Tuesday, November 21, 2006

Retirement Planning: Dividend Reinvestment

Many established stocks release dividends to their shareholders. Dividends are payments (often quarterly) of a specific amount granted per share owned. For example, let’s say you own 215 shares of Proctor and Gamble (PG). P&G paid a $.31 dividend last week. So this means that your 200 shares have earned you: 220 x .31 = $66.65.

So, your a long term investor and want to accumulate value on your stocks. What to do? Reinvest those dividends! Most stock brokerages offer dividend reinvestment plans, which allow you purchase more shares of the particular stock that just paid you dividends with the dividend payment (so this means we could buy another share of PG with our dividend payment).

Over time you will continue accumulating shares and your dividend payments will grow. This process may even be accelerated if the total dividend payments exceed the price of a share of stock. 50 years from now those dividend payments may be massive, providing a sizable amount of portfolio value.

Watch it in Practice:

If you invested 1,000 in Proctor and Gamble in '95 what would your asset be worth today:

- 95': Bought 53 shares (1000 initial investment / $19.00 average per share). Received annual dividend = $.40 and reinvested at a price of $19.50. Now own 54 shares of PG (.40 x 53).
- 96': Received annual dividend = $.45 and reinvested at $20.00. We now own 55.25 shares of PG.
- 97' Received annual dividend = $.50 and reinvested at $25.00. We now own 56.5 shares of PG.
- 98' Received annual dividend = $.56 and reinvested at $31.00. We now own 57.5 shares of PG. - 99' Received annual dividend = $.62 and reinvested at $41.00. We now own 58 shares of PG.
- 00' 2 for 1 split (shares are now 58 x 2 = 116). Received annual dividend = $.70 and reinvested at $29.00. We now own 119 shares of PG.
- 01' Received annual dividend = $.77 and reinvested at $34.00. We now own 122 shares of PG.
- 02' Received annual dividend = $1.17 and reinvested at $30.00. We now own 127 shares of PG.
- 03' Received annual dividend = $.90 and reinvested at $45.00. We now own 129.5 shares of PG.
- 04' Received annual dividend = $1.00 and reinvested at $54.00. We now own 132 shares of PG.
- 05' Received annual dividend = $1.12 and reinvested at $54.00. We now own 135 shares of PG.
- 06' Received annual dividend = $1.25 and reinvested at $62.00. We now own 138 shares of PG.

So in a little over 10 years we have almost tripled the amount of shares we started with leaving us with a portfolio value of over $8812 (63.86 x 138). A 881% gain!

Monday, November 13, 2006

IPO Plays This Week

I started trading IPO's about a month ago. Statistically, IPO's perform the best during the last quarter of the year, so I thought it was a good time to start looking into this dynamic asset class. I say dynamic because these plays offer strong fluctuations from one day to the next. If you know what to buy, and when exactly to sell it, you can make a lot of money. Since this is one of the most publicized IPO weeks of the year, it is a perfect time to share my IPO picks of the week.

The most mentioned IPOs this week include the rental car company Hertz (HTZ), the Halliburton spin-off KBR (KBR), and the commodity exchange Nymex (NMX). So which one(s) should you play?

Hertz rental car may seem like a safe play (steady revenues, incremental growth, and legitimate expansion plan); I am concerned about the scalability of the rental car business as a whole. Thrifty, arguably Hertz' most notable competitor, has seen diminishing profits for several consecutive quarters. I feel that if you are going to play this IPO, get ready to get out in the short run. I look for a maximum of an 8% increase sometime during the first week - get out at that point. A competitive, diminishing market is not a long term play. Decision: Pass.

While KBR will likely be more volatile that Hertz, I feel that the stock has stronger earnings potential. This company's financials and growth potential are astounding (revenues over 9 billion and demand for oil should increase sometime shortly). One weakness is USA's potential withdrawal from Iraq. KBR has substantial construction business in Iraq and a U.S. withdrawal could pose problems for the company. The answer: play this one short term. The U.S. may remove troops from Iraq, but the country still needs to be repaired, yielding plenty of business for KBR. Decision: Play.

This is the big one. Nymex is a commodity exchange with huge growth potential. Many investors have been salivating over this release, but there are some evident flaws. The over-hype and massive participation could push the open price of this IPO up to $150/share. By this time speculative investors could sell their shares and drop the price significantly. While the share price may deter some investors, there are many reasons to invest in NMX. I like the company's strong financials (Almost 120M in profits) and successes from similar IPO exchanges (NYX, CME and BOT). The positives outweigh the negatives, so the question is how to play NXM? While there is potential to make money buying and selling on highs and lows, I feel the best strategy is buy it and never look at it again. Decision: Play.

CNN Article

Friday, November 10, 2006

Earnings Follow-Up

Below are some companies that release their earnings next week. Remember; make your picks soon before the companies are overbought.

AMAT - Techs are hot, the stock is down. Get it now before the stock gets overbought.

TLB - The Company’s core business consists of classic women’s clothing. Similar retailers have show strong earnings. Get in now while the stock is down.

BEAS - Software company. There are a lot of tech plays below. This company may not make your list.

NTAP - Data storage and management services. Related companies are all up, looks pretty solid going into earnings next week.

CLE - Teen retailer. Earnings look pretty good, maybe a potential buyout? Buyouts are always good.

HPQ - Not only a hardware retailer, but also a technical services company. Competitors have done well, may be overbought into earnings.

SBUX - May be at a low end of a peak. Hit it up now before the earnings next week.

MSCC - Semiconductor company. The industry is pretty popular, stock is relatively cheap.

MRVL - Semiconductor company like MSCC. May want to play one or the other.

HIBB - Sporting goods company like Dicks. Sporting good companies like have done well so far this earnings this season.

Thursday, November 09, 2006

How to Play Earnings

Earnings season is a pivotal time for stocks. Quarterly earnings articulate prior success and future growth of companies. Thus, earnings season is a perfect opportunity to make some quick money. So let's learn how to make the most out it.

1. Look up what companies are reporting and when they are reporting (http://biz.yahoo.com/research/earncal/20061109.html). Sites like Yahoo not only show when the company is reporting, but the analyst earnings expectations on the company.

2. Develop a list of potential plays. Develop a list of stocks that are scheduled to report in the following week or later. Limit your list to companies that you have some knowledge about and are confident that they may have had a good quarter.

3. Piggy back on competitors. From your list, use Google Finance to locate your picks’ core competitors. See if any of your picks’ competitors have already reported their earnings. A stock is much more lucrative is its competitors have beat the street. Analysts are industry whores; a significant amount of their estimates are derived from the industry's success. Look at your list again and keep the companies with successful competitors.

4. Diversify your picks and buy them early. Buy your stocks a week or so before they report. There is a significant amount of traders that trade like crazy a day or two before earnings. If the stock is popular, there is a strong potential that it will be overbought going into earnings. An overbought stock will significantly reduce the potential capital gains from the report, but will escalate the value of the stock in the days prior to the earnings. Finally, diversify your picks. Like all stocks, strong diversification significantly reduces unsystematic risk, yielding safer earnings plays. I reduce risks on earnings plays whenever I can, diversification is a good way to do this.

I have had good luck on earnings using these strategies. Good luck!