Monday, November 17, 2008

Volume 2, Issue 42

Published weekly, the TopStockAnalysts Digest is loaded with stock picks, trading ideas, market commentary, and educational guidance designed to help you become a better investor. To ensure uninterrupted delivery of this newsletter, please follow these simple instructions.

Table of Contents

1.  Market Update
2.  C/D Global Shipping (SEA)
3.  Google (GOOG)
4.  Additional Investing Ideas
5.  Investor Trivia -- October's Biggest Victim
6.  Featured Topic -- Finding a Healthy Company in an Unsafe Market
7.  Free Investing Resources

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Today's Top Stock Picks

Buy the Bottom and  Rebound on the High Seas
Shipping stocks are at a price point that suggests the world has stopped turning and the seas have evaporated. When investors eventually come to their senses, I want to sail the rebound in this attractively valued  shipping ETF.  Read More. . .

A Second Chance to Buy This +265% Gainer
Google (GOOG) has been throwing off +35% returns annually. And investors often wish they could turn back time and buy it at its IPO valuation. Well they just got their wish.  Read More. . .


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Market Update


Last week, I was reminded of the scene from Jaws, when Roy Scheider calls out, "You're going to need a bigger boat." Until that moment, he had no idea about the enormity of his prey. I got the same feeling when U.S. Treasury Secretary Henry Paulson announced that the U.S. was backing out of their intention to use a portion of the $700 billion bailout fund to buy up "toxic assets" from the banking system.

Even as the G20 economic summit was about to convene, the Dow closed down -5% for the week. It was almost as if Wall Street decided the world might not be able to come up with a big enough economic boat to stem a worldwide recession. These fears were supported by Japan's announcement that it had slipped into its first recession in seven years. And on Friday, the European Union confirmed that it, too, had entered its first recession since the euro's inception in 1999.

And whether it was preoccupation with the presidential election or a sense of tougher economic times to come, U.S. consumers weren't shopping in October. Retail spending was down -2.8%, posting its biggest drop in history. U.S. jobless claims also hit a seven-year high last week. And companies as diverse as retailer Best Buy and computer chip maker Intel warned of a bleak fourth quarter.

At some point, I found myself wanting to shout, "Stop with the bad news already, we get it." The world's economies aren't going to break any land speed records in the next year. And people will cut back. But the world will not stop in its tracks, no matter how hard the market tries to price in that impossible feat. And just as consumers will be more price-sensitive this holiday season, so too will investors. But both groups will buy when they find a good deal. 

With that in mind, Nathan Slaughter, editor of The ETF Authority, points out that ships continue to move goods like grain and ore across the world's oceans. Shipping stocks have been hammered by a perfect storm of adverse events. But unless the seas actually dry up, Nathan senses that the sector has found its bottom. He points out the advantages of the
Claymore/Delta Global Shipping Fund (NYSE: SEA, $10.17), an attractively priced fund that is destined to reward on the rebound.

Market Advisor editor, Paul Tracy, is also value shopping this week. He suggests that investors can literally turn back the clock and pick up Google (Nasdaq: GOOG, $312.02) at a valuation point not seen since its IPO launch in 2004. If you kicked yourself for missing out on this search engine giant the first time around, you have a small window of opportunity to grab this technology growth stock at a bargain.     

Good Investing!

-- Amy Calistri
Assistant Editor
TopStockAnalysts Digest


The Top Stocks to Own Before Obama Takes Office

Whenever Washington decides to help a new industry get off the ground, the investment profits follow in lockstep. We saw it happen in biotechnology, nanotechnology and the Internet. But if you missed out on these government-fueled bonanzas of the 1990s, don't feel bad... an instant replay is straight ahead.

A small group of 20 to 30 stocks is going to be flooded with so much new government cash that a few of them will likely shoot up 100-to-1 in the next three or four years. This group of investments was a good bet even before Obama was elected ... now it's a slam dunk.

Go Here to Learn How to Profit from These Stocks Now


Buy the Bottom and Rebound on the High Seas

by Nathan Slaughter, Editor -- The ETF Authority


I've been keeping my eye on the Claymore/Delta Global Shipping Fund (NYSE: SEA, $10.17) for over a month now. The fund invests in 30 of the world's premier shipping stocks -- firms that are paid handsomely to move oil, coal, iron ore, grains and other commodities and finished goods from one port to another.

The shipping sector was home to many of the market's star performers last year, with even the laggards posting gains of more than +100%. However, sometimes the biggest winners in a rising market end up being the biggest losers when the bottom falls out -- and that has indeed been the case here.

A month ago, this fund was tempting. The price was down and they had just announced a comforting $0.147 quarterly dividend. But I felt there might still be further downside risk.  And indeed, shipping stocks have continued sliding over the past few weeks. But I think we've now reached the point where any additional risk is dramatically outweighed by the potential rewards.

Much of the recent downturn in the shipping sector is attributable to signs of an economic slowdown in China -- which has a ravenous appetite for oil, coal and many other raw materials. Obviously, any type of economic contraction could slacken demand for these goods, and by extension dampen the need for shipping. To compound matters, Chinese officials have also instituted a damaging boycott of Brazilian iron ore over a disputed price hike.

However, Chinese steel makers can only rely on their iron ore inventory stockpiles for so long. Eventually they will have to bring in new supplies from Brazilian mines -- meaning increased demand for dry bulk carriers. Additionally, I think much of the slowdown in overseas trade has been exaggerated. Emerging markets like China have become key manufacturing hubs, and every day tons of raw materials have to be imported, just as finished goods are exported out to consumers around the world.

On the supply side, the credit crunch is making it tougher for shippers to have new vessels built. In fact, three shipyards in South Korea just had to halt the construction of 40 new ships due to lack of funding.

With all this in mind, I believe the Baltic Dry Index (a common barometer of global shipping rates) is poised to rebound from a recent five-year low. Remarkably, the index has plunged almost -90% over the past five months, a drastic overreaction.

And in any case, it's worth noting that many shippers have already locked up their vessels under long multi-year charters at steep rates, meaning they have little to no exposure to recent declines in the "spot" market.

Eagle Bulk Shipping (Nasdaq: EGLE) is a prime example. Despite the recent fall-off in shipping rates, the firm's revenues still jumped +26% last quarter, thanks entirely to fixed time charter revenues. And to give you an indication of demand, the firm is expecting 35 new vessels to enter its fleet over the next few years, and over 60% of this additional shipping capacity has already been spoken for.

Yet, thanks to this relentless selling pressure, the stock now trades at just three times forward earnings and offers a mammoth yield of 24%. And Eagle looks very similar to the rest of the portfolio. In fact, top holdings such as Diana Shipping (NYSE: DSX), Teekay Tankers (NYSE: TNK) and Euroseas (Nasdaq: ESEA) can all be had for earnings multiples below six and carry rich yields above 20%.

Shipping stocks have been struck by a wave of commodity-related selling. But keep in mind, the cash flows (and thus share prices) of this industry are influenced by the supply/demand dynamics of the shipping business -- not those of the underlying commodities. Whether oil is trading at $70 per barrel or $100 per barrel, much of it still has to travel by ship.

I think there could still be a fair amount of downside, but these stocks should be close to a bottom -- some are trading at just one or two times earnings and have very healthy growth forecasts. And during market rallies, the shipping group has seen powerful advances. With generous (and for the most part highly secure) dividend distributions and some of the most compelling valuations I have ever come across, shipping stocks are looking increasingly attractive in this market.


These Stocks Should Rebound First as the Market Recovers

In this brutal market, most stocks are dead money. But when the huge snapback rally happens -- and it might have already started -- a handful of stocks are going to jump twice as fast as the rest.

Are you going to miss the boat? Get the names of these stocks before the market really takes off.

Go Here to Get the Names of These Stocks


A Second Chance to Buy This +265% Gainer

Paul Tracy, Editor -- Market Advisor


The word "google" has become synonymous with surfing the Internet. But lately, every time I hear it, I think of how cheap this company is to own right now. As the global leader in online search, Google (NYSE: GOOG, $310.02) provides a free website that allows users to search for specific content across the world wide web. And while Google has been considered a growth stock since its IPO, it's now trading at historically low valuations, tempting even hardened value investors.   

Most of the company's revenues come from advertising -- text advertisements appear adjacent to search results when users look for specific content. GOOG in turn gets a fee every time someone clicks on one of these online advertisements.

Catalyst(s): Online advertising spending is growing rapidly -- especially for search engines. The reason being that this form of advertising offers more measurable and targeted results.

Google's system targets specific ads based on what users type into their search box, geographic location and other factors. Their sophisticated, proprietary systems for targeting advertisements are continually improved to effectively deliver ads to users who are most likely to click through to advertisers' websites.

With television or radio advertising, it's tough to target advertisements to specific users. Even worse, it's tough to know how effective that advertising has been in generating new customers -- there is no real way to accurately measure how many people respond to a particular ad.

But online search advertising addresses these issues -- ads are carefully targeted toward specific users, and it's simple to measure how many users click on an ad and how many eventually make an order. Better still, advertisers pay for an advertisement only when a user clicks on it -- not each time it is viewed.

As a result of these advantages, corporate spending on search advertisements is growing even as companies pare back on spending elsewhere. This should help make search advertising far more resilient in an economic downturn -- companies will likely continue to increase their spending on more effective and targeted online advertising.

My staff and I also see some of GOOG's newer services offering potential growth catalysts even though search advertising is currently close to 90% of revenues. For example, Google's YouTube website has become an increasingly popular website for online video delivery; given the website's traffic, it's likely to become an increasingly popular site for advertisers as well.

Competitive Advantages: GOOG is far and away the largest player in the search advertising business. GOOG's websites are also among the busiest in the world. Consider that Google and YouTube currently rank as numbers 2 and 3, respectively, in terms of the world's highest-trafficked websites (Yahoo! (Nasdaq: YHOO) ranks number one). It's estimated that close to a third of all Internet users visit on any given day.

This traffic confers what is known as a network advantage for GOOG. In other words, the more users a search website has, the more valuable it is to advertisers because it offers better exposure to potential customers. Given Google's huge and growing traffic, advertising on its site is a natural choice for many and gives it a huge advantage over any would-be startups.

Valuation and Outlook: GOOG trades at roughly 13 times estimated 2009 earnings, its lowest valuation on that metric since going public. With an estimated long-term growth rate of +22%, GOOG currently trades at roughly 0.63 times its growth potential. That's extraordinarily cheap for a market leader in a fast-growing industry like online search.

In addition, Google has a solid financial position with no debt and more than $14 billion in cash on the balance sheet. Over the past 12 months, it generated more than $7.4 billion in free cash flow, equivalent to 7% of its market capitalization. With a leading market position, plenty of cash to fund growth, and the lowest valuation since its IPO, GOOG looks like a solid "Buy" candidate. Given its valuation, we think this is a great time to add the shares.


Additional Investing Ideas


A 7.6% Yield in a Recession-Resistant Market Leader
More often than not, you have to choose between a safe business model and a tempting yield. But with Pfizer (PFE), you can have both.

The Tales Get Taller
Guest Editor Peter Schiff discusses why the U.S. dollar may be the biggest victim of our current financial predicament.

An ETF that Captures Trillions of Dollars in Infrastructure Spending
As emerging countries commit literally trillions of dollars to build out their infrastructure, this newly launched ETF is well positioned to build your gains.
Visit this link to read additional articles from today's leading market experts!

Investor Trivia -- October's Biggest Victim


October was a bad month for almost every investment. But which asset class suffered its worst month in October 2008 since 1956?

B.)  Bonds
Real Estate

(Please click on one the links above. After you make your choice, we'll show you the correct answer on our web site.)


Featured Topic -- Finding a Healthy Company in an Unsafe Market


For years, any investor who was asked which U.S. companies were the healthiest would likely point to the Dow Jones Industrial Average and blue chips like Johnson & Johnson, IBM or AT&T. But now, with the global economy soft and the financial sector in shambles, markets are experiencing unprecedented volatility. Most investors would be hesitant to hazard a guess as to where the next round of bad news will erupt. The sturdiest of the sturdy seem to have been knocked askew.

In this investing climate, there's only one sure measure of a company's health -- an increased dividend. Raising the payout to shareholders demonstrates not only that the just-ended quarter was strong -- it also shows that the outlook for the year ahead is positive. Only companies that know with certainty that they can easily generate an ample supply of cash are willing to boost their payments in the current environment.

Amid the relentless barrage of financial news for the past two weeks -- a good portion of it less than pleasant -- you may have missed a critical bit of information from Standard & Poor's.

That's certainly understandable, as there has been a lot of important developments to keep up with. But for investors searching for companies that are not only surviving, but actually thriving in this perilous market, S&P's research could well be the Holy Grail.

But we have to warn you, it's one of those "good news/bad news" things.

We'll start with the bad news.  S&P found 138 companies weren't as strong as their executives and directors thought. Their businesses are so besieged and their financial footing is so precarious that these companies -- many of them the blue-chip firms -- were forced to slash their dividends last quarter.

In fact, divided cuts increased +557% from last year.

To make things even more ominous: As the number of dividend cuts rose, the number of dividend increases fell.  Only 346 companies boosted their payouts in the third quarter. That amounts to a -21.2% drop versus year-ago levels.

The dividend cuts totaled $22.5 billion. That's not a mere paper loss -- that's actual dollars of income that didn't make it into investors' pockets. This collective dividend axing by U.S. companies was unprecedented.  "It was the worst September for dividends since we started keeping dividend records in 1956," said Howard Silverblatt, a senior analyst at Standard & Poor's.

Every cloud, however, has a silver lining. We're reminded of the advice of the noted mathematician Carl Jacobi, who said, "Invert, always invert."

So what's on the other side of this coin?  Mr. Silverblatt was quick to point it out. "Given the uncertainty of the markets and the economy, these companies [that are increasing their dividends] have to be extremely confident of their future earnings and cash flow."

In other words, if the companies cutting their dividends are weaker than even their own executives expected, then it stands to reason the companies increasing their dividends are the strongest, most stable businesses in the country. They can afford to literally give money away.

Important Note:  Because this article is fairly extensive, we could not include it in its entirety in today's newsletter. You can find the remainder of this article on our website. Please visit this link to continue reading this article.

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Good investing in the coming weeks!

Nathan Slaughter
TopStockAnalysts Digest

Paul Tracy
TopStockAnalysts Digest

839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614

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