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Building a Facebook Model - Investment Ideas
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Invest in Indonesia - The New Rising Star of Asia - Investment Ideas
Emerging markets are an important part of the global economy and increasingly significant contributors to the global growth. Their high return potential and low correlation with the developed markers are main reasons why they should be a part of any diversified investment portfolio.
Most investors think about China and India when planning to invest in emerging Asian countries and many investors already have some exposure to these giant nations. Further, with both these countries facing significant headwinds currently, it is time that the investors take a serious took at some of new rising countries in that region. Indonesia is one such country which offers solid growth potential for future. (Read: India ETFs: Trouble On The Horizon?)
Indonesia was one of the worst suffers of the Asian currency crisis in 1997-98. The country has since transitioned from a dictatorship riddled with corruption and inefficiency to a democracy on the path of fast growth driven by significant market reforms.
The economy has grown at an annual rate exceeding 5% in seven of the past eight years, mainly due to increasing consumption by the rising middle class. The country now has a population of more than 240 million, behind only China, India and the U.S. (Read: Time to Buy the Singapore ETFs)
Foreign exchange reserves have risen to $110.5 billion (as of March 2012) from about $20 billion in mid 1997. Thus the currency, (which had declined about sevenfold during the crisis) has become much more stable with the central bank willing to defend it using reserves. At the same time, the external debt has declined from over 150% of GDP in 1998 to 26.7% of GDP in 2011.
Indonesia was one of the very few countries which had a positive stock market performance in 2011. Its bond market was the best performer in Asia last year. (Read: Why Colombia ETFs May Continue to Rise)
The economy is expected to grow at 6.1% and 6.6% respectively in 2012 and 2013 (per IMF) after an impressive 6.5% growth in 2011. GDP for Q1 grew 6.3% year-over-year, which while slightly down from the 6.5% growth recorded in the previous quarter, is still one of the highest growth rates in the world.
Rising domestic demand in the country is able to offset the weaker export demand. 65% of the GDP is domestic consumption driven in the Southeast Asia’s largest economy and thus the economy remains much less exposed to global economic headwinds.
Foreign direct investment has been rising. During the first quarter, the country attracted $5.6 billion in FDI (up 30%), which seems to be in-line with the governmentÂ’s target of attracting $22.4 billion in FDI this year, 18% higher than last year.
Moody’s and Fitch have recently upgraded the credit rating of the country to investment grade.
Looking at the negative side of the story-Inflation has been creeping up towards 6% and fiscal consolidation is the main solution in containing inflation (difficult task due to massive fuel subsidies). Corruption and poor infrastructure remain some of the main hurdles to faster growth.
Last week, the central bank left the key rate unchanged at a record low of 5.75% for the third straight month, after having cut the rate by 25 bps earlier this year and by 50 bps late last year.
The investors currently have a choice of two ETFs which provide exposure to the broader Indonesian economy.
Market Vectors Indonesia Index ETF (IDX)
IDX seeks to track Market Vectors Indonesia Index, which provides exposure to publicly traded companies that are domiciled and listed in Indonesia or generate at least 50% of their revenues in Indonesia. The fund currently manages $508.9 million in assets and holds 43 securities.
Van Eck recently cut the expense ratio to 57 bps from 60 bps earlier. In terms of sector exposure, financials are at the top with 30.2% weight, followed by energy (15.1%) and consumer staples (13.6%). The ETF has returned 48.4% to the investors since its inception. The fund's annual dividend yield is 1.57%.
iShares MSCI Indonesia Investable Market Index Fund (EIDO)
EIDO tracks the MSCI Indonesia Investable Market Index, which is designed to measure the performance of stocks in the top 99% by market cap of the stocks listed in Indonesia.
The ETF holds $238.8 million in 87 securities and is thus must more diversified than IDX. However, like IDX, this fund also has largest allocation to financials (31.5%), and the next two are consumer discretionary (16.8%) and consumer staples (12.2%). The fund charges 59 bps and has risen 16.7% since inception.
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Forget Facebook, Buy The Agriculture Stocks Instead - Investment Ideas
With the Facebook IPO launching next week, and a string of hot technology IPOs in the last year, all of the focus has been on Silicon Valley and social media wunderkinds.
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Find Outperforming Stocks in a Down Market! - Investment Ideas
This week I learned a great lesson of life in my tennis class. I found myself pitted against a better player and we were to play just one set. After the first two games, I was getting blown out while barely winning a point. I was down 0-2, and thought, "This guy's good and it's gonna be ugly." I imagined him winning six straight games. Then something in my mind shifted perspective. Just as easily as I pictured the impending doom, I had a moment of clarity. I envisioned, "No, get yourself together and make it hard for this guy. You can play better, so do it!" I rallied back to win six out of the next eight games to take the set. True story.
Needless to say, I've been bounding around since then and feel I have a new outlook on life. When you undergo something like that, it becomes crystal clear that success takes perseverance and determination. And for some reason, the taste of victory is always a little sweeter when you've had to struggle for it. I often try to keep learning from my experiences and apply learned perspectives to other aspects of my life.
So my experience made me think of how this particularly rings true for the stock market today. Since May 1, the market's down over 3% and down nearly 4% since April 2. I wrote about potentially tough times and the Sell in May effect about a month ago. Now I’ve formed an idea on how to find stocks that outperform in down markets.
Best Stocks for a Down Market
Like life, investing also requires equal measures of skill, luck and perseverance. So we need to find a way to find profitable stocks and continue to swim upstream even when the market's current is against us.
We don't have any control over luck, so let's ignore it in our winning formula. What we can control is the ability to endure and our skill. Each person's ability to persist is unique, so you need to find what works best for you. Paying less attention to daily market moves, taking meditative breaths and having a stiff upper lip are some examples, but find something--anything--that works specifically for you.
Where I can help you the most, though, is to point you to a tool that can improve your stock-picking skill. I'm going to use the Zacks Research Wizard to devise a strategy to pick stocks that tend to perform better than the market, specifically when the market is losing money.
Let's Take a Look
Since the Research Wizard contains hundreds of data items, I narrowed the list to a set of the one hundred that I thought would be helpful in this study. Those factors were selected based on my own experience and also knowing how others have addressed this in the past. I then conducted tests from 2002-2011, using monthly holding period returns for each factor to find the five that performed best during down markets. Drum roll please... The best five indicators are Beta, Coefficient of Variation, Pretax Margin, Return on Equity and Forward Earnings to Price Ratio.
Building a combination strategy using these five indicators provides very interesting performance results. First off, the strategy outperforms the market 76% of the time when the market is down and the average excess return during a down market is +2.1% per month. For example, if the market returns -1.1% for a month, this strategy, on average, would return +1.0% for that month.
Also, this five-factor strategy is less risky than the S&P 500. Its annualized volatility and average losing stretch in terms of number of periods and returns are all less than the S&P 500. But what's most remarkable is that this strategy also outperforms the S&P 500 over the ten-year test period!
The average annual compounded return is 13.3% for the strategy versus 2.7% for the S&P 500. $10,000 grew to $35,004 for the strategy and $13,094 for the S&P 500. This combination also beat the S&P 500 in average return per month, average number of positive months and highest number of positive months. Thus, we kind of have the Holy Grail of a strategy: one that outperforms the market, yet has less risk. It's not too often you discover something that special!
Here's the method for a market-beating strategy with less risk:
- First, start with only US stocks.
- Next, create a liquid, investible set of the stocks with the largest 3000 market values and average daily trading volume greater than or equal to 100,000 shares (if there's not enough liquidity, it'll be hard for you to trade it).
- Because a lot of stocks under a certain price are difficult to trade, keep only those stocks trading above $5/share.
- Add another filter by selecting the 250 stocks with the lowest Beta. (Let's minimize our exposure to the market by selecting low Beta stocks.)
- From this set, select the 100 stocks with the highest Coefficient of Variation. (CoV is the ratio of the consensus annual earnings estimate divided by standard deviation of the estimates. So we want a high earnings estimate and a low variation of these estimates.)
- Pick the top 50 stocks with the highest Return on Equity. (Companies with a high ROE perform well on average and this holds true for market slides as well. Think "flight to safety.")
- Next, opt for the 25 stocks with the highest Pretax Margin. (Profitable companies tend to perform well in down markets.)
- Finally, choose the 10 stocks with the lowest price-to-earnings ratio. (Lower means you want to pay less per unit of earnings.)
Here are five of the stocks the strategy produced this week (5/11/12):
CPB - Analyst Report - Campbell Soup Co.
Campbell, a New Jersey-based company, together with its subsidiaries, engages in the manufacture and marketing of branded convenience food products worldwide. This company has a Beta of 0.3, a high consensus earnings estimate with little variation, a whopping 71% ROE, a Pretax Margin of 15% and a P/E ratio of 14. "Soups on" when the dark clouds of the market loom.
BCR - Analyst Report - C.R. Bard, Inc.
C.R. Bard and its subsidiaries design, manufacture, package, distribute and sell medical, surgical, diagnostic and patient care devices worldwide. This stock has an attractive P/E of 15, a solid Pretax Margin of 18%, a 31% ROE, a high and agreed upon annual earnings estimate and a low Beta of 0.34. That all adds up to a fairly safe and consistent company, and the market generally rewards those companies in times of despair.
FRC - Snapshot Report - First Republic Bank
First Republic, together with its subsidiaries, provides personalized relationship-based preferred banking and business banking, real estate lending, trust and wealth management services to clients in the metropolitan areas of the United States. This company has an excellent P/E ratio of 12 and a fabulous Pretax Margin of 41%. Also, the 0.22 Beta is the lowest of these five stocks. "Solid and stable at an inexpensive price" best describes this stock.
APOL - Analyst Report - Apollo Group Inc.
Apollo, through its subsidiaries, provides online and on-campus educational programs and services at the undergraduate, masters and doctoral levels. With a high ROE, high Pretax Margin and a low P/E ratio, this stock is a good way to economically buy into solid corporate profits.
HTS - Snapshot Report - Hatteras Financial Corp.
Hatteras Financial operates as an externally-managed mortgage real estate investment trust (REIT). In terms of its P/E (8), this company is the least expensive of the bunch. Coupling that with the low Beta and the high Pretax Margin creates a good stock to hold when the market heads south.
Pick Yourself Up, When the Market Kicks You Down
Just as easily as I was able to turn my tennis game around, you can turn your investing fortunes around. I know you can. If you possess a winning strategy, you have to persist with it even if you suffer a few losses along the way. That's one of the attributes that separates the great investors from the poor investors. When faced with adversity, you have to find a way to work through it if you want to be profitable in the end. Remember, investing is a marathon not a sprint.
Want to find more stocks that outperform when the market takes a dive? Have your own ideas for selecting stocks in a down market and want to test it? These questions are very easy to answer with the Zacks Research Wizard.
Starting today, you are invited to use it free of charge. You'll have 14 days to create, tweak and backtest your strategies. At the same time, you can see the latest picks from pre-loaded winning strategies that average gains of up to +67.4% per year.
Learn more about your Research Wizard free trial >>
Let's make some money!
Kip
Kip Robbins is a Quantitative Analyst with Zacks.com. He analyzes screens and strategies for Zacks customers and for use in Zacks Research Wizard, which empowers individual investors to use market-beating screens, build their own, and backtest their results.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: http://www.zacks.com/performance.
APOLLO GROUP (APOL): Free Stock Analysis Report
BARD C R INC (BCR): Free Stock Analysis Report
CAMPBELL SOUP (CPB): Free Stock Analysis Report
FIRST REP BK SF (FRC): Free Stock Analysis Report
HATTERAS FIN CP (HTS): Free Stock Analysis Report
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Top 5 Zacks #1 Ranked Precious Metals Funds - Best of Funds
Precious metals provide a hedge against the broader market slump during an economic downturn. When economic activities are sluggish and inflation is at a high, precious metals stand out as an investment avenue outperforming other asset classes. However, investments in precious metals involve a substantial amount of risk given their volatile nature. Mutual funds capturing the essence of this particular asset class, with their diversified portfolio and expertise, are therefore the appropriate choice for investors seeking to get exposure in the precious metal space.
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Ritholtz: For Investors, Jumping On The Facebook IPO Could Be A Recipe For Disaster (FB)
Facebook will start trading publicly today. Valued at $104 billion, it will be the third biggest IPO in U.S. history.
But Barry Ritholtz, market commentator and CEO/director for equity research for Fusion IQ, reminds us there's a difference between a good company and a good investment.
In an interview with Bloomberg TV, Ritholtz said historically IPOs have been money losers and said Facebook shares at $38 or higher are not a wise investment:
"Given the hype and excitement about this, it all goes back to Peter Lynch "buy what you know' which has had mixed results over the past few years.
There's probably going to be a substantial pop in this. The stock is going to have a nice opening run but the question to me - I have yet to be dissuaded that this isn't an extremely expensive stock and in order to grow into this, they have to grow faster than they're growing. They have to grow profitability much faster than they're growing, and they have to more or less double revenues every year for the next four or five years."
While Facebook is interesting because of its tremendous reach and very few companies have managed that sort of reach, but the question is can they monetize their user base.
Ritholtz added that "jumping on every hot thing that comes down the pike, that's a recipe for disaster." He said in a period of "retrenchment" investors should look at broader indexes and reduce their equity exposure.
Don't Miss: 11 Brilliant Insights From Wall Street Legend Barton Biggs >
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VALUATION GURU: I Would Be Very Surprised If Facebook Shares Were Overpriced (FB)
Everyone's got an opinion about what Facebook is worth.
But one of the most respected opinions comes from Aswath Damodaran, the legendary NYU finance professor who literally wrote the book on investment valuation.
So, what does he think?
Basically, Damodaran doesn't expected too many fireworks.
Here's an excerpt from his blog:
I don't think that there has ever been an IPO where investment bankers have had more information (from private share market prices to institutional investor feedback) to work with, when pricing the stock, than this one. I would be very surprised, if the stock were overpriced; the bankers and the company have too much too lose. I would be equally surprised if the stock were dramatically under priced; a pop of 50% or even 25% would reflect very badly on the bankers' pricing skills. In short, this is shaping up to be a Goldilocks IPO, at least in the initial hours: a pop of about 10-15% (just right for both the bankers and the company). The question is how long the pop will last. This company is too big and too public to stage manage in the weeks after the IPO. If the pop fades quickly, perhaps even by the end of trading tomorrow, I think it is a very bad sign for the momentum game in all social media stocks.
Damodaran made headlines ago when he dumped Apple after holding the stock for 15 years. Apple's share price is down 13 percent since he announced his sale.
Read more at Damodaran's Musing on Markets blog.
SEE ALSO: Damodaran Explains How To Invest In Corrupt Companies >
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