November 17, 2008
2, Issue 42
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2. C/D Global Shipping (SEA)
3. Google (GOOG)
5. Investor Trivia -- October's
6. Featured Topic --
Finding a Healthy Company in an Unsafe Market
7. Free Investing
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Top Stock Picks
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. . .
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Google (GOOG) has been throwing off +35% returns
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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.
-- Amy Calistri
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A small group of 20 to 30 stocks is going to be flooded
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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
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.
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Paul Tracy, Editor --
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
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 Google.com 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
Investor Trivia -- October's
October was a
bad month for almost every investment. But which asset class suffered its
worst month in October 2008 since 1956?
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
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