Association for Investor Awareness - Week of 06/25/2009

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

In 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.

In 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.

Mixed Economic Signals Worry Investors

It 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.

Sales 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.

There 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.

But 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 their money.

Lastly, 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 disconcerting.

Another Kind Of Bailout Is Also A Concern

It's 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.

According 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 lines.

A New Economic Reality Is Emerging

Of 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.

The 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.

For 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.

Likewise, 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.

The 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.

For Efficient Companies, Slow Growth Can Be Profitable

Some readers may wonder how any companies can possibly prosper given the big economic problems that dominate the news.

The 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.

That's especially true for multinational firms that do a substantial amount of business in countries with stronger growth rates than in the U.S.

Your Best Strategy Now

Thanks 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.

Stocks 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.

More 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.

All 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.

We 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) http://finance.yahoo.com/q/bc?s=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.

A bit more aggressive, but with prospects to match, are Alcoa (AA) http://finance.yahoo.com/q/bc?s=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: UTA) http://finance.yahoo.com/q?s=UTA have been rewarded with a very nice upward move of 44%, with Wednesday's close at $10.10.

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 ending 12/31/08.

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 months.

Go to http://cnutg.ir.stockpr.com/ for more details.

The Bottom Line This Week

The 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 recession rebound.

Fortunately, 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.

Investors 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 the pack.


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.


Disclaimer

Copyright 2010 The Association for Investor Awareness, Inc. All Rights Reserved

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Posted 06-25-2009 9:32 AM by Research & Editorial Staff