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Archive for September, 2006

ConocoPhillips (COP) buy candidate

Thursday, September 28th, 2006

ConocoPhillips is a good buy candidate for me right now.

Here is a corporate overview of ConocoPhillips according to S&P.

“On August 30, 2002, Phillips Petroleum and Conoco merged, creating ConocoPhillips (COP), the third largest oil company in the U.S. COP operates in six operating segments: exploration and production (E&P; 27% of 2005 sales, 62% of 2005 net income), refining and marketing (R&M;71%, 31%), midstream (2%, 5%), Lukoil Investment, chemicals, and emerging businesses.”

Cop is a fairly large company with a market capitalization of 97 billion. COP’s current stats look good:

Price/Earnings ratio (P/E) 5.4 compared to industry average P/E of 11.

Price/Book ratio (P/B) 1.3 compared to industry average of 3.

Price/Sales ratio (P/S) .5 compared to industry average of 1.7.

Here is are the current valuations from Reuters.com.
COP as well as other energy stocks have taken a hit ever since oil prices have gone down to $60 a barrel. I think now is a good entry point to get into energy stocks such as COP, Suncor (SU), Valero (VLO), Apache (APA), Devon (DVN) and XTO Energy (XTO). I think COP is the most attractive stock right now and I plan on buying some soon.

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Current assets in portfolio.

Thursday, September 28th, 2006

I just sold JLG Industries (JLG) and Burlington Santa Fe (BNI) yesterday for a 9.5% and 11.3% gain. I held BNI for 48 days and JLG for 8 days. I thought it would be a good time to take profits while it is still there.

My current individual positions include:


My portfolio is quite diversified. It has a risk grade of 68 according to Riskgrades.com. I also have 4 open end mutual funds in my Roth IRA. The four mutual funds are from American funds. They are Capital Growth and Income (CWGIX), Capital Income Builder (CAIBX), New World Fund (NEWFX) and Small Cap World (SMCWX). These funds are all foreign funds. They are used to give me international exposure because all my individual stock positions are US companies. These funds have performed very well, earning 15% since 4th quarter 2005.

I may plan on moving these funds into a taxable account so I can do my trading in the Roth to take advantage of the tax shelter.

My 401k’s asset allocation is 30% S&P 500 index, 25% aggregate bond index, 25% international index, and 20% small cap index.

I plan on getting some fixed income CEF in the future. For now, I am going to focus on buying some more individual stocks.

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Current credit card utilization

Wednesday, September 27th, 2006

I need to repay $8,000 to my 2 Citibank cards next month.
I was thinking about borrowing $10,000 from my MBNA credit card. There is a 0% APR on balance transfer until August 2007, but the problem is that there is a 3% balance transfer fee. If I borrow $10,000, I would have to pay $300 up front. The interest I can earn from a savings account is around 5%. If my tax rate is at 25%, I would earn 5/.75 = 3.75%, which is higher than the fee I paid. That is a lot of trouble to go through to only earn .75%. I’m sure I can invest the money and earn a much higher rate than 3%.
The 3% cost of borrowing is quite cheap compared using margin, which some brokerages charge 8%+.

My current goal is to lower my credit utilization on my credit cards to raise my credit score. According to Truecredit.com, my 3 credit scores are around 680. They were 725 before I borrowed the money. My credit score will go back up after I pay off what I owe. I already paid back some money to the credit cards to lower my credit utilization to 69% on 4 cards. After raising my credit scores up, I plan to raise my credit limits and borrow $100,000+. I will probably open 15+ credit cards at the end of this year or the beginning of the next year.

Total utilization of all my credit line is 41%.

Credit Card, Date Due, Amount, Utilization

Discover Gold Card, 4/1/2007, 2700, 67.50%
AT&T Universal Rewards , 4/2/2007, 3090, 68.67%
AT&T Universal Platinum, 4/3/2007, 6570, 87.60%
Citi’s Driver’s Edge Mastercard , 10/5/2006, 3935, 67.84%
Citi’s Platinum Select MasterCard, 10/5/2006, 3935, 67.84%
Chase , 6/1/2007, 14105, 92.19%

Posted in Stocks | 2 Comments »

Basic personal finance

Sunday, September 24th, 2006

Personal finance is an easy subject to understand. Anyone can learn the basic information to help them prepare for the future. After learning about the basics, there will be a lot of repetition in what you read. Personal finance can be broken down into easy steps that anyone can follow.

1. Spend less than you make.

2. Contribute to 401k or 403(b) up to company match.

3. Pay off all high interest debts such as credit cards and high interest rates loans. (Low interest rate loans such as mortgage payments and student loans do not need to paid off immediately since the cost of borrow money is low. For example, if your student loan interest rate is 3%, it is a better idea to hold off paying off the loan in full. Instead, use the extra money and invest it to earn a higher rate of return.)

4. Open Roth IRA account and contribute the maximum of 4k a year. Roth is a great for young people. It can also act as an emergency fund. Contributions can be taken out without a penalty because the money has already been taxed.

5. Save for short term goals and long term goals and distribute amount of money based on personal goals. For example, if someone wants to buy a house in a few years, then may hold off maxing out their 401k to save for the down payment on the house.

6. Invest money base on time horizon. Invest in stocks if time horizon is longer than a few years and be more conservative if it is a short term goal. If that money is needed in a few years, it may be a good idea to protect the principal and put the money in a risk free or low risk investment such as T-Bills, CDs, or a money market account.

7. Diversify your investments based on personal goals and objectives. For conservative investors, their asset allocation may be 60% stocks, 40% bonds. For younger people who can stomach volatility, they might put all their money in stocks.

8. When your cash flow is greater than your expenses, you can retire.

Investing is not that difficult too. Just learn the basics and decide how much time you want to devote to your portfolio. A person can spend as little or as much time as they want. For low maintenance portfolios, you can invest in a diversified portfolio of low cost index funds and rebalance it every year. For other people who enjoy picking their own individual stocks, they may spend many hours day.

Posted in Personal Finance | 2 Comments »

FOMC meeting on Wednesday.

Monday, September 18th, 2006

This Wednesday is the FOMC meeting.  I read some articles recently that said there was a 89% chance that the Feds will not raise the Fed fund rate based on the futures market.  This will hopefully give stocks a strong boost.  The case for leaving the Fed Fund rate unchanged is implementation lag.  The Fed has been raising the rates 17 consecutive times before the last pause.  The effect of the increase in interest rates has not fully realized yet, so the best course of action should be to wait and see. 

The market was pretty flat today.  A lot of traders are awaiting the news to see what happens.  I may plan on getting some stocks tomorrow.  I am currently looking at JLG Industries (JLG), Centex (CTX) and Sunoco (SUN).  Sunoco as well as many other energy securities have been taking a beating over the past few weeks.  The price of oil has dropped to around $64 a barrel, which is causing these energy stocks to plummet.  I think it will be a good time soon to pick up these beaten down stocks.

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Unpredictable market

Tuesday, September 12th, 2006

The market is unpredictable. 

I sold some stocks because I thought the market was going to be weak.  I got rid of Countrywide Financial (CFC), Abercrombie and Fitch (ANF) and Skywest (SKYW) last week.  I bought some 3M (MMM) last Friday. I did not buy some stocks that did look attractive too.  I was planning on buying Best Buys (BBY), but I had too many retail stocks and I did not think that adding that stock to my portfolio would help diversify it. 

Currently my portfolio contains:

Alcoa (AA), Northern Santa Fe (BNI), Claires (CLE), Dollar General (DG), Gannett (GCI), Home Depot (HD), Legg Mason (LM), 3M (MMM), MSC Industrial (MSM), Maxim (MXIM), Pentair (PNR), Wrigleys (WWY).

Who would of thought that oil prices would drop to 63$ a barrel?  I thought that energy prices were going to stay high for a while, but I did not make base my stock selections on my hunches of what I think will happen.  I may buy energy stocks soon because of the recent price drop and the fact that I have none right now.

I am really bad at making predictions.  There are too many variables to account for everything.  I have not bought any home building stocks because of the declining housing market.  I think I will buy some soon because there are some high quality stocks that have been punished more than they deserved to be. 

Picking stock picks based on your predictions of how the market will behave is speculating if you have no data to back it up.  I try not to base my decisions off what I think will happen because more often than not, I get proven wrong.  I think making purchases based on sound fundamental research is the best way to earn money in the long run. 

Posted in Investing | 2 Comments »

Tax deferred account are great.

Thursday, September 7th, 2006

Generally, it is a good idea to maximize your tax deferred account(IRA, 401(k), Roth, 403B, etc..), especially when you’re young.  Having your money compound in a tax deferred account maximizes the growth of the account because taxes do not have to be paid until withdrawal.  If you’re young, you’ll have a longer time horizon to compound the money.  This makes tax deferred accounts the most valuable for younger investors with a longer time horizon. 

So with all these advantages, why doesn’t everybody do this?  For one, most young people do not like to put their money in retirement accounts.  The main disadvantage of a tax deferred retirement account is its illiquidity.  For 401k and IRAs, investors will not be able to withdraw from their accounts until they are 59 1/2 years old.  If you withdraw the money before that, you’ll have to pay a 10% penalty on top of the income taxes owed on the money.  This can take up 40 percent + of the money withdrawn. 

This really scares a lot of people away.  The general thinking is why should I worry about retirement.  I still have 40 years before I retire (This is a really good reason to invest).  Who knows if I am going to live that long anyways?  I might as well enjoy my money now.  There are a lot of excuses not invest in a retirement account. 

It is important to keep money in a taxable account for short term goals such as a vacation, car, or house.  I think saving for a house is a good.  That money should generally be put in a savings account to protect the principal. 

But I am going to do things differently.  I am maxing out my Roth and my 401k.  If I plan to buy a house in the future, I can always take a loan out of the 401k and my contributions from my Roth as a last resort.  I can take out up to 50% of my 401k or 50k, whichever is less.  For the Roth, I can take out all my contributions if I wanted to, but that is not a very good idea at all.  Taking advantage of tax deferred accounts is one of the best ways to grow money.

Posted in Personal Finance | 3 Comments »

Valuing a stock using Dividend Discount Model.

Sunday, September 3rd, 2006

Investors can value a stock using the dividend discount model. The dividend discount model should be used on mature companies that have stable growth.
The formula for the dividend discount model is: V= D1/K-G
Value of stock = Next year’s projected dividend / Required rate of return - Growth of company.

Next year’s dividend is dividends paid out this year X growth rate. D0 X G.
To figure out what the required rate of return (K) is, investors need to use the formula:

Required rate of return = Risk free rate (RFR) + Inflation Premium (IP) + Risk Premium(RP)

or Capital Asset Pricing Model’s (CAPM) formula, which is:

Required rate of return = RFR - Beta(Expected Market Return(Er) - RFR)

Calculating the growth of a company is not too difficult. Growth rate = Retention rate X Return on Equity (ROE).

The retention rate = 1 - payout ratio. The payout ratio is the amount of earnings a company pays in dividends out of its earnings. So, payout ratio = Dividend per share/Earnings per share.

ROE can be broken down into 3 separate ratios. ROE = Profit margin(PM) X Asset turnover (AT) X equity multiplier (LEV).
Here is an example that can be used to figure out a price of a stock.Solve for value of stock with the following characteristics.

Earnings = $2/share, Dividend payout ratio(D0) = 40%, Return on market (Rm), LEV = 2, RFR = 6%, Beta (B) = 1.4, profit margin(PM) = 6%, Asset Turnover (AT) = 1.2.

So the formula is D1/K-G. We need to calculate D1, K and G plug in this formula.

First, we can calculate this years dividend by multiplying the D0 X E, which is .4 X $2 = .80. That means that the company will payout 80 cents per share this year.

To calculate the require rate of return K, we need to use the CAPM formula which was:

K = RFR + Beta(Rm - RFR). Thus, K = 6% + 1.4(12%-6%) = 14.4%.

Now that K is out of the way, growth (G) must be calculated. Recall that G = Retention rate X ROE. And ROE = profit margin (PM) X asset turnover (AT) X equity multiplier(LEV).

The dividend payout ratio was 40%, so the RR = 1-40%. The retention rate is 60%.

ROE = PM X AT X LEV, which is 6% X 1.2 X 2. ROE = 14.4

G = RR X ROE = 14.4 X .60 = 8.64%.

D1 = D0 X (1+G) = .80 X 1.0864.

Now plug in all the numbers into the formula D1/K-G and we get:

.8691/14.4% - 8.64% = $15.09.

The dividend discount model will only work on companies that pay a dividend and only if the required rate of return is higher than the growth rate. Finally, investors can use Dividend discount website to use dividend discount model to calculate the value of one of their stocks.

If you are thinking to purchase house, then you need to seek all the relevant information about mortgage. There are many banks and online companies that are providing information and mortgage calculators, in order to calculate the installments and interest rate. Now days it is very easy to find home mortgage consultant for proper guidance, like central mortgage is among the leading ones. While on the other hand, people who fail to payback because of lacking planning usually become part foreclosure listings.

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