Stock Trading Blog
Oil hasn’t been popular with investors for quite a while. Since oil collapsed following an OPEC-led attack to bankrupt foreign oil producers and take back market share from new oil sources like U.S. shale, oil stocks have been looked at warily. But even though oil has been the most recent asset class to fall on hard times, it’s still fared better than the most distrusted asset right now – real estate.
Since the sub-prime mortgage crisis in 2008 that struck down financial markets across the globe, real estate has been one of the most quiet asset classes with very little coverage and seemingly little attention from investors. But it’s been nine years since then – real estate might be getting an unfair deal right now.
Unpopular Doesn’t Mean Worthless
Following the disastrous 2008 financial crisis, investors stayed as far away from real estate investments as they possibly could. Words like “collateralize mortgage obligation” sent shivers down the spines of whoever heard them and the real estate market was virtually left abandoned.
Fast forward nine years and investors still aren’t talking about real estate investments. It’s still considered a taboo area to be invested in, but this lack of attention could translate into opportunities for value seekers. An ignored sector of the economy could be one that’s being unfairly priced.
But real estates often gets lumped together under one big umbrella, when it should be separated into categories: residential, commercial, and industrial. And while many investors might still be wary of residential investments, there’s no reason commercial and industrial investments should also be avoided.
Real estate investment trusts (REITs) look relatively undervalued right now and trading well under the S&P 500 multiple of 26 times earnings. REITs that specialize in commercial applications look particularly attractive due to their stable long term cash flows. Despite the rise in interest rates, businesses will continue needing to pay rent, creating a predicable business model that investors can take advantage of.
The current environment of rising interest rates brings up an interesting conundrum for investors. Rising rates generally mean trouble for dividend yielding stocks like REITs, but they also mean a red-hot environment for real estate. In fact, 2017 is shaping up to be a huge rebound year for home prices. Sales jumped 9 percent for March this year compared to last year as buyers try to get the best rate possible and lock it in before interest rates go higher. The median price of a home sold in March was up 7.5 percent year-over-year to $273,000.
The lack of supply of old homes available for sale means good news for home-builders who are seeing a pick-up in new orders. As summer approaches, real estate values should continue to rise, although the long term impact to the real estate market is still uncertain.
The markets have officially come off the post-election high and are now looking uncertain in the face of a far more aggressive rate hike from the Fed. Investors might be looking for some kind of safe haven asset class in order to weather a possible upcoming storm and classic defensive sectors like utilities, healthcare and consumer staples are the first places to find shelter. But with markets overheated, true defensive value could lie elsewhere.
Dividend yields might be attractive for investors who are looking for downside protection, but it’s hardly a secret. That means that dividend payers are in high demand, driving up valuation multiples and essentially robbing them of their defensive powers. When everyone is after the same thing, the price goes up and value goes down.
Looking for Value in All the Wrong Places
One of the most common mistakes beginning investors make is assuming that defensive stocks automatically mean less risk and greater wealth preservation. But true value lies in a stocks price to earnings multiple. This is how much of a premium investors place on a company’s future streams of income.
Right now, the average P/E of the S&P 500 is over 26 – 26.14 to be exact. Considering that the average mean is only 15.65, that means that, in general, stocks are historically overvalued. While P/E has climbed much higher before collapsing in the past, the fact the stocks are trading above their historical averages should send a red flag to investors.
Once the market becomes saturated and investors have no more buying power to put into already overheated stocks, the markets can quickly find themselves in a downward correction spiral. Normally, bear market jitters send investors to traditional defense sectors, but even these parts of the stock market appear to be overvalued.
Stocks in sectors like utilities, known for dividend yields, low growth and low risk, are trading well above their P/E averages right now. The average P/E in this sector is at 22.5 times earnings. But other typically defensive sectors aren’t faring any better. Coca Cola, a $183 billion consumer staples conglomerate, is trading at nearly 29 times earnings. Despite the 3.5 percent dividend yield, the premium on this stock doesn’t seem to outweigh the lack of value.
Just because equities are overvalued, doesn’t mean there aren’t other investment opportunities. Bonds are usually chosen for their defensive capabilities, but in the face of higher interest rates, it’s a tough market to invest in at this point. Instead, investors might want to broaden their horizons to commodities like gold and silver. These safe haven assets can help hedge against inflation, while holding value independently of stock and bond performance.
Regardless of what happens to stocks or bonds, precious metals hold their value much better. In fact, most commodities tend to outperform when stocks and bonds go down. For investors who are looking for a truly defensive sector, commodities – particularly gold and silver – look like a much better deal.
The Fed raised the Fed Funds by 25 basis points in March, just three months after a rate hike in December. The last previous raise was in December the year before. And now the markets expect to see at least two more hikes before the end of 2017.
Originally, the rate hike discussion kept getting delayed because the economy wasn’t producing the kind of data the Fed was looking for, so this sudden shift in gears should have a big impact on the economy. With multiple hikes on the table for this year alone, investors need to be prepared for a more volatile market.
The Effect of Interest Rates on Stocks
Over a long period of time, it’s hard to say what the full impact of higher interest rates has on the stock market. Interest rate hikes won’t prevent stocks from going up, but that effect happens over a period of years. In the short term though, rate increases tend to have a detrimental impact on stocks.
As rates climb, interest on debt also goes up, making it more expensive for companies to take out loans and do business. Debt obligations and interest payments go up, which in turn curbs business activity and helps to slow down the economy. This is done in an effort to curb inflation and keep the economy balanced.
A slow increase in interest rates doesn’t have much of an impact. This is because the slow increase gives investors and companies plenty of time to adapt to the new paradigm without sacrificing much in the way of earnings. But if rates rise rapidly, then it could become difficult for companies to take into account higher debt payments and procure loans. That means lower earnings and lower stock prices.
In July of 2016, inflation was a mild 0.8 percent. As of February, inflation has risen to 2.7 percent – a gain of more than 200 percent in less than a year. The quick jump in inflation is primarily why the Fed changed their timetable. If the hike in rates is successful, inflation should decelerate, keeping the economy in balance.
One concern over this speed is how quickly the rates will actually impact inflation. As it stands, the boost in rates will only affect debt assets and won’t actually help out savers with rats on savings accounts. It may be some time before savers will see the benefits of higher rates.
Is There Anything You Should Do?
Investors should use caution as the Fed enters into a faster cycle of rate hikes. If stocks continue to climb at the same pace they have been, valuation multiples will increase along with volatility leading to irrational pricing. A sudden correction could occur, leaving investors scurrying to find an exit. The resulting sell-off could trigger an even greater correction or lead to a full bear market that wouldn’t bottom out until stocks are properly priced in with the new interest rate.
Technology is a fast paced industry that’s constantly redefining the way we do business and live our day-to-day lives. In the same way the personal computer changed the world, IoT (Internet of Things) promises to be just as disruptive.
IoT is technology that’s able to interact with other technology, like smart grids that can predict maintenance needs, self-driving automobiles and smart homes that are energy efficient and fully integrated with our phones and computers. While IoT has the capability to improve our lives and increase productivity, it also opens the door to new challenges and risks.
Protection Against the Unknown
A fully integrated society has a lot of upsides, but carries a new kind of risk, as well. Most types of technology run the risk of hacking, viruses and other malware. As such, a new type of defense in needed – cybersecurity.
Right now, companies like Symantec – known for it’s Norton antivirus software – are developing new methods to combat technological risks using A.I.-based software protocols. As IoT becomes more and more integrated, the need for additional and more advanced protection tools will become necessary.
For instance, Symantec developed a solution for auto manufacturers in 2016 to help defend integrated vehicles against zero-day attacks – attacks made on new technology that hasn’t yet been publicly released. The healthcare field is especially susceptible to these kinds of attacks. Smart technology that can help diabetics control sugar levels and wearable devices to monitor heart rates and other vitals is a life-saving breakthrough in technology, but may also open the door to insidious viruses and malware that could be used to harm or even kill.
Because IoT technology is still new, there isn’t much in the way of protection developed yet. Hackers could easily take control of a moving vehicle, break through corporate firewalls and steal data, or even crash power grids. As such, standard IT protection like network monitoring and segmentation will become vital to the successful integration of IoT.
There is an upside to cybersecurity needs for investors, though. With all the advances in technology and subsequent risks involved, it opens the door for a whole new industry aimed at cybersecurity and online protection. Companies that specialize in IoT defensive needs will be big business and investors can cash in on the trend by investing in those types of stocks.
Over the next 5 years, investment in IoT security is expected to increase by a factor of five, making it one of the fastest growing industries in the market. As a lasting trend, it’s a long term investment that could be the next big bull market.
As a beginning investor, you might already have some familiarity with mutual funds, stocks, ETF’s and even options. Most online brokers have services that allow you to trade a combination of those assets and you likely understand how to put basic combinations together as part of your investment strategy.
But trying your hand in the commodities market is a different story.
Commodities trade on the futures market – a market that obeys rules that are very different from the ones you might be used to with stocks and options. You’ll also need to find a broker that allows futures trading. Because of the complexities involved, many online brokers won’t deal with futures contracts so doing your homework before opening an account is critical.
Playing the Futures Market
A basic futures contract is simply an agreement to buy or sell an asset on a future date for a predetermined price. Let’s use a hypothetical situation as an example of how this works.
XYZ Copper Mining is a company that wants to make sure the price of copper doesn’t go down in the future. The company might agree to sell copper 3 months out at today’s price. If in 3 months the price of copper drops, the company won’t be affected by the loss since they already agreed to sell at a higher price.
While much of the commodities market is made up of hedge contracts like in this example, other traders act as speculators, betting on whether prices will rise or fall in the future. Commodity investing could be a way of managing overall portfolio risk, while others may simply be placing a bet on prices in the hopes of quick gains.
Technically, futures contracts are for the physical delivery of a commodity. While investors can choose to deal with just the contracts, its important to note that delivery and storage costs are all part of the equation when determining where prices will go.
Futures contracts come with far more risk than trading stocks or options, though. While margin accounts may allow you to leverage your portfolio to a degree, futures contracts are designed with leverage in mind. Contracts are leveraged at 10:1, 20:1 or even 200:1 ratio depending on the underlying asset involved.
With leverage so high, a small percentage change can result in huge gains or losses. A 5 percent loss in the contract may be the equivalent of a 50 percent loss on your investment. Volatility this high means that you won’t be able to hold positions for a long time. Even if you end up being right about price in the long term, even a few days of volatility could cost you your entire investment.
Opening up an account to trade futures isn’t the only way to invest in commodities. Mutual funds and ETF’s that trade only commodities are another option, as are companies that rely heavily on commodities, such as mining companies. While these types of investments might not be “pure plays” on a commodity, they’re far less risky and could be the right move if the idea of losing your entire investment in one day feels unacceptable.
Investing online when emotions are high can have devastating consequences. You know the signs are pointing down, yet you can’t find it in yourself to sell your favorite stock. What do you do?
The best way to combat emotions while trading is to have a list of rules. Many traders argue that the hardest part about investing in the stock market isn’t buying the stock, but selling it. When you get emotionally attached to a position, the longer you hold it the harder it will be to let it go.
To combat this and let go, follow these simple steps.
1. Separate yourself from the position.
Imagine the stock as any random company with ticker xyz or cba, it doesn’t matter. You need to get the attachment out of your head that this stock is special and unique.
2. Take a good hard look at the facts.
Ask yourself, “Knowing what I know now, would I still buy this stock today?” Once you review the fundamentals and technicals again, you’ll see things a little clearer, having separated yourself emotionally,.
3. Acknowledge the worst.
You need to mentally acknowledge the fact that this stock is no longer a stock you should hold and needs to be removed from your portfolio.
4. Sell the stock immediately.
As soon as you understand what needs to be done, do it! Don’t sit around and wait because your mind will try and reverse your thinking. Hesitation is for the weak, but you are strong!
5. Drink a cold one and reflect.
Now that you’ve done the unthinkable and sold your once favorite stock, reward yourself with a beer, lemonade, glass of water, whatever. Think about what you did and how it will benefit you in the long haul and be proud of yourself for staying disciplined.
6. Find the next big winner.
With your freed up cash and freed up mind, start your search for your next big winner.
Post the rules somewhere on your wall, desk, or monitor so that you see them every day. When you run into that situation next time, simply refer to your rules and you’ll be amazed at how calm you remain. Why? Because you have a plan of attack.
For more than a decade, China has been the engine driving global economic growth. A leader in the emerging market economies with double digit GDP growth, a newly capitalist political regime and a rising middle class gave investors a guaranteed way to maximize profits. The exponential growth caused demand for commodities like steel and aluminum to rise and helped lift markets worldwide.
But China’s days as a fast growing emerging market economy are numbered. GDP is decelerating and settling into a normal pace for a developed economy and the global economy has yet to recover from the demand vacuum China left behind.
The Next Generation
Investors might already be familiar with the BRIC economies: Brazil, Russia, India and China. These have been the staple for high growth emerging markets for more than a decade, but their reign may be at an end.
Brazil and Russia have been gripped by recessions and China’s story is essentially at an end, leaving only India as the one BRIC economy that could rise up as a replacement. With a fast growing population and radical political reforms, India is well positioned to take over China’s place in the global economy. India’s GDP growth has risen more than 76 percent since 2008 and is now expected to be at 7.1 percent for the first quarter of 2017. In comparison, China’s GDP growth rate is less than 7 percent.
But the real growth may come from the new MINT economies: Mexico, Indonesia, Nigeria, and Turkey. These countries all share several similar qualities – a young workforce, a changing political paradigm focused on pro-business policies and no dependence on a singular industry.
These economies look much like the BRIC’s did several decades ago and could be where the next big emerging market boom comes from. While all four countries still face significant challenges, there are a number of positive developments that investors should take notice of. Still, Mexico looks like it’s in the best position to break out as an emerging market favorite.
Mexico has successfully diversified its exports, no longer being oil-centric and focusing instead on its growing manufacturing sector. As the closest manufacturing powerhouse to the United States, Mexico could undercut established manufacturing bases like Taiwan and China with a lower cost of labor and lower cost of transportation.
The longer the global economy goes without a country to take over China’s place, the closer we get to an equilibrium, in which case it won’t matter. Once the global economy balances with the lack of a high demand emerging economy, any new growth should have a hugely positive effect. Still, there are plenty of new economies developing that could take center stage.
The most likely scenario is that more than one economy emerges with high growth prospects. Diversifying your emerging market investments might be the best way to take advantage of the next big global growth boom.
Most people think of space exploration as the domain of scientific discovery and nothing more. Only a handful of tech visionaries have already begun investing in what could be the next greatest economic expansion in human history.
While it might seem like the stuff of science fiction, investors can already invest in space operations with defense contractors, aerospace companies and telecommunications companies. While most of the companies on the forefront of space technology are still private, investors should pay close attention to what is being developed and how they’re growing.
There’s no bigger name in private spaceflight right now than Elon Musk’s SpaceX. The company builds and launches rockets with its Falcon 9, Falcon Heavy and Dragon spacecraft. Recent breakthroughs have made the rockets reusable, lowering the cost of a launch to around $42 million – a significant decrease from just a decade ago when launches typically averaged over $100 million. Musk’s latest goal to travel to Mars to establish a colony may sound too bold, almost unreasonable, but considering how fast the industry is developing, that goal looks more and more achievable every year.
The other major competitor in the private space industry is Blue Origins. Founded by Jeff Bezos, the man behind Amazon.com, this company also designs and launches its own private spacecraft. Unlike SpaceX, Blue Origins is focused more on human spaceflight with plans to take customers into space and even in orbit around the moon. Looking ahead, Bezo’s wants the company to provide supplies and flights to and from established space stations and lunar colonies. Along with SpaceX, Blue Origin also has a contract with NASA to provide supplies to the International Space Station.
Planetary Resources and Deep Space Industries
Two up-and-coming industrial mining companies are also looking into space exploration: Planetary Resources and Deep Space Industries are specifically focused on mining asteroids. Before you dismiss that idea as mere fantasy, consider that a recently discovered asteroid (16 Psyche) located between Mars and Jupiter is estimated to contain a mineral worth of $10,000 quadrillion. That one asteroid alone is worth enough to crash the world economy. Many high value elements like gold, platinum, rare earth metals, and more can be mined from these objects remotely using drones. NASA is already planning a mission to 16 Psyche set to launch in 2023.
While space exploration might be the next big investment opportunity, significant risk remains. Like the advent of the computer, many pioneering companies will likely undergo a number of mergers and acquisitions, making it difficult for investors to navigate. Interested investors can get exposure to space technology through companies like Boeing and ATK Orbital, until the future of space industries begins to form more concretely.
One of the best ways investors can gauge the strength of the economy is through mergers and acquisitions (or M&A) activity. It tells investors that businesses are growing and that the economy is healthy enough to support large financial commitments.
Historically, increased M&A activity has been associated with the availability of credit, deregulation or other changes in government policy, and innovation stemming from the private sector. Because these business deals are often multi-billion arrangements, mergers and acquisitions tend to make the most sense when stock values are high so companies can finance part or all of the buyout through stock purchases. With the markets near all-time highs and a pro-business administration newly elected to office, it would make sense that M&A activity would be up.
M&A Activity in the Last 12 Months
For 2016, takeover activity registered as the third highest on record – with only 2015 and 2007 being higher. Some of the biggest mergers recently were the mega-deals in the chemicals industry. Dow Chemical and DuPont agreed to a $59 billion merger, China National Chemical Corp acquired Syngenta for $42 billion, and Bayer bought Monsanto for $66 billion.
Tech mergers have been strong as well, especially in the telecommunications industry, while the energy industry has been forced to make deals in order to stave off bankruptcy and combat low oil prices. On a global scale, the United States attracted $387.1 billion in M&A funds for 2016 ahead of the election – the highest on record according to Mergermarket, an M&A monitoring firm.
Other major deals last year were the AT&T/Time Warner deal and the GE/Baker Hughes oil and gas merger.
Mergers to Watch for
As Donald Trump begins to implement his policies, deregulation could return to Wall Street, helping boost M&A activity further for 2017. So far this year, M&A activity looks stronger than ever with January registering a 12.7 percent increase in deals from December.
For 2017 though, there are a few interesting merger possibilities that investors might want to watch out for. One is the video streaming service, Netflix. With its low debt load and high growth prospects, it could attract buyers like Disney or Apple.
Another deal could happen in the retail space with Barnes and Noble getting bought up by online giant, Amazon. While the brick-and-mortar business model hasn’t been working for most retailers, Amazon has recently announced plans to expand into physical locations and Barnes and Noble could meet those demands fairly easily.
Finally, Acadia Pharmaceuticals, a biotech with drug developments for Alzheimer’s and Parkinson’s could be attractive to buyers like Pfizer or Gilead Sciences.
One sector that hasn’t seen much deal-making lately is healthcare. As Trump starts to deregulate markets and address issues like the Affordable Care Act though, there could be a shake up in the industry that investors might be able to take advantage of. Interested investors should watch the industry closely to see how the fallout from political changes will shape the healthcare industry.
The bull has been marching for eight years now with no signs of weakness. In fact, the economic data keeps growing stronger, supporting the case for continued strength in the global rally. The Fed’s recent statements seem to indicate possible rate tightening to combat future inflation, as well – another sign that the markets are healthy.
Taking a look at volatility in the markets reveals that investors aren’t too worried about a correction of any kind with the VIX reading under 12 for the past month. But it’s often when nothing seems obviously wrong that the markets make a sudden turn downward. The only way to really know if the markets are growing is to check the data.
Important Market Indicators
While many investors rely on the mercurial Fed for direction, there’s another way of determining the strength of the markets. There are a number of indicators that investors can use to analyze how healthy the markets are.
One obvious indicator is the strength of the markets themselves – in other words, how equities are performing. When equities are high, it’s a good sign that there’s something positive pushing values up. The higher stocks go, the greater confidence investors tend to have.
Of course high stock prices can mean that equities are being overvalued. Investors should take a look at the average P/E ratio of an index like the S&P 500 to figure out where average values are at. Right now the average P/E of the S&P 500 is 26.60 – far higher than the historical average of 15.64. That could mean that stocks are overvalued, but it doesn’t guarantee that a correction is imminent either.
The yield on the 10-year treasury is another tool investors can use to analyze markets. A low yield could mean that credit is easy, but that could be to encourage businesses to invest. Conversely, a rising yield can actually be a good thing, as it means that the economy is growing. In the past 6 months, the yield rose from 1.50 percent to 2.37 percent – a 58 percent increase.
Inflation is one of the most often looked at indicators for determining economic strength. Rising inflation, like yields, can indicate economic growth. Over the past 6 months, inflation has risen from a sluggish 0.8 percent to 2.5 percent – a whopping 212 percent gain. It’s a strong sign that the economic rally has a fundamental basis.
Finally, the PMI (Purchasing Mangers Index) can be helpful to investors by detailing how the manufacturing sector is performing. Generally a reading of 50 or less indicates an economic contraction. At 56 percent, the PMI seems to be telling investors that the U.S. economy is strong and growing.
Other than economic data, momentum can be a powerful influence on market direction. If positive momentum is strong and investor expectations are high, then markets can still move upward, even after the underlying fundamentals turn negative. Basing a market rally solely on performance can be misleading and leave your portfolio exposed to unnecessary risks.
The stock market is a dynamic entity that’s in constant motion. Investors analyze stock movements across various sectors in an attempt to spot trends and predict future patterns. One of the most often used methods for analyzing stock patterns is the business cycle.
As the economy ebbs and wanes, certain sectors of the stock market outperform or under-perform. The business cycle tracks these movements and creates a generally recognized pattern that investors can use to identify winning sectors. By identifying where the economy is at in the cycle, investors can narrow down their search to those sectors that are expected to perform well.
Tracking the Business Cycle
There are four main stages of the business cycle: early expansion, mid-expansion, late expansion and recession. Let’s take a closer look to see what events occur during each stage and which industries outperform.
In this stage of the economy, a recovery from a recession is well under way with inflation turning positive and manufacturing production rising. Monetary policy changes to ease credit conditions, allowing for growth in profit margins, while low business inventories set the stage for high sales growth.
The sectors that perform best during this stage are consumer discretionary, financials, industrials and technology.
The middle part of economic expansion is usually the longest-lasting phase with the economy establishing a solid growth rate. Credit remains relatively easy with businesses increasing profit margins, while inventories and sales growth reaches a balanced state.
Most non-defensive sectors perform well during this stage, with few sectors emerging as true leaders. Sector investing is least effective during this stage and investors should focus on identifying trends within sectors.
The economy hits its peak in the late expansion phase with growth beginning to slow down. Inflation peaks and monetary policy switches to a restrictive environment, raising interest rates. Profit margins decline, while sales growth slows down with business inventories beginning to rise.
Energy and materials are typical out-performers during this stage, benefiting from inflation. Defensive sectors begin to become more popular, as well, with consumer staples, healthcare and utilities attracting investments.
The economy retracts during this stage of the cycle with credit availability reaching its lowest point. Business margins plummet, while inventories slowly begin to fall, until an equilibrium with sales is reached.
Defensive sectors, such as consumer staples, healthcare and utilities outperform during this stage, as they produce goods and services that have a steady demand unrelated to economic performance.
While the business cycle can help you find what sectors should outperform, it only helps on a macroscopic scale. In other words, it won’t help you find trends within an industry or tell you what stocks within an industry are considered best-in-class. Some industries, like biotechnology, don’t follow along the business cycle at all, so over-relying on it could mean that you miss out on other opportunities.
Investors typically use several generally recognized methods for analyzing a stock’s value. Basic ratios such as P/E (price-to-earnings), EPS growth, margins and more provide an overview of how a stock is performing. Normally, these ratios work to compare stocks with the broader markets and can reveal whether a stock is under-valued, fairly priced, or over-valued.
But the biotech sector doesn’t necessarily play by the same rules. Because of the nature of the industry – scientific research, FDA approval, and patents – biotech stocks can be extremely lucrative and volatile. Typical fundamental analytical methods like P/E ratio comparisons don’t make sense for this type of stock, so investors need to know the unique nomenclature of the industry in order to understand what to buy or sell.
Key Ratios for Biotechnology Stocks
There are three main ratios in the biotech sector that investors need to be aware of. Some of them might be familiar, while others might be ratios you never thought to look at.
Current Ratio – This ratio tells investors how a company is doing financially. In other words, what is the ability of the company to pay its short term and long term debts. To find the current ratio, you need to compare current assets to current liabilities. The higher the ratio, the more financially stable the company is, while a low ratio – especially under 1 – can be a red flag to investors that the company could be facing financial challenges.
Price-to-Earnings-to-Growth Ratio (PEG) – While the price-to-earnings ratio tells investors how expensive a stock is currently priced at, the PEG ratio provides a more complete picture by taking EPS growth into account, as well. A company that seems expensive based on its P/E might actually be a good deal if that company’s EPS growth rate is equally high.
Research and Development (R&D) to Sales Ratio – The biotech industry lives and dies on its research and development segment. A general rule of thumb is that the more is spent on R&D, the more spent on new, untested products. From an investment standpoint, a lower percentage is better. It tells investors that the company is able to generate profits from existing product lines and isn’t overextending itself on R&D that might turn out to be worthless.
How the Industry Works
Aside from research and development, biotech companies thrive on their patents. The protection of a biotech company’s intellectual property is paramount to success – the more patents owned, the more streams of revenue generated.
It might seem that new products should mean more revenue for a biotech, but the FDA approval process is nowhere near guaranteed and takes years to undergo fully. A new drug developed today would take years before it actually reaches the market – assuming that it can pass all of the FDA’s approval stages.
Investing in biotech can be a a lucrative, risky proposal. One way to add biotech to your portfolio is to use it as a risk mitigation tool. After all, because biotech tends to trade independently of the overall markets, a biotech stock can actually help you reduce overall volatility in your portfolio.
Newly minted investors often turn to mutual funds to meet their financial goals and expectations instead of trading stocks on their own. The idea of taking the fate of your portfolio into your own hands can be intimidating and the availability of investment vehicles that offer diversification and automatic management all-in-one almost makes the decision seem like a no-brainer.
But, despite the proliferation of mutual funds in the investment industry, they might not be the bargains they appear to be. There’s been a lot pf discussion lately about the importance of mutual funds in a portfolio and whether or not they actually add more value than ETF’s, stocks, or index funds. There’s also evidence that most mutual funds consistently under-perform benchmark indexes, such as the S&P 500, indicating that the age of the mutual fund as an investment portfolio pillar may soon be coming to an end.
The Hidden Disadvantages of Mutual Funds
Most mutual funds appear to be complete investment vehicles with built-in diversification and professional management. But when we compare them to other investment vehicles and strategies, mutual funds tend to lose their luster.
While mutual funds have built-in management, either by an individual or a team, management is limited in what they are allowed to do. Manager’s aren’t free to invest as they please – they are required to invest within certain guidelines and maintain certain percentages of their holdings in line with what the fund is designed to do. This can hurt overall performance by preventing managers from making changes as the economy ebbs and wanes along the natural business cycle.
Mutual fund returns need to be taken with a grain of salt, as well, considering they come with an expense ratio. This ratio basically covers the fees for management and marketing of the fund, but work against the total return of the fund. In other words, even if a mutual fund manages to keep pace with the broader indexes, it will still provide a lower return for investors.
In order to determine which funds are doing well and which aren’t, we can look at a fund’s alpha ratio. This tells us how the fund is doing relative to its benchmark index. A high alpha indicates the fund is beating the index, while a low one lets investors know it’s lagging. This ratio can be misleading as it doesn’t follow management – it follows the fund. So a fund that has a new manager, but shows a high alpha isn’t necessarily reflecting the fund’s true potential.
Because mutual funds have been lagging the markets for the past several years, investors have begun transitioning to other options, like ETF’s. Money outflows from mutual funds have plagued the industry, while ETF’s have seen steady inflows. This suggests that investors are moving their money away from under-performing mutual funds with high fees and expenses to ETF’s, which offer more competitive gains for less.
An exception to this trend could be the index fund – a mutual fund that doesn’t have active asset management, but is designed to simply track a benchmark index. While investors might not get the downside protection a traditional mutual fund offers, index funds could replace mutual funds for long term investors looking to maximize their gains.
The energy industry has been on a bit of a roller coaster ride over the past few years. Oil prices crashed in the summer of 2014 as the threat of new oil production from non-OPEC sources, like U.S. shale oil, triggered a price war. OPEC nations pumped out more oil than global demand called for, creating a huge supply glut. As oil prices plummeted, many energy companies struggled to stay afloat, even as the low cost of oil benefited certain industries like transportation.
But just a few years ago, the energy industry was looking at a different revolution in the form of alternative energy. Solar stocks were Wall Street darlings, with technology providing more cost-competitive means of production, that is until oil prices dropped and natural gas came back into focus. But fossil fuels are still a limited resource, while alternative energy continues to clear the path as a long term solution for energy.
The State of Green Energy
The Trump administration has not pulled any punches when it comes to their energy policies. Coal has been one of Donald Trump’s primary focuses, hoping to revitalize the industry and causing across-the-board drops in green energy company stocks after the election results came in in November.
The combination of cheap oil and natural gas, along with an administration viewed as being unfriendly toward green energy, has put a damper on alternative energy stocks. Guggenheim Solar ETF (TAN) has dropped more than 54 percent in the past two years from $38.89 to $17.79, revealing just how out of favor alternative energy has become.
One of the problems alternative energy faces is the extremely high cost of starting up. It takes a significant amount of time for green energy companies to recoup those initial costs – on average around 20 years. They also tend to take out a large amount of debt to pay for operational costs, making them sensitive to interest rate changes. With interest rates on their way back up again, it’s just one more headwind the alternative energy industry faces.
Some stocks are well positioned to weather the storm, though. The hydroelectric company, Brookfield Renewable Partners (BEP), generates stable cash flows, allowing it to profit despite the issues facing alternative energy. They also pay out a hefty dividend, yielding just over 6 percent – giving investors some downside protection.
The long term expectations for alternative energy are still optimistic, despite the short term headwinds that have been plaguing the industry. For now, Trump’s plan to remove environmental protections that restrict coal and oil companies will undoubtedly provide gains for those industries, while curbing growth in alternative energy. Investors should be wary of green energy companies that have high debt loads and diversify to avoid risk in any one company.
The technological revolution arguably began with the proliferation of the personal computer. From there global industries began to change incorporating technology into their everyday operations. Entirely new industries like telecommunications sprung up almost overnight and the world became interconnected in a way that had never before been seen in human history.
A new emerging trend in technology known as IoT (Internet of Things) is proving to be just as disruptive. IoT is “smart” technology that interacts with other technology, allowing for things like energy grids to be able to self-repair or vehicles that can identify maintenance issues before they happen. But it’s the retail industry that’s undergoing a paradigm shift with the changes IoT is creating right now.
A Closer Look at the State of Retail
Consumer tastes are changing and the retail industry is struggling to keep up. The traditional brick-and-mortar model of customers walking into shops and making purchases is starting to lose its appeal. Now, people all over the globe are shopping online.
Companies like Amazon are thriving because they’re taking advantage of how consumers want to shop. Reducing overhead costs by eliminating physical locations has allowed Amazon to gain an edge over other retailers and maximize efficiency. Meanwhile, traditional retailers have not fared so well.
Big brand names like J.C. Penny’s and Kohl’s haven’t been able to make the transition easily. Earnings are down and their stocks are being downgraded, while store closures rise in an attempt to curb losses. But not all retailers are in trouble. Nordstrom has done well with its ecommerce system and has successfully kept customers faithful by providing online ordering options.
IoT is taking the internet to a new level though. Interactive technology is a game changer and other companies are already making preparations. Korean-based Samsung launched a refrigerator model last year that comes equipped with a camera to let you see what’s inside your fridge without even opening it. But the company isn’t stopping there. Samsung recently partnered with Grubhub – a company that let’s customers order delivery from thousands of restaurants – to create a model that allows you to place orders directly from your refrigerator.
Grocery stores are changing too. Aside from the shift away from cheap options to organic food, grocery stores will soon be able to interact with your refrigerator. IoT is developing ways for you to grocery shop right from home and even have it delivered without ever stepping outside.
These radical changes in technology come with numerous risks and pitfalls. Experienced investors might remember the dot-com crash back in 2000 after rapid commercial growth of the internet industry. Anything ending in a .com attracted investment, (regardless of real world application,) creating an unstable environment. IoT seems to be following similar tracks and investors should be careful to maintain discipline and focus on fundamentals in order to navigate through these changes.