Are tax-free bonds losing sheen? Bajaj Cap analyses

Rajiv Bajaj, Vice Chairman & MD of Bajaj Capital believes that investors are now looking at safe capital protective returns. Therefore, fixed income products and tax-free bonds saw a phenomenal response last year. However, the first tranche of such investments closing on March 15 got a lukewarm response in the current year.

Also read: See 25bps rate cut; bond yields may trough at 7%: Deutsche

He advises investors to opt for issues from institutions that are offering good returns at the moment. People are nowadays more inclined towards locking in money for a period of three to five years. But, it is best to invest in long term bonds, only when the investor can give 10 to 15 years, he opined.

"If you have 10 to 15 year's money to spare, that is when you should come into these bonds and this could be one of the major reasons why people are not coming into these bonds in a hoard. The current mindset of fixed income minded investors is they want to wait and watch, they want to lock-in money for ideally three years, maximum for five years and that is why you see mutual funds and the capital protection side ballooning, growing very fast," explained Bajaj.

Here is the edited transcript of the interview on CNBC-TV18.

Q: We did not see much too much investor enthusiasm even at 7.8 to 7.7 percent tax exempted returns. How do you think investors should behave, what explains that lack of enthusiasm?

A: As we know that we are in a fixed income era and investors are looking at safe capital protective return. If one sees the response one is getting to all fixed income product and tax-free bonds, there was a phenomenal response last year. This year in the first tranche the response was lukewarm and in this current tranche where many issues are closing on March 15, the response is even cooler.

I believe fixed income minded investors have a certain benchmark return in their mind and they get put off if the return falls below that. So, most of these tax-free bonds are offering tax-free returns in the range of 6.8 to 7.5 percent depending upon what rating, what bond you buy. In that case the pre tax comes to just above 10 percent with Housing and Urban Development Corporation Limited (HUDCO) being the best for a 15 year tenure, offering close to 11 percent pre tax yield.

My theory is that whenever a pre tax return of a tax-free bond comes below ten percent, the investor begins to lose enthusiasm. So, even in the first tranche last month in January, money was still flowing in because the return was above 10 percent. Investors now have options. They can even get 9 to 9.5 percent from bank deposits today. I am referring to retail investors, people putting in up to Rs 10 lakh. If you are an institutional investor, with a high networth, your return is even 0.5 percent lower than what I mentioned.

Q: There are nine issues in the market currently; some of them are from first timers like Jawaharlal Nehru Port Trust (JNPT) or National Housing Bank (NHB). Do you have preference that you would recommend to retail investors? How do you choose?

A: These are all high pedigree institutions. If one were to look at finer details, HUDCO at AA+ is as solid an institution as any other and if they offer up to 7.69 percent for a 15 year tenure, that comes to 11 percent pre tax. So, that stands out.

NHB on the other hand is offering lower interest because the prices of these bonds are set on the basis of two weeks preceding government securities (Gsec) yield. Maybe they got stuck at a wrong time and hence, they are offering 20 bps lower than other institutions.

Therefore, investors should go for institutions which are offering good returns. Otherwise, Ennore Port is offering higher yield on ten year option and all the other institutions, whether it is Rural Electrification Corporation (REC), Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC), India Infrastructure Finance Company (IIFCL) are offering similar returns.

Q: If someone enters into these and wishes to exit perhaps in two-three years before the maturity of 10-15 years gets over, they will be listed on the exchange but when you wish to exit at the exchange, does someone lose out on the yield due to illiquidity and if yes, how much would be the yield that you lose out?

A: Not that there is much activity on the secondary market on these bonds but, I did check that last year people who bought the bond got about 4 percent appreciation of capital. This is a kind of a bonus for them but, the volume traded would not be much.

Hence, it is a theoretical comfort which investors have. My view would be clear, if you have 10 to 15 year's money to spare, that is when you should come into these bonds and this could be one of the major reasons why people are not coming into these bonds in a hoard.

The current mindset of fixed income minded investors is they want to wait and watch, they want to lock-in money for ideally three years, maximum for five years and that is why you see mutual funds and the capital protection side ballooning, growing very fast. It has already become Rs 10,000 to Rs 15,000 crore market.

Q: What explains this lack of interest? Is it higher inflation for the last few years?

A: Inflation is one of the important factors but, inflation is also an investor's friend because whenever inflation is high, you start getting higher returns. So, what investors need to look at is what is the alpha you are getting on top of inflation. Retail investors in particular are not enthused if you offer them 0.5 percent over inflation and they are very happy if you offer them anything above 1-1.5 percent over inflation and they are delighted if they get 2-2.5 percent real return.

Retail Banking Vs. Corporate Banking

Retail banking refers to the division of a bank that deals directly with retail customers. Also known as consumer banking or personal banking, retail banking is the visible face of banking to the general public, with bank branches located in abundance in most major cities. Banks that focus purely on retail clientele are relatively few, and most retail banking is conducted by separate divisions of banks, large and small. Customer deposits garnered by retail banking represent an extremely important source of funding for most banks.

Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers. The term was originally used in the U.S. to distinguish it from investment banking, after the Glass-Steagall Act of 1933 separated the two activities. While the Act was repealed in the 1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the U.S. and elsewhere. Corporate banking is a key profit center for most banks; however, as the biggest originator of customer loans, it is also the source of regular write-downs for loans that have soured.

Products and Services – Retail Banking
Retail banking encompasses a wide variety of products and services, including:
Checking and savings accounts – customers are generally charged a monthly fee for checking accounts; savings accounts offer slightly higher interest rates than checking accounts but generally cannot have checks written on them. Certificates of Deposit and Guaranteed Investment Certificates (in Canada) – these are the most popular investment products with conservative investors, and an important funding source for banks since the funds in these products are available to them for defined periods of time. Mortgages on residential and investment properties – because of their size, mortgages account for both a substantial part of retail banking profits, as well as the biggest chunk of a bank's exposure to its retail client base. Automobile financing – banks offer loans for new and used vehicles, as well as refinancing for existing car loans. Credit cards – the high interest rates charged on most credit cards makes this a lucrative source of interest income and fees for banks. Lines of credit and personal credit products – Home equity lines of credit (HELOC) have diminished significantly in their importance as a profit center for banks after the housing collapse in the U.S. and subsequent tightening of mortgage lending standards. Foreign currency and remittance services – the increase in cross-border banking transactions by retail clients, and the higher spreads on currencies paid by them, makes these services a profitable offering for retail banking. Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank:
Stock brokerage (discount and full-service) Insurance Wealth management Private banking The level of personalized retail banking services offered to a client depends on his or her income level and the extent of the individual's dealings with the bank. While a client of modest means would generally be served by a teller or customer service representative, a high net worth individual who has an extensive relationship with the bank would typically have his or her banking requirements handled by an account manager or private banker.

Although brick-and-mortar branches are still necessary to convey the sense of solidity and stability that is crucial to banking, the reality is that retail banking is perhaps one area of banking that has been most impacted by technology, thanks to the proliferation of ATMs and the popularity of online and telephone banking.

Products and Services – Corporate Banking
The corporate banking segment of banks typically serves a diverse range of clients, ranging from small to mid-sized local businesses with a few millions in revenues to large conglomerates with billions in sales and offices across the country. Commercial banks offer the following products and services to corporations and other financial institutions:
Loans and other credit products – this is typically the biggest area of business within corporate banking, and as noted earlier, one of the biggest sources of profit and risk for a bank. Treasury and cash management services – used by companies for managing their working capital and currency conversion requirements. Equipment lending – commercial banks structure customized loans and leases for a range of equipment used by companies in diverse sectors such as manufacturing, transportation and information technology. Commercial real estate – services offered by banks in this area include real asset analysis, portfolio evaluation, debt and equity structuring. Trade finance – involves letters of credit, bill collection, and factoring. Employer services – services such as payroll and group retirement plans are typically offered by specialized affiliates of a bank. Through their investment banking arms, commercial banks also offer related services to their corporate clients, such as asset management and securities underwriters.

Importance to the Economy
Retail and commercial banks are of critical importance to the domestic and global economies. Retail banking brings in the customer deposits that largely enable banks to make loans to their retail and business customers. Commercial banks, for their part, make the loans that enable businesses to grow and hire people, contributing to expansion of the economy.

For proof of the importance of banks to the economy, one needs to look no further than the global credit crisis of 2007-08. The crisis had its roots in the U.S. housing bubble and the excessive exposure of banks and financial institutions around the world to derivatives and securities based on U.S. home prices. As iconic American investment banks and institutions either declared bankruptcy (Lehman Brothers) or were on the verge of it (Bear Stearns, AIG, Fannie Mae, Freddie Mac), banks grew increasingly reluctant to lend money, either to their counterparts or to companies. This resulted in a near-total freeze in the global banking and lending mechanism, causing the most severe recession worldwide since the 1930s' Depression. This near-death experience for the global economy led to renewed regulatory focus on the largest banks that are deemed "too big to fail" because of their importance to the worldwide financial system.

Biggest Retail and Commercial Banks
The amount of domestic deposits held by a bank is a widely-used measure to gauge the size of its retail banking operation. According to the Federal Deposit Insurance Corporation (FDIC), some of the biggest U.S. banks by this measure were:

1. Bank of America
2. Wells Fargo
3. JPMorgan Chase
4. Citigroup
5. U.S. Bancorp

Some biggest U.S. commercial banks, based on Federal Reserve data, were:

1. JPMorgan Chase
2. Bank of America
3. Citigroup
4. Wells Fargo
5. U.S. Bancorp

In Canada, the five biggest commercial and retail banks are:

1. Royal Bank of Canada
2. Toronto-Dominion Bank
3. Scotiabank
4. Bank of Montreal
5. Canadian Imperial Bank of Commerce

The Bottom Line
Retail and commercial banks are essential for the smooth functioning of an economy. Most large banks have specialized divisions that deal in retail banking and corporate banking; both businesses are among the largest profit centers for most banks.

Cliffs' CEO to Retire - Analyst Blog

Top 5 Canadian Stocks To Invest In 2014

Cliffs Natural Resources Inc. (CLF) announced that its president and chief executive officer (CEO) Joseph Carrabba will be retiring from his post by Dec 31, 2013. Carrabba, however, will continue to serve as president and CEO and a director of the company until a successor is elected. Cliffs also announced the retirement of Laurie Brlas as president of global operations, effective immediately.

Carrabba has served Cliffs for the past eight years while Laurie Brlas has served the company for the last seven years as chief financial officer, and most recently, as executive vice president and president, global operations.

Cliffs has named James Kirsch its non-executive chairman, effective immediately. He had been the company's lead director. Cliffs' Board has retained an executive search firm, Heidrick & Struggles, which enables it to find candidates to lead the company.

Cliffs is an international mining and natural resources company and a major global iron ore producer. The company posted adjusted earnings of 60 cents per share in the first quarter of 2013, down 29.4% from 85 cents earned in the year-ago quarter but ahead of the Zacks Consensus Estimate of 32 cents. The adjusted earnings exclude a tax benefit of 6 cents per share.

On a reported basis, Cliffs' earnings were 66 cents per share compared with $2.63 reported in the year-ago quarter. Weak iron ore pricing coupled with lower volume hurt Cliffs' earnings in the quarter.

Sales for the quarter came in at $1,140.5 million, down roughly 5.9% from $1,212.4 million in the prior-year quarter and also missed the Zacks Consensus Estimate of $1,226 million. Decline in global iron ore sales volumes led to reduced sales in the quarter.

Cliffs is slated to report its second quarter results after the closing bell on Jul 25. Cliffs currently retains a Zacks Rank #4 (Sell).!

Other companies in the mining industry worth considering are Alderon Iron Ore Corp. (AXX), NovaGold Resources Inc. (NG) and Lake Shore Gold Corp. (LSG). While Alderon carries a Zacks Rank #1 (Strong Buy), both NovaGold and Lake Shore Gold hold a Zacks Rank #2 (Buy).

Are Stocks Overbought? These Little-Known Indicators Say Yes

The S&P 500 index rose another 3% last week, continuing a winning stretch that began last fall.

Since Nov. 7, the S&P has risen 22%. That works out to be a roughly 35% annualized gain. Trouble is, the rally is increasingly due to a perception by individual investors that stocks can only move in one direction: up.

In its most recent survey, the American Association of Individual Investors (AAII) noted that the percentage of investors who are currently bearish is now less than 20%. That's the lowest reading in 18 months, yet as legendary fund manager Sir John Templeton once noted, "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."

I've already researched one half of that maxim. Back in 2010, I noted that stocks tend to rally when that AAII survey finds few bullish investors. The logic is quite simple: When investors are in a negative mood, they have already pushed stocks down to levels that are too low to ignore. As Templeton notes, maximum optimism should be of equal concern.

Discussing the sharp gains posted in the market last week, MKM Securities' Katie Stockton noted that "short-term momentum was strong enough to lift the S&P 500 above its June levels, while generating abundant breakouts on the individual stock level. Breakouts tend to foster additional momentum," which she adds can lead to overbought conditions.

In effect, technical indicators like momentum -- not fundamental indicators like valuations and growth rates -- are ruling this market.

The Profit Disconnect
It's important to think about issues such as momentum and investor bullishness as we head into earnings season, which will replace speculation with fact. Companies in the S&P 500 are expected to boost profits 3% from the same quarter last year, though the actual figure is likely to end up closer to ! 4% or 5% once the numbers have been digested. In each of the past three earnings seasons, year-over-year profit growth has been 1 or 2 percentage points above early season forecasts.

Yet the real risk to stocks will be based on what companies have to say for the rest of 2013. Both a strong dollar (which mutes foreign earnings) and a fresh slowdown in key emerging market economies could easily compel companies to set a lower bar for the next two quarters.

Margin Concerns
There's an unusual stock market correlation that has developed over the past 15 years that investors should heed. In 2000 and 2007, the amount of money that investors had borrowed to buy stocks (that is, margin debt) surpassed $350 billion. In both cases, the stock market was sharply lower a year later, partially induced by forced margin selling -- and more importantly, the U.S. economy had slipped into recession by then. It's as if investors became overly aggressive with margin debt right at a time when they should have been tilting toward caution.

Well, for the third time in 15 years, margin debt has again moved above $350 billion. The figure has stayed constantly above that threshold for the whole year. (Data are only available through May, which saw a modest downtick, likely induced by "tapering" comments by the Federal Reserve on May 21, though the trend may have been reversed as those tapering comments have subsequently been walked back. The next data will be released in late July.)

The Move To Cash
Thanks to aggressive recent stock buying, many investors have come close to exhausting their sidelined cash and are "all in," as they say in poker. But having all of your chips on the table can be dangerous, especially if you carry margin debt as well.

So while your gut may tell you to stay focused on further market gains, your head should be talking you into locking in profits. Yet which stocks should you sell during this earnings season?

In market environments with less froth, you s! hould alw! ays seek to cull the bad stocks from your portfolio and "let your winners ride." But the current environment, which has seen more than 90% of the stocks in the S&P 500 move above their 200-day moving average, means that even great stocks should be in question.

My rule of thumb: Unless a company can make a solid case for robust profit growth over the next few years, the time may be here to take profits.

I would also prioritize my portfolio, separating the low-priced stocks (in terms of price-to-earnings, price-to-book, or price-to-cash flow) from the high-priced ones. Though both types of stocks would flourish if the market moves yet higher, the lower-priced stocks at least have better downside protection if the market moves lower. Lower-priced stocks are also more likely to initiate share buyback or dividend hikes if the market comes under deeper pressure.

Risks to Consider: With U.S. trading partners in distress, this coming earnings season could take a much more somber tone. This is no time to be complacent (even though the VIX index -- the "fear gauge" -- is again below 14, signaling historically high levels of complacency).

Action to Take --> Instead of focusing on the market, keep a close watch on the stocks in your portfolio. Examine the coming quarterly results (and outlooks). Merely "decent" business conditions are no longer grounds to hold any stock that has appreciated sharply in recent quarters.

Can Exxon Mobil Break Out?

With shares of Exxon Mobil (NYSE:XOM) trading around $91, is XOM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Exxon Mobil is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and a range of specialty products. The company has a number of divisions and affiliates with names that include ExxonMobil, Exxon, Esso or Mobil that operate or market products in the United States and other countries of the world. Exxon Mobil’s principal business is energy, involving exploration for and production of crude oil and natural gas; manufacture of petroleum products; and transportation and sale of crude oil, natural gas, and petroleum products. Energy is essential to global growth and day-to-day operations of companies and consumers worldwide. So long as crude oil is a main source of energy, a bellwether like Exxon Mobil will continue to see rising profits well into the future.

T = Technicals on the Stock Chart are Strong

Exxon Mobil stock has moved significantly higher in recent years and has run up to a long-term resistance level. Should the stock make a solid break above this key resistance level, higher prices will undoubtedly be ahead. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Exxon Mobil is trading above its tangled key averages which signal neutral to bullish price action in the near-term.

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(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Exxon Mobil options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Exxon Mobil Options	17.53%	43%	40%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
June Options	Average	Average
July Options	Average	Average

As of today, there is an average demand from call and put buyers or sellers, neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Exxon Mobil’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Exxon Mobil look like, and more importantly, how did the markets like these numbers?

	2013 Q1	2012 Q4	2012 Q3	2012 Q2
Earnings Growth (Y-O-Y)	6%	11.33%	-1.88%	56.42%
Revenue Growth (Y-O-Y)	-12.29%	-5.29%	-7.68%	1.5%
Earnings Reaction	-1.52%	0.07%	0.47%	1.5%

Exxon Mobil has seen increasing earnings and decreasing revenue figures over most of the last four quarters. From these figures, the markets have been indifferent about Exxon Mobil’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Exxon Mobil stock done relative to its peers, BP (NYSE:BP), Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS), and sector?

	Exxon Mobil	BP	Chevron	Royal Dutch Shell	Sector
Year-to-Date Return	5.22%	3.17%	14.09%	-1.62%	4.15%

Exxon Mobil has been a relative average performer, year-to-date.

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Conclusion

Exxon Mobil provides essential energy products and services to a multitude of companies and consumers located around the world. The stock has moved higher over the last several years and is now bumping up against a long-term resistance price level. Earnings have risen while revenue has declined over most of the last four quarters which has not produced any significant reactions by investors. Relative to its peers and sector, Exxon Mobil has been a year-to-date average performer. WAIT AND SEE what Exxon Mobil does this coming quarter.

The Most Ridiculous Lie They Teach in Business School

The "efficient market" hypothesis is bunk...

 

This is the financial theory Professor Eugene Fama developed at the University of Chicago in the 1960s. Fama argued that no one can consistently beat the market because prices on traded assets already reflect all publicly available information. It soon became the conventional wisdom on markets...

 

The efficient-market hypothesis offers a kind of symmetry... a balance. The market knows all and accounts for everything. It is always in balance, at equilibrium.

 

It's comforting... but the real world doesn't work like that.

 

In finance, one symmetry we're taught is between risk and reward. This makes sense intuitively. And people want to believe it. It seems fair. If you want to succeed, surely you have to take big risks. But that's complete nonsense.

 

In our studies of highly capital-efficient businesses, for example, we've found that investors who simply reinvest their dividends can consistently earn returns of around 15% a year. That's simply investing in high-quality, low-risk, brand-name stocks, like Hershey, Heinz, and McDonald's...

 

And we've discovered another anomaly that gives almost any investor... at almost any time... on almost any stock he wants to own... the opportunity to invest with lower risk and earn profits that are far greater than what's possible by just owning the stock outright.

 

As we'll show you... you can take advantage of this anomaly to amplify the gains you make on stock investments... potentially big triple-digit gains on margin. And you can do that without taking on any more risk than you would by simply buying the common stock – less risk, in fact.

 

Before we get started... you should know something about Stansberry Alpha... the service dedicated to this new trading strategy.

 

To take advantage of the anomaly we're going to describe, you only need to learn a single, simple strategy. And that one technique (which we'll walk you through in a moment) is an options-trading strategy.

 

Many individual investors tune out immediately when they hear 'options.' "It's too risky," they say. "It's too complicated... It's not for me."

 

If you have that kind of reaction to the words "options trading," we urge you to set aside those concerns for a moment. The strategy we're using in Stansberry Alpha is simple and very safe... even safer than simply buying stocks outright.

 

I'll explain the details of how this strategy works in a moment... But for now, just remember, options are simply contracts that give the owner the right (but not the obligation) to buy or sell a stock at a predetermined price by a specific deadline.

 

That's it... Options that give the holder the right to buy a stock are called "calls" – as in, you "call away" someone else's shares. Options that grant the holder the right to sell a stock are called "puts" – as in, you are "putting" your shares to another investor.

 

A trader buys a call if he thinks a stock is headed higher, so he can buy shares at a lower-than-market price. He buys a put if he thinks a stock is headed down, so he can sell shares at a higher-than-market price. All else being equal, the price he pays is based on how much the market expects the stock to move in the future...

 

Here's where the "Alpha anomaly" comes into play... Since puts and calls based on the same underlying stock are subject to the same market moves, you would think they should be priced the same. That's what the conventional wisdom would tell you... But that's not the case. And our strategy takes advantage of this "anomaly" in prices.

 

Why does this anomaly exist? It's simple human nature...

 

Fundamentally, people are more scared of losing money than they are attracted to the promise of making lots of it. That's why they pay more for the protection of puts than the promise of calls. Their twin emotions of fear and greed are out of balance... They are asymmetrical.

 

That's the anomaly. And as simple as that sounds, it gives you a powerful way to reduce your risk... collect income from your trading... and set yourself up for outsized gains down the road.

 

Our Alpha trades are high-conviction investment ideas where we have a strong belief in the company's business and ongoing profitability.

 

But the way we structure Alpha trades can generate bigger returns than we could get by simply buying the stock... And this strategy is safer than just buying stocks outright. No other trading strategy offers a better combination of safety and potential upside...

 

We find stocks we love... that we'd want to own for the long term. Then we buy a call to capture the upside potential, AND we sell a put to reduce our risk.

 

Now, instead of describing our Alpha strategy in theory, I think it will be easier to show you how it works using an actual trade we recommended to subscribers...

 

In the April 23 issue of Stansberry Alpha... we recommended a trade based on the giant data-storage company, EMC Corp.

 

EMC is a great example of the types of companies we focus on in Alpha. It's a $55 billion giant in the "Big Data" space. As the transition to "the cloud" continues to grow, companies will need infrastructure and support to manage Big Data. This presents a massive opportunity for EMC.

 

To take advantage of the investment opportunity we saw in EMC, we recommended subscribers:

 

Buy, to open, the January 2015 EMC $25 call for about $2.15, and

 

Sell, to open, the January 2015 EMC $23 put for about $3.75.

 

The stock was trading around $22 at the time. (Please note: The options prices have moved, and we don't recommend anyone open the trade at current prices.) Here's how we described the trade in the issue:

 

This trade puts a net credit of $1.60 per share of cash in your account. Remember, option contracts control 100 shares. That means for every option pair you trade... you'll receive $160 in your account. That's an upfront cash payment equal to 35% of our margin requirement. (We'll explain "margin" in a moment... but it's essentially the money you tie up to open this position.)   If shares don't rise as we expect and we're required to buy shares... we'll buy the stock at a net entry price of $21.40 a share ($3.75 for the put minus $2.15 for the call). That's a fraction lower than where the shares trade today.   As always... selling the put means you accept the potential obligation to buy shares of EMC at $23 each, if they trade for less than that by January 15, 2015 (when the options expire). That's a $2,300 potential obligation. Buying the call gives you the right (but not the obligation) to buy shares at $25 until that same deadline.

Note the options name included the data "January 2015." That means the options expire on the third Friday of that month. Anyone holding these options must make his buy or sell decision by then...

 

Margin is another key concept to understand... Since selling the put means you're accepting a potential obligation to buy shares, your broker wants to ensure you're good for it... Margin is simply a kind of security deposit. The amount of margin that each broker requires can vary, but most will allow you to trade options with a 20% margin requirement.

10 Best Medical Stocks To Invest In Right Now

 

So to open this EMC position, subscribers would have been required to make a margin deposit equal to about 20% of the potential represented by the puts. In this case, that's a $2,300 potential obligation. So the margin requirement was $460 per option contract.

 

As we explained to readers, the trade could work out one of three ways by January 2015...

 

1. EMC trades for less than $23. In that case, our calls will expire worthless. The puts will be exercised, and we'll be required to buy EMC shares at $23 each. When you take into account the $1.60-a-share net credit, we will own the stock for a net cost of $21.40 a share. That is about 4% below EMC's current share price of a little more than $22. It's not a massive discount to today's prices. However, we think the stock already trades at a generous discount based on its earnings and free cash flows.   As the cloud-computing boom plays out, EMC's sales and earnings will continue to grow. And we believe that over the next year or two, the market will place a more realistic price tag on EMC's share price.   2. EMC trades between $23 and $25 per share. In that case, both options expire worthless. We would keep the $1.60 per share ($160 per contract sold). This would represent a 35% return on the margin requirement ($460). That's much better than buying the stock outright. Even if we hold on until January 2015, it's still a generous annualized return of 17.5%.   3. EMC trades for more than $25 per share. This is when the upside potential of our Alpha trade starts to kick in.   Let's say the shares return to their September price of $28... Our calls would be worth approximately $3. Added to our initial net credit of $1.60, that brings our total return to a $4.60 profit ($460 per contract) – in other words... 100% on margin – a double.   Of course, the higher shares rise, the better we do. In March 2012, shares traded briefly for as high as $30. That would get us a massive 143% return on margin.   This trade has exactly the same risk parameters as buying the stock at $21.40...   But of course, you can't get shares at that price right now. If you could and assuming the stock did go to $28, you would make roughly 30% in capital gains on your investment. That's great, but it's less than a third of the triple-digit gains we'd get for the same outcome with our Alpha trade. Plus, we're putting up much less capital.

On July 24 – three months after the recommendation – shares of EMC jumped nearly 6% to $26.75 after the company reported solid quarterly earnings. The price increase lowered our chances of being put the stock... And it gave us a huge, early return on our trade.

 

The strong move up in EMC's share price (and the passage of time) meant that the prices for both our options had also shifted... If we were to close the position early by buying back the put we sold and selling the call we hold... the resulting proceeds combined with our upfront net credit would equal a 71% gain on the margin deposit.

 

But we're not closing yet. As we outlined above, we think subscribers could double their money on margin by the time we close this trade.

 

And EMC isn't our only success story at Alpha...

 

At the end of June, we closed out four positions for huge profits and one loser. Our trade on natural-gas infrastructure firm Chicago Bridge and Iron clocked in a 232% gain in just seven months. We got a big, 119% gain in six months on casino operator MGM, another 102% in four months on software giant Microsoft, and a juicy 51% in four months on World Dominating chipmaker Intel. The only real blemish so far is our trade on power-generation firm Exelon, in which we booked a 37% loss. We closed our trade on mortgage REIT Hatteras Financial earlier for a small 5% profit.

 

We've closed six positions so far for an average gain of 79% with an average holding period of 4.67 months.

 

Our open portfolio's average gain of 35% is with a mere two-month average holding period.

 

If we closed the four open positions today and shut up shop... we'd lock an average portfolio gain of 61% over the 10 positions with an average holding period of 3.4 months.

 

Again, we wouldn't be able to make these incredible trades if the efficient-market hypothesis was true. So we encourage MBA professors to continue teaching this drivel. And we'll continue making huge, safe profits using our strategy. We'd encourage you to do the same...

 

I know most people are scared away by options... They immediately think trading options is too risky. I hope you see how these Alpha trades actually have less risk than simply buying the stock in question.

 

And if you want to learn more about these Alpha trades, Porter is hosting his first-ever live training webinar today. It's called "The Alpha Anomaly: How to Make Triple-Digit Gains With Less Risk Than Buying Stocks."

 

During this live presentation, Porter and his research team will explain, in detail, the Alpha anomaly and why his trading strategy works to deliver larger returns with less risk than simply buying a stock. He'll also show you real-world examples of his Alpha strategy at work. And at the end, he'll answer any questions listeners may have.

 

To reserve your spot for Porter's first-ever live training webinar, simply click here.

 

Regards,

 

Sean Goldsmith

Top 10 Blue Chip Companies To Buy For 2014

The power of dividends�is nothing new to decade-long income investors. Yet, more recently, droves of investors are jumping on the dividend bandwagon, thanks to all-time low savings rates. But not all dividend-paying stocks are created equal.

Looking beyond the Aristocrat status
These two great examples show us that concentrating on one sole metric, like dividend yield, means that we're likely overlooking potential red flags. Instead, a more sustainable strategy is buying dividend stocks that harness both reliable dividend growth and low payout ratios.

Take a look at these three under-the-radar companies. While each of them belongs to the elite S&P 500 Dividend Aristocrats, an exclusive club of blue chips that have boosted their dividends for at least 25 consecutive years, these three are great dividend stocks for other reasons too.

Top 10 Blue Chip Companies To Buy For 2014: International Business Machines Corporation(IBM)

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. Its Global Technology Services segment provides IT infrastructure and business process services, including strategic outsourcing, process, integrated technology, and maintenance services, as well as technology-based support services. The company?s Global Business Services segment offers consulting and systems integration, and application management services. Its Software segment offers middleware and operating systems software, such as WebSphere software to integrate and manage business processes; information management software for database and enterprise content management, information integration, data warehousing, business analytics and intelligence, performance management, and predictive analytics; Tivoli software for identity management, data security, storage management, and datacenter automation; Lotus software for collaboration, messaging, and so cial networking; rational software to support software development for IT and embedded systems; business intelligence software, which provides querying and forecasting tools; SPSS predictive analytics software to predict outcomes and act on that insight; and operating systems software. Its Systems and Technology segment provides computing and storage solutions, including servers, disk and tape storage systems and software, point-of-sale retail systems, and microelectronics. The company?s Global Financing segment provides lease and loan financing to end users and internal clients; commercial financing to dealers and remarketers of IT products; and remanufacturing and remarketing services. It serves financial services, public, industrial, distribution, communications, and general business sectors. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. IBM was founded in 1910 and is based in Armonk, New York.

Advisors' Opinion:

• [By Paul]

  IBM. Emerging markets are a big growth driver for this computer systems and software provider. Not only that, Resendes says, IBM has "a bullet-proof balance sheet that will allow it to weather the current storm and position it for superior growth and profitability in the long term." He thinks the stock, which recently traded at $93, is worth $120 a share: ''There are some obvious companies that offer much bigger discounts, but you have to incorporate the safety factor. You're getting a premium company here that's a good spot to be in within the tech space."

• [By Geoff Gannon] Wells Fargo (WFC) ��that only seem cheap if you believe in their franchises. These are far from Ben Graham bargains.
  
  And then other times, Buffett buys companies like Daehan Flour Mills. Or he buys into a liquidation like Comdisco. Or an arbitrage position like Dow Jones.
  
  How does Buffett choose between:
  
  路 A wonderful business at a fair price
  
  路 A fair business at a wonderful price
  
  路 A business that is liquidating
  
  路 An arbitrage opportunity?
  
  Very few successful investors buy stocks that fall into all these categories. Ben Graham did arbitrage, liquidations, and fair businesses at wonderful prices. But he never bought wonderful businesses at fair prices.
  
  Phil Fisher bought wonderful businesses at fair prices. But he never bought fair businesses at wonderful prices, or liquidations, or arbitrage.
  
  Is Buffett just combining Ben Graham and Phil Fisher?
  
  No.
  
  Buffett invested in GEICO ��in fact he put 75% of his net worth into GEICO ��while he was still taking Ben Graham�� class. GEICO is a great example of Warren�� departure from the Ben Graham approach. Buffett was departing from Graham�� approach from the moment he set foot in Graham�� class.
  
  How?
  
  He was focused on his return on investment. He was focused on compounding his wealth. Graham wasn��. Buffett was. That was the difference.
  
  And so Buffett immediately started buying the same stocks as Ben Graham ��but he focused on just the very best ideas in Graham�� portfolio. A great idea for Ben Graham would ��at most ��account for about 10% of his common stock portfolio. A great idea for Warren Buffett could be ��like GEICO was ��75% of his portfolio.
  
  When Buffett started his partnership, he had a 25% position size cap. But he removed that to allow for a 40% investment in American Express (AXP). Buffett made many investments of 10% to 20% of the partnership�� portfolio over the years. For Ben Graham, 10% to 20% was a real! ly big position. It wasn�� the kind of thing you bought every year.
  
  So a huge difference between Ben Graham and Warren Buffett was focus. Buffett was always focused on his best ideas. This is part of what makes Warren Buffett similar to Phil Fisher. And very different from almost all other investors.
  
  The other part of Warren Buffett�� approach that separates him from most investors is that he�� wedded to a very specific idea ��return on investment ��rather than a very specific style of investing.
  
  The only way Buffett can sort through a range of different ideas including good companies, mediocre companies, liquidations, and arbitrage ��is by looking at his return on investment.
  
  I wrote about this back in 2011 in an article entitled: ��arren Buffett: Mid-Continent Tab Card Company.��br>
  That article was based on Alice Schroeder�� description of Warren Buffett�� investment in Mid-Continent Tab Card Company.
  
  And it�� a good article to read if you want to know how Warren Buffett thinks about stocks. Because it includes such heretical ideas as: ���growth had the potential to be either an added kicker or the most serious risk to his investment��and ��ou build the margin of safety into each step. You don�� just slap a 40% discount on the intrinsic value estimate you get at the end.��br>
  But the most important statement in that article was:
  
  ��uffett doesn�� seem to make actual estimates. Alice Schroeder says she never saw anything about future earnings estimates in his files. He didn�� project the future earnings the way stock analysts do.��br>
  How is that possible?
  
  How can you sort through a variety of different investment options without using any explicit future estimates?
  
  You have to think in terms of return on investment.
  
  In fact, the reader who asked me the question that prompted the Mid-Continent Tab Card Company article actually got very close to identifying how Warren Buffett thinks about st! ocks:
  !
  ��ou wrote that Buffett just looked at the initial return (>15%) he was getting and the business�� own ROC. When you aid ��nitial��do you mean the 1st year? I think that sort of makes sense because his return of the subsequent years would be taken (from) the firm�� own ROC and sales growth. Is that how you see it?��br>
  Now, what did that reader get wrong? He came very, very close to describing how Buffett looks at a business. But he just missed.
  
  What variable isn�� being considered there?
  
  Is it really true that: ��is return of the subsequent years would be taken (from) the firm�� own ROC and sales growth��
  
  Let�� say a company has zero leverage. And its return on assets has been 10% a year for each of the last 100 years. You can bet on that 10% a year. Okay. Now, let�� say it is growing sales by 10% a year.
  
  How much is the business worth?
  
  And how much should an investor expect to make in that stock if he pays exactly tangible book value?
  
  Can the investor expect to earn 20% a year or 10% a year?
  
  Or something in between?
  
  Now, if you expect to hold the stock for a short-period of time your return will largely be based on what the market is willing to pay for each dollar of earnings the stock has in the future. So, you can certainly make over 100% a year if you buy a stock at 10 times earnings and sell it at 20 times earnings exactly one year from today.
  
  I�� not talking about that. Don�� worry about the resale value right now. Just look at the question of what the owner of a business can expect to make if the following facts are true:
  
  路 Total Assets: $100
  
  路 Annual Earnings: $10
  
  路 Future Annual Sales Growth: 10%
  
  Do you think you can answer that question?
  
  A lot of people think they can answer that question. But Warren Buffett would say you can�� answer that question.
  
  Not until you consider two possible future scenarios. Ten years from today, that same business cou! ld look l! ike:
  
  路 Total Assets: $260
  
  路 Annual Earnings: $26
  
  路 Future Sales Growth: ?
  
  Or it could look like:
  
  路 Total Assets: $100
  
  路 Annual Earnings: $26
  
  路 Future Sales Growth: ?
  
  Or it could look like anything in between. In fact, I�� simplifying. If you look at their 10-year records, quite a few businesses grew assets faster than earnings. So, the range of possible outcomes in terms of the ratio of change in earnings to change in assets is even wider than I just presented.
  
  If we look at two businesses each earning 10% on their assets, each unleveraged, and each growing at 10% a year ��we can imagine one future where assets have grown by $160 over 10 years. And we can imagine another future where assets haven�� grown at all over 10 years.
  
  Which is the better future for an owner?
  
  Obviously, the future with sales growth that far exceeds asset growth.
  
  That would allow the company to buy back stock, pay dividends, etc.
  
  So we can think of the combination of a company�� return on assets and its change in assets and sales as being like the total return on a stock. The total return on a stock includes both price appreciation and dividends.
  
  The total return on a business includes both the return on assets (from this year) and the growth in sales. But it does not include sales growth apart from asset growth. Rather, to the extent that assets and sales grow together ��growth is simply the reinvestment of more assets at the same rate of return.
  
  In other words, a business with a 10% ROA and 0% sales growth and a business with a 10% ROA and 10% sales growth could be more comparable than they appear. If the company with no sales growth pays out 10% of its assets in dividends each year, why is it worth less than the business with a 10% ROA and 10% sales growth?
  
  In the no-growth company, I get 10% of my initial investment returned to me. In the growth company, I get 10% of my initial investment reinv! ested for! me. If the rate of return on that reinvested cash is the same rate of return I can provide for myself on the cash paid out in dividends ��why does it matter which company I choose?
  
  Doesn�� an owner earn the same amount in both businesses?
  
  Now, I think there are qualitative reasons ��basically safety issues ��that would encourage me to prefer the growing business. Usually, companies try to grow. If a company isn�� growing, it could be a sign of something serious.
  
  So a lack of growth is sometimes a symptom of a greater disease. But growth is not always good.
  
  In more cases than people think, growth is actually a pretty neutral consideration in evaluating a stock.
  
  There is an exception. At unusually high rates of growth ��growth is almost universally good. This is a complex issue. But I can simplify it. Very few businesses that grow very fast do so by tying up lots of assets relative to the return they earn on those assets. Therefore, it is unnecessary to insist on high returns on capital when looking at very high growth companies. You��l get the high returns on capital ��at least during the company�� fast growth stage ��whether you ask for them or not.
  
  What do I mean when I say growth is often a pretty neutral consideration?
  
  Let�� use live examples.
  
  Here is Hewlett-Packard (HPQ)��br>
  10-Year Average Return on Assets: 3.2%
  
  10-Year Annual Sales Growth: 10.7%
  
  10-Year Annual Asset Growth: 14.5%
  
  And here is Value Line (VALU)��br>
  10-Year Average Return on Assets: 76.2%
  
  10-Year Annual Sales Growth: (8.2%)
  
  10-Year Annual Asset Growth: (11.1%)
  
  Whose assets would you pay more for?
  
  I have a problem with an 8% a year decline in sales. And worry that the future looks really, really grim for Value Line.
  
  But it�� hard to say Hewlett-Packard has gained anything through growing these last 10 years. The company has retained a lot of earnings. And it retained those earnings e! ven while! return on assets was low.
  
  The 10-year total return in Value Line shares has been (0.9%) a year over the last 10 years. The 10-year year total return in Hewlett-Packard has been a positive 4% a year.
  
  So it sounds like Hewlett-Packard has done much better. But all of that is attributable to investor perceptions of their industry. If you look at HP�� industry, total returns ��from 2002 to 2012 ��in the stocks of computer makers were around 14% a year. Meanwhile, publishers ��like Value Line ��returned negative one percent a year. So, Value Line�� underperformance relative to Hewlett-Packard is probably better explained by the miserable future prospects for publishers compared to the much more moderate future prospects for computer companies.
  
  Why does this matter in a discussion of Warren Buffett?
  
  Because it illustrates the one future projection I do think Buffett makes. I think he looks out about 10 years and asks himself whether the company�� moat will be intact, its growth prospects will still be decent, etc.
  
  In other words: will this stock deserve to sell at a fairly high P/E ratio 10 years from today?
  
  Warren Buffett doesn�� want to buy a stock that is going to have its P/E ratio contract over 10 years.
  
  To put the risk of P/E ratio contraction in perspective, consider that Value Line traded at over 5 times sales and nearly 25 times earnings just 10 years ago. Whatever the company�� future holds, it�� unlikely we��l see the stock at those kinds of multiples any time soon. Publishers just don�� deserve those kinds of P/E ratios any more.
  
  So, how much the market will value a dollar of earning power at in the future matters. And that is one place where projecting the future is probably part of Buffett�� approach. This is mostly a tool for avoiding certain companies rather than selecting certain companies.
  
  For example, Buffett was willing to buy newspaper stocks in the 1970s but not the 2000s. The reason for that was ! that in t! he 1970s he thought he saw at least a decade of clear sailing for newspapers. In the 2000s, he didn��.
  
  Today, I think Buffett sees at least a decade of clear sailing for the railroads and for IBM. In both cases, his perception of their future prospects was almost certainly the last puzzle piece to fall into place. It wasn�� an issue of IBM (IBM) getting to be cheap enough. It was an issue of Warren Buffett being confident enough to invest in IBM.
  
  By the way, let�� look at IBM�� past record:
  
  10-Year Average Return on Assets: 10.3%
  
  10-Year Annual Sales Growth: 2.8%
  
  10-Year Annual Asset Growth: 1.9%
  
  As you can see, IBM isn�� much of a growth company. But that doesn�� mean the shares can�� be growth shares. IBM has improved margins and bought back stock. That has led to a 20% annual increase in earnings per share compared to just a 3% annual increase in total revenue.
  
  So can we answer the question of why Warren Buffett is interested in companies like IBM and Norfolk Southern (NSC) rather than Hewlett-Packard and Value Line?
  
  Well, Value Line is obviously too small an investment for Buffett. But we��e using it as a stand in for all the publishers Buffett once loved but now shuns.
  
  Buffett is a return on investment investor. He isn�� exactly a growth investor or a value investor ��if by growth we mean total revenue growth and if by value we mean the company�� value as of today.
  
  Buffett wants to compound his money at the fastest rate possible. So he looks at how much of the company�� sales, assets, etc. he is getting. Basically, he looks at a price ratio. And then he looks into the company�� return on its own sales, assets, etc. When you take those two numbers together you get something very close to a rate of return.
  
  The last part you need to consider is the change in assets versus the change in sales (and earnings). Does the company need to grow assets faster than earnings?
  
  Or ��like See�� Candy �! �can it ! grow sales a little faster than assets?
  
  Let�� take a look at Norfolk Southern as a good example of the kind of railroad Buffett would own ��if he didn�� own all of Burlington Northern.
  
  Norfolk Southern
  
  10-Year Average Return on Assets: 4.9%
  
  10-Year Annual Sales Growth: 6.0%
  
  10-Year Annual Asset Growth: 3.6%
  
  Now, how much earning power do you get when you invest in Norfolk Southern?
  
  Total Assets are $28.54 billion. And the market cap is $21.28 billion. So, $28.54 billion / $21.28 billion = $1.34 in assets for every $1 you pay for the stock today.
  
  Now, Norfolk Southern�� return on assets has averaged a little less than 5% over the last decade. But I think that ��like he does with IBM ��Buffett believes the current returns on assets of the railroads are sustainable. So, we are talking something in the 5% to 7% range for a railroad like Norfolk Southern.
  
  On top of this, he sees that the railroads have grown sales faster than assets. Now, we could do an elaborate projection of future margins, returns on assets, etc. to try to figure out what the railroads of the future will look like.
  
  Or, we could just assume that over the last 10 years, Norfolk Southern has grown sales about 2.5% a year faster than it has grown assets. And Norfolk Southern can earn 5% to 7% on its assets. As a result, an investor in Norfolk Southern will see his wealth grow by about 7.5% to 9.5% of the company�� assets he owns. This doesn�� sound like much. But, railroads use leverage. And they often have price-to-book ratios lower than their leverage ratios. As a result, investors can often buy more than $1 in railroad assets for every $1 they spend
• [By Peter Hughes]

  International Business Machines (IBM) -- our aggressive pick for the year -- is one of the world's most dominant technology companies, with annual revenues of $105 billion and net income of $16 billion.

Top 10 Blue Chip Companies To Buy For 2014: Visa Inc.(V)

Visa Inc., a payments technology company, engages in the operation of retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company owns and operates VisaNet, a global processing platform that provides transaction processing services. It also offers a range of payments platforms, which enable credit, charge, deferred debit, debit, and prepaid payments, as well as cash access for consumers, businesses, and government entities. The company provides its payment platforms under the Visa, Visa Electron, PLUS, and Interlink brand names. In addition, it offers value-added services, including risk management, issuer processing, loyalty, dispute management, value-added information, and CyberSource-branded services. The company is headquartered in San Francisco, California.

Advisors' Opinion:

• [By Charles Sizemore]

  One of the “big picture” economic themes that I expect to play out over 2011 and beyond is the secular shift to a global cashless society.?Though the process is well on its way in the U.S. and Europe, roughly 40% of all transactions are still made with cash and paper checks according to Barron’s.

  This means that even in “boring” developed markets, there is ample room for growth in electronic payments. And there is no better company to benefit from this trend than credit card giant Visa (NYSE: V).

• [By Rebecca Lipman]

   Operates retail electronic payments network worldwide. Market cap of $82.48B. EPS growth (5-year CAGR) at 15%. According to Morgan Stanley: "Global penetration of electronic payments remains low with 85% of the world's transactions still cash-based, leaving ample runway to support healthy growth prospects through (at least) 2015."

• [By Victor Mora]

  Visa strives to help consumers, companies, governments, and other entities by providing methods of easy transaction worldwide. The company recently reported earnings that made investors happy, and the stock is now trading near all-time high prices, with still more room to rise. Over the last four quarters, earnings and revenue figures have been increasing, which has pleased investors in the company. Relative to its strong peers and sector, Visa has been an average year-to-date performer. Look for Visa to continue to OUTPERFORM.

10 Best Safest Stocks To Invest In Right Now: Apple Inc.(AAPL)

Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers. In addition, it sells third-party Mac, iPhone, iPad, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals through its online and retail stores; and digital content and applications through the iTunes Store. The company sells its products to consumer, small and mid-sized business, education, enterprise, government, and creative markets. As of September 25, 2010, it had 317 retail stores, including 233 stores in the United States and 84 stores internationally. The company, formerly known as Apple Computer, Inc., was founded in 1976 and is headquartered in Cupertino, California.

Advisors' Opinion:

• [By Geoff Gannon] bott Laboratories (ABT), Autodesk (ADSK), Cisco (CSCO) and Exelon (EXC). Others were ideas collected from places like news, etc.
  
  ��The ranking exercise (is) based on growth and fundamental analysis. EXC ranks at the bottom in both analyses��op 4 results are Apple, BHP Billiton (BHP), Mosaic (MOS) and Rio Tinto (RIO). MOS was eliminated as it has one year of negative FCF.
  
  Since AAPL is listed as No. 1, I went back and looked at P/E when I bought it at $333 in April and May 2011. The P/E was 11 - 13 times. It is currently 15 times��I think the iPhone 4s plus Sprint network addition plus iPad plus enterprise adoption of Mac will provide an impressive fabric of earning growth that is sustainable.
  
  The other two on the list are basic materials, they could be��good long-term to my stock portfolio. Assuming scarcity as their global trend (need to learn more here.)
  
  From the fundamental analysis: Rio is cheaper than BHP. But, RIO is qualitatively inferior when compared to BHP (ROIC, ROE, ROA). I have not looked at Vale (VALE), so maybe next weekend I will continue this exercise with VALE.
  
  I am not confident what the next step can be.
  
  Should I do more work or buy AAPL or EXC?
  
  Thank you very much.
  
  Ning
  
  (I should mention here that Ning included some very extensive Excel tables with this email.)
  
  Those are some extensive tables you included there. They are thorough. But I think the next step is not quantitative. It is qualitative. I would first look at the stocks you already own and feel you know best.
  
  This sounds like Apple (AAPL) and Exelon (EXC).
  
  I may be wrong about that. But it sounded to me like you had a lot of basic materials stocks show up for purely quantitative reasons, while you yourself didn�� have a strong feeling whether buying basic materials was a good idea or not. It could be. But you didn�� seem to have any special insight there. Am I right?
  
  Where you did have some special insight ��or at lea! st a very clear opinion ��was on Apple. Now, normally I wouldn�� encourage anyone to start with one of the most talked about, written about, gossiped about companies out there.
  
  Everybody has an opinion on Apple. Everybody knows the company. It is hardly a hidden gem. But it might be a gem in plain sight. And it sounds like you have some ideas about Apple beyond the numbers. So, that�� where you should start.
  
  The other company it sounds like you��e interested in is Exelon. Part of the reason why I�� saying you sounded interested in doing more work on Exelon is that you talked about the stock despite it finishing at the bottom of your purely quantitative comparison.
  
  Is that really a good sign? Am I really saying you should spend more time studying a company that finished at the bottom of a comparison you drew up?
  
  Here�� what I�� saying. You did a wonderful quantitative comparison of some very different stocks. A bunch of the stocks you��e got there are basic materials stocks. This should tip you off that something is ��amiss. When you do a purely quantitative survey of stocks you��e casting a net. When you get back a list of stocks that are all in the same industry, you need to take a good, long pause.
  
  You may not be measuring what you think you��e measuring. Or at least you may not be catching what you wanted in that numerical net you threw.
  
  I think Exelon and Apple are a good place to start.
  
  They are very different companies. That's good. Apple is a very high profile company. While Exelon is not. Both are potentially very interesting companies.
  
  You could argue that either has a wide moat.
  
  I wouldn't disparage the quality of either business relative to its peers. However, I think the next step ��for me at least ��would be to look at the industries they operate in. Are Apple and Exelon predictable? Do they have sustainable competitive advantages ��especially in regards to operating margins and return on equity. ! Look at t! he stocks found in GuruFocus�� Buffett-Munger Screener. Compare the stocks you��e interested in with those companies. Not just quantitatively, but qualitatively as well. Right now, it doesn�� look like either Apple or Exelon score very high in terms of business predictability (as GuruFocus measures it). Again, that�� a purely quantitative judgment ��like your own Excel tables ��but it�� worth keeping in mind.
  
  I��l tell you how I use quantitative measures. I don�� think of them as giving me the whole picture. I like to think of them more like vital signs. They are alerts. They let me know what areas of a stock I need to study more thoroughly. For example, Apple gets a 1-Star business predictability rating. Does that mean it�� a bad, unpredictable company?
  
  Absolutely not. It just means that the trajectory Apple has had these last 10 years hasn�� been predictable. It has been phenomenal.
  
  So you need to focus ��this is always true, but it�� especially true with Apple ��on whether or not the current level of sales, earnings, etc., are sustainable for the long-term. In Apple�� case, this means you need to do qualitative analysis. Probably competitive analysis.
  
  The industry Apple operates in ��consumer electronics ��is not an especially predictable one. It is not one where competitive advantages ����oats����tend to be especially durable. That doesn�� mean that Apple can�� maintain its terrific position. It doesn�� mean Apple lacks a moat. It just means that you need to investigate that issue.
  
  Okay. Another good question to ask is what the risks are. What happens if your assessment of a company is wrong? What if you think Apple has a wide moat and it doesn��? What if you think a barrel of oil will be $150 in 2013 and it ends up being $50? Often, investors focus on the probability of an event. That�� important. But it�� not more important than thinking about what happens if your assessment is wrong. Maybe $150 a barrel oil ! is way mo! re likely than $50 a barrel oil. But ��no matter how sure you felt about the future price of oil ��would you really buy a stock that could go to zero if oil stayed at $50 for any length of time? Probably not. Likewise, however strongly you feel about Apple�� ��oat��as of this moment ��it�� important to be honest about what would happen to the stock (and your portfolio) if Apple�� moat were breached.
  
  I wrote about mean reversion in one of my net-net posts. My point was that when you buy a company that's very cheap relative to its liquid and/or tangible assets any movement toward that company doing "about average" relative to American business generally is a positive for you. Well, these two stocks ��Apple and Exelon ��are far from net-nets. Any movement towards an "about average" business performance for stocks like Apple and Exelon will be very, very bad for you. That is because you are ��in both cases ��paying a high price to liquid and tangible assets (relative to the price you could buy many of their peers at).
  
  That doesn't mean they are bad businesses. An insurer or bank that trades at a premium to tangible book value may be quite a bargain if it is something like Progressive (PGR) or Wells Fargo (WFC).
  
  The important thing is not to confuse a temporarily wonderful competitive position with a competitive position like PGR or WFC that can probably be maintained for many, many years.
  
  You may disagree with me here, but I think in the case of Apple you are really betting on the organization. And in the case of Exelon you are betting on the assets. Basically, you are saying that Apple's brand and people and culture working together are going to achieve things ��like higher returns on investment ��than competitors who seek to do the same thing. In the case of Exelon, I think you are saying that their assets are lower cost (higher margin) generators of power than their competitors. In fact, you are saying they are so much more efficient that it is wort! h paying ! a substantial premium to tangible book value.
  
  I don't disagree with either claim. I think Apple has a superior organization. And Exelon has superior assets.
  
  Exelon's assets are clearly carried at far below their economic value. So the issue with Exelon is how to value those assets.
  
  Have you read Phil Fisher's "Common Stocks and Uncommon Profits?"
  
  It is a good book to read if you are thinking about investing in Apple.
  
  And "There's Always Something to Do" is a good book to read when thinking about Exelon.
  
  After reading the information you sent me, I'd say that the most important thing for you to do now is get some distance from comparative numbers. Think about what it is you are buying in each case. What aspect of the business is providing you with your margin of safety?
  
  It�� not the price.
  
  These are not cheap stocks on an asset value basis if you consider only their tangible book value.
  
  Therefore, either the tangible assets must be worth much more than they are carried for on the books ��or the intangibles must be very valuable for you to buy these stocks.
  
  In your final analysis I think you should focus on one question:
  
  How comfortable would you be if you had to hold this stock forever?
  
  This is an important question because you may have in mind that you have a lot of faith in Apple right now. That faith may be well founded. But if you have little faith in Apple four or five or six years out ��do you really think you will be the first to spot the company's loss of leadership? Think about how quickly companies like Nokia (NOK) and Research In Motion (RIMM) saw their P/E ratios contract when investors realized just how far they were behind the competition. Do you really think you will be fast enough to spot a change in Apple's position? It�� not enough to see the writing on the wall. You have to see it faster than everyone else. You have to sell before they do.
  
  That�� not the Phil Fisher way. The Phil F! isher way! is to be very sure when buying a growth company. Then, yes, you do monitor the situation. But it is not about understanding the situation one or two years out. It is about understanding the qualities already present in the company that will prove durable.
  
  Even if you've read Phil Fisher and Peter Cundill's books, I'd suggest looking at them again as they are good examples of the kind of investing you are trying to do in Apple (Fisher) and Exelon (Cundill).
  
  Also, you might want to read a bit about Marty Whitman's philosophy and Mario Gabelli's philosophy. If you think Exelon is a buy, it is probably because you have reasons similar to the reasons those two investors have when they buy a stock.
  
  Basically, Marty Whitman and Mario Gabelli try to find out the value of a company's assets in a private transaction. They don't try to figure out what public markets will pay for the stock. They try to figure out what private owners would pay for the business and they work back from there to figure out the stock's value.
  
  So my advice is to step back from all the numbers. Zero in on just a couple companies. Don't look at more than one stock in the same day. If you are thinking about Apple today then think only about Apple for today. Exelon can wait until tomorrow. Think about what aspect of the company makes the stock clearly worth more than its current price. Then study that aspect. And don't add a dime to your investment in that stock until you are comfortable with betting on the permanence of that aspect.
  
  Make sure you understand the value in the company. And make sure that value is durable.
  
  Understanding often requires more than just numbers. So, I

Top 10 Blue Chip Companies To Buy For 2014: Philip Morris International Inc(PM)

Philip Morris International Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Its international product brand line comprises Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company also offers its products under the A Mild, Dji Sam Soe, and A Hijau in Indonesia; Diana in Italy; Optima and Apollo-Soyuz in the Russian Federation; Morven Gold in Pakistan; Boston in Colombia; Belmont, Canadian Classics, and Number 7 in Canada; Best and Classic in Serbia; f6 in Germany; Delicados in Mexico; Assos in Greece; and Petra in the Czech Republic and Slovakia. It operates primarily in the European Union, Eastern Europe, the Middle East, Africa, Asia, Canada, and Latin America. The company is based in New York, New York.

Advisors' Opinion:

• [By Louis Navellier]

  Philip Morris International (NYSE:PM) is involved with the manufacture and sale of cigarettes and other tobacco products in over 180 countries across the globe. Year to date, PM stock is up 16%, compared to a loss of nearly 2% for the Dow Jones.

• [By Michael Brush]

  Philip Morris International (PM) has a dividend yield of 3.7%.

  This company is the world's second-biggest cigarette seller, after China National Tobacco. Philip Morris International controls the rights outside the United States to such brands as Marlboro, Virginia Slims and Parliament. So it's positioned to sell more cigarettes as smokers in rapid-growth emerging markets earn more and trade up to premium brands.
  

   

  Insiders continue to buy the stock, suggesting room for further appreciation. And, of course, tobacco's addictive nature assures steady revenue. If you oppose smoking for moral, health or other reasons, this stock is not for you. As an ex-smoker, I'd understand.

• [By Roberto Pedone]

  One stock that insiders are buying up a large amount of here is Philip Morris International (PM), which manufactures and sells cigarettes and other tobacco products in markets outside the U.S. Insiders are buying this stock into modest strength, since shares are up 5.5% so far in 2013.

  Philip Morris International has a market cap of $143 billion and an enterprise value of $168 billion. This stock trades at a reasonable valuation, with a trailing price-to-earnings of 17.25 and a forward price-to-earnings of 14.6. Its estimated growth rate for this year is 4.2%, and for next year it's pegged at 11.8%. This is not a cash-rich company, since the total cash position on its balance sheet is $3.59 billion and its total debt is $25.50 billion. This stock currently sports a dividend yield of 3.8%.

  A director just bought 123,500 shares, or about $11.01 million worth of stock, at $89.15 per share.

  From a technical perspective, PM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last two months and change, with shares dropping from its high of $95.38 to its recent low of $85.21 a share. During that move, shares of PM have been mostly making lower highs and lower lows, which is bearish technical price action.

  If you're bullish on PM, then I would look for long-biased trades as long as this stock is trending above some near-term support at $87.65 to $87 and then once it takes out its 200-day at $88.72 and its 50-day at $89.25 a share with high volume. Look for a sustained move or close above those levels with volume that hits near or above its three-month average action of 5.10 million shares. If we get that move soon, then PM will set up to re-test or possibly take out its next major overhead resistance levels at $91.40 to $92.26 a share. Any high-volume move above those levels will then put $94 to $95 into range for shares of PM.

   

Top 10 Blue Chip Companies To Buy For 2014: McDonald's Corporation(MCD)

McDonald?s Corporation, together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonald?s restaurants that offer various food items, soft drinks, coffee, and other beverages. As of December 31, 2009, the company operated 32,478 restaurants in 117 countries, of which 26,216 were operated by franchisees; and 6,262 were operated by the company. McDonald?s Corporation was founded in 1948 and is based in Oak Brook, Illinois.

Advisors' Opinion:

• [By JON C. OGG]

  McDonald’s Corporation (NYSE: MCD) is at $85.08 and analysts have a consensus price target objective of $97.68.  It carries a 2.9% dividend yield and the stock is down 5% from its 52-week high.  McDonald’s trades at close to 6-times book value, but its return on equity is 37%.  S&P carries an “A” local long-term rating on the Golden Arches.  In the “you gotta eat somewhere” theory, McDonald’s seems to keep winning over and over and its shares and same-store sales keep rising handily.

Top 10 Blue Chip Companies To Buy For 2014: Chevron Corporation(CVX)

Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The Upstream segment involves in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as holds interest in a gas-to-liquids project. The Downstream segment engages in the refining of crude oil into petroleum products; marketing of crude oil and refined products primarily under the Chevron, Texaco, and Caltex brand names; transportation of crude oil and refined products by pipeline, marine vessel, motor equipment, and rail car; and manufacture and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives. It a lso produces and markets coal and molybdenum; and holds interests in 13 power assets with a total operating capacity of approximately 3,100 megawatts, as well as involves in cash management and debt financing activities, insurance operations, real estate activities, energy services, and alternative fuels and technology business. Chevron Corporation has a joint venture agreement with China National Petroleum Corporation. The company was formerly known as ChevronTexaco Corp. and changed its name to Chevron Corporation in May 2005. Chevron Corporation was founded in 1879 and is based in San Ramon, California.

Advisors' Opinion:

• [By Victor Mora]

  Chevron provides essential energy products and services to growing companies and consumers worldwide. The stock has been on a bullish run for many years that has taken it to all-time high prices. Over the last four quarters, earnings and revenue figures have been mixed, however, investors in the company have been mostly happy with earnings reports. Relative to its peers and sector, Chevron has been a year-to-date performance leader. Look for Chevron to OUTPERFORM.

Top 10 Blue Chip Companies To Buy For 2014: Colgate-Palmolive Company(CL)

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. It offers oral care products, including toothpaste, toothbrushes, and mouth rinses, as well as dental floss and pharmaceutical products for dentists and other oral health professionals; personal care products, such as liquid hand soap, shower gels, bar soaps, deodorants, antiperspirants, shampoos, and conditioners; and home care products comprising laundry and dishwashing detergents, fabric conditioners, household cleaners, bleaches, dishwashing liquids, and oil soaps. The company offers its oral, personal, and home care products under the Colgate Total, Colgate Max Fresh, Colgate 360 Advisors' Opinion:

• [By ChuckCarlson]

  Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has raised distributions for 48 years in a row. The 10 year annual dividend growth rate is 12.40%/year. The last dividend increase was 9.40% to 58 cents/share. Analysts are expecting that Colgate Palmolive will earn $5.52/share in 2012. I expect that the quarterly dividend will be raised to 64 cents/share in 2012. Yield: 2.60%

Retirement Pros Weigh In on DOL’s Lifetime Income Plan

Retirement planning groups are weighing in with their reviews of the Department of Labor’s proposed rule that would require lifetime income illustrations be given to participants in defined contribution plans, such as 401(k) and 403(b)s.

In early May, DOL’s Employee Benefits Security Administration announced that it was seeking public input on the proposed rule, and said it would take comments until July 8. However, that comment period was extended until Aug. 7.

Phyllis Borzi (left), assistant secretary of Labor for EBSA, said in releasing the proposal that EBSA is “looking for the best ideas on how to show people what their lump-sum retirement savings look like when they are spread out over all the years of retirement.” Retirees, she said, “run the risk of outliving their savings. If workers have the benefit of seeing how long their savings could last, it might spur better planning for the future, such as adopting more effective savings strategies.”

A bipartisan group of senators took a cue from the DOL when they introduced a bill in mid-June that would allow workers in retirement plans to receive an annual statement of how their lump-sum savings translate into a lifetime stream of monthly income.

The Lifetime Income Disclosure Act was introduced by Sens. Johnny Isakson, R-Ga.; Christopher Murphy, D-Conn.; Tim Scott, R-S.C.; Bill Nelson, D-Fla.; and Elizabeth Warren, D-Mass.

The companion bill, H.R. 2171, was previously introduced in the House by Reps. Rush Holt, D-N.J.; Tom Petri, R-Wis.; Ron Kind, D-Wis.; and Dave Reichert, R-Wash.

The Insured Retirement Institute told EBSA in its comment letter that it is “highly supportive” of EBSA’s initiative as it enhances “Americans’ understanding of their retirement savings and helps them effectively” plan for retirement.

“Given the prevailing need to improve education about lifetime income needs, we strongly support the concept of providing lifetime income illustrations on participant benefit statements,” said IRI President Cathy Weatherford (right). “These illustrations would provide participants with a better understanding about how much income can be generated from savings and go a long way toward helping participants put their savings in proper perspective. As such, providing lifetime income illustrations may spur participants to begin saving more and help them to plan more effectively for retirement.”

While the American Society of Pension Professionals and Actuaries says that it also supports EBSA’s lifetime income initiative, ASPPA would like to see some enhancements made to the current proposal.

“ASPPA recommends that a lifetime income disclosure be focused and concise,” Craig Hoffman, ASPPA’s general counsel and director of regulatory affairs, told EBSA in his comment letter.

“The [lifetime income] estimates should be calculated using 3%, 5%, and 7% as the three nominal rates of return to provide useful information without overloading the benefit statement,” he said, and “the calculation should be done without any assumption that there will be future contributions by the employer or the employee, because future contributions are rarely guaranteed.”

Also, Hoffman said that ASPPA recommends that the proposal include a “safe harbor” that plan sponsors can rely on “for the assumptions used in calculating the lifetime income stream, and that those assumptions be modified in several ways to facilitate the disclosure regime in a cost-effective manner.”

The modifications would include “setting the time period for the projection as a static age and limiting the form of distribution to a single life annuity and a 50% joint and survivor annuity for a spouse of the same age, to make results across multiple plan sponsors more consistent.

Finally, ASPPA said that DOL’s online calculator could be enhanced to be “more educational and to allow consideration of many different assumptions including retirement assets held outside of the plan, such as in an IRA.” The use of an enhanced DOL calculator or the use of a private service provider online calculator, Hoffman said, “should then be encouraged so participants can individualize the assumptions used to calculate potential lifetime income distribution streams.”

3 Mouthwatering Stocks To Buy TODAY! - Investment Ideas

Everyone is looking for mouthwatering ideas... the kind that just make you drool since they are so enticing. I have three of them, and they will excite you on multiple levels.

Hopefully you are not reading this article on an empty stomach....

Let Them Eat Cake

Cheesecake Factory (CAKE) recently appeared on my radar screen even though I have been going to this restaurant and the Grand Lux for several years. My personal favorites include the baked potato soup and just about anyone of the "Glamburgers" they have on the menu.

Beyond all the good food, investors will enjoy a solid earnings history. Over the last 18 earnings reports, the company has twice missed and twice met the number, all the other times have been a positive earnings surprise. The most recent earnings release was in late April for the March 2013 quarter. The company beat the Zacks Consensus Estimate of $0.42 by a nickel for an 11.9% positive earnings surprise.

The June quarter is carrying some big expectations, with analysts calling for revenue of $475M and EPS of $0.57. Just meeting this number would make for a highly favorable comparison to the year ago revenue of $455M and $0.51 in EPS. The growth is likely due to a stronger consumer that has more discretionary income.

Estimates for CAKE have been inching higher over the last several months. The Zacks Consensus Estimate was sitting at $2.14 in March and has pushed higher to $2.16 in May and is now at $2.17. The same could be said of the 2014 Zacks Consensus, with the number moving from $2.43 to $2.46 to $2.47 over the same time period. That implies a 13.8% growth rate for earnings.

The valuation for this Zacks Rank #2 (Buy) stock are right in line with the industry average for most every metric. A 20x forward earnings multiple is slightly higher than the 17x industry average, but what I like to see is CAKE's higher net margin (5.6%) compared to the industry average (3.6%). Along with the 13.8% earnings growth! rate, analysts are looking for 7.5% growth on the top line, and that is 33% above the 5% industry average.

Don't be Chicken

Pilgrim's Pride (PPC) is a chicken producer that is another mouthwatering play. It is not clear if they are a supplier of CAKE, but they are for Yum Brands, Wendy's, Burger King and ConAgra Foods. On the retail side, PCC sells to grocers like Walmart, Publix, Kroger and SuperValu among others.

I have seen some tangential evidence of a good quarter upcoming for PPC. There have been channel checks that suggest several restaurants like CAKE and specifically BWLD are trending ahead of expectations. Especially when a name like BWLD is mentioned to have good things coming due to their reliance on chicken wings in particular.

Estimates for FY2013 have been moving higher and higher. The 2013 calendar year started out with the Zacks Consensus sitting at $0.86, but that number jumped to $1.31 in April, and then again to $1.49 in May and now sits at $1.65. That is some excellent growth of nearly 100% in just six months.

The picture for 2014 is a little less clear, but still shows some growth. The Zacks Consensus for next year started the year at $1.18 and ticked higher to $1.22 in April. A big move up to $1.41 the following month and a subsequent move to $1.47 at the current level.

The valuation picture for PPC is a good one. With a trailing PE of 20.8x the stock trades at a very small premium to the industry average of 19.5x. Not that great, but not that bad either. The impressive valuation metric is the forward PE of 9.3x compared to the 18x industry average. That is a significant discount for such a large player in the industry. The price to book of 4.1x carries a small premium to the 3.6x metric for the industry. Price to sales of 0.5x is only a fraction of the 2.4x industry average, so lots of room to expand there.

Now That You Gained All That Weight

Herbalife (HLF) makes a supplement for consumers tha! t feel li! ke all that chicken they have eaten at CAKE and supplied by PPC is starting to form a spare tire around their mid-section. Don't think the supplement alone will help you lose the extra weight, you need to exercise as well!

HLF has been the subject of two major short attacks over the last year and a half. First David Einhorn got on the earnings conference call and asked about the company tracks the sales of its marketers. The multi-level marketing model wasn't clear to most investors and the stock was hurt. Then Bill Ackman came into the mix later in 2012 year and said the company was an outright fraud and needs to be investigated by the FTC.

Dan Loeb and Carl Icahn are both large scale buyers of the stock, so with the shorts there are some longs. Loeb is mostly out of the stock by now, but Icahn is still in the stock in a big way.

HLF has a great history of beating the number. I would go so far as to say it's a perfect record with 27 straight positive earnings surprises. The most recent report saw a beat of $0.20 or an 18% positive earnings surprise. The company also beat on the top line as well and has done so in each of the last 16 quarters (4 years).Estimates for HLF have been moving higher throughout the year. Starting the year at $4.64, the Zacks Consensus Estimate has just moved higher throughout the year. A big pop came April, following the earnings release, when the number moved to $4.77 and has since ticked higher to $4.81. Over the same time period the 2014 Zacks Consensus Estimate has moved from $5.19 to $5.50 and is now at $5.52.

The valuation for HLF is a great one, with nearly every metric investors look to showing the company trading at a discount to the industry average. The 10x forward PE is one that might even get value investors interested in the stock! The only metric that is a little heavy is the price to book, but that concern goes out the window when the 14% topline growth rate for this year is nearly triple that of the industry average. The ne! t margin ! of 11.5% is also nearly triple that of the industry average which comes in at 3.6%.

Summary

Mouthwatering stocks don't just have to be about food, they can be about weight loss too! The key is to find stocks that have a high Zacks Rank and exhibit great growth prospects and good valuations.

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Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy.

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