Archive for November, 2012
Market participants have been bottom fishing in some of your dogs like HPQ and BBY. Will they start to bottom fish in some of the other dogs like RSH, AA, and AMD? Facebook and Apple continue to show strength. Premarket trading analysis:
RIMM up 50% this month. HPQ up 10% since gapping down after the Autonomy debacle. BBY up 6.6% today.
What is powering the sudden surges in these perennial underperformers? Are these companies turning it around? Are these companies fundamentally better than they were a week ago?
Josh Brown at the Reformed Broker just answered this question in his blog post, “Here is an incontrovertible fact“, in which he discusses the real reason behind the sudden resurgence in these stocks. The answer is market sentiment.
Stocks move on short term supply and demand. When the majority of short-term market participants are on the same side of the trade, the price will almost always move in the opposite direction. The herd is always wrong. Too many participants have thrown these dogs out, and some real Johnny-come-latelies were recently shorting them. But sorry to break it to you Johnny, nothing goes straight to zero. There are always short covering squeezes, glimmers of hope, and market sentiment shifts. And the market sentiment has shifted for all of these issues. These dogs are barking.
You know what happens when one dog starts barking in the neighborhood, all the other dogs start barking as well. So don’t be surprised if some of these other dogs start gathering some short-term interest.
Advanced Micro Devices (AMD)
Alcoa Inc. (AA)
ITT Educational Services (ESI)
Apollo Group (APOL)
J.C. Penney (JCP)
The bottom line is that there may be some short-term upside in some of these issues, but don’t get married to any of them. Just because the dogs are barking, doesn’t mean they don’t all have fleas.
The dogs are barkin this morning as YHOO, RIMM continue to rally. FB gets some love from Bernstein. But it’s not all good news as concerns in Greece are dragging down the financials. Premarket trading analysis:
AAPL takes a breather. DE, CRM report earnings. A technical look at some of your retailers heading into Black Friday. Premarket trading analysis:
Many investment advisors advocate for the use of dividend reinvestment programs (DRIPS) in their client’s portfolios. Some brokerage accounts actually have the setting defaulted to automatically reinvest dividends into the underlying companies when a customer opens a new account. I believe this is a big mistake.
Take a look at the share prices of Best Buy (BBY) and Hewlett Packard (HPQ) today. They are making new 10 year lows. The business model of both of these companies is broken. However, both companies have had a history of paying a nice dividend. If an investor had been banking those dividends for the past decade, they may still be down in both positions, but they would have had a substantial amount of their initial investment recouped, just from the dividend checks.
The story is quite different if they participated in a dividend reinvestment program, as the majority of those dividend payments over the past decade would have been reinvested in the companies at much higher prices, eroding the value of all of those dividend payments.
The underlying problem with DRIPS is that very few businesses stand the test of time. Industries change, technology changes, consumer tastes change, and companies have to keep reinventing themselves if they are going to survive. In many cases this simply does not happen.
Just ask the shareholders of Eastman Kodak. It paid a healthy dividend for the past 50 years. If you had invested in the company 50 years ago, and had been banking those dividend checks, your initial investment in the company would have been worth a small fortune just from all the quarterly dividend payments you had received.
But if you had been participating in a DRIP, all of those dividend payments, and all of that cash would have been gone when Eastman Kodak filed for bankruptcy earlier this year. You would have lost it all.
DRIPS work great in companies that continue to grow and stand the test of time. But most companies do not. Placing all your bets that the companies in your investment portfolio will be there when you retire is simply a very scary bet to place. The best way to continue to build your portfolio is to bank those dividend checks and invest them in other stocks and other sectors. Those dividend checks are the natural way to diversify out of core holdings, because very few companies last forever.