Barchart.com's Chart of the Day - Power Solutions International (PSIX) for Nov 12, 20

[Thierry Martin]

Over the long term, value stocks tend to be winners. There are a number of ways to define value.

My preferred approach is to use the PEG ratio, which compares the price-to-earnings (P/E) ratio with the earnings growth rate. A PEG ratio of 1 indicates the P/E ratio is equal to the earnings growth rate and the stock is fairly valued. Value stocks have PEG ratios less than 1.
Value investors generally need patience to succeed. It can take time for the stock to deliver gains for a variety of reasons, but within a few years, value investing usually delivers results.

Options are usually thought of as short-term trading tools, but there are some options that expire in years rather than weeks or months. These options are called LEAPS, which stands for Long-Term Equity Anticipation Securities. Currently, there are now LEAPS available that will expire in January 2015 and January 2016.

Although they are long-term investments, LEAPS are the same as traditional options in every other way. Buying LEAPS allows you to participate in market gains with limited risk.

A call option gives the buyer the right to buy 100 shares of stock at a predetermined price (the strike price) at any time before expiration. The value of a call option increases as the price of the underlying stock increases. One advantage of call options is that they cost less than the stock. This means traders can capture a larger percentage gain when the stock trades higher.

However, many investors point out that options carry a greater degree of risk. And some traders avoid buying options because they do not receive any dividends.

To maximize the potential gains of options, we could limit our buying to non-dividend-paying stocks. We could also limit risk by only buying call options on large-cap stocks, which have demonstrated that they can survive the ups and downs of a business cycle. Another risk management tool is to buy call options on value stocks, which I define as stocks trading with a PEG ratio under 1.

Micron Technology (Nasdaq: MU) looks like a good candidate for this call option strategy. The computer memory maker lost more than 95% of its value after the 2000 market top. Unlike many stocks from that era, Micron has survived.

On the monthly chart, we can see that MU formed a base over the past 10 years and seems to be breaking out to the upside.

[Thierry Martin]

Quote of the day

Richard Thaler, ?If you want to get somebody to do something, make it easy. ? (Conversable Economist)

Chart of the day



The Citigroup Economic Surprise Index is about to turn negative. (Business Insider)

Markets

Q3 earnings have been disappointing. (Pragmatic Capitalism)

The Nikkei is at an interesting juncture. (Charts etc.)

Breadth participation by market cap. (Dynamic Hedge)

The case for value stocks. (Institutional Investor)

When high momentum stocks crack, pay attention. (Minyanville)

Strategy

How your stop-loss orders get messed with. (Brian Lund)

?Only a small percentage of traders are actually serious about trading.? (Mercenary Trader)

Quantitative techniques need not be about ?black boxes.? (Turnkey Analyst)

Random stuff happens. Don?t let is drive your decision making. (Bucks Blog)

Balanced fund investors have done themselves the least amount of damage through poor timing. (Morningstar)

Companies

Apple?s Q4 in charts. (TechCrunch)

Apple is in a lull. The question is when to get worried. (SplatF)

Google ($GOOG) now wants to dominate livestreamed video. (The Verge)

Aero has a big problem: antennae are power hogs. (WSJ also GigaOM)

Why McDonald?s ($MCD) kicked Heinz ketchup to the curb. (The Daily Beast)

Finance

Is the slow down in M&A secular not cyclical? (Dealbook)

The secondary market for pre-IPO shares has dried up. (WSJ)

Pay attention to land prices to suss out a real estate bubble. (Businessweek)

More hedge fund replication ETFs are coming. (IndexUniverse)

[Thierry Martin]

Quote of the day

Richard Thaler, ?If you want to get somebody to do something, make it easy. ? (Conversable Economist)

Chart of the day

[Thierry Martin]

What is astonishing about Starbucks and its global takeover to me is the fact that it keeps going - over 15% growth in the amount of stores (19,209 in more than 60 countries) over the last three years.

When, if ever, does the chain reach saturation point? More importantly, can Dunkin Brands pull off a similar feat (I'm betting that they can)?

Infographic below from the Washington Post:

[Thierry Martin]

Stocks were up slightly on Monday morning after industrial production reached its highest gain in over seven months. The Federal Reserve said that industrial output was up 0.6% in September, after a 0.4% rise in August. This beat out economists? expectations of a 0.4% gain. Production was up at nationwide factories, mines and utility plants to an annual rate of 2.3%. This is large step up from the second-quarter?s 1.1% rise. The Fed also announced that U.S. manufacturing output was nearly flat in September. The index crept up a mere 0.1% in September after a 0.5% gain in August. The reading was held back by a 0.5% decline in computer and electronic goods output. There was a 2% increase in automobile output but this is still a sharp decline from the 5.2% gain posted in August. Millian Mulraine, a senior economist with TD Securities, said, ?With manufacturing sector activity likely to moderate even further in October, on account of the fallout from the protracted government shutdown, we expect some of this unexpected buoyancy in industrial output to be surrendered next month.?

Shares of Burger King Worldwide were trading higher after the company reported a rise in profits after a decline in costs. Global same store sales were up 0.9% while costs dropped a staggering 90% in the third-quarter. Net profit was up to $68.2 million, or 19 cents per share, from the $6.6 million, or 2 cents per share this time last year. Revenue dropped nearly 40% to $275.1 million due to a company refranchise of nearly 520 restaurants. During the quarter the company had new promotions hit their restaurants, like the $1 Fry Burger, the Angry Whopper sandwich and their latest lower calorie ?Satisfries?. Daniel Schwartz, CEO, said, ?We believe that new products like this, combined with our focus on improving operations will enhance the guest experience and drive increased restaurant profitability.?

Shares of Apple were trading higher as the company prepares to release their fiscal fourth-quarter results after the close of the bell today. It is expected to show that the company?s earnings are still falling as competition continues to steal sales. Analysts? are predicting net income to file in around $7.2 billion, or $7.92 per share, which would be a 12% drop from last years $8.2 billion, or $8.67 per share. They are expected to have a 3% increase in revenue to $37 billion. The company recently announced their latest version of the iPad, which is thinner and lighter, called Air, and will go on sale starting November 1.

That?s all for the day.

All the best,
Jack Aubrey, Oakshire Financial

[Thierry Martin]

What do Campbell's Soup, Johnson & Johnson and Deere & Co. all have in common?

All three companies have survived and thrived through two world wars, the Great Depression, countless financial panics and periods of booms and busts... and for more than 100 years, they've continually generated wealth for their owners.

These companies survived, while hundreds of other companies came and went along with hard times.

All three of these names, alongside some others, owe their good fortune to what I call a "legacy asset investment," which has allowed them to throw off huge dividends and return capital to shareholders for decades -- regardless of interest rates, the economy or commodity prices.

It's also helped generate massive wealth for investors. Over the past 14 years, for every $1 the market gained, these stocks typically have gained $4 -- that's four times the growth and dividends -- for their shareholders.

So what makes these companies special?

First, I should explain what a "legacy asset" is. Legacy assets are companies or resources that have rewarded owners for generations, often thanks in part to a durable brand or service or infrastructure system that has stood the test of time.

And as I mentioned earlier, this allows them to consistently outperform the market. To prove it, I created the StreetAuthority Legacy Assets Index -- which is an equal-weighted portfolio of 10 "legacy asset" stocks that tracked the performance from late 1999 through the end of September, including all dividends reinvested.

You can see the results for yourself...

[Thierry Martin]

Investors are so over the whole gold thing now that five years of money printing have failed to produce inflation and the global economy has proved itself quite resilient amidst one political crisis after another.

Even central banks - including many in economically backwards, superstitious countries - are so over it.

Here's the Wall Street Journal:

[Thierry Martin]

Investors are so over the whole gold thing now that five years of money printing have failed to produce inflation and the global economy has proved itself quite resilient amidst one political crisis after another.

Even central banks - including many in economically backwards, superstitious countries - are so over it.

Here's the Wall Street Journal:


Central banks sold gold regularly until 2009. As a group, they became net buyers in 2010. The shift was driven by emerging-market central banks, which were grappling with rapidly rising foreign-exchange reserves that were a result of large trade surpluses.

[Thierry Martin]

361 Capital portfolio manager, Blaine Rollins, CFA, previously manager of the Janus Fund, writes a weekly update looking back on major moves, macro-trends and economic data points. The 361 Capital Weekly Research Briefing summarizes the latest market news along with some interesting facts and a touch of humor. 361 Capital is a provider of alternative investment mutual funds, separate accounts, and limited partnerships to institutions, financial intermediaries, and high-net-worth investors.

361 Capital Weekly Research Briefing
October 28, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

[Thierry Martin]

When you think of stalwart mega-cap industrial stocks, Caterpillar (NYSE: CAT) certainly is one that comes to mind. The earth-moving equipment blue chip, Dow component, and long-time bellwether for the global economy, has been a big winner for investors and traders over the years, and for good reason.

During the past decade, there's been a huge infrastructure buildup in the emerging markets of Asia, especially China, and Russia, India and Brazil. The massive demand for heavy-duty construction equipment has made the iconic brand a mainstay on big building projects in nearly every corner of the globe.
Recently, however, demand for Caterpillar's products has waned, and that's caused a marked slowdown in the company's earnings growth, as well as a significant decline in CAT shares.

On the earnings front, the company recently released results for the third quarter, and they were anything but impressive. Third-quarter earnings sank 44% year over year, missing consensus estimates by a wide margin. The company reported earnings per share (EPS) of $1.45, down from $2.54 in the same quarter last year. Revenue disappointed as well, coming in at $13.4 billion, down from $16.5 billion in the same quarter a year ago.

The double whammy in the third quarter also came with the company cutting its full-year profit forecast, and the combined malaise caused the stock to sink more than 6% on Wednesday.

So far in 2013, CAT shares are down more than 9%. That's disappointing for a stock that has logged an impressive gain of more than 200% over the past five years.

Adding more woes to the Caterpillar tale is a confluence of bad decisions and bad luck in its mining division.

The bad decision was the 2011 acquisition of mining equipment company Bucyrus International for the costly sum of $7.5 billion. That bad decision happened to coincide with the global decline in mining equipment demand, the recent slowdown in China's infrastructure growth, and a decline in industrial commodity prices.