How do you see this crisis playing out and what does it mean for the typical investor’s portfolio?

Gerald Celente: The way it’s playing out is that the media and the politicians, of course, first of all, keep this line. You know, the Europeans have to get their act together. Matter of fact, just following the IMF meeting this past Monday, we heard from PIMCO’s head over there, Mohamed El-Erian. He said, “What I learned in Washington is that the Europeans finally get it. They recognize they have deep problems and they recognize they need to do something about it and now they are going back and will try to do something about it. This was a very important wake up call to Europe.” What wake up call? What are they gonna do about it? They’re gonna do about it with the same thing the United States did about it, is throw money after bad debt. They knew what was going on over there. There’s no solving it and the big lie is that if only the brilliant people put their minds together and work as a unified force, and speak with the same propaganda, that it’s all going to be fixed. So, what it means is that this thing is gonna continue to collapse and, just as in the United States following the panic of ’08, when things should have collapsed a lot quicker, they pumped it up by all of this phony money. And they’re doing the same now in Europe, just with the fed. They’re doing it again. (more)

2 Stocks to Profit from Fighting America's Growing Obesity Epidemic: SNY, LLY, TEVA

America's growing obesity epidemic has been for years one of the primary concerns among health-care professionals and organizations. Right now, about one-third of adults and 20% of children in the country are obese, according to the U.S. Centers for Disease Control and Prevention. So it's easy to imagine the costs associated with obesity can only be overwhelming. In 2008, for instance -- which is the most recent data available -- medical costs associated with obesity totaled $147 billion, making obesity a great burden on U.S. health care spending.

Obesity has been directly linked to other costly conditions such as heart disease, stroke, certain types of cancer and Type 2 diabetes, which is also a growing disease among the U.S. population. In fact, scientists warn that if the obesity epidemic continues, the number of Americans with diabetes will double or even triple to 20% to 30% of the population within 40 years.

The skyrocketing costs of diabetes care are disturbing, but they also create huge growth and profit [1] opportunities for diabetes drugmakers and their investors. Most diabetes drugs are made of some form of insulin and, given the growing trend, demand for diabetes drugs tends to only increase. In the past 10 years alone, global insulin sales have risen a whopping 400% to $15.4 billion currently. And in the next five years they are estimated to rise another 37%.

Given this picture, here are two high-yielding drug companies that have sizable stakes in the diabetes treatment market [2].

1. Sanofi SA (NYSE: SNY [3])
Yield: 4%

Sanofi (formerly Sanofi-Aventis) is a French pharmaceutical company that develops and markets diabetes drugs, vaccines and other medicines. The company owns Lantus, the world's best-selling diabetes drug. In the first half of the year, Sanofi's diabetes drug sales rose 11.5% year-over-year to $3.02 billion. This represented 15% of overall sales, which totaled $21.3 billion. Sanofi has 55 drugs in various stages of development, including several new diabetes drugs.

The company's earnings per share (EPS) [4] have grown 20% in the past five years to $4.68 and dividends have climbed 10.5% to $1.32. Despite patent expirations on Plavix, its well-known blood thinner whose 2010 sales brought in $2.8 billion, and Avapro, a blood-pressure medicine whose sales totaled $436 million in 2010, Sanofi still expects to grow sales 5% a year and boost profits with new diabetes drugs -- Lyxumia, in particular -- vaccines and consumer health-care products. Much of this anticipated growth should come from six new drugs Sanofi plans to launch within the next year. The company will also likely benefit from $2.9 billion in anticipated cost savings resulting from its merger [5] with biotech firm Genzyme Corp.

The company's $13 billion cash flow [6] last year easily handled $5.9 billion of research and development (R&D) spending and $4.3 billion of dividend [7] payments. With a yield [8] exceeding 4%, the stock should be attractive to dividend lovers. Even better, CEO [9] Chri Viehbacher says dividends will keep rising as Sanofi moves beyond patent cliffs next year. Sanofi is valued at a trailing price-to-earnings (P/E) ratio of 15, but just 7 times forward earnings [10].

2. Eli Lilly (NYSE: LLY [11])
Yield: 5%

Like Sanofi, U.S. pharmaceutical giant Eli Lilly plans to offset patent expirations of top-selling medicines with new drug developments for diabetes, Parkinson's disease and cancer -- all of which are already in late-stage clinical trials. Lilly's current diabetes drug, Humalog, generated sales of $2 billion last year and accounted for 9% of the company's total revenue, which reached more than $23 billion.

A recently-signed drug development pact with German drug-maker Boehringer Ingelheim is replenishing Lilly's pipeline with new mid- and late-stage diabetes treatments. The agreement covers five medicines, at least four of which the companies plan to develop and commercialize jointly.

In the first six months of 2011, Lilly's sales rose 8% year-over-year to $12.1 billion, due in part to a strong contribution from Humalog, whose sales rose 10% to $1.1 billion in the same period. However, Lilly's income declined 13% to $2.2 billion, mainly because of licensing fees and restructuring charges. In the past five years, Lilly's earnings [12] have risen 20%, while dividends have grown 5%.

With a reasonable dividend payout of 46% of earnings, Lilly could readily afford a dividend hike, especially with the stock's yield being already exceptionally good at 5.3%. Lilly is bargain-priced at a P/E ratio of 9 and price to cash-flow (P/CF) ratio of 7.

Risks to consider: My main concern with these two drugmakers is that patents on their flagship diabetes drugs are due to expire in the next three years. The good news is these drugs are forms of insulin, which is considered a biologic product and therefore is protected by law from generic versions even after patents expire. If the laws protecting biologic drugs change, then generic drugmakers such as Teva Pharmaceuticals (Nasdaq: TEVA [13]) could benefit.

Action to take --> My top pick for growth investors is Sanofi because of its deeper pipeline of drugs under development. Income investors may find Lilly more appealing due to its richer yield. If dividends don't matter to you, then you should also consider investing in Novo Nordisk (NYSE: NVO [14]), a Danish drugmaker that owns 50% of the insulin market share [15].

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America Is on Sale: Author Kiyosaki

James Paulsen (Wells): Investment Outlook

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Wells Capital Management's Chief Investment Strategist, Jim Paulsen, has just released his exhaustive investment outlook. The complete report, which is longer than the following prefacing text, follows in a slidedeck, which you can either download or fullscreen.

by James Paulsen, Chief Investment Strategist
Wells Capital Management

Since its collapse in early August, the stock market has experienced extreme daily price volatility oscillating within a broad range. These emotional daily price swings reflect a skittish investor struggling with a dichotomy between extremely attractive relative stock market valuations and an array of escalating fears. Investor worries include a widening contagion from the European sovereign debt crisis, the potential for a hard landing among emerging world economies, uncertainty introduced by uncommon and confusing Federal Reserve policy actions, and the likelihood of yet another debt ceiling debate looming on the horizon.

While these concerns should keep daily price volatility elevated, how the stock market ultimately breaks from its recent trading range will probably be determined by whether the U.S. economy avoids recession. In the next several weeks, economic reports will either galvanize recession expectations or consensus fears will once again calm, embracing the likelyhood that the U.S. economic recovery will persevere. Should a recession become obvious, the stock market would likely suffer a further significant decline. Alternatively, investor greed may dominate the rest of this year should recession fears fade as investors act to take advantage of a valuation metric (about 11 times earnings with a sub-2 percent 10-year Treasury) which, without a recession, represents a fire sale!

A U.S. Recession?

An imminent U.S. recession is unlikely. First, the traditional economic policies which precede a recession are not evident. The U.S. does not possess an inverted yield curve, has not been subjected to significant short-term nor long-term interest rate hikes, and is not suffering from restrictive liquidity conditions or tight fiscal policies.

Second, can the U.S. suffer a recession when there is nothing to recess? Recessions often result from “excesses in need of a correction.” Since the last recession ended only two years ago and since it was so extreme, private sector players have thus far been well-behaved in the contemporary recovery. Are individuals paying up too much for houses today? Have consumers extinguished pent-up demands for durable goods? Is the savings rate too low (the savings rate has been hovering about a 20-year high since the recovery began)? Are household debt burdens oppressive (the household debt service burden is in its lowest quartile since 1980 and no higher today than it was in 1985)? Have banks been aggressively overextending loans? Has anyone been borrowing too much lately? Are companies overstaffed? Overinventoried? Have businesses over invested in the last couple years? Has the Fed tightened too aggressively? Have bond vigilantes raised bond yields too much? Too much fiscal tightening lately? Is anyone lacking for liquidity? Are households overexposed to the stock market today? Is optimism over the top? It is hard to see why the U.S. would experience a recession when almost nothing requires a “correction.” Indeed, before the next U.S. recession, the answer to at least some of these questions will likely be yes!

Third, despite a significant economic slowdown since early this year (annualized real GDP growth rose only 0.7 percent in the first half and real GDI growth rose by only 2 percent), the economy is already showing some signs of bouncing. After flattening earlier this year, real personal consumption is on pace to rise more than 1.5 percent in the third quarter, weekly retail chain store sales have remained relatively robust, and the annualized U.S. auto sales rate has risen by more than 14 percent since June to 13.1 million, helped by Japan bouncing back from its tsunami. Weekly unemployment insurance claims remain in the low 400,000 range, reported private sector ADP employment gains have averaged 100,000 in the last two months and layoff announcements as recorded by the Challenger Job Cuts Index have remained subdued. (more)

Gold, DAX and Dollar Still Pointing to Sharply Lower Prices

The past month has been a wild ride for both equity and commodity traders around the globe. Novice traders have had their heads handed to them and their investment accounts drained. When fear, uncertainty and volatility are running high, some of the best opportunities become available to those who know what to look for. These market conditions force you to focus and strive for perfection in finding low risk entry setups and to also actively managing positions with laser focus because within hours a winning trade can turn into a losing trade.

Looking back on the daily charts of the dollar, SP500, gold, and also the overseas markets it looks as though we are nearing a market bottom. I say NEARING because I think investments need more time for the current selling pressure and bearish sentiment to run its course, which could take another few weeks and possibly a few month before truly bottoming.

Let’s take a quick look at some charts…

SPY 30 Minute Chart Looking Back 2 Months

As you can see below price action has been wild. But for subscribers to my newsletter it has been a fun and exciting time having pocketed over 40% return from August 1st – up until today.

The point of this chart is to show you the basic market phases (Impulse, Uncertainty, and Corrective). Understanding how to identify each phase using momentum, price action, volume analysis and market sentiment is crucial for success in today’s volatile market. Once mastered you can trade virtually any investment with a high level of confidence, though I recommend mastering 3-4 investments at most and just trading those full time with pinpoint accuracy. Through my newsletter members learn exactly how to read the market and manage positions from my daily video market analysis, intraday updates, trade alerts and trading tips.

As you can see below I am anticipating weakness in the market over the next few days. Once those levels are reached or if the charts start hinting that a reversal back down is imminent I will be ready to take action using an inverse leveraged ETF.

Index ETF Trading Newsletter

Gold 30 Minutes Chart Looking Back 2 Months

This chart will piss some people off for sure… but the chart to me is still pointing to lower prices at this time. Until we get a breakout above the upper resistance level I am not bullish on gold. Keep in mind that during strong selloffs in the stock market almost all investment drop together (gold, silver, oil, stocks).

Gold ETF Trading Newsletter

German DAX Daily Chart Looking Back 3 years

This chart shows the long term chart of the DAX which I think is giving us some insight to a global market bottom in the coming months. You will notice I painted the phases over the chart and where I feel the market is trading and where it is headed looking forward.

Dax ETF Trading Newsletter

Dollar Index Daily Chart Looking Back 3 Years

The dollar also shows us three years for price action. If this strong rally continues in the dollar we will see lower stock and commodity prices for a few more months.

Dollar ETF Trading Newsletter

Trend Trading Idea Conclusion:

In short, I feel we have some very exciting times ahead along with huge potential trades starting to unfold. While I don’t want the market to collapse I will admit I prefer trading the short side of the market because fear is easier to trade than greed, not to mention prices drop much quicker than they rise… I’m sure you like making money fast also