granting that this is a challenging time for the orthopedics industry
(and healthcare device providers in general), Smith
is struggling a little more than most. The company has been losing
share in orthopedic implants like hips and knees and disappointing
investors with regards to cash flow production, and the stock has
been chopping around in a $20 range for about three years now. While
the news on November 28 of the company's Healthpoint Biotherapeutics
does bring in advanced wound care products with very good growth,
Smith & Nephew is having to pay a pretty hefty price for this
growth injection and this just isn't a sustainable long-term plan.
can't fault Danfoss A/S for trying to join in the spirit of the
Christmas shopping season and score a sweet bargain, but I have a
feeling that this privately-held Danish company is going to have to
do better if it wants to make Sauer-Danfoss
all its own.
Deal That May Be
shares spiked the afternoon of November 28 after an SEC filing
revealed that Danfoss A/S CEO Niels Christiansen sent a letter to
Sauer-Danfoss' board offering to buy the shares it does not already
own (about 24% of the outstanding total) for $49 a share - a roughly
24% premium to the close on November 27. Not surprisingly, the deal
offered is an all-cash deal for Sauer-Danfoss shareholders.
the whole, ADT
has what should be a pretty good business model. Not only does the
company have a large chunk of the residential security market, but
customers sign multi-year contracts that lead to pretty reliable cash
flow streams. Unfortunately, it's not quite that simple. ADT has to
pay quite a lot to get those customers, the equipment certainly isn't
free, and the accounting is not exactly crystal clear. All in all,
it's no slam dunk that investors will feel secure with ADT in their
going on in the wake of the third-quarter earnings report from The
will be altogether familiar for veteran investors. Here we have a
great growth company, perhaps one of the best growth plays today on
the mass-affluent customer category, but with a stock that carried
earnings showed a hiccup in store traffic and margin leverage, and
the stock got pummeled. Although I still like the growth story at The
Fresh Market just fine (as well as the stores themselves), I'm still
a long way from liking the stock.
reports of the demise of Green
Mountain Coffee Roasters
have been at least a little exaggerated. While the market pioneer for
single-serve coffee brewing has some formidable challenges coming
from increased competition, it's worth remembering that the consumer
products market is not like the prescription drug market where
generic launches immediately drive prices into the cellar. That said,
it's not as though Green Mountain's valuation marks this out as an
especially cheap stock today.
from a few signs of life in the telecom infrastructure space, there
hasn't been much to cheer about for semiconductor stock investors
lately. Consumer electronics are still pretty weak, auto build rates
have slowed noticeably and industrial demand has swooned on
macro/fiscal worries for 2013. All in all, Analog
did OK for its fiscal fourth quarter, but the reality is that these
quarters are basically "filler" ahead of the next rebound.
a business, building it and owning it lock, stock and barrel is a
very rewarding endeavor for many entrepreneurs, but it's not always a
practical goal. All businesses require capital and some require a lot
of it. What's more, sole
ownership may be not be the optimal structure when it comes to
transitioning leadership or incentivizing workers. Consequently, many
business owners find at some point that they need to explore ways of
ownership in their company.
Wall Street's quarter-to-quarter obsession, it's often thought that
corporate America no longer has the luxury of thinking and planning
for the long term. ConAgra's
eventual success in winning over Ralcorp
to a friendly bid shows, though, that patience can still play a
significant role in business. Although ConAgra is not getting a great
bargain here, this should be a value-additive deal for the company
over the long term.
and fund managers come and go, banks and asset
management firms rise and fall, and investing trends appear and
disappear with surprising regularity. And yet, for all of that
change, one thing seems to remain the same: despite pretty clear (if
not tiresomely thorough) rules and compliance procedures, people
continue to flout laws and common sense in the overall pursuit
of making a buck.
the risk of sounding like I want to pile on to Hewlett-Packard's
misery, this company may become my go-to example for the years to
come in the risks of "how much worse can it get?" thinking.
I just don't see a lot of strength here in terms of high-quality
end-markets, and I question whether the company can position itself
for demands of the always-evolving IT world of tomorrow. Though this
stock still looks exceedingly cheap, I have absolutely no confidence
that this management team can guide the company back or harvest that
a company that sold Wall Street on a pretty aggressive set of
is certainly seeing the other side of the momentum trade. Worries
about the company's pipeline and competitive positioning would be bad
enough in their own right, but ongoing worries about the company's
high-voltage leads threaten not only the company's valuation but also
its competitive standing.
laws and regulations that govern mergers
and acquisitions (M&A) in Europe are a fair bit different
than those in the United States, particularly as they relate to
minority shareholders. Similar to how Alcon ultimately secured a
better offer for shareholders, despite the fact that Novartis
already owned more than three-quarters of the company, CNH
has succeeded in obtaining better terms from Fiat
company that incorporates most of the non-auto businesses of Fiat
for the 12% stake that Fiat did not already own.
real news fade, rumors seem to crop up a little more readily. In the
case of the rumor that Baxter
is arranging a bid for Gambro,
however, there's a little more credibility than usual. Baxter has
long wanted Gambro, and the combination would make sense in a
med-tech market where growth is increasingly hard to come by.
and more, it seems like long-term success in chemicals and specialty
materials is all about keeping an open mind toward reinvention.
for instance, is far removed from its legacy in products like
gunpowder and nylon, and currently looks to advanced seed traits and
nutrition as important growth markets. Likewise, DSM
has moved on from coal, fertilizer and petrochemicals into areas like
nutrition and biofuels.
DuPont's German cousin BASF
is following in this path, announcing on Wednesday that it had
reached an agreement to acquire Norwegian fish oil specialist Pronova
for 12.50 Norwegian kroner, or about $845 million in enterprise
Some of you may have been noticing some formatting weirdness. For reasons I don't understand, Investopedia changed their formatting and it now really messes things up when I try to copy/paste in the text.
I'm doing the best I can to adjust and adapt, but I ask for your continued patience with this.
who bought into the "it's different this time" stories on
major equipment and component companies such as Caterpillar
got a hard lesson in 2012, as weakness in Europe, China and South
America ultimately hit sales, profits and valuations. With the global
Ag markets looking stronger relative to mining and construction,
however, it's worth asking if Deere could be a solid stock to own on
a macro rebound in 2013 and a lengthening of the Ag cycle.
is so often the case with popular growth stocks that sport rich
valuations and purport to shake up an industry, Salesforce.com
generates plenty of controversy. While the company continues to
generate respectable free
cash flow (FCF), skeptics question whether the company can grow
enough to support its valuation and start posting real operating
leverage. I do believe that software as a service (SaaS) really is a
big shift in the enterprise software sector, but I continue to
struggle to see how Salesforce.com can grow enough to validate its
in the same boat as every other large-cap med-tech stock, where
valuation has been compressed by worries about long-term growth
prospects. Like Covidien
and a handful of select others, Medtronic seems to be past the worst
of the growth lull, and the company has several potentially major
products lined up in the pipeline. Now the real question for
investors is the extent to which this quarter's growth can be
sustained and whether the Street will come back and take a fancy to
the significant cash flow this company generates.
Volume growth is hard to come
by in the food sector today, and even a very well-run company like
can't escape that forever. With health and economic factors
translating into less animal protein consumption, and grain costs
likely to work their way through the animal production cycle in 2013,
these aren't the easiest of times for Hormel. Although I think the
company's strong operating capabilities and focus on
packaged/value-added foods will give it an edge on the likes of Tyson
I'd be careful chasing the stock so close to a 52-week high and a
tend to believe that Wall Street overvalues the supposed stability of
packaged/branded food and beverage companies, which is why investors
seldom have the chance to buy the stocks of Coca-Cola
at really compelling valuations. Within the broader group of
expensive food names, I can see an argument for owning Heinz
today. Not only is Heinz doing relatively well from an organic
growth standpoint, but the combination of strong brands in
developed markets and a very good presence in emerging markets is
compelling to me.
largely understood that established packaged/processed food companies
are not exactly growth titans. As a result, investors who look at
as a part of a portfolio of dividend-paying bond alternatives may not
be all that put out by the company's sluggish performance. Investors
more focused on total returns, however, may need to see more evidence
that Campbell Soup management has a real plan to reinvigorate growth
before buying these shares.
quarter is in the books, and there's scarcely any good news at
struggling retailer Best
While there is still a chance that founder Schulze will come back
with another go-private bid, the fact remains that comps
continue to erode and the electronics brick
and mortar retailing landscape is a grim one. With Best Buy's
management talking about wooly concepts like "reinvigorating the
customer experience," investors would do well to approach this
candidate with considerable caution.
the best thing I can say about my bullish call(s) on Agilent
is that owning its shares hasn't hurt you too badly in 2012, as the
stock has lagged the S&P 500 by about 7% for the year so far and
actually outperformed (slightly) over the past quarter. While the
for 2013 was not very compelling, I continue to believe that Agilent
offers a good collection of businesses with ongoing growth potential,
as well as longer-term margin
cash flow (FCF) leverage. The question is whether or not
investors can afford to be patient while that long-term thesis works
from using it as a tether ball in pieces talking about rumored M&A
in the tech sector, there aren't many sell-side analysts who seem to
have much use for Brocade
Certainly some of this skepticism has been earned by the company
through years of sub-optimal execution, not to mention the fact that
the company goes up against major rivals like Cisco
That said, even minimal growth expectations point to real value here
and patient investors (with an especially high frustration threshold)
may want to consider the stock.
often make investors nervous, as the temptation/risk to overpay is so
high and there are reams of research indicating that most deals
value for the acquirer. By the same token, sometimes M&A is
the only way to fill a product/technology gap and position the
company for future growth. While Cisco
shareholders are certainly going to hope that the deal for Meraki
advances Cisco's software-defined networking (SDN) strategy, the
price tag is going to cause more than a little wincing.
whatever optimism Cisco
generated with respectable quarters, Dell
rained on the parade with another weak result. Not only did Dell miss
again, but the company seems to be badly lacking momentum in any of
the sort of markets that would excite investors. While there is (and
has long been) underlying value in this business, it's anybody's
guess as to when the bleeding is going to stop.
aren't many bargains in packaged foods these days, and it seems like
all too many quarterly reports require a little explanation. That
still looks like a worthwhile name that could offer investors some
upside. Management still needs to improve how it utilizes its assets,
but volume trends are looking OK and the stock's valuation looks like
a relative bargain in the space.
quarter ago, I said I favored Lowe's
(NYSE: LOW) over Home Depot
(NYSE: HD), as I thought the difference in valuation outweighed the
difference in quality between the two companies. So far, so good with
that call, as Lowe's basically doubled Home Depot's return for the
past three months. While I do worry that both stocks are a little
expensive on the basis of investor optimism for a housing recovery, I
won't rule out the idea that an improved business plan coupled with
improving sales trends will be a powerful boost to earnings and cash
flow for Lowe's over the next few years.
retailers are not typically included in lists of cyclical
industries, but I would challenge investors to look at the
long-term performance of companies like American
and not conclude that sizable up-and-down swings are just part of the
fabric of this business.
With that in mind, it was tempting
to argue during Abercrombie
recent struggles that "this too shall pass," and that the
company will eventually turn around its operating performance. While
Abercrombie's third quarter performance was certainly surprising, and
stimulated a major move in the stock, investors may want to be
cautious in assuming that the worst is now past.
ever seems quite normal when it involves Facebook
So it's worth wondering what will happen to the stock as the company,
the market and (it would seem) the world at large all deal with
another sizable lock-up expiry that will add hundreds of millions of
shares to the float.
Considering that Facebook recently posted some encouraging financial
results, it may be the case that putting this lock-up expiration in
the rearview mirror marks the end of the "what's wrong with
Facebook?" meme within the financial press.
many companies, bankruptcy is an opportunity to gain some breathing
space, refinance debt and move on. Most airlines have been through
bankruptcy at least once, and many other companies in operation today
once had to seek protection from their creditors. It's not often that
major companies choose the route of liquidation,
but on Thursday, Hostess,
the maker of well-known baked goods like Wonder Bread and Twinkies,
announced that it was doing precisely that.
starting to look as though those tech companies reporting late in the
cycle have better news to give to the Street, as Cisco's
earnings report was decent and now so too was NetApp's(Nasdaq:NTAP).
Although it's an open question as to whether much share is shifting
between EMC (NYSE:EMC)
and NetApp, both companies seem to be putting lesser competitors
further and further behind. While there's definitely a risk that the
near-term IT spending environment could worsen, NetApp still looks
attractively-priced as a growth play on enterprise storage.
first post-split quarter is any indication, this is going to be a
conservatively-managed company focused on smart growth and steady
operating improvements. Although a global recovery in commercial
markets would be a big help, improving cost efficiency and takeout
chatter is likely to buoy the stock in the near term.
the Year as Expected
Tyco's fiscal fourth quarter report was pretty messy from a GAAP
standpoint (due in part to the split from ADT
and the flow control business (since merging with Pentair
it was basically in line with expectations.
has been a better year for Walmart's
stock than many of its customers, as the stock has more than doubled
the return of the S&P
500. While Walmart did have a solid back-to-school season and is
as leveraged as anybody to improving consumer conditions (and
confidence), the sluggish comp numbers suggest that the company is
not completely out of the woods.
but Not Great, Third Quarter Numbers
earnings always get a lot of attention, given its enormous position
the United States retail sector. To that end, Walmart's numbers
may be a good reminder that, while the worst may be over, that's not
the same thing as saying that the good times are back.
a host of tech companies taking their licks through earnings season
(or shortly thereafter), including companies like F5
investors were nervous going into Cisco's
earnings report. While Cisco's numbers don't reflect all that much
strength in the tech markets as a whole, it was a solid result in a
tough time and the guidance for the next quarter wasn't bad either.
Cisco continues to look meaningfully undervalued, but this stock is
likely going to need some time to work out.
When it comes to specialty metal components manufacturer Precision Castparts (NYSE:PCP),
it's really never a question as to whether management will do another
deal. Rather, it's just a question of who the company will buy, how much
it will pay and how successful it will ultimately prove to be.
Last week, though, management announced a real doozy - a $2.9 billion bid for titanium producer Titanium Metals (NYSE:TIE)
(aka "Timet"). Although a large and expensive deal would be a
significant risk for most companies, Precision Castparts is not like
most companies, and I expect this deal will prove to be quite worthwhile
for shareholders over time.
Mergers and Acquisitions
(M&A) play a large role in business today. While many recent
merger/acquisitions announcements have made quite a bit of sense for
both parties, Monday's announcement that Leucadia (NYSE:LUK) will acquire the remainder of mid-tier investment bank Jefferies (NYSE:JEF)
breaks that mold. Although this deal brings some fairly clear benefits
for Jefferies, I'm not really sure that Leucadia shareholders should be
celebrating this deal.
I'll start this article by openly acknowledging that there seems to be things about Home Depot (NYSE:HD)
as a stock that just seem to escape my grasp. While I have ample
respect for the quality of the business and the management team, as well
as the prospects for a housing recovery to reignite free cash flow
growth, the Street always seems to be willing to pay more for Home
Depot than I would imagine. So although I personally won't pay a
double-digit EV/EBITDA multiple to buy a mature retailer, I'm not going to suggest that Home Depot's momentum ride is over yet.
How does an investor profit if a company has the best technology in the
world, but can't deliver market-beating returns? That's probably a harsh
intro for Hologic (Nasdaq:HOLX)
today, but the fact remains that the company has to demonstrate that it
can drive tomosynthesis adoption and solid growth in diagnostics for
this stock to really work over the coming years. That puts the shares in
a challenging place for investors; bulls can likely see a lot of value
here, while bears will point to the high debt and oncoming competition
and likely conclude that the shares are best avoided for now.
Energy sector investors have learned to expect that a handful of stocks never get that cheap, and specialized service provider Core Laboratories (NYSE:CLB)
is definitely one of them. Unlike many energy service companies, Core
Labs has a surprisingly consistent record of not only positive free cash flow, but free cash flow growth coupled with double-digit returns on invested capital. While rivals such as Schlumberger (NYSE:SLB)
are trying to capture some of Core Labs' business, its strong
competitive position seems very much intact. The real question for
investors is whether they can get comfortable paying nearly twice the
normal premium for a services company.
Another quarter is in the books, and not all that much has changed about the Nvidia (Nasdaq:NVDA)
story. Bulls believe that this company will be able to transition away
from its PC graphics processor legacy and become a player in the
processors that drive mobile devices. Bears take the view that not only
will Nvidia struggle to compete against the likes of Qualcomm (Nasdaq:QCOM), Texas Instruments (Nasdaq:TXN) and Broadcom (Nasdaq:BRCM),
but that the cost of trying will erode margins and the steady growth of
mobile devices will undermine its legacy GPU business.
Who, or what, you are, really does seem to matter in America. While
corporations may be techno-legally "people," they are seldom treated as
harshly as private citizens when it comes to breaking the rules. There
are many reasons why you may hate big business.
A cynic may say that this is because of the huge contributions they
funnel to politicians, while a more charitable argument could be made
that the jobs and tax revenue created by corporations create the
possibility of substantial collateral damage. Whatever the reason, given
the differences in prosecutions and punishments between street crime
and corporation crime, it is worth asking if governments really care
about the misbehavior of corporations.
Whether it's truck and engine company executives like those at Navistar (NYSE:NAV) and Caterpillar (NYSE:CAT),
environmentalists, or energy policy pundits, it seems like there's a
broad agreement that the U.S. needs to do more to make use of natural
gas as a vehicle fuel. With high-quality partners like Volvo (OTC:VOLVY) and Cummins (NYSE:CMI), Westport Innovations (Nasdaq:WPRT)
continues to look like a promising play on that trend. That said, while
these shares could indeed have substantial upside from here, the
LNG/CNG engine market is still in its infancy and there are no
guarantees that customers will go in the direction of Westport's
Investors who've followed chips for a while probably won't be too
surprised to see that, in a quarter largely defined by weak performance
and lower guidance, Qualcomm (Nasdaq:QCOM)
was one of the positive exceptions. Not only does Qualcomm continue to
post impressive revenue gains, but the company's extensive spending
forces rivals to up their game as well. While there are cheaper chip
stocks out there right now, Qualcomm may be one of the best options in
terms of its current results, future prospects and overall quality of
Residential housing construction is coming back to life. Although
progress has been unsteady and comes off of an unsustainably weak base,
demand is improving and Louisiana-Pacific (NYSE:LPX)
is seeing the benefits. The stock has already roared back from its
going-out-of-business-sale price, but these shares could continue to
appreciate if Congress can avert the fiscal cliff and if other building material companies remain rational and prudent with their capacities and pricing.
Investors can look across the various sectors and industries in the
stock market and find many examples of stocks that enjoy seemingly
outsized valuation premiums, largely because of the consistent growth
that the companies offer. Whole Foods Market (Nasdaq:WFM)
belongs on that list, as this high-end food retailer continues to
deliver excellent growth but also sports a pretty hefty valuation.
Although I wouldn't be in any great rush to sell these shares today,
investors will almost certainly have to face an eventual valuation
adjustment, and that will likely be a painful process.
There are plenty of industrial companies that have had challenging times
in 2012, particularly as the year has gone on. It has been even worse
for Emerson Electric (NYSE:EMR),
however, as poor execution and higher exposure to emerging markets has
hurt results. While one quarter doesn't change anything, Emerson ended
its fiscal 2012 on a stronger note and there are encouraging signs of
not only better financial results, but also more realism in the
TreeHouse Foods (NYSE:THS)
is a case in point as to why I try very hard to stick to my guns when
the stock of a good company looks too pricey. While TreeHouse has been
one of the more dynamic companies in the private label food space (and
one of the relatively few investment plays on the space), valuation left
no room for error on performance and recent results have started
showing some error. Although I still don't believe these shares are
especially cheap, it would be a name I'd revisit if the stock continues
It's been a long and painful fall for Transocean (NYSE:RIG).
Once seen as one of the best operators in the energy space, and
deserving of a premium valuation as a result, Transocean has struggled
with its involvement in high-profile accidents, unacceptable downtime
leading to contract cancellations and various other operational
shortcomings. While I wouldn't say that Transocean is completely in the
clear again, nor back in Wall Street's good graces, the combination of
improving operations and discounted valuation could make this stock an
outperformer in 2013.
Investors who have been following developments in the construction
equipment and foodservice industries probably weren't too surprised with
Manitowoc's (NYSE:MTW) third quarter, even if results were lower than the sell-side
analyst averages. Order trends still point to an ongoing recovery in
the crane business, and the food equipment business is still solid, but
2013 could be challenging on both sides. Manitowoc's shares do look
undervalued today, but investors considering the shares cannot afford to
ignore the above-average risks here, nor the extent to which share
performance will be tied to macroeconomic developments.
Running a specialty drug business is hard enough on its own - just ask Salix Pharmaceuticals (Nasdaq:SLXP), Forest Labs (NYSE:FRX) or Warner Chilcott (Nasdaq:WCRX) shareholders - but Endo Health Solutions (Nasdaq:ENDP)
decided to up the difficulty level up going deeply into debt to fund a
diversification into devices, services and medical records. With
generics challenging the branded drug business and improvements needed
in the AMS business, this is a tricky stock right now. Although Endo has
a good history of generating solid free cash flow, I think investors
are justified in questioning management's vision and this isn't an especially compelling stock today.
Without going a little too far with the nautical analogies, Sysco (NYSE:SYY) continues to look like a very tight ship, but one that can't change the tides. With established restaurants such as McDonald's (NYSE:MCD) and growth chains like Chipotle (NYSE:CMG)
all seeing weaker traffic, there's not a lot that Sysco can do to goose
organic volume growth. Although Sysco's margins softened a bit this
quarter, this remains a top-notch company for the long-term, albeit one
that is not especially cheap.
Everybody knows that obesity is a huge problem in America, but it's
devilishly hard to make money here on a sustained basis. The sales of various diet drugs and devices
have largely disappointed their developers, and even those companies
that have steered clear of the FDA process (supplements and "nutritional
products") have struggled to make the money that investors expected.
That puts Weight Watchers (NYSE:WTW)
in a curious place - although Wall Street has gotten a lot more
rational about this name (and the stock has badly underperformed this
year as a result), it's still not necessarily a compelling stock today,
even though it may be the best-positioned company in the market.
Sometimes it pays listen to the voice in your head at the expense of
what numbers and company managements may have to say. There have been
plenty of calls out there in 2012 to buy semiconductors in the hopes of a
recovery, and in particular to buy Atmel (Nasdaq:ATML)
in the prospects for good growth in the touch controllers that help
drive the user-interaction experience for smartphone and tablet users.
And yet, worries about the ongoing commodization of this category have
kept me on the sidelines and have cut the value of Atmel roughly in half
Outside of some notable struggles among small and unproven companies, this
has been a surprisingly strong year for life sciences companies. This
strength, and relatively health multiples, is coming despite relatively
unimpressive revenue growth and signs that 2013 could be a very tough
year for the academic and government lab sectors. Consequently, while Life Technologies (Nasdaq:LIFE) is certainly worth a spot on a watch list, it's hard to muster a lot of enthusiasm for the stock right now.
It is perhaps a little ironic that generics giant Teva Pharmaceutical (NYSE:TEVA)
finds itself in a position similar to what it helped create for many
other pharmaceutical companies over the years. The company is facing
increasing competition for its blockbuster MS drug Copaxone, while also
having to deal with more pushback on pricing and a thinning pipeline for
major generic releases. While Teva does have to face up to some
near-term challenges, success with biosimiliars and a decision from
management to double-down on internal efficiency and profitability would
likely go a long way toward improving investor sentiment.
The apparel and footwear sectors have been seeing more than their share
of acquisition activity over the past year, as companies look to better
leverage supply chains and distribution and better compete with overseas
competitors. PVH Corp (NYSE:PVH) is paying a lot to bring Warnaco (NYSE:WRC)
into the fold (and further consolidate the Calvin Klein brand), but
this deal looks like a relative win-win, where both the acquirer and the
acquired are making a smart deal.
Investors who continue to stick by Dendreon (Nasdaq:DNDN),
and its struggling prostate cancer therapy, Provenge, finally got a
glimmer of good news after third quarter results. While Wall Street
seemed to be pleased that this quarterly result was closer to "on
target" (after a string of bad quarterly reports), Dendreon still has a
lot of work ahead of it to turn this story around. I know Dendreon still
has a loyal core of supporters, but it's difficult to argue for buying
this stock when so many other drug companies offer better prospects for
Question: Would Wall Street love or hate a republican president? Love Side
matter what an investor's personal leanings and preferences are, it's
always helpful to evaluate each side of a binary outcome, and the
upcoming Presidential election is very definitely a binary outcome -
either a republican or democrat will win. With that in mind, it is
useful to consider which industries/sectors may do well under four years
of a republican administration. Although data suggests that the stock
market does better during democratic administrations, there are,
nevertheless, sectors that seem likely to do well (or better) under a
Although the concept of “hedging” has been stretched, abused, and otherwise manipulated over the years,
it is nevertheless a very important process for many companies.
Commodity producers use forwards and futures contracts to help ensure a
certain level of cash flow, and corporate commodity consumers use
hedging to help control costs. So here’s a thought – can regular people
use commodity investment products like ETFs to hedge some of their everyday costs of living?
With the Federal Reserve firing up the presses for a third round of quantitative easing, it’s only a matter of time before more talk of imminent hyperinflation
pops up. While calm discussions on the prospects of hyperinflation are
rare (and there’s often a tinge of hysteria or paranoia around the
topic), the reality is that the U.S. does have some disturbing trends
working against it in terms of demographics, debt/deficits, and a policy
of easy money that debases the fiat currency.
What’s more, thumbing through the history books shows that periods of
extreme inflation or hyperinflation (definitions vary) are not all that
uncommon around the world. Post-World War I Germany is probably the
most oft-cited example, but a range of countries including Greece,
Russia, Argentina, China, Brazil, and Zimbabwe (most recently) have seen
stretches of inflation severe enough to call it hyperinflation.
It has been an interesting year for investors and traders focused on the metals. While ongoing economic uncertainty and recent additional monetary stimulus
from the Fed has kept gold in the news, silver has quietly had a strong
run as well. Amidst that uncertainty, industrial metals like copper
have not done nearly so well.
What has that background meant for the leading metal miner ETFs?
With QE3 now an announced fact,
gold has come back into the spotlight. While the actual historical
performance of gold as an inflation hedge is more mixed than some
goldbugs realize, the reality is that gold has done pretty well during
most prior periods of monetary stimulus. Moreover, with the ongoing
uncertainty regarding the economic health and future of Europe, the
United States, Japan and China, gold’s demonstrated value as a hedge
against uncertainty may also come into play.
Investors have a variety of ways to use gold to enhance or secure the
performance of their portfolio. Here are five names to consider.
While commodities have enjoyed a renaissance of sorts over the past ten
years, they are still somewhat outside the comfort zone of most
investors. Part of that may be due to the perception that commodities are riskier,
but some of it may be because of the unfamiliarity with the instruments
and terms that make up the market. To cite just one example, futures
and forward contracts (also called “forwards”) are very popular
instruments among commodity investors, but very different in their
One of the wealthiest countries in the world, and the richest in Asia in
GDP per capita terms, Australia is an unusual mix of a modern market
economy with a large commodities-driven export infrastructure. Despite
the influx of wealth created by its natural resources, Australia has
never been particularly successful in developing a large manufacturing
base. What’s more, the country has run large and persistent current
account deficits for over a half-century. Nevertheless, Australia has
very significant and efficient mining and agricultural sectors, and ranks highly in the world in many categories.
South Africa is the largest economy of Africa, and it accounts for
almost one-quarter of the continent’s GDP. The path to this status has
not been an easy one, however, as the country languished under sanctions
in the 1980s tied to the government’s apartheid policies. While South
Africa has a relatively well-developed manufacturing sector by the
standards of African economies (and developing economies in general), a
meaningful percentage of the country’s economy still revolves around commodities.
Although the geographical size of China is perhaps not that difficult
for North Americans to appreciate, their population is another matter.
As China has become the second-largest economy in the world, it is
without question transformed into an enormous force in the world’s commodity markets; so much so, in fact, that the recent commodity supercycle is now generally seen as a byproduct of China’s emergence.
If early returns are any indication, it looks like the nearly $3 billion deal for Pringles is going to work out for Kellogg (NYSE:K). Management has already indicated, through SEC
filings and this quarterly report, that the deal is looking even more
accretive than originally expected, and it looks like the cereal
business is also improving. The biggest question with Kellogg would seem
to be whether the company can deliver real growth at the operating/EBITDA line, but today's valuation already seems to expect solid improvements there.
Although there are exceptions here and there, this is, by and large, a
miserable time for companies in the semiconductor equipment and solar
energy markets. So it would stand to reason that if companies such as Applied Materials (Nasdaq:AMAT) and First Solar (Nasdaq:FSLR) are having difficulties, Advanced Energy Industries (Nasdaq:AEIS)
should be in trouble too. And yet, while these are not exactly banner
days for this small component and subsystems company, business is
holding up reasonably well, which gives me even more confidence for when
the eventual recoveries take hold.
If there's a benefit to reporting earnings
later in the cycle, it may be in that investors have time to adjust
their expectations as other companies report. That would seem to be the
case for Eaton (NYSE:ETN), as the market's reaction to a small quarterly miss and lower guidance
has gone along the lines of "well, it could have been worse. While it's
going to take time for Eaton to get on a better track (probably not
until the second half of 2013) and valuation is not that compelling today, investors should still keep an eye on this quality diversified industrial.