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Time to go Bargain Hunting

With volatility erupting out of Europe again, investors are left to wonder: Is this an opportunity to buy at attractive prices all of those great stocks that “got away from you” in the first quarter run-up, or is it portent of nasty things to come?

It would appear to be a little of both.

Even before the five-day selling spree, stocks were reasonably priced compared to historical measures, and they were downright cheap when compared to bonds and other common asset classes.  When you combine this with the generally gloomy sentiment towards stocks that has persisted for much of the past year, your risk of significant loss in a high-quality stock portfolio is almost nil.

Can stocks go from cheap to cheaper?  Absolutely.  It happens all the time.  But the conditions for a real bear market are simply not in place.  Fed policy remains loose, inflation remains largely tame, and stocks are cheap and underowned by individual investors and professionals alike.  These would be the conditions I would look for in a new bull market, not a bear market.

Still, after rising 28 percent from the 2011 Euro-crisis lows, stocks were due for a breather.  After returning 12 percent in the first quarter, the S&P 500 had already exceeded the returns that most analysts expected for the entire year.

This is where that “nasty portent of things to come” comes into play.  To borrow a quote from Lord Byron, it appears that the equity markets have “squandered their whole summer while ’twas May,” or more accurately April in this case.    As a result, I expect the major indices to move sideways in a choppy, range-bound market for most of the second quarter or until the latest scare coming out of Europe subsides.

Given this, how are investors to position their portfolios?

In a range-bound market, you can make money in one of two ways.   You either actively trade, attempting to buy at short-term lows and sell at short-term highs.  Or, you can orient your portfolio towards dividend-paying sectors and simply collect your checks while waiting for prices to firm up.   For the bulk of your nest egg, it is this second course of action I would recommend.   This is the approach I have taken in my Tactical ETF Portfolio in holding the Wisdom Tree Large Cap Growth ETF (NYSE: $DLN) and the PowerShares International Dividend Achievers ETF (NYSE:$PID).

For more active trading, investors might consider a contrarian bet on Spain.  I wrote favorably about Spain at the beginning of the quarter (see “Eurozone Member to Watch: Spain”), and I would reiterate this view today.  Spain has some of the cheapest stock prices and highest dividend yields in the world today, and Spanish firms outside of the construction sector tend to get a significant percentage of their revenues from outside the crisis-wracked country.

Keep the faith, dear reader.  There is money to be made in this market.

This article first appeared on MarketWatch.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Next Boom: Profiting from a Housing Recovery

Last week, I announced to the world what a momentously bad investment I had just made (see “I just made a horrible investment”).

Yes, dear reader, I was dragged kicking and screaming against my will into homeownership by my wife and two-year-old son.  My days of enjoying my Saturday mornings as an urban yuppy, drinking freshly-ground French press coffee and reading the weekend edition of the Financial Times on the patio of my Dallas Uptown highrise, are over.   Instead, they are spent at the local Home Depot (NYSE: $HD) buying rope and tools to hang a tree swing.

Men who pound away on financial calculators for a living have no business being within 100 yards of a Home Depot.  We don’t have the foggiest clue what we’re doing, and we end up spending small fortunes on tools we don’t need and have no idea how to use. And after buying it all, we generally abandon the project halfway through and end up paying a professional to redo it all.

I bring all of this up for an important reason.  The housing market has a disproportionately large impact on the health of the economy.  In addition to the obvious construction and mortgage finance industries that directly benefit from the construction and sale of homes, virtually every other industry benefits as well from an overall higher level of consumption.  When you own your dwelling, you tend to spend a lot more money on the things that go in it.  This would include furniture, appliances, electronics, decorations and artwork, and—yes—even tree swings.  Many of these purchases (though probably not the tree swings) are purchased on credit.  Thus housing and credit booms go hand in hand.

Of course, this also works in reverse. The U.S. economy has been in the dumps since the bursting of the housing bubble, with consumer spending and retail sales growth tepid at best.

All of this is about to change, and the catalyst will not be another stimulus bill or quantitative easing.  It will be demographics.

As a “thirty something” member of Generation X, I’m actually a little late to the homeownership party.  Knowing full and well what a terrible “investment” a personal residence is, I put it off as long as I could until family considerations made further delay all but impossible.  My generation is small relative to the one that came before it—the Baby Boomers—and the one that came after it—the Echo Boomers.  And our impact (or lack thereof) on the housing market has already been made.

It is the Echo Boomers that should have property developers salivating.  These children of the Baby Boomers, born in the 1980s and 1990s, form a generation even larger than that of their parents.  And they are quickly entering their peak marriage and family formation years.

The settling down of the largest generation to date will create unprecedented demand for starter homes and rentals.  Meanwhile, new supply has all but disappeared in the wake of the bust.  New home construction hit its lowest levels on record last year…breaking the record lows of the year before and the year before.

It may seem absurd to talk about given the foreclosure backlog that still plagues the market, but in a few short years we may actually have a housing shortage, at least in the cities attracting these new families.

It’s too early for me to recommend that readers buy homebuilders based on these fundamentals, and in any event homebuilder stocks have already had a phenomenal run.  The SPDR S&P Homebuilder ETF (NYSE: $XHB) has nearly doubled in less than six months, and homebuilders tend to be wildly volatile.

Figure 1: SPDR S&P Homebuilders

The best course of action would be to build a portfolio of entry-level rental properties.  While your principle residence is a terrible investment (it’s a major drain on cash flow), rental properties are an entirely different story.  If bought correctly and at reasonable prices, they generate a positive cash flow every month that is tax advantaged.  Depreciation and other charges ensure that much (if not all) of your cash income is tax free.  And real estate is a more reliable hedge against inflation than precious metals like gold or silver.

No less an authority than Warren Buffett would appear to agree.  The Economist recently quoted the Sage of Omaha as saying that he would buy “a couple hundred thousand” homes if it were practical for him to do so (see “Holding Back the Spring”).

Investors without the patience or the bankroll to buy a portfolio of rental properties can settle for apartment REITS or for the stocks of companies that cater to a recovering housing markets such as Home Depot or rival Lowe’s (NYSE: $LOW).

Oh, and about that tree swing.  It took me four hours of cursing and swearing, but I finally got it hung properly.  My two year old son loves it.

This article first appeared on MarketWatch.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Investing in the Age of the Frugal American

The February 13 issue of Barron’s made a statement that caught my eye:  Americans are paying down their mortgages.  (See “Paying Down the Mortgage.”)

50% of all refinancings now result in smaller loans that the previous mortgage.  Rather than using their homes as a virtual ATM machine, extracting equity (if you have any) to meet current expenses, Americans are actually retiring their mortgage debt early.  It’s a remarkable change in behavior for a nation of consumers who, just a few short years ago, had a well-deserved reputation for wanton frivolity in their personal finances.

As Barron’s pointed out, paying down your mortgage at, say, 4% can be considered an “investment” when bonds yield barely 2%.  But more than this, it is a change in sentiment brought about by changing demographics.  America’s Baby Boomers, the largest and richest generation in history, are entering a new phase of their lives.  With retirement approaching fast, the Boomers are adopting the fiscal habits their parents were known for.  (We all eventually become our parents; it just took the Boomers a little longer than past generations.)

A role model for the parsimonious

The Boomers are the engine that has made the U.S. economy (and by proxy world economy) go over the past 30 years, and their reticence to spend will have a real impact on economic growth.

What does this mean for investors?  Surprisingly, the news isn’t all bad.

True enough, top-line revenue growth for companies that depend heavily on the American market will almost certainly be modest in the decade ahead.  Earnings per share growth, where it happens, will have to come from share count reductions through stock buybacks and from revenue growth in emerging markets.

The good news is that investors can still make a decent profit under these conditions, assuming they choose their investments wisely and pay a reasonable price.  With less need to expand their businesses, many American companies are finding themselves with unprecedented levels of cash on hand. Some—such as notorious tightwad Apple ($AAPL)—are simply stockpiling the cash (Apple’s cash balance is estimated to be an astonishing $100 billion).

But others, including Apple’s rival Microsoft ($MSFT), are using their excess cash to reward their shareholders with share buybacks and, even better, dividends.  Microsoft raised its dividend by a full 25% last year, and more increases are expected in 2012.

A better example might be that of tobacco “sin stocks.”  Unlike Apple and Microsoft, which still have robust and growing demand for their products, American tobacco firms have faced slowing demand for their products for decades.  But with no need to spend cash on investment and no need to advertise, tobacco stocks have still proven to be fantastic investments, with total returns beating the sox off the S&P 500 over the past decade.  And nearly all of this is due to their rock-solid dividends.

I consider dividends to be the key to profitable investing in the years ahead.  There will be periods when speculative growth stocks are more attractive, and we happen to be one this quarter (seeSin Stocks Trail Their More Virtuous Peers as an example).  But for the core of your portfolio, stable, dividend-paying stocks are an attractive option in a world of slow growth and bond yields of just 2%.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Risk Aversion Ad Absurdum

Barron’s ran a featured story by Kopin Tam in last weekend’s edition titled “Just Don’t Lose It” that was telling.  Tam pointed out that, even after the best January in well over a decade, investors weren’t embracing equities, and neither were their financial advisors.  Only 44 percent of financial advisors planned to increase their clients’ exposure to stocks in 2012 compared to 63 percent this time last year.

I wasn’t particularly surprised to read these statistics.  After all, the financial wealth of this country is dominated by the Baby Boomers, the largest and richest generation in history.  The Boomers lived through the biggest bull market in history (1982-2000), but they also saw a decade’s worth of returns go up in smoke in 2008.  At this stage of their lives, they don’t feel like they can afford the risk of another meltdown.  I get that.  Even while I myself am bullish, I understand Boomer risk aversion.

This is where it gets weird: it’s not the Boomers that are skittish. It’s their children.

As Tam writes, “Risk aversion is particularly acute among ‘Generation Y’ investors born after 1980, who have decades to go before they retire but are especially reluctant to invest… As a result, this cohort allocates roughly 30% of their money on average to cash, more than any other age group.”

Far from being the reckless risk takers that youth are wont to be, this generation is showing a level of risk aversion I might have expected from an elderly retiree that lived through the Great Depression.   Fully 40 percent of the Gen Y investors said they would “never feel comfortable investing in the stock market.”

I can’t say that I don’t understand the general squeamishness with equities these days.  The same Barron’s article noted that the average daily move in the S&P 500 was 1.44 percent in the second half of 2011.  That’s nearly double the 0.75 percent average that has prevailed since 1928.

Still, when I see this kind of pervasive fear in the market, particularly among those who should normally be aggressive, I can’t help but be bullish.  Bearishness has reached the level of the absurd.

For the past two years, I’ve advocated investing in high-quality, dividend-paying stocks, and I continue to recommend these as the bedrock of a portfolio.   The alternatives for most conservative investors are sparse.  Cash pays nothing in interest, and most bonds pay only slightly more.  Meanwhile, the cash levels of U.S. companies are at an all-time high, and dividend payouts are hovering near all-time lows.  Conservative investors can assemble a portfolio of stocks that will out-yield a bond portfolio today and that will almost certainly benefit from rising dividends in the years to come.

For more aggressive investors, the time has come to “risk up” by buying the sectors that took the biggest beating in 2011.  I am bullish on Europe (see “Going Long on Two Euro Stocks”) and emerging markets (see “Emerging Markets Will Make a Comeback in 2012”).  And while I don’t make a habit of recommending commodities, I would have to add commodities to my list of cyclical sectors likely to do well in 2012.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The 10 Best Stocks for 2012

Charles Sizemore, the winner of InvestorPlace’s “10 Stocks for 2011” contest, offers his favorite stock for 2012.  Read about Charles’ pick and the other contestants below.

Wondering what the best stocks to buy for next year are? Well, look no further than the 10 Best Stocks for 2012.

This InvestorPlace feature lists 10 long-term investments from a group of money managers, market experts and financial journalists. The 10 Best Stocks for 2012 is meant to provide buy-and-hold picks you can purchase now and sit on for a year — ideally, winding up richer on the other side.

The buy list this year is a diverse group of stocks — from banks to technology, from emerging markets to Dow components, from old favorites to a stock that went public just a few months ago.

Throughout the year, the writers will regularly offer updates on the good, the bad and the unexpected as it relates to their best stock for 2012. We’ll find out in a year who had the best pick — but first, let’s examine each writer’s recommendation and what made them pick their stock as the best investment for the New Year:

Best Stock for 2012: Turkcell

Turkcell TKCMoney manager and stock picker Charles Sizemore, CFA, picked Visa (NYSE:V) as the single-best stock to buy and hold for all of 2011 — and thanks to market-trouncing returns of 40% year-to-date, his Visa pick was the winner among 10 picks in our similar contest last year.

This year, Charles gets a purer play on emerging markets with telecom stock Turkcell Iletisim Hizmetleri AS (NYSE:TKC), a mobile phone operator more commonly known just as “Turkcell.”

Yes, there is unrest in the Middle East and in the euro zone right now. But as Charles writes, this means you can buy a great company at a fire-sale price.

“If you believe, as I do, that Turkey has one of the brightest futures of any country on the planet, then the crises on Turkey’s borders should be viewed as a phenomenal opportunity to buy shares of some of Turkey’s finest companies,” Charles writes. “And my choice for 2012 is Turkcell.”

Read Charles’ complete recommendation on Turkcell.

Best Stock for 2012: Caterpillar

Caterpillar Inc. (NYSE:CAT)Investor and CBS MoneyWatch columnist Dan Burrows picked industrial giant Caterpillar (NYSE:CAT) as his best stock for 2012.

His reasons? Dan says CAT stock was oversold during the summer volatility, has good fundamentals (including retail sales that grew 31% in October) and a bargain valuation with a forward price-to-earnings ratio of about 10.

“Wall Street’s mean (and median) price target for Caterpillar currently stands at $114.50, according to Thomson Reuters data. Add in the 2% yield on the dividend, and the stock offers an implied return of 28% in the next 12 months or so,” writes Dan. “Not too shabby for a company with a market cap of more than $58 billion.”

Read Dan’s complete recommendation on Caterpillar.

Best Stock for 2012: FedEx

FedEx FDXCNNMoney’s Paul R. La Monica said, “When I was asked to pick one stock to write about for InvestorPlace that I was confident would do well next year, I immediately started thinking of companies that should benefit from a steadily improving U.S. economy.”

At the end of his deliberation, Paul settled on FedEx (NYSE:FDX).

Don’t think this is just a play on a broad-based recovery, though. A discounted P/E ratio vs. rival UPS (NYSE:UPS), a strong dividend history, recent rate increases and the lack of competition from a U.S. Postal Service in disarray are all reasons to be bullish on FedEx.

“FedEx may not be flashy. But that’s kind of the point,” Paul writes. “In a market where volatility seems to be the new black, you could do a lot worse than a stable blue chip with steady earnings growth.”

Read Paul’s complete recommendation on FedEx.

Best Stock for 2012: Hershey

Hershey HSYRenowned trader, journalist and money manager Jon Markman has a sweet play for you in 2012: confectioner Hershey (NYSE:HSY).

Why this consumer stock? Well, because in the short-term Jon is decidedly bearish on just about all corners of the market. The euro zone debt crisis will continue to rock Europe and subsequently affect nations that export goods there or rely on plush government subsidies from the content.

In fact, Jon thinks that in the short term, “the simplest trades next year will likely be short iShares Europe (NYSE:IEV), short iShares Emerging Markets (NYSE:EEM) and short solar energy equipment producers like First Solar (NASDAQ:FSLR).”

But what does this mean for buy-and-hold investors? Simply put, get defensive with consumer staples stocks.

For those who think that chocolate is discretionary, Jon adds, “Well, try explaining to my daughter that chocolate isn’t a household staple.”

Read Jon’s complete recommendation on Hershey.

Best Stock for 2012: Capital One

Capital OneBanks aren’t exactly super popular right now, so it might surprise you to see senior analyst Philip van Doorn of TheStreet picking Capital One Financial (NYSE:COF) as his best best for 2012.

But a closer look at the stock shows a lot to be bullish about, even as the rest of the financial sector melts down. Namely, strong fundamentals and a historically low valuation and book value.

Capital One also has two very important mergers in the works that will provide future growth beyond its generally well-run banking operations.

Philip is adamant that this is not just a dumpster dive, saying “the most important factor in Capital One’s strong performance this year is its outstanding earnings performance.” Compared with the big banks on Wall Street, COF is in a class of its own.

Read Philip’s complete recommendation on Capital One.

Best Stock for 2012: Mako Surgical

Mako SurgicalDavid Gardner knows a thing or two about picking stocks. As co-founder of The Motley Fool, he is the brains behind the innovative Motley Fool CAPS rating system. And from his own research and what other investors are saying, David thinks he has a quite a pick for 2012 in Mako Surgical (NASDAQ:MAKO).

What makes Mako special? It’s an innovative medical device company that has revolutionized joint replacement. It’s not profitable yet, but the potential is huge, and stories of treatments and recovery are quite dramatic.

“It’s a long way from here to there, but for the speculative portion of your portfolio, MAKO could richly reward a little patience,” David writes.

If you don’t mind taking a little risk with your investments in 2012, consider this up-and-coming medical company.

Read Dave’s complete recommendation on Mako.

Best Stock for 2012: Microsoft

Blogger, author and founder of Stockpickr James Altucher joined a similar InvestorPlace.com feature in the beginning of 2011, picking one stock to buy and hold all year. Back then, he picked Microsoft (NASDAQ:MSFT) — and his choice is the same a year later.

Similar to his previous write-up, the highlights of this year’s recommendation include:

  • 8x earnings
  • Huge stock buybacks
  • Secret weapon: Skype replaces all smartphones within next five years

The idea of Skype taking over the mobile market is intriguing, considering voice represents so little of what we can do with our smartphones these days.

Read James’ complete recommendation on Microsoft.

 

Best Stock for 2012: Arcos Dorados

Arcos Dorados ARCOJosh Brown, adviser at Fusion Analytics and the author of The Reformed Broker blog, picked freshly minted Arcos Dorados (NYSE:ARCO) as his top pick for 2012. ARCO is the largest McDonald’s (NYSE:MCD) franchisee in the world with more than 1,750 locations, largely in Latin America.

Arcos Dorados went public in April and has been up and down ever since — not a newsflash, considering the volatility of the market in general. But in the new year, Josh is expecting the stock to take off due to four factors:

  1. Expanding consumer spending in Latin America
  2. The ferocity of McDonald’s as a global brand
  3. Growth within a defensive sector
  4. The comeback potential for emerging-market equities in 2012

If you’re sick of trying to bargain hunt in struggling U.S. blue chips, and if you aren’t afraid of looking for growth abroad, ARCO could be your best bet in the new year.

Read Josh’s complete recommendation on ARCO.

Best Stock for 2012: Alcoa

Alcoa AAAs with previous picks Caterpillar and FedEx, InvestorPlace.com editor Jeff Reeves has leaned in favor of broad economic recovery with his recommendation of aluminum giant Alcoa (NYSE:AA).

Not only will growth in demand and higher prices result in bigger Alcoa profits, but overly negative sentiment has provided a great entry point, Jeff writes.

“Yes, big problems persist in the global economy, and aluminum demand and prices remain weak as a result,” he writes. “However, Alcoa hasn’t seen the $9 level since spring 2009. Are the macroeconomic fears really worse now than in 2009?”

In addition to valuation, Jeff likes Alcoa’s improving earnings, dividend potential, streamlined operations and hope for better margins in 2012.

Read Jeff’s complete recommendation on Alcoa.

Best Stock for 2012: Banco Santander

Banco Santander STDAccording to longtime stock picker, financial columnist and money manager Jim Jubak, your best bet for 2012 is a European bank. Really!

It’s an aggressive play, but Jim’s faith in Banco Santander (NYSE:STD) comes from a lot of number crunching — and the idea that as bad as things are over in the euro zone, they aren’t as bad as you think.

“The worry about European banks right now is that they can’t raise capital in the financial markets,” Jim writes. “During the past two quarters, Banco Santander has very clearly demonstrated that this bank doesn’t fit that profile of worries.”

It has attractive assets to sell if it has to, Jim says, and that’s on top of accessing credit markets just fine at the present — on top of $8 billion in free cash flow that shows a nice cushion for STD. The only catch is that Banco Santander holds almost $50 billion in Spanish government debt.

“If you think Spain will have to write off part of that debt, then Banco Santander sure isn’t the pick for you,” Jim writes. “If you think Spain is in better shape than Italy (or Greece), I think that in Banco Santander you’re looking at one of the best performers in 2012.”

Read Jim’s complete recommendation on Banco Santander.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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