Stock Trading Blog
When designing an investment portfolio, diversification is a critical component. Holding stocks in various sectors helps mitigate risk without compromising returns. But not all sectors are created equal. Depending on where the business cycle is at, certain sectors may outperform or underperform the broader indexes.
Cyclical industries behave in patterns that are relatively easy for investors to predict. Other sectors such as pharmaceuticals and biotechnology aren’t correlated with the markets at all and follow their own microeconomic patterns. The best portfolios usually have a representative from most, if not all sectors of the economy but one sector seems to be taking over in terms of importance to other stocks and the market in general.
In the past five years, the S&P 500, an index made up of 500 stocks from various economic sectors, has risen about 78%. Over that same time period, the NASDAQ, an index known for its strong grouping of tech stocks, has gained more than 132%. It’s clear that the technology sector is becoming more than just another sector of the global economy – it’s becoming the defining sector.
The new technological paradigm
There are certain moments in history when a business or idea changes the way we look at the world. These disruptors often cut a path of destruction for those companies that aren’t able to adapt in time but create opportunities for others.
There’s a list of industries that are either defunct or at the very least on their way out thanks to technological disruptors. Paper has given way to electronic forms of communication, coal is becoming obsolete in the face of cheaper, cleaner sources of energy, and even space is becoming more and more accessible to commercial interests.
But while the world might be caught in a technological renaissance, not every new product is guaranteed to be a winner for investors. 3-D printing promises to be a huge benefit to sectors like biotechnology and manufacturing, but it’s not the 3-D printing companies that ended up on top, it’s the companies that adopted the technology for themselves.
The headlines constantly reveal technological breakthroughs that promise to be paradigm-altering by some of the biggest names on Wall Street like Amazon, Google, Apple, Facebook, Tesla and more. And while these giants lead the way, it’s the companies that will benefit from technology-inspired cost reductions and innovative new products that will soar higher over the next decade.
While technology is quickly becoming a vital part of every industry, investors should pay careful attention to industries that are set to benefit the most rather than directly investing in technology companies themselves. There’s a saying on Wall Street, “when everyone is digging for gold, it pays to be the one selling the shovels.” In other words, it may be the industries supporting the changing tides that will offer the most opportunities for investors rather than directly investing in the tech companies themselves. Still, for long-term investors, it might not be a bad idea to pick up a few shares of stock from companies like Amazon or Apple.
Volatility is back in the markets and corrections seem to be happening more frequently this year. There’s been a flurry of activity early on this year with rising oil prices, a new Fed chairman, tariffs, and a possible trade war. The eight-plus-year long bull run may be facing its last days, or it might just be a temporary correction before heading even higher.
Whatever fate lies in store for the markets this year, investors need a plan to avoid making critical mistakes. Panic is the biggest enemy for investors. When stocks are plummeting, the knee-jerk response may be to sell and get out, but keeping calm could be the key to maintaining profits.
Portfolio defense 101
Protecting your portfolio against sudden unexpected downturns is a must if you want to maintain healthy long-term returns. Down markets can be scary, but having the right strategy in place can help you weather any storm.
Regardless of how the market is performing, investors should focus on fundamentals rather than technical trading patterns. The intrinsic value of a company remains the same whether it’s in a bull market or bear market. By focusing on things like financial statements and company growth, you can avoid short-term trends and market fads.
Another good defense against downturns is making sure your portfolio allocation is correct. The mixture of stocks and bonds tends to get off track over time because stocks rise more than bonds. A portfolio originally set up as 60% stocks and 40% bonds can turn into 70% or 80% stocks in a few years if left unchecked and subject you to more risk than you want.
Finally, options are a great way to mitigate risk. Simple strategies like covered calls or hedging against a position buy a put help minimize losses. A covered call involves selling a call on a stock you already own. You’ll miss out on larger-than-expected upsides but still keep some profit. More importantly, you’ll get upfront profits from selling the call that helps mitigate losses potentially seen on the stock itself. In the case of a put, the profit gained from a falling stock below the put’s strike price will limit the downside risk to the difference between the price of the stock when you purchased it and the strike price of the put.
One of the most important rules for investing is to remain calm even in the midst of a market panic. Those that panic don’t make good decisions and many savvy investors such as Warren Buffet buy and make big moves in the markets when a sell-off is underway.
When the markets dip 10% or more, you might be tempted to sell out of your positions and wait on the sidelines until the danger is over. But all this strategy does is guarantee the loss already sustained and could prevent you from profiting from the rebound. In other words, stay invested for the long term and don’t stress over temporary downturns in the markets.
Diversification is a word that investors hear every day in the markets. It’s an important concept – “don’t put all your eggs in one basket.” To most, it simply means choosing a mixture of stocks and bonds and ensuring that the stocks you hold are from various sectors of the economy and come in varying sizes from large cap to small cap. But these changes are only superficial, there’s still one more layer that tends to be overlooked – investing overseas.
Domestic market risk is what happens when a portfolio consists only of US-stocks. That means any event specific to US markets like an unexpected drop in GDP or political event will impact US stocks far more than those situated outside of the US. For investors to be diversified against regional-specific risks, there needs to be an inclusion of international holdings.
Ways to invest internationally
Picking an international investment can be a daunting task. It’s hard to perform due diligence on a company you have never heard of with limited information to go on. Unless you have unique knowledge of foreign companies, investing overseas is considered riskier than investing domestically.
But that doesn’t mean there aren’t ways to invest. Investors have several methods to choose from to gain international exposure.
Mutual funds are one of the best ways to gain international exposure. That puts the responsibility of research and balancing of international stocks solely on the shoulders of the fund managers who have in-depth knowledge about ex-US investments.
Another great way to get access to overseas stocks is through ETFs. These funds trade like stocks making liquidity a non-issue and give investors the ability to choose a basket of international holdings instead of having to narrow it down to just one company. Investors can even choose regional specific ETFs or take a broader approach by investing in several countries at once.
Finally, you can invest directly in international stocks via ADRs. Short for American Depositary Receipt, ADR’s allow foreign companies to list their stock on US exchanges. Companies listed as ADR’s have to meet certain listing requirements set forth by the SEC making them safer for investors rather than attempting to invest directly in an overseas company listed on their exchange.
Not all investors believe international investments are necessary. Legendary investor John Bogle, the founder of Vanguard Group, thinks that there’s no reason for investors to chase returns overseas – there should be plenty of opportunities for profit in the US alone.
However, diversification by including ex-US stocks isn’t something to dismiss out of hand. It can effectively hedge your portfolio against certain risks while boosting returns in high growth countries. By utilizing mutual funds, ETFs and ADRs, investors have a plethora of options to pick from.
Bear markets are the bane of every investor’s portfolio. They can strike quickly without much warning and turn a profitable year into a disaster. Panic sets in fast and the markets become a mad scramble to sell stocks before everyone else to avoid taking on even more losses.
There are few things in the markets scarier than watching the indexes drop more than a percent day after day. Bear markets bring with it large swings in volatility which can be disconcerting to even the staunchest investor. But with volatility comes profitable opportunities for those that have the ability to think differently. In many cases, not only are bear markets not something to be afraid of, but something to look forward to.
Combining offense and defense
Whether it’s a bull market or a bear market, each sector of the economy and its associated industries don’t all perform the same way at the same time. In other words, not every industry will be undergoing a bullish upswing or bearish reversal at any given moment. That means even in the midst of a harsh sell-off, there will still be attractive profitable industries investors can take advantage of.
Another way to look at a sell-off or bearish reversal is to view stocks as if they were having a sale. Some companies may be going on sale because they genuinely aren’t worth as much but far more often you’ll find that stocks are simply caught in the grip of bearish selling momentum that has nothing to do with the state of that particular business or even industry.
Savvy value investors like Warren Buffet thrive during bear markets because they’re making moves and buying quality stocks for far less than they could during a bull market. Once the smoke clears and the markets begin to recover, these stocks can produce returns far in excess of the S&P 500 average.
While opportunities can be found during bear markets, one of the best ways to prevent taking on larger-than-expected losses is to remain diversified. It can be tempting to sell some or even all of your holdings and wait on the sidelines for the danger to pass, but that can mean guaranteeing losses and missing out on the subsequent upside swing once the bear market reverses course.
Arguably, the best way to handle bear markets is to simply power through them. Historically, bear markets only last 18 months while bull market average 97 months. That means as long as you stay invested, it might be a better strategy to simply ride out downturns and let the stronger long-term trends define your gains. Having a long-term strategy means being able to weather market downturns with relative impunity.
The markets have become a volatile place of late triggered by a host of catalysts like rising interest rates and high stock valuations. Adding fuel to the fire is Trump’s newest policy of tariffs aimed at combating the United States’ trade deficit and retaliating against China. The result is heightened fears of escalating tit-for-tat maneuvers that could end in an all-out trade war.
A trade war is a bit of a mixed bag for markets. Certain industries will obviously be impacted while others may escape relatively unharmed. A trade war will certainly impact markets in a broad way, though, and many unrelated industries could see increased volatility as a result. You can be sure it will impact your portfolio, but there are steps you can take to minimize its impact and even benefit from upcoming changes.
Your war portfolio
If a trade war does break out, there are a number of things you can do to protect your portfolio and even benefit from the increased volatility. As with any major market-moving event, staying focused and avoiding panicked decisions is the best advice. That being said, here are several things you can do to prepare for a trade war.
The first move you should make ahead of time is to re-balance your portfolio. Over time your allocation between aggressive assets like stocks and conservative ones like bonds tend to get off track. This happens because with more volatility stocks tend to gain or fall more than bonds thus throwing off your portfolio weights. If a trade war does happen, you’ll want to have your portfolio properly adjusted to avoid larger-than-expected losses.
Along the same lines as re-balancing your portfolio, you should also make sure you’re properly diversified. Spreading out your investments in different sectors and stock types means minimizing negative impacts. If you want to take it a step further, you could also look into investing in stocks that are benefiting from current trends that won’t be adversely affected by a trade war like the falling US dollar.
Certain sectors like financials won’t be affected by a trade war and could, in fact, benefit from it. Technology too should be able to thrive despite any tariffs or regulations because the industry isn’t built on international trade. Companies that do business in the US and don’t manufacture overseas are also good bets as they avoid any negative impact tariffs have.
Whether or not a trade war will happen shouldn’t impact your long-term portfolio strategy or goals. You might want to think twice about purchasing a stock that will be directly impacted by a trade war, but you shouldn’t let it affect how you invest. Make sure you keep your portfolio properly balanced and don’t let short-term volatility derail your long-term investment plans.
You don’t have to look far to find advertisements claiming 1000% returns or higher trading penny stocks. They sell for just pennies, as the name implies, giving investors the impression that they are cheap and therefore have more possible upside movement.
It can seem tempting to buy thousands of shares of a company’s stock that sells for just $0.01 a share and imagine that it’s not really that risky because you’re not spending much. And because it doesn’t take much, these stocks can easily rise in value creating huge gains for investors. But far more often these stocks lose value or even go bankrupt. Investors should take extreme caution when considering a penny stock for their portfolio.
What penny stocks are
Stocks like General Electric or Amazon trade on exchanges such as the NYSE or the NASDAQ. These exchanges have certain requirements and regulations in place to ensure that stocks trading on them meet guidelines like financial accounting standards and proper reporting to protect investors from fraudulent activity.
Penny stocks, however, trade over-the-counter on what’s commonly called the pink sheets. They do not need to meet minimum requirements set forth by the SEC or file like those listed on other exchanges. These companies may be foreign-based and don’t use the same accounting rules or it may be that the company doesn’t report to the SEC. There are a number of reasons why a company may be listed on the pink sheets, but because of the lack of required information, investors are unable to do due diligence like they would on other stocks.
Scams are one of the largest risks with penny stocks. One of the most common scams is known as a “pump and dump” scheme. It happens when a stock is bought by certain parties or news disseminated about a stock in order to generate positive interest. Once the stock climbs in value due to other investor activity, the stock is sold off sending prices plummeting lower. Any unfortunate investor caught in such a scheme loses their investment.
Aside from the many dangers that penny stocks come with, there can be reasons to consider adding them to your portfolio. Some lesser known or smaller industries operate on the pink sheets and nowhere else. Some of the most popular now are marijuana companies which operate outside the US. Stocks that were once listed on an exchange like the NYSE may lose standing and trade over the pink sheets as well. While it could be due to problems like failure to report to the SEC, it could be that the stock falls below a minimum threshold and can no longer be supported on the NYSE or NASDAQ.
For investors that decide to trade over the pink sheets, they should limit their investment to a small percentage of their overall portfolio to avoid taking on undue risk. Penny stocks are highly volatile and the lack of information means that proper fundamental analysis may not be possible.
There’s a common philosophy in real estate – buy the worst house in the best neighborhood. The opportunities for profit are highest when you purchase something that needs a lot of work, but because it’s in a good location, the resultant gains are relatively easy to obtain.
The stock market works in a similar fashion, only instead of neighborhoods and houses, you have industries and individual stocks. And like real estate, values are often strengthened by the neighborhood, or industry, that they’re located in. A good stock in a poorly performing sector doesn’t have room for growth and lacks positive catalysts to move higher.
In order to maximize profits and minimize losses, you’ll need to be selective with your stock picks. That means buying only the best companies for the role they’ll play in your portfolio.
Creating a playlist
There are roughly 630,000 companies that are publicly traded in the world. Trying to narrow down that list to find the best of the best may seem like a daunting, if not altogether insurmountable task. Luckily, there is a way to make things easier.
You can start by eliminating the majority of stocks available right off the bat by sticking to domestic investments that are listed on exchanges like the NYSE and NASDAQ. Quality stocks won’t be found on the pink sheets so there’s no reason to include them in your search either. Still, you’ll end up with several thousand stocks to choose from so you’ll need to narrow it down further.
The best way to go about picking best of breed companies is to list out all the stock sectors in the market: financials, utilities, consumer discretionary, consumer staples, energy, healthcare, industrials, technology, materials, telecommunications, and real estate. You can even add a few specialty niches if you’d like such as biotechnology or pharmaceuticals. Out of those sectors, you can identify the top three contenders for your ongoing stock selection list.
Picking the top three as best in breed for your list isn’t as challenging at you might think. You start by identifying companies with brand recognition – household names like McDonalds or Disney. You can’t go wrong starting with companies listed on the DJIA while the odds are the majority of companies you’ll find that qualify as best of breed will be listed in at least the S&P 500.
It’s good to keep a short list on hand of the best stocks for each sector as a quick reference, but keep in mind that metrics and fundamentals change over time. You’ll want to update your list on a regular basis – at least semi-annually – in order to avoid making simple mistakes by not doing your due diligence. Keeping in mind the best stocks for each sector can lead to quick decisions at the moment however and allow you to perform better analysis by avoiding tedious screens that take up valuable time that could be better spent making solid investment choices.
There’s no greater sense of investment accomplishment than selling a stock after it’s doubled or tripled in price. Some stocks break even higher and put up returns tenfold or more. Google debuted at $85 per share in 2004 but today under the Alphabet name, the stock is worth over $1,000 per share – a gain of well over 1,000%.
Of course, for every big winner like Google, there are plenty more stocks that never come close to those kinds of returns. It takes a lot of patience and determination to be able to invest in a stock and believe in your analysis for years, regardless of what the markets do or analysts say. It doesn’t always work out, but one breakout stock can easily make up for a number of other stocks that haven’t met expectations.
The winning criteria
There’s no simple rule that will let you spot potential gainers of 100% or more. Instead, you need the ability to spot trends that will last years and be able to invest before the majority discover it happening. That means staying aware of current trends in many different industries – the more specific, the better.
Having in-depth knowledge about a niche sector helps set you apart from the crowd and gives you a head start when it comes to spotting trends and emerging developments in the industry. By having a deep familiarity with that sector or industry, you’ll be able to make your own predictions and do your own analysis. You won’t have to rely on “experts” to make an informed decision.
There are three key characteristics of stocks that could increase in price by double or more. They’re usually out of favor and/or cyclical, have a misunderstood business or are overlooked by analysts, and they usually have either a low stock price and/or a small market capitalization.
Cyclical or out of favor stocks tend to be favorites for value investors because market cycles can be fairly accurately predicted. That gives them an edge to be able to invest when a stock’s price is lowest at the bottom of the curve and simply ride it higher when the sector rotates back into popularity. Niche businesses and companies with little to no analyst coverage is also an ideal place to look for potential winners. And stocks that have a low price or market cap usually mean that there’s more room for outsized future growth.
Stocks that put up big gains often do so over time. These aren’t “get rich quick” stocks – you’ll need a long-term mind-frame in order to really see results. While moves can happen quickly, investors need to able to look further into the future than they’re used to and identify long-term trends in order to generate outsized returns.
There’s no lack of media coverage when it comes to big tech names like Google, Amazon, Apple, Facebook. Technological advancements seem to be coming out of Silicon Valley on a daily basis and innovative products are changing the way the world works.
Not every company that’s making breakthroughs is actually defined as a technology company. One company making a huge impact in the field of technology today is actually classified as an automaker – Tesla. But don’t let the label fool you, Tesla is anything but a simple automotive company.
The company of tomorrow
Tesla first broke onto the scene as a maker of electric vehicles. It took the trend towards green energy and fuel-efficient vehicles a step further than other manufacturers by producing only electric cars. Many investors take one look at Tesla and wonder why the stock is so popular. The metrics are not in line with other automotive manufacturers and by some accounts, the stock looks too expensive to justify buying it. But in truth, the company isn’t just an auto-maker.
One of Tesla’s strongest products is actually its battery technology. The company has made leaps forward in battery technology to allow its fleet of electric vehicles to extend their range far beyond what they could do just a decade ago. And the speed at which electric cars generate a charge is improving as well. The company’s new commercial freight truck set to hit the market in 2019 is expected to gain 400 miles of power in under 30 minutes.
And it’s not just automobiles that the battery technology benefits. The same technology can be applied to any industry that relies on portable power storage. And as Tesla continues its research, its battery-powered cars could eventually replace the need for traditional gasoline engines altogether.
One thing Tesla’s been in the news for lately is its new automation technology. Self-driving vehicles have been discussed for years, but Tesla has managed to actually begin producing and testing fully automated vehicles for use on public roads.
While other car manufacturers are getting in on the automated vehicle scene, Tesla is one of the frontrunners along with Waymo – an offshoot of Google’s self-driving car program. Considering that Intel’s report on the market value of automated vehicles could generate as much as $800 billion annually by 2030, Tesla is a long-term play that could pay off in the end.
One of the biggest catalysts for Tesla is its innovative founder – Elon Musk. With other projects like PayPal under his belt and newer endeavors like SpaceX paving the way for the privatization of the space industry, it’s safe to say that Telsa will likely benefit as well. As a technology maven, Musk’s priority isn’t just manufacturing a product – it’s reinventing the industry from the ground up. Tesla, like his other ventures, should be invested in as a technology play and not just an auto manufacturer.
There’s a common saying on Wall Street: “Bulls make money, bears make money, and pigs get slaughtered.” In other words, you can make money in the market whether it’s going up or down but getting too greedy could erase any profits you had up until that point. It sounds good, but many investors get stuck at the “bears make money” part. After all, it’s relatively easy to profit from bull markets, but profiting from bear markets isn’t quite as simple.
In order to make money in a bull market, all one needs to do is buy low and sell high. Easy enough when markets are trending higher. But in a bear market, the same principle is applied in reverse: sell high, buy low. Luckily, there are a number of various strategies you can employ to profit from down markets without taking on more risk than you’re comfortable with.
Bear strategies for any portfolio
The simplest way to profit from a bear market is to simply short a stock. You sell a stock upfront, pocketing the money, with the intention of buying the stock back after it falls in value. However, this strategy comes with a high degree of risk since a stock can only fall to $0 resulting in a 100% theoretical loss, but there’s no limit to how high a stock can climb.
Instead, investors may choose to utilize options to take advantage of falling stock values. Buying a put gives you the right, but not the obligation, to sell 100 shares of a stock at a given price. That means that if the stock does fall, you can exercise the option and take the profit. But if the stock goes higher instead, you simply let the option expire to worthless and your only loss is the cost of the put itself.
Another option strategy you can use is called a bear put spread. Let’s take a look at how this is accomplished. Assume there’s a stock trading for $50 per share and you think it will drop in value. You purchase a put at a strike price of $50 per share and offset the cost by selling a put with a strike price of $40 per share. If the stock falls, your maximum profit is the spread between the $50 strike price and $40 strike price. If the stock rises or does nothing, you’re simply out the cost of the put option which was already partially offset by selling another put.
Finally, you can profit from bear markets with a credit call bear spread. Taking from our example above, instead of purchasing and selling puts on the stock, you use calls. In this case, you would sell a call with a strike price of $50 and buy a call with a strike price of $55. This limits the total downside to the spread between the two should the stock rise in value. If it does nothing or drops, you keep the upfront credit you gained from selling the call minus the cost of the higher strike price call.
No matter which strategy you use, profiting from a bear market isn’t hard to accomplish. By using options to mitigate risk, you don’t have to worry about higher-than-expected losses compared to investing in a bull market. Bear markets don’t have to be a time when your portfolio’s returns lag – make the most out of bear markets with these strategies.
Most investors are familiar with asset classes like stocks or bonds; some might even have experience with trading options or currencies. But one area where many investors are lacking in knowledge and exposure in their portfolios is futures.
Even experienced investors may not have much exposure to the futures market. With large initial balances, sometimes $50,000 or more, opening a futures account is reserved for investors with significant resources. But there are other ways to play the futures market so you aren’t left out of the loop.
Trading futures for the novice
Investing in futures is much different from trading stocks or bonds. The risk is considerably higher due to a number of factors such as the use of leverage and mark-to-market accounting. Because of the risks, futures should only be used by investors with a high-risk tolerance.
The use of leverage in futures is ubiquitous. Investors might have some experience with leverage in their brokerage accounts with margin. These types of accounts let you borrow up to 50% which acts as a loan that gets paid back with interest. The goal is to make more on your investments than the interest that you have to pay, allowing you to boost returns. Of course, it also increases risk since losses are amplified, plus there’s the additional cost of the interest payment.
With futures though, leverage can be as high as 200:1. That gives you control over a large number of assets which can greatly boost returns, but it also means that your position can wipe out in a single trading day. One of the biggest differences investors see when trading futures compared to stocks is mark-to-market accounting. This means that positions are balanced out at the end of every day so a 1% drop in the value of a futures contract might be the equivalent of your whole position. And you won’t be able to simply rise out the correction even though in the long run your analysis could turn out to be correct.
Unless you have a large pool to draw from, investing directly in futures isn’t recommended. Instead, you could try getting exposure through asset classes like ETFs or mutual funds. For example, if you wanted to trade oil futures, you could invest in the United States Oil Fund ETF (USO). Using an ETF allows you to trade it like a stock even though the asset itself invests in oil futures.
Due to the risky nature of the futures market, most investors won’t ever directly trade them. But utilizing ETFs allow you to get exposure to markets you might not otherwise have access to. You can also use stocks to invest indirectly in futures. Mining stocks are heavily tied to commodity prices so investing in a mining stock will allow you to profit from price gains in the underlying commodity. If you want to trade futures, make sure you fully understand the risks before committing capital.
Until the summer of 2014, crude oil prices topping $100 per barrel was a common occurrence in the markets. But the OPEC-driven war against foreign oil competitors like US shale flooded the market with oil, creating a crash that dropped prices down below $30 per barrel just a few years later.
Since then, there have been a slew of unprecedented changes in the oil industry. OPEC appears broken, as their plan ultimately ended up hurting them as much as anyone else. An agreement to curb production has helped lift oil prices out of the doldrums, but there’s still a lot of room to go before prices touch $100 per barrel again.
The oil resurgence
Oil prices are surging ahead for 2018, with crude oil jumping almost 19% year-to-date. Recently hitting north of the $70 mark, investors are beginning to wonder where the bullishness will end and if $100 prices are in our near future. Considering that OPEC production cuts are still being implemented, it stands to reason that prices could indeed continue to climb.
It’s not all about supply and demand for oil right now though. Another major catalyst that’s driving prices is the volatility markets have been experiencing lately. Uncertainty in equities and regular sell-offs have spooked investors who have been turning to other asset classes for stability. A persistently high US dollar and rising interest rates have also contributed to the issue.
One of the biggest wild cars in the oil industry is US shale. While currently healthy and strong, any drop in production for whatever reason could have far-reaching consequences. A slump in production could trigger a spike in oil prices next year that has the potential to hit above $100 per barrel.
According to the IEA, the US is set to supply much of global oil demand over the next five years, providing up to 60% of the increased production demand. Oil production capacity is estimated to be as high as 107 million barrels per day by 2023, with most of that demand stemming from India and China.
Oil at $100 per barrel is by no means a sure thing. There are still many things that need to happen in order to push prices up that far, and some analysts even believe it will never reach that price range again. One of the biggest question marks in the oil trade is the changes technology will bring to the table. Solar power has officially surpassed coal as far as being the cheaper and cleaner option. And vehicles are becoming more energy efficient, with electric vehicles taking up more and more market share. Regardless of what the future holds though, oil will still be a global staple for at least the next few decades.
Unless you’ve been living under a rock, you’ve probably noticed that interest rates on the rise again. It’s been years since investors had to be concerned about interest rates when choosing investments, and some may be out of practice. But concerns are floating around on Wall Street about what rates might do next.
At first glance, higher rates might lead one to think that stocks will go down. After all, with higher rates comes higher interest payments on debt obligations – something essential for financing day-to-day business operations. But in practice, the markets don’t behave so predictably. In fact, it’s often the unseen tertiary effects of higher rates that impact stocks more so than the actual increase in rates themselves.
Catalysts to watch out for
There are a number of factors investors need to keep a close eye on in regards to where interest rates are heading. While the usual suspects like inflation and GDP will play the largest role in determining how far interest rates rise, there are other considerations at play.
A healthy economy is a balanced one. Inflation around 2%, unemployment near 3.5%, and a GDP that clearly sends a message of strength, but not so high as to induce fears of overheating. If these conditions are met, then interest rates themselves won’t really matter. But the markets rarely stay at such levels.
Inflation can be difficult to control or predict, and interest rates are the primary tool used to combat too-high or too-low inflation data. Inflation tends to hurt the value of the dollar and erode its value as a standard of currency. But rising interest rates to combat inflation can also mean higher demand for the dollar.
Looking ahead to the next twelve months, the value of the dollar will likely play one of the biggest tell-tale signs in determining whether or not higher rates are a good or bad thing. In the late 1970’s inflation began to rise, and interest rates along with it, until they hit well over double digits. But the subsequent boom of the 80’s led well into the decade after, with growth catching up to inflation and interest rates, balancing the economy out once again.
One important note investors should keep in mind is that interest rates by themselves don’t actually have much of an impact on the stock market as a whole. Certain industries like financials tend to benefit from higher rates, but the market seems to be able to absorb the impact of higher rates quite well.
It’s the speed at which interest rates rise that becomes a problem for companies to manage. As long as the Fed keeps interest rate increases at a reasonable pace, stocks shouldn’t see a noticeable dip in performance. In the long term, the actual level of interest rates won’t matter very much. While investors shouldn’t completely ignore what interest rates are doing, avoiding panicked decisions based on rate changes is key to maintaining profits in your portfolio.
Energy is a global need that will always be in demand in some way or another. It’s not a defensive sector like consumer staples or utilities though – energy is highly cyclical and tied to global economic supply and demand. As such, energy companies tend to undergo regular ups and downs along the business cycle.
The energy sector has largely been the realm of oil, gas, and coal, while green energy has been relegated to speculative investments fit for those with a high risk tolerance. A few years ago, green energy like solar was a daily headline, but since OPEC began cutting oil production and oil prices began to rise again, alternatives have fallen by the wayside.
But alternative energy isn’t gone – in fact it’s the only obvious long-term choice for global sustainability. With the coal industry gasping its last breath, green energy companies are poised to take over the power vacuum that coal will leave behind.
Predicting the future of energy
Since the advent of the industrial age, coal has been the primary energy source for every country. Even looking back at the last decade, coal has been vital for energy production. But the industry may have finally been supplanted by something else. Coal is responsible for less energy these days, and few new investments are being put into coal production. As a polluting fossil fuel, coal isn’t a popular form of energy either.
One of the reasons coal has previously been so popular is how cheap it is. In fact, the biggest argument against other energy sources like solar has been their reliance on government subsidies in order to make them competitive with coal. But technology has been improving for decades, and green energy isn’t the unrealistic cost/benefit outlier it used to be.
As of 2016, coal prices averaged around $0.05 cents/kWh, with natural gas hovering around $0.03 cents/kWh. But a commercial PV solar company beat that at $0.029 cents/kWh without subsidies – officially making solar the cheapest energy source.
As costs go down, the end of coal’s reign might seem obvious, especially considering the negative impact it has on the environment. But there’s another major obstacle for alternative energy to overcome: energy storage. Solar and wind power is largely dependent on weather conditions. A large amount of unobstructed sunlight is necessary for solar installations, which makes sense for places like Phoenix but becomes less reliable in places like Seattle. Wind power relies on relatively high and consistent sources of wind. Because alternative energy is so reliant on weather and geography, worldwide implementation is a challenge.
New advances in battery technology led by companies like Tesla Motors are making the alternative industry more competitive though. Within the next decade, coal might only have a small regional impact on the globe while solar and wind provide the majority of power.
Despite the current market focusing on oil prices, the future of energy is still in alternatives like solar and wind. Long-term investors should ignore the short-term news and focus on longer fundamentals. Companies like First Solar will likely grow larger and become increasingly important in the energy grid space.
There’s few things more exciting for an investor than being one of the first to own shares of a newly issued stock. Oftentimes these stocks can climb quickly, resulting in gains of 10%, 20%, 50% or more in a short amount of time – in a matter of weeks or even days. But they can also turn the other way and never again find themselves at the same value of their original issue price.
While finding a fair value for a stock that’s been trading for years is relatively easy to pinpoint, trying to analyze a stock with no trading history is more difficult. There’s no regression analysis that can be done and no historical earnings record to pour over. However, that doesn’t mean a fair valuation can’t be found – one just needs to know how to apply the metrics.
Finding a fair value for a new stock
An IPO (initial public offering) is what happens when a company sells shares of stock and becomes publicly traded. The company will then use that capital to invest in capital infrastructure or investment in order to grow the company.
But pricing an IPO requires a bit of thought in order to get an accurate number. It might seem arbitrary, but there’s some reasoning behind these prices. Getting an exact figure isn’t realistic, but one can at least understand how prices are derived.
Like all economics, supply and demand plays a role in pricing. In this case, it’s the market demand for certain industries. If tech is popular and a tech company goes public, it may be priced higher than a mining company going public.
Of course one of the best ways to get a good idea of value is to look at comparable companies. Comparing the new issue to its closest competitors will give you an idea of how much the stock should be trading for. If the industry average price-to-earnings ratio is 15, then you know that the new stock should have a price-to-earnings of around that figure.
Another important consideration is the company’s growth prospects. If growth is projected to be high, the IPO should reflect that growth, and vice versa. This can be hard to gauge, so a brief look at the industry’s current health and the company’s plan for growth is a must for due diligence.
Finally, investors need to be honest about the marketability of the stock itself. A company with a new product or ground-breaking business model will add value to the stock, whereas a company that’s just trying to accumulate more capital will attract less attention.
IPO’s are highly risky investments due to the uncertainty surrounding valuation. Investors should note that IPO’s are generally issued when market demand is high, not when demand is weak. This means IPO’s will naturally get a boost from current demand, which may not reflect their fundamental value. Caution should be exercised when considering adding an IPO to your investment portfolio.