In volatile market environments, I can't stress the importance of diversification enough. Check your portfolios to make sure that most of your stocks are equally weighted and fall within my recommended allocation of 60% in Conservative stocks, 30% in Moderately Aggressive stocks and 10% in Aggressive stocks. Each month, you should check to see if you need to trim back on stocks that have gotten overweighted in order to fund our new buys. My 60/30/10 mix is your key to smooth and steady returns.
Alpha is a risk-adjusted return that uses beta to calculate risk. I like stocks with high alphas, as a high alpha that means a stock is outperforming its benchmark (i.e., S&P 500, NASDAQ Composite, etc.) while taking on less risk.
American Depositary Receipt (ADR)
An American Depositary Receipt (ADR) allows foreign companies to trade on U.S. exchanges. Usually, a large U.S. bank will buy shares on foreign exchanges and sell them to U.S. investors through ADRs. ADRs trade just like domestic stocks and sometimes offer a level of protection to investors who want international exposure without investing on foreign exchanges.
Annual Earnings Change (%)
This is the change between the most recently reported fiscal year earnings and the preceding fiscal year's earnings.
Annual Net Profit Margin (%)
The percentage a company earned from gross sales in its most recently reported fiscal year.
Annual Sales Change (%)
The percentage change in sales between the most recently reported fiscal year and the preceding fiscal year.
This is when someone purchases securities on one market and then resells them on another market for a profit. Traders in the Japanese yen carry trade, for instance, buy Japanese currency and then convert it into another currency, profiting from the interest rate differentials.
Traders who invested in these, as well as other super-risky investments, such as subprime-filled hedge funds, saw their trading schemes literally blow up in the summer of 2007, during the height of the credit crisis.
Beta is a measure of systematic risk, or the sensitivity of a manager or stock to movements in the benchmark. As another risk measure, beta attempts to measure the movement of an asset relative to the broad market. A beta of 1 means you can expect the movement of a stock or manager return series to match its benchmark. So if a stock or portfolio had a beta of 1.10, that means the asset has historically moved higher and lower than the market by 10%. In a similar way, if an asset had a beta of 0.80, then it has historically moved 20% less than the market -- both up and down.
The "bid price" represents the highest price that somebody will pay for a stock at a particular point in time. The "ask price" is the lowest price at which someone is willing to sell a stock. To compensate for the risk they undertake, investors try to buy shares at lower prices and sell them at higher prices. The bid-ask spread is meant to compensate market makers for the risk they take in dealing with the stock and keeping the markets liquid.
My Blue Chip Growth service utilizes a buy-and-hold investment strategy. That means I've designed it for long-term capital gains. I typically hold stocks for more than a year so we only have to pay 15% federal taxes on our stocks instead of 35% taxes on short-term capital gains.
Buy Below Price
A stock is a good buy as long as you purchase it under my Buy Below price. If a stock moves above my Buy Below price, or moves "out of range," then do not buy it until I calculate a new Buy Below price in the next issue. Never chase a stock. If you can't buy it under the Buy Below price, simply wave goodbye to it.
CDOs are investment-grade securities that are backed by a pool of bonds, loans and other assets. Specific to the credit crisis, CDOs involved mortgage-backed securities. CDOs represent different forms of debt and risk, called "tranches," or slices out of a larger pool. Each slice has a different rate of return based on risk—with more conservative rates on more conservative slices of debt, and bigger returns on aggressive and risky slices.
A very short-term loan issued by a corporation, typically to pay for day-to-day operations like accounts receivable and inventories. The loans are rarely extended for more than 9 months and doesn't normally require any form of collateral, so only firms with high-quality debt ratings will find buyers for their commercial paper because of the risk of such loans. The reference to liquidity problems because of the credit crisis often reference commercial paper—specifically, the lack of buyers for it that is restricting cash flow for companies across every industry.
A survey measuring how consumers are feeling about the economy's immediate future, and whether they should save money or spend it. If they're not confident in the economy, consumers tend to be tighter with their budgets.
Usually positive events for a company, buybacks boost stock prices and earnings per share. Both corporate stock buybacks and merger mania should continue well into 2010 due to dividend tax relief and the relentless quest by corporate insiders and private-equity folks to pay only 15% in federal taxes via dividends or partnership distributions.
A company's current assets divided by its current liabilities. This reflects a company's balance-sheet strength.
Dollar-Cost Averaging simply means the adding money to your positions (typically stocks that are down), and thus moving your average buy price accordingly. If you add to your position when a stock is lower, you can make it easier to recoup losses and boost returns. However, the downside is that you stand to lose even more if a stock continues to slide.
Here's an example: Let's say you bought 500 shares of Super Corp. at $20 a piece (a total of $10,000). The stock dips to $10 a share, so you've technically lost $5,000 on paper. Ouch! In a few weeks, the stock bounces back up to $15 a share (a total worth of $7,500), so you unload it for a $2,500 loss and consider yourself lucky.
However, if you decided to "dollar-cost average" by buying another 500 shares when the stock was at $10 (an additional $5,000 investment for a total value of $15,000). When the stock bounces back to $15, you have broken even because $15 is the average cost of the shares you own. And if the stock continues to climb back to the first buy price of $20, you would actually MAKE money instead of getting back to square.
This is, of course, the positive scenario. If you added to your position and the company continued to slide, you'd suffer even greater losses. So make sure to weigh the risks and rewards of dollar-cost averaging on a case-by-case basis.
Dividends are an offering of a portion of a company's earnings to a class of shareholders. Dividends can be quoted in terms of the dollar amount per share, or in terms of the percentage of the stock's current market price. Not all companies offer a dividend.
The heart of all good financial analysis, earnings growth simply tells us how strong a company's earnings have been in the past four quarters.
This measures whether a company's earnings are accelerating or decelerating. It's the strongest variable for selecting large-cap growth stocks in the current market environment. Since the S&P 500's earnings were down in the fourth quarter thanks to all the multibillion-dollar write-downs from financial stocks and the problems in the housing market, stocks with accelerating earnings momentum in a decelerating earnings environment are performing especially well.
I refer to this as "Judgment Day" on Wall Street–it's when a company tells its shareholders whether its performance is meeting, exceeding or falling nowhere near expectations. I pick stocks with superior fundamentals, so our stocks usually report stellar earnings. Shares typically surge in the days following its earnings report.
Wall Street "experts" try to forecast a stock's earnings per share every quarter. When they underestimate a stock, the company posts a positive "earnings surprise" that is calculated as a simple percentage. Here's an example: If earnings for a given stock were forecast to be 10 cents a share and the company reports earnings of 12 cents a share, that is a 20% surprise—because 12 cents is 20% larger than 10 cents. Similarly, if the company reported 8 cents a share on a forecast of 10 cents a share, it would be a negative surprise of 20%. Positive earnings surprises show that a company exceeds expectations, and is doing better than investors predicted.
Estimated EPS Change (%)
A change in analysts' consensus earnings estimates.
ETFs (Exchange Traded Funds)
ETFs are essentially mutual funds for the 21st century. Mutual funds operate by pooling the buying power of many individual investors,
and then delivering a share of the profits that big pool of money creates. ETFs, on the other hand, allow you to invest directly in
a certain group of stocks or even in a certain strategy. There are ETFs that are meant to track the major indexes, ETFs that track
only a certain sector, ETFs that "short" a sector and go up when the stocks go down, ETFs that track the price of gold—you name it.
Just pick the investment flavor, and there is a fund dedicated to that strategy. And because these funds are "exchange traded" just
like the stocks you are already buying and selling, they allow you investors to customize their portfolio very easily.
The interest rate at which banks lend to each other overnight.
Federal Reserve, or the Fed,
Chaired by Ben Bernanke, the Board of Fed Governors meets several times a year to review economic conditions and set monetary policy regarding the interest rates, lending standards and reserve requirements. Wall Street tried to decipher the obtuse Fed's meeting minutes for hints on what they're planning to do in the future. I refer to this phenomenon as a "Fedspeak translation."
Louis Navellier assigns a Fundamental Grade to each of the 5,000 stocks in his Portfolio Grader database. The Fundamental Grade of a company is calculated from a weighted blend of his eight fundamental variables: Operating Margin Growth, Sales Growth, Earnings Growth, Earnings Momentum, Earnings Surprises, Analyst Earnings Revisions, Cash Flow and Return on Equity. Be sure to view the Stock Report of any graded stock in Portfolio Grader to see the grades assigned for each of these eight variables.
This involves investing money in companies that promote environmental responsibility. This encompasses two key areas: a) A company operates in an environmentally compatible way, or b) A company produces products that seek to improve different environmental problems. Most companies today are looking for ways to maximize energy efficiency and reduce waste output.
Gross Domestic Product, or GDP, is a gauge of the finished goods and services produced within a country. GDP is calculated on a yearly and quarterly basis, and can be revised up or down after "flash" estimates are changed due to new developments or updated statistics. Basically, GDP shows how fast a country's economy is growing or shrinking.
This is the bread and butter of all Navellier investment portfolios. Growth Investing means we seek out stocks with fantastic growth potential, indicated by fundamental factors like sales growth, earnings growth, cash flow and others. Simply put, we want company that can beat Wall Street's expectations, and grow faster than its sector and the market in general.
Inflation is hideously high right now due to food and energy prices. The food inflation stems from the fact that we are putting corn in our gas tanks due to ethanol blending, so the costs for animal feed (corn) have risen, causing all food prices to rise. The energy inflation has not been as bad, since natural gas prices remain low. Furthermore, the prices at the gas pumps have not risen as much as the light/sweet crude oil quoted on CNBC, since North America runs predominately on cheaper heavy sour crude oil, and the price of ethanol has fallen in recent months. However, when the summer driving season approaches and demand picks up, gas prices could cross over $4 per gallon if oil prices remain high.
The Fed tends to ignore inflation from food and energy and concentrates on "core" prices. Since core inflation in much better behaved, the Fed has plenty of room to continue cutting interest rates.
ISM Manufacturing Index
The Institute for Supply Management Manufacturing Index is a key index of the nation's manufacturing activity. The report covers indicators including new orders, production, employment, inventories, prices and exports. Any reading above 50 signals growth, while a reading below 50 indicates a slowdown.
When I talk about interest rates, I'm typically referring to the Federal Funds rate, or short-term interest rates.
The percentage change from the latest quarterly earnings report compared to the same quarter one year earlier.
The use of other financial tools and loans to increase the power of investments. Let's say you only have $1,000 to invest. A 10% return for a year would give you only $100. But say you borrow $9,000 from a friend and follow the same strategy with $10,000—a 10% yeild would make you $1,000 instead, doubling your money. Unfortunately, leverage works the other way as well. If your $10,000 investment backfired and you lost 10%, you'd have only $9,000 left and your friend will still want his money back. That leaves you with nothing, instead of a $100 loss.
The London Interbank Offered Rate, or LIBOR, is the rate banks can borrow funds from other banks. The LIBOR is the most common reference point for short-term interest rates, because it indicates the rate for the most credit-worthy borrowers. Riskier borrowers also see interest rates set in reference to this amount.
A limit order is an order to buy a stock at a specific price. It helps you avoid buying a stock at a higher price than you want. I often recommend that my Emerging Growth investors set limit orders for the thinly traded micro- and small-cap stocks.
Liquid literally means "easily convertible to cash." When I say that a market is "liquid," I'm referring to the high number of buyers and sellers. The more activity occurring in the market, the better our stocks generally perform.
Lock and Load
Okay, I've seen a lot of John Wayne movies in my day. The Duke first used it in Sands of Iwo Jima. Ever since, financial guys have used it as a general expression to "get ready for some action."
This tells me if a company's earnings will continue to grow faster than its sales. Companies with "fat" operating margins typically dominate their respective businesses.
To be perfectly candid with you, I'm not an options expert, nor am I licensed to give advice on them. But let me give you my opinion on options. Before you consider buying options, I strongly advise you to look at the premiums. Options command high premiums, and those premiums can really eat into your profits.
"Put" options are designed for investors who want to hedge. They act as insurance for your portfolio. But you can pay hefty premiums for puts, and sometimes the premium doesn't allow the insurance to kick in until the market falls 10% or more. Let's say you bought a put option to protect yourself against a drop in the stock market, and sure enough, the market falls 10%. But if you paid a 10% premium, the option would still be useless.
If you want to speculate and buy options, you'll pay a premium on that side, too. You might be betting that the market is going to go higher. Even if the market moves 10% higher, you still might not make a lot of money simply because of the premium you paid on the option.
It is possible to write call options on the Buy List stocks and collect income to supplement your dividend income. Writing call options is the most conservative way to boost your income beyond dividends. But it's important to remember that if the stocks rally, the options will be called. If you're ever going to experiment with options, I think it's best to experiment by writing call options on good companies.
Like I said, I'm not an options expert, nor will I ever recommend options in the newsletter. If you'd like to learn more about options, I recommend the Chicago Board Options Exchange.
Our Best Defense
Is a strong offense of fundamentally superior stocks.
When I say that a stock is traded OTC, this means that it is traded in some context other than on a formal exchange. The stock may instead be informally traded via a dealer network instead of on a centralized exchange like the NYSE or AMEX.
Current stock price divided by last reported annual earnings per share.
P/E Ratio (Projected)
Current stock price divided by the consensus analyst estimate of earnings per share for the next fiscal year (12-month) or the next two fiscal years (24-month).
PortfolioGrader is my online stock-rating database. The database contains nearly 5,000 publicly traded stocks and each are rated on their various fundamental and quantitative factors. Stocks are rated A (Strong Buy), B (Buy), C (Hold), D (Sell) or F (Strong Sell).
Positive Analyst Earnings Revisions
I just love making the analysts squirm. Whenever they need to make aggressive earnings revisions, that means they're struggling to keep up with what we already know–and our stocks usually post fat earnings surprises as a result.
As the political rhetoric heats up, the stock market historically performs well. My analysts and I looked at the market's performance from the 1900 election to the 2004 election, and the market has typically made big upward moves in Presidential election years. Traditionally the Fed "primes the pump" heading into a Presidential election, since it does not want the U.S. economy, or the Fed itself, to take the spotlight in the election debate.
In my opinion, price targets are a sham. Our goal isn't to predict exactly where a stock will go in a given period of time. Today's stock market consists of millions of investors around the world shifting trillions of dollars around, and I don't think there's anyone who can honestly predict an exact target for a stock.
Consider a stock we used to own, EMC (NYSE: EMC). In fact, EMC was in our premiere issue of Blue Chip Growth. At the time, EMC was at $50 a share. We were very fortunate, and the stock did very well for us. We eventually sold it at $288 (not adjusted for three 2-for-1 splits). If I had given a price target of $288, I would have sounded crazy. How could I have known where it was going to go? I did know that it was a good company and that it had a high probability of outperforming the market. It's our goal to find those companies.
It's never too late to buy a great stock, and it's never too early to sell a lousy one. According to The Hulbert Financial Digest, we've beaten the market in good years and bad years. We've done this by focusing on solid companies with superior fundamentals. If they stay superior, we hold on to them; otherwise, we sell them. I think price targets cause too many investors to needlessly sell their best stocks.
The current price of a stock divided by sales-per-share of the company in the most recent fiscal year.
Long-term, is a measure of a company's net profit margin in the latest reported quarter divided by its profit margin in the previous fiscal year. Short-term, is a measure of a company's net profit margin in the latest reported quarter divided by its profit margin in the immediately preceding quarter.
Involves the statistical study of historic returns, price volatility and price correlations of different assets to construct optimal portfolios.
My exclusive quantitative formula measures the institutional buying pressure supporting a stock and then determines the quantitative grade. Like individual investors, large institutional investors, such as corporations, cities or school systems, invest in stocks for income. These large institutional clients buy chunks of a stock, often worth millions of dollars. Typically, the more attractive a stock currently is to institutional investors, the better the stock will perform in the near term.
Quarterly Earnings Change (%)
The historical earnings change between the most recently reported earnings and the preceding quarter.
Quarterly Net Profit Margin (%)
Net operating earnings after taxes for the latest quarter divided by revenues for the quarter.
A company's cash and equivalents divided by current liabilities. This is an indication of a company's financial strength.
A recession is defined by two quarters of negative GDP growth. We are nowhere near this happening. The final third-quarter GDP estimate was 4.9%, and the Flash estimate for fourth-quarter GDP was 0.6%. While the Fed anticipated GDP growth for the first and second quarters of 2008 to remain slow, this essentially tells me that they will likely be lowering interest rates for the next few months. I expect that by the time the November presidential elections near, the U.S. economy will be firing on all cylinders and growing at approximately a 5% annual pace.
Return on Assets (% ROA)
A company's net earnings divided by its total assets.
Return on Equity (% ROE)
Tells me how well a company is managing its resources. This is derived by taking a company's net earnings and dividing it by its equity.
A comparison of the stock's Alpha relative to its risk. This is calculated by dividing the stock's Alpha by its Standard Deviation.
A Reward-Risk Ratio greater than 0.4 is considered excellent.
Stocks are ranked in descending order by Reward-Risk Ratio, with # 1 being the highest rank.
This is the wild card. Sales Growth's importance has surged in my stock selection model recently. Due to the credit crisis, the syndicated money that had been funding many of Wall Street's mergers, especially leveraged buyouts, has dried up. As a result, sales growth is reasserting its strength.
"Sell In May and Go Away"
A market phenomenon. A lot of investors tend to exit the market over the summer months, so liquidity dries up and the market gets bumpy. In 2006, there was no doubt that many folks "sold in May and went away" In 2007, the market was hitting new highs through the spring until it faltered in late-July. In August the market repeatedly tried to "retest" its lows.
August is a tough month on Wall Street, since many traders do not like to work in the summer and go on vacation. When the "pros" come back to work after Labor Day, volume picks up and the market usually settles down.
Selling "Into Strength"
After good news such as a strong quarterly earnings report, even weak companies will see shares rise up briefly. Occassionally, I recommend "selling into strength" with our weaker stocks to maximize our returns by selling at the top of the bounce a company gets after earnings. Sometimes the difference in share price can be significant day-to-day.
If a stock splits 2-for-1, it means the share price drops by half and the shares double. So if you owned 100 shares of a stock that traded at $100, after a 2-for-1 split you would have 200 shares of that stock at $50. The value is the same in your portfolio. There are different reasons for a company to split shares, including perceptions that shares price are too high for some investors, or that shares are too expensive to buy in round amounts like 100 or 1,000.
Stagflation happens when the economy isn't growing but prices are. It also happens when unemployment is on the rise. This is why I keep such a close eye on the monthly payroll and unemployment reports.
Standard deviation is a common risk measure as it measures the volatility of returns for an investment from its average return for
a given period of time.
Standardized Unanticipated Earnings (SUE)
Relates the average earnings surprise at a company to the dispersion of analysts' earnings estimates for the company and can be used
to estimate the future likelihood of earnings surprises.
Given the wide swings in stock values each month, many investors ask if they can lower their risk by using "stop-losses," which are standing orders with your broker to sell an investment automatically if it falls to a certain price. They're fine to use in my Ultimate Growth trading service, where we're trying to lock in short-term gains.
For long-term investors, I'm very much against stop orders. Stop-losses are counterproductive to long-term investors, as they pull you out of good stocks during momentary downdrafts. Think of all the people who were stopped out of their stocks when the market plunged after 9/11. Those investors are probably kicking themselves today.
I can guarantee you that if we published specific stop-loss figures in my Buy List, some unscrupulous traders on Wall Street would push the price of a stock down to that level, to try to get the order flow going. They'd clean out the stop-loss orders before they push the stock up again. Overall, I sincerely believe that a stop-loss system would cause excessive turnover and severely hinder the tax efficiency (i.e., long-term capital gains status) of an investor's portfolio.
Your best insurance against the occasional bad stock is to maintain a very diversified portfolio. Never let one stock grow to more than 5% of your portfolio unless you're a top executive and your company requires it. Remember what happened to the thousands of low- and mid-level employees at Enron. If they had followed this simple rule, nobody's life savings would have been lost.
But even if my stocks have a rough ride, I can almost always expect them to firm up when they release their quarterly earnings. Good stocks like those on the Buy List almost always rally in the wake of their quarterly earnings announcements.
Structured Investment Vehicle (SIV)
An SIV is an entity set up when a bank buys long-term assets from proceeeds of short-term loans. The bank gets a fee for managing the SIV, but can keep the SIV's debt off the balance sheet because it doesn't take on the credit risk. At least, that's what we used to think. See, SIVs often employ great amounts of leverage to generate returns. But when the cash flow slows from those short-term loans, it creates massive liquidity problems. That's exactly what we've seen in the credit crisis.
"Market Timing" is basically trying to predict the future direction of the market, typically through the use of technical indicators or economic data. Market timers try to switch from stocks to bonds before the market goes south, and then try to switch back to equities when it looks like the beginning of a bull market.
The problem is that it's nearly impossible to time the market perfectly, no matter what fancy tools and information you have at your disposal. Most investors wind up leaving the market after some of the damage from a decline has already hit, and then sitting out the market for the first part of the recovery. And even if a trader predicts one trend accurately, duplicated such a feat regularly over the long term all but requires a time machine.
I do NOT recommend trying to time the market. Unless you have a tremendous amount of time, desire or skill to comb through mountains of data on a daily basis, you're better served simply picking the best stocks for near-term success and long-term profits.
This is a philosophy of investing that targets stocks that trade for less than what they're worth. Value investors look for stocks they believe Wall Street has undervalued due to overreaction to bad news, and that have moved down despite the company's long-term fundamentals. These investors profit by buying what they think is a good stock at a deflated price. But the big problem these traders face is that there is no such thing as a true value everyone can agree on. A room full of people will come up with a wide rage of prices a given stock should trade at. Think of this as bargain hunting, or trying to buy a company for less than what it's worth. If you're lucky, you can find a great deal. Other times, you're stuck with an inferior product and get what you pay for.