Top 3 Trends for 2009… and the Stocks to Profit

The global economic crisis made 2008 a year that many investors would like to erase from their memory. A sharp rise in mortgage defaults caused banks to tighten lending for both consumers and businesses. Consumers stopped spending, businesses stopped producing, and raw material prices dropped sharply. The result was a rough 2008 that may pave the way for a solid recovery in 2009. Here are the top three trends that we see in 2009 and the top three stocks to go along with them…

The first big change in 2009 will be a new president that has promised to bring change. Barack Obama has petitioned Congress to pass an economic stimulus plan that could top $1 trillion. The plan will increase spending on public infrastructure in order to create more than 3 million jobs while improving the quality of life for Americans. The plan will also create opportunity for a few public companies.

Vulcan Materials Company (VMC: 67.07 -4.12%) is a construction company that stands to benefit from these trends. Obama’s infrastructure plan will focus on building roads, bridges, modernizing schools and creating a clean energy infrastructure. Vulcan, a producer of construction aggregates, sees more than half of its sales come from these road and highway construction projects and stands to benefit.

A second big trend in 2009 will be the increase in oil prices as the biggest plunge in crude oil prices on record may be setting us up for a rally later this year. The so-caled forward curve of futures contracts suggest that oil prices will rise 28% to $60.00 per barrel by December. The increasing amount of supply going offline is also setting the stage for a potential shortage when oil demand rebounds.

Teekay Tankers Ltd. (TNK: 14.31 +2.43%) is one indirect beneficiary of higher oil prices that pays out a large portion of its income. The oil tanker owner and operator is structured as a Master Limited Partnership (MLP) and therefore has to pay out the majority of its net income. Currently, the stock is trading so low that the dividend yield on this payout is in excess of 30% despite strong fundamentals.

A third big trend in 2009 is alternative energy – a combination of the two previous forecasts. Obama’s new plan calls for increased spending on alternative energies while higher oil prices will also reignite demand for such products by private industry. Combined, this is good news for the solar industry in particular as it is one of the largest alternative energy segments.

LDK Solar Co., Ltd. (LDK: 14.99 +1.01%) is a premier solar energy play that could benefit from these trends. The firm has a strong contract backlog for 2009, but expects to see some delayed shipments in light of the current global economic crisis and tight credit markets. Meanwhile, the firm continues to show a solid cash position and unused credit facilities totaling more than $380 million and $850 million, respectively.

Looking for a way to leverage your returns on these stocks? Check out “Using LEAPS as a Stock Substitute” for information on how LEAPS can help. Also, see our Tools & Products sections for e-books, software and other tools to help you boost your returns.

Time to Buy Drybulk Shippers?

The dry bulk industry may be on the decline with lower asset valuations and tumbling freight prices, but some investors believe that the record-low valuations may spur some positive action. Dry bulk shipping rates have plummeted more than 90 percent since last summery while the net asset values of the ships have dropped 70 percent in some cases. The result has been record low valuations for the owners of those ships – those companies operating in the dry bulk industry.

The Baltic Dry Index, which measures day rates for dry shipments, recently moved below 800 signaling the worst pricing since around 2002. These lower day rates are the result of reduced demand due to slowing economies around the world. Less iron ore shipments need to be made given the slower construction in both the United States and growing economies like China. However, many important players in the market are predicting a recovery.

DryShips (DRYS) is one stock that has nearly tripled from its 52-week lows on speculation that things will improve. Chief executive and 34% owner George Economou believes that the company will be able to weather the storm over the long-term. These sentiments have even led to speculation that that billionaire shipping mogul would take the firm private at its cheap valuation and take it public in a few years to yield several times the return.

Many experts believe that the current Chinese iron ore negotiations are moving in favor of dry bulk shippers. Jefferies & Co. said in a research note that a successful downward adjustment to iron ore prices in China could spur demand for the dry bulk market by increasing the number of shipments. Meanwhile, much of the capacity expected to go online has been canceled and fuel / labor prices have also decreased over the past several months.

Unfortunately, many dry shippers are highy leveraged. The risk is that dry bulk owners will simply default on their payments, go into bankruptcy, and emerge under a new name after cleaning out shareholders. It wouldn’t be anything new for DryShips, which was created from the bankruptcy of predecessor Alpha Shipping. That entity was also owned by Economou and went bankrupt in 1998 and resulted in 37 cents on the dollar being paid to creditors and most of the fleet under his ownership.

Safe bets within the sector may be those dry bulk carriers with low debt, few new builds, and limited spot market exposure. These companies include names like Eagle Bulk Shipping (EGLE), Genco Shipping & Trading (GNK), and Star Bulk Carriers (SBLK). Unfortunately, even some of these companies are struggling with Star Bulk already defaulting on a $106,500 a day long-term contract after its client filed for bankruptcy and killed the contract.

So, how can investors get involved with these companies with limited risk? One way may be through long-term options call LEAPS – or long-term equity anticipation securities. These options provide investors with the upside of stock ownership without the risk of owning the stock. Investors can purchase the right to a set number of shares at a fraction of the cost of owning the underlying shares.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or see our Tools & Products section for products to help you invest with LEAPS.

Top 3 Retailers for a Tough 2009

Retail stocks have had a rough year that just keeps getting worse with last month’s drop in consumer spending being the largest since the data began to be tracked in 1947. Unfortunately, things do not look much better for 2009 with some 44 percent of consumers saying that they would further cut spending after the holidays, according to a study conducted by America’s Research Group. However, some investors see opportunity for strong retailers that can weather the storm…

Many investors looking at the retail sector will find no shortage of value in the form of low multiples, but relative value is no longer a valid measure in today’s environment. Investors should instead look at brand strength, asset valuation, cash flow generation and debt load to find retails that will be able to not only survive but thrive in the economic crisis. So, without further ado, here are our top three retail stock picks for 2009:

Wal-Mart Corporation (NYSE: WMT)

Wal-Mart’s stock has continued to perform well throughout the economic crisis as consumer sought lower prices. The discount retailer has also attempted to reinvent its image to include quality along with price while expanding its presence internationally. Combined, these changes have resulted in a 9.4 percent jump in third quarter net sales with the international segment leading growth.

Despite a modestly lower guidance for the full year, Wal-Mart continues to be one of the strongest retailers in the United States given its strong value proposition to customers. Meanwhile, the retailer’s efforts to reinvent itself as a quality retailer may end up paying dividends down the road when the economy recovers and consumers open up their billfolds, especially against rival discount retailers like Target Corporation (NYSE: TGT) and Macy’s (NYSE: M).

Investors interested in taking advantage of Wal-Mart shares over the long-term may want to consider purchasing long-term options called LEAPS (or long-term equity anticipation securities). Currently, investors can purchase $55 January 2011 LEAPS calls for $12.95 per contract. This means that investors can buy the right to 100 shares at $55 anytime over the next 764 days for only $1,295 compared to $5,519 by purchasing the underlying stock.

Target Corporation (NYSE: TGT)

Target has recently been the target of activist investor William Ackman’s Pershing Square. The hedge fund noted the fact that the retailer owns the real estate under the vast majority of its stores and estimates that it could be worth roughly as much as the company’s current market capitalization. As a result, Pershing Square recommended that the firm spin-off the land portion of the real estate into an REIT that would lease-back the property to the stores via a ground-lease.

Theoretically, this plan would unlock tremendous value for Target shareholders. The new REIT would be forced to trade at a reasonable valuation given its massive size and security (having Target stores as collateral in the unlikely case of default). Meanwhile, Target’s strong cash flows and balance sheet make it one of the best tenants that any real estate owner could desire. Finally, Target would be unencumbered with many of the costs associated with purchasing land for new stores (now covered by the REIT.

Investors looking to take advantage of this situation may want to consider a pair trade between Target and the retail ETF (NYSE: XRT). One Target LEAPS call and one retail ETF LEAPS put with the same dollar amounts will create a situation where investors will only profit when Target outperforms the retail sector. This means that no losses will be incurred when the retail sector declines, only when Target sees its value unlocked or comes to value.

Aeropostale Inc. (NYSE: ARO)

Warren Buffett chose to invest in this specialty retailer for a good reason: Aeropostale has no debt, strong cash flows, and an easy to understand business. Shares may be down some 32 percent over the past year, but the firm’s fundamentals remain very strong. Return on equity stands at a huge 54 percent while operating and profit margins remain strong despite the uncertain economy. Finally, the firm’s $100 million in free cash flow generation certainly has many investors interested.

Investors looking to make a bet on this stock may also want to take a look at long-term LEAPS options. Currently, investors can purchase $20 January 2011 LEAPS calls for just $6.60 per contract. This means that investors can have the right to 100 shares at $20 per share anytime during the next 764 days for just $660 down compared to $1,747 for the underlying stock.

See “Using LEAPS as a Stock Substitute” for more information.

3 Gold Stocks Set to Rally in 2009

Randgold Resources Ltd. (NDAQ: GOLD), Gold Fields Limited (NYSE: GFI), Kinross Gold Corporation (NYSE: KGC) and other gold stocks rallied as investors looked to hedge against inflation. The U.S. dollar weakened against other currencies after the Federal Reserve lowered interest rates to help encourage economic activity, which led to a rally in many commodities including gold.

Investors purchase gold for their portfolios in order to hedge against inflation and a declining dollar while also using it as a safe-haven during times of instability. Prices have also been helped by a fall in mine supply, a slowing of central bank sales, ongoing de-hedging by producers, firm demand from ETFs, and a likely recovery in jewelry demand. Meanwhile, banks taking major short positions on the Comex market in New York may also be forced to cover their positions after the market’s recent rally.

Many analysts are also very bullish on the prospects of gold going forward. Goldman Sachs raised its near-term gold forecast on expectations for a weaker dollar and as interest in the precious metal as a safe-haven from risk continues to keep prices moving higher. The bank raised its three-month forecast to $700 an ounce from $690 while also raising its full-year prices to $795 from $710 an ounce. Studies at the bank have shown that gold moves opposite the dollar 90 percent of the time.

Companies like Randgold Resources, Gold Fields, and Kinross Gold could benefit from the rise in prices as it will both increase the value of its current reserves as well as provide funding for future exploration activity. Of course, higher prices also help increase revenues, drive profits, and improve the balance sheet. Moreover, bigger miners like the companies offer a combination of safety and profitability given the fact that they are well-capitalized and trading at near-record low price to net present value multiples.

So, how can investors leverage their position while taking on less risk? One way may be to purchase long-term options called LEAPS (long-term equity anticipation securities). While not available on all securities, these options enable long-term investors to purchase rights to a stock at a set price and time in the future for a much lower upfront payment than purchasing the underlying stock outright. See “Using LEAPS as a Stock Substitute” for more information.

Top 3 Chinese Stocks for 2009

The United States may have been in a recession with negative economic growth since December 2007, but China still expects to hit its economic growth target of 8 percent in 2008. Meanwhile, the country joined with leaders of South Korea and Japan in the first Asian economic summit designed to explore ways to help the region play a role as the center of world economic growth.

Despite the positive growth, the Chinese stock market has plunged more than 60 percent so far this year compared to a 39 percent drop in the U.S. stock market. China may not have experienced single digit economic growth for six years, but the country’s economy is still quickly expanding as many western economies head into recession. So, how can investors take advantage of this differential?

China Mobile Ltd.

With over 399.5 million subscribers, China Mobile Ltd. (NYSE: CHL) is the largest provider of mobile telecom services in China with service in 31 Chinese provinces, autonomous regions and directly administered municipalities in Mainland China and Hong Kong. Currently, the firm is trading at a price-earnings multiple of 13.87x despite posting 44.7% quarterly growth, according to Yahoo! Finance.

Surprisingly, the earnings multiple for China Mobile is lower than that of U.S. counterpart Verizon Communications (NYSE: VZ) despite a sharply higher growth rate, high profit margins, and larger potential market. In fact, the majority of Verizon’s mobile growth in recent times comes from its recent acquisition of regional mobile provider Alltel while China Mobile’s growth is primarily organic.

Baidu.com, Inc.

The internet search boom may have been put on hold in the United States, but Chinese online search (and internet usage) is just getting started. The state-run China Internet Information Center reported earlier this year that China had surpassed the United States as the nation with the largest number of internet users. In fact, China increased its internet users in one year by 73 million while the total number of U.S. users is estimated to be just 215 million.

Baidu.com (NDAQ: BIDU) dominates the Chinese search market the way Google (NDAQ: GOOG) dominates the U.S. market. The firm has over 60% market share and even Google admits it would be difficult to compete. Google’s Kai-Fu Lee noted, “Gaining share against a well-established supermajority competitor is a difficult proposition because there is a certain critical mass, eonomy of scale and word-of-mouth effect that one has to overcome.”

Baidu.com is currently trading with a price-earnings multiple of just 27.79x despite its strong 91.4% quarterly growth, according to Yahoo! Finance. This compares to Google’s 19.87x earnings multiple with quarterly growth of just 20.6%. China also has a positive economic growth, which comes in sharp contrast to the United States where Google operates.

iShares China ETF

Investors looking to place a bet on the broader Chinese economy may want to take a look at the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) ETF. The fund holds the top 25 largest Chinese companies, including China Mobile, PetroChina, China Construction Bank and other large names. Currently, the entire index has a price-earnings ratio of just 8.42x despite continued growth in the Chinese economy.

Investors looking for a relatively safe leveraged bet on the Chinese economy may want to take a look at long-term options on the ETF known as LEAPS. Currently, investors can purchase $30 January 2011 calls for just $8.40 per contract. This means that investors can pay just $840 now for the rights to 100 shares of FXI at $30 per share anytime during the next 760 or so days.

For more information see “Using LEAPS as a Stock Substitute”

Top 3 Oil Stocks to Weather Any Storm

Goldman Sachs analyst Argun Murti warned that oil could hit $200 a barrel last May as crude prices hit the $123 mark for the first time. Now, University of Calgary professor Philip Verleger is predicting $20 per barrel oil as the global slowdown eats into demand while destroying anticipated supply. The lesson here is that nobody really knows where oil prices are headed, but that doesn’t mean investors should avoid the oil sector. Rather, investors should build a well balanced portfolio to weather any storm.

The first thing taught in university investment courses is the concept of diversification. The best way to reduce risk is to diversify holdings across many different sectors. Similarly, the best way to diversify risk within one sector is to choose different types of businesses within the sector. This ensures that even if one sector falls, the others will rise to make up for it. The result is smoothed portfolio performance during even the roughest of economic times.

The oil sector has several different players:

• Drillers – These are the companies that take the oil out of the ground, either on land or under the sea. One of the best oil driller plays is Petroleo Brasileiro (PBR), also known as Petrobras, which discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro.
• Shippers – These are the companies that take the oil from Point A to Point B by shipping it across the ocean. One of the best oil shipping stocks is Frontline (FRO), which is trading at a very low earnings multiple with a high dividend yield.
• Refiners – These are the companies that take crude oil and refine it into gasoline and other usable substances for consumers. One of the best refiners in the business is Marathon Oil (MRO), which has combined exploration with refining to create a strong business.

Owning these three stocks can help investors gain prudent exposure to the oil industry. Higher oil prices can boost prices for drillers, but could put pressure on refining margins and vice versa. Meanwhile, shipping companies rely more on demand than just pricing. Remember, increased supply with consistent demand could lower prices without lessening demand. All in all, diversification, even within a sector, can help reduce risk.

What Does the Bailout Mean for Foreign Automakers?

The U.S. government agreed to a $15 billion plan to bailout the big three automakers, but the package serves as only a temporary measure until a more permanent decision is reached. However, the temporary measures have provided hope for not only the U.S. automakers but also foreign automakers that have remained largely silent during this whole crisis. The big question now is whether or not they will be passed and the industry will be saved.

The proposed bailout package would provide a $15 billion loan to General Motors and Chrysler in order to stay in business while requiring them to restructure their operations to ensure repayment. The legislation would also include protections for taxpayer dollars, including the appointment of a federal official to oversee the automotive industry who could force the companies into bankruptcy if the companies don’t come up with a business plan by the deadline of March 31st.

Foreign automakers like Toyota (TM), Honda (HMC), Hyundai (HYMLF) and Nissan (NSANY) have pumped some $40 billion into 70 American facilities in the last 30 years and are also banking on a bailout. The manufacturers rely on many of these same parts suppliers as the big three automakers and therefore stand to lose out upon any failures. After all, any failures in the automotive industry will likely result in failures among part supplies, which could be disastrous for the industry.

So, will a long-term bailout pass government circles at the end of March? Well, the reasons behind the automaker bailout must be addressed, but few can agree on exactly what the problems really are. Some believe that wage disparity is to blame, but a recent report showed that a lowering of wages would only reduce prices by $800. Instead, many experts insist that the automakers must reinvent their image to the American public in order to spur sales. Whether or not this is possible remains to be seen…

Cashing in on Obama’s Infrastructure Plan

The stock market rallied on Monday after Barack Obama unveiled his economic stimulus program. The president-elect promised to create the largest public works construction program since the inception of the interstate highway system a half century ago. The plan is designed to create millions of jobs while also providing a boost to the economy and improving the quality of life in the United States.

Obama’s infrastructure news may have sent a chill up the spines of some economists, but many investors are looking forward to the opportunities that will present themselves. Companies dealing with infrastructure may be the next big stocks in 2009 and beyond as this plan unfolds. So, what are some of the key stocks to watch?

A large part of Obama’s plan deals with constructing new roads and highways while building new schools and public structures. All of these projects require a commodity, which means that the prices of many commodities and their miners may rise. These companies include everything from fertilizer companies like Potash (POT) to coal companies like James River Coal Company (JRCC).

Construction companies will be the other large beneficiary of these projects. Companies that manufacture construction and mining equipment, like Caterpillar Inc. (CAT) and Deere & Company (DE), stand to rise sharply as the need for equipment rises. Meanwhile, specialty builders like Vulcan Materials Company (VMC) and Cemex (CX), may also see sharp gains.

So, what’s the best way to play these companies? Many investors are turning to long-term stock options called LEAPS (or long-term equity anticipation securities) to best capitalize on the trends with limited risk. These options give investors the right to purchase shares, often for up to two years, at a fraction of the cost of ownership. The result is increased leverage, lower cost, and the long timeframe desired.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or visit LEAPSInvestor.com for information on LEAPS options.

Treasure amid the Market’s Shipwreck

American factory orders came in higher than expected in July. The dollar saw gains against the euro for its 10th straight session. Crude oil and commodities continued their decline to multi-month lows. It’s not hard to see why some investors are seeing sunny skies ahead.

Time for a Turnaround

Those who are old enough should not be that surprised either – stagflation is not a new phenomenon. The financial media, perpetually predicting a doomsday, has the public obsessively focused on the “housing meltdown”, “credit crisis”, and “soaring commodities”.

Now, I’m not saying that investors should ignore the financial media, because they do have some valid points. Agricultural stocks like Potash Corporation (POT) and Monsanto (MON) have racked up gains while companies like Home Depot (HD) and Target (TGT) have racked up losses.

Investor and consumer sentiment are now at all-time lows – but so are stock prices. American icons like Warren Buffett and Bill Miller may be sitting on heavy losses, but they are digging deep into their wallets to buy more stock. So should you.

After all, it was the best investor of all time that said “be fearful when others are greedy and be greedy when others are fearful.” Now is the time to be greedy…

Finding Treasure among Trash

Profitable, growth-orientated companies trading at steep discounts to their intrinsic value are the underpinnings of a quality stock portfolio. Lucky for you, there are many such opportunities in today’s market.

Retailers like Target (TGT) and Sears (SHLD) have already staged impressive turnarounds, but still trade well below their 52-week highs. Meanwhile, large technology names like eBay (EBAY) and Cisco Systems (CSCO) are also available on the cheap.

Not everything is on sale, however. Some stocks deserve to be cheap. Financials and real estate investment trusts, among others, should probably be avoided until the market paints a clearer picture of where they are headed.

Another one of my favorite Warren Buffett quotes is: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Don’t take risks on stocks just because they are cheap – make sure they are well-known, quality companies.

The Best Way to Cash in

Investing in a turnaround is risky, but can pay off handsomely. One way to tilt odds in your favor is to diversify your holdings and use leverage to increase your upside. Unfortunately, diversifying requires a lot of capital and leverage works in two directions.

Luckily, there is a solution. Investors looking to multiple their upside while reducing their downside may want to consider long-term equity anticipation securities (or LEAPS). These long-term options allow investors to focus on a long-term timeframe while realizing the advantages of options.

LEAPS options can give investors the right to purchase shares at a fraction of the cost of purchasing the underlying shares. This means investors have more money to diversify, less money at stake per stock, and more leverage – a win, win, win situation.

Get Airborne with Aeropostale

Aeropostale, Inc. (ARO) shares are up more than 45 percent in 2008 despite a drop in consumer spending and a rise in inflation. The clothing retailer saw its same-store sales rise 13 percent in July and raised its second-quarter profit forecast, citing better than expected sales and gross margins. The performance comes in sharp contrast to competitors like Ambercrombie & Fitch (ANF) that reported falling same-store sales and new pressures on margins, and demonstrates strong brand strength despite the poor economy.

Investors bullish on Aeropostale during the long-term may want to consider LEAPS options. Currently, the 35 January ‘10 LEAPS are trading at a $9.00 premium. The breakeven on any position is therefore $43.71, or 25.9% higher than the current market price, within the next 515 days. Considering the stock has already moved more than 45 percent in 2008 and an economic recovery may be just on the horizon, many experts view these long-term options as a bargain at these levels.A

Aeropostale stock appears reasonably priced in today’s market with a PEG ratio of just 1.04. However, two analysts recently downgraded the stock saying that there may be better better entry points for the stock. The analysts also expressed concerns that year-ago comparisons will soon get more difficult, but noted there is still nothing wrong fundamentally with the company. Essentially, they are betting that there will be a pullback in which to add more shares later.

Investors should also carefully watch Aeropostale’s upcoming second-quarter earnings numbers to be announced on August 21st. Many are expecting the results to come in above last year, but some are concerned that expectations may be too high. The declining economy also has some concerned that the outlook would be lower-than-expected. As a result, prudent investors may want to consider waiting until after the results before purchasing a stake in the retailer.

Visit LEAPSInvestor.com for more information on this LEAPS strategy.

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