Sunday, September 21, 2014

Is Atlantic City Doomed to Fail?



               The new season of HBO’s hit prohibition era show Boardwalk Empire has just begun its last season. The show portrays Atlantic City under the control of Political boss turned gangster Enoch “Nucky” Thompson.  As I was watching the show showing Atlantic City at its height my mind turned to the modern day plight of Nucky’s old town.
               It is no secret that Atlantic City is dying; its once booming casinos and boardwalk have decayed to the point of almost no return. This year has been especially tough as the once thriving resort town suffers through the closing of a quarter of its casinos and the downgrading of debts to junk status. The question now becomes whether or not the old Domain of Nucky Johnson (the real life political boss of Atlantic on whom the fictional character Nucky Thompson is based on) could be revitalized and survive into the next decade.
               Atlantic City has always been a playground, throughout the 20’s the beach resort and boardwalk attracted tourists all over the North East and beyond but by the late 70’s the city had fallen on hard times so legalized casino gambling was adopted in 1978 and new life was given to the town. From 1978 to 2006 the gambling industry in A.C (Atlantic City) flourished even surpassing Las Vegas for a brief point in the 80’s and early 90’s. In 2006 annual gambling revenue in A.C reached a peak of $5.2 billion, since then though revenues have been falling in 2013 gambling revenues were at $2.86 billion. What is causing Atlantic City’s decline and could the town be resurrected?
               Well the answer to those questions lies in the finances of Atlantic City’s suffering 12 casinos, of which three, the brand new Revel, Trump Plaza (owned by the now bankrupt Trump Entertainment Resorts) and the Showboat Hotel & Casino (owned by Caesar’s Palace), are closing their doors. Not to mention since the recent bankruptcy of Trump Entertainment those 3 casinos might be joined by another Trump casino, the Taj Mahal which will close its doors in November if labor negotiations fail.
               Clearly the closings and bankruptcies do not paint a pretty picture but just to make you understand just how much Atlantic City depends on its casinos here are some not so fun facts about A.C. Of its 44,000 person population 30-32,000 people work in or for business related to the gambling industry (that is 75% of the population). 65% of the city revenue comes from casino property tax and with the closing of the three casinos the city will lose $30 million annually in lost tax revenue which is equivalent to 15% of the city budget. Oh I almost forgot another not so fun fact, with the three casinos closing 6-8,000 people will find themselves without a job.
               Dealing with the loss of 15% of your city revenue is clearly a terrible thing that requires drastic action, what do you think Atlantic City’s Mayor, Dan Guardian, is proposing to raise more revenue? The esteemed Mayor has proposed raising property taxes 29% on homeowners. Just to let you know how absurd that really is, Atlantic City has an unemployment rate of 13% (double that of the nations) and with the casinos bleeding cash it likely that number will rise, the mayor is saying that the town should tax these very people more in order for the town to stay afloat. Obviously the unemployed and the soon to be unemployed have little to give the town in terms of taxes.
               Atlantic City needs a new plan if it wants to survive. New Jersey Governor Chris Christie has said that his administration has a 5 year plan for the city, which includes building a new convention center. For the short term that might be a decent idea since it will provide construction jobs and additional tax revenue, it is certainly better than the Mayor’s plan for raising property taxes. But this is only a short term solution, the new convention center will need to attract people to the city and not just a few a lot of people if it wants to generate even a fraction of the business the casinos used to.
With the casinos going out of business left and right it is hard to see if Atlantic City could resurrect itself, but hold on their Atlantic City’s casinos might not be totally doomed. Although that is what Christie said 2 years ago when the Revel Hotel & Casino was opened. The 1,600 room Revel was called a game changer when it was first opened in 2012; it was widely believed that with an opening of a hotel and casino as grand as the Revel was it meant that surely Atlantic City was recovering and that it would regain its lost glory. Well it turns out that those so called promises of recovery were merely false promises, the Revel proved to be a disaster. Hurt by increased competition in Pennsylvania, Maryland and Delaware the hotel & casino lost $185 million in 2013 and declared bankruptcy twice in as many years. Now the owners of the Revel have slated that the once so promising resort will close its doors for good, an act which will cost 3,000 people there jobs.
The Revel joins the Trump Casinos and the Showboat in the world of sunken Atlantic City casinos but as I have said before the future might not be as bleak as it seems for the A.C casino industry. The Revel although thoroughly bankrupt (the $2.4 billion property had less than $3.7 million in cash left when it declared that it will close its doors) has been put up for auction. At first it might seem as though nobody would want the sunken casino but apparently interested investors think they have spotted opportunity in the form of the closed casinos on Atlantic City’s boardwalk.     
Glenn Struab a Florida real estate developer, has offered a $90 million cash bid for the property, stating that with a large cash infusion he could reopen the property in 2 years. Alex Muruelo, owner of the California bases Muruelo Group (which has tried to break into the Atlantic City casino market before with a bid for the Trump Plaza) has also described an interest in the Revel. Another far more familiar name also seems to desire the Revel, activist investor Carl Icahn.  
You might know him as the man who intimidated Tim Cook and the largest company in the world (Apple) into buying back $100 billion of their own stock, or as the man who has been battling Bill Ackman over Herbalife but perhaps you did not know that Icahn also has his fingers in Atlantic City. Apparently Icahn owns the Tropicana Hotel & Casino, and since the bankruptcy of Trump Entertainment Resorts, the Taj Mahal is about to fall into the hands of the infamous activist investor.
Since the last time Trump Entertainment declared chapter 11 back in 2011 (it has declared bankruptcy 4 times since the company was created) Icahn has been the principle owner of the debt of the beleaguered casino company bearing the name of rival billionaire Donald Trump. He currently owns $285 million in secured debt of Trump Entertainment, giving him an opening to take control of the company and its two casinos.
Icahn has not made it clear whether or not he will close the casinos and funnel there customers to the Tropicana, but he has made it clear that the Trump Plaza will close its doors for certain, whether or not the Taj Mahal (the 5th most profitable casino in A.C generating about $131 million in gambling revenue annually) is yet to be seen. By the way as a side not Donald Trump has little affiliation with Trump Entertainment Resorts he owns less than 5% of the stock and has been trying to strike his name from the company for years.
As for large casino companies with assets on the boardwalk the decline of Atlantic City has been detrimental to their bottom lines. Especially since AC used to be one of the top gambling destinations in the world many companies invested billions into developing resorts there. Caesars Palace owns 3 casinos there, MGM also has a presence as well as Boyd Gaming which owns the most profitable hotel & casino in AC, the Borgata which has a 95% occupancy rate every night.
To understand just how important AC is to these companies all one has to do is look at how much of a percentage of the company’s profits come from its Atlantic City properties. Caesars Palace makes 20% of its revenues from AC and Boyd gets 14% of its profits from the shrinking resort town as well. Clearly Atlantic City is an important asset to the casino companies of the U.S and obviously gambling is in demand so why is Atlantic City and its casino’s going under?
The answer is that the casinos in the area south of the Tri-state (which includes Southern New Jersey, Maryland, Delaware, and Pennsylvania) have been overbuilt. There are simply too many casinos and the supply has outstripped the demand. Atlantic City thrived when it was the only place on the East Coast to go gamble now a day though you could go anywhere and find a casino.
Atlantic City has lost its monopoly and is now going down the drains, the good news is that gamblers are still flocking to AC and to the out of state casinos in Pennsylvania and Maryland which means there is still a large demand. With the closing of the three casinos and the possible closing of a 4th the other casinos in AC might be saved as they eat up the customers from there failed competitors.
Regardless skeptics believe that in 5 years gambling revenues in AC will have dropped to a mere $1.5 billion and that half of the casinos still afloat will go under. Personally I doubt that things will get so bad, I believe that AC’s problems stem from the over saturation of the casino market and that the means to it survival lie in closing as many of its casinos as possible. With that said AC can no longer rely on gambling to sustain it instead the resort town has to invest in a new industry which should be its beaches and boardwalk much like its neighbors to the North in Longbranch and Asbury Park. AC has traditionally neglected its beaches I believe its time for that to change, unfortunately to renovate these things requires cash and AC has none. But it is necessary, Atlantic City is not a lost cause and could be resurrected it just needs new blood and an infusion of money.
As for the companies operating out of Ac I believe investing in them is a terrible idea, in fact investing in any casino company that derives most of its revenue from the continental U.S is a bad idea. There is simply too much competition in the U.S gambling market. Atlantic City is merely a victim, a symptom of this disease. This disease which is called oversaturation, it’s the thing that destroyed the railroads, and the banks it will do the same with gambling. The best time to buy into U.S based gambling companies will be in 5-10 years from now when the majority of them declare bankruptcy and shut their doors.  


IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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Sunday, September 14, 2014

Alibaba, Investment Gold or Expensive Flop?



             The stock market has been acting much like a roller coaster this past summer with the Dow gaining a little over 200 points since the last time I posted June 29th. With that said there has been a large over 600 point sell off in late July but stocks have since bounced back, and continue to climb ever higher. Investors have had a lot to digest this summer and early fall, with tensions with Russia heating up again in light of the new sanctions, the winding down of the war in Gaza, and America’s new involvement in Iraq and ISIS. Even Scotland’s new referendum to secede from Britain has had its effect on the market. But one thing has definitely  kept Wall Street’s eye throughout the summer and for months before that, the most anticipated and largest IPO of all time, the Chinese ecommerce giant Alibaba. 
                Any person who has even glanced at the financial news over the last several months has heard of Alibaba. Jack Ma’s internet startup that has become one of the largest ecommerce giants in China and hence forth the world and now is having its market debut on the New York Stock Exchange. For those of you unfamiliar with it Alibaba is China’s equivalent of Amazon, EBay and PayPal rolled into one, the primary difference is Alibaba is larger than both Amazon and EBay combined with over 279 million active buyers and 8.5 million active sellers in the first 6 months of 2014.
                Everybody knows that China has the potential to become the largest consumer market in the world but American companies have been struggling for years to break into the heavily regulated market. Chinese companies such as Baidu, Tencent Holdings and off course Alibaba have taken advantage of Wall Street’s thirst to get into the Chinese consumer market by having there IPO’s in New York as opposed to Hong Kong. But honestly, I know you do not particularly care about that what you want to know is if Alibaba is a good addition to your stock portfolio and how will the stock perform.
                Obviously I am not the first one to write about Alibaba and I am sure I will not be the last but with the IPO only a week away I believe it is a good time to give my opinion on this new internet giant.
                The first thing investors need to know about Alibaba and its IPO is that this is not a Chinese version of the Facebook or Google IPO. Those companies went public as mere startups and grew into internet giants and corporate empires. Alibaba is already established, the company is unlikely to double its stock price on the first day the way Twitter nearly did when it went public last year.   
                With that said the hype around Alibaba has been intense, and it has been confirmed that nearly 40 institutional investors have already requested up to $1 billion in Alibaba stock each. With this hype it is unlikely that retail investors would be able to get their hands on the stock at anywhere near the initial price of $60-66. So the billion dollar question is whether Alibaba stock is priced low enough to be good buy and at what price will the stock become too expensive in terms of evaluation.
                To answer that question we must go through Alibaba’s financials and see if the numbers add up. Alibaba reported profit of $2.3 billion in the first 6 months of 2014 and revenue of $8.5 billion last year, those numbers are growing considering Alibaba’s profit jumped 43% in just 1 year. Estimates for 2015 show that profit for that full year will jump to $7 billion and that revenue will continue to climb 30% per year which would mean that by 2016 Alibaba would be producing about $20 billion in revenue.
                That kind of earnings growth would put Alibaba ahead of American internet giants like Amazon and Google. But these numbers are also estimates and if investors know anything it is that estimating anything on Wall Street is futile. With that said however these are the most accurate numbers investors have to go by in order to make a decision about whether or not to invest in Alibaba so lets make the best of it.
                If these numbers are accurate Alibaba will go public at a P/E ratio of about 24x 2015 expected earnings. Now that is not bad at all, I would not call that cheap per say but when compared to other companies in the industry it exceedingly average. (Below is a chart created by the Wall Street Journal comparing Alibaba’s evaluation to other American and Chinese internet companies)
Amazon- 71x 
Facebook- 35x
Tencent- 29x
Baidu- 25x
Alibaba- 24x 
Google- 19x
EBay- 15x
(2015 P/E Ratios for estimated 2015 net income)
               
              As you see in the chart above Alibaba is not exactly cheap, but with earnings potential being almost limitless considering the fact China might become the largest consumer market in the world by far, it is possible that Alibaba warrants the price tag given to it at its IPO. Unfortunately like I said before it is unlikely that retail investors will be able to the stock at anywhere near $60-66 a share but is the stock stays below $80 I would still consider it a good investment.
                To summarize Alibaba’s $24 billion IPO could be an amazing opportunity to get in on the growing Chinese consumer market. Even with the potential problems in the future such as increased competition from other Chinese and American internet companies as well as the problems of breaking into the U.S market the opportunity Alibaba presents is unprecedented. My recommendation would be to make room in your portfolio for this stock immediately so that on Friday when it goes public you could one of the first to buy.



IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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Sunday, June 29, 2014

Is American Apparel and its Competitors Doomed?


               Apparently investors are writing off the continuing crises in Ukraine and Iraq along with Argentina’s debt problem as just mild inconveniences since all the major indexes ended the week with solid gains. But one person is definitely not smiling, Dov Charney, you might know him as the man who founded American Apparel in 1998, or as the controversial C.E.O who has a history of sexually harassing employees, but this week he is known as the man who was fired from the company he started 16 years ago.

                Whatever the drama behind the ouster, the recent firing of American Apparel’s C.E.O and founder has led many on Wall Street to notice the recent struggles at American Apparel and other casual clothing stores. Alright, I know “struggles” is an understatement if there ever was one, but with all the media attention on American Apparel I figured it would be a good idea to analyze the company and its competitors and see if there was a potential buying opportunity because of cheap prices or at the very least, a shorting opportunity.  

                What truly shocked me during my research is just how low shares of American Apparel and some of its competitors including Aeropostale had fallen. As of Friday stock in American Apparel is at just $.97, that’s shocking considering the stock was at $15 in 2007. The question now becomes can the struggling retailer, which has not made a profit since 2009, make a comeback?

                First of all lets address the companies evaluation, which acts as an indicator if the company has the potential to see its stock bounce back or see if it makes sense for the company to be bought out by a 3rd party.  By taking a quick look at American Apparel’s 1st Quarter earnings report for 2014 it is obvious to me and to any value investor that American Apparel has no hope of seeing its stock bounce back.

                A simple way of demonstrating this is by looking at the true value of American Apparel, by true value I mean the value shareholders will receive in case the company is liquidated. A simple way of finding the true value of a company is by subtracting the company’s total assets from its liabilities. The closer the company’s market cap is to the company’s true value the better. In the case of American Apparel the true value is negative $53.672 million. As of Friday American Apparel’s market cap stands at $167.6 million.

                The company’s deficit makes it highly unlikely the stock will bounce back at all, but the recent ouster of its controversial founder did give some investors hope that American Apparel, which does have some brand recognition amongst 19-30 year olds, might get bought out by a 3rd party such as Urban Outfitters or Abercrombie & Fitch. Personally I feel that such a buyout is highly unlikely, not just because Co-chairman Allan Mayer said that “the company was not pursuing a transaction and has no plans to put its self-up for sale”. But also because American Apparel’s balance sheet has no hidden jewels that would make an acquisition worth it and the stock does not trade for less than the sum of its parts (which is something buyers tend to look at).

                With all this evidence I feel confident saying that American Apparel will probably be forced to declare bankruptcy within the next few years. The only thing shareholders in the company can hope for is that ousted founder Dov Charney, who still owns nearly 27% of the company will assemble a consortium and buy back his company. Unfortunately that appears to be a forlorn hope since the board has recently taken steps to protect the company from any take over attempt by Charney. Worse still the battle between the ousted founder and his company has shifted to the court house, where Charney will attempt to sue American Apparel for smearing his name and wrongfully firing him from his position. Whatever the outcome of the suit American Apparel will have to spend millions in legal fees, millions that the company does not have. It appears that Charney could take revenge on his board by uing the company within an inch of bankruptcy (unfortunately the company is already within an inch of bankruptcy so that is kind of a bad pun). However with that said be wary of shorting this stock, as a penny stock American Apparel has become rather volatile so I would stay away from this company altogether.

American Apparel seems to be doomed are its rivals also destined for the same fate? Stocks of other casual retailers like Aeropostale and American eagle have been under pressure recently as sales slump do to changing fashions. But other competitors such as Abercrombie & Fitch have actually seen their stocks rally somewhat in 2014. So what is the future of these retailers?

                The first retailers that came to mind after doing some digging into American Apparel were Aeropostale and American eagle. Both companies have seen their stocks fall sharply in 2014 (American eagle is down nearly 20% year to date while Aeropostale stock is off over 63%). Aeropostale is almost at the level of American Apparel, with its own stock trading at just $3.55.

                Unfortunately for Aeropostale there does not seem to be any hope on the horizon, the company trades at a true value of $207.97 million and with a market cap of $279.2 million. The company has been losing money for 5 quarters straight and has been encouraged to either go private or sell itself to a competitor. The company has recently been closing up to 70 stores in order to lower expenses but this might be too little too late. It appears that with just $24.5 million in cash and with an expected loss of over $50 million coming in the 2nd quarter of 2014 it might appear that Aeropostale is doomed to the same fate as American Apparel.

                American eagle on the other hand is in slightly better shape, shares in this popular teen clothing store currently trade at over $11, and unlike American Apparel or Aeropostale the company is actually profitable. Since American Eagle brings in revenue of over $3 billion, and has so far been able to remain profitable I feel that this retailer will survive. With that said buying the stock is a risk move because the trend has so far been negative and the stocks volatility is high.

                While American Eagle adapts to the new fashion environment another competitor in the industry is actually seeing its stock rally in 2014. Abercrombie & Fitch stock is up over 30% year to date as the analysts say the company is a ripe takeover target. Whether that’s true is a different question entirely.  Personally I would stay away from this stock, even if an outside company does buy Abercrombie it is unlikely to do so at a high premium, and with slim margins and a constantly changing fashion market I do not believe this company’s stock could keep its current levels if a buyout does not occur.

                However you look at it he apparel retail industry appears to be a dangerous proposition for an investor. With companies like American Apparel and Aeropostale barely fending off bankruptcy and competitors like American Eagle and Abercrombie barely being able to adjust I do not think any investor should invest in this industry.           
 
 
 IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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Tuesday, June 17, 2014

Is the Party Over for Airline Stocks?


               It has been wild week on the market, with Apple stock splitting 7 to 1, a new crisis in Iraq and spiking oil prices. If that is not enough Europe now appears to be thinking about raising interest rates before the year is out. The culmination of these events resulted in a triple digit sell off on Wednesday and Thursday. Now this particular blog could be on any number of those topics, I could go into detail on how our President refuses to deal with the crisis with the Al Qaeda in Iraq. I am not going to do that though, instead I will address the selloff that occurred in an industry I have been bullish on for over a year, the Airlines.

                For people who have been following airline stocks recently you know that the industry is in the middle of one of the greatest turn round’s in business history. Airline stocks were amongst the best performers last year, impressive considering that last year was a record breaking year for stocks.

                The airlines are recovering from the chaos of the 1990’s and early 2000’s where almost every major airline in the U.S went bankrupt, including former industry leaders like Pan Am and TWA. Since then airlines have begun to consolidate, with the smaller weaker companies going out of business and the larger somewhat stronger companies merging out of necessity.

                The effect of this consolidation is the U.S Airline industry being controlled by just 3 or 4 large players, American Airlines (just fresh off its merger with U.S Airways last year), United (also a product of a merger with Continental in 2010, Delta Airlines (in my opinion the strongest airline and also created when Delta bought Northwest airlines), and to a lesser degree Southwest Airlines.

                This consolidation in the airline industry has led to higher prices for airfare which means higher margins which adds up to higher profits and stability which has not been seen in the industry since its deregulation in the 70’s. Under these new conditions the airlines have flourished and have rewarded shareholders handsomely.

                Now that you have some background on the industry the question is, why am I writing this? The answer is that the airlines have fallen victim to a large and in my opinion somewhat unwarranted sell off this week. Yes airline stocks that have gained over 50% in the last 6 months fell upwards of 5-7% last week. Ok I am lying the selloff was not entirely unwarranted.  On Wednesday the primary German Carrier, Lufthansa, announced an earnings warning saying that profits for 2014 might be as much as 33% lower.

                Wait lets step back a moment, I thought that the Airlines were flourishing? In fact European airlines are facing significant challenges (As was highlighted by Lufthansa). The German airline, with a market cap of over $12 billion, stated that increased competition from Gulf Carriers, labor union strikes, adverse currency effects, and unexpectedly weak revenue growth in its passenger and cargo businesses, all contributed to Lufthansa’s troubles.

                After the warning came out shares of Lufthansa fell 15% (understandable considering shareholders have just found out that the airline is expected to make just $1.35 billion for 2014, instead of the previously estimated $2 billion) Unfortunately for the rest of Europe’s Airlines the concerns stated by Lufthansa also pose a problem for the rest of them. Shares of International Consolidated Airlines Group (parent company of British Airways) and Air France immediately headed lower as there German counterpart announced that competition from low fare airlines and larger competitors in the Gulf was cutting into margins.

                Oh no, this is exactly what destroyed the Airlines before, extreme competition and price wars coupled with union labor troubles.  Apparently Europe’s Airline industry is going through what the U.S based industry went through during the late 20th century. Normally I would not really care about what Europe’s airlines had to go through, since I am mostly invested in American airlines (specifically Delta, Southwest and Spirit) but the sell-off of European airline stocks quickly spread to the U.S. Major carriers in the U.S were all down on Wednesday. But Lufthansa was the least of the airlines worriers this week.

                While Wednesday’s sell off was a healthy breather for U.S airline stocks Thursdays sell off was far more detrimental. Apparently an Al Qaeda splinter group had taken control of Northern Iraq, including Iraq’s second largest city. This caused the price of oil to skyrocket to a 9 month high of $107 a barrel. To the airlines, whose very survival hangs on the price of jet fuel, this rise in oil prices caused a major sell-off, with shares of all major airlines down over 3-7%.

                So with increased competition in Europe, and rising oil prices is the party over for airline stocks? The answer is no! Competition in Europe does not really affect the American based airlines, and the rise in the price of oil was unwarranted and will fall during the next few months.

                The unwarranted rise in oil prices was due to commodity traders being worried that the flow of Iraqi oil will be interrupted by the insurgents in Northern Iraq. What these traders did not take into account was that the majority of Iraqi oil comes from the South, nowhere near the fighting. Even if the fighting does interfere with oil production Iraqi oil is no longer as much of a factor to the U.S market. The U.S now produces enough oil to meet its own demand and lobbyists from major oil companies are even now trying to have Congress pass an act allowing the U.S to export some of its oil.

                With U.S shale oil deposits producing so much oil U.S airlines are in a much better position to get there vital jet fuel then there European counter parts. Another point as to why the Airlines have been oversold and why Airline stocks will continue their march upwards is that many airline stocks are still very cheap.

                Delta airlines for example, the airline has a P/E of just 3.4, that’s amazingly cheap considering the S&P has an average P/E of 16. Delta airlines is probably the most attractive airline stock out there but other airlines like Southwest are also attractive, considering that Southwest does not even fly to Europe and so avoids the conundrum confronting the Airlines in Europe completely.

                To conclude this week’s sell off in the airline offers nothing but opportunity, as the market begins to correct itself after the sell off last week the airlines will regain their momentum. This sell-off provides the first opportunity to buy airline stock in a long while; I would take advantage of it.  
 
 
 
IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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THANK YOU  
 
 

               

                 

Tuesday, May 27, 2014

Where Should You Invest Your 401K?


              As investors return from there 3 day weekend it appear as though they have come back happy, buying up stocks in all sectors and driving the U.S stock market to new highs. By now I’m sure you think you know what is coming, you think I am going to give another factual analysis of some hot new industry, I’m sorry to disappoint but today I am going to write about something completely different. This week’s article will be about where to invest your 401K.

                Although indexes are hitting all-time highs today it has been a bumpy ride over the last 6 months. Last year you could not have gone wrong by simply placing your 401K or savings into simple broad market funds, which would have gained over 25% last year. But this year despite the headlines the Dow Jones and NASDAQ are up barely 1%, which is a far cry from the gains made last year. So the question now becomes where is the best place to invest your 401K?

                Unless you are a seasoned investor investing your retirement savings could be tricky, considering you have no shortage of investment options. You could invest in broad market funds and ETF’s, commodities, Currencies, Treasuries, Corporate or Asset backed bonds, or you can invest in emerging markets. Ordinarily it is suggested that you keep 80% of your retirement savings in equities, to provide meaningful growth and the other 20% in bonds to provide stability. That is good advice but it’s very broad, below is an analysis of which equity, bond and emerging market funds might prove most attractive for those wishing to invest there 401K’s.   

Equities-

                2013 was a great year for equities and stocks in general, it was a year where the Dow and S&P both rose over 30%, but as 2014 is proving, those kind of gains across the board are highly unlikely to occur again anytime soon. In fact over the last year equities have gotten expensive, and no longer trade at the bargain prices they did a few years ago, meaning that returns from stocks will probably be muted for the next few years. What should also be taken into consideration is the possibility of a steep correction. A correction is defined as a drop of at least 10% and theoretically should occur once a year, but there has been no such drop in the last 2 ½ years which has led some investors to worry about the future.

                With market conditions as they are I have been minimizing my exposure to stocks recently, and I expect a correction of about 15% to occur soon. With that said which equity funds should you reduce exposure to and what should you keep?

                The first funds I would reduce exposure to would be funds focused on small and midcaps. Small cap stocks are companies with market caps of under $5 billion and mid-caps are companies with market caps of under $15 billion. Generally these stocks are more volatile than ordinary blue chips, which at times could be good because in bull markets they usually outperform the rest of the market, the bad news is in bear markets these stocks tend to suffer more. Funds focused on small and mid-cap stocks will most likely get hit hard during the inevitable correction, which is why I would recommend getting out of them. With that said after the correction occurs these funds will be the best investment because when the market bounces back small and mid-caps stocks will most likely outperform anything else out there.

                Small and midcap funds are not the only equities investors should start reducing exposure to; large caps will also not be spared during a correction. But besides the possibility of a correction another reason to lessen exposure to U.S Equities is that with stock prices getting a bit out of control returns from them will be reduced to maybe 5-6%. Which although is a healthy gain, your money could be invested in other areas where it will be more productive. One such area is bonds.

Bonds-

                While equities performed remarkably last year, 2013 was also a horrible year for bonds as investors, worried about the possibility of rising interest rates, pulled billions out of bond funds. Hence for anyone who maintained a large portion of their 401K in bonds suffered, this year things could be different or can they?

                With interest rates expected to rise sometime this year and with the Fed winding down its bond buying program bonds might suffer in 2014 also. So bonds might not pick up the slack in your portfolio left by your flattening stocks. With that said, high quality corporate bonds should perform well, and I would stay away from high yield junk bonds because these usually tend to mimic equities which are due for a no so light correction.

                If stocks are set to perform well over the next few years and bonds not ready for a comeback what is the best place to invest your 401K to achieve the greatest returns? The answer is emerging markets.

Emerging Markets-

                Yes I know emerging markets have not been the greatest investments so far in 2014, especially with the crisis that occurred in several of them in January and February. But in my opinion several specific emerging and international markets present a good opportunity.

                One of these markets is Russia; yes I know Russia has recently been hammered economically as the West imposed sanctions due to Russia’s involvement in Ukraine including the annexation of the Ukrainian province of Crimea by Russia. Russian stocks have not fared the crisis well, as Russia’s main index is down heavily in 2014 and analysts predict that Russia’s economy will most likely see any growth in 2014 due to current geopolitical crisis.

                Yet in Russia’s case the old saying of “The Best time to buy is when there is blood on the street” rings true. There seems to be light at the end of tunnel, for Russia anyway. Russian state owned Natural Gas giant Gazprom has recently signed a $500 billion deal to sell natural gas to China. And many Russian stocks amidst the selloff have become cheap and could be bought at bargain prices.

                Besides Russia several other emerging markets might prove attractive investments as well, India for one. After the election of the pro-business conservative government in India, India’s stock market has been enjoying a fantastic rally. But I would not get in on that action just yet considering the new Prime Minster has not yet proven himself and the new government has not instituted any meaningful economic reform yet.

                Whether or not you decide to invest in emerging markets is up to you but with equities flat and bonds uncertain the emerging markets along with cash might be looking like the best alternatives to which you could allocate your 401K to. But there are always other alternatives; there are always individual stocks that will flourish even amongst the worst bear markets and I will continue bringing you up to speed on which ones are the best investments.
IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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