In This Issue:
Mixed Economic Signals Worry Investors
Another Kind Of Bailout Is Also A Concern
A New Economic Reality Is Emerging
For Efficient Companies, Slow Growth Can Be Profitable
Your Best Strategy Now
Three Analysts And A Fool Have Recommended This Stock
The Bottom Line This Week
our last issue we remarked that "the rally may be getting short of breath."
Shortly thereafter, the huffing and puffing began in earnest. On Monday of this
week, definite wheezing sounds were heard as the bull dropped to its knees just
short of pushing the market into positive territory for the year. Perhaps the
old boy was out of shape after letting the bear take over for six months.
any event, since May 28 the Dow dropped 0.8% while the Nasdaq managed to squeak
ahead a miniscule 0.8%. More importantly, both measures slipped 3.0% and 1.7%
last week – and they are even lower now.
Signals Worry Investors
is not possible at this early juncture to know if the bear has returned.
However, we can say that many of the economic "green shoots" that have
attracted so much attention of late are beginning to look a bit wilted.
of existing homes are typical of the economic signals that are making investors
nervous. Sales increased 2.4% in May, which suggests that the housing market is
finally turning around. At the same time, however, home prices dropped again
and are now 16.8% lower than they were a year ago. Economists can't decide if
the increasing sales offset the negative consequences of declining prices.
Until the matter is settled, many investors are taking a time out.
are also mixed signals about inflation and interest rates. On the one hand,
rising oil and commodity prices are clearly inflationary. Ditto for the money
supply that is shooting up due to all the king-sized bailouts from Uncle Sugar.
at the same time, wages are dropping, layoffs are increasing, household wealth
is plummeting, and several states are on the edge of bankruptcy – all of
which point to continued deflation. Since the tug of war between inflationary
and deflationary forces could go either way, many investors are sitting on
investors were counting on a solid global turnaround in the coming months.
Those hopes were put in question when the World Bank reported that growth would
contract 2.9% this year instead of expanding 1.7% as previously predicted. Oops!
Even if the numbers are not spot on, the reversal in the outlook is
Of Bailout Is Also A Concern
not just investors who are nervous about the economy. The grand poobahs at
America's largest companies are also moving their chairs closer to the door. In
fact, many company officers are leaving the party altogether.
to TrimTabs, a respected group of investment analysts, in June insiders at
S&P 500 companies unloaded $2.6 billion worth of shares, vs a paltry $120
million purchases – and the month isn't even over yet. That lopsided
ratio indicates that many executives believe the business outlook is not very
good. Although company insiders are not always right, their track records are
much better than from Wall Street number crunchers who aren't on the front
A New Economic
Reality Is Emerging
course, the disappointing green shoots news is no surprise to our readers. We
have been arguing for months that "a recovery will probably be more modest"
than most analysts and investors expect. Instead, the economy is probably just
settling into a lower pace of activity where it may remain for years.
biggest impediment to a strong rebound is this recession isn't just another
contraction in the business cycle. Instead, the economy is adjusting to
major structural changes in banking, credit, trade, manufacturing, consumer
credit, and many other conditions – all of which are scaling down.
example, many homeowners and realtors think that rising home sales indicate
that the housing market will soon be moving up again. That may be true in many
markets. However, rebounds to anywhere near pre-collapse levels are almost
certainly out of the question for several years.
manufacturers will probably need to rehire some workers to replace inventories
that have been drawn down over the past year or so. But another all-out
production boom is very unlikely. The outlooks are similar for the other
engines of growth.
biggest change is occurring on the social front. The madcap spending binge of a
few years ago is being replaced by the desire to be frugal and put money away
for the future. Even people with good incomes are changing their spending
habits. The old phrase "He who dies with the most toys wins," is being replaced
with "A penny saved is a penny earned." Since consumer spending is two thirds
of the economy, the new thrift indicates that growth will be very modest for
some time to come.
Companies, Slow Growth Can Be Profitable
readers may wonder how any companies can possibly prosper given the big
economic problems that dominate the news.
answer is that the front pages don't tell the whole story of what is happening
in America. The economy has a lot more going for it than banking, housing, and
auto making. Although earnings are down in nearly every industry, most
companies are still in the black.
especially true for multinational firms that do a substantial amount of
business in countries with stronger growth rates than in the U.S.
to the rally, we have seen excellent gains in our blue chip stocks. Although
the upturn may have a second wind and continue for another few weeks, we think
the possible rewards are not worth the risk. Accordingly, this would appear to
be a good time to take some profits off the table.
that you intend to keep for the long haul you should protect with stop loss
orders. If you are a conservative investor, using a tight stop of 10% might be
in order, although choosing 15% would give prices more wiggle room.
aggressive investors should consider using a 20% or a 25% stop to protect
against a large loss in case the market is blindsided by an unforeseen event.
investors who use stop loss orders should make them trailing stops that will
follow any additional price rises every step of the way. The most effective
trailing stops are based upon a percent of the price, but you can also choose
fixed prices if they suit your needs better.
also think you should make use of a correction to buy high quality stocks that
fall significantly in price. All the high quality stocks that we have been
recommending of late should be on your list including: ConAgra Foods (CAG)
ExxonMobil (XOM), http://finance.yahoo.com/q/bc?s=XOM,
Hormel Foods (HRL) http://finance.yahoo.com/q/bc?s=HRL, Colgate Palmolive (CL) http://finance.yahoo.com/q/bc?s=CL,
and Procter & Gamble (PG) http://finance.yahoo.com/q/bc?s=PG.
We think the blue chip group is as close to being a sure long term bet as Wall
Street ever offers.
bit more aggressive, but with prospects to match, are Alcoa (AA)
Deere (DE) http://finance.yahoo.com/q/bc?s=DE,
General Electric (GE) http://finance.yahoo.com/q/bc?s=GE,
and Caterpillar (CAT http://finance.yahoo.com/q/bc?s=CAT.
All the companies are tied to the global economy, they are very efficient, and
they can prosper even in a slow growth environment.
A new investment that we
believe has excellent prospects is the iShares
MSCI Emerging Markets Index ETF (EEM) http://finance.yahoo.com/q/bc?s=EEM.
Emerging nations are growing much more strongly than in the U.S., and they
should continue to do so. The BRIC countries in particular (Brazil,
Russia, India, and China), are developing their large internal markets and are
becoming less dependent upon exports to Europe and the U.S. The BRIC countries
are also signing currency exchange agreements with each other to reduce their
dependence on the U.S. dollar – but that's a story and an opportunity we
must leave for next time.
THREE ANALYSTS AND A FOOL
HAVE RECOMMENDED THIS STOCK
Last month we reported
on a significantly undervalued China stock we had been following for quite some
time. Those of you who took a position in Universal Travel Group (NYSE Amex:
have been rewarded with a very nice upward move of 44%, with Wednesday's close
Since moving to the
American Stock Exchange, UTA has been showing up on more radar screens than a
757. The Company was profiled by "The Motley Fool CAPS" on June 23, 2009. One
comment that caught our attention was..."Universal Travel has outpaced the
other 11 stocks in the CAPS Travel Services sector by orders of magnitude.
Shares of the growing travel company are up nearly 50% over the past month (and
up more than 223% year to date),compared to the 6% increase across the sector
since late May."
You may recall that Universal Travel specializes
in online and customer representative services. The Company offers packaged
tours, air ticketing, hotel reservation and agency services. They racked up
some great numbers from 2005 through 2008: 202% Compound Annual Growth Rate
(CAGR) ... they have no long-term debt ... $16.2 million in cash ... $30.2
million in working capital... and earnings of $14.5 million for the full year
By our calculations, they have earned $1.20 ttm,
and at a closing price of $10.10 on 6/23/09, they are still trading at less
than a 8.5 P/E multiple. Comparable industry multiples range from 25 to 43
times earnings...even with its recent share price increase, Universal Travel
has a lot of upward potential.
Three independent analysts have issued recommendations
on UTA in the past eight months...the latest indicating a price target in the
$16 to $18 range. We think that could be conservative, given the average P/E multiple
of 34 might suggest a price approaching $40 per share. Given the Company's YOY
growth of top and bottom lines, that's certainly possible in the next 12 to 18
Go to http://cnutg.ir.stockpr.com/
for more details.
Line This Week
green shoots that most investors have been expecting are here, but they are
developing more slowly than expected. We think the reason is the U.S. economy
is adjusting to a lower level of growth instead of making a traditional post
well-established companies are adept at squeezing profits from slack markets.
At the top of that list are our top-rated blue chip companies. All of them may
be purchased if a correction makes their prices attractive again.
who will accept extra risk in return for the prospect of higher profits should
look to emerging markets where growth rates remain high. Among them, the BRIC
countries appear to offer the greatest long-term potential, with China leading
In the interest of full disclosure, John M. Casson, Executive
Director of AIA is president of Casson Media Group, Inc. (CMG), an affiliated
company. CMG has received cash compensation and allocated $2500 for the
transmission of this publication as part of a comprehensive corporate
communications services agreement for Universal Travel Group. Although the
Research and Editorial Staff of AIA conducts independent research and analysis,
you should be aware of this potential conflict of interest.
Copyright 2010 The Association for Investor Awareness, Inc. All Rights Reserved
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06-25-2009 9:32 AM
Research & Editorial Staff